Tax reform delay

Tax incentives are usually given to new companies to help them survive risks associated with starting a business. Over time, these perks are removed as the beneficiaries mature and become competitive. It is therefore absurd when some companies are given tax incentives forever.

But such is the case of the Philippines where some sectors continue to enjoy incentives from the time they set up shop in the 1980s. It has come to a point where, under the current set-up, the government may end up subsidizing more than two-thirds of the economy, according to the Department of Finance.

The Duterte administration is seeking to change this incentives scheme. Simply put, it wants tax incentives, which could have otherwise been monetized and spent on essential public services, to be given only to those who deserve it.

A bill under deliberation in Congress, titled Corporate Income Tax and Incentives Reform Act (Citira), aims to gradually lower the corporate income tax for companies that do business in the Philippines — a welcome move since the tax is one of the highest in Southeast Asia.

At the same time, however, Citira — which was already passed by the House of Representatives — will overhaul the giving of incentives to private investors. This has drawn a lot of opposition, with critics claiming it would lead to job losses from companies failing to cope with the increased cost of doing business once the tax perks have been removed.

Months of lobbying had seemed to have brought the Duterte administration’s economic team to a common position; Finance Secretary Carlos Dominguez III earlier said he was hopeful that the bill would be passed by the Senate before the year ends.

However, Trade Secretary Ramon Lopez announced last week that a new Citira bill would be filed in the Senate this month or early next year, to address the “specific needs” of companies fearing increased costs once tax incentives are revamped.

He said the new bill would be filed by Sen. Pia Cayetano, chair of the Senate’s ways and means committee. “What the stakeholders can expect is [a bill] that would address the specific interests [and] specific needs of the stakeholders,” Lopez said.

The new round of legislation, and the lobbying and horse-trading that go with it, inevitably means fresh delay. And that delay will cost the government billions of pesos more in unnecessary tax incentives to industries or companies that do not deserve them.

While it is true that tax incentives attract companies to choose the Philippines as their base, especially if the tax perks are more substantial than those offered by our neighbors, such incentives must be conscientiously and rationally given out.

Finance Undersecretary Karl Kendrick T. Chua explained this clearly: “We cannot dispute that the many industries receiving incentives have made valuable contributions to the economy and to the Filipino people. Many of them are important, but given that the current system is poised to subsidize more than two-thirds of the economy, policymakers need to make tough choices between which industries and activities to prioritize if we are to ensure that every peso given away as a tax incentive yields a net positive benefit to society.”

Citing a recent DOF study, Chua pointed out that the industries being granted tax incentives under the Board of Investments’ 2017 Investment Priorities Plan accounted for a staggering 69.4 percent of the entire economy.

The proposed rationalization of the incentives system seeks to make the granting of tax perks performance-based, targeted, time-bound and transparent. Such a system will allow the Philippines to prioritize and provide better incentives to targeted industries, areas and activities for the right reasons, among them the creation of quality jobs, investments in research and development, and expansion in less-developed areas.

This seems simple to understand. It’s about time foregone taxes in the form of incentives were converted to actual government revenues that could be used to hire more teachers or build new hospitals.

It’s time to remove tax breaks from companies that are long past their infancy stage and have benefited from such perks for the longest time. And there is no need for yet more delay in the passage of this critical reform measure in the Senate.