Package 2
COMPREHENSIVE TAX REFORM PROGRAM
Cost-benefit analysis of fiscal incentives
As of 15 October 2018 9:00 pm
2. Cost-benefit analysis
What do we gain from a review of past incentives and benefits
received?
1. Why is reform necessary?
Co n te n t
4. Results
What have we learned?
3. Methods
How do we account for total
benefits and costs?
The Philippines has the highest corporate income tax rate in the ASEAN region.
Source: Asian Development Bank and PWC
CIT revenue is increasing, but efficiency is very low.
Source: OECD, individual country statistics offices, and DOF staff calculations.
We have a complex
tax incentives system.
- 14 IPAs
- 136 investment laws 200 non-investment laws
- 546 ‘ecozones’ and freeports
We grant the most generous fiscal
incentives since they are in lieu of all taxes and given forever.
Source: Individual country finance agencies and investment promotion offices.
Huge inequity under the current system:
● Firms with no incentives pay the regular rate of 30% of net taxable income
● Firms with incentives pay between 6% and 13%
For example, almost all of the 90,000 SMEs pay the regular 30%
rate.
Source: DTI and TIMTAEstimated forgone
revenue due to tax
incentives
Tax incentives in billion pesos
Type of tax Income tax
Customs duties Subtotal
Import VAT (gross) Local VAT (gross) Local business tax Subtotal for incentives Leakage
Total
No. of recipients
2015 86 18 104 160 37 TBD
301 43 344 2,844
2016 121
57 179 TBD TBD TBD TBD TBD TBD 3,102
Source: TIMTA, DOF estimates
Some incentives may be needed to attract
investments that support our growth objectives.
Create more and
better jobs Promote research
and development Encourage innovation
Stimulate domestic industries Diversify product space (e.g., to higher value exports)
However, they must be performance-based, targeted, time-bound, and transparent.
Number of firms enjoying incentives for at least 15 years
We have been
supporting many
firms unnecessarily.
645 firms receiving incentives for at least 15 years.
Source: TIMTA.
Despite giving the most generous and forever incentives...
FDI pales in comparison to our neighbors.
Source: BSP, UNCTAD, and DOF calculations
Export competitiveness has been in decline.
Domestic industries have weak linkages to export industry.
Reliance on imported parts, thus weak domestic content.
Despite giving the most generous and forever incentives...
Source: PSA, UNCTAD, DOF calculations
The current incentives system has a big room for
improvement.
- Complexity and inequity
- Lack of monitoring and evaluation, accountability, and transparency - Incentives as band-aid solution to
compensate for past structural weaknesses
It is time that we revisit our incentives
system to ensure that we gain from
every peso that we grant.
Incentives may be important to encourage investments that promote growth and jobs...
Some incentives are unnecessary, i.e., investment would have happened anyway even without the incentives (e.g., available
market, quality labor, land, resources, etc.).
...but, investment tax incentives are tax expenditures that someone else has to pay.
It is not free money from heaven.
Government needs to ensure efficiency in spending.
(How much tax incentive can we afford?)
Package 2
Fair and accountable tax incentives system
Every peso granted as tax incentive is a peso off the budget that could have been spent for infrastructure, health, education, and social protection that
benefit all, and not only a few.
“Ex-post” cost-benefit analysis
This is done so that we can
determine if the tax incentives given to recipients benefit our economy more than it costs.
Note: Evaluation of the past performance does not
necessarily indicate future priority or preference over
some industries.
Tax incentives usually violate the principles of:
Efficiency Equity Simplicity
However, incentives may be justified if they provide net
benefit to society as a whole.
Basis for cost-benefit analysis
Economic value
Social value
Political value
Cost-benefit analysis:
Methods
1. Estimating implicit labor subsidy
What is the cost for each job created?
3. Estimating net
government revenue
Do we generate more revenue from the tax we forego?
2. Performing a
counterfactual analysis
Do firms with registered activities for incentives perform better in terms of job creation, R&D investments,
productivity, etc. when compared to non-registered firms?
4. Accounting of direct and indirect cost and benefit
Do total benefits from incentives,
both private and social, outweigh
total costs?
Result #1
(Implicit labor subsidy)
Source: IPA submissions, TIMTA, DOF estimatess
In 2015, to create 1 job, it costs taxpayers around P2.4 million.
Note: In 2015, 123,725 jobs were created, and total tax expenditure was P301 billion. If this is adjusted for VAT refund, the
implicit labor subsidy would be P1.4 million.
In general, registered firms, when compared to non-registered firms…
● Have the same employment relative to size
● Have similar average wages, but pay top management higher
● Spend more on fixed assets, but do not spend higher on R&D
● Have the same level of exports relative to sales
● No difference in productivity
Result #2
(Counterfactual analysis using propensity score matching)
Source: PSA ASPBI, TIMTA, DOF estimates
Summary
(all firms)
On average, for every peso we grant as incentive, we collect 34 cents in taxes, even after accounting for taxes from indirect
employment and domestic inputs.
If taxes from unnecessary incentives are accounted for, we collect 95 cents.
Result #3
(Net government revenue effect)
Taxes collected from:
Firms Employees Dividends
Indirect employees Domestic inputs Tax incentives on:
Income Duties (30%)
VAT (net of refund) Local taxes
Source: IPA submissions, SEC, TIMTA, DOF estimates
Identifying necessary & unnecessary incentives
On average, for every peso spent on incentive, between P0.63 and P1.21 comes back in benefits, even after accounting for
employment generated and spillovers, both direct and indirect.
Result #4
(Accounting of total direct and indirect cost and benefit)
Source: IPA submission, PSA ASPBI, SEC, TIMTA, DOF estimates
Dividends declared at 164% of income tax incentives received
Source: SEC, TIMTA
Source: TIMTA, DOF estimates
Re su lt # 2 Re su lt # 1 Su mma ry Re su lt # 3 Re su lt # 4 For every peso we
grant as incentive, we collect 34 cents
in taxes.
For every peso spent on incentive, between P0.63 and P1.21 comes back in
benefits.
In general, registered firms do not perform better on employment, exports, and productivity compared
to non-registered firms.
To create 1 job, it costs taxpayers at least
P2,434,662.
There are other and may be better ways to support firms
Granting tax incentives is not the only way to
directly help firms
The government can use more efficient and targeted subsidies
The real solution in the medium-term is to address
infrastructure gaps, corruption, inefficiency in government, and complex
business regulations
Ex. lifeline subsidies, power subsidies,
housing vouchers, skills training, etc.
Incentives must be
With effective monitoring and evaluation system
and anchored on a strategic investment priority plan that emphasizes:
Job creation Research &
development Countryside
development Skills training Innovation
Thank you!
