Timta, RFI could cost P-Noy business support
As Congress resumes sessions today, local and foreign business chambers will again be on the edge of their seat as lawmakers—upon the prodding of Malacañang—start deliberating anew on the two bills that businessmen dread—the Tax Incentive Monitoring and Transparency Act (Timta) and the Rationalization of Fiscal Incentives (RFI) bill.
The two tax measures have been inching their way slowly through Congress for the past two years. But, for President Aquino, who took
severe beating popularity-wise due to the Mamasapano incident, as shown in surveys, these two proposals could just cost him the support of the private sector, as well.
Since their introduction in the 16th Congress, the Timta and the RFI bill have been closely guarded by the business community, as they should: Both measures are seen as the Department of Finance’s (DOF) mechanism to inject control in incentive administration of the country’s investment promotion agencies (IPAs), in a bid to boost the state’s coffers.
The RFI bill, which has failed to get the nod of Congress for 15 years now, aims to restructure the incentive scheme of IPAs, including those of the Board of Investments and the Philippine Economic Zone Authority (Peza), by removing the coveted income-tax holiday (ITH) and other perks seen as “redundant.” (Table 1 shows the numerous statutes that give various incentives to certain activities that need to be harmonized through RFI.)
A broader stroke for control, however, is enshrined in the Timta, a newer measure introduced in the 15th Congress. The measure seeks to keep track of incentives availed of by registered enterprise through a reportorial requirement.
The various Timta bills in the two chambers of Congress differ on the proposed mechanism but all agree that the DOF and its agencies will be given an oversight function over the IPAs on the grant of incentives.
DOF explains side
Finance Secretary Cesar V. Purisima—in pushing for the passage of Timta and RFI—challenged the Department of Trade and Industry (DTI) and the various IPAs to bring fiscal policy “into the 21st century,”
Based on the first Tax Expenditures Report released by the DOF, the government’s revenue loss from the grant of ITH, reduced income tax rates and duty exemptions to investments was at least P144 billion in 2011. “This represents a significant loss in revenues: 1.5 percent of gross domestic product, 9.3 percent of government’s expenditures, or 10.6 percent of government revenues in 2011.
These figures are conservative given the report covers only 29 percent of all 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. “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.”
Tax expenditures
The DOF defined tax expenditures as a measure of the revenues forgone through the provision of tax privileges such as reduced tax rates, special deductions, or tax credits or allowances to promote or assist specific economic activities or groups of taxpayers. The measurement of tax expenditures requires the establishment of a benchmark tax system that excludes all such tax privileges to form a basis for identifying tax policy deviations and estimating the revenue impact of such tax policy deviations from this benchmark. The tax benchmark reflects decisions that take into account considerations of the ability of persons to pay the tax, and the economic, administrative and compliance costs of the tax.
According to the DOF, the the inclusion of tax expenditures in the budget process allows these policies to get the same level of strict budget scrutiny as normal budget expenditures.
“Accordingly, to make the budget process more complete, all expenditures should be accounted for and allocated to the functions, sectors, or regions benefiting from the tax expenditure. This allows recognition of the budget support provided to a sector directly through public expenditures and indirectly through tax burden relief. This information enhances the debate about both the magnitude of public support and the appropriateness of the modalities for delivery of support to a sector, economic activity or group of taxpayers.
Accounting for tax expenditures also highlights the tradeoffs that need to be recognized in awarding or enhancing tax privileges. A key tradeoff is that the enhancement of a tax expenditure favoring a specified group or sector has to be offset by increased tax burdens on the rest of the economy to sustain existing direct expenditure-supported programs. The tradeoffs need to be considered include lowering (raising) the benchmark tax rates for most taxpayers in exchange for decreasing (increasing) the tax privileges for some taxpayers. Alternatively, tax expenditure support for a sector could be considered a better (worse) delivery mechanism than assistance through direct expenditure programs.”
The DTI, tasked to promote investments and spur economic activity, has been hard-pressed to concede to the DOF’s demands on the measures. It didn’t help that the RFI, in particular, was included among the President’s priority economic bills this year, the third year in a row.
