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DRAFT FOR DISCUSSION. SUBJECT TO CHANGE.CTRP – Package 2: 4B cost-benefit analysis (as of October 11, 2019)
Package 2COMPREHENSIVE TAX REFORM PROGRAM
Corporate income tax and incentives reformCost benefit analysis
As of 11 October 20191
DRAFT FOR DISCUSSION. SUBJECT TO CHANGE.CTRP – Package 2: 4B cost-benefit analysis (as of October 11, 2019)
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DRAFT FOR DISCUSSION. SUBJECT TO CHANGE.CTRP – Package 2: 4B cost-benefit analysis (as of October 11, 2019)
2. Cost-benefit analysis What do we gain from a review of past incentives and benefits received?
1. Why is Package 2 necessary?
Outline
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DRAFT FOR DISCUSSION. SUBJECT TO CHANGE.CTRP – Package 2: 4B cost-benefit analysis (as of October 11, 2019)
Objectives of the tax reform packages
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DRAFT FOR DISCUSSION. SUBJECT TO CHANGE.CTRP – Package 2: 4B cost-benefit analysis (as of October 11, 2019)
Others
1. Motor Vehicle Users Tax
2. General amnesty with lifting of bank secrecy for fraud cases and automatic exchange of information.
3. Mining tax regime
Duterte Administration’s Comprehensive Tax Reform Program
5
Package 1
Package 1A: TRAINPersonal income tax, consumption tax, and
transaction taxes (RA 10963)
Package 1B: Tax amnesty Estate and delinquency tax amnesty (RA 11213)
Package 2
Corporate income tax and fiscal incentives
Package 2+
A. Tobacco excise (RA 11346)B. Alcohol and e-cigarette
Package 3
Property valuation reform
Package 4
Passive income and financial tax
DRAFT FOR DISCUSSION. SUBJECT TO CHANGE.CTRP – Package 2: 4B cost-benefit analysis (as of October 11, 2019)
Source: Asian Development Bank and PWC
The Philippines has the highest corporate income tax rate in the ASEAN region.
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DRAFT FOR DISCUSSION. SUBJECT TO CHANGE.CTRP – Package 2: 4B cost-benefit analysis (as of October 11, 2019)
CIT revenue is increasing, but efficiency is very low.
Source: OECD, individual country statistics offices, and DOF staff calculations. 8
DRAFT FOR DISCUSSION. SUBJECT TO CHANGE.CTRP – Package 2: 4B cost-benefit analysis (as of October 11, 2019)
We have a complex tax incentives system.
Source: Individual country finance agencies and investment promotion offices.
9
1. 13 IPAs2. 133 investment laws and
209 non-investment laws, total of 342 special laws
3. 544 ecozones and freeports
We grant the most generous fiscal incentives since they are in lieu of all other taxes and given forever.
DRAFT FOR DISCUSSION. SUBJECT TO CHANGE.
Tax typeRegular firm
(More than 90,000 firms)Registered business entity
(Around 3,000 firms)
Income tax 30 percent based on net taxable income Income tax holiday followed by 5 percentbased on gross incomeIn general*, 3 percent is for the National Government while 2 percent is for the Local Government Unit (LGU)
Local business taxUp to 3 percent of gross receipts, depending on the localized revenue code
Value-added tax (VAT) 12 percent net VAT payable Exempt
Customs duty Up to 65 percent of the dutiable value Exempt
Improperly accumulated earnings tax
10 percent of improperly accumulated taxable income
Exempt
Branch profitremittance tax
15 percent of total profits earmarked for remittance
Exempt
Documentarystamp tax
Up to 12.5 percent, depending on the taxable document
Exempt
Real property taxUp to 3 percent of the assessed value of the property
Exempt, except for landowned by developers
Regular firms are unfairly disadvantaged by the verylow tax regime registered business enterprises enjoy
10*Note: LGU share per Investment Promotion Agency (IPA) varies. A breakdown per IPA is provided in slide no. 5 as support.
DRAFT FOR DISCUSSION. SUBJECT TO CHANGE.CTRP – Package 2: 4B cost-benefit analysis (as of October 11, 2019)
We have a complex tax incentives system
13 Investment Promotion Agencies (IPAs)
15
DRAFT FOR DISCUSSION. SUBJECT TO CHANGE.CTRP – Package 2: 4B cost-benefit analysis (as of October 11, 2019)
Source: PEZA, IPAs, and DOF staff calculations
We have a complextax incentives system.
16
As of 2018, there are
544 ecozones, all of
them are separate
customs territory,
meaning they are
exempt from all taxes.
Moreover, 223 or 41
percent of these
ecozones are in Metro
Manila alone.
IPA No. of ecozones
AFAB 1
APECO 1
BCDA -
BOI -
CDC 1
CEZA 1
PEZA 531
PIA 1
PPMC 1
TIEZA 5
SBMA 1
RBOI-ARMM -
ZCSEZA 1
TOTAL 544
DRAFT FOR DISCUSSION. SUBJECT TO CHANGE.CTRP – Package 2: 4B cost-benefit analysis (as of October 11, 2019)
ChileThailandIndonesia
Source: Individual country investment promotion offices.
17
Closest economic zone to each country’s capitalCapital Economic zone Distance, in kilometers
Jakarta (Indonesia) Tan Jung Lesung 181km
Bangkok (Thailand) Sa Kaeo 197km
Santiago (Chile) Free Zone of Punta Arenas 3,022km
Notes: Distances were estimated using Google Maps and the location of the capital is denoted by .
