Incentives for the Rich Harms the Poor and Bleeds Billions From Government

14-15 AUGUST 2006
Incentives for the Rich Harms the Poor
by ROEL LANDINGIN

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Our latest report deals with how tax incentives amounting to billions of pesos are being given to big companies that have no need for them. It cites the P13-billion in incentives given by the Board of Investments to telecommunications companies putting up 3G operations, even if these companies have decided to carry out the projects — with or without incentives.
Tax incentives are meant to attract and encourage investments. Yet they are being given mostly to for high-return projects being undertaken by big, profitable companies that practically own the entire domestic market for their product or service. These firms have no need for incentives to encourage them to invest.

And yet, as this report by business journalist Roel Landingin shows, such incentives are routinely being provided to mobile-phone providers, power plants, water services and other business activities that cater to domestic customers as well as to "resource-seeking" projects such as mining and call centers.

This report is timely as it is being released just as the Senate is set to begin deliberations on a bill that seeks to overhaul the country's system of tax incentives. Authored by Senator Ralph Recto, Senate Bill No. 2411 wants to do away with tax and duty exemptions for companies serving the domestic market, except those located in the country's poorest 30 provinces. Tax and duty breaks will continue to be granted to exporters although the type of incentives and the way they are administered will also be changed.

Part two of the report also reveals that many companies abuse the incentives by claiming excessive tax exemptions. In 2004, the BOI approved only P7.6 billion worth of income-tax holidays. But the BIR reported that income tax exemptions claimed by BOI-registered firms that year reached P19.4 billion, an excess of P11.8 billion. In other words, P6 of every P10 income tax exemption claim filed with the BIR was unauthorized, representing loss of revenue loss for government.
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IT TAKES the tax bureau's southern Makati district office, housed at the Atrium building along Makati Avenue, about a year to collect P13 billion in taxes. Just a few blocks away, another government agency, the Board of Investments (BOI), took just 14 working days to decide to grant the same amount in tax exemptions to two of the country's most profitable companies — Globe Telecom Inc. and Smart Communications Inc.

The BOI accepted Globe's application for a four-year income tax holiday for its P5.5- billion 3G (3rd generation) mobile wireless communication project last April 27. Nine working days later, on May 10, the agency approved P2.87-billion worth of tax exemptions for the project, which is expected to earn an average 22-percent return on investment and 37-percent return on equity in its first five years of operation.

Less than a week after, Smart filed a similar application for its P33.2-billion 3G project, which is expected to post an eight-percent return on investment and 14-percent return on equity over the five-year start-up period. Though Smart's P7.96-billion tax exemption is nearly thrice that of Globe, the BOI approved the application in almost half the time.

A timely objection from the Department of Finance prompted the BOI to freeze the approval of fiscal incentives for Globe and Smart's 3G investments. The finance department, which is struggling to boost tax collection to fund higher spending for infrastructure and social services while cutting the budget deficit, wants to review if the tax exemptions are still necessary for the 3G investments to push through.

Fiscal incentives, after all, are meant to attract and encourage investments. Yet the two phone companies have pretty much decided to carry out the projects — with or without incentives. Some of their officials say they asked for the tax perks to hasten the pace of investment in 3G wireless technology.

Manuel Pangilinan, chairman of the Philippine Long Distance Telephone Co. (PLDT), parent firm of Smart Communications, says the company needs the incentives "so we can accelerate the period of losses from x years down to y years. We make money and we pay taxes sooner than later."

He does not understand what the fuss is all about: "In the first three years of 3G, people won't be making money anyway. We're not gonna pay taxes."

But the furor over Globe and Smart's aborted tax exemptions has raised important questions about the need for giving incentives to what are expected to be high-return projects being undertaken by big, profitable companies that practically own the entire domestic market for their product or service.

The controversy also comes just as the Senate is set to begin deliberations on a bill that seeks to overhaul the country's system of fiscal incentives. Authored by Senator Ralph Recto, Senate Bill No. 2411 wants to do away with tax and duty exemptions for companies serving the domestic market, except those located in the country's poorest 30 provinces. Tax and duty breaks will continue to be granted to exporters although the type of incentives and the way they are administered will also be changed.

Citing international studies, Prof. Renato Reside Jr. of the UP School of Economics explains that fiscal incentives have varying degrees of effect on the decision to invest or not, depending on the motivation that is driving the investment. He says incentives matter most for so-called efficiency-seeking investments such as electronics and semiconductor exporters who locate in the country primarily to reduce per-unit production costs.

