Double-dipping soon outlawed–DOF
There is a need to streamline the institutional framework for granting tax incentives such that all 14 investment promotion agencies (IPAs) at present observe a single menu of incentives rather than a diverse, confusing and non complementing set of rules, the Department of Finance (DOF) said last Friday.
According to Finance Undersecretary Karl Kendrick T. Chua, all 14 incentives-granting IPAs do not complement each other and allow investors to resort to “forum shopping” by comparing the various laws governing the IPAs and choosing the best package that suit them.
“Our system has created a very unfair system wherein those paying the regular rate pays 30 percent of their net taxable income but that those receiving the [tax] holidays and the special rates only pay one-third of that at around 6 percent to 13 percent of their effective tax rates,” Chua said.
He said this complicates tax administration and encourages businesses to employ transfer pricing and profit-shifting schemes in which related companies subject to different tax regimes transfer profits to another entity enjoying tax holidays and shift expenses to an entity subject to tax, so that they get to reduce their tax payments.
Aside from the Board of Investments (BOI) and the Philippine Economic Zone Authority (Peza), 12 other so-called ecozones are authorized to grant incentives, with no clear coordination among them. Most other countries have only one or two IPAs, Chua said.
“The present fiscal incentives system [in the country] has been suffering from policy overload such that there is now a proliferation of incentives laws granting tax and duty-exemption privileges. This results in forum shopping where investors compare various laws and choose the better package, or double-dipping where investors avail themselves of tax incentives in more than one law,” he said.
The Peza accounted for the bulk of more than P66 billion worth of income and customs duty tax breaks given in 2015, followed by the BOI with P29 billion. The other 12 ecozones accounted for another P9.4 billion worth of incentives for a total of P104.40 billion that year alone.
Chua said the small and medium enterprises are most commonly the companies paying the regular corporate income tax of 30 percent while the big corporations enjoy the tax breaks.
There is now this need to correct the “policy overload” in the country’s fiscal incentives system resulting from the proliferation of laws offering tax and duty exemption privileges to businesses in economic zones and in sectors listed in the government’s investment priorities list.
Such, Chua said, have led investors to double dip and avail themselves of perks in more than one law.
It was mainly for this reason that the DOF submitted the second package under the Comprehensive Tax Reform Program to the House of Representatives on January 15.
The package aims to reduce corporate income tax to 25 percent, from the current 30 percent and, at the same time, harmonize the confusing set of fiscal incentives.
According to Finance Secretary Carlos G. Dominguez III, Package 2 will enable businesses to focus on balancing whether they want to have lower corporate-income tax or the targeted incentives.
“If you are a company you will really balance it. Do I really need this incentive or am I better of with lower income tax? So always a balanced approach, [of] giving them a choice,” Dominguez said.