Manufacturing investments dropped by half in 2017 due to tax reform

New investment pledges in the manufacturing sector plunged last year to almost 50 percent due to the uncertainty brought by the tax reform law, top officials of the Philippine Economic Zone Authority (PEZA) said on Wednesday.

New commitments registered under the PEZA dropped to P48.38 billion last year, 46.39 percent lower than the P90.24 billion worth of pledges reported in 2016, data showed.

This is the worst performance the sector has had in the agency’s history, according to Elmer San Pascual, manager of PEZA’s promotion and public relations.

To put the situation in perspective, San Pascual said the sector even managed to sustain a flat growth during the global financial crisis in 2008.

“The TRAIN [Tax Reform for Acceleration and Inclusion law] is [the] number one cause of uncertainty. You cannot get serious investors when there is a cloud of uncertainty. With that cloud, investors wouldn’t invest especially in the manufacturing sector where there are large investment costs in the machines,” he told reporters in Filipino.

Some local transactions on hold

Prior to the tax package, PEZA-registered companies enjoyed zero-rated VAT for their local transactions, with the amount estimated to reach P250 billion yearly. The TRAIN law temporarily kept this zero-rated status, but would remove it under the condition that an enhanced refund system has been put in place.

Companies spiraled into confusion following Duterte’s veto of some TRAIN provisions in December last year. One of his vetoes intended to remove the zero-rated status immediately, but technicalities in the way the veto was worded pushed some to believe that PEZA could still be spared.

Peza Director General Charito Plaza said she met with Finance Secretary Carlos Dominguez III in January, wherein the latter noted that the veto did not cover local transactions made by PEZA-registered firms. Companies, however, wanted the Department of Finance (DOF) to issue an official clarification.

“I wrote a clarification letter to convince our companies [that the perk stays]. Up to now, they said that if it’s not written in black and white, they’re still scared that they’re still covered by the veto. I said the DOF made the pronouncement and it’s officially recorded,” she said in a mix of English and Filipino during a press briefing on Tuesday.

She said she sent the letter to DOF on Monday. She said she has been informed that the official rules regarding VAT would be released in a few days. For now, however, she said some investors “put their local purchases on hold until it’s made clear.”

Decline continues

Prior to last year, the manufacturing sector normally accounted for 80 to 85 percent of investment commitments under PEZA, Pascual said. However, in 2017, the sector only accounted for a little more than 20 percent.

The decline continued for the month of January, a 46-percent decline. An absolute figure for the month was not given.

New PEZA investments in Information Technology and Business Process Management (IT-BPM) investments, which also dropped to almost 50 percent last year, started 2018 with a drop of 73.23 percent to P529 million, from P1.98 billion in the same month last year.

Nevertheless, overall investments under PEZA reached P14 billion, a 27.2 percent increase due to pledges to develop more economic zones.

It remains to be seen how PEZA could reach its goal growing at least 10 percent this year, especially since the tax perks it had long used to entice investments are now subject to change and uncertainty.