_
F_I_ _J_I_ _-_
January
]_
e
Research Fe3_ow, Philippine Tnstitute for Development Studies (PIDS). The author wishes to acknowledge Ms. Anlcia C. Sayos for her able research assistance, and Ms. Juanita E. Tolentino for word _rocessing support.
IMPACT OF BOI INCENTIVES ON _TE OF RETURN, FACTOR PRICES AND RELATIVE FACTOR .USEs A C_MPAKATIVE ANALYSIS OF INCENTIVES UNDER THE _4NIBDS INVESTM_4T$ CODE..OF 1981 (P,D, 1789} AND THE INVEStMenT INCENTIVE. POLICY ACT (B. P. 391 )
by
P._IO
1.0
intEOduction
Sinee
the
Philippines, part
of
first
termination
various
the, government's
such
law
passed
..(RA)35 or the-New
It
granted
four
"new
internal (4)
were year
and
taxes
exte_ed
fKom
transition
exemption Industries diminishing equip_nt
date
RA 901
from
tax
to
years
with
I_riod
during
which
the
exemptions
andl spare
parts
of
to Zero. was
as
was
The
Republic
Act
for
of i\_6. from
a period
PA _5 and
favored
to six
3127)
enacted
organi_tion
four
(RA
the
exemptions
included) ,of
in
scheme.
Industries
customs, duties,
gra_a_i_y.,.declined Law
been
period
supplanted
accorded
exemption
have
industries" not
the
,.tax exemption6
war
Necessary
(tariffs
from
sovereignty
laws
post
necessary
In .1953_
including
U.S.
industrialization
in the
and
years
industry.. the
of
incentive
Act
all
G. MANASAS"
of
pf_portion
passed,
on importati_s
by
privileges
a_ additional
In 1961,
the
broadened
industries tax
'of
four
of
tax
the
Basic
it,. pEovided
for
of
machinery,
"ba.s_c ind.ustries",untll
1.970.
.....
_Re_arch Fellow, Philippine _[nstituce for Development Stud.ie$. _"The _author wishes to a_kmowledge_,, An_cia C. SaMos,for her able research assistance, and}Is. Juanita E. Tolentlno,for word processing support.
•_2 _
i
In was
•1967,
the
passed.
It
important
is
generally
industrial
Philippines.
It
benefits
to
registered were
Inve_.._,_n_s
with
classi
introduce
as
new
"preferred"_
Board
in
range
of
,
the
priori_._y
%_hich
existing
the
and
other sectors
I_vestme.nts
i _e. in
most in
i_-dustriai (BO..!).
processes
!
5 [.86)
single
f_<_a_!
"pioneer",
or
those
as
Xnvestments
either
products
i.e.
in of
.
.._%ct (!C_
l.._..9i_l_tio.i_ enacted
a wid_
investing
the
fled
considered
incentive
provided
firms
Incenti"_es
those
that
the
market,
capacity
is
or
de_:med [
to
fall
short
of
potential.
The
5186
a
exhibit
rated
more
tax
market
important
fiscal
capital
depreciation,
ment,
domestic
cheapening
tax
credit
on
on
and
incentives
effect,
exemption
domestic
demand
in
RA
namely:
imported
ca_ital
export
a_Cele-
capital
equipment,
equip-
e_pans_on
,
•
_:einw.-,._.tmen_ allowance _...... _.t _ , .-._.......,,_,.. loss
Other:
and
e_,cept
income
._, _
a
Inc_:-ntives enacted
in
g_';,i__tedunder _:o
_ales,
materia
i,_
tax
ded.u;.:_,.,_..on from
preoperating
Act,
the
19_,0.
measure
R_5186,
,addition RA
co_pensating, semi-mam_
6135
net
to
m_.t
factu red
tax_s
on
rating
orga_iza"
_rom
to
provided
specific
_ipe
in,._'_:_of
.,
tax
..... ta:_es
only).
E x_,c,._.... ":- :entices In
:
exemption
p_.c_'-'.._..r projects
_o;"_..?_imentary
withholding
were ':<
taxaDie
expenee
:_tax (for
and
c_.'i.;ditfor _._c,.l.uded
Lr_centi_Jes
ca._:-y over,
tional
and
_"
the
Investa_sDts
Acu.
_.A
_" _.
of
the
incenti_,'es
for
_ax, credit
_n_ duties
products
_sed
_,_, I..
eg._al on
in
raw .the
-3-
produ_t£on -fees, and.
"for<.e_p_t
double
exemption
deduc.t_on., from
promo_/o_%a_
'eRpense.
'
the
._BOI.
entezl)r_se_. output
taxable for
prodo_erm;:'-expo_-_raders, with
.from
and _As
a
income
e_ports, serv_e
_or ._mUlt be::_p_o4u.cing
impost
and
o£. shi_pping .t_
.all
exporters,
prerequisite
must..--be exporting
tax
export
to.
at .._east 50
costs
exporter registered
,registratlon,
peEaent
of
product.s:..listed.--_nd_r
their
EPP
of
the
SoI. After.
the
declazation
of
martial
president_a:l.,
dee.r@e.s have
been
Investments:
and
Incentives
1973) Of
liberalized the
_a_.es-,
eXtende_.
production
ope.rati_nS'
to
addi_i_l_ Of
.an
._r
labor
_ii
from
i_ent"
of
d e_.U_tio,
of
exporting.",
firms
local
export
.promotional provided
for .the
availme.nt
of.
expansion credit
st.a_._._
an_. the
..f_
cost
expenses
.... for
to
5186,
shining and
the
..._f,..the ..the
._eduGtion
abolished and
RA
up
used
ulM]rading
double
on
c_mme.rcial
of.._e._h_l._
incurred
revenue,.,
under
.p_v!ded
i_come
materials
on
_.taxes _,and._ dU.tie,s,
per._, gross
the
(January
o_. t_x.
years-_ince
labor raw
_both
selal _mknufactu_ed..Lpr(_duQts
expenses,
umski_led
and
I0
several
62
income
availability
indefinite
t/ain_g, of
and
PD
conditions
specifiC.
!f=mm
deduction
effi_ciency
25
and
.1972,
amending
Act,
taxable
the
_ .raw ma%e._._ais
export
direct
from
in
promulgatea
required
.u_.pensating
supp1iee.,
value
the
deduction
•reinvestment,
in
EXpo_£s
law
a maximum the.
of
double
costs , limits
o_
of the
-4-
expansion per
reinvestment
cent
of
and
50
non4pioneer
(June
i974)
customs
anG
from
cent,
whose
depending
on
r_tio), granted
under
registered
enterprise
has
capital
and
up
RA
and
equity
for
fiscal
at
an
by
industry,
of
it
cost
PD Code,
taxable 2)
roads,
1789, was
6135
as
a
the
<See
Table
as
_eqU_ment
6135
a_s for
under
RA
incentives equal
credit
in
January
provisions
like
1981. of
the
to
RA
proper
l ) the
to
cent
of
llst
of
I00
It 5186
an
per as
by
an_
area
dispersal
amended,
direct
such
the
in
as
undertaken
as
least
{
for
pia_t
z
equal
}_nown
%.he
at i
per
i)
6135
infrastructure and: the
certain when
of
33.5
:(the
amended).
loca_=s
income tax
of
necessary
otherwise
issDed
codified
RA
entitled
necessary
waterworks,
and
was
and;
of
BOI
e_cess
fea_s
additional
from
exports
in
producer
the
following
d_,ction
two
under
export
designated
the
profits
least
incentives
If
of
earns
CaPital
of
capital
485 from
_50Q,QQQ
application
5186
a _aid
_x_mp_on
exceed
50
expansion : PD
i
_500,000
;251-
imported
imported
the
RA
for
full_ on
assets
withdraw
incentives
of tax
firm's
to
respeatlvely_
instead
total
the
percent
respectively_
compensating
firms
I00
projects,
partiai_
and
to
worker
_r
pioneer
granted
equipment
per
- i00
d_ties
reduction
allowaD_ce
the
to
a_itional labor ae_t
cos_: Df
_h_
port_:_rks flrm_
Omnibus
_nvestme.nts
revised,
integrated
and
RA '; 6135.
The
-5-
fiscal as
incentives
those
granted
In passed is
by
st_ll
1983,
_he
related
depreciation
eqUipx_nt still
and
taxes five
(5)
firms
c_pital
and on
supplies
defined
and aS
equipment
has
only
loan
and
of
value
of
and
the
net
and
and on
ex_)ort
sales
of
firms
net
to #.he
these first
taxes
on
incentives
value of
are
non-exporting
Two
c_ed_t
value
An
duties
utilities tax
capital
equivalent
i.e.
lesslcost
(2)
While
equipment
payable
the
accelerated
non-exporting
operation
sales
fiscal of
imported
capital
_n
which
Most
e.g.
on
firms,
credit
was
allowance.
t_xes
payment
Act
(8)
l).
withdrawn,
f Eee
same
scheme, eight
114 (Table
equipment.
of
Policy
incentive
equipment
defer
capita]
value
Incentive sew
the
6135.
domestic
Capital
_x
basically
reinvestment
commercial
(I)
as
were
interest
to
equipment
exporters
earned
raw
are which
materials
and
depreciation
of
local
of
less
imported
content depreciation
raw
materials
supplies.
Table RA
Of
new_
components, capital
an
allowed
defined
1789_s
are
RA
B0_,
exporting
on
and
entiEely
PD
Credit to
duties
machinery
ana
tax
years
aze
the
duties
obtain
and
by
expansion
available
essentially
The
incentives
from
and
Investment
to
and
exemption
5186
legislature.
compared
i789
under
RA
administered
capital
of
under
April
incentives
is
provided
6135,
1 summarizes PD
1789
and
the BP
391.
fiscal
incentives
under
RA
5186,
(
,_
,_
/
f
/,
¢
/
/
_ tll
/'.
/,,
/
/ls,_t#
/'
t
/<
/
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k
.p
,,._.,_. _ ,_,_liltT, t lii
,
-
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Im
_-
llililllilit "1 "ml.ll!:l
I_
:t'llll_L _ _ll
at', tim
.,,.w mmmIM_m_mmm _ml, amaV ,_ I
/ ._
i
j '
.......
"l
_IA.Inl)I"d
1
tSt d8
6M,,tOd
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_
t_
9UIGUll
,ad'_L'_lal _Rt.GI Ila_tlaP_U_lNl"a_3BL4
PioMm"_kzv.Pion_ Pi_
S. tahoe t_inlq m-' proms ,qsivalmt to. mrs _m i_ diwet laboP
j
j
the
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¢¢ili_mJ :._
iota]
_;
_
_.
|oral mpo_ _. _ _ _, In h_ case ¢¢_ local _,
j
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mtm'_!
iacla_! in t_ em-
_.,aimof _
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rialt
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i_ the _
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in_ e_-
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m+.l_eJi' _+m ma++_. ...+_
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lqoe_-RonmrPiaur
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Pi,nrmr lksev.Pi,_,mrPiaMw, ,_meer
lwi_
liok_'Pieum' Pi_:_fa,' __
Pi,mmv l_"_,,_ww'
,,ii!,
?,: l_'_li_io_ml ded_L_i_m..