Even lawmakers, despite oppositions from business groups, have given indications the two measures will pass
House Committee Ways and Means Chairman and Liberal Party Rep. Romero Quimbo of Marikina said the panel has decided to prioritize the passage of these economic bills.
Timta
The Timta, or House Bill 2942, authored by Liberal Party Rep. Maria Leonor Gerona-Robredo of Camarines Sur, seeks to promote transparency and accountability in the grant and administration of tax incentives to business entities, private individuals and corporations.
Among the salient features of the bill that the business group is opposing is the creation of a tax expenditures account (TEA) in the annual General Appropriations Act (GAA). This would account for the incentives, pinning more accountability to how IPAs administer and grant such incentives, and providing the Bureau of Internal Revenue (BIR) authority to impose requirements before the award of such perks, among others.
But Quimbo said: “They [businessmen] don’t have to worry, we [the both chambers] already deleted the provision creating TEA in the annual GAA.”
“We’ve also removed the provisions that require IPAs to appear before Congress and ask for budgetary tax subsidy. What we now require is simply a transparency measure—a reporting system of incentives given out,” the lawmaker added.
Senate Bill 2669, a consolidation of bills authored by Senate President Franklin Drilon and Senate Pro Tempore Ralph Recto, provides for the monitoring of tax incentives with the creation of a Tax Incentives Information section in the annual Budget of Expenditures and Sources of Financing.
The Senate’s Timta version, senators clarify, does not, in any way, affect the independence or autonomy of the IPAs or other government agencies to administer incentives granted by law to registered business entities and qualified private individuals or corporations.
“The bill merely requires that the incentives be accounted for. It does not tamper with the fiscal incentives presently enjoyed by companies; it only requires that their use be made transparent,” Recto said.
“It does not rescind, nor recall any investment perk; it just obliges companies and the government to record and report it. Why? Because in taxation, it doesn’t mean that when taxes are forgiven, you can already forget about them,” he added.
Recto said the viability of an idea is tested on simulations of its implementation. “This saying is true in legislation, as in cooking: Just because a rose smells better than cabbage should not lead us to conclude that it makes a better soup.”
He said the Philippines offers incentives, or perks, to compensate for its “handicaps.” “When we have one of the highest power rates in Asia, when our ports are congested, our roads clogged, our airports crammed, and even data travel slow in the information highway, when business is choked with rules, then we try to offset these with tax holidays and the like,” Recto said.
“In short, we indemnify them with incentives,” he added.
RFI
On the RFI, Quimbo said the government wants fiscal incentives streamlined because these distort the tax structure of the country and take away billions of pesos from the government every year.
“Those billions of pesos could be used to improve the country’s fiscal position and social services,” Quimbo said.
According to Quimbo, an ally of President Aquino, these two measures have been included in the both chambers’ priority bills for the 16th Congress.
The fiscal incentives rationalization bill has been facing strong opposition due to its provisions, particularly the lifting of the tax- and duty-free incentives of several industries.
Under the draft bill submitted by the DOF and the DTI to the House Committee on Ways and Means, companies registered with the Philippine Economic Zone Authority (Peza) are given two options in
the measure.
They can opt for a four-year ITH, with either 5-percent tax on gross income earned (GIE) in lieu of local and national taxes, except value-added tax (VAT) and real property tax (RPT) for 11 years; or 15-percent reduced tax on corporate income in lieu of local and national taxes, except VAT and RPT for 11 years, the bill said.
Peza-registered companies under the second option are given the choice of either 5-percent GIE for 15 years, in lieu of local and national taxes, except VAT and RPT for 15 years; or 15-percent reduced tax on corporate income in lieu of local and national taxes, except VAT and RPT for 15 years.
According to Quimbo his panel is still studying the RFI version of the DOF and the DTI and the same four bills filed in the lower chamber.
He said, citing the DOF-DTI draft bill, it is a policy of the state to grant investment incentives that encourage long-term and recurrent investment, are simple to administer, time-bound and whose performance and outcomes are easily verifiable.
