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Economy

Duterte's tax plan curbs foreign investment for 2nd straight year

Philippine FDI falls 23.1% to $7.6bn amid policy uncertainties and trade war

Downsizing announcements by Honda Motor, Wells Fargo and Nokia are giving Philippine President Rodrigo Duterte a headache.   © Reuters

MANILA -- Foreign investments in the Philippines plunged for a second straight year in 2019, as prolonged debates on amending corporate income tax rules and the U.S.-China trade war forced companies to put off expansion plans.

Now the coronavirus epidemic is threatening to slow the global economy and complicate legislative deliberations on the Corporate Income Tax and Incentives Rationalization Act, or Citira, which President Rodrigo Duterte said must be passed urgently.

Job-generating foreign direct investment fell 23.1% to $7.6 billion in 2019, the Philippine central bank said on Tuesday. The latest FDI figure could further pressure the Duterte government, after recent announcements that high-profile foreign companies like Honda, Wells Fargo, and Nokia are either leaving the country or cutting jobs.

"Investors faced difficulties from the trade war as well as regulatory risks plus uncertainties from tax reform bills that went pending for several months and impaired expansion plans," said Robert Dan Roces, Security Bank's chief economist.

Citira seeks to gradually lower the corporate income tax from 30% -- the highest in Southeast Asia -- to 20% in hopes of attracting new investments. But it will also streamline fiscal incentives, including perpetual tax holidays enjoyed by many foreign companies such as call centers and exporters.

Since being proposed in 2018, the reform has met strong opposition from foreign business groups, which warn of job cuts. Congressman Joey Salceda, the chair of the ways and means committee at the House of Representatives, last month said $12 billion worth of investments were lost or delayed due to the prolonged debate on the proposed law.

Citira has recently gained the backing of the local business community. "The uncertainty over Citira must end," 10 local business groups, including the prominent Makati Business Club, said in a joint statement on Monday.

Also on Monday, Charito Plaza, the head of the Philippine Economic Zone Authority, asked senators to carefully study and delay Citira's passage due to the COVID-19 crisis.

Plaza, initially a vocal critic of the bill, came around after facing pressure from members of Duterte's economic team. But she told a senate hearing on Monday that "the situation is different now" and argued that dampened global demand due to the coronavirus outbreak is hurting exporters.

The Philippines has historically struggled to attract foreign investment, partly due to foreign ownership restrictions. Foreigners are barred from owning land and media assets while their ownership of public utilities, from telephone companies to airlines, is limited to 40%. The House of Representatives recently passed on second reading a bill relaxing the public utility restriction, but the measure needs further deliberation, and a counterpart bill must hurdle the senate.

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