THE Philippines has been deemed a “bottom feeder” when it comes to attracting foreign direct investments (FDIs) in the Association of Southeast Asian Nations (Asean).

The level of the country’s FDIs as of 2015, according to the Department of Finance (DOF), reached only 2 percent of the country’s GDP. This means FDIs could be P266.44 billion in 2015 using current prices. Full-year GDP in 2015 was at P13.32 trillion.

This may look impressive since DOF cited Bangko Sentral ng Pilipinas (BSP) data which showed net FDI has been steadily increasing and reached $8 billion in 2018 from only $1.7 billion in 2005.

And yet, compared to the rest of the 10-member Asean, the country is a laggard in terms of FDI. Its closest neighbors are Thailand and Indonesia with FDIs reaching 2.3 percent of their GDP.

The smaller Asean countries such as Cambodia, Lao PDR and Vietnam were the leaders in terms of attracting FDIs with 9.4 percent, 8.7 percent and 6.1 percent of GDP being accounted for by FDIs, respectively.

This situation has led the Philippines to extend so many concessions over the years in the hope that foreign businesses would be more attracted to invest in the country and to stay and give Filipinos decent employment.

The DOF said these “deal sweeteners” are enshrined in 123 laws and even 192 noninvestment tax incentives. These incentives have been in existence for the past 50 years.

“We have been granting incentives for 50 years and I think it is high time that we revisit and see if they are coming back in the form of better jobs and welfare for our people,” Finance Undersecretary Karl Kendrick Chua said in the first hearing on the second package of the Comprehensive Tax Reform Program (CTRP).

Lost revenues, perks ‘forever’

The 123 investment-led fiscal incentives have protected many firms across at least 25 major industries. There are also incentives extended for various sectors under the Board of Investments (BOI); enshrined in the Local Government Code of 1991; the National Internal Revenue Code (NIRC); and the Customs Modernization and Tariff Act (CMTA).

The most number of incentives are given to communication and postal services with as much as 42 investment-led fiscal incentives followed by a far second, the energy/oil industry with 14 fiscal incentives.

Other industries that have more than two fiscal incentives are agrarian reform/agriculture, 8 incentives; games and amusement and banks/financial industry, 5 incentives each; air transport services and BOI-registered firms, 4 incentives each; and environment/pollution control and shipping industry, 3 incentives each.

“Many of them are in communication through franchises which grants 2, 3 or 5 percent in lieu of all taxes, to the energy sector, to the economic zones, and so on,” Chua said.

Further, compared to Asean, the country grants longer-term incentives to investors. Some of these incentives are given forever.

Singapore, the pack leader in Asia in terms of Net FDI flows at $61.6 billion, grants the shortest income-tax holiday at only three short years. An emerging powerhouse in the Asean, Vietnam, grants an income-tax holiday of only two to four years.

Thailand and Cambodia extend fixed income-tax holidays of eight years and nine years. Malaysia grants a five-year income-tax holiday which can be extended for another five years, while Myanmar grants an income-tax holiday of five to seven years.

Chua said, however, that in the Philippines, income-tax holidays can last for four years and extended to as long as eight years. Further, the country allows Philippine Economic Zone Authority (Peza) locators to pay only a tax of 5 percent of gross income earned (GIE) in lieu of all taxes and this lasts forever.

Firms in the country also receive other tax perks such as tax investment allowances, higher deductions for research and development, training, labor, etc.; accelerated depreciation; net operating loss carryover; customs duty exemption; and export subsidies.

Currently, there are 13 firms receiving incentives as long as 26 to 29 years; 131 firms getting incentives for 21 to 25 years; and 510 firms getting incentives for 15 to 20 years.

As a result, Chua said granting tax incentives has cost the country some P301 billion in lost revenues. This estimate is a conservative one that does not yet account for the leakage in taxes as well as local business taxes.

The biggest bulk of these lost revenues are due to import VAT (gross) losses worth P159.8 billion. This is followed by income taxes, P86.3 billion; local VAT (gross), P37 billion; and customs duties, P18.1 billion.

After the passage of the Tax Incentives Management and Transparency Act (Timta) in 2015, the government lost P104.4 billion in income-tax holidays worth P86.3 billion and customs duties worth P18.1 billion.

Largest losses in Peza

The largest losses because of tax incentives were reported by the Philippine Economic Zone Authority (Peza) with P66.6 billion and the Board of Investments (BOI) with P29.4 billion.

The main beneficiaries of these tax perks are mostly manufacturing firms or those engaged in the production of industrial goods, machines, electronics and electrical products, among others, as well as call center and/or business-process outsourcing (BPO) firms.

Total tax expenditure on income and duty granted to manufacturing reached P30.8 billion while for BPOs, it reached P14 billion in 2015.

“We have to rationalize the incentives. Now the details are something we can discuss if there’s a better suggestion, how long, what rate, what industry so that is really the meat of the form,” Chua recently told reporters.

The proposal

The rationalization of fiscal incentives, under the proposal of TRAIN 2, also includes the creation of the Fiscal Incentives Regulatory Board (FIRB), which will be headed by the Finance Secretary, and will approve incentives moving forward.

The primary criteria proposed by the DOF in granting tax incentives include performance-based indicators such as actual investment, job creation, exports, country- side development, and research and development.

