TIMTA: Transparency in tax incentives management and accounting

SUITS THE C-SUITE By Rubina P. Bundoc-Aquino

Business World (01/25/2016 – p.S1/4)

Fiscal and non-fiscal incentives have, for many years, formed an integral part of the government’s efforts to promote domestic and foreign direct investment (FDI). The question that has always been raised is whether these incentives — particularly the tax or fiscal incentives — are costing the government more compared to the benefits that the FDI brings. Until recently, there was no system to properly account for the tax incentives granted to these businesses, and the government has been unable to determine the magnitude of its exposure on these incentives.

Republic Act No. 10708 or The Tax Incentives Management and Transparency Act, otherwise known as TIMTA, was enacted to address this issue. Approved by President Benigno S. C. Aquino III on Dec. 9, TIMTA aims to promote fiscal accountability and transparency in the granting and management of tax incentives, by developing the means to promptly measure the government’s fiscal exposure on these grants. It also aims to enable Government to monitor, review and analyze the economic impact of the incentives and hence, optimize the resulting social benefits.

TIMTA applies to business entities registered with Investment Promotion Agencies (IPAs). These IPAs include the Board of Investments, Philippine Economic Zone Authority, Bases Conversion and Development Authority, Subic Bay Metropolitan Authority and other similar agencies.

As a first step in the monitoring purpose of the law, all business entities registered with IPAs are required to file their tax returns and pay their tax liabilities using the electronic system for filing and payment of taxes of the Bureau of Internal Revenue (BIR). At present, only selected taxpayers are required to electronically file and pay with the BIR.

Registered entities availing of incentives, which include income tax holidays (ITH), exemptions, deductions, credits or exclusions from the tax base, are mandated to file a complete annual tax incentives report with their respective IPAs within 30 days from the deadline to file the tax returns and pay the related taxes. The reports, which will include the entities’ income-based tax incentives, value-added tax and duty exemptions, deductions, credit or exclusions from the tax base will then be submitted by the IPAs to the BIR.

TIMTA requires the BIR and the Bureau of Customs (BoC) to monitor and submit to the Department of Finance (DoF) the tax and duty incentives of the registered entities, as reflected on the filed tax returns and import entries, and the actual tax and duty incentives, as evaluated and determined by the BIR and the BoC.

The DoF will maintain a single database for monitoring and analysis of the tax incentives granted. It will also submit to the Department of Budget and Management (DBM) the aggregate data on a sectoral and per industry basis of: (1) the amount of tax incentives availed of by registered entities; (2) the estimated claims of tax incentives in the previous year; (3) the programmed tax incentives for the current year; and, (4) the projected tax incentives for the following year.

These data will be reflected on the DBM’s annual Budget of Expenditures and Sources of Financing. The DBM will also forward such information to the Joint Congressional Oversight Committee, which will monitor and ensure the proper implementation of the law.

Based on the information provided by the IPAs, the National Economic and Development Authority (NEDA) is mandated to conduct a cost-benefit analysis of investment incentives to determine the impact of tax incentives on the Philippine economy.

To provide teeth for its implementation, the law penalizes (with fines ranging from P100,000 to P500,000 or the cancellation of registration) any registered business entity that fails to comply with the law’s filing and reportorial requirements with the IPAs, and/or that fails to show proof of having filed tax returns using the BIR’s electronic system for filing and payment of taxes. However, failure to show proof of filing tax returns through no fault of the registered entity will not be grounds for the suspension of the ITH and/or other income-based tax incentives availment.

The law also penalizes (through fines and/or suspension from government service), in addition to any existing criminal and administrative penalties, any government official or employee who fails, without justifiable reason, to provide or furnish the required tax incentives report or other data or information, as required under the law.

In an effort to assure those who may fear any negative impact of the law on investors, TIMTA emphasizes that there is nothing in its provisions that will be construed to diminish or limit, in whatsoever manner, the amount of incentives that IPAs may grant pursuant to their charters and existing laws; or to prevent, deter or delay the promotion and regulation of investments, processing of applications for registrations and evaluation of entitlement of incentives by IPAs.

The TIMTA law is considered one of the current administration’s priority programs as it institutes a transparent and accountable public financial management system. The law seeks to ensure that granting fiscal perks contributes to the economy’s overall improvement. By providing government offices and authorities access to a cost-benefit analysis, for instance, they may obtain a higher level of understanding of how tax incentives work for economic advancement.

The TIMTA law’s passage, along with the other economic and security laws already passed, reinforces the government’s strong focus on fostering an environment conducive to long-term growth.

This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinion expressed above are those of the author and do not necessarily represent the views of SGV & Co.

Rubina P. Bundoc-Aquino is a Tax Partner of SGV & Co.