Fiscal incentives overhaul to yield best returns — NEDA

Rationalizing tax incentives provided to firms in special economic zones (SEZs) would enable the economy to benefit more from firms that can create more jobs and help narrow the prevailing trade deficit, the National Economic and Development Authority (NEDA).

Citing the results of its first report pursuant to the Tax Incentives Management and Transparency Act (TIMTA), NEDA said it is mandated by the law to assess the impact of the provision of tax incentives on the economy.

Signed into law on Dec. 9, 2015, TIMTA aims to promote transparency in the grant of fiscal incentives. Under the law, registered businesses are required to disclose a tax incentives report to Investment Promotion Agencies (IPAs) which govern economic zones and grant tax incentives.

“The regulatory framework governing tax incentives needs to be carefully evaluated and modified so that the incentives deliver the best returns,” said Socioeconomic Planning Secretary Ernesto Pernia. “The current fragmented tax incentive regime from different IPAs would need to be revisited and overhauled.”

The Philippines, he said, currently has the longest time frame for incentives in Southeast Asia, with data showing at least 654 firms receiving tax incentives for at least 15 years.

Pernia said the performance of locators in SEZs show mixed positive and negative effects to the economy.

Most locators in special economic zones (SEZs) were found to be heavily-reliant on imports, worsening the trade deficit, said NEDA. This is not seen to have an entirely negative effect on the economy in the short term, but is considered disadvantageous in the long-term, NEDA added.

“Whether or not firms in special economic zones (SEZs) make a positive impact on the country’s gross domestic product is difficult to determine due to the gross trade deficit these registered firms have incurred,” said Pernia.

NEDA said the contribution of ecozone businesses to the trade balance is negated by their heavy import dependence compared with other industries that are not receiving incentives.

“Higher imports of registered firms from the zones is not necessarily harmful to the economy. But extended reliance on import content and technology over the longrun could work against the economy,” NEDA said in the report.

NEDA noted, however, that the benefits of the tax incentives are seen in the greater number of jobs created and wages paid by firms registered with IPAs.

Such firms generated a total of 2.5 million jobs in 2015. Some 89.5 percent of this, or 2.2 million jobs, came from the Philippine Economic Zone Authority and Subic Bay Metropolitan Authority.

NEDA noted in the report that the full potential of locators in special economic zones are still untapped because of weak linkages in the supply chain in the domestic economy.

“While the Philippines is one of the early adopters of SEZs, unfortunately, their potentials are still largely untapped due to the weak backward and forward linkages in the domestic economy,” the NEDA reported.

As such, NEDA recommends the strengthening of investment assistance provided by IPAs to locators along side tapping the active participation of LGUs to align their Local Investments and Incentives Code (LIIC) with the objective of creating ancillary industries.