Investment as a legislative oxymoron

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Ben D. Kritz

Ben D. Kritz

ONE unexpected positive to come from the otherwise questionable decisions by the leaders of both houses of Congress to end hearings on the Mamasapano Massacre is that Congress is again free to do some actual work. Unfortunately, some of that work is at cross purposes.

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Yesterday, Sen. Sonny Angara issued a press release to draw attention to Senate Bill 2672, or the ‘PPP Act,’ which he actually filed last week. The bill makes a number of surprisingly good suggestions, such as including the administrative franchise, license, or other necessary permits with the project package to be awarded

The part of Angara’s bill that will scuttle its good intentions is mentioned in a very much “oh, by the way” fashion toward the end of the press release: The measure would give the President authority to designate “projects of national significance.” Among other perks, these projects would be exempt from real property tax; the total of other taxes and fees collected by the local government unit would also be capped at no more than 0.5 percent of the project company’s gross revenues from the preceding year.

From a business point of view, that is a significant incentive. But the revenue saved by project companies would be revenue lost to LGUs, and that is not something they are likely to take sitting down. If the bill passes with this provision intact, there is a chance worth betting on that many proposed infrastructure projects would be subject to “Not in my backyard” sentiment, and the inevitable legal snarls that follow them.

Across town, a measure that is working its way through the legislative process in the House of Representatives is creating more worries for business groups. House Bill 2942 or the Tax Incentives Management and Transparency Act, a measure given the “urgent” tag by President B.S. Aquino 3rd, would change the way tax incentives are handled in an effort to “increase transparency” (but of course).

The Department of Trade and Industry (DTI) already issued a position paper asking lawmakers to reconsider HB 2942, and the Joint Foreign Chambers raised the same alarm in a letter sent last month to House Ways and Means Committee Chairman Rep. Miro Quimbo. The reason is that HB 2942 contains a bizarre, and as far as anyone knows, completely unique provision that would fix the amount of tax incentives for a given year by adding a “tax expenditure account” to the General Appropriations Act.

The logical flaw in that idea seems to have escaped the Administration, as well as the members of Congress who routinely cooperate with Aquino’s sometimes disturbing notions of what the legislative agenda should be. Tax incentives can be defined as subsidies in the sense that they are proportional, their amount being dependent on some revenue-generating activity. In an example such as the exemption from real property taxes in SB 2672, the value of that exemption changes according to changes in the property value, which, in turn, are significantly affected by the economic activity that takes place on that property.

Fixing the amount of the incentive ahead of time places a limit on the economic activity. For instance, if a project company is given an incentive of a reduced income tax rate, it is encouraged to earn as much revenue as it can, because the difference between taxes that would have been paid and what are actually payable with the incentive in place represents additional revenue. If that incentive amount is fixed, however, any income in excess of the covered amount creates tax costs, and therefore encourages the project company to keep its revenue below that ceiling.

DTI has argued that the scheme may violate World Trade Organization rules. That may be debatable, but the competitive disadvantage the fixed-incentive proposal imposes on the Philippines is obvious: broadcasting the intended amount of incentives gives competing governments a chance to offer prospective investors a better deal; and because the Philippines’ tax incentives will be tied to the national budget, the government and its investment promotion agencies have no flexibility to respond competitively.

The government’s intentions in seeking to liberalize the investment environment to some extent and to make its management of investments more efficient are being sabotaged by ideas that raise additional barriers—in effect, SB 2672 and HB 2942 are legislative oxymorons.

Both measures may be backed by good intentions, but will create additional problems if they are passed with the troublesome tax-related provisions intact.

ben.kritz@manilatimes.net.

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1 Comment

  1. Ruben V. Calip on

    Under BS Aquino’s control even otherwise sound-thinking people, like young Angara who should be workling harder to be like his father, have been infected with the mental, psychological, and psychiatric –not to mention the moral and ethical–problems of their leader, the de facto Smartmatic-PCOS-machine created president of our pitiful Republic.