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D_e_ nln _r eR of _ili_i_
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Pia_m" ikx_i_
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il'¢_l_m _ Pi_Nr _i_'_m'
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_mfaehad
Tie _ltlllt i/Irllt I f_ip
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lli_
i_.Pk_e-
PiNs,
_
Piomn. iio_liwil,
nn u ,
i"_ /litiaml i_. tim m _ _ilq ormmf ' turiq pli_
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Qf_
lt_,-li¢_t_
i
7 {|llS _ _ have_
7"
q ad _
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tri*. _i_ i_ clfi..,.tlr_
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n!
..
lllilic _li!| _"
litilm.
:"
i4t, llli lillii lllllivil_mttO saIn_ C_
_inl fic i
i 7
d
i
V
I'
<r
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_"
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_'2
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--*<,'_;- > •r i
:
_"
"*
""
•
v.
vi
i
t i' I
!,
,r
--6-
The
impact
as
amended
6135
rel_tive
BOI the
use
above
effects
O_
incentives
rate
of
(1979).
the
the
on
f_ctor
in, Gregorio update
Of
z-egi_
The
return,
ere_
purpose
mentioned the
of
wor_
various
unde$, ,R_ factor
,_:t.e_ris_s of
by
5186
the
gz'anted
RA
prices was
and
analyzed
pre,sent"is%udy
quantifying,
i,_ce_._ves
and
is
to
agd. comparing Under
PD
1789
?
and
2.0
BP
391
o, these
three
variable_,
MethodoLOgy
The
certain
_
thal., " " ' ....
me_M_dology
extels_ons
and
i_
_._mp]oyed ,
modifications
coasideration
incentive were
schemes
ra_
various
investment hand,
in of
the
on
,that
the
co,_ts _e
cost
used
to
analyze
leve_
capital
and
factor
decisions
_.. relative wag_
rates.
on
of
capita! the
choice the
factor
',
'
The
_o_c.ept
of
__he
of
the
. based
on
t/%e. flow
of
other
elasticity o,f the
has;.._._ On, _he,,
prices,
the that
i ,. ,On th e
e.f._cts
hiring
in
.t_%e impact
and
to
,
6135
of . fir_S
industri.es/sectors user
that
trace
is
;,introduced
pr0visi_ns
influences,
of
on i._ative
determined
to
profitability
incentives f_rm
used
â&#x20AC;˘
tile profitâ&#x20AC;˘ability
to._rticular
substitution
are
is
,L
study
RA, 5186
prev.i..c_usstudy.
return
incentives
premise
_,_ effe:,:ts of _-_.,_
adopte,._ after
.not tackled
inf2ernal
the
;
into
i %hie
have"ibeen
'
take
in
;
of
various
,i_stu, l_te
,O_ factor i.,e, user
'services ,cost of
'_ 7 _
2.1
The
Rate
of
Return;
:: :';,
One is
of
the
the m objectives
promotion
of
of
the
investments
BOI in
_:
...
• ,, ,
...,
incentives
priority
scheme
industrial
.,,,, ,:[,
sectors.
The
investment of
can
said
in
be
this
incentives by
o_, some approach
%/ie direction
of
%he
their
of
of
o
quantizylng
_asure
are
base
measure
on
.,
evaluated
Entrepreneurs some
of '.
incentives
Implicit
I0
effect
..,'
the
_pact
profitability.
following
assumptions
in ve s _Jne_. /_e_ i s i on s
on
p_zof_tability;
4_
_.
They to
3.
perceive the
They
the
incentives react
to
additional as
the
such,
profits
attributable
and
incentives
_ induced ,°
in6rements [.
in
profits
respond
in
to
aris£ng
the
Changes
from
same in
manner
the
that
level
vat iat.ions
of
in
_/%ey
would
profitability
other
economic
!i
variables,
It
other
should • be
necessarily which
is
constraint invested; will
on, but
influence
which
are
1978,
Hooley
being
no_:,ed that
alter the
thir_gs
the when
the
amount
there
is
& Sicat
by
i:n_entives levi•of
domestic of
so_e
investmen_:.s
favored•
fiscal
aggregate
case
equal.
said
19_7).
evident:that: _O,
incentiq_'S
not
inv@stment,
s__ngs
resou=_s
to flow,
will
imposes %hat
a
:!can_
inceneives :.thai sectors (Shah
&
Toye
-8-
The can
be
i.
one
impact
measured
of
may
of
any
in
seward!
of
application
2.
the of
assump_.ions
on
timing
the
and
profitability
ways:
in
inw_stment the
the
on
the internal
resulting
incentive
initial
ÂŁrom
gi,ve_
Qf
the
the
specific
investment
n_lgninude
rate
cost,
the
and
the
increase
in
benefits
involved;
one
may
the
project
compute
the
's
net
assumptions
with
investment
cost,
the
incentive
comp_*'.e ,_he increase
return
costs
given
benefits
_.ncentive p=esent
regards the
and
induced val_e
_.o the timing
costs
qiven
specific
discount
and
involved;
t_e
rate, mag_itude
and
the of
I'
w ,] ,
3.
for
a
level the
given
internal
initial change
profit)
rate
investm_: in
stream
the
of
retur_
cost,
one
bef ore-_ax
arisin_
from
the
and may
net
a
given
comp_te revenue
availment
of
for (or the
incentive.
The analysis. incentive, of
return
third
procedure
'Thus, the may
if
the
familia1_ be
is
followed
_n
t_e
ensuing
firm
does
_O_
_va!il
formula
for
the
internal
consid_redz
of
any rate
(la) n
{l-u)x
j t
â&#x20AC;˘--,, q = 0
J (l+i)
where
g
is
the '"initial,
acquisition taxes is
the
corporate
x
is
the
cons_-ant
the
internal
n
is
the
life
is
the
and
tc td
tax
#.he cost given
q
is is
capj, ta_.
or
inclusive
the of
income annual
rate
rat.e,
pre-_:_-ax
profit
of
return,
.and
s_...,,_n of the
capit_l
asset.
an:_. tariff
relatioI.i of
tax
shream
incentive,
is
acq.uisi%ion
where
the
i
Philippines,
outlay
and "dutie_:_0.
Without
taxes
co:;._-hof
Tj
Given
inv¢..stment
between
capita],
system q
exclusive
and of
in
the
y,
the
duties
and
by:
= (! + tc)(_ _ td) y
the the
compensating tariff
rate
tax on
rate
capital
on
capif, al
goods..
goods
ThDs,
we
may
a!terna_=ively
._rite
_q_atio_
(!a)
as
follow_ (ib)
n
(l-u)x - (!+tc)(l+ta)w 0 (I+i)
OUr
procedure
is
to
solve
for
x as
a
function
of
q
:[,
(or
y)
!.
for
assigned
Next,
we
constant is i
compute
annual
availed
for
variants
describe
the
of
A
provide
the
sam_
the
and
value
I
K
if
,
so
of
two
k n
modified
impact
the
incentive
'
to
k
is
values
of
and
as
incentive
the
equation i.e_
values
of these of
from
of
assigned
when
measure
i
stream
equation
comparison
some
n
profit
si_uation
operational_ then
of
for
pre--tax
of,
from
values
wou].d
incentive
k
f
on
the
of will
enterprise's/project's
The
modifications
return
formula
be
individual
2.2
Another
of
â&#x20AC;˘ i.e., We
of
user then
a
cost
translate
on given
of
following
section
and
In
one
at
Relative
the
order
BOI
to
assess
employment,
we
incentive
capital, these
internal are
Prices of
basic
incentives
analyzed
objective
incentives
effect
the
the
are
employment.
various
the
in
Factor
on
various
incentives
Relative
generate
made as
described
profitability.
c,
changes
on
a
rate
introduced when
time.
Factor
Use
program
is
the
to
influence
first
evaluate
factor
prices,
and
the
in
c
wage an_
rate, w
w. into
-11-,
changes the
in
the
elasticity
The the
of
to
capital
the
the
fixed w
were
zero,
i.e_
any
given
sector,
of
macro
the
studies,
(Berndt 1971).
Also,
that
and
labor
On
substitution exist
in
raw
packaging
and
storage.
opportunities developing
as
would for countries.
capital-labor
the
wage-cost
any
change
i_a
on
and
the to
micro obtain
from _.968,
from to
hand,
the
.4
1.5
are data.
than
micro
peripherical
activities
results
of
that
long-
studies capital
semi-finished
indicate
labor-capital
to
Williamson
between
the
the
the
time-series lower
a
_n
studies
be
c
empirical
possibilities
to
were
Quite
tend
Thus,
of
proportions
range
and
of
elasticity
substitution,
those
material_
seem
the
Sicat
.the other
of
studies
defined
cross-section
estimates
handling
of
, is
the
out
of
1969_
than
estimates.
show
carried
from
higher short-term
g
employment_
estimates
Clague
Estimates
generally
of
then
both
elasticity these
1962:
concept
factor
on
studies, been
if if
r_o effect
have of
the
in in
course,
levei_
estimates
chanÂŁe
pero_uta_e_,_g_
nun_er
via
substitution,
percentage
_,'i_. have
large macro
of
Of
within
or
ratio
substitution°
ratio.
substitution
term
of
elasticity
ratio
ratio
labor~capital
like goods,
both there
substitution
types are in
-12-
By
definition,
theelasticity
of
_ubititution,
0 ,
(2)
wh_re
K
is
investment,
L
is
labor,
W
is
wage
C
is user
rate,
cost
and
of
capital
,[ If
the
wage
rate
is
held
constant,
(2)
reduces
to
(3a)
d(_tL)(KIL) -dclc or (3b)
d(L/K) .... = _ (a c/c). (L/K) On
the
other
constant,2
hand,
if
the
user
cost
of
_apital
is
held
becomes
(4a)
a(K/L)t(K/_) d w/w or
"
(4b) d(KIL)I(KIL)
_ ad ._
Expressions impact
of
selected
w
incentives,
on
_le
approach
function
that
of
increase
in
affects
employment direction
stock.
