Lies, damn lies, and FDI in the Philippines

The Asian Tax Seminar was held in Antipolo City 7-9 August, in the hills overlooking the endless foggy urban sprawl of Manila. This seminar, hosted by Action for Economic Reforms (AER), and Jubilee South Asia Pacific Movement on Debt and Development (JS-APMDD) was the first of its kind targeted specifically at civil society participants, to share tax advocacy and research experiences.

Among the heated discussions, came up the issue of Foreign Direct Investments (FDI), in which already the inward-orientated investments cost the country 1% in GDP in 2004. Cristina Morales-Alikpala from Action for Economic Reform (AER) mentioned that FDI is “the game as it is being played now”, and in this game the Philippines is disadvantaged due to rampant corruption and poor infrastructure.

The Philippines is experiencing historically low tax effort (tax per GDP) levels, mobilising only 13% in tax per GDP in tax revenues, a dramatic fall from it’s peak a decade earlier when the ratio reached 17% in 1997, just as the Asian Crisis hit the country. Surely there is capacity to collect more taxes in a country that is categorised both as mineral wealthy, and middle-income.

But why should the Philippines “sweeten” the deal by giving a whole host of tax incentives? For most investors, it seems that tax incentives are not the central issue when deciding on the location of investments. A recent study by Chai and Goval at the IMF mentions that the cost of tax incentives outweight the benefits in the Caribbean states. Similarly, in Central America, Cabnera from ICEFI have published similar findings, on how incentives outnumber social spending in Guatemala and Nicaragua.

Incentives are also readily abused, and here the official literature is mostly blind on the issue. The Board of Investment (BoI) and the Philippines Export Processing Authority (PEZA) have large discretion on handing out incentives, and they also end up giving them to companies who sell to domestic markets, thus undercutting local producers. In Ghana, it was found that 72% of forestry turnover at the Kumasi tax office was under Free Zone status, while forestry doesn’t qualify for incentives. The TJN Ghana Report mentions that

“Yet, the more glaring reason for low tax payments is that six of the fifteen firms, accounting for 72% of turnover, were registered as Free Zone companies, and are thus not liable for any tax at all.”

Why does the Philipino Government play the FDI Game if provides little in benefits and is open to abuse?

The Philippines received US$1.9 Billion in FDI, which is dwarfed by the US$ 17 billion it received in remittances from the estimated 10 million Overseas Filipino Workers (OFW), representing 22% of the total work force. Rex Varona, from the Asian Migration Centre, argued that better policies for the overseas workers would make these remettances more productive, investing in co-operatives and by-passing expensive middl-men like the Western Union and MoneyGram.

And what about the US$ 1.9 Billion figure, how much of this is “round-tripping” where a Filipino pretends to be an overseas investor, by establishing a company in Singapore or the British Virgin Islands. A pity the National Statistical Coordination Board (NSCB) doesn’t provide FDI statistics on-line, so we had to dig elsewhere.

A paper by Balboa and Medalla we can deduce that a staggering 15.1% of Philipino FDI between 1998 and 2003 comes countries known uniquely as Secrecy Jurisdictions (British Virgin Islands 2.8%, Hong Kong 5.9%, Singapore 6.4%), while a total of 38.5% of FDI came from countries that offer secrecy services (adding on the Netherlands 6.4%, USA 11.7%, UK 5.3%). The largest FDI source was Japan with 25%.

UNCTAD in its blindness to secrecy jurisdictions, is facing increasing criticism for not telling anything behind the FDI statistics, which are often taken at “face-value” whereas when you put FDI to the “secrecy jurisdiction” test, you get a wholly different picture.

So what are the most enduring effects of Foreign Investment in the Philippines? Well – it must be the Jeepneys! Originally brought by the US Military in the Second World War and abandoned and sold off after the war, and adopted as popular mini-busses that are a pride of the Philippines. There are currently several domestic producers from small workshops of recycled vehicles, to industrial facilities now rolling out electric Jeepneys and adapting the Jeep to new designs from Toyota people carriers to Humvees.

If technology transfer were the point of FDI, then best support local manufacturers and stop subsidising foreign firms.