The aim of this chapter is twofold. The first aim is to analyse the main features of the tax incentives in developing countries with a case study of two countries, Singapore and the Philippines. Singapore has been regarded in literature as one of the countries that has successfully attracted foreign direct investment; however, it is not yet clear whether this is the result of tax incentives or any other measure. The Philippines is at the time of writing in the process of introducing a comprehensive tax reform program CTRP that aims to redesign the tax incentives to become more competitive in the region and to achieve social and economic growth.
These countries also belong to the same region i. e. South East Asia, and therefore, the comparison of the incentives in these countries can also contribute to best practices in the region. Following this comparison, the second aim of this chapter is to evaluate the tax incentives granted in Singapore and the Philippines taking into account a new proposed evaluative framework for tax incentives in light of the Sustainable Development Goals SDGs. Globalisation and increased mobility of capital allow companies to structure their business operations across various jurisdictions and to select countries that offer the most favourable investment climate.
Decisive factors include, among others, lower capital costs, ability to benefit from free trade agreements and favourable tax incentives Easson 2001. In principle, tax incentives are considered to be very useful means for attracting foreign direct investment; however, their design and implementation can have a great impact on whether they prove to be successful in a particular country. Most common types of tax incentives offered are tax holidays, reductions in tax rates and deductions for certain expenditures and free trade zones, among others. An overview of the incentives introduced by countries to promote foreign direct investment has been developed by the United Nations Conference on Trade and Development UNCTAD 2000. The assessment and efficiency of tax incentive regimes in developing countries have been discussed for almost more than two decades now Holland and Vann 1998; Raff and Srinivasan 1998; Kinda 2014; Munongo et al.
2017. Among other reasons, there are concerns whether tax incentives generate the desired economic growth and social development Brauner 2013: 26. There are also concerns that the incentives erode the tax base without having actual effects on the level of investment in the country Brauner 2013. Therefore, the focus is no longer only on tax incentives as the methods of attracting investment but also on the impact they have on countries’ economies IMF et al. 2015.
More recently, and in light of the Base Erosion and Profit Shifting BEPSFootnote 1 Action Plans, countries have been reviewed in light of BEPS Action 5. BEPS Action 5 deals with tax incentives on geographically mobile business income regarded as preferential tax regimes to assess whether these regimes can be regarded as harmful tax practices. BEPS Action 5 is one of the four minimum standards that countries participating in the BEPS Inclusive Framework have committed to implement. The assessment of BEPS Action 5 is outside the scope of this chapter Mosquera Valderrama 2020b; however, some reference will be made to the compatibility of tax incentives in Singapore and the Philippines with BEPS Action 5. In light of this background, the first aim of this chapter is to compare the tax incentives for developing countries with a case study of two countries: Singapore and the Philippines.
Footnote 2 Singapore has been regarded in literature as one of the countries that has successfully attracted foreign direct investment; however, it is not yet clear whether this is the result of tax incentives or any other measure. The Philippines is at the time of writing in the process of introducing a comprehensive tax reform program CTRP that aims to redesign the tax incentives to become more competitive in the region and to achieve social and economic growth. These countries also belong to the same region i. e. South East Asia, and therefore, the comparison of the incentives in these countries can also contribute to best practices in the region.
Following this comparison, the second aim of this chapter is to evaluate the tax incentives granted in Singapore and the Philippines considering a new proposed evaluative framework for tax incentives in light of the Sustainable Development Goals SDGs. The economic analysis of costs and benefits is outside the scope of this contribution. Footnote 3This chapter is structured as follows: Sect. 7. 2 introduces the framework to evaluate tax incentives developed by literature, international organisations and our own proposed framework.
Section 7. 3 contains a case study of Singapore and the Philippines, where their respective tax incentive regimes are analysed and other considerations for attracting investment in both countries are addressed. Due to the COVID 19 pandemic at the time of writing June 2020, a short reference will be made to the tax incentives to provide fiscal stimuli introduced by Singapore and the Philippines. Section 7. 4 provides a comparison of these two countries and the assessment of the design of tax incentives in these two countries in light of our proposed framework presented in Sect.
