[Introductory Remarks] Ladies and gentlemen, a pleasant afternoon to all of you.

I am here to share with you my views on the transparency and accountability in the governments grant of fiscal or tax incentives in favor of certain industries or corporations. As some of you may have already been aware, both houses of Congress had already passed their respective bills embodying this policy. There are several versions of the proposed measure but if legislated and approved, this would probably be referred to as TIMTA or the Tax Incentives and Monitoring Transparency Act. By definition, tax incentives commonly pertain to the special exclusions, exemptions, or deductions that provide for special credits, preferential tax rates or deferral of payment of tax liabilities. In the Philippines, after the determination of the Investment Promotions Agencies (IPAs) such as the Board of Investments (BOI), the Bases Conversion Development Authority (BCDA), or the Philippine Export Zone Authority (PEZA), a qualified investor maybe granted with (1) income tax holidays, during which an investor would not be allowed to pay income taxes for a certain period, (2) additional deductions from taxable income, (3) reduction of the rates or exemption from customs duties on capital equipment, spare-parts and accessories, (4) exemption from wharf dues, tax, and other imposts and fees, or (5) imposition of VAT at zero percent (0%). Like in other countries, the grant of tax incentives is being used as a tool to attract or encourage direct investments. Ideally, more investments result to more job opportunities, more capital transfers, improvement in technology and generally, to increased development. However, the grant of tax incentives is not without disadvantages. The grant of tax incentives necessarily results in the loss of income to the government as every exemption or

reduction in the supposedly imposed taxes, duties or fees is equivalent to revenue that the government cannot legally collect. In theory, loss of government revenue also means reduction of budget allocation to fund government programs on basic social services, infrastructure projects, education, etc. This is the reason why the grant of tax incentives entails a cost-benefit analysis; meaning, to be effective, the benefits obtained from the governments tax incentive program should be greater or higher than revenues loss for its implementation. According to a study conducted by the World Bank Institute in 2002, the effectiveness of tax incentive as a scheme to increase investment is inconclusive and varies from one jurisdiction to another. In some countries, the tax incentive scheme has resulted in few investments with substantial cost to the government while in others, tax incentives had contributed immensely to economic growth and development. This is where transparency and regular monitoring would gain significance. According to Senate President Franklin Drilon, in his Explanatory Note in Senate Bill No. 469 (one of the bills which proposes transparency and monitoring in tax incentives), he said that a study in 2004 found that the income tax holiday incentive administered by the BOI represents around one percent (1%) of the country's Gross Domestic Product (GDP) and that in 2011, the non-investment tax incentives estimated the cost of noninvestment tax incentives at 1.3 percent of GDP. However, according to Sen. Drilon, the effectiveness of these tax incentives as a fiscal tool to promote economic and social objectives is yet to be determined because the government does not have empirical evidence that directly links the tax incentives to its intended benefits. Also, Senator Ralph Recto, in his version of the proposed measure, in Senate Bill No. 1187, he mentioned that although the

data from the Department of Trade and Industry shows a 35% increase in net foreign direct investments from US$ 1,816 Million in 2011 to US$ 2,797 Million in 2012, the bulk of the tax incentives granted to these business entities are not accounted for, and that the government does not have adequate information on the scope, cost, or effects on investment and the economy of these incentives. Simply put, without transparency, the government, and the society as a whole, will not have accurate information to evaluate whether the benefits from governments tax incentive program are greater than the corresponding loss in revenues. Without regular and continuous monitoring and accounting, the government will not have adequate data to conduct a reliable and credible cost-benefit analysis which would reflect the real and honest effects, impact and contributions of the tax incentive program on the countrys fiscal and economic status. The proposed measure is likewise in accordance with the Organisation for Economic Co-operation and Development (OECD)s principles of enhancing transparency and governance of tax incentives for investment in developing countries. According to the OECD, the lack of transparency diminishes the tax morale as it tends to undermine the credibility of the tax system and the revenue authority in the eyes of the citizens. In the end, the transparency, monitoring and accounting of tax incentives has become a necessity for our economy to move forward. Through the proposed measure, the public and the government could fully understand and assess the cost and benefits of the current tax incentive program. To be accurately and adequately informed would be to know whether it is best for us to continue or discontinue same, or at the very least, make the necessary amendments, modifications or rationalization of the current system. After all, the wisest policies are made when they are based on the truest and most complete information.

Thank you.