Makati Shangri-La Hotel
December 6, 2018
His Excellency Jan Top Christensen, ambassador of Denmark to the Philippines, His Excellency Koji Haneda, ambassador of Japan to the Philippines, former Finance Secretary Gary Teves, Mr. David Robinson, president of Wallace Business Forum Manila, Mr. Peter Wallace, friends in the business community, distinguished guests:
You know, as I was coming in, I saw you have a lot of sponsors. I also have my own sponsors, and I’m actually late for a Senate hearing on the budget. So I hope you don’t mind if I go ahead. Unfortunately, I have to leave because if I don’t, maybe the national budget will be further delayed as it has already been delayed in the House.
Thank you for inviting me to join you today. This is a rare opportunity to directly address the captains of Philippine business and, hopefully, bring clarity to the succeeding tax reform packages now being considered by the Philippine Congress.
The two most salient components of the reform package dubbed the Tax Reform for Attracting Better and Higher Quality Opportunities or TRABAHO bill by the House of Representatives are the phased reduction of the corporate income tax rate and the rationalization of the fiscal incentives program of the government.
Our proposal for the phased reduction of the corporate income tax rate is quite straightforward. Having a corporate income tax rate higher than those of our neighboring economies at 30 percent is a barrier to investments. We want to bring down the rate gradually to 20 percent to match regional averages.
The economy will benefit from this reduction. It will not only remove a barrier to direct investments. It will encourage our enterprises, particularly the hundreds of thousands of small and medium enterprises to invest in expanding their businesses and hire more workers. If SMEs invest just half of their additional savings from lower corporate income tax, some 1.4 million jobs can be created in the next decade. It will help the government broaden the tax base and facilitate compliance. All of these will create a business environment conducive to inclusive growth.
The more controversial component is the rationalization of the fiscal incentives program. The proposed reform has generated some headwind as we expected. But we are confident that as the reform is better clarified, we could push forward with this recasting.
For years, we relied on granting fiscal incentives as means to draw investments into the economy. The results are hardly spectacular. A global survey conducted by the World Economic Forum for 2017 on investor appetite for the Philippines indicates that tax incentives are only the fifth most important concern of investors. The first four are: government inefficiency, the infrastructure gap, corruption and the high cost of doing business. This government is addressing these top four concerns decisively.
In fact, let me just point out that today, you no longer hear criticisms about the absoptive capacity. We are, in fact, spending in the most difficult part of the spending program, which is infrastructure, and we have exceeded our targets. Corruption–you see almost weekly the president firing somebody for one reason, because of corruption or another. High cost of doing business–we have addressed that with the Ease of Doing Business law and hopefully, that will be implemented very shortly. And of course, our Build, Build, Build program is addressing the infrastructure gap.
Over the years, we have created separate agencies empowered to grant fiscal incentives without a clear economic strategy to guide them. That’s like having one of your companies that have several divisions and say, okay, in Mindanao, we give the authority to your regional manager to grant a 15-percent discount on your products. In Luzon, 5 percent. And that is not managed centrally. That is what we have faced today. I think that’s the best way I can put it in corporate terms. I don’t think any of you will stand for that situation. Today, there are 14 of them and 25 more await in Congress to be legislated. The result is a wild tangle of incentive programs, including the permanent grant of overly generous tax discounts without performance measures. The incentive program is confusing, contradictory, unaccountable and has unclear goals. Instead of creating a competitive environment for our businesses, they have created an uneven playing field.
If you examine the proposal more closely, you will see that the new incentive regime being pushed by the Duterte administration is even more attractive for those who wish to do the country good while doing well. Companies granted incentives can avail of 50 percent more deduction on labor costs; 100 percent more deduction on training, research and development; and 50 percent more deduction on purchases of local raw materials. All these are designed to incentivize the proper behavior to create jobs and invest in hi-technology.
