Republic of the Philippines
HOUSE OF REPRESENTATIVES
Quezon City, Metro Manila

19DEC 2012

FIFTEENTH CONGRESS
Third Regular Session

HOUSE BILLNO.___ 6785

Introduced by HON. JOCELYN S. LIMKAICHONG

EXPLANATORY NOTE

The provision of tax incentives is one of the fiscal strategies to encourage desired
economic activities or social behaviors. In the Philippines, tax incentives are used to
promote investments that are deemed to have a significant impact on economic growth
and development. Several Investment Promotion Agencies (IPAs) administer tax
incentives provided under various investment incentive laws, to registered investors,
domestic or foreign, and located within or outside designated economic zones.

Similarly, there are a number of special laws that provide tax incentives to non-
investment activities. These activities are being encouraged with the hope of enhancing
the welfare of certain groups or sectors in the society. In fact, countries in different
stages of development use tax incentives, when necessary, to satisfy the government’s
socio-economic goals.

Considering the beneficial purposes of tax incentives, it is of prime importance to
ensure that the same are met or fulfilled. It is therefore critical to instill transparency in
the system of tax incentives, an undertaking that is aligned with the present
Administration’s battle ery of open and good governance.

Transparency, in itself, is a factor in creating a better fiscal and investment
environment. It empowers all stakeholders -- the government, the business sector, and
civil society in general -- by allowing for greater public scrutiny of the government's
actions, which, in turn, enhances the certainty and predictability of government policy
formulation and implementation.

In the Philippines, the effectiveness of tax incentives as a fiscal tool to promote
economic and social objectives is yet to be determined. The lack of empirical evidence
that directly links incentives to intended benefits results in protracted debates on their
true worth. Nonetheless, in terms of their fiscal cost, there are numerous findings from
local and international studies and literature on how much tax incentives cost to the


government, Reside (2004) found that the Income Tax Holiday (ITH) incentive
administered by the Board of Investments, by itself, represents around one percent (1%)
of the country’s Gross Domestic Product (GDP). In his 2011 research on non-investment
tax incentives, on the other hand, Reside partially estimated the cost of non-investment
tax incentives at 1.3 percent of GDP.

The concept of tax expenditure accounting or producing a tax expenditure
statement improves the transparency of the tax system. It is noted, however, that the
present system of accounting for tax expenditures in the annual budget or the General
Appropriations Act (GAA) only includes tax incentives granted to National Government
Agencies and Government-Owned or -Controlled Corporations (GOCCs). The bulk of
tax incentives which are those granted to private individuals and corporations, are not
accounted for; hence, the magnitude of these incentives remain largely unknown.

The proposed measure aims to address this serious information gap without
posing additional administrative burden to investors. For the most part, the bill will
create a Tax Expenditure Account (TEA) in the annual national budget to reflect the
amount of tax incentives granted to private individuals and corporations to foster
transparency in the present system of granting tax incentives.

Considering the significant benefits of this measure, utmost considerati
passage of this bill is eamestly sought.


Republic of the Philippines
HOUSE OF REPRESENTATIVES
Quezon City, Metro Manila

FIFTEENTH CONGRESS
Third Regular Session

9 =
House piLNo.__©&785

Introduced by HON. JOCELYN S. LIMKAICHONG

AN ACT ESTABLISHING A SYSTEM FOR,
TAX INCENTIVES MANAGEMENT AND TRANSPARENCY,
AND FOR OTHER PURPOSES

Be it enacted by the Senate and House of Representatives of the Philippines in Congress
assembled:

SECTION 1. Title. — This Act shall be known as “The Tax Incentives
Management and Transparency Act.”

SECTION 2. Declaration of Policy. — It is hereby declared the policy of the State
to promote fiscal prudence and transparency in the proper management and grant of tax
incentives by developing means to measure the government's fiscal exposure from these
expenditures, to enable the government to analyze and rationalize the fiscal cost and at
the same time optimize the economic impact and benefit incidence of such incentives.

SECTION 3. Definition of Terms. As used herein,

a. “Investment Promotions Agencies (IPAs)” shall refer to government entities
created by law, executive order, decree or other issuance, in charge of promoting
investments, administering tax and non-tax incentives, and/or overseeing the operations
of the different economic zones and freeports in accordance with their respective
charters. These include the Board of Investments (BOI, Philippine Economic Zone
Authority (PEZA), Bases Conversion Development Authority (BCDA), Subic Bay
Metropolitan Authority (SBMA), Clark Development Corporation (CDC), Poro Point
Management Corporation (PPMC), Bataan Technology Park, Inc. (BTPI), Cagayan


Economic Zone Authority (CEZA), Zamboanga City Special Economic Zone Authority
(ZCSEZA), Phividec Industrial Authority (PIA), Aurora Pacific Economic Zone and
Freeport Authority (APECO), Authority of the Freeport Area of Bataan (AFAB),
Tourism Infrastructure And Enterprise Zone Authority (TIEZA), and all other similar
authorities that may be created by law in the future.

b. “Other Government Agencies” shall refer to government agencies other than
IPAs, which administer tax exemptions of any kind to any specific entities and/or class of
persons by reason of any law.

c. “Tax Expenditures” shall refer to grants of tax incentives or those special
provisions that give tax exemptions or preferential tax treatment to qualified firms in their
registered investment activities or to special groups or individuals as a form of assistance
for the purpose of encouraging certain economic behavior or for other public interest
purposes or policies declared by law.

