‘P504 B wasted due to loopholes in tax incentives’

by Jess Diaz, Neil Servallos (The Philippine Star), Aug 10, 2019

MANILA, Philippines — Thanks to tax incentives for establishments engaged in “medical tourism,” some of the country’s top-rated hospitals enjoy substantial tax breaks.

Finance officials say that such loopholes in the granting of tax incentives have resulted in “scandalously” huge forgone revenues for the government, which in 2017 alone totaled P504 billion or roughly 3.2 percent of the gross domestic product (GDP).

Briefing The STAR yesterday, Finance Undersecretary Karl Kendrick Chua said that in 2017, the Philippines gave away an estimated P441 billion in tax incentives to 3,150 companies, or 15.9 percent higher than in the previous year. On top of the P441 billion was P68 billion lost in 2017 to transfer pricing.

“Transfer pricing” is done by shifting profits from high-tax jurisdictions in some countries to tax havens in other places where taxes are lower, or from certain corporations to their related businesses located at special economic zones (SEZs) in the same country.

It can also happen when firms shift profits and costs between projects or activities within the same firm to cut tax payments.

The DOF reported in 2018 that the government was losing some P43 billion a year in tax leakages due to some firms’ possibly exploiting the country’s convoluted corporate income tax system.

The amount supposedly given away as incentives in 2017 was just slightly below the annual budget of the Department of Education (DepEd) and roughly four times that of the Department of Health (DOH).

“The amount could have been used to build around 33,000 public markets, 46,000 kilometers of roads, 130,000 daycare centers or 450,000 classrooms,” said Chua.

The DOF earlier this week said that from 2015 to 2017, the Philippine Economic Zone Authority (Peza) gave away P879.1 billion worth of tax incentives.

The amount accounted for the bulk of tax incentives and exemptions given away by the country’s investment promotion agencies (IPA) during that period, totaling P1.12 trillion.

“In principle, granting incentives is justifiable if the recipients generate a net benefit to society, such as the creation of good jobs, investing in less developed areas, and if incentives are given for a reasonable amount of time – not forever,” he explained.

Peza, however, branded the DOF report as “misleading” as it overlooked IPAs’ contributions to the economy.

“These kinds of misleading information only seek to poison the minds of readers and gain public sympathy at the expense of Peza and its valued investors,” Peza said in a statement last Thursday.

3 tax bills to be rushed

The House of Representatives, meanwhile, has committed to approve at least three tax bills next month, including one that seeks to increase excise taxes on beer and other alcohol products.

The commitment is contained in a letter of ways and means committee chairman Albay Rep. Joey Salceda has sent to President Duterte’s economic managers led by Finance Secretary Carlos Dominguez.

Aside from the alcohol tax, the assurance of Salceda covers the bill on lower corporate income tax and incentives reform, and another measure reforming capital income taxation. Salceda said Speaker Alan Peter Cayetano has named him his economic adviser.

The Albay lawmaker said the House plans “to pass these tax measures on third (and final) reading by September 30,” or in just one-and-a-half months.

He said his committee is already preparing its “reports and substitute bills.”

Another Bicol congressman, Luis Raymund Villafuerte of Camarines Sur, supported the early passage of tax measures.

He said the approval of the proposed laws would “enhance growth and raise funds for President Duterte’s priority programs over the final half of his six-year term.”

Villafuerte has filed bills on reducing corporate income tax, simplifying real property and capital taxation, and increasing liquor and tobacco taxes.

“Imposing higher excise taxes is still the most effective policy tool to affect prices to discourage consumption of ‘sin’ products, in particular, among the youth and the poor who are the most sensitive to price changes,” he said.

He said he is proposing to increase tobacco levies again because the P15.7-billion projected additional collections from higher cigarette taxes the law the President signed last week imposes are just a fraction of the expected P62-billion funding gap for the universal health care program next year.

He said a bigger amount of revenues from his new sin tax reform proposal “will help sustain PhilHealth coverage for all Filipino families, improve accessibility and affordability to quality healthcare, and provide better outpatient benefit package, including check-up or consultation and medicines.”

The alcohol tax was last adjusted in 2012. In contrast, the tobacco levy increased under the controversial Tax Reform for Acceleration and Inclusion law, which took effect in January last year, and went up again under Republic Act No. 11346 Duterte signed last Thursday.

In a related development, committee on health chairperson Rep. Angelina Tan of Quezon is seeking a ban on alcohol drinking in public places.

In Bill 3049, Tan is proposing to prohibit the selling, serving and consumption of alcoholic beverages in all streets, pathways, plazas, alleys, sidewalks, parks and parking areas.

It would also ban the consumption of alcohol in all establishments from midnight to 8 a.m.

“This measure is a proactive response to the growing clamor of the people and President Duterte’s commitment to curb criminality in the country by banning the consumption of beer, wine, liquor and similar intoxicating beverages in public places,” Tan, a medical practitioner by profession, said.

“Alcoholism and violence have clearly become key public health issues that require urgent attention. Hence, it is imperative for the country to initiate a national policy to curb alcohol consumption in public places,” she said.

She recalled that the President, in his fourth State of the Nation Address last July 22, told lawmakers he wanted a law mandating all drinking establishments to close at midnight.

Citing a World Health Organization report, Tan said alcohol drinking “is a causal factor in more than 200 disease and injury conditions.”

“It also found that three million deaths every year result from harmful use of alcohol worldwide and latest causal relationships have been established between harmful drinking and incidence of infectious diseases such as tuberculosis as well as the HIV/AIDS,” she said.