Proposal to junk fiscal incentives bucked

The National Tax Research Center (NTRC) is cautioning against a proposal for member-countries of the Association of South East Asian Nations (ASEAN) to disengage from the grant of fiscal incentives.

In a letter to Finance Secretary Jose Isidro N. Camacho, the NTRC admitted that there are two schools of thought on the need or significance of fiscal incentives.

On one hand, the NTRC said, there are benefits brought about by foreign investments that are lured by tax incentives.

On the other hand, the NTRC said, there is also the view that incentives do not alter economic behavior or investment patterns at a sufficient degree to justify the costs in revenue, tax fairness or the diversion of limited administrative resources.

Instead of inducing investments, the NTRC said, incentives sometimes merely confer windfall benefits on taxpayers who would have made substantially similar investments without the added impetus of incentives.

As such, the NTRC acknowledged government may sacrifice revenues unnecessarily to the extent that tax concessions exceed the amount necessary to induce the establishment or expansion of the business.

Unfortunately though, the NTRC pointed out, "the reality of the situation is such that in the ASEAN region, the member-countries compete with each other in what some have referred to as a race to the bottom."

It is for this reason, the NTRC argued, that earlier efforts to harmonize the grant of incentives among the ASEAN should perhaps be revived.

The NTRC said that such efforts are more practical to pursue compared to disengaging from the grant of fiscal incentives.

The NTRC further pointed out that under the umbrella of the World Trade Organization (WTO), its members are prohibited from granting certain forms of intervention such as fiscal incentives to selected firms or industries by the year 2003.

The NTRC added that any initiative to disengage from the grant of incentives could generate mixed results.

The result, the NTRC warned, would either be beneficial or damaging to the country’s effort to attract more investments in its directions.

The NTRC added that if non-ax factors that are considered critical to investment are not available in a given country, the said country may find it very difficult to attract investments in its favor.

The NTRC emphasized that "this is an area where other ASEAN countries have more to offer."

For instance, the NTRC cited, the provisions for infrastructure are better in Singapore and Malaysia.

Labor cost is cheaper in Indonesia and Thailand, while power rates are cheaper in Malaysian and Indonesia.

In other words, the NTRC said, incentives in this regard offset the absence of non-tax factors which are also considered by investors in their overall appreciation of a country as a situs for the investments.

The NTRC disclosed that revenue foregone in 1999 due to the grant fiscal incentives under various laws amounted to almost P46 billion.

On a 10-year period from 1990 to 1999, revenue foregone from incentives availment totaled P273 billion or an annual average of P27 billion.