PEZA needs to be put in its place
Credit to Author: BEN KRITZ, TMT| Date: Mon, 09 Sep 2019 16:15:00 +0000
WITH the year already into Jose Mari Chan season and the retooled second package of the Comprehensive Tax Reform Program (CTRP) not yet passed, Congress, President Rodrigo Duterte, or God Himself needs to step in and put an end to the Philippine Economic Zone Authority’s (PEZA) irrational and desperate obstruction of the measure.
CTRP Package 2 started life as the Trabaho Bill (Tax Reform for Attracting Better and Higher-quality Opportunities), and in its somewhat updated form is known as the much more professional-sounding Corporate Income Tax and Incentive Rationalization Act (Citira). It has two main objectives: First, the gradual reduction of corporate income taxes from 30 percent to 20 percent; and second, the rationalization of fiscal incentives to businesses, primarily those located in the country’s abundant number of special economic zones.
PEZA has steadfastly resisted passage of the bill from the very beginning, which has presented the rather unusual and awkward spectacle of one government agency, and a subordinate one at that, openly defying administration policy being managed by another. In the process, the most important and farthest-reaching component of the bill, the reduction of corporate income taxes, has been completely overlooked.
There are approximately one million businesses in the Philippines, all of which would benefit to some degree from the tax reduction, but in the ultimate example of tripping over a peso to pick up a centavo, PEZA would see the whole measure scrubbed for the sake of preserving the tax perks for just 3,000 businesses in economic zones.
And in case anyone is under the mistaken impression that PEZA is simply angling for some sort of compromise, PEZA Director Charito Plaza disabused everyone of that notion over the weekend, saying in a statement that PEZA was “not willing to compromise [on its position on the bill], because it is a dangerous compromise.”
PEZA’s position, specifically, is that it and the businesses under its umbrella should be exempted from the provisions of the Citira bill. “We should not tinker with our incentives, which is presently globally competitive. What we can give is to exempt PEZA and test it [Citira] first [with] domestic enterprises, not [with] exporters, because we have to take advantage of the opportunities [the latter offer],” Plaza said.
That argument is as asinine as it is grammatically incorrect. First of all, very few domestic enterprises are given the sort of tax incentives that are covered by the Citira bill, so the “test” – the objective of which Plaza didn’t bother to explain – would be completely irrelevant. Second, the “opportunities” are more than a little overstated. For manufacturing locators in ecozones, fully 85 percent of their production inputs are imported, according to recent Department of Finance data. Yet both PEZA and the Joint Foreign Chambers, which backs the rogue government investment agency, insist on throwing around the “$100 billion in trade and $30 billion in investments” figures as evidence of the “opportunities.”
Plaza added another dubious argument in her call for an exemption for PEZA locators. “Ecozones of the Philippines are not the…best ecozones,” Plaza said. “We still lack other things, like good supply chain, infrastructures [and] transportation facilities…so it is really our incentives that attract [foreign] investors,” she added, apparently unaware that there have been at least a dozen studies in the past seven years that have found that incentives are not a major factor in business’s decisions to locate in a certain area. Nevertheless, Plaza warned, “if government insists on Citira, investors will prefer transferring to neighboring countries.”
Again, the argument does not stand up to basic logic, because the importance of incentives is grossly overstated. No amount of incentives can compensate for insufficient supply chains and infrastructure; the resources and environment available in a potential location are either useful or they are not. If the Philippines has shortcomings that are serious enough to be considered a justification for some form of compensation to investors, then the shortcomings should be addressed.
What Plaza and the JFC have conveniently overlooked – an omission that has been noted several times by the Department of Finance – is that “rationalization” of fiscal incentives does not necessarily mean removal of them, but reorganization of the incentive framework. Some incentives will be reduced or eliminated, but for the most part these will be incentives that have outlived their usefulness, such as some that are currently granted to highly profitable BPO locators. Other incentives will be left alone, and in a few cases, even increased.
If PEZA cannot align its position with that of the government of which it is a part, then the problem is not the policy, but PEZA itself. That makes it even more important to pass the Citira bill, because in that context the Citira bill becomes a tool to help fix a faulty investment promotion framework. That has longer term benefits to the entire economy, and is a step Congress should take quickly.
ben.kritz@manilatimes.net
Twitter: @benkritz