Fixing unfairness of incentives and more in TRAIN 2

Yellow Pad

 

In our engagement with the private sector with regard to the second package of the comprehensive tax reform, I often hear a similar view from the businessmen: “Of course, we support the rationalization of fiscal incentives, of course we support leveling the playing field, but given our different condition, we need the tax breaks or preferential treatment.” To me, it’s akin to saying: “Sure I believe everyone should go on a diet, but I’d like to keep this box of donuts for myself, please.”

The arguments are the same: They contribute to the growth of the economy.

They create jobs. They need to be competitive. But then many other firms also contribute to growth, create jobs and face intense competition; yet they do not receive fiscal incentives. Where’s the fairness?

Others have argued that because they’ve “taken the risk” of investing in the Philippines during the times when it was precarious to do so, they deserve to be given these incentives in perpetuity (as reward for their valor, I suppose). Never mind that they have been receiving these perks for the past decades, and therefore have been amply rewarded. Besides, doing business really involves risk and such risk has been mitigated by the initial incentives they had obtained. Or has fiscal incentives become an entitlement for the old firms?

The main issue is about reforming the fiscal incentives system (and everyone agrees with this so long as self-interest is not involved) to promote investments that will generate huge social benefits but, at the same time, curb abuse and revenue leakage. Much of the abuse stems from a flawed and complex system that has been granting incentives, sometimes to firms which may not need them or who would have otherwise invested without them. Therefore, there is a need to put in place a system that is simpler, fairer, time-bound, targeted, and accountable.

CORRECTING MISINTERPRETATIONS
The Department of Finance (DoF) and the Department of Trade and Industry (DTI) have articulated their intention of transforming our fiscal incentives system into one that is consistent with technically sound economic criteria, including being time-bound, performance-bound, and transparent. If upright businessmen think their businesses deserve the incentives, they then should not worry about these principles.

It is also worth clarifying that the existing bills, including those supported by either DoF or DTI, do not explicitly state incentives for a particular sector will be taken away. The reforms as expressed in the bills do not favor any sector.

Further, business activities that fall under the Strategic Investments Priority Plan (SIPP) will qualify for incentives, but the appropriate type of incentives will vary depending on the concrete situation of each. The reform intends to harmonize the granting of incentives even as it provides a menu of incentives that will be more sensitive to the particular needs of a firm or industry.

Industries or firms that generate quality jobs, bring development to poorer areas of the country, and invest in cutting-edge research and development — in other words, those that have high social benefits — should have nothing to fear from the proposed reforms on fiscal incentives.

To reiterate, in the proposed bills, incentives will still be provided to activities that are included in the SIPP. The SIPP, not the legislation, will be the mechanism to re-evaluate priority industries. The priorities, determined through multi-stakeholder processes, are flexible enough to be aligned with changes in the economy and in the medium- and long-term goals of the government.

Every firm, regardless of industry, market orientation, and ownership structure, can apply for new incentives as long as it meets the SIPP criteria. These incentives will be granted to activities for as long as they abide by the principles of the reform. But perpetuity of an incentive for the same economic activity has to end. The disciplining mechanisms have to be put in place.

IMPROVING TAX ADMINISTRATION AND EASE OF DOING BUSINESS
Much ado has been made about how this reform might affect the investment climate in the Philippines and how it might weaken our competitiveness in the region. It is then worth noting that fiscal incentives are not the sole nor the primary factor that investors consider when deciding where to invest.

Empirical cross-country studies, such as the World Economic Forum Global Competitiveness Index, reveal that the primary stimuli for investments in the country are: market size, ease of doing business, well-trained and well-equipped manpower, good infrastructure, peace and order, and political stability. In the past decade, the Philippines has improved in these indicators, but is still currently lagging behind its Asian neighbors.

Securing tax incentives has become an excuse to make up for the losses arising from the higher cost of doing business in the Philippines.

However, the current tax incentives regime, insofar as it is ineffective in attracting the right investments and perpetually subsidizing even businesses that are unsustainable, is also preventing us from becoming more competitive. In other words, it is a band-aid solution that only creates more problems rather than addressing the real issues.

Hence, it is equally important that we talk about how to introduce institutional reforms. Aside from modernizing our fiscal incentives system, the government should make the tax system simpler, fairer, and a whole lot easier for compliance.

Let us take the bull by the horns. Apply the fiscal incentives on strict and sound economic criteria. Address squarely the valid complaints of companies doing business in the country, but let us not use tax incentives to compensate for other problems.

 

Karla Michelle Yu is a research associate of Action for Economic Reforms (AER) focusing on fiscal policy reform.

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