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NEDA CBA on tax incentives vindicates PEZA’s incentives and performance as top contributor to exports, employment, and poverty-reduction

NEDA CBA on tax incentives vindicates PEZA’s incentives and performance as top contributor to exports, employment, and poverty-reduction
October 7, 2020
NEDA CBA on tax incentives vindicates PEZA’s incentives and performance as top contributor to exports, employment, and poverty-reduction

07 October 2020 (Wednesday)

Pasay City – Amidst the pending reform on corporate taxes and tax incentives in the country being pushed in Congress, Philippine Economic Zone Authority (PEZA) Director General Charito “Ching” Plaza lauds the much-awaited initial findings of the cost benefit analysis (CBA) conducted by National Economic and Development Authority about tax incentives from 2016 to 2018.

Plaza underlined the CBA vindicated PEZA’s globally-competitive, tried and tested tax incentives that it indeed generates more investments and contribution to the economy.

According to NEDA’s initial CBA study, “For three years, an average 94.5 percent of all exports were made by RBEs under PEZA” while SBMA takes up most of the residual. In terms of economy-wide impacts, “Tax incentives increase domestic production” and “the export performance under the scenario with tax incentives indicated rising growth.” It says also that tax incentives appeared to help reduce poverty levels.

NEDA conducted the CBA study in view of Republic Act No. 10708 or the Tax Incentives Management and Transparency Act (TIMTA). Under the law, NEDA has been tasked to conduct a cost-benefit analysis (CBA) on investment incentives to determine the impact of such incentives to the Philippine economy.

Senate President Pro-Tempore Ralph Recto, who is also the author of RA 10708, noted that NEDA will be the final arbiter between DOF, on the revenue side, and DTI, on the investments side.

According to the PEZA Chief, “The findings of the NEDA CBA shall be a credible study that evidence PEZA’s clarion call to the retention of its tax incentives because it is key attraction to export-based investments in the country. More than labelling tax incentives as foregone taxes, tax incentives helped generate investments, employments, and dollar earnings from exports.”

“The findings in the preliminary study proves the importance and effectiveness of the tax incentives being given to investors and their presence in the country,” Plaza added.

Based on NEDA’s CBA study, eight investment promotion agencies (IPAs) submitted data covering 1,687 companies. PEZA registered business enterprises (RBEs) have contributed the most of the data.

2016-2018 CBA Key Findings

In terms of employment generation, PEZA, Subic Bay Metropolitan Authority (SBMA) and Authority of Free Port Bataan (AFAB) contributed the most among the IPAs. Over the three years, 78.09 percent of employment were generated by RBEs under PEZA.

Moreover, RBEs under PEZA made an average 94.5 percent of all exports while they also acquired the most imports (92.7% to 97.0%). Industry-wise, the manufacturing sector was highly dependent on imports, comprising around 96 percent.

It’s also been revealed that the current tax incentives in the country is effective. As stated by Senator Recto during his interpellation on CREATE last September 28, “[the CBA shows that] the current tax incentives package is favorable to the Philippines” and that “benefits outweigh the costs.”

RBEs under PEZA received most of the tax incentives, about PHP42.5 billion to PHP50.3 billion each year. This is equivalent to 16.6 percent to 18.26 percent of the corporate income tax recorded from 2016 to 2018. Also, RBEs under PEZA had stockholders’ equity equivalent to 4.17 percent to 5.69 percent of the equity market.

Some of the economy-wide impacts cited by NEDA are the following:

1. Tax incentives increase domestic production.

2. The export performance under the scenario with tax incentives indicated rising growth. All export growth multipliers were positive and rising. However, the export growth was generally slightly slower compared to a no-tax-incentives regime.

3. Tax incentives appeared to generate more investments.

4. As factor supplies increase, additional incomes are generated and the bases of the direct income taxes expand. Personal income tax collection was 3.17 percentage points higher with tax incentives.

5. A household wellbeing measure in the form of equivalence variation suggests that households are better off with the tax incentives.

6. Tax incentives appeared to help reduce poverty levels. However, disaggregation suggests that rural households benefit more from the tax incentives.

Plaza noted, “The findings show that PEZA’s incentives are in fact performance- and target-based and it has undeniable positive effect or impact to the local government units (LGUs) hosting the ecozones.”

Nevertheless, Plaza said “we cannot deny the impact of investments being brought into the country by export companies who are attracted of PEZA’s tried, tested, and globally competitive fiscal incentives. In fact, PEZA’s incentives entice RBEs to come and invest in the

Philippines as these compensate the high cost of doing business and lack of efficiency factors.”

Appeal to consider the possible impact of CREATE

The Director General stated “We continue to appeal to our Honorable Senators and legislators at the House of Representatives to consider the possible effect of the change in the current tax regime to our export-oriented sectors and to our economy.”

The Mactan Export Processing Zone Chamber of Exporters and Manufacturers (MEPZCEM Chamber, Inc.) has called on the Senate to retain PEZA’s attractive and globally competitive incentives and powers to grant incentives to its registered export-oriented enterprises or else they will pull out of the country. In their position paper, the chamber said that ‘We are waiting to hear the outcome of CREATE bill in the Senate. If it is passed, we will plan our exit to another country’.”

“Given the current economic scenario [due to pandemic], we expect the Government to be coming up with more incentives and aid for business establishments and most especially exporters as this is the only way to keep the majority of the workforce employed,” the chamber said.

“Let us not change the rules in the middle of the game especially in this crucial period of the pandemic and world recession. Changing and tinkering of the rules and incentives that are working will destabilize investment and the economy as it would lose the trust and confidence on the stability and attractiveness of the Philippines to FDIs and export enterprises,” explained Plaza.

She added “Let us acknowledge the many contributions of our exporters to improve our economy, create thousands of jobs, bring in new technology, develop the millions of hectares of idle lands, build hospitals, school buildings, seaports, airports and other infrastructures supposedly built by the Government. There are also other Corporate Social Responsibility projects by PEZA locator companies. Let us not kill the goose that lays the golden egg.”

Senator Richard Gordon also called for caution in tinkering around with something that is not broken especially on rationalizing incentives given by IPAs. “It may not be the right time to do this. Let us take a step back and look at our situation because COVID is going to exacerbate it. Let us not tinker around too much with what is working because we might end up in a bigger abyss,” he said.

The Senate interpellations on CREATE will continue before their October 15 break.