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Investing in the Philippines: What to Expect in 2017

June 5, 2017 • GLOBAL ECONOMY, Asia - Pacific, Special Feature on Duterte and the Philippines

By Alexander Chipman Koty

The Philippines garnered substantial international attention in 2016, owing largely to President Rodrigo Duterte’s controversies. Lost in the Philippines’ political drama, however, was the country’s strong economic performance. This article examines the Philippines’ business climate in 2017, and its leadership prospects and priorities as chair of ASEAN.

 

The Philippines garnered substantial international attention in 2016, owing largely to President Rodrigo Duterte’s rise to power, his litany of controversial remarks, and contentious war on drugs campaign. Lost in the Philippines’ political drama, however, was the country’s strong economic performance.

The Philippines posted a robust 6.8 percent GDP growth rate in 2016, outperforming popular investment spots such as China (6.7 percent) and Vietnam (6.2 percent). This follows years of sturdy growth under the previous Aquino administration, where growth averaged 6.2 percent per year.

FDI into the Philippines also increased in 2016, reaching US$6.2 billion in net inflows through the first 10 months of the year – a 22.2 percent increase over the US$5.1 billion accumulated over the same period the previous year. In 2015, total FDI amounted to US$5.7 billion. Intercompany borrowings accounted for almost two thirds of net FDI inflows (US$3.9 billion) in 2016, up 34.9 percent from US$2.9 billion in 2015. Despite improved FDI, the Philippines continues to lag behind fellow ASEAN countries such as Indonesia, Malaysia, and Thailand in this regard.

The Philippines may be better positioned than its more export-reliant neighbours to weather 2017’s uncertain global economic climate.

The Philippines’ strong economic performance is projected to continue into 2017, primarily on the back of healthy domestic spending, infrastructure development, and remittances. As opposed to many emerging Asian economies that are reliant on affordable exports, the Philippine economy is primarily bolstered by consumer spending, which accounts for about 70 percent of GDP and grew by seven percent year-on-year.

Consequently, the Philippines may be better positioned than its more export-reliant neighbours to weather 2017’s uncertain global economic climate.

Standard Chartered projects the Philippines’ economy to grow by 6.7 percent in 2017, while HSBC projects 6.5 percent growth. Meanwhile, the Philippine government is targeting growth between 6.5 and 7.5 percent in 2017 and to grow between 7-8 percent per year in the medium term, while aiming to attract US$7 billion in FDI over the coming year.

 

Tax Reform

One of the Duterte administration’s main initiatives in 2017 will be rolling out the Comprehensive Tax Reform Program (CTRP). The reform will see the highest personal income tax bracket rate reduced from 32 percent to 25 percent and corporate income tax lowered from 30 to 25 percent. The initiative aims to make the Philippines’ tax environment more competitive with its ASEAN peers, as the region as a whole has been gradually harmonising and lowering tax rates.

To offset losses from lowered personal income and corporate income tax rates, the government will expand the value-added tax (VAT) base by reducing exemptions, and add taxes on automobiles and fuel excise, among other measures.

Additionally, the government has announced that it will expand the tax collection powers of the Bureau of Internal Revenue (BIR), which will resume conducting field audits, and is also debating a tax amnesty to raise revenues and bring more companies into the formal tax regime.

Tax forms will also be simplified to encourage tax compliance and make the process more approachable for small taxpayers. Complicated and burdensome administrative measures, both in time and cost, often deter small taxpayers from participating in the official tax system.

Also to this end, Project Repeal: The Philippine Red Tape Challenge aims to improve the country’s inefficient bureaucracy – the Philippines is ranked 106th in the World Bank’s Ease of Doing Business index – by streamlining administrative and regulatory procedures and to remove unnecessary laws.

The tax reforms are projected to add an additional PHP 206.8 billion to government coffers, and the BIR is aiming to collect a record PHP 1.829 trillion in 2017. From January to November 2016, the BIR collected PHP 1.45 trillion in taxes.

 
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