DRAFT FOR DISCUSSION. SUBJECT TO CHANGE.CTRP – Package 2: 4B cost-benefit analysis (as of October 11, 2019)
In 2017, over PHP 441 billion was granted to 3,150 firms.
18
Source: DTI, TIMTA, and DOF estimates
Resulting in huge inequity and “wasted” incentives
(2.8% of 2017 GDP)
● Firms with no incentives pay the regular rate of 30% of net taxable income.
● Firms with incentives pay between 6% and 13% effective tax.
● For example, almost all of the 90,000 SMEs pay the regular 30% rate.
In 2017, 989,166 registered firms.
In addition, PHP 63 billion was lost due to possibleabuse of transfer pricing.
(0.4% of 2017 GDP)
Total: PHP 504 billion(3.2% of 2017 GDP)
DRAFT FOR DISCUSSION. SUBJECT TO CHANGE.CTRP – Package 2: 4B cost-benefit analysis (as of October 11, 2019)
Estimated forgone revenue due to tax incentives
Tax incentives in billion pesos
Source: TIMTA, DOF estimatesLocal VAT estimates for 2016 and 2017, and local business tax estimates for 2017 are subject to IPA submissions to the BIR.
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Type of tax 2015 2016 2017
Income tax 86 121 127
Customs duties 18 57 47
Subtotal 104 179 173
Import VAT (gross) 160 202 268
Local VAT (gross) 37 - -
Local business tax 2 1 -
Subtotal for incentives 301 381 441
Leakage 43 52 63
Total 346 434 504
No. of recipients 2,844 3,102 3,150
DRAFT FOR DISCUSSION. SUBJECT TO CHANGE.CTRP – Package 2: 4B cost-benefit analysis (as of October 11, 2019)
441 billion pesos of foregone revenues in 2017 could have funded…
33,000 public markets or
46,000 kilometers of roads or
130,000 daycare centers or
450,000 classrooms.
Source: DOF estimates
PHP 441 billion in foregone revenue in 2017, many of which are unnecessary incentives.
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DRAFT FOR DISCUSSION. SUBJECT TO CHANGE.CTRP – Package 2: 4B cost-benefit analysis (as of October 11, 2019)
Estimates of tax incentives:income and duties (in billion pesos, 2017)
Note: Figures were ranked by tax expenditure from TIMTA 2017Source: TIMTA
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DRAFT FOR DISCUSSION. SUBJECT TO CHANGE.CTRP – Package 2: 4B cost-benefit analysis (as of October 11, 2019)
Top recipients of tax incentives by sector(in billion pesos, 2017)
23Note: Figures were ranked by tax expenditure from TIMTA 2017Source: TIMTA
Draft for discussion. Subject to change.CTRP – Package 2: 4B cost-benefit analysis (as of October 11, 2019) Draft for discussion. Subject to change.
Incentives are not really needed by most investors
PHP 441 billion in foregone revenue in 2017 from taxincentives, many of which are unnecessary incentives.
24
1.97
1.30
0.13
9.80
-1
1
3
5
7
9
11
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Approved foreign investments by investment promotion
agency and foreign direct investments, in USD billions
BOI PEZA Other IPAs FDISource: PSA
1. Wider gap between total FDI and approved FDI means most investors don’t need incentives.
2. PEZA approved investments have been declining even without CITIRA.
3. BOI approved investments are higher than PEZA, suggesting that firms don’t need forever incentives to invest.
4. Prior to 2013, PEZA approved FDI were consistently higher than total FDI. This suggests that many approved investment don’t materialize.
USD
bill
ion
s
Draft for discussion. Subject to change.CTRP – Package 2: 4B cost-benefit analysis (as of October 11, 2019)
JFC job loss claims
Current jobs Jobs lost year on year 1 PSA
Total Direct Indirect
Direct-Indirect
employment multiplier
Total Direct Indirect
Direct-Indirect
employment multiplier
Direct-Indirect
employment multiplier
CONWEP 1,400,000 280,000 1,120,000 4 375,000 75,000 300,000 4 0.731
IBPAP 5,400,000 1,300,000 4,100,000 3.15 3.312
PAMURI 75,000 25,000 50,000 2 24,000 8,000 16,000 2 0.793
SEIPI 3,040,000 380,000 2,660,000 7 304,000 38,000 266,000 7 4.564
Total 9,930,000 2,000,000 7,930,000 3.97 703,000 121,000 582,000 4.81 3.53
25
The employment multipliers presented by the Joint Foreign Chambers (JFC) are perfect multiples, suggesting that these have little to no basis. Further,
these multipliers are much higher compared to actual PSA data.
Source: JFC, PSA1 Textile manufactures, Wearing apparel, and Footwear and leather and leather products2 Communication, Insurance and activities auxiliary to financial intermediation, Administrative and Support Service Activities3 Administrative and Support Service Activities4 Computer, Electronic and Optical products, and Electrical equipment
DRAFT FOR DISCUSSION. SUBJECT TO CHANGE.CTRP – Package 2: 4B cost-benefit analysis (as of October 11, 2019)
Cost-benefit analyses of fiscal incentives
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DRAFT FOR DISCUSSION. SUBJECT TO CHANGE.CTRP – Package 2: 4B cost-benefit analysis (as of October 11, 2019)
Tax incentives usually violate the principles of:
Efficiency Equity Simplicity
However, incentives may be justified if theyprovide net benefit to society as a whole.
