PH at a crossroads when it comes to fiscal incentives

BY BEN KRITZ, TMT, Manila Times, Apr 19, 2018

IF we take the news reports from earlier this week at face value, we might draw the conclusion that a key part of the Philippine’s economic growth formula will be put in serious jeopardy once Congress starts deliberating on the second phase of the government’s comprehensive tax reform package.

Philippine Economic Zone Authority (PEZA) Director Charito Plaza sounded the alarm on the impending tax reform initiative, which will address corporate taxes and “rationalization” of fiscal incentives to investors, saying that “a number” of ecozone locators who had previously indicated plans to expand had put those on hold, and that “some are seriously considering” moving their business elsewhere in the region.

These concerns were echoed by both the American Chamber of Commerce of the Philippines and the Korean Chamber of Commerce Philippines. An official from the American Chamber suggested that, all things considered, companies were now looking at Vietnam as a better location than the Philippines. His Korean counterpart said that locators and investment agencies from his country were “very worried” about the possible changes, and that they supported PEZA’s position that existing incentives be maintained.

On the other hand, the European Chamber of Commerce of the Philippines said that it “was not aware” of any European firms delaying or canceling investment plans, but that the reforms could have a detrimental effect.

Whether or not it’s actually news that foreign investors would prefer there to be more, not fewer, investment incentives is something for editors to decide. Personally, I don’t think it is, and I don’t think there’s a clear public interest case in this instance for allowing one’s newspaper or broadcast news program to be used as a lobbying tool. That proceeds from an assumption that foreign investment – or specifically, foreign investment by way of ecozone location, since that’s what we’re talking about here – is a priority, and that maximizing its potential should take certain precedence over other broad economic considerations. That assumption may not be correct.

It is a consequence of globalization that foreign investment, especially in this part of the world, has become accepted as an end in itself as part of economic policy, but that perspective is not entirely rational. Ideally, any country should strive to develop a self-sustaining economy; in a real sense, all these “locators” are representative of something the Philippines aspires to become – the sort of economy that sends its businesses to set up shop overseas, rather than being the landing place for others’ enterprises.

Foreign investment is desirable, but it should complement, rather than replace, the real priority, which is the development of the domestic economy. Of course, foreign investment brings with it great benefits to an economy that doesn’t already have the wherewithal to build large mines, or steel mills, or shipyards, or auto assembly plants, or electronics factories. It creates jobs; it provides tax revenue, not only directly but multiplied by new incomes that can be taxed and more VAT and excise taxes collected due to workers’ increased spending power; it encourages growth of smaller, local ancillary businesses; and it transfers technology on a couple of different levels – not only the technology involved in whatever kind of business the foreign firm brings here, but knowledge in management, coordinating with other businesses, regulators, and public services, and even in basic work habits.

Since every economy in the same position wants to realize these benefits of foreign investment, incentives that will entice investors to choose this country and not that one are a competitive necessity. What makes them “rational” is if they represent a good investment themselves, a positive exchange in value for what the country may be giving up in terms of tax revenues, or looser regulations, or control over certain industries or markets. Once the country’s own economic development reaches a point where the returns from the incentives are clearly diminishing, then they must be reassessed and eliminated, or adjusted appropriately.

Thus, the debate over the rationalization of fiscal incentives in the proposed second phase of the tax reform program is really a debate over whether or not the Philippines has reached the point where existing incentives are no longer profitable.

The government, in proposing reduction of incentives, is making the assertion that it has, indeed, reached that point, but it has yet to clearly make its case. PEZA and its clientele, of course, have understandable ulterior motives for rejecting the notion of rationalization, but in effect that is the same as asserting that the Philippines has not yet seen diminishing returns from incentives; that case has not been clearly made, either.

The Philippines may be ready to reduce fiscal incentives to foreign investors, or it may not be. Until that question is confronted directly and answered clearly one way or the other, the likeliest outcome of any effort to rationalize incentives will be something that is not entirely satisfactory to anyone.

ben.kritz@manilatimes.net