But incentives have little or no effect on two other types of investments: a) market-seeking ventures such as mobile phones, power plants, water services and other business activities that cater to domestic customers; and b) resource-seeking projects such as mining and call centers.

Unfortunately for the Philippines, a sizeable proportion of investments granted tax and duty exemptions are either market-seeking and resource-seeking, according to Reside who closely examined investments registered with the BOI, Philippine Economic Zone Authority (PEZA), Subic and Clark.

He estimates that up to 90 percent of the tax and duty exemptions granted by the BOI are "redundant" as these went to companies selling goods and services to domestic customers rather than the export market. At PEZA, which has overtaken BOI as the biggest giver of incentives, redundant incentives account for 10 percent of all tax exemptions; at the Clark Special Economic Zone, the comparative figure is 36 percent and at Subic Bay Metropolitan Authority (SBMA), 17.5 percent.

Companies availing themselves of incentives for the biggest projects with the BOI are also some of the country's largest and most profitable, and belong to its wealthiest and powerful families, according to a ranking by PCIJ of all BOI-registered projects from 1969 to the first half of 2006.

Of the 10 companies that registered the biggest projects, seven are owned, controlled or run by some of the Philippines' best-known family-based conglomerates such as the Lopezes, Ayalas, Gokongweis and Cojuangcos. Maynilad Water Services Inc., the joint venture set up by the Lopezes with the French engineering group Suez, topped the list. The Ayalas' Manila Water Co., a joint venture with United Utilities of UK, was No. 3 while the family's telecommunications unit, Globe Telecoms Inc., was No. 8. The Gokongweis also had two companies in the top 10 list-Digitel Telecommunications Inc. and JG Summit Petrochemicals Inc. The family of Antonio Cojuangco Jr. owned PLDT and Pilipino Telephone Co. before these were sold to First Pacific of Hong Kong in 1998.

Only one of the 10, GN Power Ltd., is completely foreign-owned. The government put up the remaining two, PNOC Petrochemical Development Corp. and Petron Corp., though the latter is now controlled by a Saudi Aramco unit.

The top 10 companies accounted for only 30 projects or 0.4 percent of the more than 7,500 ventures registered with the BOI over the last three and a half decades. But their P720-billion combined project cost made up about 36 percent of the total, which stood at P1,994 billion as of end-June 2006. This suggests they also got a sizeable proportion of the total incentives granted by the agency.

None of the top 10 is mainly an exporter. All cater to domestic customers in highly regulated or oligopolistic markets dominated by just a few players. Maynilad and Manila Water are monopolies in their respective water zones in Metro Manila. Petron, which has the fifth biggest project in the list, accounts for 40 percent of the domestic petroleum market. Similarly, PLDT, including subsidiary Piltel, and Globe are the country's No. 1 and 2 telecommunications groups, while Digitel is a far third. PNOC Petrochem and JG Summit Petrochem are among the country's biggest petrochemical makers.

In a paper on fiscal incentives, former economic planning secretary Felipe Medalla writes, "It is not surprising that much of BOI's tax incentives are redundant since those who lobbied for incentives were really much less concerned with correcting market failure than with raising the rate of return to capital invested by domestic capitalists hurt by trade liberalization."

Interestingly, five of the companies with the next 10 biggest projects are all independent power producers that made billions of pesos in profits out of what many consider to be onerous power purchase agreements with either the state-owned National Power Corp. or Manila Electric Co. These include GN Power, San Roque Power Corp., Mirant Sual Corp., Kepco Ilijan Corp., First Gas Power Corp, and Quezon Power (Philippines) Ltd. For some years, these companies were among the country's most profitable.

According to Reside, the projects granted incentives were expected to earn an average return on investment of 15 percent or higher.

Manila Water, the joint venture of the Ayala Corp. and UK's United Utilities, in fact made money on its second year of operations and, last year, launched the country's biggest initial public offering since 1997, when a financial crisis began in Asia.

Documents seen by the PCIJ also show that the return on investment in Globe's 3G project is expected to reach 15 percent in the second year and will rise to 40 percent in the fifth year. Similarly, Smart's 3G investment is projected to yield a return of six percent in the third year of operations, rising to 19 percent in the fifth year.

