IMF backs removal of tax exemptions, incentives

by Chino Leyco | May 22, 2016 (updated)

The International Monetary Fund (IMF) is urging the Philippine government to eliminate or drastically reduce its tax exemptions and incentives given to corporations, particularly for mass housing projects.

In a report submitted to the Department of Finance (DOF), the Washington D.C.-based institution said that tax incentives for enterprises should be targeted with a sunset provision, while tax holidays for mass housing projects should be repealed by Congress.

IMF also added the government should prioritize the phase out of its investment tax incentives before discussing any proposed reduction of corporate income tax.

“The hundreds of tax exemptions and incentives that are now granted should be reduced, with a more controlled process for determining targeted sectors in which they are potentially effective,” IMF said.

In particular, IMF said the five percent perpetual substitute tax for all enterprises that were granted tax holidays under the Philippine Economic Zone Authority (PEZA) program should be subject to a sunset provision.

The institution instead suggested that tax incentives should be targeted to foreign direct investment, not to broad domestic sectors that are already productive.

“A number of technical aspects of the current cross border corporate tax provisions should be adjusted… in order to make the system more appropriate for the emerging environment in which there is increasing outbound direct investment… as well as inbound investment,” IMF said.

IMF also urges Congress to repeal the tax holidays for mass housing and consider introducing well-targeted demand-side subsidies for housing.

“Tax holidays should be more carefully sectors that are strategically important for the Philippines,” IMF said.

The fund also wants Congress to enable the DOF and other government departments to participate in designating strategically important sectors and have a veto.

“ASEAN countries should work to adopt a code of conduct on tax incentives; the Philippine government could support this project,” IMF said.

In December, 2015, President Benigno S. Aquino III signed into law Republic Act No. 10708, commonly known as the Tax Incentives and Management Act (TIMTA), which aims to monitor and evaluate tax incentives granted by government to the private sector.

But since the signing, all government agencies in charge of crafting the implementing rules and regulations (IRR) of TIMTA are still seeking more time to complete the guidelines.

As mandated by the law, the secretaries of the Department of Trade and Industry and DOF have to coordinate with the director general of the National Economic and Development Authority (NEDA) to promulgate the IRR.

Aside from NEDA, DTI and DOF also need to coordinate with the commissioners of the Bureau of Internal Revenue and Bureau of Customs, as well as heads of the investment promotion agencies (IPAs) to promulgate the IRR.

Source: www.mb.com.ph