The Role of Fiscal Incentives on Philippine Investment

• Expectations on fiscal incentives. Governments around the world expect fiscal incentives like tax holidays, tax deductions, and tax credits to induce domestic and foreign direct investments (FDIs).
• Empirical evidence against fiscal incentives. Investors consider many factors before they invest in a particular country – population literacy, quality of infrastructure, wage cost, etc. Fiscal incentives seem to be a secondary concern among these fundamental factors. Several studies have pointed out the weakness of incentives to induce foreign investment and there are no studies yet investigating the ability of incentives to promote domestic investment.
• Fiscal incentives on different countries. Prior studies on different countries have explored the influence of incentives on investment; however, each has its own imperfection.

o   China. Special economic zones (SEZs) in China, which have a mix of infrastructure and incentive inducements, seem to influence the location of FDIs within the country, but there is no evidence that incentives, on their own, attract FDIs.

o   US. For US multinational firms, investments geared for the export markets seem sensitive to host country taxation. It was also observed that sensitivity is greater for developing countries and is increasing over time. This study, however, focuses on the impact of various incentives on location, not on fiscal incentives alone.

Fiscal incentives and FDIs in the Philippines

• Investment promotion agencies. There are two investment promotion agencies that grant fiscal incentives to investors in the Philippines, they are the Philippine Economic Zone Authority (PEZA) and Board of Investments (BOI). PEZA administers SEZs and provides tax breaks to exporters, while BOI grants incentives to non-SEZ-located firms.
• Lack of empirical evidence. While incentive instruments like tax holidays are expected to induce investment theoretically, empirical tests validating this claim are inadequate.
• Hypothesis under investigation. If fiscal incentives do stimulate investment, the cumulative size of investment subsidies given by the government must be correlated with the level of investments that receive incentives.
• Statistical results. Using regression analysis, results suggest that neither BOI nor PEZA fiscal incentives significantly determine the investment pattern in the Philippines. Instead, the significant determinants turn out to be the size and strength of the region’s market, quality of the labor force, and the condition of infrastructure.
• Policy implications. Since fiscal incentives do not significantly encourage investment, the country would benefit more if the government would limit fiscal incentives and effectively collect taxes instead to fund improvements and provide access to good infrastructure and education. Furthermore, it is recommended that the BOI should just focus on investment promotion and hand over investment administration to PEZA. Fiscal damage on the economy could also be limited if BOI concentrates on granting incentives to exporting firms only.

Source:

Reside, Renato, Jr., “Can Fiscal Incentives Stimulate Regional Investment in the Philippines? (An Update of Empirical Results)”, University of the Philippines School of Economics, June 2007.