Reforming fiscal incentives

ONE of the first legislative measures that the PNoy administration submitted to Congress — in fact, a priority bill that the President mentioned in his State of the Nation Address — was the rationalization of fiscal incentives.

That was in 2010. Today, nearly five years after and a year before the President’s term ends, a good bill on rationalizing fiscal incentives is nowhere to be found. Worse, and this affects not only the rationalization of fiscal incentives but other equally important legislative reforms, the prospect of success in passing such bills is getting gloomy as PNoy’s political capital has vastly diminished in the wake of the Mamasapano debacle.

Yes, the Philippine Congress has submitted a bill written by the Department of Trade and Industry (DTI), which backs the Board of Investments (BOI). The bill, however, does not introduce significant changes that will address the giving of aimless, arbitrary and overgenerous incentives. The bill is for the status quo, and its only reason for being is to put in embellishments like token representation of other government agencies other than the DTI and BOI. It is a bill that does not inspire, unless the legislators change it.

The granting of fiscal incentives is a tool to attract direct investments, which in turn are necessary to create quality jobs and to sustain growth over the longer term. The regime of fiscal incentives in Southeast Asian countries is quite similar, which suggests that no country really gains a distinct competitive edge through fiscal incentives alone, and thus likewise suggests that countries will be better off scaling back incentives to reduce sacrificed revenues.

The big difference though, comparing the Philippines with its neighbors, is that it gives incentives — I repeat the modifiers above — aimlessly, arbitrarily and generously. In a paper titled Toward Rational Fiscal Incentives: Good Investments or Wasted Gifts? (2006), Renato Reside wrote that in the Philippines, “a large amount of incentives being provided are redundant — they are given to many firms that would have invested anyway without them.”

Further, unlike its neighbors, the Philippines has many bodies that have the power to give tax incentives. And unlike its neighbors, the Philippines has not instituted effective disciplining mechanisms to prevent the abuse of incentives.

A clear example of the lack of discipline and accountability is the opaqueness of the information regarding the tax incentives, as basic as disclosure of firms that have been given tax incentives, the type of incentives, and the amount of incentives. Such information is for the public good. After all fiscal incentives are tax expenditures, about which Congress and taxpayers have the right to know.

Yet, the BOI refuses to provide such basic information, invoking a law that it misinterprets. (There is confidentiality of information only during the period of application for incentives, but which the BOI wrongly extends even after the application has been approved.) It is thus shocking that other government agencies cannot access the information from BOI. Even the Department of Finance (DOF), which has the responsibility of analyzing the costs and benefits of tax incentives, does not have the complete data of incentives approved by the BOI.

Also worth mentioning is how impossible it is for the Philippine Extractive Industries Transparency Initiative (EITI), composed of stakeholders from government, the private sector, and civil society, to get information on tax incentives.

EITI is a global initiative that promotes revenue transparency in the extractive sector. The Philippines is a new member, and here is a rare instance where government, the extractive industries and civil society have collaborated closely. All the stakeholders are agreed that the tax incentives given to the firms in the extractive industries be published. The representatives of the Chamber of Mines for example fully support such disclosure because it also serves the industry’s interest. Without the information on tax incentives, the revenue performance of the good mining companies cannot be appreciated. The lack of information leads to an inaccurate picture that may put the good companies in a negative light.

Hence, reforming fiscal incentives must include disclosure of tax incentives. It is most welcome that the Executive branch has endorsed a bill authored by Representative Leni Robredo, the champion for transparency, titled “The Tax Incentives Management and Transparency Act” or TIMTA. The passage of the bill on freedom of information will likewise supplement TIMTA, for the former can compel government agencies to provide information upon request of citizens.

The challenge is to make TIMTA an effective law. But again, there is an attempt to weaken the role of the Department of Finance (the most appropriate government agency to monitor and assess fiscal incentives) in managing the information.

To conclude, despite the unkind political environment, it is imperative to have the rationalization of fiscal incentives and the transparency of fiscal incentives legislated before the terms of the PNoy administration and the 16th Congress end in the middle of 2016. But beware of sabotage taking the form of laws that pretend to be reformist but actually only prettify the status quo.

Filomeno S. Sta. Ana III coordinates the Action for Economic Reforms.

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