32
DRAFT FOR DISCUSSION. SUBJECT TO CHANGE.CTRP – Package 2: 4B cost-benefit analysis (as of October 11, 2019)
Incentives may be important to encourageinvestments that promote growth and jobs...
Some incentives are unnecessary, i.e., investment would have happened anyway even without the incentives (e.g., available market, quality labor, land, resources, etc.).
...but, investment tax incentives are tax expendituresthat someone else has to pay.
It is not free money from heaven.
Government needs to ensure efficiency in spending.
(How much tax incentive can we afford?)33
DRAFT FOR DISCUSSION. SUBJECT TO CHANGE.CTRP – Package 2: 4B cost-benefit analysis (as of October 11, 2019)
Some incentives may be needed to attract investments that support our growth objectives.
Create more and better jobs
Promote research and development
Encourage innovation
Stimulate domestic industriesDiversify product space
(e.g., to higher value exports)
However, they must be performance-based,targeted, time-bound, and transparent. 34
DRAFT FOR DISCUSSION. SUBJECT TO CHANGE.CTRP – Package 2: 4B cost-benefit analysis (as of October 11, 2019)
“Ex-post” cost-benefit analysis
This is done so that we can determine if the tax incentives given to recipients benefit our economy more than it costs.
Note: Evaluation of the past performance does not necessarily indicate future priority or preference over some industries.
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DRAFT FOR DISCUSSION. SUBJECT TO CHANGE.CTRP – Package 2: 4B cost-benefit analysis (as of October 11, 2019)
Basis for cost benefit analysis
1. Economic value – can be quantified. This is what we analyze.
2. Social value – usually cannot be quantified; based on public perception of what is socially important.
3. Political value – usually cannot be quantified; usually based on a political decision.
36Department of Finance 10/15/2019
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DRAFT FOR DISCUSSION. SUBJECT TO CHANGE.CTRP – Package 2: 4B cost-benefit analysis (as of October 11, 2019)
Cost-benefit analysis: Methods
1. Estimating implicit labor subsidyWhat is the cost for each job created?
3. Estimating net government revenue Do we generate more revenue from the tax we forego?
2. Performing a counterfactual analysisDo firms with registered activities for incentives perform better in terms of job creation, R&D investments, productivity, etc. when compared to non-registered firms?
4. Accounting of direct and indirect cost and benefitDo total benefits from incentives, both private and social, outweigh total costs?
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DRAFT FOR DISCUSSION. SUBJECT TO CHANGE.CTRP – Package 2: 4B cost-benefit analysis (as of October 11, 2019)
Result #1 Implicit labor subsidyTo create 1 job, it costs taxpayers on average…
Note: TE = total tax expenditure
*Subject to change depending on IPA submissions of employment data
Source: IPA submissions, TIMTA, DOF estimates38
P2,950,756 P3,080,847*P2,434,662Jobs = 129,339 personsTE = P 381 billion
Jobs = 143,181 personsTE = P 441 billion
Jobs = 123,725 personsTE = P 301 billion
P2,822,0882015 – 2017 average
DRAFT FOR DISCUSSION. SUBJECT TO CHANGE.CTRP – Package 2: 4B cost-benefit analysis (as of October 11, 2019)
In 2017, **143,181 additional jobs were created. (note: we only use incremental jobs, not total jobs as the industry would do).
A total tax expenditure of P441 billion on ITH, GIE, customs duties, VAT. If this figure is adjusted for VAT refund, the implicit labor subsidy would be 1.2 million.
Source: IPA, TIMTA, submissions, and from DOF staff estimates*BOI recorded a negative employment flow for 2017.**2017 Employment flow data is subject to change based on IPA submissions. Current figure is a projection.
*
9,127
222,968 317,251
777,124
944,658
-
500,000
1,000,000
1,500,000
2,000,000
2,500,000
BOI ZCSEZA PPMC SBMA CEZA AFAB PEZA CDC All IPAs
Result #1 Implicit subsidy, by IPA (2017, in pesos)
41
3,718,891 3,267,653 3,080,847
CTRP – Package 2: 4B cost-benefit analysis (as of October 11, 2019)
DRAFT FOR DISCUSSION. SUBJECT TO CHANGE.CTRP – Package 2: 4B cost-benefit analysis (as of October 11, 2019)
Cost-benefit analysis: Methods
1. Estimating implicit labor subsidyWhat is the cost for each job created?
3. Estimating net government revenue Do we generate more revenue from the tax we forego?
2. Performing a counterfactual analysisDo firms with registered activities for incentives perform better in terms of job creation, R&D investments, productivity, etc. when compared to non-registered firms?
4. Accounting of direct and indirect cost and benefitDo total benefits from incentives, both private and social, outweigh total costs?
42
DRAFT FOR DISCUSSION. SUBJECT TO CHANGE.CTRP – Package 2: 4B cost-benefit analysis (as of October 11, 2019)
The golden standard —randomized assignment
1. Ideally, randomly assign eligible firms to receive and
not receive tax incentives to remove bias.a. Outcomes are then measured before and after receiving
tax incentives.
2. However, tax incentives are not randomly assigned.
They are purposely given.a. What we have:
i. Tax incentives (2015 TIMTA).
ii. Nationwide survey on firm characteristics and outcomes
of interest (2012 CPBI, 2014 and 2015 ASPBI).