To be clear, we are not eliminating fiscal incentives. But we want these incentives to be performance-based, time-bound, specifically targeted and fully transparent. We want the incentives to foster better forward and backward linkages with the domestic economy, increase hiring of local workers and cause more transfers of technology. No longer will a favored group of businesses enjoy a permanent grant of 5 percent on gross income earned. Never again will the select group of 328 incentivized firms that received 86.3 billion pesos in tax breaks in 2015 declare 141.8 billion pesos in dividends while incurring only 104.6 billion pesos in direct labor costs during the same year.
In a word, we want the incentives program to work to the advantage of building a dynamic domestic economy, to create jobs, cause technology transfers, advance research and development, enhance linkages between enterprises and improve conditions for competition.
We want the incentives program to be time-bound, specifically five years per registered activity. Incentives may be extended if new activities are proposed tosatisfy the conditions set in the Strategic Investment Priority Plan. The incentives program must ensure an even playing field for our small and medium enterprises.
We want the incentives program to be highly targeted. Incentives will be granted to industries with strong spillover effects to the larger economy, based on a rigorous cost-benefit analysis of their business activity.
Finally, we want the incentives program to be fully transparent. Companies that receive incentives and the amount of those incentives particularly in terms of what revenue government gives up to support them should be publicly reported. This will reduce cronyism, collusion and corruption in the process. It will spare Filipino taxpayers from subsidizing the profits earned by a select group of corporations enjoying redundant incentives in a convoluted system.
We urge the business community to thoroughly read the measure, rather than base their positions on hearsay and opinions of uninformed people, so that you can work with the government in explaining the true benefits of the TRABAHO bill to the public.
With improvements in the ease of doing business, investments are flowing into the Philippine economy. The foreign direct investment inflows reached a record high of 10 billion US dollars last year, double the FDI inflows in 2015. Meanwhile, net foreign direct investments rose by 31 percent to 7.4 billion US dollars in the first eight months of 2018 from 5.7 billion US dollars during the same period last year. This reflects stronger investor confidence in the Duterte administration’s decisiveness in pushing ahead with the economic reform agenda. This also dispels the concern that our tax reform is scaring away investors.
While we saw a dramatic 31 percent rise in foreign direct investments in the first eight months of this year, the Philippine Economic Zone Authority or PEZA continues to claim that investments registered with the agencies are down. This can only mean they are trying to attract investments that cannot be viable without unreasonable incentives. These are not the investments we need to become a strong economy. The more meaningful investments are being made by competitive companies that do not ask for tax holidays and other incentives.
Those who oppose the reform of the incentives program are arguing against the facts. All over the world, fiscal incentives are less important in investor decisions than efficient infrastructure and a better-educated and healthier people. We cannot fully address these more beneficial concerns if we let bureaucrats give away revenue for private profit. We need to be fiscally responsible on this matter.
I trust you will study the proposed reforms closely and come to the same conclusion we did: the reforms will be beneficial to our domestic economy. They will produce a transparent and even playing field for business. They will broaden the base of participation in wealth creation for our people.
Our economy has also responded well to the infrastructure program. In the first nine months of this year, infrastructure spending amounted to 571 billion pesos. This is 7.2 percent above target and 46 percent higher than the same period last year. It demonstrates that the Department of Public Works and Highways and the Department of Transportation, the two lead agencies in the Build, Build, Build program are moving faster than expected. The old problem of absorptive capacity has been solved. The mantra of fast and sure is being observed.
The Build, Build, Build program also benefitted from the generous financing support extended by our two closest development partners in the region: Japan and China.
Some uninformed critics claim that we are falling into a “debt trap” by tapping Chinese and Japanese financing for our strategic infrastructure projects. This is totally unfounded. The financing we availed of are soft loans at the lowest possible interest rates and the longest possible term arrangements. If we include project financing coming this year, our estimated project debt to China will constitute only 0.65 percent of our total debt from the current 0.11 percent. Our project debt to Japan will increase from the current 3.17 percent to 8.90 percent of the total debt at the end of this year.