However,
sDbstitution
borne
in
mind
a
scale
of
effect
for
of
the
gi v<_. n
c'n
is
level
the
of captures
incentives
wags
an
rate
that
more
the
pr_ram
on
_t
program in
the
have
that
the
sense
to
complement of
labor
should
,ight
_he
level
the
orly
effect.
increased
sector
an
_.-a_ital in
intensive
a
than
sectors.
concept
of
to
tax
relationship
revenue
or
t'ha_
capital
priority
that
pr/:_,"_s and
l_r
the
in
the
originally
for
demand
the
increase
within
or
i_
induced
The
paragra_h_
incentive
is
by
bot
employv_nt
labor
about
preceding
employment
the
the
ratio.
capital
the
direct that
Drought
approach of
measure
seine n_ignitode
incentive
alternative
the
-C_e
this
to
capital-labor
in
cost
used
c,
factor
by
i.e.
be
_r
employment
effect
employment,
be
relative
ei%he_
opposite
can
outi[ined
assumes
demand
(4)
in
implicitly a
and
Changes
The
is
(3)
the
user
policy
cost
firms after
maximize tax.
by
Here,
of
net the
is
capital
Jorgenson
the
capital
parameters
neoclassicaltheory formulated
of
(1963) present user
cost
and
well
..i_s J0
defined
accumulation which value of
assumes of
capital
net or
-14-
the
implicit
unit
of
rental
time
is
of
one
defined
unit
in
the
of
capital
following
service
per
equation:
(5) q (r+a)(l-ku- z) C
where
r is d
the
is
k
is
rate
the
of
rate
the
interest,
of
replacement
proportion
permitted
as
of
of
capital
investment
additional
stock,
expenditures
deduction
from
taxable
income, z
is
the
discounted
depreciation
value
charges
of
the
stream
generated
by
of
a peso
of
investment, q
is
the
price
u
is
the
corporate
the
effect
To we
trace
first
determine
hand
side
then
we
explanatory detail
in
of
(5)
which is
the
following
capital
of of
any the
question. section.
tax
given
the
with
and
rate.
incentive
variables
by
(5) in
goods,
income
affected
differentiate variable
of
on
said
the
is
to done
c,
right
incentive
respect This
on
in
and the some
-15-
3.0
Analysis
In the
BOI
in
terms
prices
this
section,
under of and
PD
+.he variousincentives
1789
and
their
effects
relative
factor
BP
391
on
are
_%e
use
extended
analyzed.and
rate
of
of
any
by
compared
return,
given
BOI
factor
registered
firm.
3ol
Accelerated
The 1789
accelerated
enabled
assets
to
normal
rate
expected be
a
limit if
is
means
that
that
government return that
as will
no
tax
â&#x20AC;˘benefit
generally
the
be
assumed.
the
ten
years
or
less.
If
of
the
As
a
to
That
may
unless
income he
be
on
has
taken
to
over
consequence, it
should
rate be
which an
income
to the of
clear
taxpayer
against such
at
and to
the
the
five
accelerated
hold
turned
be raised,
may
depreciation
Thus,
be
arise
assets
between
up
purposes
taxpayer
otherwise
will
fixed years
before.
sufficient
deduction.
fast
years,
tax
fixed
as
Speeding
than
taxes.
depreciate
PD
twice
nur{_er
frGm
would
have
ten
under
than is
life.
generally
eventually offset
any
to
more
life
over
enables
funds
not
than
date
provision
firms
more
deductions
depreciation use
of
expected
earlier
1789)
depreciation
expected
depreciated and
(PD
registered
life
years
an
Depreciation
will he
can wii_
-16-
Following effect rate
of of
the
the
accelerated
return
equation
will
(i)
is
rate,
outlined
in
depreciation
now
which
depreciation normal
procedure
be
is
provision
evaluated.
The
applicable
allowed,
say
times
the
on
the
variant
when
h
2.1,
of
accelerated as
fast
as
the
is_
(e}
+ n{h j=l
(l-u)x
+
'
(6)
is
solved
of
and
taxes,
is
to
yield
both
capital
the
n = i0
annual
before-tax
varies
from
return
is
20
years,
- u(q/n) j
rates
and
20
4.9
years, profit per
cent
varied
from
if
asset
return
of
life
in
a linear
the
reduction
due
to
to
of
6.6
to
depreciated
duties
different asset,
assumed
n
here
depreciation
of
fashion.
in
the
accelerated per
a
project
the is
actual
(as
of
under
It
(i)
profit
investment
years).
8 pe_r cent is
the
of
the
when
exclusive
if
and
proceeds
obtained
pre-tax
cost
needed
accounting
equipment
annual
length
10
the
For
is
various
(alternatively,
the
results
investment
that
on
the
for
the y)
assumptions
=
(l-u)x
(l+i)
1 summarizes
function
that
-q=O j=(n i h)+l
(l+i)
Table and
u(hq/n-q/n) J ....
cent 18
depreciati_ as
per
four
required
the
rate
cent. times
of
For as
n
fast
-i.7-
as
the
profit
actual
rate,
the
neeessary
c_.nges
from
I1.6
Table
2
project
with
average
of
project
with
average
of
To
to
yield
indicates
that
the
ten-year
life
span
percentage
percentage
trace
the
is
rate
of
_' _ w.11x
pre-tax of
re:_.u rn
return
of
!,ncrease
whi]_e
by
that
span
w::tl, l rise
of
the
an
of by
a an
points,
effect-
provision i5)
life
annual
r:_.tes
];oints
a t_enty_ye,:._r
2.1
the
various c_ent0
5
14.1
in
per
a I
depreciation equation
to
decline
on
the
defferentiated
usec with
accelerated
cost
of
respect,
to
capital_ z:
(7) (r+d )qu i C =
the
Without
the
present
value
charges,
would
_,Z
accelerate4, of
the
depreciation
provision
stream
depreciatioD.
of
be
J
Zo
Depreciating
째
=
j'=i[ _,
h
:l/n
times
l
as
'2) i+ "
fast,
i v
n/r
.bin
.
z i
would.be
z,.
, " 17a-
Accelerated
Specified
Table
2
and
_he
Depreciation
Capital Cosh, y_ Required to
Rate
of
T?,:,:clusiveof Yield the Return
i_ate of
RetUrn,
PD
1789
Duties and Taxes, Specified Rate of
_ _-_-0-............. n _o Return
•
Without the
With the
, ........ Incentive
Without the
With the
inc_ntive
Incentive
Incenti ._ .v_l21 _:_.
8%
.324y
,309y
.221y
.198y
10%
.354y
.335y
.255y
.225y
].2%
.384y
.363y
.289y
.25%y
14_
.416y
°392y
.328y
.286y
15%
o433y
,407y
.346y
.303y l
16%
.449y
,422y
,36_y
.320y
18%
.483y
.453y
.405y
.355y
in ROR from an original of 10% (in percentage points) •
Assumes
I_35
u =
.35,
tc
Asset is depreciated asset ks depreciated
=
.I,
td
2.0
=
.28,
i.e.
q _
at the maximum allowable evenly over 5 years.
1,41y
rate;
i.e_
-18-,
(z i"- z o )
is
accelerated
labor
Table
as
per
.5
other
variables
to
Tax
14
per
of
enjoy
a
the
f_-om
user
the
co,_t
_._eobserve
the
cent
in
:9_e_
for
an
3 are
of that
cost
_sset
of
Wif,h
_
that a
within
seven
in
tax
machinery
and
from tax
initial
project, is
pushed
<o_ on cost
is a
_asured,,
cj
is
varied foz"
the
years
fully
tariff
capital exempt
reduction
of) capital
requirement
Consequently,
EqUipment
from
enterprise
the
imported
upwards.
be
Capital
no_-pioneer
enters?rise
incentive
values
on Imported BP 391)
red_ction
compensating
investment
and
this
employed.
percent
pioneer
investment
when
_a_ze parameter
Table
on
of
(L/K.) can
obt_ximed
the
registration,
the
impact
capital,
granted
Exemption
reduces
the
results
.[,5 <nd
compensating
taxes.
Of
the
fifty
a
(3b),
uni._
1789
date
on
:_.mD'_,ct. on
r_;duces
Exemption/Reduction (PD 1789
PD
while
as
equahi.on
_.rom
and
much
4 gives
3.2
arising
.life span.
[]sing on
the
deprecia_.ion by
year
z
accele:_ra_i.ed <_e.p_ecia_:ion.
accelerated
20
in
incentives,
3 sums_._.izes of
Capita.1
change
depreciation
Table capÂŁtal
the
of the
rate
the may
duty
and
equipment from
such
import
duty
equipment any
given
of
return
- 18a-
Table
Accelerated
Depreciation PD
3
and th_Ueer I_89 _I
Cost
of Capital,
n _ Depreciating
over
.670
c
-.04q
-.02q
0
-°023q
0
c/c
-.141
-.074
0
-.072
'0
.
•
313
i
670
over
z
,
,502 ....
_ating
i0
•
" "
502
Assumes u = .35, k = 0, _ = .15 (for project evaluation purposes, an opportunity cost of capital of .15 is used by _h_-_: National Economic and Development Authority (NEDA).
- 18b
Table
Accelerated
Deprecla _ing in years
-
4
Depreciation and the P.D. 1789
_-_ _ =
.
o=
5
-,070
-.036
I0
-.037
0
Labor
/ 1.0
-,141 --.074
Capital
Ratio,
(L/K): o=
-.072
-.211
0
-.ii0
1,5
-.10g 0
:
-19-
On
the
exemption
other
of
hand,
duties
equipme:nt
for
producers
a deferment
extent
of
pionee_
in
and
I00
enterprises, date
waived
.taxes
are.. , due
To
of
(I)
of
compensating
the
on it
imported
only
payment
percent
foc
in
equal
the
non
full c;_pital
ai,lows
of
domestic
same
to
pioneer
within
registration.
the
we
whe&
taxes
,provides
five.
Repayment .#
installm_ntsâ&#x20AC;˘_ :
of
_'_nthe
the and "<5) the
first
of operation.
-analyze
profitability
391,
respectively,
from
(:5,),years
BP
producers,
years
five
and
exporL
50
while
look
there o_
n
.
of
._t variants
is
tax
impact
a
full
t_iS of-;(I).
exemption
imported
incentiVe The
eguivalent
fro_uties
capital
equlp_ent
on
and is-
(8) j_l
j
o,
On when taxes
the
.there on
other is
capital
hand, a
50
per
equipment
_he
variant,
cent
of _I)
reduction
tha
in
duties
and
is:
(9)
=
-
(l+i)
I +
\
+
2
y .;
2
= .','0
-20_
With _nd
defer_nent on.
d0ti_s
to
the
capital
extenh
oflO0
per
cent
of
• taxes
.equi.pn_c_nt, (].) keco_le_._: (I0 _2
n
s
_i_f_'_ defermen4= and
dut:..ies_n
to
the
y
ex.t<gnt of
50
per
_,._J::_ ..... _....!.i.i. ,_-_ °_... Li3;_.z:nt,. -(I)
cent
of
taxes
becob%es ..,
(l.t)
,
5(t+i) (?_e
_.,=._>res43,"$t::._ the
fract:ion
of
tax_=>.:.; and tO
• a(:q.+.li ._-;:.o_'t
the
(Tutie_,
_':i_el.d
;}z_nual
pre-t.a:_
_ profit,,
. .....< o._.Cai",.[tadl, _,_<"l __o_:,_ ;: ... _.;.... u_ ive
y_, ti',,e. _..i&
.s[.,_ec_i_.:..e(._ ...... _'
.requ,i.red
,.'.,_ -_: -'et_r'n
i,f
a_J :.,.',-"+_._,,+,..._._,,.e•.t.' c:;.-,". t..irtdeY
PD
t.7011_.
that
of
by
nine
7¢/..nts
_neJ
pro jects..,
by
-ti:_xea and
mo.._e,than
w.ltn"_
re_'3_ec-iTi-_.i_ _,+_,,_ _ -+ -...,_.
.r_tt_rn •.Tc0e." 5,5
_.._ _-, _._.and
_s
_
d,_ties
on
percentage
1,wentv,..vear_, ..
