Tuesday, April 11, 2006

UP study: Tax perks unnecessary to attract most investors

The government may have unnecessarily given up revenues to draw in investors who are likely to have placed their bets in the country regardless of the tax-incentive scheme, according to a study done by a University of the Philippines professor.

The study by Renato Recide of the UP School of Economics used 2004 data to show that the Philippines lost some P47.6 billion in forgone revenues, with the Board of Investments (BOI) accounting for 65 percent, at a redundancy rate of 80 percent.

The redundancy rate is the percentage of investors receiving tax holidays who would have invested anyway even if they had not been granted these incentives, Recide said. The study identified redundancy rate by classifying investors according to their motives for investing, with the data validated using regression analysis.

Next to the BOI, the Philippine Export Zone Authority (PEZA) accounted for 33 percent of the total loss, with a 10-percent redundancy rate. The Subic Bay Metropolitan Authority (SBMA) and the Clark Development Corp. (CDC), the second having lost its incentives-giving authority recently, accounted for almost 2 percent of the total fiscal loss, the study said. Both agencies had 10-percent redundancy rates.

The study said the forgone amount represents the estimated fiscal cost of tax and duty exemptions of imports of capital goods and raw materials, as well as the cost of tax credits on domestic capital equipment.

However, the results showed only partial estimates of the cost of forgone revenues since other factors have yet to be estimated, like income-tax holidays, accelerated depreciation, among others, the study said.

Recide said the study used the estimated redundancy rate of incentives for the cost-benefit analysis of incentives. Estimating the redundancy rate is a key aspect for estimating the net benefits of tax incentives in the country, "because it will enable one to have a clear picture of the tax revenues truly forgone," he said.

The UP professor said that if the tax incentives were given only to investors who would not have invested if they were not offered any, then the incentives would not have been considered as loss of revenue. However, if incentives would have gone to investors who would have invested anyway—those who do not make investments based on incentives—then there is redundancy and the forgone revenues from those redundant incentives would "represent a cost to the national treasury."

According to past surveys, investors "take stock of the entire environment for investment" in a particular area. Recide said surveys consistently showed that investors considered the country’s political stability, economic growth, size of market and even consistency of legal and regulatory frameworks for business facilitation, with these factors outranking tax incentives as an inducement for investing in the country.

"Tax incentives play an important role but secondary to these factors in the decision-making process for investment," Recide said

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