7. 2. Section 7. 5 concludes this chapter. Tax incentives have been discussed extensively by academic scholars. In the analysis of literature, the findings on the relevance of tax incentives and the role they play in attracting foreign direct investment FDI tend to be inconclusive.
For instance, van Parys and James argue that the effectiveness of tax incentives is linked to the investment climate and more specifically investor’s confidence in the revenue authorities Van Parys and James 2009. This is crucial for regions where tax competition is high and the neighbouring countries race to the bottom to provide more favourable tax incentives. In a situation where two countries from the same region provide an identical tax incentive, it is more likely that the country with the better investment climate will attract the FDI. James estimates the chances of countries with good investment climate are eight times greater at attracting FDI as opposed to countries with less favourable investment environment James 2010. Bird and Zolt share this view and argue that tax policy is just a fraction of the problem and when considering the bigger picture, improving investment climate in general will prove to be more efficient in attracting more foreign direct investment FDI Bird and Zolt 2008. Investment climate is influenced by a number of factors including, for example, political stability, stability of fiscal policy, adequate infrastructure and effective, transparent and accountable public administration James 2009.
Zolt also argues that tax incentives bring economic growth, which results in an increase in the spending power of local residents, and they ultimately generate greater tax revenue Zolt 2015. Brauner, on the other hand, voices concerns that tax incentives do not bring the desired economic growth to the region and are not necessarily the decisive factor for attracting foreign investment Brauner 2013. In the 2015 Toolkit on Tax Incentives for Low Income Countries 2015 Toolkit, the Organisation for Economic Co operation and Development OECD, the International Monetary Fund IMF, the World Bank and the United Nations UN stated that: “Tax incentives generally rank low in investment climate surveys in low income countries, and there are many examples in which they are reported to be redundant—that is, investment would have been undertaken even without them. Their fiscal cost can also be high, reducing opportunities for much needed public spending on infrastructure, public services or social support, or requiring higher taxes on other activities” IMF et al. 2015.
These organisations have therefore provided recommendations to low income countries to improve the effectiveness and efficiency of their investment tax incentives. Some of these recommendations are: “At the national level, there is generally scope to improve the design of tax incentives for example by placing greater emphasis on cost based incentives rather than profit based ones; and by targeting tax incentives better, strengthen their governance for instance through more transparency, better tax laws and a stronger role of the Minister of Finance and by undertaking more systematic evaluations. At the international level, countries may gain by coordinating their tax incentive policies regionally, so as to mitigate the negative spillovers from tax competition” IMF et al. 2015: 32. In 2018, the United Nations and the Inter American Center of Tax Administrations CIAT published a report for design and assessment of tax incentives in developing countries with a case study of the Dominican Republic UN CIAT 2018.
Footnote 4 This report provided a cost and benefit analysis of tax incentives and also a checklist for drafting tax incentives legislation in developing countries. The checklist contained the list of things to be considered to maximise clarity and administration of tax incentives and to ensure consistency of legal drafting with the policy underlying the tax incentive. In light of this analysis, one of the findings of this report is that for developed countries, it is sometimes easier to provide tax incentives than to correct deficiencies in the legal system or to improve the infrastructure of one country. However, tax incentives cannot compensate for the deficiencies in the design of the tax system or inadequate physical, financial, legal or institutional infrastructure. Therefore, this report recommends that developing countries bring the corporate tax rate regime closer to international practice and to correct the deficiencies rather than provide investors with additional tax benefits. Even though there is no specific report dealing with tax incentives published by the Asian Development Bank, there has been attention to the challenges in Asia and the Pacific regarding tax incentives.