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DRAFT FOR DISCUSSION. SUBJECT TO CHANGE.CTRP – Package 2: 4B cost-benefit analysis (as of October 11, 2019)
Impact evaluation methods
Design When to use Advantages Disadvantages
Randomization 1. Whenever feasible1. Gold standard
2. Most powerful
1. Not always feasible
2. Not always ethical
Regression discontinuity
2. If an intervention has a clear, sharp assignment rule.
1. Project beneficiaries often must qualify through established criteria
1. Only look at sub-group of sample
2. Assignment rule in practice often not implemented strictly
Difference-in-differences
1. If two groups are growing at similar rates
2. Baseline and follow-up data are available
1. Eliminates fixed differences not related to treatment
1. Can be biased if trends change.
2.Ideally have 2 pre-intervention periods of data.
Matching1. When other methods are not possible
1. Overcomes observed differences between treatment and comparison
1. Assumes no unobserved differences
(often implausible)
10/15/2019 44
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DRAFT FOR DISCUSSION. SUBJECT TO CHANGE.CTRP – Package 2: 4B cost-benefit analysis (as of October 11, 2019)
Data
TIMTA 2015(5,155)
ASPBI
Treatment group
Year No. of firmsCandidates for control
group
2014 26,046 24,356
2015 25,087 23,545
YearFirms in treatment
group
2014 1,444
2015 1,542 45
DRAFT FOR DISCUSSION. SUBJECT TO CHANGE.CTRP – Package 2: 4B cost-benefit analysis (as of October 11, 2019)
Sample study on tax incentives using PSMAuthor and title Subject Major results
Yang, Chih‐Hai and Huang,
Chia-Hui and Hou, Tony
Chieh-tse, Tax Incentives and
R&D Activity: Firm-Level
Evidence from Taiwan (May
15, 2012). Research Policy,
Vol. 41 (9), 1578–1588, 2012.
Available at SSRN:
https://ssrn.com/
abstract=2196950
https://www.sciencedirect.co
m/science/article/pii/
S0048733312001151
Effect of tax
incentives on R&D
activities in
Taiwanese
manufacturing
firms
VariablesFirm size, firm age, capital intensity, profitability, industry dummy, time dummy
Specific tax incentive program:R&D tax credits
1. PSM estimates show that recipients of R&D
tax credits appear on average to have 53.80%
higher R&D expenditures than that they do
without receiving tax credits, while there is no
significantly higher growth rate of R&D
expenditure.
2. The R&D tax credit is witnessed to exhibit a
significantly positive influence on R&D
expenditure and its growth, especially for
electronics firms. The marginal effect is
moderate, ranging from 0.094 to 0.120.
Specifically, the R&D elasticity concerning tax
credits tends to increase gradually along with
the approaching expiration of R&D tax credits
measure, lending a supportive view on its
efficacy.
10/15/2019 Department of Finance 47
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DRAFT FOR DISCUSSION. SUBJECT TO CHANGE.CTRP – Package 2: 4B cost-benefit analysis (as of October 11, 2019)
In general, registered firms, when compared to non-registered firms…
1. Have the same employment relative to size2. Have similar average wages, but pay top management higher3. Spend more on fixed assets, but do not spend higher on R&D4. Have the same level of exports relative to sales5. No difference in productivity
Result #2 Counterfactual analysis using propensity score matching
Source: PSA ASPBI, TIMTA, DOF estimates 48
DRAFT FOR DISCUSSION. SUBJECT TO CHANGE.
DRAFT FOR DISCUSSION. SUBJECT TO CHANGE.CTRP – Package 2: 4B cost-benefit analysis (as of October 11, 2019)
10/15/2019 Department of Finance 49
Outcome Indicators All Claimed Manuf IC ASSA
Employment and compensation
Total employment / total assets
Total employment / total sales
R&D employment / total employment
Total compensation
Total compensation / total expenses
Average compensation to workers
Total salaries / paid workers
R&D=1 if establishment has R&D spending
R&D expenses / total expensesTotal investments / total assets
Capital investments
Land assets / total assetsTotal fixed assets / total assets
Building assets / total assets
Machineries / total assetsExports Direct exports / sales
Productivity
Average hours workedSales / total employment
Sales / paid workersNote: Manuf comprises of electronics; Information and communication (IC) includes of non-voice BPOs; Administrative and support service activities (ASSA ) includes of voice BPOs
Result #2 PSM summary table 2014, by industries
49
= Registered firms performed significantly higher thannon-registered firms
= Registered firms performed significantly lowerthan non-registered firms
DRAFT FOR DISCUSSION. SUBJECT TO CHANGE.CTRP – Package 2: 4B cost-benefit analysis (as of October 11, 2019)
Outcome IndicatorsPanel
2012/20152014 2015
Employment and compensation
Total employment / total assets
Total employment / total sales
R&D employment / total employment
Total compensation
Total compensation / total expenses
Average compensation to workers
Total salaries / paid workers
R&D=1 if establishment has R&D spendingR&D expenses / total expensesTotal investments / total assets
Capital investments
Land assets / total assetsTotal fixed assets / total assetsBuilding assets / total assetsMachineries / total assets
Exports Direct exports / sales
Productivity
Average hours workedSales / total employment
Sales / paid workers
Note: Panel data used the 2012 CPBI and the 2015 ASPBI with the 2015 TIMTASource: PSA, TIMTA, DOF estimates
= Registered firms performed significantly higher than non-registered firms
Result #2 Summary of results
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DRAFT FOR DISCUSSION. SUBJECT TO CHANGE.CTRP – Package 2: 4B cost-benefit analysis (as of October 11, 2019)
Cost-benefit analysis: Methods
1. Estimating implicit labor subsidyWhat is the cost for each job created?
3. Estimating net government revenue Do we generate more revenue from the tax we forego?
2. Performing a counterfactual analysisDo firms with registered activities for incentives perform better in terms of job creation, R&D investments, productivity, etc. when compared to non-registered firms?
