What foreign corporate decision-makers look for in deciding whether to make a direct investment in a developing country is the country’s overall investment ambiance.
One of the things where successive administrations have had little success is the production of strong foreign direct investment (FDI) surge in this country.
It certainly has not been due to lack of effort. In the late 1960s, Congress enacted a finely-crafted piece of investment legislation, the Investment Incentives Act of 1967. Although it was as intelligent and as thorough as an investment law could be, the Investment Incentives Act failed produce the FDI surge that its authors expected it to generate. Ameliorative amendments to the law were introduced from time to time, but still no FDI surge followed.
Thinking that the existing investment legislation was neither competitive with similarly situated countries in this region nor sufficiently generous Congress passed in 2018 the Corporate Recovery and Tax Incentives for Enterprises (CREATE) Act, which was enrolled as Republic Act. No. 11534.
CREATE’s most important provision was the reduction to 25 percent from 32 percent of the corporate income tax (CIT); its other provisions with intended to simplify the availment and computation of tax incentives, such as corporate tax reductions.
Stillm an FDI surge didn’t materialize, with the Philippines still close to the tail-end of the Association of Southeast Asian Nations (ASEAN) FDI ranking, way behind Singapore, Vietnam and Thailand.
It was back to the drawing board for the Executive Department and Congress. It was decided that CREATE needed further sweetening. The end-product was the CREATE MORE [CREATE to Maximize Opportunities for Reinvigorating the Economy] Act, which President Marcos signed into law last month.
CREATE MORE, enrolled as R.A. No. 12066, offers many more perks to business enterprises registered (RBE) with the Board of Investments and the Philippine Economic Zone Authority (PEZA). To facilitate the capital investment approval process, only projects exceeding P15 billion henceforth will undergo review by the Fiscal Incentives Review Board (FIRB); the previous threshold was P1 billion.
The corporate income tax (CIT) rate for RBEs was reduced to 20 percent from 25 percent. RBEs now have the option to choose between the 5 percent special corporate income tax (SCIT) and the enhanced deductions regime (EDR), whose duration was increased to 17 to 27 years from the previous 10 years – a change intended to attract high-quality and labor-intensive economic projects.
To free them from the clutches of corrupt and inefficient local government units (LGUs), RBEs can now pay a local tax of up to 2 percent of gross sales in lieu of all local taxes, fees and charges, e.g., franchise tax, amusement tax and building permit fee. And RBEs operating inside economic processing zones and free ports are now allowed to maintain work-from-home (WFH) arrangements for up to 50 percent of their workforce.
CREATE and CREATE MORE are generous pieces of legislation. Together, they greatly enhance the prospects of RBEs’ being able to operate profitably. Indeed, offering RBEs many more fiscal perks will bring the government close to the point of giving away the store.
Is CREATIVE MORE likely to bring on a surge of foreign direct investment and lift the Philippines from the lower reaches of the ASEAN FDI ranking?
In all sadness, I have to say ‘No’. According to an old saying, you may be able to bring a horse to the water, but you may not be able to make it drink. Without a doubt, CREATE MORE will succeed in enticing more foreign businesses to invest in this country, but an investment surge – repeat, surge – is something else. I don’t think we are likely to see an investment surge in the wake of CREATE MORE’s passage.
What foreign corporate decision-makers look for in deciding whether to make a direct investment in a developing country is the country’s overall investment ambiance, not primarily the packages of economic goodies that laws like CREATE and CREATE MORE give away.
What do I mean by overall investment ambiance? Corruption at all government levels, red tape everywhere (with all due respect to the Anti-Red Tape Authority) and government’s inability to implement policies consistently, swiftly and fairly – these are the sorts of things that make foreign corporate decision-makers decide to invest, instead, in communistic’ and/or non-English-speaking and for culturally different countries in this region.
If this country’s overall investment climate were much better, a law like CREATE MORE would not be necessary.
(llagasjessa@yahoo.com)
