Business Option; Revisiting Tax Incentives

Manila Bulletin, April 20, 2004 | Go to article overview

Business Option; Revisiting Tax Incentives


Byline: Lydia N. Orial

For over 50 years, the Philippines has implemented a plethora of tax incentives to attract foreign investors to the country. Foreign capital investment is always a welcome boost to the economy, and hastens the achievement of the countrys developmental goals. It creates more jobs for the labor force, provides training and human capital development, and induces economic diversification, among others.

Economists worldwide, however, have opposing views on the relationship between tax incentives and foreign investment inflow. In a research study by Chalk (2001), he noted several studies assessing the effectiveness of tax incentives in developing countries and Asian regions. A study conducted by Lim (1983) found no correlation between incentives and investment decisions; rather it underscored how incentives tried to make up for unfavorable business climate. Allen (1979) and Lindsey (1981) concurred that tax policies were not important determinants in explaining foreign direct investment flow. Meanwhile, Tanzi and Shome (1982) indicated that in East Asia, fiscal incentives played a significant role in Taiwan, Korea and Singapore while for Malaysia, Indonesia, Thailand and the Philippines, incentives made no significant impact to investors.

Indeed, there is a general observation that the tax system in the Philippines has failed to achieve its desired objectives. The Philippine government offers an array of investment incentives like tax holiday, exemption from taxes and duties, tax credits, and additional deductions from taxable income. These tax concessions nevertheless failed to compensate for the perceived corruption in the government bureaucracy, the highly volatile economy due to political uncertainty, and poor infrastructure, among others. All these bring jitters to potential investors and ultimately turn them away.

The policy makers in our country must confront these issues in foreign investment squarely. Tax incentives are icings on the cake and do serve as an ancillary factor in the location decisions of investors. …

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