The Department of Finance (DOF) is calling for a transparent and accountable mechanism in the grant of tax incentives following the release of the Tax Expenditures Report (TER), which revealed that the government lost P144 billion in 2011 from granting tax perks.
The report said the amount of tax incentives granted in 2011 was equivalent to about 1.5 percent of the country’s GDP, 9.26 percent of actual government spending, and 10.61 percent of government revenues during the year.
GDP is the value of all goods and services produced within a country in a given year, while tax expenditures are a measure of the revenues forgone through the provision of tax privileges.
Investment incentives, on the other hand, are sweeteners offered to businesses that operate under the various Investment Promotion Agencies or IPAs and these may include tax holidays, tax credits, or tax exemptions.
The finance department noted that the report covered only 29 percent of all IPA-registered firms, indicating that the figures it used are conservative.
The DOF explained that tax expenditures are like government subsidies in a sense but unlike actual government spending, they are largely unaccounted for and uncoordinated.
“With the current tax incentives system that has been largely unaccounted and uncoordinated, the government loses billions of pesos in revenues every year which could have helped improve our fiscal position,” Finance Secretary Cesar Purisima said.
Because of this, the DOF is calling for the enactment of the Tax Incentives Management and Transparency Act (TIMTA) and the Fiscal Incentives Rationalization (FIR) so that urgent reforms can be done in the fiscal incentives system.
It said TIMTA will give the government the necessary tools to account for the magnitude of government support given to a certain sector and the appropriateness of using tax incentives in achieving socioeconomic goals, while the FIR reform will coordinate and organize the grant of incentives to different sectors.
”Tax incentives distort the tax structure of the Philippine economy. Through these twin fiscal incentives reform measures, in the long term the government will enhance the country’s fiscal capacity to continue to build on its macroeconomic fundamentals, level the playing field, and improve competitiveness and investment opportunities,” Purisima said.
“Accounting for tax incentives needs to be transparent, and these tax incentives need to be granted properly,” he added.