Fiscal incentives enjoyed by favored enterprises have cost the government P481.7 billion in foregone revenues in 2019 alone, or a year before the landmark congressional approval of the law that finally introduced bold reforms in the corporate income tax (CIT) system.

This substantial amount already represents a decrease from the P518.7 billion in tax perks given away by the government in 2018 through the various investment promotion agencies (IPAs) and through fiscal incentives granted to cooperatives, according to a report to Finance Secretary Carlos Dominguez III.

The Department of Finance (DOF) expects future fiscal and non-fiscal incentives to be rationalized to ensure that these are performance-based, targeted, time-bound, and transparent, following the enactment of the Corporate Recovery and Tax Incentives for Enterprises (CREATE) Law last March.

According to the report of the DOF-Domestic Finance Group (DFG), of the P481.7 billion-worth of incentives granted to a select group of corporations in 2019, P149.28 billion or almost a third of the total were in the form of income tax incentives.

These include the 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), Assistant Secretary Ma. Teresa Habitan of the DFG said at a recent DOF executive committee (Execom) meeting.

The incentives for the value-added tax (VAT) accounted for P283.45 billion (58.8 percent) of the incentives; exemptions from customs duties, P47.59 billion (9.88 percent) and the percentage tax incentive availed by cooperatives, P1.38 billion (0.29 percent), she added.

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 those that availed of income tax incentives, 3,083 were IPA-registered companies and 4,371 were cooperatives, she said.

These amount to a total of 7,454 or 57.5 percent of the 11,431 enterprises that were granted income tax perks, Habitan said.

The various IPAs include the Board of Investments (BOI), Regional Board of Investments – Autonomous Region in Muslim Mindanao (RBOI-ARMM), Philippine Economic Zone Authority (PEZA), Bases Conversion and Development Authority (BCDA), Subic Bay Metropolitan Authority (SBMA), Clark Development Corporation (CDC), Poro Point Management Corporation (PPMC), Cagayan Economic Zone Authority (CEZA), Zamboanga City Special Economic Zone Authority (ZCSEZA), Aurora Pacific Economic Zone and Freeport Authority (APECO), Authority of the Freeport Area of Bataan (AFAB), and Tourism Infrastructure and Enterprise Zone Authority (TIEZA).

For 2019, the manufacturing sector took the biggest share at 66.7 percent of the total tax incentives, amounting to P321.3 billion.

The services and energy sectors were granted P114.8 billion (23.83 percent) and P26.36 billion (5.47 percent) of incentives, respectively.

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.

In the case of cooperatives, it received a total of P32.2 billion-worth of tax incentives in 2019, she said, adding that the majority of cooperatives that enjoyed tax perks were 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.

Under CREATE, the grant and administration of incentives have been rationalized to ensure that the perks received by registered enterprises are benefiting the economy.

With the CIT rate and tax incentives rationalized under CREATE, micro, small and medium enterprises (MSMEs) which employ a majority of Filipino workers in the country, are the law’s biggest beneficiaries.

The law cuts 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.

For enterprises that undertake activities considered priority by the government, CREATE provides for a generous incentives menu that offers tax discounts on the basis of their strategic benefit to the country, such as their ability to create jobs and promote countryside development.

IPAs maintain their key investment promotion functions and powers under their respective charters, but the Fiscal Incentives Review Board (FIRB) will have oversight power over them.

The governance of tax incentives have been placed under the FIRB, which is chaired by the DOF and co-chaired by the Department of Trade and Industry (DTI).

The FIRB will ensure accountability and transparency in the grant of tax incentives to private corporations.

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.