;E_.._t;_. i.t..:Jrthe capital
a of
t_'le _,r,.._'jec.tis
w_, <:.'.!_ ._._ric]
tTO.iL_ ,i:'_c@.nl.ive. .vl--rate
as
w_.thout
._..his (9)
reveals
_,).er_.entag,.._
pointS, life
for _Dpans,
%cJ._.! e.._em.ptloi=_ . on
equipment,
with
.the
51<. .'
'j.
per:zent
._edue_ io_
•equi.;ment.,
_he
_pro.ximately fc_.
n ._ I0
on ra+.e
4 end and
+,.'i xe s
2b
of
and return
<+_,5 percentage
years,,
duties is points
on
.ca_Jita i
increased
by
£_espectively
Table
Redu_tlon/Exemptlon • Capital and
-"Rate of
5
of Import Duty and Taxes on _ported the Rate of Return, PD 1789_ /
Pre-ta Profita, a Proportidnof capitailcost"xclu"i'4e . Of .Tax.e_s,...y_t Require_
toYield
spec!;-fi.ed_-
of
Return
._.i:: •:--
m )
Return
5%-0-n
Nith'but
=
I0
Without n_,• -20 50% the Reduction Incentive = •..
- _. __. _ull Exemption
the Reduction Incentive. ' ,
Full Exemption ;.
8%
.324y
o229y
.221y
• 188y
,157y
10%
354y
250y
2_5y
217y
181y
_
12%
,384y
°326y
_272y
,_91y
,247y
,206y
-)
14%
.41.6y
,354y
.289y
o328y
.278y
.232¥
• 295Y
..246y
15_ _...
_'_6g,
._75y .200_'-
,433y •
:- i,) 4_49_" _
.,. •i8% -8 in ROR._from• _tn or£gi_i .of. 10% -_in percentage points )
•368y [:
•,._B3_
.
_
.307y ', .
.
-_.
._ -
.
-.
,346y :
•
'
....
.382y
.31By
.3g_y
.3%2'y
;259y
. .41/0y
.3._2y
,405y. " ""-.345y : _87y_-_..-,.-:_..._ . _..-.
" 4 +0
9= 0
'
2:5
5, 7-
Table
6 shows
the
estimates
of the
a_ual
..p_"_:.._ax
.,
profit
as a pr_rtio_
before
duties
under
4Qd
of, the ,taXes
.i_.$.
and
per_age
•4.3
an
The
p.:o_eer ente_pr_les n
":i;fO:c specifled"Taees
ofl _e%u.rn
= lO
poi_ts
391.. " _:'
Of .6.8per*enh.age
_£n_s
. .
pOi,tS with
a_et
rate
af
in the
:.
_a_e :e,f "retuxn :'Ifor
if n _I0
li:_'_._f;1_.._..._.20 .;_a_rs
return
goes ,Up. by
(.7 percentagei
Of
expo_
_. _n '_
po_.m%S :if'
if n-=.:20). Wh.ile
tl_a_. :of
point
'On _m_0rted
(5) wi_.h respect
(r+d.)(l'kw_uz')
n_a
1.2 percen_ge
(i.i percentagepoints
redu_:tion/ex_m_ion differentiate
=provi:sio, 0_BP
:
proje_;
_,xemption.
:
equ_,_ment
increase
• ,
._xport
cost
•
Of capita
defer_en_]exemptic_
incentive
" , :
&fn
_ 20).. ,'
c_pltal. _.ui_z_,_,_,.:!we to q:
q
(1-.u) :
NOw,
with.
ImpOrted
fUlii:".e=empti_n-"from caplt_.l,
taxes
and.
d,ties
on
.......
Exemption/De_.ecment
Annual Specified Rate of Return
Pre-Tax
Without Xnce_f._.vgQ
of and
Tab:_e
6
Duties and Taxes on Imported Capital the Rate of Return , BP 391 a/
Profit as a Fraction of Acquisition _ & Taxes, y, for specified Rate of n = I0 50% • Iru)% _ _il W_th0u
__D=f_rment
Deferment
Exemption
Incentive
Cost of Return
Equipment
Ca-_t_a[ n
t"
_50_
=
Exclusive
20 ....-100%
Deferment
Deferment
_
D_uties
Full Exemption
8%
.301y
.291y
.2S5y
.229y
.205y
.199y
.195y
.157y
10%
.328y
.316y
o309y
.250 M
,237y
.228y
.223y
olSly
12%
.356y
.3_2y
.333y
,272y
._70y
.259y
.252y
°206y
14%
,_86y
.370y
°358y
,295y
.305y
,291y
,282y
,232y
15%
,402y
.383y
,370y
,307y
,322y
.307y
,297y
,246y
16%
,%!7y
.397y
,383y
,318y
.340y
.324y
,312y
,259y
18%
,449y
.426V
.409V
.342y
,376y
o357y
,343y
,287y
!.6
6.8
0.6
I.0
4.3
|
m
A in ROR from an original of 10% (in percentage points)
Assu_,_es
tc
=
0.9
.I0:
td
_
.19,
_
=
.35
!
-22,-
This
implies
_/%at (15)
Aq
I - 1
q
With
e
(l+tc )( l+td )
the
capital
50
percent
reduction
of
taxes
and
duties
on
equipment,
(._6) _g -- (l+tc/2)(l+td/2)y - (l+tc)(l+td)y which
again•
implies
that (i_)
_q
(i+_c/2_(1+td/2)
q
With
(l+tC)
d_ferment
capital
in
the
(l+td)
peyment
of
taxes
and
duties
on
equipment,
(18) S Aq
_
Y
+ Y
(1+tc/p)(l+td/p)- i
_" j_l.
-
(l+tc)(l+td)y
j
5(I+i) and
5 1
q
_
j_z =
q
+
•! (z+tc/p)(Z+td/p)_• z J 5(z+i)
(19)
.... , .....
-
i
-23-
where
p
and
p
is is
equal equal
Ino _he and
to to
period
I
in
case
2 in
case
when
PD
' td _'__':._8_- '' This
of
100
of
50
1789
â&#x20AC;˘ is
cent
reduced
impllies
reduction
:equipment cent.
'
" The"
at
full
program.such
present._..These
the
user
With
50
cost per
per
duties of
and is
deferment
deferment deferment.
effect, ... to..=
with
on
BP
t_e
imp0rte it
tc
=
.I
suggest
taxes
on
and
td
.ÂŁhat
by
the
user
cost
cent
while
with
I00
W!_h
.19, _ _II
per
that
cent.
r _
.15",
of
capital
per
cent
is
recuced by' 9'.18 per
deferment,
it
goes
down
by
cent.
T_ ratio
is
elasticity -capital-
impact
of
presented of
the
given
BP
391,
on
by
3.9
provision
Table
7 for
substitution. would
cent
this in
ratio
per
ratio
=
,_
then
pc:
29
equipment
23.7
assuming
by
....... With 'the
capital
reduced
per
d capital
declines
3.91 coincided
and
o_
50
'.'
16
.i
. .
cent
that
capital
cent
in
ta:xes
parameters
.f_om
cent
exemption,
of
cent
_h_t, _/_e !i@ser,_, _,i
and
implementation
reform
exemption
15.1
.in duties
whi_4with
per
tariff
by
per
was
.
capital
per
the to
parameter
35.5
hand, per
cent.
th,e labor
varying
Under
decline
other
on
PD
anywhere
reduces
values
1'789, from
assumptions
of
the
7.5
of the
capital
to
this
the.
labor43.5 paper.
labor-capital
- 23a -
Table
Reduction/_efer_nt/Ezem_ion Capital Equipment and a_ BP
the 391
?
From Taxe, .and Labor'capital (In Per cent)
Duties Ratio,
clc
importe_ 1789 â&#x20AC;˘
.................. _'=
PD
O, PD
.5
o = 1.0
a'=
1.5
1789
50%
Reduction
-15.1
-7.5
-15.1
-_2.6
100%
Reduction
-29.0
-14.5
-29.0
-43.5
-7.8
-11.7
-16.0
-_4.0
-23.7
-35.5
BP
391
50%
Deferment
-7.8
-3_9
i0(_
Deferme,_t
-16.0
-8.0,
100%
Exemptio_
-23.q
-ii.8
-24.-
3.3
Tax '
Credit
PD
1789
for Domestic (PD 1789 and
entitled
purchases
machinery,
domestic
manufacturer
regls%r_tion of
the
registered
equipment within
paid,. ,had •. . .....
of. tariff
tha.t! ._he
credit
.,g_yen _o
that
within
do_Stlcally
5 years
the
equal
to
waived
.had the
to
repaid
be
of
the
p_odu_ers
the
d_te
taxes same
_nd
been
in equal
enterprise
the
purchased
duties
cent been
,1789 _, , .....•
also
of
capital
to,50
per
cent
entit,led
p_Qducers
c_pital
Th_'_ tax in
e_uipment
a tax,
that_ would
imported.
of
PD .._:_;.,,'.
registration
commercial
are
of
have
d_st_c
installments
's
, however,
•credlt, o_
of
date
re_ister.ed._erprise.
manufactured
from
would
equivalent
from
1O_0 per
.nm_ufactt,rer
,,BP,,. 391._,_,,g_a_.,tS.._to regi_te_e_ purchasing
from
to
imported. .;,.
,domestic
._ui_.,._n._ ,ge.t,s_a• tax ;,o_,f_-i,.,t__re¢_
taxes
been . .......
that
•and ,spare parts
equivalent
and
these - , , items
, enterprise
seve"n years
to a ,tax credit
value
pr.,ovi_,,
_
Capital.. Equipment BP 391}c':_.'" ' "
first
_redit
have
been
credit five
years
operation. to
lo_ally
has
Export
a non-repayable manufactured
tax
capltal
equipment. 'The
analysis
impec_ i of :_St
this
oJf capital,
_o
that
of
ana
._aXes on
t_e
as
well
provision and
as
the
on the
estima.tes
labor-capital
rat_
'O_
of.' return,
the .user.
"_rat_o.",a_' identical
reduction/exemptlon/uere_en_"'or_"_arif
imported
capital
as
present_d""In_:3,:'2 '.
f
-25-.
3.4
Expansion
The
Reinvestment
expansion
allowed
reinvestment
registered
income
a
certain
non-pioneer
firms
projects of
the
transferred
to
their
With
and
equipment
the
to
k,
from (.25,
.50,
.75
amount
of
capital
account
and
other
â&#x20AC;˘expansion
(PD
1789)
provision
deduct
proportion,
projects)
machinery,
Allowance
of
PD
their
taxable
.375
o_
1.0
or
.5
for
for
pioneer
undistributed for
1789
p_ofits
procurement
of
expansion.
reinvestment
relevant
_'ersion
of
the
rate
of
expansion
portion
of
the
project
allowance,
return
formula
the for
the
is: (20)
(l-v)x
uk q
_
+
j'=i
Table fraction: duties of
and
the
for
assumpt-ion
that
by
undistributed
the points 20â&#x20AC;˘.
rate if
q, the the
= I0
by
capit_l
to
expansion
yield
project Depending
goes
up to
by
6.0
1.9
profit
as
based i_
on %_
percentag_
a
inclus_ive specified
project
expansion
1.2
pre-tax
of
required
profits.
