Incentives key to attracting investments from firms shifting work from China

incentives key to attracting investments from firms shifting work from china - Incentives key to attracting investments from firms shifting work from China

By Jenina P. Ibañez
Reporter

THE Philippines must improve its incentives program and remove trade obstacles to remain competitive in attracting investments, as global companies begin shifting China-based operations to Southeast Asia, international business councils said.

US-ASEAN Business Council Senior Vice-President and Regional Managing Director Michael Michalak said in a television interview on Thursday that Vietnam has been opening up to more foreign investments, taking advantage of a global supply chain shift in the region.

He said that there is interest in the Philippines, but it faces stiff competition with neighboring countries.

“When you look around at some of the issues…with investment and with some of these incentive programs, you have to compare what the Philippines is doing with other countries around the region.”

The Philippine government has recently proposed changes to the Corporate Income Tax and Incentives Rationalization Act (CITIRA), including granting “tailor-fit” incentives unique to the needs of foreign businesses, as well as immediately cutting corporate income tax to 25% from 30%. Previous versions of the bill proposed gradually reducing the rate to 20% over a decade.

“There’s a lot of uncertainty as to what exactly those (incentives) programs will be and there’s a lot of discussion going on. Hopefully very soon, many of those discussions will be finished and I hope the Philippines will have a good story to tell,” Mr. Michalak said.

Vietnam is reopening its economy after being touted as a success story for its response to the coronavirus disease 2019 (COVID-19) pandemic, reporting fewer than 300 cases with no new cases in almost a week.

In contrast, the Philippines has reported nearly 12,000 cases of COVID-19 infection, with a current daily testing capacity of over 8,000. The country has relaxed some lockdown measures and reopened some business operations in lower risk areas, while Metro Manila, Cebu City, and Laguna remain under a modified enhanced community quarantine until the end of May.

EU-ASEAN Business Council Executive Director Chris Humphrey said in an e-mail that the pandemic-driven redistribution of supply chains for companies that had previously relied on one or two investment destinations will be an opportunity for the ASEAN region, including the Philippines.

“But without the removal of key obstacles in the regions, such as overly complex customs procedures and non-tariff barriers to trade, the region, and its member-states, will not be able to fully take advantage of the opportunity before them,” he said.

He said the young population in the Philippines could help attract new investments, but the country can play a role in removing said obstacles to take advantage of regional value chains.

Mr. Humphrey said that recent proposals to shift the country’s incentives system are “good immediate ideas” that could help companies decide on their investment destination.

“Investment funds are likely to be at a premium for business post-pandemic as companies everywhere seek to reduce costs and preserve cash. For countries to attract new investments, they will have to be offering a range of incentives in what will be a very competitive market place. These could take the form of tax incentives, access to land, easing of employment restrictions on foreign labour and management, help with permissions, licences and clearances etc.”

Joint Foreign Chambers of Commerce of the Philippines (JFC) Senior Adviser John Forbes said in a mobile message that the Philippines has not been competitive with Vietnam in recent years, as the latter has attracted more final assembly manufacturing from major electronics brands.

“The Philippines has excellent potential if it can organize a marketing campaign. The first step is to determine strengths and weaknesses. Investors do careful research and are convinced by hard facts not BS. Fix the weaknesses, starting with CITIRA, and new investors will come,” Mr. Forbes said.

George N. Manzano, University of Asia and the Pacific economist and former tariff commissioner, said in a phone interview that the government must introduce certainty in terms of incentives, as investors will find it difficult to make cost-benefit analyses and decisions without this.

He said that tailor-fit incentives would work well to help the Philippines benchmark what it can offer compared to neighboring countries.

“The bargaining power now is with the investor. We need them more than they need us,” he added.

Mr. Manzano said Vietnam has an edge because its government acted immediately to contain the virus.

“But then Vietnam is also getting a lot of investments. I’m not sure about their carrying capacity,” he said, while also expressing concerns about Vietnam’s state transparency, noting that investors may have learned their lessons from China’s state-owned enterprises.

He does not believe that investors, now prioritizing sustainability over efficiency, would concentrate all their resources in one country.

Noting that the Philippines is likely to attract labor-intensive industries like electronics and machinery manufacturing, he said that countries like Vietnam may not immediately absorb all migrating companies.

US-ASEAN Business Council’s Mr. Michalak said companies are already looking at where they will move their operations, noting that “they’re not waiting forever.”

But Mr. Manzano said prudent investors could wait and see before making investment decisions as the pandemic may have a second outbreak or virus mutation.

He said that if the country handles the pandemic badly, it could create a worse situation.

“Test, isolate, and trace. Ramp it up,” Mr. Forbes said.

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