Quimbo also said the state shall ensure that the grant of incentives promotes substantial social and economic spillovers and equitable development across income classes and across provinces, are fiscally sustainable, financially and economically justifiable and is consistent with international treaties.
Despite strong opposition from the business sector, the Aquino administration seems bent on enacting the Tax Incentive Monitoring and Transparency Act (Timta) and the Rationalization of Fiscal Incentives (RFI) bill.
Finance Secretary Cesar V. Purisima, the chief proponent of the two fiscal measures, had said the government is losing at least P144 billion in revenues annually due to the grant of income tax holiday (ITH), reduced income-tax rates and duty exemptions to investments.
“This represents a significant loss in revenues: 1.5 percent of gross domestic product, 9.3 percent of government’s expenditures or 10.6 percent of government revenues in 2011. These figures are conservative given the report covers only 29 percent of all IPA-registered firms,” the Department of Finance (DOF) said in its first Tax Expenditures Report covering 2011, released mainly in support of the lobbying for the passage of Timta and RFI.
In 2011, however, data showed that the Board of Investments, Philippine Economic Zone Authority and other investment promotion agencies (IPAs), approved P746.8 billion worth of new investment commitments from local and foreign businessmen—fresh capital infusions that would not have come in if the country’s fiscal-incentives regime was different. See table 2.
This is the bone of contention that business groups want ventilated in opposing the passage of Timta and RFI.
The American Chamber of Commerce in the Philippines (AmCham), as part of the Joint Foreign Chambers (JFC), has stood its ground that any change in the investment scheme will only cast doubt on future investments in the Philippines.
“Why fix it if it isn’t broken? If it’s a question of redundant incentives, there are numerous laws they can tweak, but don’t change the existing one,” said John Forbes, senior adviser to the AmCham, in an interview.
Forbes was referring to the mandatory list of activities and areas being given incentives in the yearly Investment Priorities Plan, by virtue of existing laws, numbering to more than 50. These laws have also irked the DOF as aggravating the redundancy of incentives.
The same sentiment is echoed by other foreign business groups representing the Philippines’s main trade partners and top investment sources, including the European Chamber of Commerce in the Philippines (ECCP) and the Japanese Chamber of Commerce in the Philippines.
“Investors will always compare, more so now that we have the Asean integration. We had $6.2 billion in foreign direct investments last year; that’s because of incentives. If the administration succeeds in putting those measures through and shrink the incentives scheme, future investments will go somewhere else,” said Henry Schumacher, vice president of the ECCP. Japanese Chamber of Commerce and Industry Vice President Nobuo Fujii made the same statement in February during the visit of the largest Japanese business delegation to the Philippines since the 1990s.
The JFC said Timta will “hamper the exercise and operations of IPAs, in view of the rigid government budgetary processes in the passage of the appropriation law, as well as the actual implementation of this system.”
Local business groups echoed their foreign counterparts. The Management Association of the Philippines (MAP) is scoring the stringent policy that the DOF wants in carrying out the Timta, deeming the forfeiture of incentives in the case of noncompliance, as a “harsh and confiscatory” measure.
Makati Business Club (MBC) Executive Director Peter Perfecto, in an e-mail interview, warned that removing the ITH under the RFI bill could have repercussions on the country’s competitiveness in light of the forthcoming Asean integration by the end of the year.
“We maintain that administering incentives require some rationalization efforts, including defining roles and functions of the different IPAs and regulatory bodies and addressing some outdated laws. However, in a period of stiff competition, especially with the Asean Economic Community where all our neighbors, everyone, offer ITH; removing ITH altogether will certainly put us at a disadvantage,” Perfecto said.
On the Timta, the MAP said the transparency measure should not entail stringent penalties from the monitoring body, which, in the measure, would be the Bureau of Internal Revenue.
“This is just an information tool, the penalty for imperfect compliance should not be forfeiture of incentives for the registered enterprise,” said Francisco “Popoy” Filamor del Rosario Jr., president of MAP, via an e-mail interview.
