The country’s rapidly growing foreign direct investment (FDI) inflows—which soared to an all-time high in 2017—could hit a snag this year, as the second tranche of the Duterte administration’s tax-reform agenda is seen to force investors to take a wait-and-see approach on the Philippines anew, an international think tank said.

Fitch Group subsidiary BMI Research said the second package of the tax-reform program will make the Philippines less competitive in terms of investments against its regional peers.

The think tank made the assumption based on its scrutiny of the bill submitted by the Department of Finance to the House of Representatives.

“While the proposed tax reforms in the second package would streamline the complex tax system, we believe it will likely weigh on the country’s competitiveness, and create uncertainty for investors in the near-term,” BMI Research said.

BMI Research discussed the particulars of the proposed second tranche of the tax-reform bill, including the government’s plans to gradually lower the corporate income-tax rate from 30 percent to no less than 25 percent, while modifying tax incentives for companies to make these “performance-based, targeted, time-bound and transparent.”

Current Philippine laws grant an attractive package of incentives, including income-tax holiday for a maximum of eight years, followed by a perpetual 5-percent tax on gross income earned, and zero value-added tax on local purchases and up to 30 percent of local sales, among others.

The new tax-reform proposal now calls for an overhaul and streamlining of these incentives, including a limit on Philippine Economic Zone Authority incentives to a maximum of 10 years and to increase the 5-percent tax on gross income earned to 15 percent tax on net income.

“Despite the proposed corporate income-tax cut, we note that tax rates in the Philippines will still be one of the highest and least competitive in the region, and the repealing of tax incentives to investors will likely make it worse. This comes at a time when other countries in the region are trying to offer more tax incentives in order to attract foreign direct investment [FDI],” BMI Research said.

“Although the quid pro quo approach may be fiscally prudent, it creates more uncertainty for businesses. We believe that this could weigh on investment over the near-term, as investors adopt a wait-and-see approach,” it added.

The Philippines, after being a laggard in FDI, registered an all-time high FDI inflow in 2017, the Bangko Sentral ng Pilipinas (BSP) reported just this week.

The BSP said FDIs in 2017 hit a total of $10.05 billion for the whole year, 21.4 percent higher than the $8.28 billion seen in 2016.

“Investors continue to view the country as a favorable investment destination on the back of the country’s sound macroeconomic fundamentals and growth prospects. All major FDI components registered increases during the year,” the BSP reported.

FDI are the nonresidents’ investment to the Philippines in search for longer-term yield. These are usually more coveted than the foreign portfolio investments as they are longer-lasting and job-generating.

‘Give it a chance’

Philippine Chamber of Commerce and Industry (PCCI) Honorary Chairman and Treasure Sergio R. Ortiz-Luis Jr. told the BusinessMirror that, while the current version of the bill presents issues, the streamlining of tax rules for corporations will be beneficial for the economy overall.

Ortiz-Luis, also the president of the Philippine Exporters Confederation, said while foreign investors may seem to get a direct hit from the rationalization of incentives, at the end of the day, global players will still look at the country’s potential for growth and will eventually place their money on those that are geared for strong growth.

The government targets a growth of anywhere between 7 percent and 8 percent for the local economy for 2018, potentially making the Philippines one of the fastest-growing economies in the world.

The PCCI official also said they are in talks with local economic managers and have been in several consultations regarding the propositions in the second tranche of the tax-reform agenda. The first package of the Tax Reform for Acceleration and Inclusion—which was focused largely on lowering personal-income taxes and adding excise taxes on certain commodities—has been in effect since January.

Source: https://businessmirror.com.ph/investments-seen-taking-a-hit-from-second-tax-bill/