4. Accounting of direct and indirect cost and benefitDo total benefits from incentives, both private and social, outweigh total costs?
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DRAFT FOR DISCUSSION. SUBJECT TO CHANGE.CTRP – Package 2: 4B cost-benefit analysis (as of October 11, 2019)
Identifying necessary & unnecessary incentives
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Number of yearswith incentives
Profitability
Primary motivation
Domesticmarket-seeking
Efficiency-seeking(e.g. exporters)
Resource-seeking
DRAFT FOR DISCUSSION. SUBJECT TO CHANGE.CTRP – Package 2: 4B cost-benefit analysis (as of October 11, 2019)
Number of firms enjoying incentives for more than: A. 10 years - 1,169B. 15 years - 627
627
Source: 2017 masterlist of registered enterprises, TIMTA
Time, in years Years AFAB BCDA BOI CDC CEZA PEZA PPMC SBMA Total
40-45 1972-1976 1 1
36-40 1977-1981 5 5
31-35 1982-1986 4 4
26-30 1987-1991 45 45
21-25 1992-1996 207 32 239
16-20 1997-2001 1 2 272 58 333
11-15 2002-2006 1 434 107 542
6-10 2007-2011 2 378 3 31 783 161 1,358
0-5 2012-2017 96 6 845 506 189 1,353 5 394 3,394
Total 98 6 1,225 511 220 3,104 5 752 5,921
Incentives are not timebound.
53
1,169
Draft for discussion. Subject to change.CTRP – Package 2: 4B cost-benefit analysis (as of October 11, 2019) Draft for discussion. Subject to change.
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ADDITIONAL INFORMATION
DRAFT FOR DISCUSSION. SUBJECT TO CHANGE.CTRP – Package 2: 4B cost-benefit analysis (as of October 11, 2019)
There are other and may bebetter ways to support firms
Granting tax incentives is not the only way to directly help firms
The government can use more efficient and targeted subsidies
The real solution in the medium-term is to address
infrastructure gaps, corruption, inefficiency in government, and complex
business regulations
Ex. lifeline subsidies, power subsidies, housing vouchers, skills training, etc.
55
DRAFT FOR DISCUSSION. SUBJECT TO CHANGE.CTRP – Package 2: 4B cost-benefit analysis (as of October 11, 2019)
Cases based on necessity of incentives
Case 1: Assumes that ALL incentives are necessary, i.e., none of the incentivized activities will occur without the incentives. Thus, even when the investment is market- or resource-seeking, highly profitable, or on a long-time recipient of incentives, benefits (under the “Unnecessary” column in the tables) are counted.
Case 2: Assumes that some incentives are unnecessary, i.e., some investments would have come anyway even without the incentives. When the investment is market- or resource-seeking, highly profitable, or on a long-time recipient of incentives, benefits (under the “Unnecessary” column in the tables) are not induced by the incentives and therefore not counted.
56
DRAFT FOR DISCUSSION. SUBJECT TO CHANGE.CTRP – Package 2: 4B cost-benefit analysis (as of October 11, 2019)
Result #3 Net government revenue effect (2015)
Taxes collected from:FirmsEmployeesDividendsIndirect employeesDomestic inputs
Tax incentives on:IncomeDuties (30%)VAT (net of refund)Local taxes
* Subject to change depending on IPA submissions to the BIRSource: IPA submissions, SEC, 2015 TIMTA, DOF estimates
On average, for every 1 peso we grant as incentive, we collect…
Tax incentives > tax collected
57
35 centsIf taxes derived from unnecessary incentives are accounted for, we collect 95 cents.
DRAFT FOR DISCUSSION. SUBJECT TO CHANGE.CTRP – Package 2: 4B cost-benefit analysis (as of October 11, 2019)
Result #3 Net revenue effect (in million pesos, 2015)All firms
Case 1: Assumes ALL incentives are necessary
2015
Total Unnecessaryincentives
Necessary incentives
Number of firms 2,8441,492
(52.46%)1,352
(47.54%)
Net benefit (cost) -8,495 -26,063 17,568Net-revenue ratio 0.95 0.80 1.39
I. Benefit 170,139 107,304 62,835
A. Direct 69,843 43,070 26,773
Taxes paid by firm (CIT) 41,870 25,512 16,358Taxes on dividends 14,183 8,522 5,662Taxes paid by employees (PIT) 13,789 9,036 4,753
B. Indirect 100,296 64,234 36,063Taxes paid by employees from ancillary industries 23,231 15,205 8,027Taxes paid by firms from purchases on domestic inputs 77,065 49,029 28,036
II. Cost 178,634 133,367 45,267
A. Direct 178,634 133,367 45,267
Tax expenditure on income (CIT) 86,259 64,907 21,352Tax expenditure on duties 5,707 4,237 1,470Tax expenditure on VAT (net of refund) 85,024 63,031 21,993Tax expenditure on local taxes 1,644 1,193 452
58
Note: None of the incentivized activities in the “Unnecessary” column will occur without the incentives (i.e., purely necessary incentives)..
