Limiting tax perks

With the first package of the Tax Reform for Acceleration and Inclusion (TRAIN) program of the administration already made into law, the Department of Finance (DOF) is setting its sight on the second package which aims to give the finance secretary the authority to rationalize the grant of income tax holidays and other perks to industries.

According to the DOF, the government lost P301.22 billion in revenues in 2015 from tax breaks, which accounted for approximately two percent of the country’s gross domestic product that year.

At present, these financial carrots can be given by various investment promotions agencies without a singular overall authority supervising their actions.

The reason often given to justify the grant of this privilege is to encourage investments in an “undeveloped” industry or to reduce its tax burden while it is still at the initial stage of operation so it can develop its market.

What has happened, however, was, many of these industries have become too dependent on these tax accommodations.

In an interview, Finance Secretary Carlos Dominguez III said it was time the companies that have been enjoying these tax holidays, some for as long as 40 years, be made to compete in the market without the benefit of financial assistance from the government.

Under the DOF’s new proposal, the finance secretary, upon the recommendation of the Fiscal Incentives Review Board (FIRB) can cancel or suspend the enjoyment of tax incentives. For this purpose, the DOF shall draw up, among others, a single menu of incentives that can be given to industries that meet the criteria for tax privileges.

The underlying objective is to make sure the tax privilege is not abused and to minimize revenue leakage from this business arrangement.

The rationale behind the DOF’s new proposal is similar to that of Republic Act No. 10149, or the GOCC Act of 2011, which created the Governance Commission for Government-Owned and -Controlled Corporations (GCG). The GCG is tasked with, among others, the responsibility of seeing to it that government-owned and -controlled corporations (GOCC) meet the objectives for which they were organized and to set the standards for the appointment of competent administrators.

In line with this mandate, the GCG can recommend to the President the abolition or merger of a GOCC if it finds that it is, say, not doing its assigned work, has outlived its usefulness, or its functions overlap with another GOCC. It will be recalled that the GOCC law was enacted in the wake of reports that some GOCCs were being used as milking cows by their officials and employees, and were not remitting dividends to the government.

To date, based on GCG’s accomplishment report, several nonperforming GOCCS have been abolished and most GOCCs have been regularly remitting respectable dividends to the government.

Going by the GCG experience, it makes good governance and business sense that a similar strategy be used to address the revenue leakage that the government has been suffering from the unregulated granting of tax holidays.

As the country’s primary fiscal manager, the finance secretary should be given the authority to cancel or suspend tax perks when, after a careful evaluation of the attending circumstances, the financial subsidy no longer serves its purpose or has become disadvantageous to the government.

Hopefully, the second package would have smoother sailing in Congress so the country can enjoy its benefits at the earliest time possible.