:of return h
_:_e ar_nual
acquisi%i:3n
taxes,
return
,o
0 (I+i)
8 presents of
"q,=O
8.9
rates on
fully the
of
the
financed
Val_'_
of
k,
percentage
points
if
n =
Table
8
a/ EXPANSION
_I
INVESTMENT
Before-Ta_
ALLOWANCE
AND
THE
Profit a_ a Per_ntage Required to Yield
RATE
OF
RETURN,
PD
1789
of Capital C_oQt In_lu&lwe Specified Raees of Return
of
Taxes
& ;)urges,
q
,
% t
Rate
.
_n
o
f
R e
t
u r n
_i_cmt
With
xnda.ci_ k--25 "k=-_ %
_he
-
10
_
n
incen%lve
_= 5
._ L
Wlthoot
k_ 7S--_;i O-
With
zhCen_ive k= _s"_ k=_s
_._
_
20
the
IncentiVe
k-_--s.... k-_-vS k_1 o | tn
8%
2_q
xa_
211q
201q
192q
174q
155q
157q
144q
138q
131q
l19q
106q
:_sxq
24eq
2_
_6e_
_q
2o_
xg_
x_g
x74g
x58g
x_2_
227q
204q
232q
214q
206q
197q
179q
161q
237g 24J6q
_13_ 222g
_59q _46_
_9-27q 240q
__lSq 230q
208q 22Oq
190q 201q
181q 17lq
287q
266g
255q
245q
223q
202q
2 0
2 6
4 I
6 0
14%
2
272q
261q
250q
15_ 16%
.3_q 3
283q 294g
272q 282q
.26Oq 270q
317q
304q
292q
26oq
241q
I 9
2 9
40
6 _
8
A _n 18% RDR
f_
an 3_q i_nal
l_o_nti}
r
.!
a
I 2
I
_26-
TO cost k
trace
of
to
the
effecit
c_pital,
we
of
_•thls incentive
differentiate
_,} the
(5)_witN:
ul, r
!reSpe_%ito
obtain:
(21) qu( Ac
) Ak
=
(l-U) Without this
the
expansion
incentive
,the status
k
of
z_investment
rangesl
the
from
c]-ause, __k
_2,5,
register_?d
and
firm.
_ O;
l.O:_,dependi, ng
Table _"
prov
of
the
effect
on
the
user
cost
' "
of_ i_apita_ ,-" .'-
the
tax
incentive,on
assumption
on
expansion
the
Value
of
_r_investmen£_ u,
d and
I
on ,Slia,
L...,I
summary
with
? :Of t,,';
The
same
x_ aS :in 3.1
,-are
used.
The
impact
of
this_ incentive
on
the
labDz-=_i_al L ', , ,
ratio
3.5
is
presented
TaX
in
Credit
tax
PD
credit
foreign
1789,
for
loans
a
taxes
in
r_gistered w_ _hheld
providedil
that • •
credit
his
I0,_,
for Withholdir_g ,17891 and BP •391)
(PD
Under
Table
own
b"
dues
assumed from
the the
interest
_: _'
and
liability
for
lender,.
This
. on
_ _,t_:Z_%
firm, was, en.ti_led'_i_:_,, a
the
the ,
,
i
....
_.
!_,.._ ! ,_,_.
iregiStere_i'_irm " "
payment
prOvisiOn
p&yment_/On
:enjoys _ •
.
,%hat •i
has
Tax
t_e,i_ lender
. _
cOUntry
L
,_
'
,_. ,.
_f' ithe_.!*_ax a_fects
the
Expansion
Reinvestment
k =
n =
,25
• 26a
-
Table
9
Allowsnce
k
=
.375
the
k _
.5
U_er
Cost
k
_
,75
of
Capita/
k
-= I00
,.
20
A c
and
-.02Vq
-, 0'_Oq
-,054q
-.098
.-.147
--,197
'-,295
-. 393
6 c
-. 034q
-. 050q
~_.067q
-. i01q
-. I •_._--._
A c/c
-. 106
-. 159
-..2 _...... ">
._.318
-.425
c/c
-.081q
-, 108q
- 26b-
Table
Expansion
Relnv_stment
I0
Allowance
A (LtK) el-.5
_=
and
_e
Labor
/
(_:/K)
Capital
1.0
_ _
_.zio
1o5
n = I0
n _ ;0
n _ i0
n = 20
n = I_
n =
•25
-.053
-.04_
_0106
-.098
-. 159
-. 14 _,
•375
-.080
-.07"
-.15_
-.147
-.239
-.22C
05
-.106
-.098
-. 212
-. 197
-. 303
-. 29 f"
.75
-. 159
-. 147
-. 31_
-. 295
-. 477
-, 44_
-. 212
_'.176
-. 425
-. 393
-. 637
-. 56_
! _0
,-27-
e,ffeCtl,We
r_e"i":_£
'' Interest
•_,: " ;:_ .
.
&t:' '_i_h
. -'"!ii_ , i
,._:,...,_,--.,., +, .,. _i
._i_
•, g_n_S 391':: • •+.,,•
application
°,
,._
.:
::.,_
•
<,. ., _.,, e_1,Y _:
.
tO. _oneer.
.
the
,,
same_
fi_,!_rrow
+from
_ !: • .i+. _,..
,i+,,:. ! - •;:.,:,..!_.:,.,: ,, .
, .
,;
:
' , _. .in_n$1ve ::i;_. _ _
enterprises*
'
.
, ,
..,
_ ¢,.'. ,;,._ b_i?,:i+_mite
"
its
•Table
•Tax
Credit
For
The
Witholdi•ng
Rate
.of Ret_n_
'"
Tax_ _on _r@e_ PD
_&_•A/_5
1789 •ana• BP
391
--
n=20 n-Rate 0
N _
__ I: Without
f r n
t U
"
Wit, s.out
ilncentive L. L [ ._.
A r =
=015
.25
s
s =
__
..
=
_ r _
A r -- _0225
,5
-_ =
,25
a =
Inc-'_7_'tive
.5
s -= ,25
_
015 "
A r -- ,0225
s. =
=
,5
s =
,
...
o15
s =
"
J
_229q
.226q
.222q
_224q
_2lSq
_.':.SVq
.153q
,149q
,151q
10%
.250q
.247q
.243q
.245q
.239q
,181q
..177q
_i?3q
,!?Sq
!2%
,272q
.269q
,Z65q
.267q
.261q
.206q
.202q
ol9Sq
,200q
.195q
14%
.295q
,29!q
.287q
.289q
,282q
,232q
.229q
.225q
.227q
.221q
,242q ,
.238 s
.240q:0
,295q
246q _ ,
15%
.307q
_6_
.3tsq. .3_q --
Of
342q
10% int_
(in
p
. .
..303q
,:
.299q
.3X__ . .3t3q.
_q
enrage
-,335q
" .3
.301q
.337q
•• _
,4
._
.
.30_q-_ -_.25N .331 q
_ i
_-.25_
.287q
. 284q
3 :
•
.
. =_52s =soq
,5
.
8%
18%
k
I0
. .
...145q -
.16_q
.235q ;
'-.2s4q _ .24sq . 2a_q , . 2_6q
i
,•6
5 "
1,0
ml
-28-
rate 1.0
of
return
dueto
percentage
this
of
ranges
from
ho
we
.3
to
points.
Differentiating effect
incentive
this
(5) wi_
incentive
on
respect the
user
r,
cost
of
see
the
capital: [
(23) be
_
_ithout interest,
_r
the
r
is
incentive, equal
WÂŁth
this
incentive,
the
nominal
rate.
Table done
12
on
interest the
is
effect
isdicate 1:o
per
of
cost
of
labor.-capital
Table
_se_7 cost
cent
due
This capital
of
the
implies
that
decline
by
1.15,
is
the the
capital
of
simply
simulations rate
The is
of
results
reduced
by
in0entive for as
of
picture
ratio.
to
will
r
as
_.3 give
of
times
the
o:6 capital
on
the
rate
rate
interest,
results
while
per
unit
rate
effective
nominal
varied
the
investigation.
_%e
the
user
that
8.3
the
shows
the
to
the
=
under
1.0_
mu_h
as
7
8.3
labor per
cent.
This
incentive
foreign
loans.
a
credit
tax
has
This for
bias
taxes
a built-in comes paid
on
from
bias two
interest
in
favor
sources: payments
of (I) on
,,_,, ,
4,.,. _._C_
_7_bie !2
,_s_r Cost
of ,C_itai a_d _[a._Credit for WlthhoidÂŁng On 1_'_.te_e_.et on For_iqn Loans
Ac
r0 =
..... [15
n = 20
n ---]0
- 020q
.-.018{
Ac _ = ,_0
,, ..... "_ j'__ ....
Tax
,::/c
rl =
i0
.264q
n = 20
:e = lO
-. 091
.-.070
II
r0 __ _!4
-.027q
-.025q
-._27%q
.317q
->i00
-.080
z(] _,, .1725
-. 031q
-_029q
_309q
.35,_q
-.lO1
-. O_l:_
rI =
_!5
-- _Sb--
Table
Tax
Credit
For
Wi,thholding
.....
., ,.
,,,
,
rI
.I15
Interes%
onForelgn
) '5 --
_ CL/.K).!,-. (LIK) .......
_
" " i"
_ ....
.5 _
'
'" 0'_._' _'_
. ,,,,,.'
q = ......
._.u ' . "
-,
0_ "'
'
.15
rI _
.13
r0 =
.1725
rI =
.15
,,,,.
q _ 'i';'-5"" :.:::= :,h_:-
-.I05
--.I0 .... : :
r0 _
Loans ....
,.":J ' ,
q
r0 =
o_
AndLabor-Capital"Ratio
. :',....
Tax
.!_
-.040
-.08J
-.i20
-.041
-.083
-.i24,
:-:,'-':'.--
-29.-
foreign• none
loans
is
loans2
allowed
applicable (2)
the
loans
is
of
status
the
is
lower
to tax
than
for
interest
Deduction
domestic
enterprise
the
first
_ens
deduct
from
to
sum
the
materials
per
their• of
To
of
./.'
_:_e d_te
Under of
an
_anufacture
export,
the
:is engaged
of
25
per
cent
allowable sum
of
direct
the
additional income
1789
for to
•equivalent
of_
only export
does
in
assurQe
tax without
revenue
cost_
deduction the
export
not
for!..the
export,:a_ivities _'!
cea!,_ng
deductions
labor
their•
exceed
revenue.
analysis,
additional
the
taxable
of
PD
;_o_nt'
[
the
Local /
:resis_ration,
tha_._ suc], a deduction
simplify
that:_firm
:
_ the
total
re_ardless
.i
• •__••_.blie ir_come
in
provided cent
f_om
direct
used
product 25
yea_:s
foreign
Cost and Cost of 175'9[_ ' • :•'-
fir._n_ =._.ereentitled
five
while
domestic
on
concerned.
of Direct Labor RaW Mat-er•t,•!:_i•_ (PD
Registered
on
paymen£_
, •
3.6
firms,
payments
0,% in_erest th._n on
of e_h_
registered
and on
is
incentive
!oc_l
jus_
that
.
doeS._t
L and
moment
the
amount
exlst, r_w
eq_l
0 ._+_:Th_S,
If
material
_-o
the
i-f
,_he
'!
