There is no question that the outside world no longer considers the Philippines as the “sick man of Asia.” Articles after articles citing the World Bank, IMF, ADB, Bloomberg, Hong Kong, and Shanghai Bank, and a host of multinational banks from Europe and Asia have been citing the Philippines as among the fastest growing, GDP-wise, in the Indo-Pacific region this year and in the next four to five years, together with India and Vietnam. This happy situation is not a flash in the pan. Our growth rate of six to seven percent annually has been going on since 2011 interrupted only for a brief moment during the Covid-19 epidemic.  

What has led to this bonanza for the Philippine economy? Have there been dramatic achievements in the efforts to reduce corruption and red tape and to improve the ease of doing business? Most would answer No. The answer is found in one of the paragraphs of the FEF rejoinder to the UP position paper on FDIs:  “…the incremental effort required to reduce an index of corruption by some quantum in the real world will entail massive political will, institution building, and changes in social values that will take many more years than changing the economic provisions in the Constitution which can be effected through a constitutional process.  This will set in motion dynamic economic forces in terms of more competition, technology transfer, contestable markets, and access to global markets, among others.”

What has happened during the last 30 years is a result of a slow process of policy changes effected through legislation that has led to a critical mass of reforms that have created a more conducive environment for both domestic and foreign investments. There were game-changing reforms during the presidency of Fidel V. Ramos that privatized, deregulated, and liberalized the Philippine economy. There was the controversial but very much-needed Valued Added Tax (VAT) law during the Administration of President Gloria Macapagal Arroyo, who can be credited for a quantum leap in government revenues. All these policy reforms were implemented and perfected during the term of President Benigno Aquino III. The Administration of President Rodrigo Duterte will be remembered by posterity as the period when infrastructure spending finally climbed to five to six percent of GDP, bringing the Philippines to the level of its peers in Southeast Asia. Finally, President Duterte will also be remembered for being the one to sign into law the amendment of the Public Service Act (PSA) that finally opened up practically all critical infrastructure and renewable energy investments to 100 percent foreign equity. 

Another possible game changer in fiscal reforms may be happening now in the present Philippine Congress. As described in detail in a column of one of the most brilliant tax consultants today, Ramon Abrea, who just spent some time at the Harvard Kennedy School of Government, the CREATE tax law passed during the Duterte Administration needs some revisions because of its clashing with some of the necessary investment incentives given by other agencies of Government to attract foreign investments, especially those which are export-oriented like the electronics and semi-conductor components sector as well as the BPO-IT sector that accounts for some 10 percent of the Philippine GDP.  

According to Abrea, the CREATE Act was passed in 2021 in order to lower corporate income tax rates and rationalize existing incentive regimes. Since the Law was passed, the Philippines has approved some P1.1 trillion worth of investment capital. However, one of the bills currently pending before Congress seeks to amend CREATE in order to further improve its provisions.  Dubbed CREATE MORE, the bill seeks to restore the authority to administer incentives to the Investment Promotion Agencies (IPAs) instead of the Fiscal Incentives Board (FIRB). The main reason for this is the removal of an additional administrative layer in the granting or denial of incentives. How the system works at present requires the business enterprise to seek the approval of either IPA or FIRB, depending on the amount of investment capital. Pursuant to a FIRB advisory released on February 19, 2024, the threshold for the FIRB’s jurisdiction starts at P15 billion. On the other hand, incentive applications for businesses  with an investment capital of less than P15 billion are subject to the approval of the relevant IPA. This delays the start of commercial operations of business enterprises covered by the threshold because of the unnecessary double jurisdiction. This is an example of reducing the number of signatures needed to start a business operation. Some bankers have complained that to start a business in the renewable energy sector, more than 30 official signatures are needed. 

There is also a need to further authorize IPAs, especially PEZA, with the authority to downgrade incentives. Prior to CREATE, PEZA allowed the downgrading of incentives (e.g. from Income Tax Holiday or ITH incentive to a Special Corporate Income Tax or SCIT  incentive) in cases where they did not meet certain conditions. There is, however, no similar provision for this under the existing CREATE Act. This means that failing to meet a few conditions already would warrant the cancellation of that RBE, which may be too drastic. Giving PEZA more elbow room in the administration of tax incentives is justified by the specialized knowledge and expertise its management has demonstrated over the years in contributing significant amounts to FDIs entering the Philippines through its jurisdiction. In 2023 alone, PEZA was responsible for drawing in P175 billion in approved investments, a 25 percent increase from 2022. In fact, PEZA is the usual venue for the only export-oriented manufacturing activity in which we have a chance of competing with our ASEAN neighbors, especially once the U.S. and Japan are able to endow us with the funding to build the so-called Luzon Economic Corridor that runs from   Batangas Bay to the Manila Port and eventually to Subic and Clark.

Another proposal under the CREATE MORE bill is to exempt RBEs from the need to obtain business permits from LGUs. The very purpose of the ecozones was to minimize government intervention in the operations of businesses located within a given political jurisdiction. At present, RBEs are still required to obtain local government permits, such as mayor’s permits or business permits. Under the proposed bill, license fees are collected by the relevant IPAs and remitted to the LGU concerned. 

These and other changes under the CREATE MORE bill seek to further enhance the administration of tax incentives in the Philippines. Unnecessary bureaucratic layers and procedures tend to drive away potential investors and render the Philippines a less competitive investment destination on a global scale. At present, the most pressing concern of foreign investors and locators is the processing and approval of the VAT refund. While the former TRAIN Law (the Tax Reform for Acceleration and Inclusion Law) mandates an enhanced VAT refund system, it is still a very tedious and complicated process, given the possible inability and risk on the part of the Bureau of Internal Revenue and the pending implementation of electronic invoicing to automate the processing of the refund.

I have quoted generously from this expert evaluation of the impending bill called CREATE MORE in order to illustrate the fact that the valid complaints of foreign investors about the difficulty of doing business in the Philippines are being addressed, albeit slowly and painfully. Fortunately, enough time has elapsed during the last thirty years that there is already a critical mass of reforms resulting from efforts of a similar nature so that the Philippines is truly ready for business. As long as these reforms are not reversed by the present and future Administrations (such as going back to the “Filipino First” policy), our demographic dividend and our rich natural resources can enable the economy to continue growing at six to seven percent, GDP-wise, or even more while reducing the poverty incidence to single digit by 2028.  Sticking to this critical mass of economic reforms will also ensure that the Philippine economy will not fall into the “Middle Income Trap”  that has befallen many Latin American countries.  To be continued.