Second of three parts
OTHER stakeholders agreed with the country's top economists and have also opposed the income tax cuts in the Corporate Recovery and Tax Incentives for Enterprises (Create) Act, especially in light of the coronavirus disease (Covid-19) crisis that has claimed thousands of lives, shuttered businesses, and laid off millions in a continuing saga marked by despair and dislocation.
"Whether or not you're happy with the quality of services the government is providing, [the government] will still need to expand the pie to be able to have meaningful public expenditures for social services," said Alvic Padilla, a former senior economic justice advisor for the UK-based Christian Aid. Nevertheless, Padilla said he was in favor of the provision to simplify tax incentives as outlined under Create.
In January 2020, Padilla led a multi-country effort to produce a study that dealt with tax incentives, titled, "The Use and Abuse of Tax Breaks."
Published by the Financial Transparency Coalition, the study contained a special section on the Philippines, which cited data from the finance department's study about tax incentives.
Padilla said the estimated P301 billion foregone revenues due to tax incentives in 2015 "could have easily covered the annual national budget for health (P104.96 billion) or social security and welfare (P231.34 billion)." The same thing could be said for 2018.
Based on the Department of Budget and Management (DBM) data for that year, the government's investment promotion agencies granted tax incentives worth P477.168 billion in 2018.
The amount could have easily covered the budgets of the health and the social welfare departments at P167.9 billion and P141.8 billion, respectively.
Some officials of IPAs -- which grant income tax breaks to investors anywhere from four to six years -- have criticized the DOF for "over-estimating" revenues foregone due to tax incentives.
The DOF estimates should not have included value added taxes (VAT) and Customs duties because they are not incentives, several officials of the Board of Investments (BOI) and the PEZA have said in separate interviews.
A noted tax lawyer, whose clients included PEZA enterprises, shared the same opinion, asserting that VAT, a tax on goods and services borne by end-consumers, is covered by a separate law.
Of the P301.2 billion foregone revenues due to tax incentives in 2015, P18.1 billion came from Customs duties, P159.8 billion from the VAT on imports, and P37.0 billion from VAT on local goods and services, based on data emailed by the DOF.
Taken together, Customs duties and import and local VAT for 2015 was worth P214.9 billion, an amount that was almost three-quarters of the total.
"All over the world, VAT exemptions for exporters are not counted as incentives so why does the DOF consider that as an incentive?" an official told PCIJ.
A DOF official defended its figures, explaining that these were arrived at by a special team of 30 members that checked, examined, and encoded items from numerous documents, including 6,000 financial statements of companies that received incentives from 2015 to 2017.
The team also examined the August 2018 cost-benefit analysis of tax incentives produced by the National Economic and Development Authority (Neda), which, among others, said that data about tax perks were hard to come by.
In accounting for revenues foregone due to tax incentives, the DOF team chose to include VAT and "other exemptions that were not received by regular corporations," the DOF official said.
Filomeno Sta. Ana III, coordinator of policy and advocacy group Action for Economic Reforms (AER), who supports CREATE, shared that sentiment.
"Strictly speaking, only export goods are VAT-exempt or zero-rated. But clearly, the threshold for exemption even in the proposed reform is below 100 percent," Sta. Ana said. "In that case, the VAT exemption for such firms is a tax incentive or a tax expenditure."
He added: "It is in fact the power of the state, not just a prerogative, to impose taxes or withdraw taxes."
PH in bottom half of progressive spending index
VAT-included or not, revenues foregone due to tax incentives could have benefitted millions of Filipinos.
Had these revenues from tax incentives not been foregone but instead have been collected, channeled, and spent properly on social protection programs, the Philippines would have improved its turnout in "progressive budget spending," according to Mae Buenaventura, senior policy officer of the Asian Peoples' Movement for Debt and Development (APMDD).
Progressive budget spending is one of the metrics examined by the Commitment to Reducing Inequality Index (CRII) in 2018. Formulated by Development Finance International and Oxfam, the reducing inequality index ranked 157 countries based on fair taxation, public spending on health, education, and social protection, and labor regulations.
Results of the CRII 2018 were featured in "Towards Sustainable Tax Policies in the Asean region: The Case of Corporate Tax Incentives," a June 2020 study commissioned by Oxfam and undertaken by the Vietnam Institute for Economic Policy and Research, the PRAKARSA in Indonesia, and the Tax and Fiscal Justice Asia.
Based on its CRII scores in progressive budget spending for Asean countries, the Philippines spent 33.66 percent of its total budget on education (18.31 percent), health (8.00 percent), and social protection (7.35 percent).
This set of figures were a far cry from what Thailand spent on education (18.93 percent), health (14.20 percent) and social protection (33.10 percent), or a combined 56.3 percent.
As a result, the Philippines ranked 114th in the progressive budget spending metric in terms of reducing inequality, way below Thailand (56th), Vietnam (89th), Singapore (91th), Indonesia (98th) and Malaysia (99th).
The Philippines was 15 notches above Cambodia (129th), Laos (153rd) and Myanmar (156th).
Thailand -- together with Vietnam and Singapore -- "scored best on progressive budget spending in the Asean region," the report said, adding that all three countries had the highest levels of universal health care in the region in 2015.
Moreover, based on its overall rating in the index for reducing inequality, the Philippines scored 0.331 and placed fourth, among nine Asean countries ranked.
Only two -- Thailand and Malaysia -- breached the 0.354 average for the East Asia Pacific region since both countries' scores were tied at 0.377.
Both countries were trailed by Indonesia (0.344), Philippines, Vietnam (0.315), Cambodia (0.254), Myanmar (0.194), Singapore (0.162), and Laos (0.158).
Thailand and Malaysia may have outclassed others in the reducing inequality index, but they're still very much in the same boat with other Asean-member countries as far as tax collection is concerned.
Levels of revenue collection, measured as a proportion of GDP, remained very low for all nine nations, compared with the OECD average, according to the Oxfam-funded study.
In wealthier OECD countries, the average budget revenue ratio stood at 39.6 in 2018, much higher than the Asean average of 19.1.
While five countries breached the average - Cambodia (23.9), Thailand (21.4), Philippines (20.2), Vietnam (19.5), and Malaysia (19.4) - these ratios were still considered low, the June 2020 study said.
These low ratios showed that "countries in the region have little budget capacity and are running public deficits," the study said. "This gap has dramatic consequences for the quality of public services, infrastructure, and levels of good governance."
Add a pandemic -- and its ensuing effects -- into the mix and it would likely result in, among others, increased demand for public services that have barely been able to cope even before Covid-19 came along. This is best exemplified by the overwhelmed health system in the Philippines, which continues to struggle with the pandemic's manifold effects. (To be continued)
Editor's note: The first part of the series, entitled "Tax cuts," was published on November 1, 2020 and can be read on sunstar.com.ph/davao while the whole story can be read on pcij.org.