Fiscal incentives bill: Is it really priority?

MANILA, Philippines – Since his first State of the Nation Address (SONA), President Benigno Aquino III has cited the rationalization of fiscal incentives as “priority” bill.

But now entering the 5th year of his term and about to deliver his 5th SONA, the President finds the measure still pending before Congress.

The Aquino administration, led by its finance secretary, Cesar Purisima, wants fiscal incentives streamlined because these distort the tax structure of the Philippine economy and take away billions of pesos from government every year that could be used to improve the country’s fiscal position and social services.

Under Executive Order 226 or the Omnibus Investments Code of 1987 – one of the major laws governing fiscal incentives in the Philippines – incentives that can be granted to identified Board of Investments (BOI)-registered enterprises include tax exemptions, tax credits, and deductions from taxable income.

Investors have normally been given corporate income tax holidays for a period of up to 8 years. The Department of Finance (DOF) is looking at discontinuing such tax breaks for sectors like shipbuilding, iron and steel, and vehicle manufacturing. It said it would rather support investments in exporting industries, micro, small and medium enterprises, and research and development.  

Pending still

In his first SONA in 2010, Aquino announced a package of economic reforms, including the rationalization of incentives.

“We will re-evaluate fiscal incentives given in the past. Now that we are tightening our purse strings, we need to identify those incentives that will remain and those that need to be done away with,” he stressed then.

He made similar statements in his 2011, 2012 and 2013 SONAs. In the last, he reiterated the need for such rationalization so “incentives we provide to businesses become even clearer and more accountable.”

However, the measure is still pending before Congress. There are 4 bills with the House Committee on Ways and Means, all covering the rationalization, grant, and administration of fiscal incentives for investment growth. These include:

House Bill (HB) 02765	An Act Rationalizing the Grant and Administration of Fiscal Incentives for the Promotion of Investments and Growth, and for Other Purposes, by Gabriel Luigi Quisumbing	Pending since September 10, 2013
HB 01788	The Investments and Incentives Code of the Philippines, by Rufus Rodriguez	Pending since July 31, 2013
HB 00302*	The Investments and Incentives Code of the Philippines, by Susan Yap	Pending since July 23, 2013
HB 00130*	An Act Instituting the Code for the Administration of Fiscal Incentives for the Promotion of Investments and for Other Purposes, by Mark Villar	Pending since July 23, 2013

* No links and text available

The bills seek to make BOI responsible for industry development, policy formulation, investment promotion, investment facilitation, and creation of an Investments Priorities Plan, whose activities comply with the Medium-Term Philippine Development Plan and Medium-Term Philippine Investment Plan.

The bills also cover satisfying conditions on substantial amount of investments, considerable amount of employment, use of modern or new technology, and installation of adequate environmental protection systems. Lifting the tax- and duty-free incentives enjoyed by several industries to shore up the government’s tax collection is also covered.

In November 2013, House Committee on Ways and Means Chairman and Marikina City 2^nd District Representative Romero “Miro” Quimbo called for the passage of a fiscal incentives measure, saying it has been in Congress for 15 years.

Three fiscal incentives bills are also pending before the Senate Committee on Ways and Means. These are:

Senate Bill (SB) 35	Investments and Incentives Code of the Philippines, by Cynthia Villar	Pending since July 23, 2013
SB 987	An Act Harmonizing the Grant and Administration of Fiscal and Non-Fiscal Incentives, and for Other Purposes, by Ralph Recto	Pending since August 14, 2013
SB 2048	An Act Rationalizing the Grant and Administration of Fiscal Incentives for the Promotion of Investments and Growth, and for Other Purposes, by Loren Legarda	Pending since January 1, 2014

Why rationalization is needed

Purisima said that the reintroduction of the fiscal incentives rationalization bill in the House of Representatives, through HB 02765, would help DOF identify which sectors use incentives most effectively, and trim government revenue losses.

In March this year, the Tax Expenditures Report published by DOF showed some P144 billion ($3.33 billion*) worth of tax breaks were given in 2011, equivalent to 1.5% of the country’s gross domestic product, or 9.3% of government expenditures and 10.6% of revenues.

HB 2765 wants to ensure that tax incentives are cost-efficient and attuned to the fiscal sustainability thrust of the national government.

Meanwhile, HB 1788 seeks to streamline the tax breaks for businesses, stop the practice of extending so-called perpetual perks to several industries, and support an investment policy to ensure that no industry will unjustly benefit from incentives provided.

In a Senate public hearing, Bureau of Internal Revenue Commissioner Kim Henares also acknowledged that fiscal incentives played an important role in supporting new and innovative businesses and helped create more jobs. But she said some companies, particularly profitable ones with stable operations, no longer needed tax perks.

‘Wish list’

As he presents in his 5th SONA on Monday, July 28, his administration’s achievements the past year, will Aquino again mention and push for the fiscal incentives rationalization bill?

Various business groups still “wish” for the measure’s passage. For one, Management Association of the Philippines President Greg Navarro said Aquino should prioritize the rationalization of fiscal incentives, along with the liberalization of foreign investments; acceleration of infrastructure projects, new energy plants and investments in agriculture; customs modernization; and implementation of manufacturing and other industry roadmaps.

Early this month, Quimbo said a consolidated version of the bill was set for approval at the House committee level by August.

This will be a welcome development for the Aquino administration. Purisima said, “in the long term, the government will enhance the country’s fiscal capacity to continue to build on its macroeconomic fundamentals, level the playing field and improve competitiveness and investment opportunities.” – Rappler.com

 

 

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*($1 = P43.30)

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