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PEZA’s embarrassing error

August 21, 2019

OFFICIALS of the Philippine Economic Zone Authority (PEZA) have some explaining to do.

On Monday, the Department of Finance’s (DoF) chief economist Undersecretary Gil Beltran issued a statement demolishing a claim by PEZA that the investment promotions agency had contributed P10 trillion to the Philippine economy from 2015 to 2017.

Beltran actually found two errors in the PEZA claim, mistakes that were so elementary that even a first-year economics student would have likely spotted them.

Beltran explained that PEZA had arrived at its P10-trillion figure by double-counting. It had added the total amount of exports, investments, capital equipment and raw materials from businesses in economic zones — which are expenditures — to the total amount of wages and taxes generated by those businesses, which are income.

“This is a no-no in basic accounting,” Beltran said. “Like GDP (gross domestic product), benefits can be measured from either the expenditure or income side, but not both.”

Furthermore, Beltran pointed out that PEZA had inflated export figures due to another basic error.

PEZA had claimed that about P7 trillion, or 70 percent, of the P10-trillion economic contribution had come from exports from economic zones. However, the calculations did not deduct the imports of raw materials and other goods necessary to manufacture those export products. Beltran explained that about 80 percent of the inputs for ecozone export products were imported, and should have been subtracted as they add no value to the local economy.

“Assuming their figures are correct in the first place, using the appropriate method to account for exports and remove double-counting wipes out more than half of the P10 trillion they allege to have given back to the economy,” Beltran said.

PEZA’s mathematically flawed statement was in response to a report by the DoF that the government had foregone an estimated P1.12 trillion in tax revenues in 2015 to 2017 due to fiscal incentives granted to select companies. The biggest part of that total, P879.1 billion, or about 78 percent, were tax perks granted by PEZA, the DoF report said.

The DoF report and PEZA’s error-filled counter-argument are part of the ongoing debate over the second package of the government’s comprehensive tax reform program pending in Congress. The reform package lowers corporate tax rates from 30 to 20 percent, but also overhauls the fiscal incentive program. Under the proposed new law, the process by which tax incentives are awarded will be changed, and many companies now enjoying tax perks will see their benefits reduced or eliminated.

PEZA, along with other investment promotion agencies and business groups, has strenuously objected to the rationalization of fiscal incentives, saying it will discourage investors from setting up shop in the Philippines.

Following Beltran’s explanation of PEZA’s misleading claims, we can deduce that the real contribution of ecozone activity to the economy in the three years between 2015 and 2017 was between P2.9 trillion and P4.4 trillion. Having granted P879.1 billion in tax incentives through PEZA, that essentially means the government paid a premium of between 16.65 percent and 23.26 percent of the potential total in order to realize those gains. There is no ideal percentage for what a government should incur in costs for the granting tax incentives — that is a matter of investment policy — but when one considers that the value-added tax (VAT) paid by nearly everyone is only 12 percent, it certainly seems that the current fiscal incentives regime is far too generous.

Unless PEZA can present error-free calculations that indicate differently, it should drop its resistance to the rationalization proposal, and work with lawmakers and the DoF to develop a fair and productive solution.

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