For instance, the 2018 Report on Tax and Development addressed in Chap. 2 the need for tax incentives “to be controlled by the Ministry of Finance. If they are managed by the Investment Board or ministries to promoted FDI, tax incentives proliferate and can become too complex at the expense of government coffers. In such a scenario, lost revenues will have to be raised from other distortionary taxes” Nakabayashi 2018: 12. In addition, the report stated the need to prevent a race to the bottom tax competition and the need to broaden “the tax base by rationalizing tax incentives and exemptions” Nakabayashi 2018: 12. The Asian Development Bank has published an overview of tax incentives which provides a comparison of the tax guidelines and regulations pertaining to direct investment in South East Asia and South Asia.
According to the website, “data sources include official reports and press releases from respective government were government agencies such as ministries of finance, trade and commerce; economic development boards; boards of investment; and related agencies of national governments pursuing investment creation and promotion, and to some extent, trade”. However, the database does not provide the current developments, for instance, the current tax reform in the Philippines, or information related to fiscal stimulus regarding COVID 19. Therefore, for a comparison of fiscal stimuli measures, the database of international organisations e. g. IMF is relevant. Footnote 5The 2018 ESCAP report contains a chapter addressing tax incentives and tax base protection for developing countries.
The focus of the chapter is on the economic effect of tax incentives. Therefore, administrative considerations regarding the complexity, arbitrariness and use of discretionary tax incentives are not addressed in this chapter Jun 2018: 75. Footnote 6 Despite this caveat, the report addresses the choice of governments to “use a more visible and readily available tool, such as a tax holiday, to attract investors rather than resort to such time consuming measures as enhancing macroeconomic stability and upgrading public infrastructure” Jun 2018: 74. The chapter contains an analysis of some Asia Pacific countries i. e. Singapore, Hong Kong, China and the Republic of Korea.
Regarding Singapore, the author analysis is that “Singapore excels in state efficiency items compared to its neighbours. This suggest that a given incentive is likely to be more cost effective in Singapore than, say, in the Republic of Korea because administrative costs and corruption possibilities associated with tax incentives might be much lower in Singapore” Jun 2018: 92. The report also addresses the changes that Singapore has made to its incentive policy stating that “in fact, Singapore has adjusted its incentive policy from an aggressive, broad based incentive scheme at earlies states of development when its competitive advantage was limited, to a more target based one couple with lower statutory rates in the mid 1980s when it already became an attractive investment location” Jun 2018: 93. The 2020 Report by the World Bank focuses on the cost benefit analysis of tax incentives as it was also the case in the UN CIAT Report. The report states that the “cost benefit analysis can help policy makers demonstrate the direct cost tax revenue foregone incurred by governments against the economic benefits being pursued. Global evidence on investment location decisions suggests that while tax incentives can help attract investment, other factors, such as the wider investment climate and market opportunities, matter most.
Tax incentives should therefore be conceived as part of a country’s broader investment policy framework and governments should be realistic about the potential impact any measure may have. In this light, cost benefit analysis can serve as a powerful tool to inform incentives policy reform and offer important inputs into a country’s investment policy strategy” Kronfol and Steenbergen 2020: 1. Tax incentives should be transparent, and the granting of the tax incentive should not be discretionary. To achieve greater accountability and transparency of tax incentives, it is important that the general tax expenditure of the country is periodically analysed and tax budgets are implemented UN CIAT 2018: 19. Efforts should be made by international organisations to train staff and use data analytics to carry out this analysis in developing countries.
For instance, the OECD regional revenue statistics including the one for the Asia and Pacific Region refers to the need to include the reporting in the revenue side and the expenditure side OECD 2019b. After providing a distinction between tax and expenditure provisions, this report also states that the focus of the report is on tax provision rather than the expenditure provision. Footnote 7 However, in our opinion, in order to increase transparency, countries should also include in their annual budgets the expenditure report as it has been done by the Philippines and Singapore see Sect. 7. 3. 6.