7'
C_"
' R is receipts from export imported inputs and O is other
sales, : M :is _he costs.
co s_
of
-30-
incentive zero
is
and
availed
afterr_ax
u(R-D-L-M-O). after-tax
of,
profit The
profit
tax
will
liability
be
raised
proportional
due
to
the
incentive
u(R - D - L - _ - O)
is
year
the
the
the
n_ximum
amount
increase
is_given
u
possible
incentive of
income
is
local
in
as
538
and
tax
no
be. forthcoming
labor
were
in
case,
the
proportion, claimed
profits
labor.
Beyond
would
incren_ntal
even
if
since
it
by
exceed
the
increasing this
point,
the
taxable
in
profits
increase
more
in
local
inputs
and
used.
this
year
and
in
obtainable
deduction
furthe_i
_¢ould
increase
cl_imed,
inpu_:s
additional
the
of
an
be
l-u
use
the
by
rate
_'
This
would
incentive say
in
registra%ion_
A_
is ;.nd
the
first
the
variant
is
known
claimed tha_five of
(1)
that
is
profits
increased
this
incentive
years
from
which
is
by
in some
can
be
date
of
relevant
is
(24} 5
(l-u) (I+A) x
n
(l-u) x
j=i
j (i+i)
j=s
j (l+i)
Using rate
(24), of
return
if
it
is
before
ae.'_umed that
n =
+-he incentive
is
I0
and
claimed
that ks
the I0
-31,-
per
cent,
it
can
be
_hown
increase
by
8 percentage
incentive
is
availed
On and
the
other
local
profits
then
taxable
income
incentive by
is
an
be
without
u(D
will
be
_,q_al
if
the
+ L)
of
of
the
sum
direct
less
than
_,s less
incentive.
Thus_ wi!_.
incre_.se
t'he in
same
cost
pre-tax than
the
J...f the
be
decreased
subsequently, Dy
this
labor
deduction
and
if
.
of
is
returnwill
maximum
14)
iiabil.ity
i_creased
rate
at
cos_.
tax
rate
Table
the
claimed_
pro_i_c::hional
(see
additional
aiT_unt
profit
of
material,
the
the
points
hand,
raw
that
after
tax
amount.
after-tax
The
profit
will
to
u_D+5)
u <
(l,-u) (R--D,.-L-M-,0)
The local
implloation raw
is
that
materials
and
l_u
i': pays labor
to
as
increase
long
as
the
{D + L)
use <
of (R-
D-L-M.-O ) ....
Now, labor per
recall
and cent
local
of
the
incentive
use
of
export to
domestic:
directions=
(i)
%hat raw
%ihe additional materials
z'evenue. increase raw
the
sum
costs Thus,
proflte
materials of
tax
and direct
deduction
cannot the
via
exceed
limitations
increasing
labor labor
come and
for 9.5 on the
from
two
domestic
Tab Ie
Deduction
of Direct and The
Labor Cost and Rate of Return,
•Annual Before " Inclusive
Ra-te
R_turn "
Wit3aou_. the Incentive
.I4-
....
i_cal Ray PD 1789 a/
Mat-erials
Tax Profit as a Perc e_ag_ of._ Ca_)ital Costs of Taxes and Duties,_ q _ R_u_'red"to:_[_eld ' ' Specified Rate of Return _.
:
With the Incentive
"
Wi+_ou,_. :t_e _I_nti(Ve
With• thQ Incentive
•-_
8%
,|
.229%
.! _4_
._.I. 5 ,'q
.129q
to_
.2s0q
._ss_
.j sJ._
.1._6q
.12%
.2_2q
. 203q
;_0_
.16_q
t;14%
_295q
.218q
=_" "_
.IS2q
15_
.307q
.226q
_-_246q
.19._q
/
"
_ _OR from orig i'nal of. 10% (in percen_ rage points)
?.•_"•"_',.ei_ k; _"
8.0
3[.': "" _= =$
__:" _"='--'k"
4
4.0
m
'
- 32-
raw
material
the
25
per
cent
,T_dditional raised up
_:•_!a.t.Lveto
o_
ex_-o_t
deduction,,
by
to
costs
In
increasing
the
point
taxabl.e • iacome
sables
c_eiliz_g
other
_.jor(J._
locall.yproduc_d
wheT:'e the
Ic.wer
and
on
allowable
profit.%
inputs
of
these
(2)
can
and
_e
lab:_.:_"
constr,_.nts
i.q
is. engaged
.in
reached.
At
this
•point,
.l.x;_-,_:h export -_
and
c¢__s.ide_
of
£ncrease
i[r_ view
firm
that
dome _'r_:"_. r;:: >.¢.tiv.ities.
,.r<--D--L._M,_O ), (D
rate
a
"_ L,) <
in
of
,25X,
_,:_.-,:,l .... *_": "" .... _.._t=_
t.h.i_
it
if
(13,'+ L}
then
tne
is
given
_"_'_util",.z_:c<_on of
_[_ateriais
:i.:_ ..::_nh:_nee by
pz_ofits
and
laD_:_r
9ained &
from
a • larger
ceiling)
can
should
be
of
export
for
the
binding
tha,t
domestic
the
the z'a_.,
•presence T[his
of .is _0
,,
•because
it
by
:_...tlvlty "._ '_ ' _.
t-_..:.:: dome_tic
, ,
be
prop:,.._::_ti.or_.;.:_ _..
be_._ome.:_apparent
_.n<..n._l.ve to .increase
_:
d_¢![uction
abs0rD¢_
pointed sales
o_t
by
(within
the
l.a_ger
re. +o.taZ
_sales
_he
more
above
25
per
cent.
profit.
t_;-_-_t .<:he higher
fAr•st •iimi'ta._.ic, n _en.tioned constx_aint.
the
%he
A.2.s<_,
proportion
_.ike!y re•be
it.' is
the
l_re
Now effects it
let of
is
then
an
and
the
direct
It
availed of
direct
at
should
of
only
of
in
claimed
can
be
(.25}
(.35)x
=
.0875X
recalled firsu
in
decreased
in
at
the
terms
of
incentlve
is
that
this
incentive
can
five
(5)
this
the
are
the
such,
expressed
cent
If
inputs is
year
in
generation.
bill
the
bill
possible
wage
in
the
the
material
per
As
wage
raw
35
registration. labor
the
most
be
on
employment
labor
to
changes
claimed.
date
all
by
attention
on
equal
proportional
be
our
that
amount
maximum
focus
thisprovision
assumed
imported by
us
year
years
red_ctio_ the
terms
from
the
an
the
incentive
of
an
is
equivalent
J
reduction of
in
the
direct
whole
labor
cost
project,
if
throughout
the
raÂŁe
the
duration
of
interest
direct
labor
is
0
assumed
to
bill
assumed
of
is the
be
15
to
project,
maximum)
in
incentive
is
from
date
the
per
the
and
remain this
if
the
constant 35
direct
claimed, of
cent
per labor
i.e.,
registration,
throughout
cent
reduction
cost the
in
first is
_e
_he (at years
five
equivalent
(5) to
wage life the the years 18.4
To do this, we solve for the percentage reduction in the direct labor wage bill effective for the whole duration of the project such that the present value of the cost flow app;opriate to this situation is equal to the present value of the cost flow when there is a 35 bill for
per cent the first
reduction five years
in %_e direct of operation
.... labor only.
wage
-34-
per
cent
(23.4
throughout As
the
share as
the Share
of
of
Of
local the
projects
•local
raw
of
m_ximum
as
to
i.5
subsidy
labor.
First_ It
labqr
firms
facing there
local
raw
capital
does
not
intens/,ve,,. .the
reaterials
wh_le
u:_e o_
for
since
duration
first incentive compared
five to £o
(5)
,increase the
domestic
incentive
of the to
fro_
!ittie
export cost
_erket,
firms
using
are
also
more
coppe_;smelting
is
of
increase
of
that
and
is
local
.;may
raw
be
both, Third,
short,
i_e_,
the
only
then
the
operations use
i:.he,
v_,
f!_e incentive
years
at
to
the
_nuf_,ctur_
impcrte_-raw-_terials-intensi of
p_-_r:
u_i.n_:_ m£_re
relative
capital
labor-andthe
of
the
inst,!_-_ce,
,_lectronics
labor
very
only
_?ossibi!ity
both
l_,.bor
varies
have
_w&r_:,: i.nter_'sive],y For
__ore
.F_e_:cent
applies
affect
the
f,.>r
project_
,_ay
,p_odu_:ing
ma<.e_ials
±n
year
rate,
subsidy
SuDs_.:.itution
incentive
exists
intensive
20
-to 27,6
the
any
i_:_9ene_:al,,
::he a•t_:.ractivene_s
the
production,
Second;
use
a
project_
A£
that
9_2
same
rises
techniques
pr¢_vision
i,n increasing
inputs
a
_f
the
year)
decreases.
A,nd_
for
(I0
get
rise_._ by
_:.hi s
yea[
in
fir:,:_!._ _o
_,he elasticity
However, effect
and
pe:c cent
20
i_terials
n_terials.
ca_ital
T,.eduction
a
raw
dis cu s_:,_e,_above,
unit
.5
cent )
duration
l_:._borin
selecting and
per
local the
raw
materials
use
of
labor
_5-
is
greater.
technique
This chosen
easier
to
inputs
than
incentive
case
that
relation
to
the
firm
inputs
actually
with
export
profit
take
full
advantage
the
a_o_lly
of
is
should
be
of
costs.
the
a
The
last
more
general
the
margin
more no
than incentive
earning
or
rs0i_ed
is
economic
a
above
labor that 25
cent. _:_.sales â&#x20AC;˘ ': give[_, rents,,
These
us
I?or this
firms
cent
can
points to
a
up
limit there
percentage
effective
inputs
reason,
at
exist
example,
are,
_
only
always
for
local
firms
only
to consider
there
in
local
per
fixed
leads are
margin
Rather
a
Ehe
and
This
to
have,
tO
profit
co:!_ts up
However,
straight
value
least
_incenti_es
choice.
per
Ef
_,,,:_.t additional
firms 25
c_}i!ing,
export
equivalent
be. the
cent
becomes
certain
_y
after
in
son-_ o_'_her factors,
credit
l;ibor
question
(_f t?ce deduction.
problem.
intra-marginal
per
is
produced
it
actual
_-.,_[_7_n,_; ,,_fat
point
of
25
it
in
",__se:d 'i['hisimplies
to
tax
the
',#ith ire
deduc_:i_g
related
!%vo inputs
s,lle,,:4hose
whether
for
Fourth,
_,_<:,vi s ion
varie_{
of
production
locally
inputs
ia_&e_,, the
the
regardless
that
o_:her
exceed,:
export
individual
are
of
then
to
i:,:,p_r _,.:, d for
hag
share
the
,'_,:_,:_.ni:,,g of operations_,
substitute
export
occurs
]:>ecau_:e, given
the
period
to
subsidy
at
So
substitu'<e
the
this
_S
used
even
if
tllerefore, some
have
argued
that
setting
incentives
case
basis,
of
To
and
materials° offset
the
protection the
basis
labor. the
The
three
3°7
_xemption
PD all extent
of
cent
for
for
the
eleventh _%irteenth
price
should
be
I00
be
the
ninth and to
cent
sixth
apply
mixed
in
of
or
domestic so
as
just that
subsidized
social
subsidized
so
<'_n
value
as
inputs.
for
raw
exchange be
the
this
_ubsidizing
subsidized foreign
reasons
u_
(2)
to
of ,_tch
These
subsidies.