58
DRAFT FOR DISCUSSION. SUBJECT TO CHANGE.CTRP – Package 2: 4B cost-benefit analysis (as of October 11, 2019)
Result #3 Net revenue effect (in million pesos, 2015)All firms
Case 2: Assumes that some incentives are unnecessary
2015
Total Unnecessaryincentives
Necessary incentives
Number of firms 2,8441,492
(52.46%)1,352
(47.54%)Net benefit (cost) -115,799 -133,367 17,568Net-revenue ratio 0.35 0.00 1.39
I. Benefit 62,835 0.00 62,835
A. Direct 26,773 0.00 26,773Taxes paid by firm (CIT) 16,358 0.00 16,358Taxes on dividends 5,662 0.00 5,662Taxes paid by employees (PIT) 4,753 0.00 4,753
B. Indirect 36,063 0.00 36,063Taxes paid by employees from ancillary industries 8,027 0.00 8,027Taxes paid by firms from purchases on domestic inputs 28,036 0.00 28,036
II. Cost 178,634 133,367 45,267
A. Direct 178,634 133,367 45,267Tax expenditure on income (CIT) 86,259 64,907 21,352Tax expenditure on duties 5,707 4,237 1,470Tax expenditure on VAT (net of refund) 85,024 63,031 21,993Tax expenditure on local taxes 1,644 1,193 452
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Note: 100% of the incentivized activities in the “Unnecessary” column will occur without tax incentives (i.e., purely unnecessary incentives).
59
DRAFT FOR DISCUSSION. SUBJECT TO CHANGE.CTRP – Package 2: 4B cost-benefit analysis (as of October 11, 2019)
Summary of NRA ratios (2015)
102
DRAFT FOR DISCUSSION. SUBJECT TO CHANGE.
Category 2015
All firmsCase 1 Case 2
0.95 0.35
Aggregate industry
Agriculture 1.30 0.62 Non-mfg Industry 1.14 0.00
Manufacturing 1.12 0.59 Services 0.68 0.18
Select industry
Non-voice BPO 0.70 0.68 Voice BPO 0.61 0.00Electronics 0.89 0.31
Renewable energy 1.48 0.00Housing 1.93 0.00
Investment promotion agency (IPA)
AFAB 0.65 0.27 SBMA 0.38 0.20
BOI 1.40 0.58 CDC 0.99 0.32 CEZA 1.04 0.79 PPMC 0.65 0.00
ZCSEZA 0.18 0.18 PEZA 0.82 0.28 TIEZA 0.15 0.00
Note: Case 1: Assumes ALL incentives are necessaryCase 2: Assumes that some incentives are unnecessary
102
DRAFT FOR DISCUSSION. SUBJECT TO CHANGE.CTRP – Package 2: 4B cost-benefit analysis (as of October 11, 2019)
Summary of NRA ratios (2015)Select industries
103
Other industries 2015
IndustryCase 1 Case 20.64 1.21
Manufacturing (chemicals) 1.06 0.85 Manufacturing (food, food processing) 4.43 4.40
Manufacturing (garments, textiles, wearables including jewelry, leather products - including bags) 1.73 1.15
Manufacturing (industrial goods, machines; 2015 includes electronics and electrical products)
0.64 1.23
Manufacturing (metals, steel) 1.43 0.63 Manufacturing (personal care and healthcare products, medical products) 0.60 0.41 Manufacturing (personal goods) 0.66 0.43
Manufacturing (vehicles, vehicle accessories, transport equipment) 1.39 0.88
Manufacturing (wood, paper, rubber products; 2015 includes glass, paper, plastic, ceramic and rubber)
0.82 0.17 Mining and quarrying 0.31 0.00Energy (coal, diesel) 0.32 0.00Energy (refining, storage, marketing and distribution of petroleum products) 3.27 0.00
Note: Case 1: Assumes ALL incentives are necessaryCase 2: Assumes that some incentives are unnecessary
103
DRAFT FOR DISCUSSION. SUBJECT TO CHANGE.CTRP – Package 2: 4B cost-benefit analysis (as of October 11, 2019)
Cost-benefit analysis: Methods
1. Estimating implicit labor subsidyWhat is the cost for each job created?
3. Estimating net government revenue Do we generate more revenue from the tax we forego?
2. Performing a counterfactual analysisDo firms with registered activities for incentives perform better in terms of job creation, R&D investments, productivity, etc. when compared to non-registered firms?
4. Accounting of direct and indirect cost and benefitDo total benefits from incentives, both private and social, outweigh total costs?
104
DRAFT FOR DISCUSSION. SUBJECT TO CHANGE.CTRP – Package 2: 4B cost-benefit analysis (as of October 11, 2019)
Accounting for the benefits
10/15/2019 106
Government
- Taxes
Employees
- Wages
Capitalists
- Profits (dividends and
retained earnings)
Industry
- Domestic inputs
Direct benefits
Indirect benefits Multiplier effects
=Total revenues, or expenditure, or output
Department of Finance
106
DRAFT FOR DISCUSSION. SUBJECT TO CHANGE.CTRP – Package 2: 4B cost-benefit analysis (as of October 11, 2019)
Accounting for the costs
10/15/2019 107
Foregone revenues, leakages,
and administrative
costs
Direct costs
Indirect costsMultiplier
effectsInterest on debt
Opportunity cost
Department of Finance
107
DRAFT FOR DISCUSSION. SUBJECT TO CHANGE.CTRP – Package 2: 4B cost-benefit analysis (as of October 11, 2019)
List of indicators used for the CBA
Type Benefits Costs
Direct
1. Net compensation and benefits of employees
2. Domestic capital input3. Other domestic inputs4. Dividends paid out5. Retained earnings6. Taxes paid by firms7. Taxes on dividends8. Taxes paid by employees
1. Tax expenditure (income, duties, VAT
(net of refund), and local taxes)
2. Leakage due to transfer pricing abuse
3. Administrative cost
Indirect
1. Industry multiplier
2. (includes indirect jobs) (weighted
average is 3.05)
3. Fiscal multiplier (3.94)
1. Negative fiscal multiplier (-3.94)
2. Excessive rents to capitalists
3. Opportunity cost (i.e., traffic, low skills)
4. Interest paid on additional debt
5. Contribution to increased borrowing cost
10/15/2019 Department of Finance 108
108
DRAFT FOR DISCUSSION. SUBJECT TO CHANGE.CTRP – Package 2: 4B cost-benefit analysis (as of October 11, 2019)
CBA framework
Unnecessary Necessary
Type Cost Benefit Cost Benefit
Direct P P P
Indirect P P P
10/15/2019 Department of Finance 109
1. When incentives are unnecessary, benefits are not accounted for because the investments will likely occur even without the incentives.
