Foreign investors discouraged by lack of progress on tax reform laws

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THE Philippines needs to address the lack of clarity on investment policy, which is discouraging foreign direct investment (FDI), an economist from Fitch Solutions Country Risk & Industry Research said.

In a television interview Monday, Fitch Solutions Senior Country Risk Analyst Michael Langham said the delays in the 2019 budget approval and passage of tax reform laws slowed FDI net inflows last year. Net inflows dropped 23.1% from a year earlier to $7.647 billion.

This year, Mr. Langham said another set of uncertainties caused by the coronavirus pandemic and the still-ongoing debate over tax reform will further dampen foreign investment.

To attract more long-term FDI inflows, he said “more clarity for foreign investors is needed.”

“As we saw in 2019, FDI really dropped quite sharply and a lot of that was over policy uncertainty as well as the weaker outlook for the global economy,” he told ANC.


He said the proposal to lower corporate income tax will place the country at par with its neighbors but the measure, which is still pending at the Senate, could deter potential investment.

“The COVID-19 (coronavirus disease 2019) situation has already created enough uncertainty as it is; investors don’t need also tax and policy uncertainty on top of that,” he said.

Among the main contentions in the bill is the overhaul of the tax incentive system, which has also been cited as a cause of uncertainty last year, according to a June 10 report by Fitch Solutions.

The Corporate Recovery and Tax Incentives for Enterprises Act bill aims to lower corporate income tax to 25% this year and further to 20% by 2027 from the current 30% and streamline incentives while keeping sunset provisions at up to nine years.

Both chambers are currently on break until July 27. They could convene in a special session if the President calls them in to tackle urgent measures.

Mr. Langham said other factors that deter foreign investments are the high cost of logistics and other trade-related expenses.

In a recent report, Fitch Solutions forecast FDI inflows to “remain depressed” this year as the fallout caused by the pandemic is expected to “aggravate the challenges” the country faces in attracting foreign investment.

Mr. Langham added that a strong peso will also be considered a negative “in the very near term” for foreign investors “looking for discounted assets elsewhere particularly in the emerging markets.”

“But over the longer term, the peso stability has been somewhat positive in terms of the Philippines’ overall financial markets stability and that is something that over the coming years could prove a selling point in terms of investment into the Philippines,” he added.

The peso maintained its strength against the dollar despite headwinds from the coronavirus pandemic, outperforming weakening currencies in Southeast Asia. The peso is expected to trade between P50-54 against the dollar this year.

FDI inflows fell 18.5% year on year to $507 million in March , but slightly 1higher than the $505 million recorded in February.

The central bank attributed the decline to the impact of the pandemic on “investor sentiment and investment activity.” — Beatrice M. Laforga