Package 2 COMPREHENSIVE TAX REFORM PROGRAM Corporate ...€¦ · to tax incentives Tax incentives...

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


2


2. Cost-benefit analysis What do we gain from a review of past incentives and benefits received?

1. Why is Package 2 necessary?

Outline

3


Objectives of the tax reform packages

4


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


Source: Asian Development Bank and PWC

The Philippines has the highest corporate income tax rate in the ASEAN region.

7


CIT revenue is increasing, but efficiency is very low.

Source: OECD, individual country statistics offices, and DOF staff calculations. 8


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.


We have a complex tax incentives system

13 Investment Promotion Agencies (IPAs)

15


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


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 .


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)


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.

19

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


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.

20


Estimates of tax incentives:income and duties (in billion pesos, 2017)

Note: Figures were ranked by tax expenditure from TIMTA 2017Source: TIMTA

22


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


Direct-Indirect


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


Cost-benefit analyses of fiscal incentives

31


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


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


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


“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.

35


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

36


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?

37


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


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)







42


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).

43


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

44


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


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

47


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




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


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

50







51


Identifying necessary & unnecessary incentives

52

Number of yearswith incentives

Profitability

Primary motivation

Domesticmarket-seeking

Efficiency-seeking(e.g. exporters)

Resource-seeking


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.

54

ADDITIONAL INFORMATION


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


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


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.


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


Result #3 Net revenue effect (in million pesos, 2015)All firms

Case 2: Assumes that some incentives are unnecessary

2015

Total Unnecessaryincentives


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

59

Note: 100% of the incentivized activities in the “Unnecessary” column will occur without tax incentives (i.e., purely unnecessary incentives).

59


Summary of NRA ratios (2015)

102


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


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







104


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


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


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


108


CBA framework

Unnecessary Necessary

Type Cost Benefit Cost Benefit

Direct P P P

Indirect P P P


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


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.


110


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.


Result #4 Total benefits (in million pesos, 2015)All firmsCase A

2015

Total Unnecessary 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


Note: This case assumes 100% of incentivized activities will be invested anyway even without incentives. 112


Result #4 Total costs (in million pesos, 2015)All firmsCase A

2015



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



Result #4 Total benefits (in million pesos, 2015)All firmsCase B

2015



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




Result #4 Total costs (in million pesos, 2015)All firmsCase B

2015



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



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.


Result #4 Summary of benefit-cost ratios (2015)

168


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.


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.

Package 2 COMPREHENSIVE TAX REFORM PROGRAM Corporate ...€¦ · to tax incentives Tax incentives...

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