2. Necessary incentives, on the other hand, incur costs which may or may not be offset by benefits arising from incentives.
3. Key summary indicator: benefit-to-cost ratio
a. If higher than 1, more benefit than cost.
b. If lower than 1, less benefit than cost.109
DRAFT FOR DISCUSSION. SUBJECT TO CHANGE.CTRP – Package 2: 4B cost-benefit analysis (as of October 11, 2019)
Cases based on necessity of incentives
Case A: Assumes some incentives are unnecessary and 100% of incentivized activities, when incentives are unnecessary, will be invested anyway even without incentives.
Case B: Assumes some incentives are unnecessary and 70% of incentivized activities, when incentives are unnecessary, will be invested anyway even without incentives.
10/15/2019 Department of Finance 110
110
DRAFT FOR DISCUSSION. SUBJECT TO CHANGE.CTRP – Package 2: 4B cost-benefit analysis (as of October 11, 2019)
Result #4 2015 Accounting of total direct and indirect cost and benefit
Source: IPA submissions, PSA ASPBI, SEC, 2015 TIMTA, DOF estimates.
On average, for every 1 peso spent on incentives…
… pesos come back as benefits even after accounting for employment generatedand spillovers, both direct and indirect.
111
0.64 to 1.21Case A Case B
Note: Case A: 100% of incentivized activities, when incentives are unnecessary, will be invested anyway even without incentives.Case B: 70% of incentivized activities, when incentives are unnecessary, will be invested anyway even without incentives.
DRAFT FOR DISCUSSION. SUBJECT TO CHANGE.CTRP – Package 2: 4B cost-benefit analysis (as of October 11, 2019)
Result #4 Total benefits (in million pesos, 2015)All firmsCase A
2015
Total Unnecessary incentives
Necessary incentives
Number of firms 2,844 1,492 (52.46%) 1,352 (47.54%)Net benefit (cost) (784,052) (1,589,445) (805,393)Benefit-cost ratio 0.64 0.00 2.32
I. Benefit 1,416,280 0.00 1,416,280A. Direct 462,911 0.00 462,911
Net compensation and benefits of employees 31,723 0.00 31,723Domestic capital input 52,018 0.00 52,018Other domestic inputs 233,634 0.00 233,634Dividends 50,955 0.00 50,955Retained earnings 67,808 0.00 67,808Taxes paid by firm 16,358 0.00 16,358Taxes on dividends 5,662 0.00 5,662Taxes paid by employees 4,753 0.00 4,753
B. Indirect 953,369 0.00 953,369Industry multiplier 874,658 0.00 874,658Fiscal multiplier 78,712 0.00 78,712
7/5/2019 Department of Finance 112
Note: This case assumes 100% of incentivized activities will be invested anyway even without incentives. 112
DRAFT FOR DISCUSSION. SUBJECT TO CHANGE.CTRP – Package 2: 4B cost-benefit analysis (as of October 11, 2019)
Result #4 Total costs (in million pesos, 2015)All firmsCase A
2015
Total Unnecessary incentives
Necessary incentives
Number of firms 2,844 1,492 (52.46%) 1,352 (47.54%)Net benefit (cost) -784,052 -1,589,445 805,393Benefit-cost ratio 0.64 0.00 2.32
II. Cost 2,200,332 1,589,445 610,887A. Direct 243,723 178,958 64,766
Tax expenditure on income 86,259 64,907 21,352Tax expenditure on duties 5,707 4,237 1,470
Tax expenditure on VAT (net of refund) 85,024 63,031 21,993Tax expenditure on local taxes 1,644 1,193 452Leakage due to transfer pricing abuse 56,900 41,560 15,340Administrative cost 8,189 4,031 4,158
B. Indirect 1,956,609 1,410,488 546,121Fiscal multiplier 692,471 514,285 178,185Excessive rents to capitalist 51,514 51,514 0Interest paid on additional debt 7,360 5,466 1,894
Opportunity cost 1,030,184 709,194 320,991
Contribution to increased borrowing 175,080 130,029 45,051
113
Note: This case assumes 100% of incentivized activities will be invested anyway even without incentives. 113
DRAFT FOR DISCUSSION. SUBJECT TO CHANGE.CTRP – Package 2: 4B cost-benefit analysis (as of October 11, 2019)
Result #4 Total benefits (in million pesos, 2015)All firmsCase B
2015
Total Unnecessary incentives
Necessary incentives
Number of firms 2,844 1,492 (52.46%) 1,352 (47.54%)Net benefit (cost) 360,445 -444,948 805,393
Benefit-cost ratio 1.21 0.61 2.32
I. Benefit 2,100,607 684,327 1,416,280
A. Direct 699,304 236,394 462,911
Net compensation and benefits of employees 49,817 18,094 31,723
Domestic capital input 78,376 26,358 52,018
Other domestic inputs 356,207 122,573 233,634
Dividends 73,963 23,008 50,955
Retained earnings 101,248 33,440 67,808
Taxes paid by firm 24,012 7,654 16,358
