Fiscal perks: giving away the nation's birth right!

NOW that the Board of Investments (BOI) and the Bureau of Internal Revenue (BIR) have admitted that they were giving tax holidays to every Tom, Dick and Harry without asking why, it’s high time for Congress to take over and launch a thorough investigation on the matter.

Right now, Congress is trying to reform the country’s fiscal incentive system through the “fiscal rationalization” bill and it would help if they first get to the bottom of this issue. Congress should do it not just “in aid of legislation” but in pursuit of economic equity and social justice!

The other day, Trade Undersecretary Elmer Hernandez told our reporter Max de Leon that some companies are enjoying income tax holiday despite the fact that they are not eligible to get these perks. Each year, the country loses about P300 billion in forgone revenues—and part of this forgone amount goes to those who don’t deserve them because, as Hernandez admitted, many of those who availed themselves of the fiscal perks were not entitled to them.

Hernandez said the government lost billions because the BIR just allowed income tax holiday claims in their income tax returns even without proof from the BOI that the claimants were really eligible for the perks. He seems to be telling us that it’s just a simple, honest mistake, or one caused by sheer inability of state agencies to get their act together or streamline their systems owing to the great burden of their work.

We don’t think so. We believe a large part of such neglect grows out of corruption that has been plaguing the country’s fiscal-incentive system since the last several decades.

We don’t think bureaucrats from the BOI and the BIR are people who are naïve enough to allow these shenanigans to get through under their noses unless some people deep within these bureaucracies are benefiting financially from it.

The questions right now are the following: What are those companies that stole from the country’s coffers? Who in the BIR approved their ITH claims? How much money did the country lose to what companies since the President Aquino Executive Order 226? And why is it that BOI doesn’t seem to have any idea about how the country’s incentives system is being implemented? How about the Peza’s incentive system? These are questions that boggle our mind.

This blatant abuse of the fiscal incentives system is almost criminal. For years, the country, nay the Filipino people, have been suffering from poverty and lack of economic opportunities for the simple reason that the State could not provide good economic and social infrastructure. Bureaucrats have been telling us ordinary mortals that the government needs to collect more taxes “to finance development” and we were foolish enough to agree to a higher VAT rate on all the things we buy with our slave wages. Little did we know that while these bureaucrats were taking away food from the mouths of our children, they gave away hundreds of billions of pesos worth of income tax holidays to favored friends and clients, including to ones not entitled to the fiscal perks in the first place.

God knows how much money bureaucrats from the BIR and the BOI and other “investments promotions agencies” are really giving away to favored companies. For all we know, they have been giving away the Filipino nation’s birthright, probably the main reason why we can’t seem to achieve economic takeoff despite a favorable external economic environment.

In the last 20 years, BOI, the Philippine Economic Zone Authority and several other “investments promotion agencies” have been giving away all sorts of perks—income tax holiday; duty-free importation of machines and equipment; exemption on duties and taxes on imported spare parts; exemption from wharfage dues and export tax, duty, imposts and fees; tax exemption on breeding stocks and genetic materials; tax credits; and additional deductions from taxable income—and we can’t seem to account for their impact on the Philippine economy and our future as a nation.

Agencies like the National Economic and Development Authority, the Department of Finance, and the Department of Trade and Industry cannot account for the real contribution of these perks to economic development because they may have been designed as a vehicle for rent-seeking behavior in the bureaucracy. Amid this flurry of perks are a tangle of almost 200 other laws and executive orders giving privileges to companies to claim more fiscal perks from the country’s coffers for several other economic activities ranging from the production of steels and ships and jewelries. This confusing snarls of laws and regulations and the apparent lack of transparency with which these agencies implement them suggest that abuses like double-dipping (claiming perks for the same projects from several laws and agencies) and the brazen act of collecting perks for investment projects that were not even registered with the BOI are prevalent.

Right now, the DTI does not want to release detailed information about the issue because “they are still completing their findings.” Congress should not wait for that report before acting on behalf of the Filipino people.

