1. Leveling the Playing Field: Rationalizing Investment Tax Incentives
Shortening the list of priority sectors in the IPP?
Abolishing the BOI in favor of the PEZA?
And other proposals that address the symptoms rather than the core of the problem
To fix 2 overarching problems

2. Reforms need to address the core problems
To minimize waste due to poor targeting (e.g. when not needed; when costs > benefits)
To curb abusive practices whose primary purpose is to lower taxes for just a few taxpayers
There is a need to change that way it is conferred, who confers it, and how performance is assessed after
To fix 2 overarching problems

3. Un-complicating Investment Tax Incentives (ITI) reform
ITI or fiscal incentives are special tax treatments conferred to entities in order to promote investments in specific activities
(e.g. ITH, 5% GIE, double deduction for R&D, etc.)
Is it an effective marketing tool?
Is it a tax expenditure?
Or perhaps it is both!

4. What is an “incentive”?
Simply stated… We give an incentive to motivate someone to act in a way that we like
These are the 2 conditions that make giving incentives worth it, otherwise it is not
This should also be a guide to those granting fiscal incentives

5. Are these 2 conditions met?
First – are fiscal incentives really what motivate registered firms to invest, in all instances? Or, is it profit? Second – definition of “we” is limited to just a subset, in practice limited to the DTI and IPAs.

6. Philippines Fiscal Incentives: published in the BESF
All IPAs
2011
2012
2013
Number of firms
1,318
2,473
1,660
Growth
87%
- 67%
Source: DoF and DBM (BESF 2015, 2016)
A few observations…
Represents just a handful of firms with about 800 thousand SEC registered, and in the past an inclusive list of activities
If the volatility is due to entry and exit from the ITI regime, then maybe this is a symptom of poor targeting?
Or are firms simply remiss with their reports to tax authorities?
Publication in BESF consistent with international good practice
800 thousand registered with SEC; 0.25%
IPP includes
Preferred activity (from green projects to mass housing to export manufacturing to loosely defined “Strategic Projects … with very high social economic returns”)
Mandatory list
Export activity

7. Philippines Fiscal Incentives: published in the BESF
In Bn PhP
2011
2012
2013
Tax Expenditure
144.3
159.9
146.8
Ratio to GDP
1.5%
1.3%
Source: DoF and BESF 2015, 2016
“flat” as a ratio to GDP despite fluctuating number of firms
Equivalent to about PhP200 billion at present
Not a trivial amount given that the NG deficit stood at PhP121 billion (1% of GDP) in 2015

8. FI policy in the Region is broadly similar, but execution is not
Note: liberal definition of eligible sectors for all; but only PH has perpetual GIE tax and only PH has more than 2 implementing entities
Incentives PH
Thailand
Indonesia
Malaysia
Vietnam
Singapore
Eligible sectors
Sectors in IPP + ”pioneer”, exporters
“Eligible industries form agri to manufacturing
Pioneer industries (e.g. mining, oil, renewable, etc)
Can opt for “pioneer” status or investment tax allowance
High technology (research, IT, etc)
Geographical regions
Pioneer (manufacturing for global markets)
Special Tax Treatment
ITH
For 3 – 8 years
For 5 – 10 years
For 2 – 4 years
For 3 – 15 years
VAT and Duty exemption on imports
VAT and Duty exemption or reduced rates
Limited application of VAT and Duty exemption
Perpetual GIE tax (5%), liberal application of deductions
50% reduction in NTI for qualified investment for 5 yrs
30% reduction in NTI for qualified for 6 yrs
Liberal application of deductions (e.g. double deduction for training, etc)
50% reduction on CIT rate after ITH for next 4 – 9 years
5 – 10% CIT for qualified investment
Implementing arm
12 entities in total: BOI, PEZA, SBMA, CDC, CEZA + 7 more IPAs
2 entities: BOI and Industrial Estate Authority of Thailand (IEAT)
2 entities: BKMP and MoF (with veto power)
1 entity: Malaysian Investment Development Authority (MIDA)
1 entity: Foreign Investment Agency
1 entity: Economic Development Board

9. Philippines Fiscal Incentives: the problem of waste
12 PH entities conferring tax privileges, (mostly) independent from one another, with one purpose in mind – to promote investments “We” is incomplete unless these are also treated as tax expenditures

10. Philippines Fiscal Incentives: the problem of transfer pricing abuse
Take 1 firm, X, with 2 activities: a “regular” activity where it pays 30% income tax, and a “special” activity where it pays the 5% GIE XR XS
SalesR
SalesS
Less COGSR
Less COGSS
GIR
GIS x 5%
Less DdR
Less DdS
NTIR x 30% Dd
NTI
Abusive TP schemes may be used to shift deductions in order to lower taxes
Tax Due =

11. This behavior occurs across all IPAs
Source: FPI computations using data from DoF
Note how deductions are much greater in the regular activity compared with exempt and special
This resulted in a much lower “taxable base” for the same, by about half
This behavior occurs across all IPAs
0.7% (sp) vs 2.1% (regular), otherwise is 4.5% for regular
By shifting deductions, a firm can lower tax due by at least half

12. Lasting solutions that address the core problems
With TIMTA (RA 10708) passed, we should now look to enact rules to manage FI more effectively, and to control abusive behavior. At minimum, this includes:
Enacting a meaningful fiscal incentives rationalization (FIR) law
Treats fiscal incentives as a tax expenditure
Limits where benefit > cost and investments that need them
Implements an effective re-capture provision
Provides a sunset clause
Defining “related parties” for the purpose of implementing tax laws, while strengthening regulations to minimize abuse