Fiscal perks overhaul seen keeping investors on edge

THE PHILIPPINES still receives the least foreign direct investments (FDI) among Southeast Asian nations, a global bank has noted, pinning the blame on constitutional restrictions and uncertainty over a new system for tax perks.
Restrictions on foreign participation in several sectors as well as proposals to remove fiscal incentives the government deems redundant may be discouraging more foreign capital from entering the country, HSBC Global Research said.
“Many countries in the region must also continue to find ways to remain competitive in the long term. For instance, the sustainability of investment incentives may be in question for countries with reduced fiscal space, such as Vietnam, while the Philippines is also considering amending its incentives to corporations and investments in the second phase of tax reforms,” the bank said in a report published last week.
While Southeast Asia on the whole has been enjoying an investment boom given its “tremendous economic potential,” FDIs are not distributed equally among individual states.
HSBC said the biggest considerations are “rule of law, strength of institutions, demographics and investment incentives,” HSBC said.
The Philippines, Vietnam, and Indonesia have seen big gains in Global Competitiveness Index rankings in the past 10 years, the bank noted, citing progress in improving infrastructure and fiscal management, as well as in reducing corruption.
At the same time, it cited major risks, including trade tensions between the world’s two biggest economies — the United States and China — as well as policy changes in each emerging market.
The second tax reform package, which has been named by the House of Representatives as the Tax Reform for Attracting Better and High-quality Opportunities (TRABAHO) bill, seeks to cut the corporate income tax rate gradually to 20% from 30%.
The measure also proposed to limit incentives to a single menu with perks capped at five years. Business groups and ecozone locators have cautioned that changing the set of perks could dampen investor appetite towards the Philippines and derail expansion plans of foreign firms already operating here.
Southeast Asia’s top FDI sources are Europe with an average of $21.97 billion from 2010-2017, followed by intra-Association of Southeast Asian Nations (ASEAN) flows with $21.191 billion and the US with $15.124 billion. These FDIs mainly go to financial and insurance activities, manufacturing, and wholesale and retail trade, the report noted.
“[T]he Philippines receives the least amount FDI from its ASEAN peers, averaging just $200 million since 2010. This may be partly due to the country’s onerous restrictions on foreign ownership of certain key industries, as protected by its constitution,” HSBC said. “Unsurprisingly, the most developed economies (i.e. Singapore, Malaysia, and Thailand) are also largest source of intra-ASEAN FDI, with their largest recipient being Indonesia — the biggest economy in the region.”
The 1987 Constitution as well as the Foreign Investment Negative List limit foreign participation in key sectors like retail, small-scale mining, public utilities, private lands, education, suppliers to state agencies, as well as financing and investment companies. — Melissa Luz T. Lopez