Mixed signals on fiscal incentives

We hope that President Gloria Macapagal Arroyo (GMA) was just talking in general terms to soothe the nerves of business people who attended workshop on foreign direct investment in the Philippines organized by the American Chamber of Commerce.

The president said that “our policy is to keep and improve the incentives the Philippines offers strategic foreign and domestic investors, especially exporters. The incentives need not be fiscal. The incentives you want are the competitiveness element: the workers being paid well enough in terms of affordable food; the technology, in other words, our continuing knowledge worker richness in our economy; the infrastructure; the power; and the reduction in the red tape. “

And on fiscal incentives she said: “let us assure you too that the Philippines will not become less competitive in the fiscal incentives we offer our foreign and domestic investors. I know some of your worries that's why I want to assure you that we will not support proposals that have that effect of reducing competitiveness.”

Anybody who follows the debate on the fiscal rationalization bill now being discussed in the Senate would find those statements confusing. On one hand, she was saying that competitiveness ultimately depends on a much broader range of factors like the state of infrastructure, overall policy environment, among others. This has been the argument by the economists who think it’s high time we junk the current fiscal incentives system that has been causing a lot of hemorrhage in the country’s revenue collection system. Each year, based on data from the Department of Finance, the country has been foregoing collection of at least P300 billion a significant part of which are probably redundant and unnecessary. Had the country been able to collect at least half of that, so the argument goes, we could have accumulated a significant amount of money to fund the building of more roads, bridges, and other important infrastructure. Doing this would mean that we achieve “fiscal consolidation,” obtain better sovereign ratings that would guarantee easier and cheaper access to global capital for both the public and private business organizations.

But on the other hand, she seems to be saying she is going to junk the bill being discussed at the Senate ways and means committee, one major proposal of which, is the removal of income tax holidays granted to firms registered with the Board of Investments, to be replaced with a uniform 15 tax percent rate. Some companies and business organizations have been worried that the removal of their income tax holidays would undermine their competitiveness. If President Arroyo was actually to talking to this crowd, then certainly she is telling Senate that their deliberations are going nowhere as she is bent on maintaining the status despite here earlier commitment to reform the country’s fiscal incentive system.

But then again, we don’t really know. She may have been saying that broader economy-wide incentives are in the offing. For instance, what prevents the country from simplifying the incentives regime by wholesale reduction of corporate income tax from the current 36 percent to say 15 percent a la Hongkong and Ireland? Certainly, that will be more attractive to investors as they no longer have to see the face of bureaucrats when setting up their operations here. That policy option shoots several birds in one stone: you address red tape (you could even abolish many of these agencies including the BOI), ensure transparency, and speeds up the process of setting up business.

But who knows? So until this time, the uncertainty continues. And it’s sending a mixed signal to the Senate ways and means committee that is currently crafting the fiscal rationalizations bill. When legislators started discussing the fiscal incentives rationalizations bill, the mood from Malacañang has been towards improving the country’s finances. Now, Malacañang is singing a confusing tune, something that will confuse the investor community even more. It’s this uncertainty that actually drives away foreign investors.

Is there a way out? Joachim von Amsberg, country director of the World Bank in the Philippines, has a concrete set of solutions during that worshop. Allow us to site a few:

First, ensure macroeconomic stability and fiscal sustainability (efficient collection of taxes). Second, continue deregulation in the economy (which could mean no more oligopoly in shipping and port operations). Third, move away from sector or firm specific to economy wide deregulation and incentives (read: why not provide incentives for everybody through a lower corporate income tax across the board?). Fourth, uphold the sanctity of contracts (a contract is a contract is a contract!). Fifth, reduce cost of doing business (no red tape, speed up court processes, no graft). Sixth, ensure open and competitive bidding (no under the table deals). And seventh, further liberalize foreign entry into the financial services sector (read an end to the banking oligopoly).

If we could achieve most of these recommendations, we may realize we may not even need “fiscal incentives.”

