Comments and responses to the FY 2011 Tax Expenditure Statement

Comments Response (24 Jan 2014)

A. Graham Glenday 19 November 2013
1 Some VAT exemptions or zero rated purchases may be Not applicable to current TES, FY 2011. TE on
tax expenditures, but many or probably most probably are VAT is limited to imports of raw materials that
not. Given a VAT exemption or zero rated purchase on are “transshipped” to ecozones and freeports.
inputs into the supply of VATable items does not result in Hence, data in FY 2011 TES reflects only VAT
a loss of revenues if the person would have been able to exempt imports.
deduct the input tax from output tax or gain a refund or tax
credit. If much of the imports are going to manufacturing, TE on VAT does not include imports of raw
and much possibly for export, then the tax expenditure is materials that are “transshipped” to ecozones
overstated as no net VAT would have been collected on and freeports.
these imports. Where the VAT break is going to business
that would have been VAT exempt, then the VAT
exemption or zero rating of purchases is a tax
expenditure. Given the wide range of activities that are
covered by the investment incentives, there may be a
share of the beneficiaries where it is a true tax expenditure
such as those in financial, education, etc sectors or the
goods are clearly final consumption goods. I am not sure
whether you have the importer data aligned with the type
of importer business to sort by those that definitely would
have paid the VAT with any refund, and those that
definitely would have received a refund or credit. There
would be some in between that may be hard to classify
because of size of business or type of product or imported
good (such as a passenger car that my or may not be an
input in supply of a VATable supply.) The NEDA (BEC)
code on imports may also assist in grouping imports. In
any case if you leave the VAT as is, then some cautionary
statement should be added that (i) estimates are gross
amounts of VAT not collected, (ii) but some of the
beneficiaries would have received refunds, credits etc
under the normal operations of the VAT such that the net
VAT forgone would be a smaller amount, and (iii) in the
future efforts will be made to identify the VAT that would
have been creditable if the importer had been conducting
business as a normal VAT registered entity.
2 A missing tax expenditure is on the treatment of sales Yes. TES 2011only included data from the
from a zone into the domestic economy. To give equal income tax returns. Reconciliation with VAT
treatment to the importation of the same good, these sales returns of entities registered with IPAs will be
should pay the duty rate on the product sold (and this is included as a TE estimate once accurate
the more usual treatment of imports into a domestic information on sales to different markets
economy from a duty free zone.) It is my understanding become available to the DoF.
that they only pay the duties forgone on the imported
inputs to the product. The difference is a tax expenditure.
In other words a zone company is benefiting from the
same trade protection as a domestic company, but is also
getting income tax breaks. Import duty is typically
regarded as the minimum duty chargeable whereas
arguable the company should also pay a premium to
neutralize the income tax break as well on sales to the
domestic economy. I am not sure whether this estimate
can be captured from the customs data on imports into the
domestic economy from the zones. Normally customs
 should record the normal duty payable and then note any
exemption and actual amount paid. If this data is not
readily available in the customs data (and I recall that
imports from the zones was not yet being captured in the
new customs IT system), then you could note this for
future inclusion in TES.
3 In your GIE TE estimates in Annex D, I am assuming that
your TDD are not “total deductions” but rather “total
disallowed deductions” under GIE such that GIE includes
allowed deductions and GIE – TDD = Net income. It
would also be useful to include some comment on the
TDD/GIE ratios on average (and possibly range) by sector
to help get a sense of the impact of GIE treatment.
4 Your presentation gives TES by “sector” and by IPA, but
not the cross tabulation of these. For analysis of the cost-
effectiveness of tax expenditures it is useful to know how
much of the TEs are going to the highly competitive and
internationally mobile sectors such as export
manufacturing or call center services versus location
specific sectors such as infrastructure, utilities, mining,
etc. Typically PEZA supports the former and BOI the
latter.
B. Jay Peiris. Dec 6, 2013 and Oct. 29, 2013
1 When published it will be headlines and the question is
According to BIR (AITEID), in practice
deductions are disallowed to the extent that
these are unrelated to the computation of gross
income (i.e. 1. If direct costs are for the regular
activity, and 2. If items are deemed part of
operating expenses). Thus the list of allowable
direct expenses for the computation of GI (RR
11, 12 and 13 – 2005) seems to be merely a
guide and not meant to be exclusive, AITEID
(audit information tax exemption and incentive
division) which is in charge of monitoring
incentives, in practice would allow deductions
other than that in 1 and 2 above. Again the
formula (TDD ratio), uses actual information of
IPA-registered firms, and computes the ratio of
operating expenses to gross income.
Such that:
Exempt activity Regular activity
GS GS
- COGSe - COGSr
= GIE = GI
- OEe (TDD) - OEr
= NTI = NTI
If
COGSe > COGSr (due to disallowed
deductions under exempt activity)
then GIE < GI;
However
COGSe=COGSr since expenses are
disallowed iff (i) are part of OE or (ii) are part of
COGSr.
Noted. Will include in the TES.
TES to report what is available data, at the
 whether you want it to say revenues foregone is more
than 1 percent of GDP or could be around 4 percent of
GDP ( (0.64+0.53)/0.29) ), if the sample represents entire
taxpayers receiving incentives). Do you have a sense
whether the reported and unreported follow a normal
distribution or whether the largest are captured so the
revenue losses may be accounting for most. Some gauge
of this is important for final drafting and communication.
2 I have no major comments on the tax expenditure
statement except that one should clarify or estimate the
potential tax expenditures that are not reported
(particularly because the report says tax expenditure
estimates cover only about 26% of all IPA-registered
investors as of October 18). Also, it is noted that some
firms that avail of GIE do not report it as deduction or
incentive, in that case how can you know if you are
capturing the universe of GIE firms?
3 The most interesting breakdown is by sector. Is there
more detail like type of condos and proportion of low cost
units in real estate segment. Also what type of firm get
incentives in the transport sector that appears large?
moment. But we do have reason to believe that
the almost 3/4 of firms, if at all must legitimately
include incentives in their ITR, will contribute
much less than 3/4 to foregone revenue. Note
that the LTs numbering 329 actually account
for 90% of the TE estimate. Thus the rest,
almost 1,000 non-large firms account for a
tenth of the TE value for FY 2011.
TES will report based on available information,
while BIR instructed by the CIR to draft a
Revenue Regulation that will compel IPAs to
submit information on their registrants (e.g.
whether active or not), and to reiterate the
mandate to file electronically.
A sectoral/industry study is currently being
drafted, which will attempt to answer such
questions, including whether incentives meant
for a sector are redundant or not.