How Philippines can attract more foreign investments

by Jon Carlos Rodriguez, ABS-CBNnews.com

Posted at Dec 05 2014 03:35 PM | Updated as of Dec 06 2014 06:40 PM

MANILA – Government has to implement reforms on the country's current tax system if it wants to attract more foreign investors, according to former Budget Secretary Benjamin Diokno.

Diokno, also an economics professor at the University of the Philippines, said the country’s uncompetitive tax system is one of the reasons why the Philippines has received the least foreign direct investments (FDI) among its ASEAN-5 peers during the last four years.

He said that one way of attracting FDIs is by reducing corporate income tax rate and aligning it with other Asian economies.

The corporate tax rate in the Philippines is 30 percent, above the average in Asia of 23 percent. It is also higher than Singapore (17 percent); Thailand (20 percent); and Malaysia (25 percent).

“In 2010, we had the same tax rate as Thailand. Thailand did something that we did not: they reduced tax rates from 23 in 2012 to 20 in 2013,” Diokno said at the 2015 Investment Outlook forum hosted by the Philam Asset Management Inc.

He is also urging government to reduce the personal income tax rate from 32 percent to 25 percent; and increase the value-added tax rate from 12 percent to 15 percent.

“The focus of taxation should be on consumption, which is what one takes away from society rather than income which is what one contributes to society,” he said.

He also said that the 20 percent final tax on interest income should be reduced to change the current tax system that penalizes savers.

“If you save P10,000, you will be taxed the same way as the Ayalas, or the Tans, or the Sys. No wonder, the country has the lowest savings rate in the region,” he said.

Invest in infrastructure

Diokno said poor public infrastructure which includes unreliable and costly power is another reason why investors turn away from the Philippines.

He said that while public-private partnership (PPP) projects have its benefits, government should also invest in public infrastructure of all types: large, capital-intensive projects in urban centers and medium and small scale, labor intensive projects in rural areas.

“There is too much emphasis on PPP in Metro Manila, but the poor is in the countryside,” he said.

PPP projects should also be of “hybrid” variety, Diokno suggests, which means government will construct the project, but it will be operated by a private concessionaire, selected through public bidding.

Diokno said this scheme will be less costly from the users’ viewpoint because the government can borrow at lower interest; it can acquire right of way more cheaply; and it does not have to impute pure profits.

He added that government should increase its spending for infrastructure projects; increase planned budget deficit by 1 percentage point; and use higher deficit to finance additional P130 billion spending for public infrastructure.

Politics

Diokno said the Aquino administration should also settle political issues hounding the country, noting that the Philippines remains the “most politically fragile” country in the ASEAN 5.

“President Aquino should embrace, not defy, the Supreme Court decision on the Disbursement Acceleration Program (DAP). Fighting it weakens the Judiciary, already the weakest of the three branches of government,” he said.

The Philippines posted $3.9 billion in FDIs last year, way behind FDI inflows in Singapore ($60 billion); Indonesia ($18 billion); and Thailand ($13 billion).
 
Diokno expects gross domestic product (GDP) to grow 6.2 percent in the fourth quarter, which means it will likely miss the government's full-year target of 6.5 to 7.5 percent growth.

The GDP growth in the third quarter slowed to 5.3 percent due to a contraction in public spending and weaker growth in all sectors. It was the slowest since the fourth quarter of 2011.