Perks for those who don't need them

THAT we need investments, both foreign and local, is not the issue in the debate about fiscal incentives in the Philippines. We have been stressing that the Philippines needs everybody’s help, including those of foreign and local investors, to develop this country. Whether or not fiscal incentives are the best way to achieve them, however, is the real question. Our position has been consistent and clear enough—that there are better and effective ways to promote investments other than fiscal incentives. The Federation of Philippine Industries (FPI), for one, has made a good case of the more important tack of lowering the cost of doing business than, say, haphazardly giving income-tax holidays.

Admittedly a few fiscal incentives, well-thought-out and validated by experience, may do the trick, but these are rare. Moreover, there are ways to reform the system that do not disrupt the operations of those who are already doing business within the country’s borders and have enjoyed such perks.

How? Remember that fiscal perks, say tax holidays, are time-bound and constitute, in effect, a contract between the government and the investors. The government therefore will have to allow them to complete the full terms of those projects, providing safeguards against abuse while Congress is reforming the system that has been draining the country of substantial forgone revenue.

Our main problem with fiscal incentives is the ease with which they can be easily abused to the detriment of the public. The BOI, through its Investment Priorities Plan, has been granting incentives to certain industries, without a clear and strategic view of what it wants to achieve for the country. To attract investments? Certainly it has fallen below expectations here. To spread investments in the countryside? It has failed in this regard also because fiscal incentives are not likely to counteract serious barriers to investments like poor roads, peace and order problems, and other constraints borne out of the structural problems.

Do we need to promote export? To promote tourism? Or information technology? Definitely yes. But according to Prof. Renato Reside of the UP School of Economics, 95 percent of the overall value of BOI investment portfolio is not exporting. It’s not IT-related. Neither is it tourism-related.

These statistics mean that those who got the perks are mostly those who don’t need them or would have invested just the same because there is simply too much money to make with or without the perks. Reside says that companies investing could be classified into domestic market-seeking, resource- seeking and efficiency-seeking, and the first two are simply redundant ones that don’t need the perks. In a word, the good professor says that a regime of misplaced incentives” is largely to blame for deepening poverty in this country.

In a saner context, industries like telecommunications, mining and real property development don’t need the perks because they are just too profitable and redundant. Yet most of these projects got the perks for some reason that only the BOI and PEZA can explain. The result is that the government is not collecting the money that the country needs to finance development. Lacking the money after giving all the perks to rich, the government instead is squeezing the general public—nay, the fixed-income employees—as well as the consumers to fund the operations of the state through higher income and value added taxes. As one analyst put it, this seems to be the case of a government that gave the money to the rich and then squeezes the poor.

Who determined which industries needed these perks? They are unelected bureaucrats of the BOI, Peza and other government agencies—and the apparent irrationality in some of their decisions have inevitably led to suspicion in some quarters of collaboration with certain vested interests. The suspicions could have been quelled if the basis for their decisions were clear. Nobody seems to know such, however, because these institutions are never transparent.

If mining, real estate development, or telecommunications deserve the perks, why not the lowly sari-sari store at the corner street? Certainly, everybody else—including the magbobote and magtataho—also deserve the perks. But if everybody else deserves the perks, then we might as well abolish them so we could collect taxes from everybody; and so that government can have enough money to spend for the betterment of all, not just a few who are already so rich.

At some point we need to stop institutionalizing favoritism in the country’s economic policy. The way BOI and Peza are running things really looks like it’s rent-seeking plain and simple. In harsher terms, it may be wealth creation through bureaucratic corruption.

The Senate right now is reviewing the country’s fiscal incentives laws to “rationalize” them. We suggest that the Senate form a panel of independent experts to study extensively the country’s fiscal incentives system, including how the BOI and Peza have been implementing them. We suspect they are going to find tons of worms that are gnawing at the guts of the country’s economy.

Abolish the fiscal perks!

THE controversy regarding the granting of fiscal perks by the Board of Investments (BOI) to Smart and Globe for their 3G projects simply confirms what economists have been saying all along: many of the incentives, even before the 3G controversy broke, had been found redundant; many of those industries would have set up shop in the country with or without them; and worse, the indiscriminate grant of perks probably provide just another avenue for graft and corruption. The Philippines has been suffering from a continuing fiscal crisis yet the government—in some misguided belief that all we need to do is dangle those perks to attract investors—refused to collect the taxes that could have gone to financing development.

