The government needs to improve tax and other forms of incentives for business process outsourcing (BPO) firms, or risk losing out to other locations like China and Vietnam that offer lower costs for new investors.
The Business Processing Association of the Philippines (BPAP) said moves to cut tax breaks for BPO firms would drive away companies that employ hundreds of thousands of Filipinos.
“We will not win just on cost, but we need a competitive package to just play the game,” BPAP president and CEO Benedict Hernandez said in a briefing on Thursday.
Hernandez said the cost of doing business in the Philippines, especially in commercial centers like Metro Manila, was already five to 10 percent higher than it was in India, the country’s main competitor in the BPO sector.
This was despite the lower average salaries that BPO employees receive in the Philippines. He said this was a result of a combination of several factors, mainly the Philippines’ high power rates—said to be one of the highest in the world—and India’s more business-friendly tax structure.
Finance Secretary Cesar Purisima last month said the government would push for the removal of “unlimited” tax perks enjoyed by firms located at Philippine Economic Zone Authority (PEZA)-registered sites—mostly BPOs.
“If we remove our tax incentives, the situation will worsen,” Hernandez said. He was speaking at the launch of the industry’s latest “Next Wave Cities” report, which showed Davao City on top of the list.
Companies in PEZA sites are entitled to up to a six-year exemption from corporate income taxes. These are extended for three more years if a company expands its operations. When the extension expires, companies still get to enjoy discounted taxes. Alejandro Melchor III, deputy executive director of the Information and Communications Technology Office (ICTO), said the administration should look at expanding these perks instead of limiting them. The ICTO is an agency attached to the Department of Science and Technology.
He said other countries were even improving the incentive packages offered to BPOs. Malaysia, for instance, extended the income tax holidays for BPOs to eight years from six. China and Egypt offer free rent for up to three years to attract BPO companies.
“They have the right mentality because they are trying to steal market share from us,” Melchor said. “All we are seeing are the losses in potential corporate tax revenues. But BPO companies contribute additional revenues as they continue generating employment.”
As of the end of 2011, the BPO sector accounted for 630,000 workers and $11 billion in revenues, making it the country’s second-largest source of foreign exchange, next to remittances from migrants.
In the meantime, others in the “Next Wave Cities” report—which lists 10 cities outside Metro Manila, Metro Cebu and Clark that offer the best facilities and talent pool for BPO firms—are Sta. Rosa in Laguna, Bacolod, Iloilo, Metro Cavite, Lipa, Cagayan de Oro, Malolos, Baguio and Dumaguete.
Davao City topped the list given its deep pool of college graduates and high-quality network infrastructure as its main advantages over the other cities.