National T_x (PD
NI_[C
enterprises
are Hence
except
inco_e
tax
five
through
the
eight
years,
tenth
years,
years
fifteenth
and year.
20 iO
per per
Revenue
exemption
first
twelfth
for
Internal 17S9)
the
and
the
that
to
response
use
i,_qx_rted
pioneer the
per
a case
separated._
granted under
on
maximize
_!;econd should
From All Except Income
1789
taxes
The
addabie
should
are
be of
eom_>%rnbie
and
to
expoL-ts,
shouSd
+.he shad_)w
on
indeper_dent the
first
third•
drawback
t.hing_
underevaluation
of
as
_ubsid:[zir. 9 the
depends.
sector
by
lo_;t.
subsidiz:ing
The
discriminate
incentives
so
three
(3_
or
g):anting
revenue
(I)
should
firm
firms,
summarize,
employment
each
of
all
tax
provision-
to
for
across
unit
9ore rnv._ant
instead
uniformly per
the
from to
years,
75
50 per
the per cent
cent
for
the
cent
for
the
-37-
The the
most
pioneer
proviso some can
important firm
is
the
proportion write
was
the
of
f,
r&te
of
NIRC
exempted
sales s
the
under
tax. of
If
annual
return
taxes th_s
we
as
which
incentive
express•
pre-tax
formula
from
sakes
profit,i
as x,
we
follows" z _
(25) "5
(i-u)(x+gots f x)
••[
J
-q=O
j
(i +i )
where
gj
is
the
exte_t
ts
is
the
sale:_
We
observe,that
of
this
to
7.7
4.0
percentage_
incentive
3.8
Tax
BP
391
tax
credit
net
value
commercial
consequently_
Credit
for
Net
accords non equivalent earned operation.
year
for
of
of
return
if
n
"-=I0,
n _
i0
(see
if
i_
range
rate
poin_
points
in
j,
and
the
impact
•t;_••x rate.
the
incentive
and
exemption
a reasonable
on
Percentage
This prices
for
of
ne_tlal
with
factor
Value
Net
and
from
Table
from
3.0
!.4
to
LS)
respect!
Earned
years value
(BP
(pioneer)
5 per
five
ranges
tO
factor
choice.
pioneer to
f,
cent
39L)
enterPrises
(i0 per
from
the
earned
%s
Cent)
of
start
of
defined
as
_a/ Exemption_from
Annual Rate
All
Pre-Tax
NIRC
Profit
as
TaXes
EXcept
Inco_
Tax
a Proportion of Capital. Specified Rate of Return
and
Rate
C(_st
of
Return,
Inclusive
of
PD
_-axes
1789
and
Duties,
q
, for
:....
of
.
n._. I0
n
_ 20
Retu rn _.
Wi thou t Incentive
_
-With _ Incentive
f =
4.0
Incentive Without
f = 1._
With _ =2,[ Incentive ....
f _4.0-
r..
8%
229q
,2030q
+ !_88_q
i0_
.250q
.z;.._
205_q
. 15%
.307q
20%
.367q
.
-
....
.
_'_70__ 3230q •"
,2507q .? .299!" q ."
+ 1704q
.157q
iS57q <-u 1.4q. .2260q
° 1358q
.1257q
181q
.1646q
. 553q
.1432q
.206q-
,1867q
.t757q
+ 1615q
,2214q
,2077q
,1900q
.2822q
.2635_
. .246q
,2692q +_._
,.1434q
,i_15_ ..
_i
;
"
"'
•
'-"
' •
_-
+ 2396q _.
•
+J.
[L
an +_ hal _in (in ROR parc_ £ro_ !0%
_ _IC '"
_ "
......
._
-_
....... . .._.
......
•....
-_._ ..-..+_ .
. .,.-:... __ --:+_ . -...._.._.:_. . _ . . • • .. .
• ......._-__+-. +-._/_C-___--< =_'.>'._..-. -_i?
-38-
value
of
sales
components,
To of
supplies
assess
return
incentive
of
express
v,
of
this net
of pre-tax
is at
raw
utilities
effect
can
say
cost
and
the
we
proportion, the
less
5 per
cent,
materials
and
and
depreciation.
provision
value
on, the
rate
as
some
earned
profit,
xi, such
equation
i_at
if
_ becomes=
(26) 5
(l-u)x+ .05(vx)
j=l
5
j
l-u)x
j=5
'T'.. ,,
(l+i)
Similarly,
if
(1+i)
the
incentive
is taken
at i'i0_r
cent
we
get=
(27)
5
(1-u)x + .l(vx) ,
n [
. (Z+i)
An
examination
of
(l-u)_ ,-q=O (1+i)
the
1979
Input-Output
Table
reveals ,1
that
v
ranges
from
1.25
to 3.5
for
the
_anufac_uring [,,
sectQr. incentive
Table
16
on the
annual
firm,_s rate:of'return percentage
points
by
8.1
2.7-
(n=20 ).
summarizes
impact
pre.-tax profit. increases
while
(1.4
the
that
of
A non
by:l.3-!3.9 a pio_eeE
- 3..9) percehtage
of
this
pioneer
(.7 - 1.9) firm
:points
goes
if n =
up I0
Table16 .i
• ..
.
T,__,_t®_:_ _._n_t _te
E_,__,,_, 9,__ _
L_'e-T_
_fit
as
a
_ag_ t' of
_Ni_
Capi_Jl _
....
of-
:_
l
_
_i_,_
• ,f _
_iet_n
:_-:,.
v " 1°25
v =2
_i_
_
v_ 3.5.
"
_i_ _ !_i_ v _ t.25
v__
v = 3.5 -
:_ m
_ _ _._
._ _. _
'X
._
._
._
._
,_
,_
.... _
._
:_._ _
:
._ _,_
.a_
.a¢_
_,_. _;a _,_ ....
.a_ a_
._
._7_
i,_: _: ._
._t_ _ :a_ _:_,_;: _: ._:
.,_ __ __ _ _
-39-
The
tax
respect
to
credit
factor
equivalent
is
contribution,
Credit
BP
591
equal
tO
five
years
is
I0
on
per
de_ÂŁ_ed
granted
to
incentive
is
also
Net
Con_ent
export net
commercial export
the
cost
(BP
a
this economic
tax for
Net cost
'
of
391)
content
lees
level
effective.
producers local
with
under firms
operation. sales
neutral
firms the
Local
is
since
on
t_ent .of
as
earned
Furthermore,
provides
of
value
dependent this
Tax
net
use.
s_beidy
incentive
3.9
on
_he
local
of
credit first
content
imported
raw
_:
materials
and
depreciation.
If m,
of
components,
loaal 1
before_tax into
becomes
:
utilities
and
_
net
taken
supplies,
content
is
profit,
x
account,
then
expressed , and the
as
if
rate
this of
some
factor,
incentive
return
is
formula
(28) (l-u)x
+
.l(m
x)
n
(l-u)x
(I+i)
Given in
_he value
effect
1979 from
of
this
(l+i)
Input-Output 2.0
to
8.0.
provision
Table,
m
Table on
the
17
is
seen
to
range
summarizes
the
rate
of
return.
- 39a
-
Table 17.:
al T_ [2,.edito. NetLocal "_t
_I
: : -.
. .-.
__ ...
_
•
.
:' ::
:
.-:-.
-.---:-_,,.
,
_:t_+.
_ _!_h:r__i_.........
_t
_i_h :n_i_
,a
a/
_ _I
Pre.-TazP_"ofi't_ z Peopo_ie_ ofCap. ilalCostl,_l_si_ of Taau and ]Y_i_ • f_ Sp_ifi__tesof ._
_te
_i_rn
a_ ;_,ate of _,
-:--:
q, ._-..
o-40-
The
tax. credit
on
of
return
by,4._5
and
by
to
2.1
net to
I0,2
local
20.5
content
increases
percentage
percentage
points
.points
if.n'
the if
n
rate =
10
= 20.
h
Like
the
incentive in
as
its
tax
credit
is
neutral
clause
much
as
it
does
availability
export
to
performance
content
of
their
3410.
Total Effect of Capital
Gregorio incentives have and
at
lea.st
"exactly
capital Using of
.when
and her
the
(when
return,
labor_ registered
and
it
effects
the the _firms.
on
will
user
an
of cost
Since
firms'
with
local way
User
-various
of
at
user
the in
cost
capital ratio
on
and of
the
of
ratio,
total
the
other return
labor-capital
look
of
Cost
each
rate
__he
"true"
net
_.he
simultaneously)
labor-capital
use
R_turn, Ratio
the
analyzed
of
factor
efficient
that
on the
now
this
the
combination
incentives availed
is
in
shown
in
earned,
prices. the
the Rate of Labor-Capltal
consequently, we
on
effects-on
additive
selected
sections of
applied
results,
hinges
has
additive
factor
reflected
on and
(1979)
values
respect_to
affect
exports,
exports.
net
with
firms as
promoting
Th_
not
on
effect
foregoing the cost
typical
rate of BOI
-41-
Firms under
registered
two
main
exporting. headings (2)
falling
,nay further
be
(i)
new
IS
incentive of
"typical"
Table
of
bOth
points
the
rate non
of
excludes available the
reverse of
the
this
one
1789
on
exporting
_
to
5.9
fate
expansion
reinvestment
to
expansion
projects
return,
greater
under
is
_f
true
"typical
"_ BOI
of BP
the non
391
exporting
given
rate
of
return
firm,
31,5
in
PD
hand,
expansion
BP
on
the
391
adds
points
to
#.he
if
one
which
is
return,
then
the BOI
increase exporting
under
PD
1789,
the
rate
of
firms_
1789
percentage
non
"typical"
than
increase
is
allowance
only,
the
similar
situated
of
return
significant.
_>ercentage
internal
the
391
the
to
other
the
of
BP
pioneer
the
24.7
of A
quite
projects
On
of
_fhe rate
of
by non
or
distinguish
effect
internal is
expansion
may
under
the
return
these
pioneer
firms.
characteristics of
of
non
projects.
incentives on
(2)
one
(I)
â&#x20AC;˘total
schemes
3.0 firms
rate
is
PD
range.
from
registered
firms
impact
pioneer
anywhere
in
The
the
exporting
_e
categorized and
as
registered
the
on
with
part
expansion
incentive
Depending augments
(2)
under
be
either
classified addition,
for
may
exporting,
Xn
BOI
19.
BOI
under
presents
package
presentation
top
and
the (I)
Firms
Table
in
groupsz
non-pioneer.
between
with
The return
L"£
8"6
L'G
I_'_
_
m'i
g'_
i't
t'_
e'6
L';
e_
L_
I '6
t'_
1"6
_luaed!r, b3 uosaz,1_
puY-_,_j. aoj.1!1_:)
.--
. •
.,
_-___ ....................
