DOF: More foreign investors in PH no longer seeking tax perks

tax file stockMANILA, Philippines—Rising foreign direct investment (FDI) flows despite tax perk-seeking projects trending lower meant that more and more foreigners investing in the Philippines were no longer in need of fiscal support, the Department of Finance (DOF) said.

In a bulletin on Monday, the DOF’s chief economist and former undersecretary Gil Beltran noted that foreign-led, job-generating projects approved by investment promotion agencies (IPAs) rose by nearly three-fourths to P192.3 billion last year compared with 2020 levels, but remained below the pre-pandemic commitments amounting to a record P390.1 billion in 2019. IPAs give tax and other fiscal incentives to qualified projects.

The latest Bangko Sentral ng Pilipinas (BSP) data had shown that net FDI inflows in 2021 hit an all-time high of $10.5 billion, breaching the previous record of $10.3 billion in 2017 and above the pre-pandemic flows amounting to $8.7 billion in 2019. Last year’s FDIs reversed the fall to $6.6 billion in 2020, at the height of the Philippines’ worst post-war recession amid the longest and most stringent COVID-19 lockdowns.

“Since 2014, net FDIs have been surpassing investment pledges, suggesting that, currently, the larger portion of foreign investments do not actually ask for fiscal incentives,” Beltran said.

“Indeed, IPAs are not the only foreign investment channels. Following the further liberalization of the banking sector in 2014, foreign banks sought to establish presence in the Philippines. Japan’s MUFG, for instance, bought a 20-percent stake in Security Bank in 2016,” Beltran said.

“As a percentage to GDP [gross domestic product], investment pledges have been trending lower since the onset of the global financial crisis,” Beltran said.

“FDI also fell, hitting only 0.5 percent of GDP in 2010 but, in contrast to investment pledges, has since recovered and trended higher, eventually making a record-high of as much as 3.1 percent of GDP in 2017, at a time when investment pledges amounted to only 0.6 percent of GDP,” Beltran added.

Beltran noted that it was in 2017 when FDIs were boosted by Japan Tobacco International’s (JTI) acquisition of Mighty Corp. following the homegrown cigarette manufacturer’s settlement of unpaid excise. It was also five years ago when a foreign consortium bought a 32-percent stake in Energy Development Corp. (EDC).

“Capital formation (in percentage to GDP) has also risen in conjunction with the increase in FDI. Note that FDIs are actual transactions in contrast to ‘approved foreign investments’ which are investment commitments or pledges that may materialize in subsequent periods,” Beltran said.

“Note further that, unlike FDI, investment pledges include those with foreign ownership of less than 10 percent of a company’s ordinary shares,” Beltran added.

The Corporate Recovery and Tax Incentives for Enterprises (CREATE) Act signed by President Duterte last year empowered the President to grant perks to entice elephant-sized investments, upon the recommendation of the interagency Fiscal Incentives Review Board (FIRB).

The CREATE law also rationalized the previously wide array of fiscal incentives being offered by IPA, which had resulted in billions of pesos in foregone revenues for the government.

TSB

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