BSP: Tax incentives for FDIs to be rationalized, not removed

September 13, 2018 News

Despite the rather slow inflow of badly needed Foreign Direct Investments (FDIs) into the country, the government still insists on the future implementation of streamlining of incentives to the present batch of FDIs for transparency and monitoring purposes. 

Many government officials feel that such scrutiny of incentives is quite overdue considering the fact that tens of billions of pesos have been diverted to the benefit of the investors instead of finding their way into the national budget to fund projects and social initiatives for the general populace. 

"We just want to rationalize the incentives to be sure if these are used properly. The investors have to prove that the investments generate better job quality, introduce new production processes every three years, and foster innovation to research and technology," declared Diwa Guinigundo, Deputy Governor of Bangko Sentral ng Pilipinas (BSP).

He downplayed an earlier claim of PEZA (Philippine Economic Zone Authority) Director General Charito Plaza who said that the total revenues contributed by the 380 economic zones has reached PhP1.33 trillion during its four decades of existence. She compared this figure to the PhP235.3 billion in foregone revenues, which went to investor incentives.

Guinigundo questioned what specific components the PhP1.3 trillion figure referred to. Are these raw materials, employment figures, or tariffs? He declined to comment further on the issue as he found it difficult to react since he found the claims rather vague. 

Do not kill the goose that lays golden eggs

 In an exclusive interview with Expat, Plaza stated that a vast majority of the 4,161 locator companies would suffer financial setbacks and may even close shop and move to other Asean companies if their incentives would be withdrawn. "I will do everything in my power to defend these locator companies since they have contributed so much to the national economy. Do not kill the goose that lays the golden eggs. This can spell disaster for everyone," she said earnestly over a European Chamber of Commerce Philippines (ECCP)­Cebu chapter hosted cocktail reception. She also surmised that the national government needs the investor incentives to fund its ambitious "Build, Build, Build PhP7­ trillion infrastructure program of large­scale projects such as bridges, airports, railways, and roads nationwide.

Spoiled investors 

For his part, Guinigundo declared that there are several "spoiled" investors that have enjoyed the incentives for over 50 years—resulting in huge losses for the government on a regular basis.

 "These firms have been tax­ exempt for decades, while much smaller local firms are paying 30 percent in income taxes every year. There is no value added in terms of the high production chain. And the big firms have been using basically the same infrastructure for decades," he continued. 

Jasmin Dacio, Bank Officer V of BSP, revealed "many investors also enjoyed double incentives when they relocate to another ecozone and collect the same benefits. 

"Because of this, we want to insure discipline and transparency where incentives are concerned. Incentives should be performance ­based only," she affirmed. 

Both speakers declined to mention the offending firms and the circumstances involved.

Favorable despite kinks

"Bureaucracy and red tape now belongs to the courts and the police," Guinigundo said. "The new law authored by Sen. Migz Zubiri specifies deadlines for response time in all government offices. Once deadlines are broken, the request is deemed in favor of the person concerned and a case is filed vs. the erring party." 

He admitted to the possibility that affected firms may leave for greener pastures abroad, but also cited the allure of the Filipino workers. 

"Each and every country will have their own collective set of strengths and weaknesses," he said. "But nothing beats the Filipino friendliness, flexibility, and ease with the English language. No need to translate anything to the local dialect. Plus we also have child labor and environment laws. All in all, we still remain a very favorable investment haven despite the usual kinks, he declared."

The ecozones 

Some government officials already feel that it is about time some incentives for FDIs, especially the foreign locators in economic zones, be reviewed thoroughly in order to prevent or limit certain alleged abuses such as duplication of factories and perpetual extension of benefits. 

With over 380 economic zones operating nationwide under five categories, Plaza stressed that a vast majority of the 4,164 locator companies based in these zones would suffer financial setbacks that would eventually force them to close shop due to the disappearance of their buyers. 

These five zone categories are classified into 74 industrial and export processing zones, 266 IT Parks and Centers, 19 Tourism Ecozones, two Medical Tourism Parks, and 22 Agro­Industrial Parks. These integrated ecozones are geared toward the creation of Smart Towns, Digital Cities, and New Metropolitan Areas.

Powerful committee births unease

 Speaking on the topic "Updates on PEZA and TRAIN 2" before the ECCP­Cebu chapter, Plaza revealed that the TRAIN 2 (Tax Reform for Acceleration and Inclusion 2) created a powerful committee composed of the secretaries of the Department of Finance and the Department of Trade and Industry that can revoke the incentives of existing companies.

 Dubbed the FIRB (Fiscal Incentive Regulatory Board), this committee was originally created to raise revenues for the administration's infrastructure program. 

But the FIRB also created unease and restlessness among the ecozone locators as its powers seem to supersede that of PEZA's, therefore threatening its very survival. 

Plaza revealed that she spoke up during Investors Night where she defended PEZA's shining record of having produced trillions of pesos in revenue for the government since its creation in 1995 despite the national government giving it zero budget from the start. 

She cited 2015 figures of PhP235.307 billion as the total estimated foregone revenues due to tax incentives given to PEZA companies. While the staggering figure of PhP1.33 trillion was presented as the total economic figure contributed by PEZA companies. "

This means that the total economic gain contributed by PEZA companies is 5.66 times bigger than the total estimated foregone revenue due to tax incentives given to PEZA companies," she declared.

Glowing figures and decongesting cities 

Plaza also cited that the total amount of industry purchases, which has risen from PhP265 billion in 2016 to PhP296 billion in 2017, translating to a 10.5 percent increase on a year­to­year basis. 

Moreover, she pointed to glowing figures in PEZA's 2015 report to the National Economic Development Authority (NEDA). This included PhP270.716 billion in salaries; PhP773.243 billion in exports; PhP6.507 billion total of five percent gross income tax paid; plus PhP 1.994 trillion in total actual investments.

"The PEZA offers the highest investment incentives and remains to be the biggest spoiler of investors. We have also given PhP700 million or half of our net profit to the national treasury. We decongest Metro Manila and create new cities. Also, our economic programs have been proven to reduce crime and spread the wealth in the countryside," Plaza added. 

As an example, she pointed to the social progress brought about by the presence of Metro Manila and the CALABARZON (Calamba, Laguna, Batangas, Rizal, and Quezon) region, which accounted for 56 percent of the country's GDP. 

Surprisingly, she expressed belief that the TRAIN 2 will not be passed due to the 2019 elections. She iterated that the politicians need the support of their constituents and will do what they can to please the voters. Then, there is also the proposed shift to federalism that requires massive attention and large­scale changes in the systems.