Streamline tax incentives, IMF lectures government

THE International Monetary Fund and the World Bank are urging the government to review its fiscal incentives program, saying it is redundant and stops it from raising more revenue.

The government should streamline its institutional framework, enhance public disclosure, narrow the scope of incentives, and abolish tax holidays, Dennis Botman the IMF’s Resident Representative, said in a Fiscal Incentives Forum at the Bangko Sentral last week.

Finance and central bank officials attended the forum, which was not open to reporters.

“Tax incentives are not the most important [consideration for] investors,” Botman said.

Citing a survey of the foreign investment decisions of the Fortune 500 companies, Botman said that non-tax factors were the main determinants of their location decisions—not the tax incentives that a country could offer to investors.

He said such factors included good transportation systems, good governance and enforcement of property rights, a skilled labor force, low power costs, and a supportive regulatory environment.

“To improve the score on some of these factors, it is essential to raise government revenue,” Botman said.

“At the moment, incentives provide money to something that is less important to foreign investors—at the expense of factors that are more critical to their investment decisions.”

Botman backed Finance Secretary Cesar Purisima’s stance not to give incentives to mass- housing projects.

“Income tax holiday for developers of housing projects of low-income earners does not necessarily promote housing for low-income earners,” Botman said during his presentation.

“Rather, this would unduly benefit developers at the expense of other taxpayers and be prone to abuse.”

Although all forms of tax incentives carried some disadvantages, “tax holidays are particularly damaging as profits are exempted regardless of their amount,” Botman said.

“The most profitable investments, which would have taken place in any event, benefit the most.”

Estimates showed that the Philippine government’s loss from redundant incentives could be as much as 1 percent of the gross domestic product, providing a windfall gain to beneficiary enterprises, Botman said.

Instead of giving enormous amounts of incentives, he said, those revenue resources could be used to scale up public investment, which was low by regional standards at only around 3.5 percent of the total economic output.

Tax holidays were inviting tax avoidance by their indefinite extension through the creative re-designation of existing investment as new investment, or by encouraging transfer pricing or other devices to shift earnings into holiday companies, Botman said.

“This is especially true for countries with weak revenue administrations,” he said.

Meanwhile, Eric Le Borgne, senior economist of the World Bank in Manila, cited the country’s lack of systematic tax expenditure accounting.

The Philippine government must enhance the transparency of the budget document, including all revenues foregone and making explicit the agencies granting them, he said.

“The country’s data on fiscal incentives, and more generally on tax expenditures, are not regularly and systematically collected,” Le Borgne said. –Elaine R. Alanguilan, Manila Standard Today