The competition for foreign investments among developing countries has become more intense with the rapid globalization of trade and investments over the last decade. And because of fierce competition for investments, developing countries like the Philippines engage in perpetual incentive war with other countries to influence the investors’ choice of investment destination.
However, the grant of tax incentives is not without its cost.
Aside from creating inequity in the tax system, tax incentives entail costs in terms of foregone revenues. Due to its impact on government finances, it is vital that an assessment be made on the performance of the existing tax incentives granted by the government in terms of whether these incentives accomplished their intended goals (such as investment and employment generation, which are the common objectives for offering tax incentives), and weigh these economic benefits against foregone tax revenues.
Unfortunately, any analysis of the effectiveness of tax incentives is only as good as the data relied upon in deriving revenue estimates and drawing conclusions. An often common criticism is that available data culled from government agencies are inadequate and/or obsolete, making it difficult to conduct a thorough and up-to-date analysis of the tax incentives, which is an important tool for policymakers in deciding whether to curtail or fine-tune existing tax incentives offered by the government.
Republic Act No. (RA) 10708, or the Tax Incentives Management and Transparency Act (TIMTA), aims to fill this gap on data by creating a single database for monitoring system and analyzing the tax incentives granted by the various Investment Promotion Agencies (IPAs), such as the Philippine Economic Zone Authority (PEZA), the Board of Investments (BOI), and the Bases Conversion Development Authority (BCDA). The mandate is for all registered business entities enjoying tax incentives administered by IPAs to submit an annual tax incentives report within 30 days from the statutory deadline from the filing of tax returns.
The annual report shall contain data on the income-based tax incentives, value-added tax (VAT) and duty exemptions, deductions, and credits or exclusions from the tax base, which shall be submitted by the IPAs to the Bureau of Internal Revenue (BIR), the Bureau of Customs (BOC), and the National Economic Development Authority (NEDA).
The BIR and the BOC shall then submit the report to the Department of Finance (DOF), which shall maintain a single database for the tax incentives. The DOF shall in turn furnish the Department of Budget and Management (DBM) with aggregate data on tax incentives on a sectoral and industry basis. The data shall be reflected by the DBM in the annual Budget of Expenditures and Sources of Financing (BESF), which shall be known as the Tax Incentives Information (TII) section.
The TIMTA Law subscribes to the framework of “cost-benefit”, based on analysis done by NEDA, to determine whether tax incentives are successful at generating economic activity.
While ensuring that the quality and availability of data promotes transparency and accountability, the TIMTA Law puts undue bureaucratic burden on business entities enjoying tax incentives. It should be noted that the same data required under the TIMTA Law can be accessed in the BIR records as well as reports submitted by entities registered with PEZA and other IPAs. Despite this, the law places upon concerned business entities the burden of generating the reports, which means additional compliance costs in terms of paperwork and manpower.
Under the TIMTA Law, all registered entities availing of tax incentives are required to file their tax returns and pay their tax due using the electronic filing and payment system (eFPS). There is nothing new about this requirement since enrollment in the eFPS has long been a requirement for PEZA, BOI and freeport enterprises pursuant to Revenue Regulations 09-01, as amended.
The TIMTA Law imposes stiff penalty for failure to comply with the reportorial requirements with the appropriate IPAs in the amount of P100,000 for the first violation, P500,000 on the second violation, and cancellation of registration for the third violation. The penalty may be considered harsh especially compared to the penalty that the BIR and PEZA would impose under existing rules and regulations for the same offense or violation. It should be noted that if the same information were required to be submitted to the BIR, the penalty would only range from P1,000 to P25,000, depending on the taxpayer’s gross sales, earnings or receipts, while PEZA would have collected a basic fine of P500 and a penalty of P50 for each day of delay on the submission of report.
The TIMTA Law provides a framework for monitoring and assessing tax incentives. It promotes transparency by ensuring availability of data that can be used by policymakers and legislators to fine-tune the existing tax incentives to respond to changing economic conditions and priorities of the government. In the formulation of the implementing rules and regulations, the responsibility for which falls on the shoulders of the DOF and the DTI, in coordination with NEDA, BIR, BOC and IPAs, the appropriate policies and procedures must be developed not only to ensure that the requirements of the TIMTA Law are observed but also to facilitate compliance by providing, for example, uniform or standard templates, and online system of submission of the reports. These will go a long way in easing the administrative burden on affected entities in complying with their reportorial obligations. This also ensures that the law’s objective of putting transparency into practice is achieved.
The author is a Director with Deloitte’s local Tax & Corporate Services Division. Navarro Amper & Co. is a local member practice of Deloitte Touche Tohmatsu Ltd., a UK private company limited by guarantee (DTTL”). Deloitte provides audit, consulting, financial advisory, risk management, tax and related services to public and private clients spanning multiple industries. It has more than 220,000 professionals worldwide, including those in Deloitte Southeast Asia Ltd., which covers Brunei, Cambodia, Guam, Indonesia, Lao PDR, Malaysia, Myanmar, Philippines, Singapore, Thailand and Vietnam.