The criteria also include granting only targeted incentives to minimize leakages and distortions; ensuring they are time-bound; and transparency, which means these are regularly monitored by the government.

Trade and Industry Secretary Ramon Lopez said that for every P1 tax incentive that BOI grants, the country generates P2.3 additional tax during the period of income-tax holiday (ITH) availment. But as BOI incentives are time-bound, the taxes being paid continue for every year of the whole life of the project—even after the ITH availment period.

Lopez said projecting over a 10-year period using 2015 data, total ITH is estimated to amount to P52 billion, while additional tax revenues will be P300 billion—or a P6 additional tax revenue for every P1 of tax incentive granted.

“Some of the incentives granted, however, were entirely unnecessary given the inherent attractiveness of our market size, our natural and human advantages and our freshly gained competitiveness. Whatever incentives are granted should be performance-based, tightly targeted, time-bound and transparent,” Finance Secretary Carlos G. Dominguez III said in his opening statement.

Lower corporate income tax

Under TRAIN 2, the DOF proposes to lower the CIT rate to 25 percent by 2022 from the current 30 percent while expanding the tax base by 0.75 percent of GDP.

Th DOF said that by January 1, 2020, the CIT rate will decline by a percentage point for every 0.15-percent reduction of investment tax incentives two years prior.

In terms of incentives, the DOF has a longer list of proposed reforms. Apart from those mentioned above, these include the creation of a single menu of incentives applicable to all Investment Promotion Agencies (IPAs).

The country has 10 IPAs—Peza, BOI, Clark Development Corp. (CDC), Subic Bay Metropolitan Authority (SBMA), Authority of the Freeport Area of Bataan (Afab), Cagayan Economic Zone Authority (Ceza), Tourism Infrastructure and Enterprise Zone Authority (Tieza), Poro Point Management Corporation (PPMC), Zamboanga City Special Economic Zone Authority (ZCSEZA), and Bases Conversion and Development Authority (BCDA).

The DOF also proposes:

• banning the double registration of activities;
• granting income-tax incentives only to new investments and not expansions;
• limiting expansions only to availment of customs duty exemptions;
• defining exporters as those who have at least 90 percent of their sales shipped abroad;
• one-year relocation for firms moving out of Metro Manila; and
• higher incentives for those locating to lagging regions, among others.

Impact on jobs, welfare 

Economists believe rationalizing incentives and passing the second package of the CTRP will help level the playing field for both Filipino and foreign firms.

Former Finance Undersecretary Romeo Bernardo told the BusinessMirror that lower corporate tax rates will benefit small, medium enterprises (SMEs) the most because they comprise the majority of the country’s firms.

Bernardo also said those who enjoy incentives also comprise a small portion of the firms in the country and many of them are already established corporations.

“It is not pro rich. Ninety-five percent of firms, mostly SMEs, pay the regular corporate income tax rate of 30 percent. That is the highest rate in Asean and among our competitors. Larger, richer companies who enjoy incentives pay around 6 to 13 percent. We need to make the system more equitable, especially for SMEs, and investors who take risks for the good of the country,” Bernardo said.

Nonprofit think tank Action for Economic Reform (AER) said incentives were also mainly enjoyed by a few firms and do not need incentives to invest in the Philippines. These firms are involved in the aviation, mining, housing and gambling industries.

However, Lopez stressed that rationalizing tax incentives does not mean that the country will no longer grant tax perks.

Lopez said this will be done with the crafting of the Strategic Investment Priorities Plan (SIPP) which will be crafted by the Board of Investments and recommended to the President.

He said the SIPP will state the preferred areas of investment activities which will be identified by the BOI after interagency and stakeholder consultations.

AER said firms who are qualified under the SIPP will still be able to avail themselves of incentives while those firms with current incentives will enjoy a transition period if they are not qualified to apply for new incentives.

“Incentives are not being removed. They will be retained for those who create good jobs, develop the countryside, and/or integrate new technology. Second, the reform is designed to encourage and support companies to create jobs where they are needed most,” Bernardo said.

AER also said the proposed bills in the House of Representatives Committee on Ways and Means specifically provide double tax deductions for firms that invest in training current workers to upgrade their skills and in hiring new marginal labor on an annual basis.

This means, AER said, more Filipinos can look forward to finding regular employment once the government modernizes the fiscal incentives it currently gives to firms and investors in priority sectors that are needed by the economy.

“The government’s push to reform the fiscal incentive regime will encourage businesses to hire more people and upgrade the skills of existing workers by building backward and forward industry linkage as among the criteria to qualify for fiscal incentives,” said Jo-Ann Diosana, senior economist at AER.

“The rationalization actually intends to have a clear set of criteria as a condition to receiving incentives and one of the criteria is the generation of full-time, regular employment,” she added.

The first hearing on the second package of the CTRP last week left more questions than answers. Tax incentives and the decline in corporate income-tax rates are not the only aspects of the bill that are crucial in the discussions.

But succeeding hearings and deeper discussions, which even the President’s economic team admits are necessary, would greatly benefit the new bill. One can only hope that all these proposals can finally take the Philippines out of the bottom of the pack when it comes to FDIs while ensuring that the jobs and welfare of Filipinos will not be jeopardized in the end.

Image Credits: Yooran Park | Dreamstime.com