Chua: Cost of tax incentives outweighs economic benefits

CEBU, Philippines — The government has to streamline tax incentives because the cost of granting them outweighs its benefits to the economy, a finance official said.

In a forum with the Cebu business community during a recent Board of Investments (BOI) event in Cebu City, Finance undersecretary Karl Kendrick Chua explained the cost-benefit analysis of fiscal incentives currently given to companies registered with the country’s investment promotion agencies (IPAs).

“This is done so we can determine if the tax incentives given to recipients benefit our economy more than it costs,” Chua said.

Based on 2015 data, he explained that on average, the economy gets only 60 centavos for every one peso spent on tax incentives, “even after accounting for employment generated and spillovers both direct and indirect.”

“For every peso we grant as incentive, we collect 34 cents in taxes,” he added.

Chua noted there are many redundant and unnecessary incentives.

According to the Department of Finance, the government had to spend over P257,000 to generate just one job in a registered investor.

He said there was no significant difference in productivity between IPA-registered companies and firms that do not enjoy fiscal incentives.

“In general, registered firms, when compared to non-registered firms, have the same employment relative to size, same average wages, but pay top management higher, spend more on fixed assets, but do not spend higher on R&D (research and development), have the same level of exports relative to sales and no difference in productivity,” the finance official explained.

The second package of the government’s tax reform seeks to cut corporate income taxes and rationalize fiscal incentives.

Aside from streamlining of fiscal incentives, the Tax Reform for Attracting Better and High-quality Opportunities (TRABAHO) bill also proposes to cut in corporate income tax rates gradually to as low as 20% from the current 30%, which is the highest in Southeast Asia.

The measure, filed as House Bill No. 7458, will also replace the existing five percent gross income earned tax incentive with a 15% tax on net income, while capping this perk at five years. (FREEMAN)