In order to exchange best practices, Sect. 7. 2 provides a comparison of the tax incentives in Singapore and the Philippines by looking at 1 the types of incentives offered, 2 whether they are cost or profit based, 3 whether they are targeted at specific locations/sectors, 4 their overall transparency, 5 the role of the Minister of Finance, 6 systematic evaluations of incentives, 7 regional coordination and 8 other considerations including the influence of BEPS Action 5 in their tax incentives. The Philippines is currently in the process of passing a comprehensive tax reform, and only one out of four proposed packages was signed into law. The second package that dealt with tax incentives was expected to be adopted in 2019 at the time of writing, June 2020, the adoption has not yet taken place; instead some changes have been introduced to cope with COVID 19. Footnote 8 Therefore current incentives system and the proposed changes will both be discussed in this section.
Corporate tax in Singapore is levied at 17%, which makes it the country with the lowest corporate income tax rate in the Association of Southeast Asian Nations ASEAN region. On top of this, Singapore provides generous tax incentives including concessionary tax rates for selected industries and free trade zones. Footnote 9 Due to the COVID 19 pandemic, Singapore has introduced several measures to support business. For companies, the fiscal stimulus measure aims to ease the cash flow of companies; therefore, two measures have been introduced a deferral of payment 3 months of corporate income tax and the extension of tax filing deadlines. Footnote 10Some tax incentives aim to encourage companies to grow certain treasury management and strategic finance capabilitiesFootnote 12 or grow aircraft leasing industry in Singapore. Footnote 13 Other tax incentives focus on development of research in the areas of science and technology,Footnote 14 on providing the employees with various training programmesFootnote 15 and on encouraging the use and commercialisation of intellectual property rights from research and development RandD activities.
Footnote 16 These incentives are tied to certain activities ascertained as beneficial to Singapore’s development and aim to enable long term economic growth. There are also incentives that support facilities to be more energy efficient and improve competitiveness. Footnote 17The incentives administered by the EDB can be split into three main categories: 1 growing industries; 2 innovation, RandD and capability development; and 3 productivity. These incentives include the Pioneer Certificate Incentive PC and Development and Expansion Incentive DEI, Finance and Treasury Centre FTC Incentive, Aircraft Leasing Scheme ALS, Research Incentive Scheme for Companies RISC, Training Grant for Company TGC, Intellectual Property Development Incentive IDI, Resource Efficiency Grant for Energy REGE and Land Intensification Allowance LIA. For example, under the PC and DEI, companies enjoy exemption from corporate tax or a concessionary rate of 5 or 10%. Companies benefit from 8% concessionary tax rate on income from qualifying FTC activities under the FTC incentive and 5 or 10% on qualifying IP income under the IDI.
In 2019, the Ministry of Finance published the Income Tax Amendment Bill, which extends and refines tax incentive schemes for funds managed by Singapore based fund managers IBFD 2019. The corporate income tax rate in the Philippines is 30% for both domestic and non resident corporations, the highest corporate income tax rate in all of ASEAN countries. Footnote 18 Despite the corporate income tax CIT revenue increasing each year, the tax incentive regime lacks efficiency. Footnote 19 Even though the Philippines provide the most generous tax incentive systemFootnote 20 in the region, when compared to neighbouring countries, Philippine’s inward FDI does not reach the desired amounts Philippines Department of Finance 2018c. Philippines’ incentives under the current regime include tax holidays, regional operating headquarters incentives and concessionary tax rates under the Regional Operating Headquarters ROHQ and gross income earned tax regimes.
Incentives are legislated under the Omnibus Investments Code of 1987 and the Special Economic Zone Act of 1995, which include both fiscal and non fiscal incentives. At the heart of Philippines incentives system are income tax holidays offered to Board of Investment BOI/Philippine Economic Zone Authority PEZA registered activities with pioneer status 6 years income tax holidays and non pioneer status 4 years income tax holidays. After the lapse of income tax holidays, PEZA registered activities can then benefit from 5% gross income earned GIE tax regime. The GIE is given for an indefinite period of time and applies to all income, value added tax VAT and local taxes. As of 2015, the Tax Incentives Management and Transparency Act TIMTA requires that tax incentives granted to registered investments are reported Philippines Department of Finance 2018c.
