Investing in ASEAN: Philippines
“According to the projections of the United Nations, the majority of our people will reach working age next year, which means that there will be an abundance of talent and creativity in the workforce, ready to spur your businesses to success,” Philippine President Benigno S. C. Aquino III said in September.
During his speech before a business roundtable meeting with CEOs and other senior officials from the US Chamber of Commerce and the US-ASEAN Business Council, Mr. Aquino cited the Philippines’ improved economy and “vibrant” work force to woo investors to the country, as well as the Philippines’ consecutive upgrades from major credit rating agencies, and its improved ranking in the World Economic Forum’s 2013-2014 Global Competitiveness Report.
Welcome to the Philippines
The Philippines is an archipelago of 7,107 islands off the southeastern coast of mainland Asia. It was under Spanish colonial rule for over 300 years until it was ceded to the United States in 1898, and attained independence in 1946.
The country is a democratic republic, with a presidential form of government modelled after that of the United States. National and local elections are regularly held and are generally free and fair. The government has three branches: Executive, Legislative and Judicial, and the president heads the Executive branch.
“The economic system is open and market-oriented,” says a report from PwC Thailand entitled South East Asia – Investment Opportunities, Tax & Other Incentives, adding that, “pricing mechanisms remain regulated in a few sectors to protect consumers. The Philippines has undergone significant structural reforms in the past decade. Market competitiveness has been enhanced through the dismantling of protectionism and opening to global competition”.
While infrastructure is underdeveloped in many parts of the country, it is considered adequate in major metropolitan areas, and the government is committed to increasing infrastructure investments.
Indeed, as this post was being written, a story broke in Interaksyon detailing the government’s plans to ramp up spending on infrastructure: “One of Asia’s fastest-growing economies, the Philippines is showing signs of overheating,” the story said, “and the Aquino administration is drumming up investor support for its plan to sustain the country’s recent economic gains, as infrastructure bottlenecks threaten to derail its growth trajectory”.
The story lamented that “a truck ban at the capital has piled up containers at the country’s main port of entry, while intermittent outages last summer threaten to become a full-blown power crisis next year. Add to that overcrowded trains, hellish traffic on Metro Manila’s roads, and the country’s main international gateway bursting at the seams”
“The Philippines ranks the poorest in terms of public infrastructure among Asean-5 economies. It’s a major drag on Philippine economic growth,” said University of the Philippines economics professor and former budget secretary Benjamin Diokno. “Traffic congestion imposes negative externalities in the smooth flow of goods, services and passengers. The dwindling and uncertain supply of power negatively affects all sectors of the economy. To address the problem the government has to set aside at least 5% of GDP for public infrastructure”.
“We are playing catch up’” said Transport Secretary Joseph Emilio Abaya. “At least the government is doing what it thinks it should do. We are blessed that there are resources, there’s fiscal space”. That ‘fiscal space’ comes from under-spending so far this year, with revenue outpacing expenditures, and for 2013-2016, the government has lined up 952 projects for a total investment of USD 46.69 billion.
A story in U.S. News & World Report in May said that, “when it comes to emerging markets, the average investor is focused on Brazil, Russia, India and China. But some smaller developing countries are also worth a look as they pull ahead in terms of economic growth and attract booming industries. One notable example: The Philippines grew its gross domestic product 7.2 percent in 2013, and the country has trumped India as the leading destination for call centers. Large corporations including JP Morgan Chase and Procter & Gamble recently expanded operations there”.
U.S. News added that, “unlike residents of many other emerging markets, Filipinos speak English fluently, and the country supplies low-wage workers that appeal to large companies growing their operations overseas. These factors make the Philippines an attractive area for investment”.
“As a newly industrialised country, the Philippine economy has been in transition from one based on agriculture to one based more on services and manufacturing” says PwC. The Philippines is still an economy with a large agricultural sector; however, services have come to dominate”.
Much of the industrial sector is based on processing and assembly operations in the manufacturing of electronics and other high-tech components, usually from foreign multinationals.
The Philippines has overtaken India, however, as the world leader in business support functions such as shared services and business process outsourcing. The majority of the top ten BPO firms in the US operate in the Philippines – employment has ballooned to more than 700,000 people and is contributing to the growth of the country’s middle class.
