Business World, 12 August 2014

Ever wonder why the Philippines has attracted the least foreign direct investments into the country, compared to its ASEAN-5 neighbors? That’s not hard to figure out. Blame it on the poor physical infrastructure — dilapidated airports and seaports, aging urban transit system, crumbling roads, failing and uncertain power supply, and so on — that discourages investment in many areas of economic activities like manufacturing, tourism and modern agriculture.

Blame it on the uncompetitive tax regime. The Philippines has the highest corporate income tax rate, one of the highest personal income tax rates, and an unpredictable way of honoring VAT refund.

Blame it, too, on the “lack of transparency, predictability and consistency in the government’s behavior,” as cited by Henry J. Schumacher, the vice president for external affairs of the European Chamber of Commerce of the Philippines (ECCP).

Schumacher laments that the Department of Finance and the Bureau of Internal Revenue have made it extremely difficult to secure the investors’ refund on the excess input VAT credits and of the advanced VAT payments made by investors for the importation of capital equipment for infrastructure projects.

The ECCP statement is not a lone voice in the wilderness. It is reflective of the sentiment of many foreign chambers and embassies in the Philippines. It supports the Embassy of Japan and the Japanese Chamber of Commerce and Industry of the Philippines in their advocacy for a policy environment wherein the government would deliver the valid refunds to legitimate claims of local and foreign businesses without going through the tedious and expensive legal process.

FDIs into the Philippines is roughly only one-fourth of what Malaysia and Thailand attracted in the last 3 years, and only one-twentieth of what Singapore received in the same period. These numbers do not support the view that the Philippines is Asia’s new rising star. The harsh reality is that foreign investors do not regard the Philippines as their top investment destination.

The government is being short sighted by refusing or stalling the payment of excess input VAT credits and the advanced VAT payments made by investors for the importation of capital equipment for infrastructure projects. It gives a false sense that more taxes are being collected than what they really are.

Uncertainty works against investment in two ways. First, it discourages further expansion or re-investment by those who have invested into the country before. This applies to the San Roque Power Corporation (SRPC), and similarly situated firms, which invested in the Philippines at the height of the power crisis in the early 1990s. To date, after a lengthy legal battle, SRPC remains unpaid of its promised VAT refunds.

The Philippines is once more on the verge of a power crisis. It needs to attract new foreign investors to put up power plants.

But how can SRPC justify to its shareholders new investment in the Philippines, when the government has denied its promised refund for its import and investment more than 10 years ago?

Second, in general, uncertainty discourages investment, both local and foreign. Inconsistent, unpredictable and unreliable tax rules are big turnoffs for potential investors. No wonder, the Philippines has failed to attract the level of foreign direct investment that it needs for strong, sustained and inclusive growth.

Luckily, this climate of uncertainty can be cleared without legislation. As Schumacher advised: “it is high time for the government to see the big picture rather than relishing in the short-term success of depriving investors of the VAT (value-added) refunds.” But are our fiscal authorities capable of reversing themselves?

In order to sustain strong growth, the country needs investment in public infrastructure, in manufacturing, and in modern farms. Sadly, attracting foreign and domestic investments would continue to be a challenge if the tax regime were arbitrary, unpredictable and inconsistent.