The aim of the reform is to correct the country’s deficient tax system caused by special treatment and exemptions for some taxpayers. According to Philippines Department of Finance, this special treatment coupled with lack of transparency leads to unequal, complex and inefficient tax system Philippines Department of Finance 2018c. The proposed reform will likely impact all of these incentives. The aim of the CTRP is to “accelerate poverty reduction” and to “sustainably address inequality” Philippines Department of Finance 2018c. The CTRP introduced four packages, with the first package enacted in 2017 and the second to be adopted in 2019. A reform of tax incentives is covered in Package 2: “Corporate Income Tax Reform and Fiscal Incentives Modernization CITIRA”.
Footnote 21 This package has been recalibrated in light of the COVID 19 pandemic. The new Package 2 is referred as the Corporate Recovery and Tax Incentives for Enterprises Act CREATE. According to the Philippines Department of Finance website, the recalibration was necessary “to make it more relevant and responsive to the needs of businesses, especially those facing financial difficulties, and increase the ability of the Philippines to attract investments that will benefit the public interest” Philippines Department of Finance 2018f. Footnote 22The goal of CTRP Package 2 in its CITIRA form is to 1 lower the CIT rate gradually from 30 to 20% over the next 10 years; 2 reorient fiscal incentives towards strategic growth industries; and 3 make incentives available to investors who make net positive contributions to society Department of Finance 2018f. In addition, corporations registered for corporate incentives will receive further deductions for labour costs, training costs, purchases from local suppliers, infrastructure development, research and development, accelerated depreciation allowance and enhanced net operating loss carryover.
The new measures proposed by the CTRP Package in its CREATE form are mainly the introduction of fiscal stimuli for business. Footnote 23 These measures include an immediate 5% corporate income tax reduction starting July 2020, extension of the applicability of carryover for losses incurred in 2020 from 3 to 5 years for non large taxpayers, companies benefiting from the 5% gross income earned GIE incentives will benefit from a sunset clause from 4 to 9 years in CITIRA form was 2–7 years; and more flexibility for the President in granting fiscal and non fiscal incentives, which according to the Department of Finance, it “will be critical as the country competes internationally for high value investments”. Footnote 24The CTRP recognises the need for tax incentives in order to attract investment, which supports achieving Philippines’ objectives, including job creation, stimulation of domestic industries and encouraging innovation. However, the Philippines also acknowledge the need for fair and accountable incentives systems. The rationale is that the money supporting the incentives comes from the government’s budget and would otherwise be part of public spending that benefits the society.
To ensure fair and accountable tax incentives regime is in place, incentives need to be 1 performance based, 2 targeted, 3 time bound and 4 transparent. However, the discretionary power to the President to grant fiscal and non fiscal tax incentives in CREATE may reduce the effectiveness of the transparency goal of the CTRP reform. Profit based incentives are linked to the profits of the company and include, e. g. reduced tax rates or tax holidays that exempt the profits in their entirety. Cost based tax incentives reduce costs for the company and can include, e.
g. tax credits and accelerated depreciation. Profit based incentives, although easier to administer when introduced, require continuous monitoringFootnote 25 to ensure the taxpayers qualify for the incentives, which is not always easy Abramovsky et al. 2018. This can prove to be particularly difficult for tax administrations in developing countries, where resources are limited.
Therefore, scholars and international organisations recommended for developing countries to introduce cost based tax incentive even though it is more complex to administer Abramovsky et al. 2018; IMF Toolkit. In the Philippines, tax incentives under the current regime are prevalently profit based and focus on reducing the tax rates for companies. The reason for this could be the high corporate tax rate to begin with and the need to lower this to attract investment. The proposed CTRP aims to lower the corporate income tax rate so the focus of the new incentive regime will shift to cost based incentives instead.