The Senate right now is thinking about “rationalizing fiscal incentives” by doing its own review of the bills as approved by the House; it might as well look into the possibility of abolishing them and replacing the incentives with a low and uniform corporate income tax to remove bureaucratic participation in the private sector’s investment decisions.

For a long time, analyst after analyst has been telling policy makers that the grant of fiscal perks is not the answer to the lack of investments in the Philippines. Studies have been saying the determinants of investments generation are adequate infrastructure, stable and predictable macroeconomic policies, political stability; effective investments promotion, and good governance. And yet the government has been clinging on to them; legislating hundreds more laws granting perks to every Tom, Dick and Harry. Ask anyone from the government’s planning bodies how many laws and executive orders granting fiscal perks and chances are—and they don’t know. Yes, there are hundreds of them and not anyone in the government knows what firm got what fiscal perks from what law because the system has become so tangled, one could only suspect some people out there in the bureaucracy are making huge money from doling them out to the cronies, clients, and friends. And of course, from that confusing tangle, it’s so easy for some crooked bureaucrat to make money too. For decades, government has been granting them yet we really have nothing to show for it. How much investment do we attract each year? Just below a billion dollars. And our Asian neighbors? About four to five times as much. It’s really nothing but just another venue for “bureaucrat capitalism” or an institutionalized rent-seeking.

In simple terms: gatasan lang talaga ang estado! Why do we suspect this? Because of the total lack of transparency with which fiscal incentives are being administered. Try asking about the criteria by which BOI and its sister company administering those fiscal perks, the Philippine Economic Zone Authority (Peza), as well as several other government agencies, grant those perks; ask for the relevant documents and you wouldn’t get anything. Confidential information, they will say. Peza, for instance, won’t give you basic information like project costs and employment generation per project. They are supposedly public documents, yet these government agencies are guarding such information and documents like hungry dogs. Why? Because they contain truth that’s better not shared with the public?

The government has been trying to rationalize fiscal incentives in the last three decades. But every time policy makers did it, they always ended up messing the issue even more. Why? It’s because there has never been any honest-to-goodness or truly independent study of the policy and how they are being implemented by bureaucrats. In the last two to three decades, it’s clear that these perks never came close to achieving their objectives, yet policy makers and legislators seem to believe that all is well. Well, all is not well and it’s high time legislators look at those with critical lenses.

Here’s our recommendation: First, the Senate should commission an independent group of economists to analyze those perks. These technical people should examine the costs and benefits of having those perks and how government agencies are implementing them. With the tangle of laws from which anybody could claim fiscal perks, it’s highly probable some of those businesses are making business out of double-dipping. The study team should look at this angle as well. And while this is being done, the government should stop granting those perks until a better policy takes shape. At the same time, Congress should also require BOI, Peza, and other incentive-granting agencies to open all documents for public scrutiny to ensure transparency. Only then should the Senate continue deliberating on the fiscal incentives bill once the senators have all the right inputs.

Or better still, the Senate might as well just abolish the fiscal perks— including the BOI, if you ask some critics. In lieu of this body, an investment promotions agency could do the work. Lately, the Federation for Philippine Industries (FPI) has called for a lower corporate tax in lieu of the fiscal perks to lessen opportunities for rent-seeking and corruption among bureaucrats. That proposal makes sense. Those enjoying incentives right now could be given a transition period to adjust to a new policy regime (i.e., low corporate tax, no fiscal perks). They would even welcome it because under this new policy regime, companies could do business without having to see the faces of bureaucrats to make their investments going. Hong Kong and Ireland, which are less corrupt, have done this and they are now attracting more investments than the Philippines.

Indeed, abolishing the incentives system as currently constituted is necessary to give some sense of social justice in this country. Otherwise we will remain the only place on earth where the middle class, or the aspiring middle class, are squeezed through taxes while the rich wallow in fiscal “perks.” No wonder the middle class would rather leave for foreign shores.