Tax perks and FDI

The Department of Finance announced that some P414 billion worth of projects have already been approved for incentives under the CREATE Law. The law, among others, slashes the corporate income tax (CIT) from 30 to 25 percent. For domestic companies with a taxable income of P5 million and below, and with total assets of not more than P100 million, their CIT was cut from 30 to 20 percent.

The DOF didn’t say how much fresh foreign direct investment (FDI) has so far been attracted by CREATE. After a year or so of CREATE, it would seem that the tax cuts that were justified on the basis of its investment-enhancing outcomes are not delivering in terms of FDI. For now, the tax cuts seem to have merely rewarded fat and rich corporations already here, even as the government is foregoing much needed fiscal revenue.

Maybe it is too soon to expect a miracle. The pandemic and the volatile financial environment worldwide affected investor sentiment.

In January this year, net FDI slumped 45.7 percent year-on-year to $0.45 billion, below the market consensus of $ 0.63 billion. It was the smallest FDI inflow since May 2021, due to a decline in non-residents net investments in debt instruments and equity capital, the BSP reports.

Tax perks alone will not get us the FDI we want to attract. There are other things in the minds of potential investors that weigh heavily in making investment decisions in a country.

I have talked to a number of potential investors and it seems they are looking beyond tax cuts. From what I can gather in our conversations, they are already interested in investing here. But they want reassurance on things like political stability, peace and order, a fair judicial system, consistency of policies and laws, among other things.

They have heard of what Duterte did to the water companies and that is scary enough to hesitate. After all, the contract was running for almost three decades and abrogated just like that, disregarding international arbitration called for in the contract.

They have heard of how long it took San Miguel to get approval to start building MRT 7 and the Bulacan airport. They have heard of the removal in new contracts of the provision on material adverse government action (MAGA), for which a private contractor should be duly compensated.

They have heard of how the PPP Center has become another bureaucratic gate keeper whose red tape an investor must untangle in addition to the infrastructure group of NEDA. Neither bureaucracies seem eager to implement PPP despite administration press releases.

They have heard of how long it takes (six years) for a simple power plant project to start construction and the 600 or so signatures required from national and local officials.

They have heard of our iffy and expensive power supply situation and how there seems to be no relief in the foreseeable future.

They asked about crony capitalism, how it distorts fair competition. What can I say? Rent seeking is still prevalent.

They have heard too of how LGUs, including barangays, are screwing investors simply because they assume investors have money and can afford to pay them off.

They like our young population… a good source for labor, as well as providing market purchasing power. But they have heard of how badly educated our young people are and how we are losing our facility for English, a come-on in the past.

So, there we are… offering tax perks, but neglecting a long list of things to do to compete with our ASEAN neighbors in attracting foreign investments.

ASEAN has been a strong magnet for FDI, except for us. The early movers in the shift towards export-led development based in part on FDI have the advantage. Vietnam and Indonesia have attracted the greatest stock of greenfield FDI over the last decade ($232 billion to $242 billion), followed by Malaysia and Singapore ($153 billion and $164 billion).

Our barriers to FDI are well known. In 2020, we were ranked third most restrictive out of the 84 countries in the OECD FDI regulatory restrictiveness index.

I tell potential investors that we are doing something… We have passed a new Public Service Act that opens up areas to foreign investment that were previously reserved for Filipinos. And that we are considering amending the Constitution to remove more restrictions for foreign investments.

Those who are familiar with us like the Japanese, the Singaporeans, and the Americans are not daunted by our governance idiosyncrasies. So, they continue to invest.

But we shouldn’t expect CREATE to create a miraculous inflow of FDI if we don’t fix other things that are important to investors. Fiscal incentives constitute only one reason to invest here.

A key worry is the corruption in our regulatory and judicial systems. Red tape is another. Those who are subject to foreign corrupt practices laws in their home countries are very concerned. Our bad reputation is apparently widespread. I don’t even try to deny it.

Stability of contracts and policies is another question mark. Improvement of infrastructure from roads to energy is important too. The fairness of our justice system is one major worry and the EJK stories and our withdrawal from the ICC have reinforced their fears.

Our economic managers have been doing investment roadshows for years now. They just had another one this week in Washington DC. But all those seemingly rosy economic numbers don’t mean as much to potential investors if the situation on the ground is problematic.

For one thing, they want to feel safe… for themselves, their families and their staff. We have to speed up cleaning the PNP. Hearing the DILG Secretary say that top police generals are involved in the drug trade and nothing much else being done about it is not reassuring.

For us, there is no getting away from doing our homework first. CREATE is not a magic wand for FDI. We have to clean up first and the FDIs will follow. After all, we have a good story that investors can theoretically love. But our inability to implement good plans we promise during roadshows and the obvious absence of good governance are keeping new direct foreign investors away.

Boo Chanco’s email address is [email protected]. Follow him on Twitter @boochanco.