Let us review the “necessary conditions,” which the Christian Aid paper (“Towards Measuring the Costs/Benefits of Tax Incentives,” June 2015) propounds. And let us see how relevant they are and how we can apply or enable them in the Philippine setting.
WHEN THE REVENUE LOSSES THEY CAUSE ARE NOT GREATER THAN ADDITIONAL REVENUES THEY BRING IN.
At present, we are not aware of any complete or definitive cost-benefit study on fiscal incentives, both at the aggregate level and the industry level. And the reason is simple: The necessary information is not accessible. Some studies -- for example, by Rosario Manasan (2002) and Renato Reside (2006) -- have focused on the costs or the redundancy of incentives. Such studies, likewise hampered by data collection, need to be updated.
WHEN OTHER BUSINESS CONDITIONS ARE GOOD.
In the main, present business conditions are good -- especially the political and macroeconomic stability. On the other hand, the inadequate infrastructure has been a binding constraint, which the current administration has not effectively addressed.
The argument of some lobbyists and even some government officials that the fiscal incentives are necessary to compensate for bad infrastructure is wrong. Longer-term investments will avoid a country, regardless of tax incentives, where crumbling infrastructure obstructs business. Tax incentives cannot replace good business conditions like adequate infrastructure to attract productive investments.
WHEN THEY PROMOTE SPILLOVERS -- SUCH AS THE DIFFUSION OF NEW KNOWLEDGE (TECHNOLOGY), UPGRADING OF THE SKILLS OF THE WORKFORCE AND/OR LINKAGES TO DOMESTIC FIRMS, AND/OR SUPPORTING ‘INFANT INDUSTRY.’
The criteria for granting incentives are vague, leading to arbitrary decisions. New knowledge or technology can mean anything like the change from third generation (3G) to fourth generation (4G) of mobile broadband Internet. But that kind of new technology in itself does not merit the granting of tax incentives. All industries, in order to prosper, have to diffuse new technology and upgrade the skills of workers. Going by that logic, government has to give tax incentives to all industries!
The economic criteria for granting fiscal incentives must thus be tight and well defined. Fiscal incentives must in fact be limited to the confines of the country’s industrial policy and roadmap. But that likewise means industrial policy cannot be broad and arbitrary.
WHEN THEY HAVE BEEN PUBLICLY JUSTIFIED WITH CLEAR OBJECTIVES, AS PART OF A BROADER POLICY.
The public discussion is limited. Accountability of the agencies that have the power to grant incentives suffers. This stems from the muddled criteria, the opacity of the whole regime of fiscal incentives and, concomitantly, the absence of assessments through cost-benefit studies.
WHEN THE RECIPIENTS OF TAX INCENTIVES ARE TRANSPARENT.
This kind of information remains confidential. The Bureau of Internal Revenue can only provide the information if it gets a waiver from the recipient corporations. In this light, the Department of Finance (DoF) and the Department of Trade and Industry, with the full support of the President, have endorsed a bill titled “Tax Incentives Management and Transparency Act.”
WHEN THERE IS SUFFICIENT DATA COLLECTION.
This again leads us to the lack of transparency of the regime on fiscal incentives. Further, the Philippines has many investment promotion agencies -- the Board of Investments, Philippine Economic Zone Authority, Clark Development Corporation, Bases Conversion and Development Authority, Subic Bay Metropolitan Authority, etc. And they all have their own sets of rules, making data collection difficult.
WHEN THERE ARE MONITORING AND ENFORCEMENT MECHANISMS TO ENSURE POSITIVE IMPACTS AND COMPLIANCE.
The DoF and the Bureau of Internal Revenue are the proper agencies to assess the impact of fiscal incentives and to ensure compliance with rules. But at present, the DoF is sidelined in the whole process of the decision-making on fiscal incentives. The DoF cannot even make cost-benefit studies, impeded by the refusal of, say, the Board of Investments, to provide the necessary information.
WHEN THEY ARE IN THE LAW, AVAILABLE TO ALL INVESTORS ON THE SAME TERMS AND NOT DISCRETIONARY.
Granting fiscal incentives in the Philippines is arbitrary.
To reiterate, the criteria are general and ambiguous and are not anchored on rigorous economic criteria that emphasize higher social returns or benefits than the private gains. Some degree of discretion cannot be avoided because fiscal incentives are selective. But the discretionary aspect can be disciplined by having clear and tight economic criteria, which at the very least will eliminate redundant incentives.
WHEN THEY ARE SIMPLE TO ADMINISTER AND WHEN THEY ARE ADMINISTERED BY A SINGLE GOVERNMENT AGENCY.
As previously indicated, the Philippines has too many investment promotion agencies, with different sets of rules. Worse, the DoF and the National Economic and Development Authority practically have no influence in the decision-making of these investment promotion agencies. In neighboring countries, investment promotion is vested in one agency or two agencies, at most.
WHEN THEY ARE COORDINATED AND/OR HARMONIZED (TO SOME DEGREE) WITH NEIGHBORING COUNTRIES.
It is high time that the members of the Association of Southeast Asian Nations tackled the problem of the race to the bottom arising from tax competition.
The truth is, every country in the region offers similar tax incentives, and thus no real advantage accrues to a particular country, from the perspective of tax competition. Everyone thus has to gain by cooperating towards reducing the incentives, thus being able to recover the foregone revenues from unnecessary incentives.
In sum, the Philippines has a lot to do to reform its system of fiscal incentives. The President has called Congress to pass the bills on the rationalization of fiscal incentives and the transparency of fiscal incentives.
Enactment of these bills will not be easy because of the strong resistance from vested interests, including those within government. In addition, less than a year is left to have these bills approved. The President must actively intervene to ensure the passage of the bills. The intervention needed is similar to how the President has campaigned in Congress for the controversial Basic Bangsamoro Law.
Filomeno S. Sta. Ana III coordinates the Action for Economic Reforms.
www.aer.ph
source: Businessworld
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