TAX perks to favored firms have cost the government P481.7 billion in foregone revenues in 2019 alone, a year before the passage of the Corporate Recovery and Tax Incentives for Enterprises (CREATE) law.
While this is 7.13 percent lower than P518.7 billion in tax perks given by the government in 2018 through various investment promotion agencies (IPAs) and through fiscal incentives granted to cooperatives, the Department of Finance (DOF) still considers this a substantial amount.
The DOF-Domestic Finance Group (DFG) reported to Finance Secretary Carlos G. Dominguez III that more than half or 58.8 percent of the total comprised incentives for value-added tax, accounting for P283.45 billion. This was followed by income tax incentives that made up almost a third or P149.28 billion of the total. Other forms of incentives extended by the government in 2019 were exemptions from customs duties, P47.59 billion (9.88 percent), and the percentage tax incentive availed by cooperatives, P1.38 billion (0.29 percent).
Finance Assistant Secretary Ma. Teresa Habitan of the DFG said at a recent DOF executive committee meeting that the income tax incentives include income tax holiday (ITH), accounting for P68.4 billion (14.2 percent); the special income tax rate for IPA-registered enterprises, accounting for P66.41 billion (13.8 percent); and the income tax incentives for cooperatives accounting for P14.47 billion (3 percent).
The DOF study covered 11,431 enterprises that filed their tax returns, of which 5,749 were IPA-registered firms and 5,682 were cooperatives.
Of the 11,431 enterprises, 7,454 or 57.5 percent were granted income tax perks, Habitan said.
More than half or 4,371 of those that availed themselves of income tax incentives were cooperatives while the remaining 3,083 were IPA-registered companies.
The manufacturing sector took the lion’s share of total tax incentives at P321.3 billion (66.7 percent), followed by services and energy sectors at P114.8 billion (23.83 percent) and incentives at P26.36 billion (5.47 percent), respectively.
Agriculture, fisheries
Tax perks for the other sectors, such as agriculture and fisheries, amounted to P19.24 billion or 3.99 percent of the total tax expenditures for 2019, Habitan said.
Cooperatives received a total of P32.2 billion worth of tax incentives in 2019, she said, with majority of these being service cooperatives in the banking and financing industries.
These foregone revenues from tax incentives were based on the perks granted to registered enterprises before the enactment of the CREATE law.
The CREATE law, which took effect on April 11 this year, paved the way for the rationalization of the grant and administration of incentives in a bid to ensure that the perks received by registered enterprises are benefiting the economy.
Touted as the largest fiscal stimulus for firms in recent history, the DOF said the law will provide P1 trillion worth of tax relief over the next 10 years.
The law also cut the regular CIT rate by 10 percentage points, from 30 to 20 percent, for domestic corporations with a taxable income of P5 million and below, and with total assets of not more than P100 million.
All other domestic corporations will benefit from an immediate reduction of the CIT rate from 30 percent to 25 percent. Foreign corporations currently paying the regular rate will also enjoy a reduced 25-percent CIT rate.
Corporate taxpayers whose gross sales or receipts do not exceed the VAT-exempt threshold of P3 million and are subject to the 3-percent percentage tax will only pay 1 percent instead from July 1, 2020 to June 30, 2023.
On the long-overdue fiscal incentives reform, CREATE proposes more flexibility in the grant of fiscal and non-fiscal incentives, which will be critical as the country competes for high-value investments from overseas now and in the post-pandemic era.
Under CREATE, a Strategic Investment Priority Plan (SIPP) will be formulated every three years to identify priority projects or activities that will receive the new set of generous incentives. These are projects and activities offering quality jobs and technology transfer, and introducing new industries that would allow the economy to flourish.