_...... _-,_ .... ._ .... ........ _......... _. .... ,
B__lqILt
ro
Ex_i_,
__.._T_O-_Iit. l_Idi,_ T_ _,l_r¢_--c/ _._
_,4
_._i
_.4
_.¢
K4
@.4
_._
_
_._
._._
_._
f.)
_.7
7._
_._
_.¢
_._
_._
fra_all
7.
_II Ir__n_iv_._
.¢;
i?.8
13.1
Z£.?
15.1
_4.ii
15._
31._
19.7
6.1t
_&.tl
I[._
£t.I
15.7
_Y t
,, ZT,: ....
Table
BP
391
Incentives and _%e Change in the Rate, of of "Typical" BOI Registered Firm_ / (in percentage points)
Expor
i.
4.
5_
NOn-Exporti
Nor, Pioneer n_!0 n=2O
ng
Pioneer n=l 0 n=20
Pioneer n--lO n--20
6.8
4.3
6_
4.3
.9
.6
1.6
1.0
-
-
0,,4
0.4
~
-
0.4
0.4
Tax Credit on Net Value Earned
2.2
1.0
4.5
2.1
2.2
1.0
4.5
2,1
Tax Credit on Net Local Content
12.0
6.0
12.0
6,0
22째0
12.3
2.6
7.5
Deferment/ Exemption/ Credit of Taxes and Duties on
Tax for
Credit With-
h01ding Tax 3.
ti ng
Return
Non Pioneer n:10 n_20
Capital Equipment 2.
19
All Incentives
24.7
13.8
The increment in the ROR is estimated without the incentive is I0 per cent.
Assumes
v =
2.
Assumes
h
5_
=
....
4.1
assun_ng
that
4.5
the
ROR
-42-
Table incentives
20
summarizes
on
both
labor-capital
labor
capital
ratio
on
traits
391,
there
c_hoice,, duties
in
is
only
na_ue!y_ on
tO
23.7
Summary
The point it
and
Conclusions
in
the
only
related that
the
by
eight
Third,
a
PD
incentives
that
address
objectives
in
circuitous
effects.
This
it
and
cost
firm째
did
2_.I
incentive
the
in
to
Note which
labor
capital
_983
of 14
in
PD
PD
the
under'
favor
on
relative
1789's
multiple manner
and, that
introducing
a
the
this
t_rning First,
of
times,
produces
with
capital-use incentives
factor
two
and
incentives
propensity at
BP
_._,;_'_,_iOby _ 7.8
incentives
in
[789
taxes of
fiscal
of
cent
factor
policy.
most
the
that
marked
fiscal
ThE,
per
effect
incentive
the
82.7
of
The
April
and
affects
nt.
withdrew
effect
by
of
defe_ment/exemption
it
eliminated
a
capi#_l
user
1789's
present
neutral
it
firm.
ind_striai
Second,
incentives
BOI
the
391
1789
"representative"
administration
replacing (8).
have
BP
Philippine
simplified
program
of
PD
capital
equ ip_
cent.
of
of
of
the
effect
cost
from
one
per
total
ranges
reduce
passage
user
the
capital
_' '"_' " "' '_
4.0
of
reduction
depending
the
ratio
total
the
prices_ to
grant
conflicting deleterious
(2)
innovative
Tabl_2_
a_ Labor-_ital _tioof t_ica$bOIR_is_e_.-ed fir_
f
f
â&#x20AC;˘
,
,-
'
L
,C_ccei_va_._ _recia:io_ -?._ -I_, i
-?._
-I_. l
-7._ -i_.l
-=_J,_
_. _._
-I_,I
-_,3 -I_.I
-?._
-14.I
hb
-l,_
-I_, I
-7,_
-14. i
-7._ -14, I
-7._
-I_. I
Cna_itf_r Taxes a_ Capital _:i_nt 3. TaxC._it onWi._h holdi_Ta_ on Inheritor
,,-_._..-,_9.t
-8.:3-l_.l
-_,#
-_.3
-_._
-,.--_J , "_;_-
-15.I
-&3
-_,3
-I_.I
.-I_I
-I_.I
-i5,1
-&3
.. -_.0
-i5;i
-._.
-I_,[
-8,3 -i_.!
_
'-,_I
-_.3
"i_.J
-1_:!
,:
w
i_:.en_ivu_
_
;,;oe.................._.
Pior_,_r
_n Pi_
-
Piou"_m¢'
_. S_b-Total for _pi_aI Ir_n_i_ I _c ¢
-_._
-_,_.
-F.._,)
of=Oir_t
7,
_1.I _rc'er._ives
_7.9
.
-_1,1
,_.8
-37,_
_,5
_4.5
-_k_
-7&3
-_.?
-,_.__
-39.3
-_,5
_._I
-44,5
-_.E
-76,3
-82,7
-3Li
-3_,8
-5_,9
-E_,3
-3_.6
-a-'9.3 -._,5
-_._
-_4,5
-53,_
-7E.3
-_...7
-
_, o"
-43-
incentives use
of
that
scarce
PD
its.
cheap@nin
9
not
of
heavily
effect_
' _amely,
tax
credit
reinvestment
indicated
that
cpital
cent
of
the
to
in
well.
518.6 and
RA
6135
came
depreci_tion,
credit/
taxes
duties_on
capital
and
withholding
of
is
taz,o_ilnteresÂŁ The
foregoing
capital
reduced
package
labor
_ha_
which
accelerated
cost
and,
analysis
consequently,
anywhere of
and
from
incentives
30.6
to
relating
to
regi tere fi=m.
and
counteract by
efficient
a Capital
full
use
but
ha_e
for
user
direct
capital
as
incentives
avai ed of by
ability
favoring
on
ratio if
us i,
deduction the
the
neutral
allowance.
lahor_eapital per
RA
of
exlmansion
%2.7
:like
relied
equipment,
factor
resources
1981t:
exemptio.lre_uction
the
only
government
17_9
before
are
local to
reduciag
raw
material
costs
extent
this
some the
do ble
wage
bill
by
has bias
18.4
to
°
23.4
per
cent
effectiveness and
local
per in
raw
annum
doing
so
material
cost
of is
_t
the
n_ximum.
th_
double
limited
But
deduction by
the
the
of
labor
presence
of
so
!
many e.g. per
caveats it cent
,,On
regarding
_S
available
of
export
_,th_,other
its to
export
revenues,
hand,
accelerated
depreciation
provisions.
At
the
availability
same
firms
to only
registered and
only
firms, up
to
25
etc.
BP and time
it
391
completely,droPped
the
expansion
limited
the
the
reinvestment availability
of
_44-
the
tax
firms
credit
only.
credit
taxes with
the
imply
taxes
as
BP
the is
net
foregoing
factor
tax
local
but
cost
of
incentive
these
made
registered two
neutral
new
from
all
taxes
base
of
_uax credit
that
of
the
tax
government
depend
on
added) firms.
and/or It are
except
income
is
is sales°
and
to
1789,
tax,
terms
is
of
in
economic
the
tax
out
in
only
because the foregone
realized
be
391
not
a_ternatlVe!y,
export
PD
are
or
the
BP
pointed
This
superio¢
under
provisions
earned
weil0
should
available
cent.
incentives,
in
said
registered
per
incenhlves
the
of
modifications
already
as
non
associated
firms
23_7
value
subsidy,
to
holiday
to
these
payment
of
have
effective
incentives
incentive NIRC
We
that
to
(value
net
equipment,
these
related
on
equivalent
is
7.8
pioneer
exemption/tax
problems
of
capital
only
credit
cost
of
contribution
of
flow
to
full
defer
All
capital
discussion
the
cash
content.
level
the
by
get
to
taxes.
interest
capital
allowed
cost
the
the
of
these
on
on
the
reduced
of
ne_)tral
revenues,
duties
only
user
the
on
firms
alleviate of
place
instituted credit
to
391
In
exporting
are
payment
that
under
tax
and
firms so
withholding
While
for
exporting
the
for
economic
reven_es
generated
pointed
out
the
only
i.e. the
tax
sense
contribution
V.hat factor
holiday that
the
while
-45-
"Finally,,
we
note
that
the
._ â&#x20AC;˘ ,: _, _
_r_:;_
i ncent_v@i,: ceturn most elcept
are
substantial.
ex_or_
_i_
fi:_[:i:
on ..., '_onee,r
more
favored.
1789
_.n_entlve6 .:...
return
_,
_nder
pD
1789
The
reaul_ed .
and
impact
former
of
the
i_ckage
of
rate
of
:_"
BP
391
of
PD
profitabii_
expansion the
impact .
on,
incent.'.ve
._,nd B P 391
1789
are
exportir_
tbi_.
a_._U_
enterpris_es law.
In
the whieh, general.
,in a higher _ ,:.i:nerease_n_.:.eJhe rate
, ..
of 'no_-e=pO_t:.i-ng., firms
thaS
3;'.i 39.1 incen.t.,iv_s does
on
same are PD of
-45-
S 'SLIOG 'Y
Berndt, E.. "Reconciling Alternative Estimates Of the Elae ._ ticity of Substitution", Review of _,_c0_m_O_,_d Statistics, XLIII (February _9_6). Claque, C., "Capital-Labor Substitution in _anufacturing Underdev_loped Countries", Econemetri_,_ 1 1969:. Coen,
in
R., "Effects of Tax Policy on Inves_t. in _an_facturing", American E_,nomic Review, LVII (_ay 1968).
Gregorio, R. G. "An Economic Analysis of the Effects of Philippine Fiscal Incentives in the Phi lipp_neO_,, in Romeo Bautista, John Power and Associates_ !l_us_rlal Promotion Policies !_ the Philippines, (_ez_ _ _Ity. Philippine Institute for Development Studies, 1979. ....
Hail,
R. and Behavior",
,
.
D. Jorgenson, "Tax Policy and Investment American Economic Review, LVII (June 1967).
Hooley, R. W., and G. P. Sicat, "Investn_ent Demand Philippine Manufacturing", UPSE Discussi0npa_e_N 67-2 (Revised June 1967). Philippines. 1967.
(Rep.)
Investments
Philippines.
(Rep.)
ExpOrt
Philippines. 1981.
(Rep.)
Philippines. BP 391, Shah,
(Rep.) 1983.
Incentives
Incentives
Omnibus
Act:
Investment
Investment
Act:
PD
_
5186,
1789,1981.
COde=
incentive
in _.
_,
Policy
Actz
S. M. S. and J. F. J. Toye, "fiscal Incentlves for Firms in Some Developing Countries= Survey and Critique", in J. F. J. Toye, (ed.), Taxation a_ _o_!Q. mic Development, Great Britain= --Bii_ing & Sons Limited, Guildford, London & Worcester, 1978.
Sicat,
G. P째, "Industrial Production Functlons Philippines", IEDR Discussion Paper_No._68-18_ School of Economics (_ay 1968).
Williamson, Labor mics,
J째 Go "Capltal Accumulation, Absorption Once _ore, Quarterly LXXXV (FebEuary 1971)0
in U.
LabOr-S_ Jour,ali_o__
the P.
_d