By 2022, when most of the financing for the Build, Build, Build program should have been accessed, our project debt to China will constitute around 4.5 percent of the total debt. While the project debt to Japan will be twice as large or 9.5 percent of total debt. So if we are going to drown you in any debt, it is to Japan, not to China.
We borrow with great prudence, aware that it is the taxpayer who ultimately pays for the debt. We always keep in mind that the money we borrow come from the taxes dutifully paid by the people of the countries that have continued to generously support us. Thus, we take great care that the funds we borrow are wisely used and will produce sufficient economic benefits to make the debt service easier down the road.
Let me reiterate, in the face of uninformed criticism, this administration is not about to allow the country to be drowned in debts to China. In all the financing agreements, we have made sure the country got the best deals possible and that the cardinal tenets of fiscal discipline are carefully observed.
We learned much from a previous administration’s scandalous mismanagement of Chinese financing. During that time, the previous leadership allowed Chinese state-owned enterprises to dictate what projects will be undertaken here. I don’t have to mention the names, I’ll just mention some initials. ZTE, for instance.
In our own dealings, we have made it very clear to the Chinese side that the Duterte administration will protect the country from unnecessary projects driven by agencies outside the Philippines. This does not please some people who intend to profit from wasteful projects they are pushing. These are the same people now attacking the prudent decisions of this government.
In one instance, a funding agency made an offer we thought was too expensive. We told them flatly we would seek financing from the Asian Development Bank instead. They immediately dropped their costs. We allowed them to compete for the projects.
I’d like also to point out that before any project could begin, the government has made it a point to subject each one to a feasibility study. This is an important aspect of project preparation because a feasibility study would determine whether a particular project is viable and sustainable. It also helps us determine the best source and way of financing the project.
Aside from a feasibility study, we also follow a series of stringent procedures, including, but not limited to, the Investment Coordination Committee (ICC) and the NEDA Board processes before submitting the projects for foreign financing and the conduct of internal vetting processes of our foreign funders. In each case of projects using Chinese financing, we ask the Chinese government to name three bidders from which we will make the final choice. If the winning bidder does not deliver, the Chinese government will have to answer for it.
I would also like to note that in conformity with the Constitution and laws of the Philippines, none in any of the pipeline projects allow for the appropriation or takeover of domestic assets in the event of failure to pay which hollows out our sovereignty.
Taken as a whole, the Build, Build, Build program will lay down the modern infrastructure that will enable our economy to sustain its growth momentum and liberate even more of our people from poverty in the medium term.
Despite the elevated inflation rates we experienced in the first three quarters of this year, the Philippines remains one of the fastest growing economies in the world’s fastest-growing region. The government has responded decisively to the challenge posed by elevated inflation rates. We expect inflation to taper off in the closing months, and that has been shown in yesterday’s announcement on the inflation rate for November.
Let me close by briefly discussing the recent decision of the Development Budget Coordination Committee (DBCC) to recommend reinstatement of the two-peso additional excise tax on fuel.
The earlier decision to suspend implementation of this excise tax was made when international prices oil were very high. It was a decision taken as part of the larger package of measures intending to reduce inflationary pressures. That decision will force government to forego some 42 billion pesos in potential revenues. That will have an adverse impact on our infrastructure investments as well as spending for health, education and social protection.
Over the past few weeks, however, it has been proven that the market was wrong. In October, they were betting that the price of fuel in January will be about 80 dollars. Well, I guess they were wrong. Over the past few weeks, oil prices dropped drastically. Dropping oil prices will pull down our inflation rate rather than push it up. Restoring the two-peso additional excise tax on fuel products will therefore bring greater benefits to our people. It will help us sustain the economic investments to rapidly grow our economy without breaching the 3.2 percent budget deficit-to-GDP limit we have set for ourselves next year. We will be able to maintain fiscal discipline without curtailing far-reaching economic investments.
This is, from every angle, the correct policy decision.
Thank you and good day.