Foreign investments

Duterte’s tax reform slows down foreign investment

MANILA – Foreign direct investment in the Philippines fell 4.4% year-on-year to $ 9.8 billion in 2018 as investors fear President Rodrigo Duterte’s proposed tax reform will harm the environment investment of the country.

FDI fell for the first time since 2015. Duterte’s first two years in office saw record investment in the country. Although the 2018 figure is still high, economists fear the country will lose foreign money if the investment environment remains uncertain.

The Philippine central bank had set an FDI target of $ 10.4 billion for 2018, slightly above the record $ 10.3 billion in investment flows in 2017.

Foreign investment is a key source of jobs in the Philippines. But foreign investments have lagged behind those of its neighbors. Vietnam, for example, received $ 19.1 billion in FDI last year.

Economists attribute the moderate growth in investment in the Philippines to infrastructure bottlenecks, erratic government policies and foreign ownership restrictions. Foreign companies in many sectors are only allowed to hold up to 40% of the capital. Sectors such as the media are not even open to foreign investment.

New investment fell by a third to $ 2.3 billion from a year ago. Additional investment in existing facilities by foreign companies in their local subsidiaries helped stem the decline, rising 11.3% on the year to $ 6.7 billion. These investments have helped to support the overall number of FDI in a context of a sharp contraction in new investments.

Nicholas Antonio Mapa, Senior Economist at ING Bank NV Manila, said: “Perhaps the uncertainty over the tax reform program could cause some investors to take a wait-and-see attitude.

The Philippine House of Representatives last year approved a bill to revise the country’s corporate tax rates and tax incentives. Duterte’s tax reform measure aimed to reduce 10-year corporate tax rates to 20% from the current 30%, one of the highest among the 10 members of the Association of Asian Nations from the South East.

The government is also considering new measures designed to benefit investors, such as tax exemptions for new industries like robotics and artificial intelligence.

To offset the drop in income, a bill has been proposed to reduce tax incentives for exporters, manufacturers, medical tourism and the business process outsourcing industry. BPOs are a constant source of foreign exchange reserves and generate nearly a million jobs locally.

But the slowdown in the economy is confusing some investors. FDI was strong in the first seven months of the year, increasing to 161% in July before faltering. The Philippines’ economic growth slowed to its lowest level in three years in 2018, with high inflation and low consumption pushing the country to expand to 6.2%, below the government’s target.

ING’s Mapa said FDI flows could remain stable this year as existing investors are expected to continue to flow amid still optimistic outlook for the economy.

“Regarding new FDI, we may need to get more clarity on tax reform or substantial improvements in the quality of infrastructure before we see this account increase again,” Mapa said.

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