The MBC expressed a similar sentiment in the provision of the Timta in the House of Representatives for a Tax Expenditure Account (TEA).
The fund has been a point of dispute between the DOF and the Department of Trade and Industry (DTI), as the TEA requirement would not just serve as a report of all the incentives given to enterprises in a year, as reflected in the General Appropriations Act. The TEA, as part of the budget, would also require IPAs to forecast how much incentives they will give for the incoming year—an impossible task, according to a DTI official, as the incentives are derived from the income of a company netted in the following year.
The requirement would essentially put a cap on the amount of incentives they can give, as the DTI’s hands would be tied when its forecast falls short of the actual incentives enterprises are entitled to.
“Implementing a cap on incentives may become an obstacle to investment. How do we define the cap? What if there are more opportunities for investments but the budget has already been used up? We need to consider the repercussions very carefully considering that we are competing with our Asean neighbors,” Perfecto added.
Conclusion
Repeated warnings of slower flow of investments and reduced competitiveness—should the Tax Incentive Monitoring and Transparency Act (Timta) and the Rationalization of Fiscal Incentives (RFI) bill hurdle Congress—bode ill for the Aquino administration, which has already endured a beating in its final leg after the Mamasapano tragedy in January.
So, realizing the possible backlash, especially the likely withdrawal of bu-siness-sector support for President
Aquino, leaders in Congress quickly gave the assurance that these two bills would be passed fairly and transparently.
“Actually, we discussed Timta and the RFI bill during our monthly meeting with our Senate counterparts on Monday,” House Committee on Ways and Means Chairman and Liberal Party Rep. Romero S. Quimbo of Marikina City said, noting that they took into account the concerns and fears of the private sector over the two proposed measures.
“With the [lower chamber] version of the Timta and the RFI bill, currently under deliberation in the House Committee on Ways and Means…they don’t have to worry,” Quimbo said, in reaction to a three-part special report of the BusinessMirror, titled “Timta, RFI could cost P-Noy business support.”
The monthly meeting was attended by Quimbo, Speaker Feliciano Belmonte Jr., House Majority Leader and Liberal Party (LP) Rep. Neptali M. Gonzales II of Mandaluyong City, Senate President Franklin M. Drilon and acting Senate Minority Leader Vicente Sotto III. Indeed, lawmakers need to assuage the fears of businessmen. For an administration that has proven to be too reluctant to spend public money to spur growth, a greatly reduced private-sector investment would certainly cause further economic slowdown.
The Asian Development Bank said that, when the pace of growth decelerated by almost 1 percentage point to 6.1 percent in 2014 from the average of the previous two years, the main culprit was the slowdown in government spending. In 2014 public expenditures only amounted to P1.982 trillion, or 13 percent below the programmed spending.
Timta
Still, Quimbo said the House of Representatives is set to pass the Timta before its sine die adjournment on June 11, while the RFI will hurdle committee deliberations in June and is targeted to be reported at the plenary before the President’s State of the Nation Address on July 27.
Quimbo has already said the Senate and the House have already deleted the provision in Timta mandating the creation of the Tax Expenditure Account in the annual General Appropriations Act.
They also removed the provisions that require investment-promotion agencies to appear before Congress and ask for budgetary tax subsidy. These are among the major concerns of business groups.
LP Rep. Maria Leonor Gerona-Robredo of Camarines Sur, author of Timta, or House Bill (HB) 2942, said the proposed measure should be passed as it promotes transparency, which the country needs.
HB 2942 seeks to promote transparency and accountability in the grant and administration of tax incentives to business entities, private individuals and corporations.
“There’s no provision in Timta that discourages investment; the proposed law only asks for a transparent system…nothing more, nothing less,” Robredo said. “Even businessmen want transparency besides good governance.”
Robredo also said the Timta is receiving many positive comments from the members of the lower chamber. She said the House Committee on Ways and Means will continuously discuss Timta with several stakeholders.