Horst von Wendorff, founder of Virtual Knowledge Workers, a business process outsourcing company based in Cambridge, Massachusetts, says companies are increasingly turning to the Philippines for call center expansion as opposed to India, where English is spoken less fluently.
“Industrialisation is one of the country’s major long-term objectives,” says PwC. “A major priority in the country’s development plan is to facilitate the development of information and communication technology with a view to establishing the Philippines as a knowledge and software development centre and an e-service hub for Asia. The workforce is skilled and well educated. English is the official business language and is widely spoken even in the most remote areas of the country”.
Opportunities & Incentives
“Foreign investors desiring to establish their presence and do business in the Philippines have the option to either put up a wholly-owned subsidiary, a Philippine branch office or a Regional Operating Headquarters (ROHQ). On the other hand, those intending to establish minimal presence in the Philippines may establish either a representative office or a Regional Headquarters (RHQ),” says PwC.
“The Philippines has various investment laws that provide both fiscal and non-fiscal incentives,” they add. “Implementing these investment laws are the various incentive-giving agencies such as the Board of Investments, which primarily grants incentives to export enterprises and those engaged in preferred areas of investments. Incentives may likewise be availed by entities operating within special economic zones and free-port zones”.
The BOI is an agency attached to the Department of Trade and Industry, and is tasked with implementing the provisions of the Omnibus Investments Code. It is also responsible for the annual preparation of the Investments Priorities Plan (IPP), which identifies preferred areas of investment.
These preferred areas of investment include agriculture/agribusiness and fishery, creative industries/knowledge-based services, shipbuilding, mass housing, iron and steel, energy, infrastructure, research and development, green projects, motor vehicles, strategic projects, hospital/medical services, disaster prevention, mitigation and recovery projects.
Only Philippine citizens and corporations are allowed to apply for BOI incentives. For a corporation to be qualified as a Philippine National, its outstanding capital stock entitled to vote must be at least 60% owned by Filipinos.
A corporation that is 100% foreign owned is however able to qualify for BOI incentives if it will engage in pioneer projects, export at least 70% of its total production, or undertake projects in an area identified by the BOI as a less-developed area of the country.
Examples of a pioneer project are one that is engaged in the manufacture, processing or production – and not merely in the assembly or packaging – of goods, products, commodities or raw materials that have not been or are not being produced in the Philippines in a commercial sale; is using a design, formula, scheme, method, process or system of production or transformation of any element, substance or raw materials into another raw material or finished good that is new and untried in the Philippines; and is engaged in the pursuit of agricultural, forestry and mining activities and/or services, including the industrial aspects of food processing if determined by the BOI and the relevant department to be feasible and highly essential to the attainment of the national goal in relation to a declared specific national food and agricultural program for self-sufficiency and other social benefits.
Pioneer enterprises are given a 6-year Income Tax Holiday (ITH), says PwC, extendible to another 2 years if certain conditions are met. Non-pioneer enterprises are given 4 years of ITH, extendible to 3 years if certain conditions are met.
For the first 5 years from registration, a BOI-registered enterprise is allowed an additional deduction for taxable income equivalent to 50% of the wages of additional skilled and unskilled workers in the direct labour force, subject to meeting a prescribed labor-to-capital ratio.
Additionally, imported machinery and equipment and accompanying spare parts of the new and expanding registered enterprise are exempt from tax and customs duties, provided that certain conditions are satisfied, for example, they are not locally manufactured in the same quality and they will be used exclusively for the registered activity.
Nicolas Jaquier, and emerging markets economist at Standard Life Investments, observes that the Philippines beat China’s GDP growth in the first quarter of 2013, and its 7.2% GDP growth last year was second to China’s 7.7% growth rate.
What sets the Philippines apart, he says, is an improved political environment. “President Aquino’s reform agenda has paid dividends in the last couple of years. They imposed new taxes, such as sin taxes on tobacco and alcohol, raising money that can be redeployed into infrastructure – and new infrastructure attracts global businesses and bodes well for the Philippines’ tourism industry, which is underdeveloped. The country has also been insulated from some of the effects of international market downturns thanks to the number of remittances it receives from citizens living abroad”.