BOI managing head Elmer Hernandez, however, says the agency granted income-tax holidays to Globe and Smart because these were included in the Investment Priorities Plan (IPP), a list of preferred economic activities that is drawn up by several government agencies and approved by the president and the entire Cabinet. Criticisms thrown at the BOI for approving the incentives are misplaced, he says, adding that critics inside and outside government should have participated in the IPP process to exclude telecommunications from the list. "They are barking up the wrong tree," he says.

Some companies that have enjoyed tax holidays also say they share their benefits with their customers. For example, Manila Water's chief finance officer Sherisa Nuesa says, the tax perk the firm got from BOI helped reduce its borrowing requirement by boosting cash flows in the initial years of the 25-year concession agreement. Thus, she says, "we were able to begin expansion projects in the Rizal towns of Antipolo, Taytay, Cainta, San Mateo and others ahead of schedule." And because Manila Water is a regulated firm, benefits from lower borrowings were passed on to its customers, she adds.

Then again, Manila Water didn't need the tax holiday in the first place because income taxes are reimbursable expenses under its concession agreement. In other words, the company is allowed to avoid the tax by passing them on to customers, making an income-tax holiday superfluous. "The tax holiday has no effect on Manila Water's decision to invest," says Medalla, who also consults with the government's Metropolitan Waterworks and Sewerage System.

But one implication of fiscal incentives going to the country's biggest and most profitable companies is that it contributes to the worsening disparity between the rich and the poor. Says Reside: "Across classes, it is mostly capitalists who have mostly benefited from fiscal incentives, the poor and middleclass taxpayers have borne the brunt of the fiscal cost of incentives."

Medalla says that because the cost of collecting taxes is high, a peso gained by wealthy beneficiaries of tax incentives could be equivalent to as much as two pesos worth of foregone spending for infrastructure and social services for the poor. He told a forum on fiscal incentives in June, "The people who benefit from the subsidy would probably use the money on luxury whereas people who are deprived of the money — it's a question of whether they will eat for the day or not."

As it is, the Philippines stands close to the bottom in many global competitive rankings, especially in relation to the indicators of the quality of infrastructures and human capital, such as road density, public spending on education and student-teacher ratio.

Reside says that cutting redundant incentives can go a long way in improving the country's infrastructure and human capital. Every peso spent for education, for instance, raises functional literacy by 0.04 percent while each peso for road construction increases the length of paved roads by 0.14 kilometers.

"Ultimately," he says, "the country's competitiveness as a destination for both foreign and domestic investment lies not in fiscal incentives, but in expanding access to input markets, reasonably priced skilled labor and managerial ability (a particular strength of our country); access to ports (infrastructure); and access to vibrant markets, both foreign and domestic."

But Hernandez insists that when judiciously applied, incentives can be a crucial government policy tool for economic development. He says incentives can draw investments to certain industries critical for the country's rapid growth, help compensate for a weak or unattractive investment climate, and support local industries amid trade liberalization and globalization.

He also says incentives can level the playing field between local goods and imported goods that enjoy subsidies from the exporting country. "Thai patis (fish sauce) has overtaken our own patis even though the Thais just copied it from us because the Thai food processing industry enjoys enormous incentives from the Thai government," he points out.

With the fierce competition for foreign direct investments in Southeast Asia, the Philippines cannot afford to do away with incentives especially when countries like Thailand and Malaysia are offering much more generous incentives while having better infrastructure and educational systems, Hernandez argues.

PLDT's Pangilinan also says a drastic policy change on incentives may rattle investors. "What are you signaling to investors both domestic and foreign?" he asks. "That you can change it? Sure you can change it. But if you do that, why will I invest here?"

"Thailand does not change its tax laws," he says. "And Indonesia and Singapore when they say that's it, that's it. You can operate long-term on the basis of that environment."

In the weeks and months ahead, beneficiaries of tax incentives are expected to flex their power and influence once more as the Senate holds plenary debates on Recto's fiscal incentives rationalization bill.

In January 2005, the House of Representatives passed a counterpart bill with little fuss as it merely rationalized the system for giving incentives. But Recto's bill not only seeks to eliminate incentives for most domestic-oriented investors, it also plans to create a tax expenditure fund, a more transparent and explicit way of administering fiscal incentives by treating these as expense items. As such, they are subject to budgeting and accounting.

Exporters, meanwhile, can expect tightened control and monitoring of their tax and duty breaks. For example, income tax holidays or exemptions will be replaced with lower taxes (either a 15-percent tax on net income or five-percent tax on gross income) and rules that will help lower income tax liabilities such as longer periods for carrying losses in the initial years of operations, and shorter periods for depreciating fixed assets.

