Attracting investments a challenge as government mulls changes to incentives regime

Attracting investments is going to be a challenge for the Philippines, amid looming changes on the incentives enjoyed by investors as the government pushes for a measure that would rationalize fiscal incentives.

While there is a plan to introduce changes in incentives, the government is also looking at other reforms to make the Philippines a more attractive investment destination to firms.

Philippine Economic Zone Authority (PEZA) director general Charito Plaza said it would be a tough task to encourage investments in the country’s ecozones this year with the tightening of tax perks enjoyed by investors under the TRABAHO bill.

The TRABAHO bill, or the second package of the government’s comprehensive tax reform, seeks to lower the corporate income tax (CIT) rate gradually to 20 percent by 2029 from the present 30 percent, as well as make changes to incentives enjoyed by investors, including the removal of the five per cent tax on gross income earned (GIE) that firms registered by the PEZA pay in lieu of all local and national taxes after their income tax holidays have lapsed.

During the previous Congress, the TRABAHO bill was approved on third and final reading at the House of Representatives, but the Senate was unable to pass the counterpart measure.

While it failed to be passed in the previous Congress, similar bills have already been filed by members of the 18th Congress.

In his fourth State of the Nation Address (SONA) held last Monday, July 22, President Duterte called on legislators to pass the TRABAHO bill and other remaining packages of the government’s tax reform program.

Plaza said investments to be registered with the agency are not likely to grow compared to last year’s “until we remove uncertainties brought about by changing the incentives that are working.”

Last year, investments registered with the PEZA dropped 41 percent to P140.24 billion from P237.57 billion in 2017, which the agency attributed to the wait-and-see attitude of investors.

Latest available data showed that investments registered with the PEZA were down 25 percent to P29.49 billion as of end-April from P39.09 billion in the same period last year as both prospective and existing investors continued to put off plans to invest in projects.

Plaza said she is hopeful a compromise would be reached on the changes in the incentives when the bill is discussed in Congress.

“Our industry groups are hopeful of DOF’s (Department of Finance) open-mindedness to listen to PEZA and industry associations’ version of a very competitive incentives package,” she said.

The DOF is pushing for the rationalization of incentives through the TRABAHO bill so tax perks to be given would be targeted, timebound, and based on performance of companies as providing such benefits means foregone revenues for government.

A few days before Duterte’s SONA and the opening of the 18th Congress, industry groups urged lawmakers to consider alternatives to the proposed changes in incentives under the TRABAHO bill.

Industry groups Philippine Ecozones Association (PHILEA), Semiconductor and Electronics Industries in the Philippines Foundation Inc., Information Technology and Business Process Association of the Philippines (IBPAP), and Confederation of Wearable Exporters of the Philippines (CONWEP) said in a joint statement that while they understand the government’s need to raise revenues and improve the country’s fiscal position, they are of the view such could be achieved without putting to risk jobs and investments.

“To remove or even dilute tax incentives granted to locators now would risk the loss over time of millions of jobs and investments that would otherwise have been committed to the Philippines,” the groups said.

PHILEA president Francisco Zaldarriaga said the groups are of the view PEZA’s incentives which have worked in attracting investments, should be kept.

He said over seven million jobs have been created in ecozones, accounting for more than 10 percent of the labor force, due to tax incentives enjoyed by firms for engaging in projects in priority sectors identified by government.

As other countries in the region also offer incentives to investors, he said changing incentives would affect the country’s attractiveness to firms.

“If there are no incentives, then, there are no revenues foregone. Revenues we are looking at have been generated precisely by these incentives. We need to up our FDIs (foreign direct investments). The way to do that is a combination of ease of doing business, being more aggressive in our incentives. We are up against tough competitors,” he said.

Korean Chamber of Commerce of Philippines president Lee Ho Ik said considering the high operational, electricity and logistics costs in the country, now is not the time to consider changes in the incentives regime which would affect attractiveness to investors.

