Japanese shy away from Philippines, pull down foreign direct investments

Foreign direct investments (FDI) to the Philippines are on a downtrend so far this year, no thanks to the reluctant Japanese, the country’s biggest investors.

Concerns over the government’s advancing push for a reduction in tax perks in economic zones and slowing growth are driving away investments from the eurozone toward China, but the largest drop was recorded from Japan.

Central bank data show equity FDI from Japan posted a net outflow of $103.09 million from January to June, the biggest net outflow on comparable record since 2005. A net outflow of FDI indicates that more investments left than entered.

Japan, the Philippines’ biggest bilateral partner, accounted for nearly 29 percent of $360.64 million in equity FDI placed during the first six months of the year. Equity FDI nets out re-investments and placements in debt securities to count only new foreign entrants to local industries like power and finance.

The Duterte administration has pushed for the removal of tax incentives granted to investors in economic zones, which the Finance department deems excessive and prone to abuse.

The planned reform is not new, an inheritance from previous governments since the Ramos administration that all campaigned for the reform as a revenue-enhancing measure that seeks to plug supposed tax leaks from perks offered in perpetuity, to fund the deficit.

But the deficit is controlled under the Duterte government, which has packaged the proposed Comprehensive Income Tax and Incentive Rationalization Act (Citira) as a measure to level the playing field for investors of all sizes, which in turn would make the Philippines a more attractive investment destination.

The Finance department specifically argued that small- and medium-scaled enterprises — which account for more than 97 percent of local corporations — do not enjoy the same tax perks offered to their large counterparts.

Citira, which is among the Duterte government’s priority legislation, has advanced to plenary debates at the House of Representatives, inching closer to its passage. Foreign chambers who support Citira’s provision to lower corporate income taxes to 20 percent in five years, have lobbied against the bill’s provision that reduces tax perks in ecozones.

 

The move comes amid slowing economic growth, which hit a four-year low of 5.5 percent in the second quarter.

The uncertainty on Citira’s fate and dismal economic performance have discouraged FDI, which just two years ago reached a record-high of $10 billion under Duterte. As of the first half, FDI posted a net inflow of $3.576 billion, down 38.8 percent year-on-year.

Broken down, equity investments dropped a faster 77.2 percent to $360.64 million, data showed.

Apart from Japan, investments from the European Union swung to a net outflow of $3.72 million. Although still a net inflow, Chinese investments went down 38.9 percent to $103.03 million, while that from the US rose 54 percent to $96.4 million.

Reinvested earnings rose 12.1 percent year-on-year into June to $507 million, while inflows to debt instruments went down to $2.708 billion, albeit still the main destination for FDI placements.

The Bangko Sentral ng Pilipinas expects to cap off the year with a FDI net inflow of $9 billion.