Statement of Support for Fiscal Incentives Reform

Bantay Kita[1] (BK) supports legislative proposals that seek to rationalize fiscal incentives.
 
BK believes that provision of fiscal incentives can be an effective tool to encourage investments towards particular economic activities. When applied wisely, it can contribute to equitable development, linkages and jobs creation, increase value added, economic diversification, and technology and knowledge transfer. Conversely, scrapping incentives accorded to activities that do not meet to the country’s investment objectives can contribute to a fairer share for the Philippines. Moreover, it can allow for activities more aligned with the country’s priorities to thrive.
 
BK underscores that fiscal incentives rationalization should be anchored on the country’s long-term strategy. We highlight that non-fiscal costs and benefits resulting from economic activities should be integrated in the decision-making process. Bantay Kita also deems that other fiscal instruments like corporate income tax (CIT) should be carefully considered in combination with incentives to further enhance the country’s long-term strategy.
 
In the case of mining, Bantay Kita considers incentives at the point of extraction unnecessary. The Philippines is one of the richest countries in the world in terms of minerals to land ratio. In a 2013 and 2016 survey, the Philippines ranked in the top 10 in terms of mineral potential out of 112 countries (Taylor & Green, 2017). The abundance of minerals should be sufficient to attract investors. Minerals are finite; prudent use of this resource while maximizing benefits and minimizing losses is crucial.
 
Based on the 2016 Philippine Extractive Industries Transparency Initiative (EITI)[2] Report, BK estimates forgone revenues from Income Tax Holidays (ITH) granted to large scale metallic mines was P4.9B. Government proceeds in the same period from the said subsector was P11.1B. The CIT was the biggest contributor at P5.7B or about 50%. This was followed by royalties from mineral reservations at about P2B. In Bhutan, companies primarily engaged in mineral extraction, basic ore dressing, or crushing are ineligible for Income Tax Holidays (ITH).[3]

Bantay Kita  supports the lowering of the Corporate Income Tax, with the exemption of the mining sector. Below are several examples of countries that have a lower standard CIT relative to rates on mining companies:

Country	Standard CIT	CIT for mining companies
Ghana [4]	25%	35%
Vietnam [5]	20%	40% to 50% (depending on location)
Botswana [6]	22%	22% to 55% [7]

We therefore urge Congress to maintain the CIT for mining companies.
 
In the current fiscal regime, only mining companies operating in declared mineral reservations pay 5% as mineral royalties. To date, there are four provinces identified as mineral reservations: (1) Zambales in Central Luzon, (2) Surigao del Norte, (3) Surigao del Sur, and (4) Dinagat Islands in the CARAGA Region. Per 2016 Ph-EITI Report, only 12 of the 30 mining companies (39%) operate in mineral reservations.
 
Bantay Kita proposes imposing 5% mineral royalty payments on all mining operations based on market value of gross output. This can further maximize the country’s gains from mineral resources. Extracting minerals is a one-time opportunity to improve people’s lives. Using actual figures from the 2016 PH-EITI Report, the increase in excise tax from 2% to 4%, and imposition of 5% royalty on all mining operations will have provided the government additional P4.3B. Other countries have begun to follow this trend. Tanzania imposed an increase in metallic mineral royalties from 4% to 6% in July 2017.[8] The Democratic Republic of Congo (DRC) did the same.  The DRC increased mineral royalties from 2% to 3.5% for non-ferrous and base metals in March 2018[9].
 
In terms of GDP, mining contributed 1.1%. The share of large scale metallic mining to the Philippine economy is low. However, there are other opportunities to increase the country’s take from mineral extraction.  We appeal that policymakers deliberate on imposing windfall gains tax to capture a fair share from the extraction of our minerals, similar to the Democratic Republic of Congo policy. The DRC set a “super profit tax” or windfall gains tax of 50%[10].

Moreover, governance reforms are necessary for fiscal reforms to be effective. We urge that tax rates and fiscal incentives be reviewed in the context of clear, measurable, and transparent criteria. We emphasize that monitoring the outcomes of fiscal incentives and tax rationalization in the achievement of set goals is paramount. For the extractive industries, the utilization of the Extractive Industries Transparency Initiative (EITI) as the platform for review may be considered. The Philippine EITI (PH-EITI) Report may be expanded to extensively discuss social and environmental costs and benefits. Moreover, we opine that the PH-EITI’s scope may also be extended to reflect economic linkages.



[1] Bantay Kita (BK) is a coalition of over 80 organizations nationwide that advocate for fiscal and governance reforms in the oil, gas, am mining sectors so that the country gets its fair share. Bantay Kita is a Publish What You Pay affiliate, a member of the Philippine EITI Multi-stakeholder group, and a commitment holder in the Philippine Open Government Partnership.
[2] EITI reports the fiscal terms and amounts paid by mining, oil and gas companies. It also reflects the economic gains from the industry.
[3] https://thebhutanese.bt/fiscal-incentives-2016-aimed-at-stimulating-economic-growth/
[4] http://taxsummaries.pwc.com/ID/Ghana-Corporate-Taxes-on-corporate-income
[5] http://taxsummaries.pwc.com/ID/Vietnam-Corporate-Taxes-on-corporate-income
[6] http://taxsummaries.pwc.com/ID/Botswana-Corporate-Taxes-on-corporate-income
[7] https://www.pkf.com/media/10028394/botswana-tax-guide-2016-17.pdf
[8] https://www.bdo.co.za/en-za/insights/2017/tax/tanzanian-government-increases-mining-royalties-takes-16-stake-in-projects-and-reviews-mining-agreements
[9] https://www.miningreview.com/drc-mining-code-changes-where-to-now/
[10] Ibid.