DOF: Tax Incentives Cost Gov’t at Least 1.5% of GDP in 2011

Finance Secretary Cesar Purisima calls on legislators to pass the twin fiscal incentives rationalization and transparency bills.

The government’s revenue loss from the grant of income tax holidays, reduced income tax rates and duty exemptions to investments was revealed to be at least P144 billion in 2011, the initial Tax Expenditures Report (TER) released by the Department of Finance said. This represents a significant loss in revenues: 1.5% of GDP, 9.3% of government’s expenditures, or 10.6% of government revenues in 2011.

These figures are conservative given the report covers only 29% of all investment promotion agency (IPA-) registered firms.

“With the current tax incentives system that has been largely unaccounted and uncoordinated, the government loses billions of pesos in revenues every year which could have helped improve our fiscal position,” Purisima said in a bid to push for urgent reforms in the fiscal incentives system.

The DOF is pushing the enactment of two laws that aim to build a transparent and accountable mechanism in the grant of tax incentives. The Tax Incentives Management and Transparency Act (TIMTA) will give the government the necessary tools to account for the magnitude of government support given to a certain sector and the appropriateness of using tax incentives in achieving socioeconomic goals, while the Fiscal Incentives Rationalization (FIR) reform bill coordinates and organizes the grant of incentives to different sectors that has been largely unfettered over the last few years.

“Tax incentives distort the tax structure of the Philippine economy. Through these twin fiscal incentives reform measures, 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. Accounting for tax incentives needs to be transparent, and these tax incentives need to be granted properly,” The Secretary added.

IMF: Current PH incentives regime ‘very generous’ and ‘unnecessarily complex’

The International Monetary Fund (IMF) supports the reform on the rationalization of the fiscal incentives structure, as stated in their Fiscal Affairs Department report in November 2013, ”The need for the rationalization of tax incentives in the Philippines is widely recognized. Numerous [IMF] studies and reports… established that the existing regime is very generous and unnecessarily complex.”

The IMF report also says that the tax incentives management and transparency act (TIMTA) “could be an important step towards improving the transparency of tax incentives, and capping revenue foregone by tax incentives. This means that IPAs have to begin to focus on revenue foregone costing so that IPAs begin to concentrate on the cost-effectiveness of tax incentives.”

Tax expenditure report puts PH at par with OECD countries in transparency

The Finance Secretary said the DOF’s efforts to come up with a TER puts the country at par with all of the OECD countries and some emerging economies in Asia which place a high regard in promoting transparency in the government’s tax policy actions. These countries have been producing a comprehensive Tax Expenditure Report annually, usually as part of their budget document, that allows their incentive policies to get the same level of budget scrutiny as normal budget expenditures.

The necessity of being transparent and accountable in the grant of these incentives becomes more apparent with the inundation of proposals to grant tax incentives to numerous sectors in the economy.(PCOO)

Source: www.dof.gov.ph

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