2017 priority investment activities

SUITS THE C-SUITE By Fidela I. Reyes And Michelle C. Arias

Business World (03/20/2017 – p.S1/4)

The approval of the 2017 Investment Priorities Plan (IPP) on Feb. 28, 2017 demonstrates that inclusive economic growth remains a high priority agenda in President Rodrigo R. Duterte’s administration. The IPP is a list of government priority investments formulated by the Board of Investments (BoI) that may be eligible for fiscal and non-fiscal incentives, including an income tax holiday (ITH) of up to eight years.

The new IPP, which is themed Scaling Up and Dispersing Opportunities, aims to promote investment in activities that generate jobs for more segments of the population, increase the participation of firms in local and global value chains, and expand development opportunities in rural areas.

Formulated through a participative, analytical and multi-sectoral process, the new IPP is anchored on the aspirations and current socioeconomic needs of the Filipino people and the objectives of the Philippine Development Plan 2017-2022.

The 2017 IPP contains the following priority investment areas:

1. Preferred Activities, namely, all qualified manufacturing activities including agro-processing; agriculture, fishery and forestry; strategic services; health care services including drug rehabilitation; mass housing; infrastructure and logistics, including local government unit public-private partnership projects; innovation-drivers, inclusive business (IB) models; environment or climate change-related projects; and energy projects;

2. Export Activities including production and manufacture of export products, services exports, and activities in support of exporters;

3. Activities based on Special Laws granting incentives; and

4. Priority activities for projects located in the Autonomous Region of Muslim Mindanao (ARMM).

Top priorities for investment are still the manufacturing and agriculture sectors, considering their great potential to provide employment for unskilled workers, especially in rural areas.

The preference for manufacturing is driven by the government’s continuing policy to upgrade and transform the manufacturing industry into a globally competitive business supported by strong backward and forward linkages, particularly with micro, small and medium enterprises (MSMEs). In support of the government’s manufacturing resurgence program, the new IPP removed the specific subsector list (i.e. motor vehicle, shipbuilding, aerospace parts and components, chemicals, virgin paper pulp, copper wire, basic iron and steel products, and tool and die) and broadened the scope to include all qualified manufacturing activities, including agro-processing.

The investment, employment and technology transfer requirements to qualify for incentives will be specified in the IPP’s implementing rules and regulations.

Significant additions to the list of preferred activities also include innovation-driven activities, MSME-oriented IB projects, environment-conscious projects, telecommunication services, and state-of-the — art engineering, procurement and construction activities.

In this age of information technology (IT), activities that enhance innovation and creative capacities such as research and development (R&D), the conduct of clinical trials and the establishment of innovation centers, have become essential tools to attain and maintain a competitive position in domestic and global markets. The commercialization of new and emerging technologies and products of the Department of Science and Technology or government-funded R&D projects is also incentivized to spur growth through innovation.

The integration of MSMEs into major business networks, particularly in the agribusiness and tourism sectors, and in rural areas, reflects the administration’s plan to expand the middle class and provide sustainable livelihood for the poor.

Environment or climate change-related projects that lead to the efficient use of energy, natural resources or raw materials; minimize/prevent pollution; or reduce greenhouse gas emissions are also preferred to support environmental conservation and preservation initiatives.

Under the 2017 IPP, new market players who will establish connectivity facilities for fixed and mobile broadband services may also qualify for registration. This could open up the telecommunications sector to more industry players and provide consumers with fast, reliable and stable internet services at affordable prices.

Investment in projects outside of Metro Manila (except for modernization projects) is also strongly encouraged under the IPP for manufacturing activities including agro-processing; commercial production of agriculture, fishery and forestry products; mass housing (except for in-city low-cost housing projects for lease), and business process outsourcing (BPO) activities.

Specifically for the BPO sector, the new IPP includes a sunset provision that contact centers and non-voice business processing activities that will be located in Metro Manila may no longer be qualified for incentives availment with the BoI under Executive Order (EO) No. 226 or the Omnibus Investments Code of 1987, as amended, by year 2020. The government is encouraging BPO companies, being key drivers of the Philippine economy, to expand their operations and create jobs in the provinces to continue to avail of incentives. This is also one way to cap the incentives granted to IT-BPO companies registering with the Philippine Economic Zone Authority (PEZA) because of its better incentive package. The ITH incentive of the PEZA is based on EO No. 226, which mandates the BoI to formulate the IPP. Under current rules, qualified PEZA locators can avail of the ITH, and after the ITH period, they move into a regime where they pay 5% tax on gross income earned.

Mass housing units priced beyond P2.0 million are no longer eligible for incentives under the new IPP as the price ceiling has been reduced from the previous P3.0 million. This may pose difficulty for the real estate industry in keeping their housing prices low considering the rising cost of construction materials and raw land.

The list continues to prioritize investments in strategic services including integrated circuits design; creative industries/knowledge-based services; maintenance, repair and overhaul of aircraft; charging/refueling stations for alternative energy vehicles (except LPG-run vehicles); industrial waste treatment, but excluding ship repair.

Other preferred activities are health care services including drug rehabilitation centers (subject to the positive list of locations endorsed by the Department of Health); infrastructure and logistics projects including local government unit initiated and/or implemented public-private partnerships; and energy-related projects.

While infrastructure development is listed as a preferred activity in the IPP, much-needed infrastructure could be realized, and the benefits to the industry significantly improved, if the country is also able to tap into the capital, technology and expertise of foreign contractors. Currently, the Philippine Contractors Association Board licensing rules favor local contractors over foreign ones. Foreign contractors are currently required to secure a special license to engage in the construction of a single specific undertaking/project, unlike local contractors who are entitled to engage in construction contracting within the field and scope of their license classification(s).

Significant adjustments to the ARMM list are likewise introduced with the removal of consumer manufactures and inclusion of banking, non-bank financial institutions and facilities, and energy projects.

Currently, the BoI is finalizing the General Policies and Specific Guidelines for the implementation of the 2017 IPP. The BoI is set to conduct roadshows in key cities all over the country to be led by Undersecretary and BoI Managing Head Ceferino S. Rodolfo to inform and promote the salient features of the new IPP to the various stakeholders.

Although several challenges persist in the implementation of the 2017 IPP, it is hoped that the broadened coverage of the priority list of investments will drive progress across regions, especially in provinces, strengthen various industry sectors, improve unemployment levels, and achieve sustainable and inclusive growth that can directly impact all participants in the administration’s industrial and economic strategy.

This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinion expressed above are those of the author and do not necessarily represent the views of SGV & Co.

Fidela I. Reyes is a Tax Partner and Michelle C. Arias is an Associate Director, respectively, of SGV & Co.