The proposed deductions for companies registered for incentives further prove that the new incentive system will look to introduce more cost based incentives with the objective of achieving social benefits. The issue with targeted tax incentives is that they can put non targeted firms at disadvantage. They may however be justified in cases where it reduces the cost of the policy or when targeting certain mobile investments is more cost effective Abramovsky et al. 2018. Singapore offers a number of incentives that target specific industries, such as exemptions and concessionary rates for angel investors, fund management companies, businesses engaged in various shipping and maritime activities and companies setting up global or regional headquarters in Singapore.
When looking at the activities, it mainly targets areas of manufacturing and services, trading, investment and financial services, shipping and research and development activities. Footnote 26 To benefit from the incentives, investors must meet qualitative and quantitative criteria. As a result, only selected investors benefit from the incentive, and the associated costs are therefore kept to minimum. The EDB publishes brochures and circulars on its website. They provide an overview of each incentive including the assessment criteria as well as detailed administration of the incentive. However, since Singapore’s tax incentives are not all covered through income tax law, their extent is not as straightforward and clear as it could be.
The IRAS attempts to make them transparent by having a consolidated list published on their website along with instructions how and where to apply. Each incentive also describes detailed administration of the incentives and mentions the provision of either the Income Tax Act ITA or Economic Expansion Incentives Act EEIA, where the incentive was implemented. As of June 2020, incentives can be granted by 1 of 19 Investment Promotion Agencies IPAs, and in order to benefit from them, registration with Philippine Economic Zone Authority PEZA or Board of Investments BOI is necessary for most of them Philippines Department of Finance 2018a, b, c, d, e, f. To be able to register with BOI, the business activity must be listed in the 2017 Investment Priorities Plan. Footnote 28 The fact that incentives are granted through numerous agencies results in less transparency and increased complexity when it comes to monitoring decisions to whom and under what circumstances the incentives were granted.
This leaves room for undesired discretion and can result in tax base erosion by investors who would normally not qualify for the incentive. Since one of the concerns about incentives is the direct cost revenue foregone incurred by governments, it is of great importance that incentives are transparent regarding the revenue foregone. More recently, the World Bank report evaluating the costs and benefits of tax incentives has stated the need to foster greater transparency of public finances. According to the 2020 World Bank Report, “systematically estimating the revenue foregone from incentives can result in greater transparency of public finances. Especially since the costs associated with tax incentives can face less scrutiny than direct government spending, estimating and incorporating such analysis as part of the budgetary process can lead to more informed budgetary and fiscal policy decision making” Kronfol and Steenbergen 2020: 9.
In the Philippines, the Department of Budget and Management provides for a Budget of Expenditures and Sources of Financing Report. Footnote 32 In December 2015, the Tax Incentives Management and Transparency Act TIMTA was passed. Its aim is to promote transparency and accountability in the area of granting and administration of tax incentives. TIMTA was tasked with creating a single database system to record and evaluate the impact of Philippines’ tax incentives. Furthermore, TIMTA is responsible for monitoring and tracking the tax incentives granted by IPAs.
TIMTA is regarded as a positive development towards transparency. According to Sawada, Chief Economist and Director General Asian Development Bank, due to TIMTA “it is now possible to evaluate whether tax incentives have delivered employment, income and export growth” Sawada 2018. The CTRP Package 2 also plans to introduce performance based incentives. Performance based incentives will as their name suggests set performance targets/requirements that the company needs to meet in order to be able to benefit from the tax incentive. These targets will aim to benefit the society and will result in positive development.
The main difference compared to the incentives under the old regime is that they will no longer be granted to “everyone” and “for free”. Incentives will instead be given to firms that actually need them and if they also meet the performance requirements. The introduction of these types of incentives will require more evaluations on how these objectives and performance requirements are being met. Singapore is a member of ASEAN and has a number of free trade agreements in place. Footnote 33 Singapore has also signed the Convention on Mutual Administrative Assistance in Tax Matters and is member of the OECD Global Forum on Transparency and Exchange of Information for Tax Purposes. Regional cooperation, especially in regions with developing countries, which compete to attract the investments, is crucial in minimising or avoiding harmful tax competition.
