SHOULD business-process outsourcing firms keep their fiscal incentives? The World Trade Organization (WTO) has named the BPO industry in the Philippines as one successful model of how services trade can bring about economic development and transformation.
In its World Trade Report 2019, the WTO discussed how the expansion of trade in services in many countries resulted in the development of their economies. The report cited the cases of air transport in Ethiopia; information and communications technology services in India; financial services in Kenya; health, tourism and financial services in Mauritius; tourism in Mexico; and the BPO sector in the Philippines.
“The Philippines is another example of how services trade can transform an economy and catalyze economic development,” the WTO said in the report.
The WTO said the country did right by developing its BPO sector. As defined by the United Nations Conference on Trade and Development (Unctad), BPO is the transfer to third parties of the performance of service-based functions once carried out within a company or within an organization.
“This arrangement involves foreign companies outsourcing their business processes to a service provider domiciled in the Philippines, which may be purely local, purely foreign or consist of local companies with foreign partners,” the WTO explained.
“The BPO industry has several component sectors: contact centers, back-office services, data transcription, animation, software development and engineering development. It has become a critical part of the economy of the Philippines,” the report added.
In 2015 the BPO sector generated $22 billion in revenue, accounting for 7.3 percent of the GDP of the Philippines, and was employing 1.2 million workers, the WTO reported.
Further, the BPO sector in the country tripled its share of the global market to 12.3 percent in 2014, from 4 percent in 2004. It is projected to climb to 19 percent by 2020.
“The sector’s international success owes a lot to the fact that the country has a young, educated work force with a strong command of English, as well as relatively low living costs that allow labor to be compensated at an internationally competitive rate,” the WTO said.
The BPO sector this November reduced its growth forecast by nearly $7 billion in revenue and roughly 230,000 workers in employment. It attributed the cut to uncertainties brought about by changes in tax policy on the domestic level and escalation of trade conflict on the global scale.
The sector is now just expected to generate revenue of $32 billion by 2022, nearly 18 percent lower from the original projection of $38.9 billion under the road map.
The sector is also now forecast to employ roughly 1.57 million workers by 2022, or more than 13 percent below the previous figure of 1.8 million workers. The annual growth rate in revenue was brought down to 7.5 percent, from 9.2 percent; while in manpower to 3.5 percent, from 7.8 percent.
The BPO sector is hounded by the government’s push to rationalize the menu of incentives for firms operating in economic zones as laid out under the Corporate Income Tax and Incentives Rationalization Act (Citira) bill.
Mostly located in economic zones, BPO firms will need to surrender their incentives once the Citira bill is enacted into law. The measure will bring down the corporate income tax rate to 20 percent by 2029, from 30 percent at present, but will overhaul tax perks granted to economic zone locators.
Among those that will be lifted is the 5-percent tax on gross income earned paid in lieu of all local and national taxes, which investors find crucial in maintaining their operations here.