Imports of capital equipment and raw materials will continue to be duty-free for exporters. But value-added taxes must be paid on such imports, and refunded later after the goods made with the imported raw materials and equipment are shipped abroad. The tough measure aims to prevent producers and traders selling to the domestic market from availing themselves of an incentive meant only for exporters.

Already, domestic-oriented investors are objecting to the bill. But even exporters are apprehensive. They are horrified by the prospect of having to seek value-added-tax (VAT) refunds from the government considering that the Bureau of Internal Revenue and Bureau of Customs (BOC) takes almost a year on average to approve claims.

The bill addresses this worry by requiring the BIR and BOC to decide within 30 days of receiving the applications. It also creates a trust liability account, where the exporters' VAT payments will be deposited, to facilitate refunds.

But it is likely that the Recto bill will have a tough fight ahead. Medalla's scorecard says it all. At a recent public forum, he began his speech by saying that his record in fighting for limiting tax and duty exemptions — starting from 1986 when he was helping former Economic Planning Secretary Solita Monsod, to 1999 when he worked with Senator Juan Ponce Enrile — was 3-0: three losses and no wins.

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ERRATUM
GN Power was mistaken included in an enumeration of independent power producers that made money out of what many consider as onerous power purchase agrements with either the National Power Corporation or Manila Electric Co. GN Power has yet to start commercial operation and has no power purchase contract with either Napocor or Meralco. Besides, the enumeration referred to companies that ranked somehere between 11th and 20th in a list of companies with the biggest projects registered with the Board of Investments. GN Power was No. 2 in that list, and should have not been included in the enumeration. PCIJ regrets the error.
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PART TWO
14-15 AUGUST 2006
Tax Exemptions Bleeds Billions From Government
by ROEL LANDINGIN

BIG COMPANIES expect their income tax returns to be routinely checked by the Bureau of Internal Revenue (BIR). But firms that enjoy tax and duty exemptions granted by the Board of Investments (BOI), Philippine Economic Zone Authority (PEZA) and other investment-promotion bodies belong to a special category that tax examiners wantonly ignore.

"When BIR gets the returns, they put it aside and forget all about it," is how former BIR deputy commissioner Kim Henares describes the benign neglect on the tax examiners' part.

The lack of attention from the BIR, coupled with weak coordination with investment-promotion agencies, is allowing some of these companies to abuse the system of fiscal incentives. Many firms claim tax exemptions far in excess of what is allowed by the authorities, costing the government billions of pesos in foregone revenue a year.

For 2004, the BOI, which has been granting fiscal incentives since 1969, approved only P7.6 billion worth of income-tax holidays, according to Elmer Hernandez, the board's managing head.

But the BIR reported that income-tax exemptions claimed by BOI-registered firms that year reached P19.4 billion, an excess of P11.8 billion. In other words, P6 of every P10 income tax exemption claim filed with the BIR was unauthorized, representing loss of revenue for government.

The same disparity was evident in 2003. While the BOI approved income tax exemptions of only P6.7 billion, income-tax holidays actually claimed reached P25.1 billion. This represents excess claims of P18.4 billion, suggesting that P7 for every P10 claim made with the BIR was unwarranted.

The amounts look tiny compared to the government's total budget of over a trillion pesos, but the excess claims of P11.8 billion in 2004 alone is still higher than the spending program for each of the 26 government departments in 2005, and is just about the same as the Department of Health's. Only six agencies have budgets that are more than the figure.

Excess claims for tax exemption that the government seems powerless to check underscore how the fiscal incentives system put in place about two decades ago has assumed a life of their own and grown out of control-helping weaken the government's financial position and its ability to provide basic economic and social services.

Total tax and duty exemptions claimed by companies as a result of various kinds of fiscal incentives to encourage investments in preferred economic activities or help disadvantaged sectors of society has almost tripled from P118.4 billion in 1999 to P299.9 in 2003, according to the Department of Finance (DOF). It fell slightly to P282.3 billion in 2004.

Unfortunately, the government has little idea how much of the tax and duty exemption claims-which represent foregone revenue - are valid or not. More than half of fiscal incentives are granted to firms registered with the BOI, PEZA, Subic Bay Metropolitan Authority (SBMA) and other special economic zones or free ports. But except for BOI, the other incentives-granting agencies do not generate statistical reports on the actual tax and duty exemptions they grant to registered firms.

