Ecozone developers nix tax cuts under TRAIN 2

MANILA, Philippines — The enactment of the second package of the Tax Reform for Acceleration and Inclusion (TRAIN) poses a threat to the influx of foreign direct investments (FDIs) in special economic zones, an industry group said.

In a statement, the Philippine Ecozones Association (PHILEA), the umbrella group of major ecozone developers in the country, said TRAIN 2 may result in the loss of jobs, lower production output and exports, capital flight and other setbacks in the gains achieved in the past decades through the incentives afforded ecozone locators — primarily an income tax holiday and five percent gross income earned tax in lieu of income taxes, value added tax and local taxes.

Under TRAIN 2, cutbacks on fiscal incentives granted to ecozone locators by investment promotion agencies such as the Board of Investments (BOI) and the Philippine Economic Zone Authority (PEZA), among others, will be made.

 “The tax reform measures being put forth will reverse the progress that the private sector, hand in hand with the government, have attained thus far in contributing to nation-building through strengthening of the industrial sectors of manufacturing, information technology, business process outsourcing, and many others,” PHILEA president Francisco Zaldarriaga said.

“Disincentivizing foreign investors leaves little room for Philippine industries to pose any remaining attractive propositions given the reality of lack of solid infrastructure, limited business ownership laws, high utility costs and many other constraints. The PEZA law is one of the most potent investment incentive tools that has buoyed our economy in the past decades. Why tamper with it now?” he added.

PHILEA said while TRAIN 2 proposes to lower corporate income tax to 25 percent from the current 30 percent, it will impose timing limitations on other incentives. 

Ecozone locators are currently entitled to tax investment allowances; higher deductions for research and development, training and labor; customs duty exemptions; and export subsidies.

PHILEA emphasized that it is not the first industry group to express reservations or doubts regarding the benefits of the TRAIN 2 as seen by the Department of Finance (DOF).

It cited a position paper submitted by the American Chamber of Commerce of the Philippines (AmCham) in May, which reported that TRAIN 2 would not necessarily encourage more FDIs to the country. In a survey among its multinational members, many of whom are ecozone locators, AmCham reported that 61 percent said the proposed transition periods under TRAIN 2 “would cause their firm to end further expansion.”

Meanwhile, 83 percent of respondents affirmed that fiscal incentives do compensate for higher costs of doing business in the Philippines, and that without these incentives, “investors will locate elsewhere.”

AmCham further stated that the organization supports the proposed 25 percent corporate income tax but considers a 20 percent rate more ideal, as well as a faster rate of reduction. “As the country moves upwards on its path to becoming an advanced nation by 2040, the accompanying tax regime for this new era should ensure that growth is sustained,”AmCham said.

“The proposed bill creates uncertainty for existing and new members,” AmCham said. “Tax projections, an important part of calculations of future revenues, will be handicapped by this uncertainty.”

AmCham also affirmed PHILEA’s fears on the degradation of PEZA and other important ecozones.

“Over nearly two decades, the Philippines has created a group of impressive industrial sites at former US bases and numerous PEZA zones,” it said, referring to the Subic Special Economic and Freeport Zone and the Clark Special Economic Zone, “promoted to foreign investors with attractive fiscal incentives and promises of a ‘one-stop shop’ where investors experience minimal bureaucracy.”

“Without PEZA and other special zones preserving their unique reputation as efficient locations for doing business, more investors will no longer make the Philippines their first choice,” AmCham added.

In the first half of the year, PEZA reported that investment pledges declined by 56 percent, as the the agency approved P53.07 billion to P120.22 billion in the same period last year.

PEZA director general Charito Plaza attributed the decline in approved investments to the concerns raised by both existing and potential investors on TRAIN 2.