Taxes on dividends 8,218 2,556 5,662
Taxes paid by employees 7,464 2,711 4,753
B. Indirect 1,401,303 447,934 953,369
Industry multiplier 1,284,603 409,946 874,658
Fiscal multiplier 116,699 37,988 78,712
7/5/2019 Department of Finance 114
Note: This case assumes 70% of incentivized activities will be invested anyway even without incentives. 114
DRAFT FOR DISCUSSION. SUBJECT TO CHANGE.CTRP – Package 2: 4B cost-benefit analysis (as of October 11, 2019)
Result #4 Total costs (in million pesos, 2015)All firmsCase B
2015
Total Unnecessary incentives
Necessary incentives
Number of firms 2,844 1,492 (52.46%) 1,352 (47.54%)Net benefit (cost) 360,445 -444,948 805,393
Benefit-cost ratio 1.21 0.61 2.32
II. Cost 1,740,162 1,129,275 610,887
A. Direct 191,245 126,480 64,766
Tax expenditure on income 66,787 45,435 21,352
Tax expenditure on duties 4,436 2,966 1,470
Tax expenditure on VAT (net of refund) 66,114 44,122 21,993
Tax expenditure on local taxes 1,287 835 452
Leakage due to transfer pricing abuse 44,432 29,092 15,340
Administrative cost 8,189 4,031 4,158
B. Indirect 1,548,917 1,002,795 546,121
Fiscal multiplier 538,185 360,000 178,185
Excessive rents to capitalist 51,514 51,514 0
Interest paid on additional debt 5,721 3,827 1,894
Opportunity cost 817,426 496,436 320,991
Contribution to increased borrowing 136,071 91,020 45,051
115
Note: This case assumes 70% of incentivized activities will be invested anyway even without incentives. 115
DRAFT FOR DISCUSSION. SUBJECT TO CHANGE.CTRP – Package 2: 4B cost-benefit analysis (as of October 11, 2019)
Case A Case B
Benefit-cost ratio 0.64 1.21
Number of firms = 2,844
Net benefit (cost) -784,052 360,445
I. Benefit 1,416,280 2,100,607
A. Direct 462,911 699,304
B. Indirect 953,369 1,401,303
II. Cost 2,200,332 1,740,162
A. Direct 243,723 191,245
B. Indirect 1,956,609 1,548,917
Result #4 Cost-benefit analysis (2015)All firms, in millions
158
Note: Case A: 100% of incentivized activities, when incentives are unnecessary, will be invested anyway even without incentives.Case B: 70% of incentivized activities, when incentives are unnecessary, will be invested anyway even without incentives.
DRAFT FOR DISCUSSION. SUBJECT TO CHANGE.CTRP – Package 2: 4B cost-benefit analysis (as of October 11, 2019)
Result #4 Summary of benefit-cost ratios (2015)
168
DRAFT FOR DISCUSSION. SUBJECT TO CHANGE.
Category 2015
All firmsCase A Case B
0.64 1.21
Aggregate industry
Agriculture 0.51 0.85Non-mfg Industry 0 0.74
Manufacturing 1.04 1.63Services 0.34 0.77
Select industry
Non-voice BPO 1.35 1.39Voice BPO 0 0.51Electronics 0.64 1.23
Renewable energy 0 0.95Housing 0 0.56
Investment promotion agency (IPA)
AFAB 0.7 1.19SBMA 0.35 0.49
BOI 0.97 1.67CDC 0.67 1.35CEZA 0.87 1.07PPMC 0 0.48
ZCSEZA 0.85 0.85PEZA 0.54 1.08TIEZA 0 0.03
168Note: Case A: 100% of incentivized activities, when incentives are unnecessary, will be invested anyway even without incentives.Case B: 70% of incentivized activities, when incentives are unnecessary, will be invested anyway even without incentives.
DRAFT FOR DISCUSSION. SUBJECT TO CHANGE.CTRP – Package 2: 4B cost-benefit analysis (as of October 11, 2019)
Result #4 Summary of benefit-cost ratios (2015)Select industries
169
Other industries 2015
IndustryCase A Case B
0.64 1.21Manufacturing (chemicals) 1.56 1.8Manufacturing (food, food processing) 4.54 4.59
Manufacturing (garments, textiles, wearables including jewelry, leather products - including bags)
2.14 2.67
Manufacturing (industrial goods, machines; 2015 includes electronics and electrical products)
0.64 1.23
Manufacturing (metals, steel) 0.97 1.69Manufacturing (personal care and healthcare products, medical products)
0.82 1.06
Manufacturing (personal goods) 0.78 0.99
Manufacturing (vehicles, vehicle accessories, transport equipment) 1.5 2.11
Manufacturing (wood, paper, rubber products; 2015 includes glass, paper, plastic, ceramic and rubber)
0.32 0.92
Mining and quarrying 0 0.36Energy (coal, diesel) 0 0.35Energy (refining, storage, marketing and distribution of petroleum products)
0 1.95
169Note: Case A: 100% of incentivized activities, when incentives are unnecessary, will be invested anyway even without incentives.Case B: 70% of incentivized activities, when incentives are unnecessary, will be invested anyway even without incentives.