Finance undersecretary Gil Beltran has scoffed at Philippine Economic Zone Authority (PEZA) officials for having “a weak grasp of basic economics and accounting” in erroneously claiming that this investment promotion agency has contributed P10 trillion to the Philippine economy over the 2015-2017 period.
“No one has called PEZA an evil, three-headed dragon,” Beltran said in dismissing an earlier PEZA statement that justified the massive amount of incentives it has been granting to its locators. “But based on their statement, PEZA seems to have a weak grasp of basic economics and accounting.”
Beltran, who is also the chief economist of the Department of Finance (DOF), said PEZA’s assertion that it contributed P10 trillion to the economy from 2015 to 2017 is incorrect because “their” method of accounting for its contribution is flawed.”
“For one, PEZA double counted by adding up the total of exports, investment, and capital equipment, and raw materials, which are from the expenditure side; and wages and taxes, which are from the income side. This is a no-no in basic accounting,” Beltran said.
“Like GDP (gross domestic product), benefits can be measured from either the expenditure or income side, but not both.” Beltran said.
He also pointed out that purchases of raw materials are already part of total exports, which means that PEZA also double-counted raw materials.
“PEZA’s calculations are wrong, and the result is that they’ve bloated their contributions,” Beltran said.
The Finance undersecretary said that, although the DOF agrees that exports contribute significantly to the economy, PEZA should “give the whole truth in making its claims.”
PEZA originally said that, from 2015 to 2017, their exports accounted for more than half of the country’s total commodity exports, he said.
“PEZA says that 70 percent of their supposed contribution, or about P7 trillion, to the economy is because of exports,” Beltran said. “What they are hiding is that PEZA exports contain about 80 percent imported inputs, which don’t add value to the local economy.”
He explained that a proper accounting of benefits should subtract imports from total exports to arrive at net exports. In some sectors, like electronics assembly, almost all the parts are imported and are assembled in ecozones, creating very little domestic value-added, he said.
“Assuming their figures are correct in the first place, using the appropriate method to account for exports and remove double-counting wipes out more than half of the P10 trillion they allege to have given back to the economy,” he said.
Through Package 2 of the Comprehensive Tax Reform Program (CTRP), the government seeks to change the status quo of incentive granting, where there is little accountability in the grant of preferential tax rates that PEZA grants forever, regardless of performance.
Based on the data gathered under the Tax Incentives Management and Transparency Act (TIMTA), 585 PEZA locators have been receiving incentives for over 15 years.
“Our analysis has also shown that about half of all companies receiving incentives do in fact contribute to the economy,” Beltran said. “As we’ve mentioned, we are not anti-incentives.”
“Undersecretary Karl Chua even acknowledged that these incentives have yielded some benefits in jobs created and investments in the domestic economy. What the government wants is to modernize the incentives system and make incentives performance-based, targeted, time-bound, and transparent, all practiced in our Southeast Asian neighbors,” Beltran said.
Beltran went on to explain that, in addition to gradually lowering the corporate income tax (CIT) rate, Package 2 aims to institute a single menu of generous incentives that are performance-based, time-bound, targeted, and transparent.
“Transparency has always been an issue here,” Beltran said. “PEZA has yet to account for all the incentives it has granted to locators for over 40 years, which would help make the case that it has performed its mandate.”
Beltran cited the passage of the TIMTA in 2015, which has helped pave the way for a better understanding of the economic impact of tax incentives granted to corporations.
Under Package 2, incentives will be granted for the right reasons and the right investments, including the creation of quality jobs, investments in training, and investments in rural areas and places recovering from calamities and armed conflict, he said.
“Are these reasons so objectionable to PEZA’s leadership?” Beltran stressed.
“As what we’ve been saying for some time now, the indiscriminate granting of incentives should never be used to attract investments,” Beltran said. “In the past, it might have functioned as a band-aid solution to make up for the other problems in the business environment, but the government has already been correcting those problems.”
Beltran said proof that the Duterte administration has been correcting those problems are, among others, its massive investments in infrastructure through the “Build, Build, Build” program; efforts to promote Ease of Doing Business; and the country’s “BBB+” positive credit rating, which signals that the Philippines is a less risky place for investments.
“We value all investors, and no demonization is taking place,” Beltran emphasized. “In fact, PEZA’s current locators may qualify for the superior incentives being offered under CTRP Package 2, and they are certainly welcome to apply. But the fact remains that the current system has been tilted in the favor of a few companies for so long. Hundreds of billions of pesos in tax incentives have not achieved enough. Package 2 will make things fair and level the playing field.”
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