PEZA-registered firms, for instance, claimed income tax exemptions worth P5.9 billion in 2003 and P6.6 billion in 2004, according to BIR reports submitted to the finance department. But how much of these were actually authorized by PEZA, which, like BOI, is required to validate the tax and duty exemptions claimed by firms located in industrial estates and economic zones, is unknown because PEZA does not come up with the pertinent statistics.

"We have the figures but we're not conscious of adding it all up," says PEZA spokesperson Elmer San Pascual. "We're not concentrating on that. We're concentrating on investments and employment." He adds, though, that the authority has begun working to generate exemptions data because of the ongoing debate on fiscal incentives.

For sure, in a recent study that looked at the BOI, PEZA, Clark Special Economic Zone, and the SBMA, UP economics professor Renato Reside Jr. did find PEZA as having the lowest proportion of what he called "redundant" incentives that rob the government of billions in potential revenue. Reside considers tax and duty breaks given to companies that would have gone ahead with their projects even without incentives as "redundant" or "superfluous."

Incentives make sense for companies using the country as a production base for the export market because these are "efficiency-seeking" investors who could easily set up factories or plants in other countries. Thus, investment-promotion agencies that deal largely with exporters-like PEZA-have lower figures for "redundant" incentives. Incentives granted by the PEZA, in fact, helped attract semiconductor and electronics makers who now account for 65 percent of Philippine exports, up from 36 percent only a decade ago.

Still, Reside considers some tax and duty exemptions granted by PEZA to be superfluous because they were given to "resource-seeking" investors such as mining companies, which are attracted by the presence of commercial-grade mineral ore deposits, and call center operators, who come here because of the large pools of young, college-educated and English-speaking work force. These investors, he says, would have come even without incentives because the resources they want are here.

Of course that was not how Rod Watt, Philippine country manager of Australia's Lafayette Mining Ltd., which runs the polymetallic mineral processing facility in Rapu-rapu island off Albay province, presented his company's position in a 2004 letter he wrote to President Gloria Macapagal-Arroyo. Pressing for a presidential declaration of the mining site as a tax-exempt economic zone, Watt said such was a "prerequisite for project finance" and "critical for the economics of the project and therefore, its development."

In May 2004, Arroyo declared 42 hectares of the Rapu-rapu mining facility an economic zone enjoying exemptions from income tax, import duties and even local taxes.

But exactly two years after, Lafayette was ready to forego half its local tax exemptions and pay them to the Rapu-rapu municipal government, according to company lawyer Bayani Agabin.

The move was obviously part of the company's efforts to appease angry local residents and officials in the wake of the cyanide spills in October 2005 that triggered widespread opposition to mining. But it also suggested that the Lafayette mining project remained commercially viable even if some of its tax exemptions were taken away-making these incentives, redundant.

Redundant incentives worsen the disparity across the country's regions and reinforce inequality between the rich and the poor, Reside says.

He found in his study that BOI and PEZA-approved investments "tended to be clustered in the National Capital Region as well as Regions 3 (Central Luzon) and 4 (Southern Tagalog), which are already relatively well-developed regions."

"The clustering of practically all investments in well-situated and well-endowed areas has effectively prevented a true regional dispersal of industries," he says. "This preserves and reinforces disparities in income and employment opportunities across regions."

Comparing BOI- and PEZA-registered investments with actual business activities per region, Reside found weak or no correlation between the two in most regions except Southern Tagalog. He says: "If investments were not carried out as promised, then this suggests widespread abuse of BOI fiscal incentive privileges and rampant tax avoidance and leakages."

The story of Boni Comandante, the agricultural engineer from Dumaguete City, Negros Oriental who developed a novel technology for waterless shipment of live fish, is illustrative of how the fiscal incentives system is biased against small investors located far away from Manila.

He invented a technique for keeping grouper (lapu-lapu) and other fish alive without water for as long as 24 hours, halving the cost of transporting live fish in the Philippines while boosting the survival rate. His invention can potentially help thousands of Filipino fishermen earn more from the sale of live fish, which sell for three times more than frozen ones. Each week, Comandante ships up to one and a half ton of live fish to about 50 restaurants in Metro Manila, earning an average P1 to 1.5 million a month. The fish come from Dipolog and Pagadian in Mindanao, and Capiz and Dumaguete in the Visayas.

