TAX incentives are only one issue considered by potential investors, and the Philippine market may have other disadvantages that need to be addressed urgently, like high taxes or corruption, a former socioeconomic planning secretary said.
“It is not so much the tax incentives that investors actually care about. What is keeping investors out is (dealings with the) government, corruption, infrastructure. Those are the main issues that have to be addressed first,” Ateneo de Manila University professor Cielito F. Habito, currently a professor with Ateneo de Manila University, said at the Ateneo Economic Briefing 2018 in Makati city yesterday.
Mr. Habito was referring to the rationalization of fiscal incentives under the Tax Reform for Attracting Better and High-quality Opportunities (TRABAHO) bill, representing the second round of tax reform, currently being discussed in Congress.
“Sure BPOs (business process outsourcing firms) need that initial boost. But at this point they’re here because the human resources are here. (We are in a) demographic sweet spot, we have all the young people that are educated. They are the targets of those coming here; it’s not the incentives that made them come here,” Mr. Habito said.
The “Build, Build, Build” program, he said, will be closely watched and might prove a “repellant” if the Philippines shows signs “that we cannot deliver.”
Mr. Habito described the incentives regime as “generous” which has not made the country competitive in terms of foreign direct investment (FDI). FDI inflows totaled a record $10 billion in 2017.
He said the total exceeded FDI posted by Thailand and Malaysia though he expressed doubts about the sustainability of the trend.
“Did we get lucky because of Malaysia’s corruption problems or Thailand’s continued political issues?,” he added.
Department of Finance (DoF) data show that Philippine FDI was equivalent to 2% of gross domestic product in 2015, compared with 2.3% for Thailand and Indonesia, 3.7% for Malaysia and 6.1% for Vietnam.
“I think it could very easily happen by next year and Thailand and Malaysia will have more FDI than we have today,” he added.
He acknowledged however that the other component of the TRABAHO bill — the lowering of corporate income tax rate to 20% from 30% may improve the country’s chances of attracting more FDI.
“It is going to be very important (for investors) to see that we are actually reducing our income tax. That, by the way, is one of the biggest deterrents (to FDI) relative to our neighbors,” he said.
He added that the investment restrictions provided by the constitution and special laws have been hindering FDIs.
Finance Secretary Carlos G. Dominguez III said in a statement on Thursday that investment pledges recorded by investment promotion agencies like the Board of Investments and the Philippine Economic Zone Authority do not reflect the outlook for all FDI, some of which may be flowing in without seeking incentives.
“Last year, our FDIs increased to $10 billion. That is 100% more than it was in 2015. This year, in the first five months, it has increased by close to 50%. Now, they also say approved investments are down. ‘Approved’ means you asked for a tax benefit. Those investments are down but the investments that are coming in are not asking for tax benefits, they’re just coming in. Now that is very encouraging,” Mr. Dominguez said.
The DoF said approved investments accounted for only 21.5% of total capital formation last year.
In the first half of 2018, approved investments declined by 5.3% and accounted for only 13% of capital formation, which the DoF said “implies that investors are applying less for fiscal incentives and are attracted more by the country’s improving macroeconomic fundamentals.” — Elijah Joseph C. Tubayan