A new regime for tax incentives?

If then Finance Secretary JImmy Ongpin had his way, we would have no problems with tax incentives. Part of his 1986 Tax Reform Program was the discontinuation of the Investment Priorities Plan (IPP). (The IPP lists projects and activities that will be promoted through preferential tax treatment.) However, politics did not allow him to promote a level playing field for all taxpayers. Through the years, tax incentives mushroomed as government thought that investments can only prosper if we prop them up with tax exemptions.

President Ramos had a similar intent. He succeeded in withdrawing the VAT exemption from the list of incentives to preferred industries but failed to withdraw the income tax holiday. Was it wrong strategy, double cross, or the slow pace in legislating tax reforms?

His intent was to universalize tax incentives, i.e. allow all corporations to carry their losses forward and deduct accelerated depreciation. The profit of a corporation in the years when it is making a profit can be offset by its losses in its formative years. Accelerated depreciation on the other hand allows firms to reduce their taxable income by claiming higher expenses for wear and tear of buildings and machinery. Congress adopted these incentives for all firms but failed to withdraw the tax incentives. Nadenggoy kami! (They put one over us!)

As the regime of tax incentives progressed, the estimates from revenues foregone ballooned with some estimates reaching P300 billion annually. But more than the revenues that are given up by government, tax incentives result to inequities, uneven playing field, and invite corruption. Those who are given incentives do not share at all in financing the needs of the public. They use public goods and services without paying anything in return. Encouraging free riders is quite unfair especially for wage earners whose tax payments are automatically deducted from their pay checks. Products of promoted industries can be priced lower because they carry no taxes. The rules are bent in their favor. Those outside the incentive regime have to fully sweat it out. Walang ka-laban laban! (They are without any help.)

So, I looked at the withdrawal of incentives by TRAIN 2 with great anticipation. I was totally overwhelmed by the earlier draft which amended all laws that provided for tax incentives. I asked myself if government can really get away with it.

Apparently, government took several steps backward. The bill filed by the current Senate President retains the income tax holiday and the customs duty exemption for 5 years. There will still be an IPP but with a different name, Strategic Investments Priority Plan (SIPP) that will be drafted by the BOI. The Fiscal Incentives Review Board (FIRB) which is currently chaired by the DOF is given the herculean task and super power in serving as the administrator and decision-maker with respect to the grant of incentives. Plus, the President may grant incentives to “highly desirable projects.”

Government may say that the bill provides strict criteria for granting incentives. Haven’t we heard this before? The problem with incentives is the great discretion that they provide to bureaucrats. With great discretion comes temptations, and abuse of power. We have hundreds of cases including the tax credit scams at the DOF. Why do we allow small gods to decide what investments are “inclusive”, “use modern technology,” “competitive, and “innovative”? Don’t we trust firms to do all these to generate hefty incomes?

It is a cliche, but tax incentives play a marginal role in locational decisionmaking. Many other factors play a heavier role, especially stability in policies, ease in doing business, and good governance. This was the great value-added of PEZA under Secretary Lilia de Lima. The firms were protected from harassment from the mighty and the corrupt.

What we have on the table is new name, new players, plus, more powers for the President.

Is there a reason to feel happy or disappointed? mguevara@synergeia. org.ph