SECTION 4. Accounting and Claiming of Tax Incentives. The amounts
pertaining to tax incentives administered by IPAs and other government agencies to
private individuals and corporations, and specified in accordance with a schedule to be
prepared by the Department of Finance (DOF), shall be treated as both revenue and
expenditure of the General Fund. Revenues of all persons, whether natural or juridical,
shalll be subject to the regular tax rate, and the incentives to which they are entitled shall
be administered by the relevant IPA and/or other government agency by way of
utilization of the Tax Expenditure Account provided in the succeeding section.

Registered enterprises qualified for tax incentives shall submit their claim for
incentives to their respective tax incentive administering body. After review and
approval of the claim, the IPA or government agency concerned shall be responsible for
requesting the approved amount from the Department of Budget and Management
(DBM).

SECTION 5. Tax Expenditure Account (TEA). — An account shall be created in
the annual General Appropriations Act (GAA), from which tax incentives, as may be
determined by the IPAs and other government agencies in accordance with law, are
accounted. Notwithstanding the provisions of their respective charters, IPAs and other
government agencies concerned shall account in the TEA all tax incentives that they
grant.


SECTION 6. Automatic Appropriation. Tax expenditures for purposes of this
Act are deemed automatically appropriated, provided, that no obligations shall be
incurred or payments made from the TEA thus automatically appropriated except as
issued in the form of regular budgetary allotments.

Nothwithstanding the provision under this Section, the Commissioner of Internal
Revenue shall exercise his/her power to make assessments and prescribe additional
requirements for tax administration and enforcement as specified under Sec. 6 of the
National Internal Revenue Code (NIRC) of 1997, as amended.

Revenue accounted for by way of the TEA under this Act shall not be included in
the base for computation of any other budget appropriation such as those for the internal
revenue allotment of local government units under the Local Government Code of
1991and for the rewards and incentives under the Attrition Act of 2005.

SECTION 7. Administration, Implementation and Monitoring of Incentives,—
The IPAs and other government agencies concerned shall be responsible for the
administration and implementation of tax incentives granted to registered enterprises.
They shall submit to the DOF their respective annual tax expenditures based on
computed cost in terms of revenue foregone on the tax incentives granted to their
registered enterprises or to special groups, as the case may be, and other data related to
the grant of such incentives as may be required by the DOF.

In fulfilling the foregoing requirements, the IPAs and other government agencies
shall also be subject to the power of the Commissioner to obtain information and to
summon, examine and take testimony of persons under Section 5 of the NIRC of 1997, as
amended.

The DOF, together with the Bureau of Internal Revenue (BIR) and the Bureau of
Customs (BOC), shall create a single database of all tax incentives granted by the IPAs
and other government agencies, monitor the incentives granted, and submit an annual Tax
Expenditure Report to the President and to the Chairman of the Committee on
Appropriations/Finance of both houses of Congress as part of the annual GAA.

SECTION 8. Non-compliance with Reportorial Requirements; Penalties. — The
failure of an IPA or other government agency to submit the tax expenditure report and
other data required herein, by reason of the fault or failure of any registered enterprise,
shall be a ground for the suspension of the incentives being enjoyed by such registered


enterprise or special group for the particular taxable year, due to violation of the terms
and conditions of its registration. Repeated violations shall be penalized with the
cancellation of the enterprise's registration.

The DOF shall issue to the concerned IPA or other government agency a notice
of non-compliance with this Act and its implementing rules and regulations, and direct
the latter to explain its failure to comply and the actions it took to address such failure.
The concerned IPA or other government agency, if its failure be attributable to the fault
or failure of a registered enterprise, shall state such fact in its explanation, attach
supporting documents (such as official requests for submission), and cause the issuance
of a notice of violation of registration terms and conditions against the registered
enterprise.

The erring registered enterprise shall then be subject to the aforementioned
penalties the terms of and procedure for which shall be prepared by the IPAs and other
government agencies for inclusion in the implementing rules and regulations of this Act,
in addition to the applicable penalties provided for under the NIRC of 1997, as amended,

SECTION 9. Joint Congressional Oversight Committee. — A Joint
Congressional Oversight Committee, herein referred to as the Oversight Committee, shall
be constituted in accordance with the provisions of this Act. The Oversight Committee
shall be composed of the Chairperson of the Committee on Appropriations of the House
of Representatives, the Chairperson of the Committee on Finance of the Senate and three
(3) additional members from each House to be designated by the Senate President and the
Speaker of the House of Representatives.

The Secretaries of Budget and Management, Trade and Industry and Finance shall
report to the Oversight Committee on an annual basis the investment performance and the
corresponding tax expenditures and other relevant data.

SECTION 10. Implementing Rules and Regulations The DOF, in
coordination with the DBM, BIR and BOC, and in consultation with all IPAs and other
concerned government agencies, shall, within sixty (60) days from the effectivity of this
Act, jointly promulgate rules and regulations to implement the intent and provisions of
this Act.


SECTION 11. Separability Clause. ~ In the event that any provision of this Act
is declared invalid, the other provisions of the Act which are not affected thereby shall
remain in force and effect.

SECTION 12. Effectivity. — This Act shall take effect fifteen (15) days after its
publication in a newspaper of general circulation in the Philippines.

Approved,