OECD acknowledges the need for regional cooperation and also links it to enhanced transparency OECD n. d. . Singapore has the lowest CIT rate in the region, and this can encourage other countries to provide favourable incentives and compensate for their higher tax rates. While it encourages positive change, e. g.
creation of tax incentives and revision of existing tax rules, the negative spillovers can cause neighbouring countries to race to the bottom Nugroho 2012. From the two countries of study, Singapore as a member of the BEPS Inclusive Framework has committed to the implementation of BEPS 4 Minimum Standards including BEPS Action 5. At the time of writing June 2020, the Philippines is not a member of the Inclusive Framework. Even though the assessment of BEPS Action 5 is outside the scope of this chapter Mosquera Valderrama 2020b, it is important to take into account that despite the fact that the Philippines is not a member of this framework, both countries have been reviewed for their preferential tax regimes. As a result, Singapore and the Philippines have amended or abolished some of these incentives to comply with the recommendations of the BEPS Action 5 peer review report. In the description in Sect.
7. 3, some differences can be highlighted between Singapore and the Philippines. The first notorious difference is the corporate tax rate which in Singapore is 17% while in the Philippines is 30%. In addition, there are differences in the way that tax incentives are being granted in both countries mainly regarding legislative sources and agencies granting the tax incentives. While Singapore has a more centralised decision making with 2 main legislative sources, the Philippines has incentives in 123 investment law and 192 non investment laws. In addition, the granting of tax incentives is organised in Singapore by industry segmentation, whereas in the Philippines, there are 13 Investment Promotion Agencies granting the incentives.
While Singapore is successful in attracting foreign investment, it is hard to tell whether it was achieved through its tax incentives. It could be argued that opposed to other developing countries or countries in transition, Singapore did not have investment deterrents e. g. bad economic or political climate. This supports the argument that tax incentives on their own cannot correct the tax regime and investment climate in the country and thereby make it more attractive for investors. Even the government stresses that without these non tax factors, tax incentives would likely not be effective in attracting foreign investment Zolt 2015.
The well educated and highly skilled workers, extensive network of infrastructure, efficient public transport, clean environment, high quality of life and overall political and economic stability all contribute to Singapore’s position among the most attractive business destinations. The comparison in Sect. 7. 3 shows that such assessment is very limited in the two countries. For the assessment, it is important that the government carefully plans the amount of revenue foregone to give the tax incentive and, also if necessary, to have a ceiling of the amount of revenue foregone.
After the incentive is being granted, this incentive should be evaluated systematically by the government taking into account the requirements to give the incentive and whether the incentive is still necessary. Therefore, the two countries can benefit from establishing a specific time for the review of the tax incentive before and after the tax incentive is granted and on a regular basis every 2 years and also include in the review the specific budget evaluations that can limit the amount of revenue foregone in the tax incentive. The incentive should have a clear target and eligibility criteria for granting the incentive; this target should be measurable to achieve the social and economic development of the region/sector/country. This is not the case in the two countries of study. The current Philippine tax reform aims to attract investment that makes positive contributions to society, but it is not clear as to the criteria to achieve this objective.
In Singapore, the Economic Development Board could have a role in designing clear targets and eligibility criteria for granting the incentive which can be also measured in the light of the social and economic development. Due to the COVID 19 pandemic, tax incentives are being introduced to ease cash flow from business. However, it is also important that even in COVID 19, the introduction of these tax incentives have a clear target and eligibility criteria. The description shows that while Singapore decided to grant deferral of tax payments and tax filing, the Philippines decided to immediately reduce the tax rate from 30 to 25%, to introduce favourable rules for carry forward of losses, to extend sunset clauses for certain type of incentives see Sect. 7.
3. 1. 2 and to give to the President the discretionary power to grant tax incentives. Transparency and discretionary power. There should be no room for administrative discretion on the granting of tax incentives; one person/body should be in charge of granting tax incentives, and the incentive should be transparent publicly available on the website of the tax administration or administrative agency. In both countries, the role of the Ministry of Finance is very important in the granting of tax incentives.
