According to the Department of Finance (DOF), only 3,102 firms registered with various investment promotion agencies (IPAs) to obtain tax incentives such as income tax holidays, to which the government lost P178.56 billion in potential revenues in 2016. In contrast, some 90,000 active small and medium enterprises (MSMEs) pay the regular corporate income tax (CIT) rate of 30 percent, which remain the highest among the Association of Southeast Asian Nations (ASEAN) economies.
Finance Undersecretary Karl Kendrick Chua said that based on data from the Bureaus of Internal Revenue (BIR) and of Customs (BOC) the government had foregone P74.53 billion in revenues from income tax holidays (ITHs), P46.66 billion from special income tax rates and P57.38 billion in customs duties.
These foregone revenues as a result of tax incentives given out to select enterprises are collectively termed as “investment tax expenditures.”
Under the Budget of Expenditures and Sources of Financing (BESF) document published by the Department of Budget and Management (DBM), these only include ITHs, special income tax rates and incentives on customs duties.
Chua said at a hearing of the House committee on ways and means that the data collated by the DOF’s Domestic Finance Group (DFG) does not yet include foregone revenues from the value-added tax (VAT) exemptions on imports and local VAT that enterprises registered with IPAs also get to enjoy. It also does not yet include the foregone local taxes and leakages that may arise as a result of abuse of transfer pricing.
Foregone revenues from investment incentives, excluding VAT and local tax privileges, grew 71.03 percent in 2016 from the previous year’s figure of P104.40 billion and were 52.52 percent higher from 2015 projections, the DOF-DFG report said.
The report said these revenue losses are expected to increase to P196.02 billion or by 9.77 percent in 2017.
For 2015, the DOF was already able to include estimates of revenue losses from VAT exemptions, which reached about P196.83 billion for that year on a gross basis.
Adding this figure to the investment tax expenditures of P104.40 billion from ITHs, special tax rates and custom duty incentives, this brings the total estimated foregone revenues of the government from investment incentives to P301 billion in 2015 alone, Chua said.
He told lawmakers that 2015 was the earliest year when the Tax Incentives Management and Transparency Act (TIMTA) made possible the monitoring and review of the economic impact of incentives given to businesses.
Chua said the Philippines has 14 IPAs that are authorized to grant incentives to a select group of businesses. Moreover, some 315 special laws exist that grant other forms of incentives beyond what the IPAs give.
These laws that are outside the national tax code comprise 123 statutes that give out investment incentives and 192 others that provide non-investment incentives to registered enterprises.
In terms of IPAs, the DOF-DFG report showed that the Philippine Economic Zone Authority (PEZA) accounted for the biggest portion of total investment tax expenditures amounting to P118.85 billion or 66.56 percent of the total in 2016.
The Board of Investments (BOI) accounted for P36.26 billion or 20.31 percent of the total investment tax expenditures.
Meanwhile, the Authority of Freeport Area of Bataan (AFAB), Aurora Pacific Economic Zone and Freeport (APECO), Clark Development Corporation (CDC), Cagayan Economic Zone Authority (CEZA), Poro Point Management Corporation (PPMC), Subic Bay Metropolitan Authority (SBMA), Tourism Infrastructure and Enterprise Zone Authority (TIEZA), and Zamboanga City Special Economic Zone Authority (ZCSEZA) accounted for the remaining P23.45 billion or 13.13 percent of the total, the DOF-DFG report said.
According to the report, the data covered 5,694 out of 5,790 registered business entities (RBEs) in IPAs.
From 2015, the number of RBEs that availed themselves of income tax incentives increased 9.07 percent in 2016, while those that were granted incentives on customs duties grew by 5.85 percent.
Of these RBEs, businesses in the manufacturing sector took the biggest share of total investment tax expenditures in 2016, which accounted for 50.68 percent of total. Other sectors that had huge shares were the services and energy sectors which accounted for P48.17 billion or 26.98 percent of the total, and P17.69 billion or 9.91 percent, respectively.
Chua said the current inequitable corporate tax system places MSMEs at a disadvantage as they have to compete with bigger firms that, ironically, enjoy various tax perks when they can easily afford to pay the correct amount of taxes.