ANALYSIS: Will reinvested profits in PH firms follow Apple’s move?

Jose Galang - Your Business

Posted at Jan 19 2018 02:26 AM

If Apple’s newly announced move to bring home to the US “hundreds of billion dollars” worth of earnings stashed overseas actually beats a path that will be followed by other profit-making American companies, it could eventually make a dent on foreign investments in the Philippines.

The iPhone maker has been encouraged by the recently passed law reducing from a high 35 percent to just 15.5 percent the tax on profits that American companies make overseas once these earnings are repatriated to their US parents.

To avoid paying the high tax rates, US companies have been keeping their profits overseas, reinvesting much of it in existing businesses they own, instead of remitting them back to the US. Estimates point to as much as $3.1 trillion in earnings hoarded by US companies in various countries.

In the case of Apple, it will be paying some $38 billion in taxes for the earnings it will send back to the US. That amount, the company says, would fund new manufacturing plants and data centers that will create around 20,000 new jobs.

The foreign direct investments (FDI) situation in the Philippines benefitted from that virtual freeze in US profits abroad, which could now be coming to an end, however. Around 8.5 percent of all foreign investments in the country last year represented “reinvested earnings”, according to latest data from the Bangko Sentral ng Pilipinas.

In actual amounts, reinvested earnings in January-October totaled $662 million. Given that the US has consistently remained among the Philippines’ top sources of FDI, a good portion of these reinvestments could actually be in American businesses in this country. There is no known equivalent of the high US tax on overseas earnings in other countries that could deter profit repatriation.

Including new equity, total foreign capital investments in direct equity including reinvestments during the period reached $6.51 billion, a big increase from $4.56 billion the year before.

It is interesting to note that in the cited period last year, the 10-month reinvestments total also exceeded the $465 million capital withdrawals, even if such withdrawals were substantially higher than the year-ago $272 million. Early last year, large amounts of investments from certain Asian countries reportedly pulled out in favor of such destinations as Vietnam and Myanmar.

The January-October 2017 FDI flows, according to the Bangko Sentral data, were also bolstered by larger inflows of foreign investors’ debt instruments in their local subsidiaries.

Top investors during the period came from the Netherlands, Singapore, Kuwait, the US and Germany. Recent reports indicate the entry of Dutch investors in energy-related (ethanol, biomass and charcoal) projects in different locations in the Philippines.

Conspicuously absent still in the list of countries where FDI came from is China, which since October 2016 has been making announcements of “big investment plans” in the Philippines. In other Southeast Asian countries like Vietnam, Cambodia and Thailand investments from China now account for an increased share of economic activity.

Japan is expected to remain a top source of investments, if reports of high profitability records among Japanese firms in the Philippines succeed in influencing future investor moves.

According to results of a late-2017 survey announced recently by the Japan External Trade Organization (JETRO), there is “steady” motivation for Japanese investors to expand business in Southeast Asia, Southwest Asia and China, even if increasing wages remains the “biggest operational issue” among its member firms.

The survey also showed that the Philippines is among countries where there were more Japanese companies making profits than those incurring losses. The motivation to expand business is “steady” in Southeast and Southwest Asia, while in China it is perceived to be recovering from recent challenges.

Disclaimer: The views in this blog are those of the blogger and do not necessarily reflect the views of ABS-CBN Corp.