IBPAP president Rey Untal said changes in the incentives, particularly the five percent GIE regime could be done but in a manner that would not make the country uncompetitive.

As concerns have been raised by existing locators on the proposed removal of the GIE incentive, Trade Secretary Ramon Lopez said the Department of Trade and Industry (DTI) may propose that a higher GIE rate of eight percent be applied instead for firms already registered with the PEZA.

He said the DTI is also looking to recommend a longer transition period of 10 years for the GIE incentive instead of the two to five years under the TRABAHO bill.

DTI estimates an additional P30 billion to P40 billion could be generated by government from the payment of existing PEZA-registered firms of the eight percent tax on GIE.

Untal said the IBPAP is open to paying a higher GIE rate, but discussions would be needed as the acceptable GIE rate for each of the sub-sectors varies.

CONWEP executive director Ma. Teresita Jocson-Agoncillo also said holding a dialogue with government on the matter would be necessary as a seven percent tax on GIE is already considered a stretch for the group.

While the DTI would like to address concerns of existing locators on the TRABAHO bill, Lopez said the agency also sees the bill as part of the reforms that would help entice firms to invest in the country through the lowering of CIT.

“What I like in the TRABAHO bill is the reduction in CIT from 30 percent to 20 percent. That is a big come on for many businesses,” he said.

As Philippines’ CIT is considered one of the highest in Southeast Asia, the Joint Foreign Chambers of the Philippines (JFC) said bringing down the CIT should be done at a faster pace than what is proposed under the bill.

“When it comes to CIT reduction, the JFC is pushing for a 25 percent, or reducing it from 30 to 25 percent upon enactment and then one percent per year reduction down to 20 percent,” European Chamber of Commerce of the Philippines (ECCP) executive director Florian Gottein said.

Apart from reducing the CIT rate, Lopez said there are other reforms being pushed by government to entice firms to invest and set up shop in the country.

He said the amendments to the Public Services Act and Retail Trade Law would open up more sectors to foreign firms.

The proposed amendment to the Public Services Act will limit the definition of public utilities to sectors engaged in the transmission and distribution of electricity, and waterworks and sewerage pipeline distribution system, while the Retail Trade Liberalization Act would reduce the minimum paid-up capital for foreign firms entering the country’s retail sector to $200,000 from $2.5 million at present.

Lopez said the review of the Foreign Investment Negative List, which identifies areas or activities open to foreign firms and those only for Filipinos, is also seen to encourage and entice foreign investments.

“EODB [or] ease of doing business, certainly will help encourage more investments, as well as our digital transformation. Digital connectivity is one that will also attract greater investments and of course, infrastructure development. So, there is a lot of these factors that affect the business environment that will certainly attract foreign investments,” he said.

Implementing rules and regulations (IRR) for the EODB Act signed and promulgated by the DTI, Anti-Red Tape Authority and Civil Service Commission earlier this month, was welcomed by the business community which has long been waiting for the law to take off.

Signed into law in May last year, the EODB seeks to cut bureaucratic red tape in government by putting in place the “3-7-20” rule for government transactions.

In particular, simple transactions have to be completed within three days, while those classified as complex within seven days, and highly technical ones within 20 days.

“The EODB is one of the important legislations we have championed and the most awaited by our members. Hopefully, the signing and immediate implementation of the IRR will compel the streamlining and automation of business-related services of government. It should also now be able to improve our global competitiveness standing and pave the way not only for the entry of more FDI, but the expansion of domestic enterprises especially, MSMEs (micro, small and medium enterprises),” Philippine Chamber of Commerce and Industry president Alegria Sibal-Limjoco said.

American Chamber of Commerce of the Philippines senior adviser John Forbes said the group also sees the signing of the EODB’s IRR as a positive development.

“We strongly welcome the signing of the IRR and look forward to the improved business operating environment promised by the EODBA,” he said.