Liberal Party Rep. Jerry Trenas of Iloilo, Centrist Democratic Party Rep. Rufus Rodriguez of Cagayan de Oro and LP Rep. Antonio Rafael del Rosario of Davao del Norte, all members of the Committee on Ways and Means, also backed the passage of Timta.
“The grant of tax incentives to encourage investments and companies to do business in the Philippines has been a sound strategy that our economic managers have employed to bolster our economy, generate employment and to encourage growth in certain key industries,” Treñas said. “However, we must also take into account the present-day context of our economy and of the respective industries benefited by these incentives. There is a need to reassess the efficacy and cost-benefit ratio of these incentives to ensure that the objectives of these incentives are still met by our existing legal framework.”
Rodriguez, coauthor of Timta, meanwhile, said the incentives given by the government should be monitored with the passage of the measure.
Deputy Majority Leader and National Unity Party Rep. Magtanggol T. Gunigundo of Valenzuela, said “we need a law on transparency, like the Timta, for the Asean integration in December.”
“In the advent of Asean 2015 integration, we want our policies to be consistent and the implementation should have predictable outcomes. However, we should keep an open mind on the suggestions of taxpayers,” he said.
RFI
Meanwhile, Treñas said the lawmakers should carefully review the recommendation of several government agencies before passing the RFI bill.
“Fiscal incentives rationalization, however, must be done after careful review by the concerned government financial agencies and upon proper consultation with the affected industries. We must ensure that proposed legislation rationalizing incentives should not adversely affect our ongoing programs that encourage direct investments and the growth of local industries,” he said.
Gunigundo said any rationalization must be predicated on a tax system that is easy to comprehend and comply with.
Party-list Reps. Jonathan dela Cruz of Abakada and Rep. Sherwin Tugna of Cibac also supported the passage of the RFI bill. “I am for the enactment of the bill. It’s about time we rationalize our tax regime if we are to be globally competitive,” de la Cruz said.
Tugna said: “I may support to amend the current incentives to be reasonable, making them a win-win situation for both the government to get revenue from taxes. However, the bill should not dissuade foreign investors and make our country attractive to foreign investors.”
The RFI bill has been facing strong opposition due to its provisions, particularly on the lifting of the tax- and duty-free incentives of several industries.
“Definitely, we have to hear out these oppositions and study the bases and validity of their positions and arguments with the end in view of harmonizing them with the pending bills. [However] we cannot continue nurturing and spoiling certain industries forever. We should not create a culture of mendicancy where we favor industries, which do not even try to be competitive. The government cannot forever be a nanny to overgrown adults acting like kids,” Party-list Rep. Rodel Batocabe of Ako Bicol said.
Business groups also want assurance from the government that reforms are institutionalized.
“The challenge now for the Aquino administration, and this has been also said by the Management Association of the Philippines in the past, is to institutionalize reforms so the next administration can’t go backward. We need to get something in place and not keep reversing,” American Chamber of Commerce of the Philippines Director David “Ebb” Hincheliffe had said.
With just a year left before the present administration comes to a close, business groups—fearing investment instability because of the possible change in the incentives regime—may find consolation in the fact that time may only permit the passage of just one of two bills. A ranking official of the Department of Trade and Industry (DTI), who is privy to the matter, earlier said the RFI measure may have a better chance of being passed into law, as the DTI is more inclined to give way on it, compared to the Timta.
The DTI would hold greater control in the grant of incentives with the RFI compared to the Timta, which would give the Department of Finance the power to demand the reportorial requirement from enterprises and wield the power to suspend incentives. Ultimately, the decision to bargain competitiveness in attracting investments in exchange for higher revenue collection—and whether this would be a legacy of the Aquino administration—would depend on how firm the DTI can stand its ground in the months to come.
By Jovee Marie N. dela Cruz & Catherine N. Pillas
Sources:
http://www.businessmirror.com.ph/timta-rfi-could-cost-p-noy-business-support/
http://www.businessmirror.com.ph/timta-rfi-could-cost-p-noy-business-support-2/
http://www.businessmirror.com.ph/timta-rfi-could-cost-p-noy-business-support-3/
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