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Give tax reform a chance

March 02, 2019

CONTRARY to the worries expressed by numerous business groups and some government agencies and lawmakers, the prospect of fewer fiscal incentives under the second package of the government’s Comprehensive Tax Reform Package (CTRP) is evidently not discouraging new investors in the Philippines. Those who are still opposed to it should turn their energy instead to helping implement it as quickly and efficiently as possible.

Socioeconomic Planning Secretary and National Economic and Development Authority (NEDA) head Ernesto Pernia drew that conclusion on Thursday after data from the various investment promotion agencies revealed that investment pledges skyrocketed in the fourth quarter of 2018.

Investment pledges logged by the Board of Investments (BoI), Clark Development Corp. (CDC), Philippine Economic Zone Authority (PEZA), Subic Bay Metropolitan Authority (SBMA), Bureau of Investments-Autonomous Region of Muslim Mindanao (BoI-ARMM), and the Cagayan Economic Zone Authority (CEZA) soared to P92.1 billion in the last quarter of last year. That is an astonishing 322 percent increase in pledges from the P21.6 billion registered in the same quarter a year earlier.

For full-year 2018, total investment pledges rose 69.3 percent to P179 billion from the P105.7 billion recorded in 2017.

Secretary Pernia stressed that if the provisions of the second package of the CTRP, known as the Tax Reform for Attracting Better and High-Quality Opportunities or “Trabaho” Bill, were actually discouraging investors, the high level of investor interest in the Philippines indicated by the amount of investment pledges would not have been registered.

Under the Trabaho Bill, corporate income taxes would be incrementally reduced over the next several years, but as a trade-off, the large list of current tax incentives offered by the various investment promotion and other agencies would be rationalized and brought under centralized administration. This would necessarily result in the removal of a large number of incentives, which is what business groups and investment boosters have balked at.

“Investment pledges” as a metric are often considered insignificant, and this is usually justifiable; an investment pledge is not an investment in fact, and a certain amount of the pledges is never fulfilled for one reason or another.

Investment pledges are, however, actually a very good indicator of investor sentiment with respect to the Trabaho Bill. Investment pledges are forward-looking; they express firm intentions (although not always total commitments) to invest in the Philippines at some future point. They are made on the basis of forecasts of the business environment at and beyond that future point, and take into consideration expected changes in laws and regulations, expected changes in market conditions, and so on.

Under those circumstances, investors who happen to be eyeing the Philippines must have taken into account that fiscal incentives will not be available, or will be limited. The Trabaho Bill, in effect, represents the worst-case scenario, with respect to fiscal incentives; if the prospective investor sensed that an investment would be profitable in that case, the investment pledge would certainly be withheld. That is exactly what Secretary Pernia pointed out earlier, and he was correct.

The reform of corporate taxes and fiscal incentives will have numerous benefits to the economy. More competitive corporate tax rates, although the reduction will be modest, will help to attract more investors. A streamlined, relevant fiscal incentive regime will ensure that any tax perks granted will result in a substantial exchange of value, and will benefit businesses by making those that are offered easier to manage and claim.

For all intents and purposes, the investment pledge data from the fourth quarter and the full-year 2018 removes the last rational obstacle to passage and implementation of the second tranche of the CTRP, and its critics should acknowledge and respect the evidence.

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