IT seems the Executive Branch of the government is once again set to cross swords with the Legislature, this time over the Tax Incentive Management and Transparency Act, or TIMTA.
In the latest chapter of the long-running drama (the bill, or something similar to it, has been popping up from time to time for the last 20 years), the Department of Finance, Department of Trade and Industry, Bureau of Internal Revenue (BIR), and the National Economic Development Authority (NEDA) raised objections to two amendments made to the slightly different versions of TIMTA working their way through the House and Senate.
The first objection was the removal of a requirement for NEDA to assess and report on the impact of each incentive proposal. For example, if the Board of Investments or an Investment Promotion Agency recommended exempting an auto assembly plant from paying customs taxes on imported car parts, before the incentive could be approved, NEDA would be required to analyze the financial impact, comparing the loss of revenue from duties to the anticipated gain from increased business activity.
The second objection was to an amendment that reduced the amount of time allotted the BIR to audit the books of entities involved in an incentive scheme, from three years to six months. According to the DOF and the BIR, a six-month period is simply not enough time for Kim Henares’ bloated, grossly inefficient agency to actually do its job.
The explanation of what TIMTA is as provided by the Official Gazette is anything but concise, which rather leads to suspicion about how big a priority “transparency” really is:
“The TIMTA aims to promote transparency and accountability in granting tax incentives to business entities, and private individuals and corporations. Under the bill, data and information on tax incentives claims of registered entities and individuals, and the amount of tax and duty incentives granted them shall be evaluated and monitored under a comprehensive database.”
What the bill actually aims to do is to tighten controls on fiscal incentives, first by limiting them to a specific amount by including a gross total of available incentives as part of the GAA, and second by creating a single database with which all outstanding incentives can be tracked.
The basic idea behind the TIMTA —imposing a bit of order on fiscal and tax incentive activities—is not a bad one. However, the approach being taken by the TIMTA, the approach preferred by the Executive agencies, will be counterproductive and only throw up bigger obstacles to attracting quality investments.
The first problem is the fixing of a gross incentive amount for a budget year. DTI originally objected to this idea, and rightly so, because it would take any flexibility away from the government; once the earmarked incentive amount was exhausted, investment applications would stop for that year. And because the amount would be fixed in the GAA, what would likely happen is a mad dash of investments early in the year in order to grab a piece of the incentive pie before it disappeared; under those circumstances, tax breaks or other fiscal incentives might go to projects that are not appropriate for it.
The second problem is the unreasonable delays the version of TIMTA the Executive departments want to see will include. While having NEDA conduct a cost-benefit analysis of incentives is not a bad idea, it introduces a delay to the approval process; that problem could be largely overcome if NEDA streamlined the work to take weeks instead of months.
The BIR people, on the other hand, should be ashamed of themselves for complaining that they need a full three years to examine an entity’s books. One of the issues that TIMTA attempts to solve – albeit in a not particularly effective way – is the current problem of backlogged incentives, some being delayed for 10 years or more, and virtually every one of them due to BIR inefficiency and capricious rule-changing. Instead of improving performance, the BIR instead demands that its lack of capability be enshrined by law.
Far from being any sort of improvement to the Philippine investment environment, TIMTA as it is now is simply a message to would-be investors that “We don’t really want your business.” If that is the message the government wishes to send, then the TIMTA is perfect. If this Administration has something else in mind, then the idea should be dropped, and different ways to improve processes explored.