German business confidence in the Philippines has declined on all levels, except for employment and infrastructure investment, largely due to proposed changes on tax incentives, volatile peso and record-high inflation last year, according to a report.
In its Annual Review 2018-2019 report, the German-Philippine Chamber of Commerce and Industry (GPCCI) said there is a slowdown in capital inflow from Germany, as investors await the government’s decision on whether to retain the current menu of incentives. Further, the report flagged the instability of the peso as a risk in doing business here.
“The ongoing discussion about TRAIN 2, also known as the Trabaho [Tax Reform for Attracting Better and High-Quality Opportunities] bill, is likely to be one of the factors contributing to the investment slowdown,” the report read.
Investment perception this year slumped to a net 18 percent, from 46 percent last year, the report claimed, citing the AHK World Business Outlook. Optimism in the country’s economic development declined to a net 11 percent, from 62 percent.
“The proposed lowered corporate income tax [CIT]—from 30 percent to 25 percent—is expected to benefit companies and shall boost the country’s competitiveness,” the report read.
“However, proposed reductions of incentives were met with skepticism, as the current incentive package is considered globally competitive. The abolition of incentives would mostly impact export oriented companies that are often foreign investments,” it added.
The government seeks to gradually trim CIT to 20 percent by 2029, from 30 percent, under the Trabaho bill.
However, the Trabaho bill will rationalize tax perks of firms operating in economic zones. Locators, mostly multinationals, oppose this component of the measure, as it will strip away the 5-percent tax on gross income in lieu of all local and national taxes—an incentive they deem crucial for staying in the Philippines.
“With the upcoming midterm elections in May 2019, the tax reform package’s finalization and its implementation was postponed until after the election, leaving this issue for investors in the upcoming months,” the report read.
The House of Representatives passed their version of the bill last year. However, finance officials are having a difficult time sailing the measure across the Senate, as senators raised its possible toll on investments and, in turn, employment.
German firms also flagged the volatile exchange rate and the government’s economic framework as risks in doing business.
“One aspect influencing the exchange rate is inflation. The implementation of TRAIN 1, alongside other global factors, spurred a 6.7- percent inflation in September and October 2018,” the report read.
It noted though pressure on the peso eased when inflation, or the general increase in commodity prices, tempered to 4.4 percent in January.
Moreover, German investors called on the government to fully implement the Ease of Doing Business (EODB) law. The law is intended to cut bureaucratic red tape and simplify business transactions with the government.
The law, approved in May of last year, has yet to be in full swing, as President Duterte has yet to name his anti-red tape czar, who has the sole authority to issue the implementing rules and regulations.
Berlin is one of Manila’s largest sources of offshore capital. Last year approved investments from Germany amounted to P541.28 million, according to data from the Philippine Statistics Authority.
This was, however, a decline of more than half from the P1.38 billion German investments in 2017.
On the positive side, the GPCCI report said German firms are becoming more confident with the availability of skilled labor and the development of infrastructure in the Philippines. It argued “a positive outlook on infrastructure improvement in the country is not surprising,” as the government embarks on a multibillion-dollar infrastructure program.