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What Environmentalists Should Watch Out For in Sen. Villar’s Fiscal Incentives Bill

by: Elpidio V. Peria, B.I.T.S. Policy Center, Inc.

As reported in BusinessWorld last 6 August 2013, newly-elected Sen. Cynthia Villar has recently re-filed her husband’s (Sen. Manny Villar) bill rationalizing the fiscal incentives given by the country to its investors, be they foreign or local, dubbed as Senate Bill No. 35, or the Investments and Incentives Code of the Philippines.

Advocates of electric, hybrid and alternative fuel vehicles who are also pushing for cleaner air in the country are biding their time whether to await passage of this fiscal incentives bill or to push separately for their own more specific fiscal incentives bill for alternative fuel vehicles, which bill is itself re-filed by Sen. Antonio Trillanes IV, as Senate Bill No. 164, or the Electric, Hybrid or Other Alternative Fuel Vehicles Incentives Act of 2013.

As mentioned by Institute for Climate and Sustainable Cities’ Policy Coordinator Kairos dela Cruz, this alternative fuel vehicles incentives bill passed both chambers of Congress (Senate and House of Representatives) during the previous Congress (15th session), but the Department of Finance asked that the approval of the bill be deferred to await the passage of the more comprehensive investment incentives rationalization bill.

Perusing both bills (SB 35 and SB 164) as they are re-filed in the Philippine Senate, it appears at first glance that the alternative fuel vehicles incentives bill fits nicely within the structure, content and context of the fiscal incentives bill.

If one works from the fiscal incentives bill (SB 35), the manufacturer, assembler or importer of alternative fuel vehicles can either push to have their enterprises included as part of the Investment Priorities Plan (IPP) or be classified as a Strategic Project.

To be included in the IPP, the activity must comply with the following :

a) It must be covered by the current Medium Term Philippine Development Plan (MTPDP) or the Medium Term Philippine Investment Plan (MTPIP);

b) The activity shall satisfy the following conditions:

(1) Substantial amount of investments;

(2) Considerable generation of employment;

(3) Use of modern or new technology; or

(4) Installation of adequate environmental protection systems

c) The activity must comply with the specific qualification requirements and/or

conditions for a particular sector or industry as set by the Board and other limitations the

Board may determine

What these requirements may be will be determined later by the proponents of these types of projects when it presents itself to the Board of Investments.

Now, supposed the proposed alternative fuel vehicles project may not be considered in the IPP,

it can still be classified as a Strategic Project, which is determined by the President, upon recommendation by the Board of Investments.

As mentioned in sec. 15 of SB 35, a strategic project is a project that exhibits high social economic returns and requires large investments that will significantly contribute to the country’s economic development. In the exercise of this authority, any three (3) of the following criteria shall be taken into account: (1) large capital investments; (2) generate sizeable employment; (3) use of new and internationally accepted high level of technology; and (4) creation of value-added.

Also to be considered as a strategic project as mentioned by SB 35 are projects that lead to significant improvements in productivity and value added and that will (a) produce or manufacture new, emerging and technologically advanced product, or (b) involve breakthrough process innovation, or (c) involve new and innovative service.

The Alternative Fuel Vehicles Incentives Bill of Sen. Trillanes (SB 164) gives incentives in the form of exemption from payment of excise taxes and duties, suspension of value added tax on the purchase and importation of raw materials, spare parts, components and capital equipment for nine (9) years from effectivity of the Act, exemption from the motor vehicles users’ charge in the Land Transportation Office, and non-fiscal incentives like priority in registration and issuance of plate number, priority in franchise application, exemption from the number-coding scheme of the Metro Manila Development Authority or the Unified Vehicle Volume Reduction Program (UVVRP), and provision for free parking spaces in new establishments.

Under the fiscal incentives bill of Sen. Villar, these incentives will become performance-based, which are now in the form of direct tax incentives such as net operating loss carry-over (NOLCO), accelerated deduction and double deduction for training expenses and research and development; indirect tax incentives such as zero rate for value-added tax (VAT) on sales, exemption from taxes and/or customs duties on importation of capital equipment, raw materials and source documents and wharfage dues and export tax.