When he put up a company, Buhi Marine Worldwide Supply Inc., to commercialize the technology in 2004, Comandante thought about applying for fiscal incentives but was told that his venture, initially capitalized at just P5 million, was too small. Instead, he got some credit support from the state-owned Land Bank of the Philippines.

But when he and a couple of Australian partners put up a company in Melbourne to export live salmon to Japan, he was surprised when the Australian government even offered to refund his company one Australian dollar for every 75 Australian cents invested in research and development. He is planning similar ventures in Taiwan and Thailand.

Of late, both the BOI and PEZA have become more cautious about granting incentives in the wake of criticisms and controversies generated by some of the investments that received tax and duty exemptions.

Trade and Industry Secretary Peter Favila, who is also chairman of BOI, has agreed to allow the Department of Finance to review applications for tax and duty exemptions.

Similarly, the PEZA has stopped approving applications for economic-zone status for other mining projects pending a comprehensive review of whether additional fiscal incentives are still necessary to encourage mining activities. Indeed, many in the mining industry admit that mineral extraction and processing are profitable enough and no longer need additional fiscal incentives apart from those specified in the 1995 Mining Act.

PEZA is also said to be reviewing the Rapu-rapu processing facility's economic-zone status amid allegations that a crucial signature on the Rapu-rapu municipal council resolution endorsing the project, one of the prerequisites for obtaining an economic-zone status, was forged.

Environment and Natural Resources Secretary Angelo Reyes says the National Bureau of Investigation is looking into the case, adding that PEZA may revoke Lafayette's economic-zone status if investigators confirm the signature in question is fake.

He has urged the revocation of Lafayette's tax exempt-status after estimating Lafayette's fiscal perks will likely halve the government's share in forecast revenue during the project's six- to seven-year lifespan to only $59 million from $123 million, while boosting the company's share from $104 million to $185 million.

But these improvements may prove too transient, reversible and inconsequential in the long run. And there's still the BIR to contend with in many cases. For instance, even when the statistics on tax and duty exemptions are available, as in BOI's case, weak coordination between the incentive-granting agency and BIR hampers the government's ability to plug the wide loopholes that make excessive claims for tax and duty exemptions possible.

The BOI blames the BIR for the problem. Within a month of filing their income-tax returns, registered companies are supposed to submit the return to the BOI for evaluation and endorsement. The BIR is supposed to review the returns based on BOI's endorsement, and go after those who fail to submit the endorsement; but it does not.

The board's endorsement is important because it allows BOI to check if claimed tax exemptions are within bounds. There are many grounds for disallowing part or all of claimed tax exemptions. The firm's income tax holiday may have already expired. Or, the company could be claiming tax benefits on revenue and costs that are unrelated to the registered investment.

Unfortunately, BIR examiners generally do not bother to look closely into tax returns filed by companies enjoying tax exemptions because they feel that the chances of collecting additional taxes from them are small, according to Department of Finance officials.

When the BIR tries to collect the full tax due when the company fails to submit the BOI endorsement after a month, the erring companies simply ask the BOI for a late endorsement and pay the penalties to the board. "Sometimes, the BOI gives its endorsement after two years, leaving the BIR little time to go after the erring tax payer because the prescription period is about to lapse," says a DOF official.

According to Henares — who was former BOI governor before her stint as deputy tax commissioner — greater responsibility for checking the excess tax exemption claims rests with the BIR. "At the end of the day, they're the interpreter of tax laws," she says. "The BIR should insist: with no BOI endorsement your income tax holiday is no longer effective. I don't care if the BOI gives you endorsement later."

The BIR should also assert its prerogative to examine the return even if the BOI releases the endorsement close to the expiration of the prescription period, she says. "If there is no BOI endorsement, there is non-filing (of income tax return) and therefore the prescriptive period does not apply," she argues.

The notion that tax and duty exemptions are the price the country has to pay for attracting investments is so pervasive, however, that BIR officials are hesitant to collect higher taxes from companies enjoying fiscal incentives even when there are clear grounds for doing so.

Told by the DENR that its way of computing the two-percent excise tax on minerals understates Lafayette's tax liabilities by two-thirds, the BIR replied, in effect, that the country should just be happy with what it's getting and be thankful Lafayette decided to come here instead of elsewhere.

It its letter to the environment department, the BIR said: "Our records show that the above-mentioned taxpayers have generated revenues for the government which would not otherwise have been generated. We would encourage more investments like this, subject to compliance with other laws."