Killing the goose that lays the golden egg

 (Part Two)

According to the Board of Investments, the information technology and business process management (IT-BPM) sector is one of the best-performing and employment-generating industry in the Philippines in recent years.

It said that the sector’s global leadership in voice-based services, as well as continuing improvements in non-voice and complex process outsourcing, show its promising growth trajectory. While voice-based services are the largest contributor in the local business process outsourcing (BPO) industry, several non-voice and complex BPO services are gaining prominence in the global BPO sector and are in a higher growth pace vis-à-vis voice-based businesses, the BOI noted.

In the Philippine IT-BPM Roadmap for 2016 to 2022, the industry, whose subsectors include animation and game development, contact center and BPO, health information management, IT and software development, and global in-house centers, is targeting 1.8 million direct jobs, 7.6 million direct and indirect employment, half a million jobs outside of NCR, 73 percent mid-to-high-value jobs, $40 billion in revenues, and a 15 percent global IT-BPM market share.

In 2017, new IT-BPM investments registered under the Philippine Economic Zone Authority (PEZA) plummeted by 48 percent to P15.57 billion from P30.44 billion in 2016. Aside from US President Donald Trump’s protectionist stance, President Duterte’s anti-US pronouncements, and local peace and order problems, investors adopted a wait-and-see attitude due to uncertainties as to what comes next after TRAIN 1.

Last Sept. 11, the House of Representatives approved on third and final reading the Trabaho bill, the second package of the government’s comprehensive tax reform program. It seeks to encourage investments by bringing down the corporate income tax rate to 20 percent by 2029, and rationalize tax incentives to be given to industries listed in the Strategic Investments Priority Plan.

A study conducted by consulting firm Everest Group showed that without the tax incentives currently being enjoyed by the IT-BPM sector, it would be 20 percent more expensive to conduct business here compared to India, compared to only 10 to 15 percent prior to the Trabaho bill.

The same study revealed that the industry would have to reduce its estimated $13- to $15-billion revenues by 2022 by $3.5-$5.5 billion.

IBPAP president Rey Untal has said the industry would most likely fail to generate 100,000 new jobs this year as envisioned in the roadmap, especially since it is still just recovering from overseas concerns on protectionism brought about by Trump’s election in 2016.

Under the House version of the Trabaho bill, the five percent gross income tax rate which locators in economic zones, paid in lieu of national and local taxes, would be removed after the expiration of the four to six year income tax holiday. Instead, they will be subject to an 18 percent net income tax rate (15 percent corporate income tax rate plus 1.5 percent for provincial and 1.5 percent for municipal taxes).

At present, the five percent gross income tax rate is enjoyed by ecozone locators in perpetuity. The governments wants to remove it while giving those who are currently enjoying it a sunset period of two to five years. Specifically, those who have been enjoying the five percent tax on GIE for more than 10 years will continue to enjoy this for two years, while those who have been enjoying it for five to 10 years will only have three years. Those that have received ITH or the five percent GIE for less than five years have a five-year transition period.

IBPAP is asking that the existing ITH be allowed to run out, and then go through a uniform 10-year transition period.

On top of this, IBPAP is asking the government for a P40-billion five-year skills upgrade program. Not only did the bill lower the yearly subsidy to P5 billion a year. The Department of Finance said it would grant the fund only if IBPAP would support the tax package.

The P40 billion will be enough to retrain a million Filipinos, which is a pittance if one considers that Singapore spends as much as $4,000 a year for skills retraining. For the past 10 years, the National Skills Development Council of India has already trained 12 million of its citizens for skills which the industry will demand in the future.

Around 65 percent of IBPAP’s members are located inside PEZA ecozones and stand to be affected by the shift to a new incentive scheme.

In a survey, 90 percent of IBPAP members said they consider incentives as important, to very important while 90 percent warned that if the incentives will be removed, growth will slow down.

Untal has emphasized that the proposed transition period and the skills upgrade program should go hand in hand since the first one is about keeping the country’s cost structure down so that it could remain competitive, while the other is to make sure that the talent of the future is ready for the skills required in the future.

The industry hopes that the Senate will be more receptive to its proposal.

Senate President Vicente Sotto III has filed Senate Bill 1906 which would lower corporate income tax, but immediately to 25 percent (compared to the two percentage point every two years starting 2021 proposal by the House) and eliminate incentives given to investors and business sectors.

During the first hearing of the Senate Committee on Ways and Means chaired by Sen. Sonny Angara, this writer learned that with the exception of the DOF, everyone in attendance was against the Trabaho bill.

Angara has asked the DOF and labor department to look at the impact of the proposed legislation on job loss, even as he expressed surprise why the bill was approved by the Lower House even without this study.

The Japanese Chamber of Commerce and Industry in the Philippines has already warned that should the Philippine government withdraw tax concessions currently being enjoyed by Japanese companies, many may go bankrupt or even close their operations.

JCCI vice president Nobuo Fujii said the first step is that their members do not want to expand operations here, while the second step is to gradually withdraw. He pointed out that the potential change with the biggest impact would be if the Philippines starts imposing the 12 percent value added tax on Japanese companies operating inside special economic zones. The group wants the current fiscal incentives regime in PEZA retained.

Meanwhile, PEZA director general Charito Plaza said she wants to talk directly to President Duterte, as she expressed dissatisfaction with the House version of the measure and refusal of DOF to listen.

She revealed that investment pledges in PEZA from January-September 2018 dropped 56 percent from last year. While no company has pulled out their investments yet, she said that the companies already manifested talking to principals, head of branches, to start looking elsewhere to transfer.

Plaza stressed that the impression is that the policies are unstable and that the Philippine government does not respect contracts entered into with investors.

Let us hope that the oppositors to the Trabaho bill are wrong in their doomsday scenarios. Because if they are right, then this country is doomed.

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