Palace preemptively undermines its own tax bill
BEN KRITZ
APART from debating the national budget for next year, the most important piece of actual work being done in the legislature right now is the processing of Package 2 of the Comprehensive Tax Reform Program (CTRP). This measure has two main objectives: Implementing a schedule of reductions in the corporate income tax rate, and rationalizing the country’s outdated and messy system of fiscal incentives for business locators.
The rationalization of incentives has three basic parts: Eliminating some incentives for future investors; ending incentives that have outlived their value for some present businesses; and streamlining the approval and management of incentives into a single office.
The proposals have triggered complaints from the business community and even some parts of the government for their potentially discouraging effect on current or prospective investors, but on the whole it is a good idea.
Fiscal incentives have become grossly abused in the Philippines, in part because there are more than a dozen agencies or offices with some authority over them. Most do not actually benefit the economy in any way, and their management has become so complicated that companies have found it difficult to redeem even legitimate incentives like tax refunds for re-exportable raw materials.
A version of the tax reform bill has already been passed by the House of Representatives and the Senate version is currently being debated; it will likely pass as well. The administration has tagged the measure as a priority, and has devoted a considerable amount of energy to publicly lobbying for its approval by Congress.
You would think that in anticipation of having its policy soon formalized as law, the administration would in the meantime act in congruence with it. And you would be wrong, because you don’t think like this administration does.
In spite of taking the unequivocal (and refreshingly sensible) stance that fiscal incentives and other inducements to business investors and locators ought to have some clear value adding benefits, Malacañang earlier this week undercut its own policy when President Rodrigo Duterte signed a proclamation declaring an office building in Parañaque’s Aseana Business Park a special economic zone. And if the Philippine Economic Zone Authority (PEZA) has its way, 42 other similarly dubious economic zone applications — 37 of them generated during the two years of the Duterte administration — worth more than P72 billion in tax perks will soon follow.
The 48,000-square meter Aseana 3 building is intended for BPO use. Why the powers that be feel it is still prudent and necessary to confer special tax privileges on an industry that, after a decade of untrammeled growth here is by any measure a hugely profitable success is something that has yet to be explained. Nor is there any logical explanation for this contradiction: With one hand, the government has crafted a tax reform measure that will remove fiscal incentives from many BPO businesses, for the very good reason that they are hugely profitable successes and no longer need a helping hand, and with the other, makes a mockery of the concept of economic zones by designating a single building as an area where BPOs can take advantage of fiscal accommodations.
The whole idea of economic zones is to provide areas where foreign-owned businesses are offered certain inducements to set up shop as a way to catalyze local economic growth. An automobile assembly factory, for instance, will boost the local economy by providing jobs, a market for the businesses in the local supply chain, provide justification for or even fund some infrastructure development, and encourage the development of ancillary business activity — places for the newly-created local workforce to spend their earnings. That’s the theory, anyway; it doesn’t work entirely as advertised in its real-world applications, but it does work positively to some extent if a business that are part of economic zone is the sort that has a broad web of connections to the local economy — businesses like manufacturing that have both a demand aspect as a customer for supply chains and a supply aspect as a provider of jobs and finished products.
BPOs are not without some value, but they are poor candidates for economic zone location according to the most practical application of the concept. A BPO has no supply chain to speak of; it provides jobs and a market for some new consumer businesses — reasons for Starbucks, or 7-11, or McDonald’s to open new stores nearby — but its contribution to a local economy is entirely single-ended. Creating a new economic zone for them by designating a single office building in an already highly economically developed area completely violates the clear spirit, if not the letter, of the soon-to-be tax reform law.
By now, however, any demonstration the Duterte administration’s pattern of saying one thing, but acting in a thoroughly conventional manner to ensure that business is done the same way it has been for the past couple of decades should not come as a surprise. Change is not something that works very well in the Philippines, especially not for political apparatchiks whose careers depend on their ability to adapt to the rhetorical changes of successive administrations.
ben.kritz@manilatimes.net
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