DTI, DoF clash on tax incentives

By Melissa Luz T. Lopez, Reporter | Posted on September 08, 2015 08:09:00 PM

THE FINANCE AND TRADE departments have reached a deadlock in discussions over a proposed new set of fiscal incentives given to firms operating in economic zones in the country.

Only three weeks ago, officials of the Department of Finance (DoF) and the Department of Trade and Industry (DTI) told the House committee on ways and means that they have reached a “significant” agreement to about 80% to 85% of a new draft bill on tax perks.

To recall, the incentives package initially agreed upon by the agencies were:

• for export-oriented firms: a four-year income tax holiday (ITH) and an option between a 5% tax on annual gross income earned or a flat rate 15% corporate income tax in lieu of all national and local taxes for the next 11 years; and
• for ecozone locators: a 15% corporate income tax rate for 15 years.

But during Tuesday’s hearing, DoF Undersecretary Jeremias N. Paul, Jr. reported that progress has slipped, with the periods for granting and renewal of ITH remaining to be a contentious issue.

Mr. Paul said portions of the draft being worked on by the DoF and DTI would rather extend the grant of tax holidays beyond those who are not entitled to such incentives at present, which his office opposed.

“During the last hearing, I was very upbeat and I said the road was nearing to its completion. But following our restructuring, yesterday there was something… which essentially changed the whole complexion,” Mr. Paul said during the hearing, citing results of a Monday meeting between the agencies which he said reached nighttime.

“From the very beginning, we were against ITH because we view it as the most ineffective way of incentives… We were prepared to essentially compromise in the case of PEZA (Philippine Economic Zone Authority), but under the harmonization proposal, even those ecozones and freeports that do not have an income tax holiday in their charters would now be given (it).”

“Instead of rationalizing, you even added more.”

But DTI Undersecretary Adrian S. Cristobal, Jr. said in a separate interview: “No. He is citing academic studies. We’re talking about experience on the ground as we’re the ones facing industry.”

“Investors really ask about the ITH, I guess it’s still what investors find attractive.”

Trade officials are batting for renewable tax perks, particularly the ITH.

PEZA Deputy Director-General for Operations Mary Harriet O. Abordo backed Mr. Cristobal, saying that other Southeast Asian countries have offered longer tax holidays just to bring in investors.

Ms. Abordo said Indonesia has approved ITH of as much as 20 years, while Vietnam has offered a 30-year tax holiday to electronics company Samsung. This, compared to the Philippines’ current ITH scheme of four to eight years.

But Mr. Paul stressed that the tax holidays should be limited and not left renewable “forever and ever.”

“We already agreed to a four-year ITH that is time-bound. If we are going to give tax holidays (to those not getting it now), we would have bent backwards so much that I might even break my back. We’re talking principles here,” Mr. Paul added. “We’re not against incentives per se, just that kind of incentive.”

Other sticky points still being wrestled by the DoF and DTI are the repeal of various business and incentive laws, the renewability of the tax perks, and the transition from the current incentive packages to the new one-size-fits-all scheme.

President Benigno S. C. Aquino III identified the rationalization of fiscal incentives as one of five priority legislative measures he wants passed before he steps down in June 2016, having mentioned the bill in his last State of the Nation Address.

“If they were at 80% before, they are now down to 35%. It’s really a step backward,” committee chairman and Marikina Rep. Romero Federico S. Quimbo (2nd district) told reporters after the hearing when asked about the bill’s progress.

The lawmaker, however, said the Legislative cannot move forward with the measure unless the two agencies are able to forge a complete agreement.

“There are times when Congress should impose, but there are times we feel like we need to come up with a united position coming from the Executive because the last thing we want is to come up with something worse than the status quo, and I think that will happen if we cannot get the specific and unified input of DTI and DoF,” Mr. Quimbo said, citing that the wisdom on the industry situation lies with the two agencies.

Expressing frustration, Mr. Paul even said during the hearing: “I thought the sin tax (law) was difficult but clearly, fiscal incentives is more difficult. In that context, sin tax is a walk in the park.”

Meanwhile, the Tax Incentives Management and Transparency Act (TIMTA), a separate measure also dealing with fiscal perks, will be subject to bicameral committee meeting between the House and Senate.

Lawmakers see a smoother discussion for the TIMTA, as the proposal was drawn from an agreement between the DTI and DoF.

Source: www.bworldonline.com