Rationalizing Fiscal Incentives in the Philippines: A Three-Decade Journey

This article is part of a blog series on the critical role of parliaments in tax expenditure policy making. The contributing authors include members of parliament, government officials, and further experts in the tax expenditure field. Additional blogs in the series are available on the Netherlands, the United States, and Zambia. The introduction to the series is available here.

Closer scrutiny of tax deductions, exemptions, and other incentives, also known as tax expenditures, is moving up policy agendas worldwide. As governments around the globe seek to safeguard fiscal space, the question on whether the tax benefits they offer are effective, is becoming ever more critical.

In the Philippines, the push for the rationalization of fiscal incentives dates back nearly thirty years to the Subsidy Council Act proposed in 1998 by then new legislator and economist Joey Sarte Salceda in the House of Representatives (HRep). It was based on the proliferation of fiscal incentives on investments that were not necessary, as the investments were driven by other factors such as domestic market demand and the presence of domestic resources. The measure did not pass, and since then, a variation of proposals was refiled in succeeding Congresses, much without action, also due to the fact that the main question if the incentives are worth it could not be answered. Back then, there was no data on the costs and benefits of fiscal incentives and the fourteen investment promotion agencies (IPAs) only reported cumulative numbers. These IPAs also offered a variety of menus of incentives arising from their charters.

In 2013, then President Benigno Aquino Jr. called for the enactment of the Fiscal Incentives Rationalization Bill. Unfortunately, the Bill could not transcend the inherent conflict in the mandates of the two implementing agencies – the Department of Finance (DOF) and the Department of Trade and Industry (DTI) – a problem that will eventually persist until 2019. Both agencies are key since the DOF is mandated to collect revenues, while the DTI, along with 14 IPAs, offer tax perks to attract investors to the country.

Recognizing that any reform of fiscal incentives will not fly without measuring its costs and benefits, the DOF campaigned for the passage of the Tax Incentives Management and Transparency Act (TIMTA), an unassuming measure which only required reporting of aggregate data of incentives and investments of IPAs. The TIMTA was enacted in 2015.

In 2016, then President Rodrigo Duterte embarked on pursuing tax reforms, one of which being the Fiscal Incentives Rationalization Bill.  The package of tax proposals also included reforms in income taxation, tax administration, and a tax amnesty. After enacting the Tax Reform for Acceleration and Inclusion (TRAIN) in 2017, which adjusted tax brackets and removed certain tax exemptions, the HRep embarked on refining the Fiscal Incentives Rationalization Bill. While the bill rationalizing fiscal incentives was approved on Third Reading in the HRep, there was not enough time to deliberate on it in the Senate. Mid-term elections were approaching, and since some investors could also be campaign contributors, discussion about possible reductions of fiscal incentives naturally died down during this period. Moreover, the Congress prioritized the passing of the Sin Tax Proposal that would tax vape and heated tobacco products, which was more politically acceptable since it would substantially increase revenue proceeds earmarked to finance health care.

In 2019, the reform of fiscal incentives was given new energy. The DOF, by then armed with experience of enacting two proposals in the tax reform package, set out to pursue the Fiscal Incentives Rationalization Bill as its top legislative proposal. Also, by then, a two-year database from TIMTA reports to weave narratives on the costs and benefits of the reform existed. DOF Secretary Dominguez was also seen as the leader of the economic cluster of the cabinet. The new Congress also appointed Rep. Salceda, the author of the proposed Subsidy Council Act, who had been instrumental in campaigning for TRAIN in public hearings sponsored by the DOF.

Chair Salceda and the DOF embarked on an ambitious process to pass the remaining three measures of the comprehensive tax reform package, which included the Fiscal Incentives Rationalization Bill, another sin tax measure, and the rationalization of passive income taxes (i.e., dividends) in the HRep by August 2019. This was strategic because the Committee on Appropriations was bound to monopolize the plenary for the processing of the national budget by September. With the full support of the leadership, Chair Salceda argued that the three measures were deliberated upon extensively in the previous Congress, and that being part of the priority measures of the President, Section 48 of the Rules of the House of Representatives, which would allow approval of such refiled measures in one sitting, could be used. With this strategic move, the three proposals were sent to the Senate by September 2019.

The Senate acted fast on the sin tax measure, increasing the tax rates of alcohol and tobacco products, shepherding through its enactment by December 2019. However, the Senate conducted extended discussions on the measure rationalizing fiscal incentives, and this was further delayed by the onset of the pandemic in 2020. Nonetheless, the HRep and the DOF continued the advocacy, harping on the findings that the existing incentives are not translated into substantial jobs and investments, based on the TIMTA data, and that if one compared similar businesses with incentives to those without incentives, the only significant difference is that  executives of firms benefitting from fiscal incentives are paid better. Chair Salceda also repackaged the bill into a proposal to spur countryside development, giving more incentives to investors the farther they locate from the capital and the urban centers. During the pandemic, it was further promoted as a recovery package for enterprises, incorporating a reduction of corporate income tax rates and a transitory provision allowing those firms benefitting from the incentives to enjoy these for another decade.

Virtual meetings on the measure continued, and, by January 2021, the Conference Committee Report, prepared by the Senate and the HRep panels, was ratified. The final output, the Corporate Recovery and Tax Incentives for Enterprises (CREATE) Act, was signed into law by March 2021.

What was critical was the resolve of the President to push for the measure, as well as the change in narrative — from rationalization of fiscal incentives to a recovery package for enterprises during the pandemic — and the institutional expertise of the DOF and the Committee Secretariat. The DTI and the IPAs also found the proposal acceptable, given the reduction in income tax rates and the transitory provision that allowed incentives’ beneficiaries to receive them for another decade.

Fiscal incentives are tax expenditures that must be accounted for, given the significant forgone revenues, and, hence, the great opportunity cost for the government that they trigger. The narratives that fueled the debate on rationalizing fiscal incentives from 2019 to 2021 – that these incentives do not bring about substantial jobs and investments, and largely translate into better pay for the executives of firms –  should guide the conversation on fiscal incentives. The ultimate goal of  rationalizing fiscal incentives for countryside development should also be at the core of the discussions.

In pursuing reforms, the readiness of institutions is the most critical factor. These institutions should take into account the following factors: 1) political viability, such as alignment with the priorities of the President, acceptability among legislators, stakeholders, and the general public, and whether the appropriate timing and context are present for the tax reform; 2) administrative and technical feasibility, taking into account whether the rates and systems are feasible and revenue collectors can impose these without significantly increasing the complexity of the administration of the tax system; and 3) economic and financial possibility, in essence, whether the government can finance it, and if the expected net impact on revenue is worth the effort and the political capital.

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