"Ching Plaza says it is wrong to look at only the tax incentives side of the PEZA business."
I got a reaction to my Wednesday (Sept. 18) column on taxes.
Army reserve Brig. Gen. Charito B. “Ching” Plaza, the director general of the Philippine Economic Zone Authority, disputes the contention of the Department of Finance that PEZA zones are a drain of precious taxpayers’ money. DOF had estimated that in the past three recent years, the government gave away P1 trillion of tax money in terms of foregone taxes to just 3,150 registered companies. Most of the incentives went to PEZA locators.
Ching Plaza says it is wrong to look at only the tax incentives side of the PEZA business.
The better perspective is how PEZA locators have contributed to the progress of the Philippines in terms of exports earned, jobs created, manufacturing boosted, and enhancement of the country’s image as a friendly, warm, and hospitable destination for investments, without red tape, without corruption, only with red carpet treatment.
Ching wants to expand the concept of ecozones to create industrial estates, agri-business complexes, tourism destinations, and defense industrial complexes.
DOF claims that among 3,150 companies receiving tax incentives, 1,169 have been receiving incentives for 10 years at least.
Plaza says incentives are given to companies not as companies but for their projects and they have been undertaking different export projects for more than ten years. It is no different, say, from San Miguel or Ayala, or Shell, or Citibank all which have been around for more than 100 years operating different projects which receive incentives. Just because these companies are a century old or older does not mean they have been receiving tax incentives for 100 years.
“PEZA grants incentives not for the company but to its export-oriented products and services only,” the gutsy widow points out. Mrs. Plaza is one of the authors of the Special Economic Zones law and Republic Act 7901 which created the CARAGA region which consists of five provinces—Agusan del Norte, Agusan del Sur, Surigao del Norte, Surigao del Sur, and Dinagat islands.
PEZA operates 395 ecozones. It has 4,341 locators. The most important PEZA incentive is an income tax holiday or exemption from income tax for four to eight years. If you think that is overly generous, it is not. Indonesia and Singapore have ITH of five to 15 years. Thailand has fixed eight years.
Locators pay only a 5-percent tax on gross income—in lieu of all national and local taxes. That is much lower than the regular 30-percent tax paid by corporations on their revenues, net of deductions, or an average of 10 percent. Plus tax and duty-free importation of capital equipment, spare parts, supplies, and raw materials. And zero VAT on all local purchases.
Best of all, there is no red tape since PEZA is a one-stop 24/7 shop. Locators need not trudge from door to door, shuttling from one government agency to another, which can be tedious, cumbersome, time-consuming and expensive (in terms of the potential for bribery). Locators often receive preferential electricity and water rates since there is no VAT and PEZA does run utilities. They virtually own the factory land which is leased for 75 years. A major condition is that locators must export 70 percent of their production or charge dollars for their services.
In return, the PEZA earns precious dollars—$54.22 billion in 2018, $197.46 billion since 2015 (80.5 percent of total PH exports from 2015 to 2018).
Job generation is tremendous—1.5-million jobs. With each workers being a head of family of five, the 1.5 million support 7.5 million—people who would otherwise join the ranks of the poor without the PEZA companies. There are 22-million poor Filipinos. They are 20 percent of the population. Without PEZA, there would have been 29.5-million poor Filipinos; poverty incidence would have been 27.8 percent, instead of 20 percent.
The cost to social stability and social equity of such loss of employment would have been unimaginable. Think of a worsened insurgency or a separatist movement.
And how much would government have invested to absorb the 1.5-million joblessness? At P3 million per job, 1.5-million jobs would have necessitated an investment of P4.5 trillion. Compare the P4.5 trillion to the P1 trillion in taxes foregone in the past three years by government which money was given way as tax incentives.
And can government put up projects aggregating P4.5 trillion in so short a time to avoid a costly social unrest from the sudden displacement of 1.5-million workers?
In 2017, the DPWH was given a gargantuan budget of P467.7 billion. It spent only 34 percent or a third of that. Infra projects are usually quick gestation and offer instant jobs.
In 2017, the Department of Transportation was given a budget of P55.7 billion. DOTr spent only 25.6 percent or a fourth of that.
Clearly, the government has no capability to undertake quick-gestation job-generating projects, even if money were not an issue, to absorb the ranks of the unemployed because of the mass exodus of foreign investors from the PEZA zones.
“There would be social unrest if PEZA zones were phased out,” warns Ching Plaza.
Two previous major attempts at tax and economic reform did not produce the desired results. Instead, they worsened an already bad situation.
Under TRAIN 1, the tax on diesel was raised from zero to P4.50 per liter in three years. The idea was to raise revenue, tax the rich (since SUVs are mostly diesel powered), and control pollution. Instead, high diesel taxes triggered an 11-year-high inflation. The government’s taxmen and economic planners forgot that diesel is used by fishermen for their fishing boats, farmers for their irrigation pumps, buses for mass transport, and trucks to ferry mass consumption goods.
A rice shortage and a surge in rice prices were blamed for the 2018 inflation spiral. So the government allowed private importers to bring in rice by the millions of tons. The result: Depressed palay prices at the farm and millions of farmers on the brink of further penury.