However, one problem in both countries is the design and administration of incentives by several bodies resulting in complex coordination and lack of transparency. For instance, the Philippines has 19 Investment Promotion Agencies in charge of granting incentives. This is already being targeted in the new CTRP by introducing a Fiscal Incentives Review Board to serve as overall administration and to have an oversight over 13 of the 19 IPAs granting incentives. Footnote 35 However, the COVID 19 measure granting discretionary power to the President may affect the path taken by the Philippines to increase the transparency and reduce the discretionary power in granting tax incentives. The monitoring by one central body is desirable. However, it is also important that this body has a code of conduct to guide their activities including also a list of sanctions administrative fine, dismissal or imprisonment in case that there is any corruption or bribery.
The Philippines has already such a Code of Conduct with several sanctions Rule XIFootnote 36; nevertheless, one of the problems identified in the Philippines by the World Economic Forum Global Competitiveness Index is corruption see Sect. 7. 3. 4. 2.
Therefore, one possible way to enhance more transparency is to make the sanction for the respective agency official publicly available. To achieve greater accountability of tax incentives, it is important that the general tax expenditure of Singapore and the Philippines is periodically analysed and tax budgets are implemented. From the comparison in Sect. 7. 3.
6, there is a budget published each year in Singapore and the Philippines specifying which incentives are accounted for in the budget. However, this budget also requires monitoring and systematic evaluation, and efforts should be made by international organisations to train staff and use data analytics in developing countries to conduct cross sectoral policy oriented research on how tax incentives influence investments. The main objective should be to find out how incentives are being used, including in which sector, and their impact in terms of investment and/or foregone revenues. The case studies show two very different experiences of countries in the same region. Singapore succeeded in attracting foreign investment and is often seen as a role model for other developing countries and countries in transition. However, Singapore did not create tax incentives with the aim to correct market imperfections Lipsey and Lancaster 2016.
It complemented its already attractive investment environment instead. On the other hand, the Philippines tax incentives under the old regime compensated for its high CIT. The proposed reform corrects this by setting out clear objectives to be achieved and how to monitor the efficiency and effectiveness of the incentives. To properly analyse the new regime and how successful it will prove, ex post analysis and systematic evaluations will need to be carried out to check if the initial cost benefit analysis will be confirmed. When designed and implemented correctly, tax incentives can also contribute to social and economic development of the country. It is important to keep in mind the primary objectives of the tax incentive when it is being drafted and in addition to design considerations.
Already existing studies that attempted to assess the extent to which tax incentives attract foreign direct investment provide different framework references and use different methodologies to carry out their assessment see Sect. 7. 2. That is the main reason why their findings are inconclusive and there are dividing views on this topic. The BEPS Project contains ten best practices and four minimum standards.
The BEPS four minimum standards that should be implemented are countering of harmful tax practices and exchange of rulings Action 5, preventing of treaty abuse Action 6, re examining transfer pricing documentation including country by country reporting Action 13 and enhancing resolution of disputes Action 14. At the time of writing June 2020, 137 jurisdictions have committed to implement the BEPS 4 minimum standards. In addition, a Multilateral Convention to swiftly implement in double tax conventions some of the BEPS measures has been signed by more than 90 jurisdictions. This Convention is in force since 1 July 2018. “Because this publication is concerned only with the revenue side of government operations, no account being taken of the expenditure side, a distinction has to be made between tax and expenditure provisions.
Normally there is no difficulty in making this distinction as expenditures are made outside the tax system and the tax accounts and under legislation separate from the tax legislation. In borderline cases, cash flow is used to distinguish between tax provisions and expenditure provisions. Insofar as a provision affects the flow of tax payments from the taxpayer to the government, it is regarded as a tax provision and is taken into account in the data shown in this publication. A provision which does not affect this flow is seen as an expenditure provision and is disregarded in the data recorded in this publication” OECD 2019, Revenue Statistics in Asian and Pacific Economies 2019, OECD Publishing, Paris, .