Thursday, October 12, 2006

Mixed signals on fiscal incentives

We hope that President Gloria Macapagal Arroyo (GMA) was just talking in general terms to soothe the nerves of business people who attended workshop on foreign direct investment in the Philippines organized by the American Chamber of Commerce.

The president said that “our policy is to keep and improve the incentives the Philippines offers strategic foreign and domestic investors, especially exporters. The incentives need not be fiscal. The incentives you want are the competitiveness element: the workers being paid well enough in terms of affordable food; the technology, in other words, our continuing knowledge worker richness in our economy; the infrastructure; the power; and the reduction in the red tape. “

And on fiscal incentives she said: “let us assure you too that the Philippines will not become less competitive in the fiscal incentives we offer our foreign and domestic investors. I know some of your worries that's why I want to assure you that we will not support proposals that have that effect of reducing competitiveness.”

Anybody who follows the debate on the fiscal rationalization bill now being discussed in the Senate would find those statements confusing. On one hand, she was saying that competitiveness ultimately depends on a much broader range of factors like the state of infrastructure, overall policy environment, among others. This has been the argument by the economists who think it’s high time we junk the current fiscal incentives system that has been causing a lot of hemorrhage in the country’s revenue collection system. Each year, based on data from the Department of Finance, the country has been foregoing collection of at least P300 billion a significant part of which are probably redundant and unnecessary. Had the country been able to collect at least half of that, so the argument goes, we could have accumulated a significant amount of money to fund the building of more roads, bridges, and other important infrastructure. Doing this would mean that we achieve “fiscal consolidation,” obtain better sovereign ratings that would guarantee easier and cheaper access to global capital for both the public and private business organizations.

But on the other hand, she seems to be saying she is going to junk the bill being discussed at the Senate ways and means committee, one major proposal of which, is the removal of income tax holidays granted to firms registered with the Board of Investments, to be replaced with a uniform 15 tax percent rate. Some companies and business organizations have been worried that the removal of their income tax holidays would undermine their competitiveness. If President Arroyo was actually to talking to this crowd, then certainly she is telling Senate that their deliberations are going nowhere as she is bent on maintaining the status despite here earlier commitment to reform the country’s fiscal incentive system.

But then again, we don’t really know. She may have been saying that broader economy-wide incentives are in the offing. For instance, what prevents the country from simplifying the incentives regime by wholesale reduction of corporate income tax from the current 36 percent to say 15 percent a la Hongkong and Ireland? Certainly, that will be more attractive to investors as they no longer have to see the face of bureaucrats when setting up their operations here. That policy option shoots several birds in one stone: you address red tape (you could even abolish many of these agencies including the BOI), ensure transparency, and speeds up the process of setting up business.

But who knows? So until this time, the uncertainty continues. And it’s sending a mixed signal to the Senate ways and means committee that is currently crafting the fiscal rationalizations bill. When legislators started discussing the fiscal incentives rationalizations bill, the mood from MalacaƱang has been towards improving the country’s finances. Now, MalacaƱang is singing a confusing tune, something that will confuse the investor community even more. It’s this uncertainty that actually drives away foreign investors.

Is there a way out? Joachim von Amsberg, country director of the World Bank in the Philippines, has a concrete set of solutions during that worshop. Allow us to site a few:

First, ensure macroeconomic stability and fiscal sustainability (efficient collection of taxes). Second, continue deregulation in the economy (which could mean no more oligopoly in shipping and port operations). Third, move away from sector or firm specific to economy wide deregulation and incentives (read: why not provide incentives for everybody through a lower corporate income tax across the board?). Fourth, uphold the sanctity of contracts (a contract is a contract is a contract!). Fifth, reduce cost of doing business (no red tape, speed up court processes, no graft). Sixth, ensure open and competitive bidding (no under the table deals). And seventh, further liberalize foreign entry into the financial services sector (read an end to the banking oligopoly).

If we could achieve most of these recommendations, we may realize we may not even need “fiscal incentives.”

No comments: