Uncertainty kills BPO growth

The Business Process Outsourcing (BPO) sector in the country is beset by uncertainties arising from long-standing delays in the passage of the second package of the Philippine government’s Comprehensive Tax Reform Program (CTRP).

The second package, which was introduced a year ago, was passed in the House of Representatives almost in the original form that the Department of Finance proposed, but had been subjected to a host of questions at the Senate level.

Bandied to be revenue neutral, the proposed second package would reduce corporate income taxes, but introduce several other measures to rationalize incentives given to companies. The DOF has said that the rationalization, would benefit small and medium enterprises, and create as many as 1.4 million jobs over the next decade.

However, a number of industries — including the BPO sector — would be affected with the proposed modernization of tax incentives, particularly the planned move to a 28 percent corporate income tax assessment from one that is based on gross income earned (GIE).

Companies located in export processing zones currently enjoy a five percent GIE.

Lost momentum

For Philippine-based BPO companies that serve global clients and compete fiercely for market share with companies based in other countries like India, a dilution in fiscal incentives could affect their ability to hire more people and earn more.

The bad timing for this proposed change comes at a time when US President Trump continues with his protectionist stance to bring back jobs to Americans, and China’s aggressive steps to become a major contender in the world’s BPO sector.

In addition to all these, an exponential outburst in artificial intelligence innovations has prompted many BPO clients to consider migration of parts of their business processes to the digital realm.

As a result, the industry has reported losing its momentum, with growth last year below targets that had been set in its five-year roadmap.

Moving forward

The DOF is optimistic that the Senate will be able to conclude its deliberations on the second package of the proposed tax reforms before adjournment in the first half of the year, although it acknowledges that the schedule may be tight given the forthcoming May elections where 12 of the 24 Senate seats will be contested.

With all the position papers that have been submitted by the private sector that need to be considered by the Senate in finalizing their version, the risk of having a shabbily-crafted law sent to the President for signing is very possible if our lawmakers try to rush things.

On the other hand, the distraction posed by the coming elections may force the Senate to postpone deliberations on the proposed law, thereby prolonging the uncertainties already affecting the health of the BPO sector, and even other industries that significantly contribute to economic growth.

Moving forward, notwithstanding the odds that affected businesses face with the law’s delay, the significance of the BPO sector to the country in terms of job creation as well as revenue earnings cannot be scoffed at.

Approximately 1.2 million people are directly employed in BPOs, with revenues last year estimated at about $24 billion. Its contribution to job creation alone has enabled the country to pare down unemployment stats, increase the ranks of the middle class, and contribute to increased consumer spending.

Strategic importance

It is time to heed the sector’s plea to go easy on the proposed removal of the GIE assessment and give more time for the BPO companies to transition to the new corporate income tax scheme.

The association of BPO companies are also asking the government to include the sector in the strategic investment priorities plan, as well as to retain the zero value-added tax rating for locators in special economic zones whose export sales comprise 30 percent of total sales.

Recent developments now point to a resurgence of the country’s BPO sector in the next few years, primarily because of the weaker peso that has made wages of US citizens more expensive compared to what Filipinos receive.

Also, the relocation of American BPO companies in other countries during the past couple of years has only highlighted the fact that Filipinos perform better than their counterparts in other countries, especially now that clients are demanding deeper engagement with customers.

Digital automation, as things are turning out, has only given BPO clients with a thirst to improve operational services and enhance transparency in their relationship with service providers.

The groundbreaking of new infrastructure projects under the government’s Build, Build, Build program is an encouraging sign for BPO companies who had become concerned with access to other cities outside of Metro Manila. At no other time has the prospects of the BPO sector looked so vibrant.

Property consultants, cognizant of these latest indicators, are predicting a shortage in office space by 2021 if the government, through the Philippine Export Processing Authority (PEZA), will not accelerate the opening up of new zones.

There had been a slowdown in the construction of new buildings for office space with indicators five years ago when multinational BPO companies were looking at diversifying their operations to other countries outside of the Philippines.

If the government acts fast enough, though, real estate developers may be able to respond quickly to provide the necessary support for the local BPO sector. A second wind for our call centers and business services providers could breathe more easy without all the uncertainties.

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