July 24, 2018

The National Economic and Development Authority (NEDA) has released its first report pursuant to Republic Act 10708, also known as the Tax Incentives Management and Transparency Act (TIMTA), saying that the country’s economic zones would have fared better had needed reforms been in place earlier on.

Signed into law on December 9, 2015, TIMTA aims to promote transparency in the grant of fiscal incentives. Under this law, registered businesses are required to disclose a tax incentives report to Investment Promotion Agencies (IPAs), which govern economic zones and grant tax incentives.

Socioeconomic Planning Secretary Ernesto M. Pernia said NEDA is mandated by the law to assess the impact of such incentives on the economy.

“The regulatory framework governing tax incentives needs to be carefully evaluated and modified so that the incentives deliver the best returns,” the NEDA report says, adding that the current fragmented tax incentive regime from different IPAs would need to be revisited and overhauled.

In its 13-page report, NEDA noted that tax incentives, including income tax holidays and gross income tax incentive, claimed by firms in 2015 totaled PhP91.3 billion, which is 18.6 percent of the total corporate income taxes recorded in 2015.

The agency likewise said that the Philippines has the longest time frame for incentives in Southeast Asia with the latest data showing 654 firms have been getting tax incentives for at least 15 years.

Firms registered with IPAs posted a total of USD18.4 billion in export earnings and USD292.1 billion in domestic sales.

However, whether or not firms in Special Economic Zones (SEZs) make a positive impact on the country’s gross domestic product is difficult to determine due to the gross trade deficit these registered firms have incurred.

The contribution of businesses to the trade balance is negated by their heavy import dependence. In 2015, the PhP780 billion trade deficit would have widened to at least PhP3.2 trillion were it not for the impressive performance of other export industries not receiving incentives.

“Higher imports of registered firms from the zones is not necessarily harmful to the economy. But extended reliance on import content and technology over the long-run could work against the economy, as the zones are eventually decoupled from the domestic economy,” the report says.

“While the Philippines is one of the early adopters of SEZs, unfortunately, their potentials are still largely untapped due to the weak backward and forward linkages in the domestic economy,” it adds.

The benefits of these tax incentives, nevertheless, could be seen in total jobs generated and wages paid by firms registered with IPAs.

Based on the 2015 data submitted to NEDA, 4,393 registered business enterprises (RBEs) which constitute 0.45 percent of the total establishments reported by the Philippine Statistics Authority, paid out an equivalent of 6.3 percent of the economy’s total compensation.

IPAs have also generated a total of 2.5 million jobs in 2015. Some 89.5 percent of this, or approximately 2.2 million jobs, came from the Philippine Economic Zone Authority and Subic Bay Metropolitan Authority.

Meanwhile, NEDA listed ten recommendations based on its assessment:

  1. Lowering of the corporate income tax rate such that the regular regime tax rate should converge and become indistinguishable from the special income tax rates;
  2. Simplifying a common set of incentives across IPAs;
  3. Setting of conditions when granting incentives;
  4. Defining the appropriate life span of the incentives;
  5. Considering the spatial externalities generated by the incentives (e.g., locators to poorer regions/provinces receiving higher incentives);
  6. Strengthening of facilitation mandate and investment assistance of IPAs;
  7. Identifying the overall administrator of IPAs;
  8. Defining the transition mechanism to facilitate the shift to the new investment regime;
  9. Choosing the best practices and organizational processes from the consistently outstanding IPA; and
  10. Tapping the active participation of LGUs to align their Local Investments and Incentives Code (LIIC) with the objective of creating ancillary industries.

“Henceforth, all RBEs will be required to submit timely annual reports on their performance vis-à-vis the rationale and objectives for the grant of fiscal incentives, and must include the data needed for a complete and objective cost-benefit analysis by NEDA,” Secretary Pernia said.

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Download the NEDA Report on TIMTA here.