Government mulls limit on ecozone tax perks

Desperate for additional revenues, the Arroyo administration plans to impose a 10-year limit on the income tax discounts being enjoyed by export-oriented companies located in special economic zones.

A proposal being drafted by the Department of Finance effectively requires ecozone firms to pay the standard 32 percent corporate income tax once the 10-year period has lapsed.

The tax discount is the primary incentive offered by the Philippine Export Processing Authority (PEZA) to attract investors and spur export-oriented businesses within the ecozones.

Under the incentive package, ecozone locators pay a five-percent tax on gross income instead of 33 percent on net income that is normally imposed on all businesses operating in the Philippines.

The incentive is being withdrawn as the government grows more desperate for an additional and reliable revenue stream in order to contain its worsening budget deficit, a problem that has been making investors edgy over the country’s long-term economic prospects.

The incentive has been under attack from the International Monetary Fund (IMF). The IMF has consistently warned the government of problems arising from its grant of incentives to exporters.

The proposal to limit the incentive to 10 years is expected to be challenged by the Department of Trade and Industry (DTI) which argues that incentives should be viewed not as foregone revenues but investments that would generate returns in terms of increased economic activity and job creation.

Finance department sources said the move to limit the availment period of the five-percent tax on gross income posed no problems with the PEZA.

Finance officials said the government wants to plug the loopholes that have allowed PEZA-registered firms to introduce deductions on their taxable income, a practice common among firms located at the Subic Bay Free Port.

Although the idea was to impose the five-percent tax on gross income, Subic companies have been allowed to introduce deductions on their taxable income.

The government is hard-pressed to come up with new ideas for additional revenues in an attempt to increase its revenue collection and meet its P130-billion target deficit for 2002.