Tax deal or X-deal | as easy as ABC

Philippine business leaders are optimistic for two reasons. One, the domestic economy remains strong, and two, optimism is what is needed to keep the economy strong.

What may be a surprising revelation though is that in the 2016 Asia-Pacific Economic Cooperation (APEC) CEO survey, CEOs with responsibilities for Philippine operations are the most optimistic about the Philippines, but they are almost just about the only ones planning to expand their investments in the country. APEC CEOs may be thinking on the average of increasing their investments in multiple locations but the Philippines is not exactly on top of their list.

ASEAN countries will attract fresh investments from APEC CEOs in 2017 but the survey indicates that they are principally looking at Indonesia, and even Vietnam, and will continue to invest heavily in China and Singapore. The Philippines, the new Tiger of Asia and everyone’s apple of the eye in the last few years, will have a negligible take.

Being an emerging and dynamic market does not seem enough for foreign CEOs to start flooding the country with investments. Favorable policy and regulations must combine with the market’s potential to make an economy attractive enough to invest in, according to the survey. In fact for this year, “regulatory environment” is number one in the top five “factors that matter most to CEOs investing across APEC borders today”.

Our general peace and order has improved, but rampant EJKs are not the hallmark of mainstream economies. They spook investors, and even those who merely pay a visit. That our president has been open about the cabinet running the show fiscally or economically is a plus because of a good cabinet, but the flip-flopping and conflicting pronouncements from the top also present a lack of predictability that is not helpful to a decision maker. Quarrelling with the governments of the potential investors also does not help at all.

The draft tax reform initiative is laudable in its intent to be more equitable and pro-poor – that’s good, assuming that is achieved. It must also be recognized though that apart from that, the reform offers no improvement or advantage to business that will entice an outside investor to place his bet here.

In fact, the reform’s oil tax component, because of the general increase in commodity prices if oil price increases, will burden mostly the poor who are being sought to be protected in the first place. But oil tax is meant to boost funds for infrastructure.

I get it, and I agree, that we all need to put in our fair share of tax and sacrifice. What the country is deprived of however, to date, is a strong showing of foreign direct investments (FDIs) that can actually make an impact and lessen reliance on increase in taxes to fund projects.

We agree with the Secretary of Finance that the public-private partnership (PPP) program should worry more about public benefit than the government’s initial profit. It also deserves a very good review because government infrastructure projects traditionally not funded by PPP can be candidates for the program through creative schemes.

For example, in constructing farm-to-market roads, there’s no money to be made by private sector from collecting toll fees, per se. But with an X-deal, the road developer can be allowed to develop an agri-industrial zone and recover from it. Then private investment can substitute for government funds that need to be raised. Similar X-deals can be done for bridge constructions where private sector can be allowed to recover its investment although not necessarily in the same site.

There are, in fact, a number of good X-deal examples already looked at for PPP. The much-needed modernization of the New Bilibid Prison, by building new, bigger, and better facilities in Nueva Ecija, would also bring electricity, utilities and other support services in that area. The private investor can recover by converting the old prison area’s valuable real estate in Muntinlupa into a significant commercial and residential development. Now that’s an X-deal.

The Laguna Lakeshore Expressway-Dike project – the proposed highway that interfaces with C6, Taguig all the way up to Los Baños, Laguna that also serves as a flood control system has an X-deal – particularly the reclamation of raw land along the sides of the highway. These are quite complex but very impactful projects. What’s stopping projects with these complexities are key regulatory issues and policy difficulties.

The point I am making is that the country has creative minds to make projects viable for investment, but it’s always a question of investor and rules. We badly need to push for those constitutional amendments to lift foreign equity limitations and make existing ideas more financially viable.

The new thing is, sensible legislators will now probably guard against the declared intent to amend the constitution to give the president more power. If constitutional amendment is delayed, if not aborted, because of this political issue, then the advertised opening up of our economy will not happen. And we will need to rely merely on extracting the juice from those who are already here, in terms of new taxes.

Let’s dream for a moment. What if we are able to fix all political issues internally, and we become the top investment destination, become flooded with FDIs, and figure out how to harness private sector funds into infrastructure? What if creativity and problem-solving skills are matched with the political will to make all these wonderful and life-changing projects happen? We barely scratched the surface of this potential. We can dream, but we can also do something about it.


Alexander B. Cabrera is the chairman and senior partner of Isla Lipana & Co./PwC Philippines. Email your comments and questions to aseasyasABC@ph.pwc.com. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.

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Alexander B. Cabrera

Alexander B. Cabrera

Chairman Emeritus, PwC Philippines

Tel: +63 (2) 8845 2728