How to catch investment fallout from China

When word got out that Japanese investors are looking at pulling back from China, word also got out that the Philippines was not their preferred investment destination.

To be honest, I felt that can’t be right, because how can the country that led Southeast Asia in growth rate for the better part of the decade be not the favorite?

We can’t be too opinionated on these things so we did a survey among Japanese executives in the Philippines. If you believe that it should have been done at the headquarters level in Japan, you are right, and that can be in the works, but the luxury of time is not on our side. Besides, the Japanese executives here, or elsewhere, are quite in touch with the thinking of their head offices in Japan. Sometimes, they are faulted as acting in unison, earning them the term of endearment, Japan Inc.

The survey results for me do not cast the Philippines in a bad light. It is anyway still their number two business destination of choice, but next to Vietnam, which takes top spot. Still, Vietnam can absorb a lot and there is still a lot that we can miss out on.

They cite labor costs still as one of the attractions for doing business here. However, they now cite the rising costs of doing business in the country as one of the reasons why a small but sizable percentage of them are looking at moving out. Pre-COVID-19, only five percent of them had definitive plans of moving out, but this doubled to 10 percent after they experienced the COVID-19 environment in the Philippines. Lockdowns and strict quarantine rules in the country did take its toll on everyone, and they simply could not operate like they do in Japan, where there are no lockdowns just emergency measures.

While 90 percent of them are not saying they will leave, everyone is evaluating their next strategy. From the survey, pre-COVID-19, 36 percent of them have plans of  expanding or introducing new products, but even that will be up in the air in the new COVID-19 environment. Private enterprise is still reimagining the possible and other economies in Southeast Asia are looking at how to lure investors. How Philippine policy transforms and impacts the cost of doing business in the Philippines is as crucial as ever before.

While the country has struggled with ease of doing business, it is almost ironic that one of the top reasons that makes the Japanese community stay here particularly those in the zones, is ease of doing business. The One Stop Shop Center of the Philippine Economic Zone Authority (PEZA) is a gem for them. Dealing with one agency of the government makes all the difference.

This taxation at a gross income tax (GIT) rate in lieu of all national and local taxes is thus key. Real property taxes should be factored in that one GIT rate. If they deal with the local government on real property taxes that are attached on their buildings, improvements and machineries, that one-stop-shop effect and ease of doing business as a model will disintegrate.

For domestic market enterprises, ease of doing business will still be a journey, but doing business has received a positive boost in the Corporate Recovery and Tax Incentives for Enterprises (CREATE) bill, which immediately lowers the 30 percent tax to 25 percent (eventually going down to 20 percent by 2027).

For most of the respondents (63 percent), however, they operate inside the zones and serve the export market for the country. They cite that the key incentives for them are the five percent GIT, tax and duty-free importation, VAT exemption and income tax holiday, with the five percent GIT as the most important.

This brings us to the other part of the CREATE bill, which deals with incentives for the broad export or dollar-earning sector. CREATE increases that five percent GIT to 10 percent effective 2023, when the first sunset period of four years expires. About 80 percent of respondents will fall under the four years sunset period category because they have been registered for more than 10 years. From our data, the 10 percent tax based on gross income can easily be more than the 25 percent tax based on net income. As such, the 10 percent GIT will not be an incentive at all. Simply put, there will be no income tax incentive anymore after the sunset period.

We should be reminded that those serving the export market are not competing with those serving the domestic market in our economy. And if we’re talking about contributions to the Philippine economy, apart from taxes, the employment card should never be understated. We know that the government’s ability to provide welfare is quite limited. It needs the private sector to provide employment, retain local purchasing power and regain domestic market vibrancy. It’s all connected, especially with export zones providing direct and indirect employment to nine million workers, easily supporting 30 million of our more than 100 million population.

The opportunity is still golden. It’s not only about supporting domestic market enterprise. We cannot start leaking at the export sector. In the new normal, winning begins at home. If we want investors to come here, we must keep those who are already here. What is good for them, is good for any newcomer. Keep them, and we keep our hopes high about catching those investments from Japan Inc. or anyone, coming from the China fallout or otherwise.

* * *

Alexander B. Cabrera is the chairman and senior partner of Isla Lipana & Co./PwC Philippines. He is the chairman of the Integrity Initiative Inc., a non-profit organization that promotes common ethical and acceptable integrity standards. Email your comments and questions to [email protected]. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.