AT the height of the enhanced community quarantine (ECQ) in April, Enrique Razon told ANC: “The globalization that we have now, that is over.” Razon happens to be the most global in outlook among the dozen or so Filipino taipans dominating the Philippine economy. He controls International Container Terminal Services Inc., which operates in all the continents of the world—Asia-Pacific, the Americas, Europe, the Middle East and Africa.
Razon’s observation is supported by the endless flow of negative news—almost daily—on the devastating economic impact of Covid-19 pandemic on virtually all countries of the world. The International Monetary Fund’s Managing Director Kristalina Georgieva calls the Covid-driven economic downturn “a crisis like no other.” Per IMF’s analysis, the global economy is likely to contract in 2020 by at least 3 percent, which means “the worst recession since the Great Depression.” This contraction is happening worldwide, dubbed by the IMF as a “synchronized contraction, a sudden global shutdown.”
The sharpest contractions (over 6 percent) are occurring in the United States and Europe, the global epicenters of the pandemic. These two motors of globalization are joined by the other locomotives of the global market such as Brazil, Middle East and South Africa. In Asia, contraction is happening across the continent, from South and Central Asia to East and Southeast Asia, including the countries down under (Australia and New Zealand). China’s economy is still in positive territory but its projected 1.2-percent growth rate (IMF study) is the lowest in its four decades of unbelievable annual double-digit growth.
Because of the foregoing, United Nations Conference on Trade and Development, the UN agency specializing on the movement of foreign direct investments or foreign direct investment (FDI) under globalization, came up with a gloomy World Investment Report 2020. The Report projects a dramatic drop in foreign direct investment in 2020 and 2021 as follows:
“…Global FDI flows are forecast to decrease by up to 40 percent in 2020, from their 2019 value of $1.54 trillion. This would bring FDI below $1trillion for the first time since 2005. FDI is projected to decrease by a further 5 to 10 percent in 2021.”
Decrease by 40 percent! This sharp decline in FDI flows worldwide is deepened further by the protectionist response of the developed countries to the pandemic crisis. Most of the stimulus spending being lined up by their governments seek the retention of jobs and businesses at home as well as the revival of critical industries through capacity building in the production of health-related materials like PPEs and ventilators. Trump’s anti-China sentiment is also increasingly being shared by some of the world leaders, who are now calling on their mutinationals to divest from China and return investments and jobs to their home country. End of the seamless flow of FDI under a borderless global economic order?
Against the changing global economic landscape outlined above, one is at a loss why some Filipino policy- makers are overly focused on how to entice global investors to park their funds in the Philippines by simply calling for the further opening up of the market, as if the country has been a closed economy. One measure that they are pushing is the passage of the Corporate Recovery and Tax Incentives for Enterprises Act (CREATE). The idea is to reduce the corporate income tax from 30 to 25 percent (followed by one percent annual reduction) and that losses incurred in 2020 can be used by the corporations as deductibles in doing their income accounting for the next five years.
Accordingly, more than 90,000 small businesses shall benefit from CREATE. Fine.
But then there is the leap in logic: the above provisions will also bring in FDI. How? By aligning the Philippine income tax rates with the low tax rates offered by the other Asean members. This is questionable. Tax incentives alone are not enough to bring in FDI. In fact, the Philippines was ahead of these countries in the game of lowering tax rates (before 2000). And yet, these did not usher in a flood of FDI.
One proof of this is that the Peza-accredited enterprises have been enjoying fiscal incentives such as the income tax holiday and duty-free import/export privileges since the 1970s. And yet there has been no visible surge of FDI in the Peza areas compared to what we have seen in the case of China. Incidentally, the proposed removal of the ITH or the 5 percent gross income tax (GIT) was the reason why the Peza administration was vehemently against the original draft of CREATE. To appease Peza, the revised CREATE draft provides for a long transition period in the migration of Peza enterprises from the ITH/GIT system to CIT.
The point is that low tax rates are not the sole factor used by foreign investors in any decision on whether to come to the country or not. As one former DTI secretary quipped: we have been throwing parties to welcome foreign investors but they do not come. Instead, they went to China where restrictions on FDI operations were a lot tougher such as rules requiring investors to share technology, which is now at the center of the US-China trade war.
The fact is that the Philippines has been one of the most open to FDI in Asia since the 1990s, due largely to its compliance with the policy conditionalities under the IMF-WB’s structural adjustment program. In 1991, Congress passed the Foreign Investment Liberalization Act, allowing 100 percent foreign equity in various industrial fields except in a few areas listed under a “negative investment list” where Filipino capital is required to be in the majority. This negative list is a short one; it covers the following: mass media, cooperative sector, land and public utilities.
The liberalizers are still not happy with the negative list and the 60:40 Filipino-foreign equity arrangement. In the name of FDI liberalization, some legislators and economists are even seeking an amendment of the Constitution as if such liberalization is a life-and-death matter for the economy. Is the liberalization of the markets for land, mass media (including Internet and telecom), and utilities (power, water, etc.) really crucial to Philippine economic recovery from the pandemic crisis? Is this liberalization the way forward, or is this the means to take out the local “oligarchs” and replace them with foreign players?
In the meantime, CREATE, if passed, will affect the revenue-generating capacity of the government in these difficult Covid times. It is estimated that over P600 billion will be lost in tax collections.
The truth is that those who will avail of CREATE tax privileges are mainly the top 100 corporations, whose operations dwarf those of the 99 percent of the one million registered enterprises in terms of sales, assets and profits. As to the hundreds of thousands of micro businesses, the CREATE privileges do not matter because these cannot substitute for incentives given under the Barangay Micro Business Enterprise Law or BMBE. As to the small and medium business enterprises, many have already been flattened by the Covid lockdown and too weak to inquire if CREATE is the lifeline they need in these difficult times.
Policy-makers need to be more creative in packaging tax and recovery programs needed to save the economy in Covid times.