There are also non-fiscal incentives under SB 35 such as time-bound processing of requirement for doing business, whereby after the lapse of ten (10) working days, applications for permits and licenses in government agencies which are not yet acted upon are considered automatically approved, and then there’s the obligation by the Bureau of Customs and the Bureau of Internal Revenue to simplify customs and internal revenue procedures as well as the reduction and harmonization of documentary requirements to government agencies.

This last non-fiscal incentive did not mention local government units so perhaps, depending on the dynamism of the LGU concerned, it is up to LGU to make life difficult or easy to the potential investor.

From the way these incentives are laid out in these bills, it seems the incentives for alternative fuel vehicles can be considered an add-on to what is laid out in the broader fiscal incentives bill; that is, if the advocates of the alternative fuel vehicles incentives bill succeed in having their pet bill passed in addition to the more comprehensive SB 35. But what may happen to the fiscal incentives bill is that, given its huge scope, it may get bogged down longer in the legislative mill, much like the much-delayed National Land Use Act, which has been pending since the early nineties when it was first filed in Philippine Congress.

The challenge for environmentalists is how they may convince the Department of Finance, which stopped the bicameral approval of the alternative fuel vehicles incentives bill the last time, that the foregone revenue from the incentives to be given out to alternative fuel vehicles will have a more significant impact on the economy in the long-run, thus, it should have precedence over the broader fiscal incentives bill. Of course, they can present as added argument the economic benefits of a cleaner environment, though it is uncertain if the dyed-in-the-wool bean-counters in the Department of Finance would be easily convinced by these types of rationales.

Nonetheless, if the environment advocates are stuck with the fiscal incentives bill, they should watch out for its provisions on automatic approvals of environmental permits provided for in its sec. 42, which states that applications for environmental clearances, permits, and/or licenses of registered enterprises shall be acted upon by the appropriate government agency within thirty (30) days, not working days, from date of official acceptance. In the event the appropriate government agency failed to act within 30 days, the application for the said environmental requirement shall be deemed complied with for purposes of operation of the registered activity.

Another provision worth noting and debating further is the freedom from expropriation provision in sec. 30 of SB 35. Combined with particular bilateral investment treaties that the Philippines has already signed on to with its major trading and investment partner-countries, it may subject the Philippines to costly litigation in foreign arbitral tribunals if the aggrieved investor finds that any environmental measure that it may pass, for example, the open-pit mining ban of some local government units, may render its investments useless, thus, subjected to something similar like expropriation, where an asset or property of an investor are considered “taken” to serve any purpose set by government, like environment protection, thus the claim for compensation.

Then there’s the suspension of nationality requirement that may be recommended by the Board of Investments (sec. 6.B.(6)) as part of its regulatory functions in appropriate cases such as those involving bilateral, multilateral, or regional investments, or other trading agreements of the Philippines with other countries; or when the existing laws of another country where the investor comes from provides no nationality restrictions for Filipino investors or provides for reciprocal nationality accommodations. While this may be favorable to investors, can this be allowed, given that in certain cases, the nationality requirements in certain industries is provided for by the 1987 Constitution?

Any proposed measure giving out fiscal incentives to investors should be seen in a larger framework that promotes investments, employment, industry, structural change, learning, technological absorption, and all the other nice things we hope to get from foreign direct investments, according to Action for Economic Reform’s Cristina Morales-Alikpala in a study done on the subject back in 2010. “At the outset,” Alikpala stated in the Action for Economic Reform (AER) website as it appeared in 2012, “it must be stated clearly and plainly that investment promotion is industrial policy. “

The key argument that environment advocates need to present to the legislators and the Department of Finance as both these incentives bills are considered is : a sound environmental policy goes hand-in-hand with a sound industrial policy, the former cannot be sacrificed for the latter. The advocates should think this through thoroughly now so they will be prepared to argue their points with the businessmen and economists in this key important policy debate that may well define what Pnoy’s legacy may be in the field of both economics and the environment as he exits in 2016.

 

Editor’s Note: This article is a re-post from a B.I.T.S. in bits article last August 10, 2013. Biodiversity, Innovation, Trade and Society (BITS) Policy Center, Inc is a non-stock, non-profit organization that provides policy research, advisory and litigation services on issues relating to biodiversity, innovation, trade and general societal concerns (including climate change, health, human rights, etc.) based in General Santos City.

About the image: The images shows an electric jeepney behind a conventional diesel-powered jeepney in one of the Quezon City’s busiest streets. (c) Veejay Villafranca/iCSC

 

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