TRAIN LAW/MAY 30,2018: Marginal people were first hit by the implementation of TRAIN and the next implementation of TRAIN 2 business establishment including BPO’s would be affected.(CDN PHOTO/TONEE DESPOJO)
BPO industry asks gov’t not to remove incentives under 2nd tax reform package
Young graduates eyeing to land a job in call center companies might start looking for other options.
The information technology and business process management sector in Cebu is anticipating a slowdown in the wake of the second wave of the government’s tax reform package which will affect the tax incentives given to companies.
“Honestly, I don’t have a definite answer as of now but initial feedback from the industry is that they are concerned if incentives will be taken away,” said Wilfredo “Jun” Sa-a Jr., Cebu IT-BPM Organization (CIB.O) managing director.
Saa echoed the fears expressed by some industry leaders like Jonathan de Luzuriaga, president of the Philippine Software Industry Association (PSIA) about the Tax Reform for Acceleration and Inclusion 2 or TRAIN 2.
During the recent Transformation Summit in Cebu, Luzuriaga said some local industry players had told him that they were “stepping on the brakes” on their expansion plans due to uncertainties brought on by the TRAIN 2.
He pointed out that the country might lose its selling point — tax incentives.
“I hope this uncertainty is settled soon. If you ask me what’s in Train 2, I really don’t know. It keeps on changing,” he said.
The Department of Finance (DOF) has repeatedly defended the proposed Train 2, saying it would not remove incentives but only sought to “rationalize and modernize” these to make them more responsive, relevant, and effective, since these had not been changed for decades.
On the other hand, it also sought to gradually reduce corporate income tax (CIT) rates to no less than 25 percent from the current 30 percent which was one of the highest rates in Asia.
Currently, the Philippine Economic Zone Authority grants a package of incentives to locators in PEZA-registered companies that include an income tax holiday of a maximum of eight years and a perpetual 5 percent tax on gross income earned (GIE), zero vat on local purchases and up to 30 percent of local sales, among others.
The proposed TRAIN 2, however, sought to overhaul these incentives to make tax perks “more equitable and effective in creating jobs, industry development and attract more foreign direct investments and generate more revenues” to fund the massive infrastructure program under the “Build, Build, Build.”
But leaders of the IT-BPM sector fear that this will hurt the industry more especially since incentives have attracted more investors into the country.
The Contact Center Association of the Philippines (CCAP) was the latest industry group that joined the calls for government to reconsider the tax incentives being reviewed under the proposed TRAIN 2 package.
“Our competitors are giving incentives to attract more investments. That’s what we’re saying to government. The Philippines is no longer the cheapest destination. We are 10 percent more than our competition in terms of call center work,” said Jojo Uligan, CCAP president, during a recent visit to Cebu.
He cited the case of India which was a favored destination for business processing outsourcing (BPO) companies since it is cheaper by 10 percent to operate there.
The higher cost of doing business in the country is only being barely sustained by the country’s high-quality workforce, Uligan explained.
With tax incentives possibly removed, he said the industry may take a hit.
Uligan said they have been sending position papers together with other industry groups like the IT and Business Process Association of the Philippines (IBPAP), asking the government to retain the incentives to attract more investors and grow the industry.
“The good thing is there’s open dialogue. Government is welcome naman. It’s a balancing thing. The effect is not just on our industry, it’s about everyone. We’re asking and hoping to retain whatever incentives we can retain,” he said.
The proposed TRAIN 2 was still being deliberated at the House of Representatives (HR).
During the first congressional hearing on House Bill 7458, which covers Train 2, last May 22, Finance Secretary Carlos Dominguez urged lawmakers to approve the measure, which he described as “pro-business, pro-investments and pro-incentives.”
He said TRAIN 2 would help the government build a fairer and more competitive business environment through reforms in the corporate tax system “that would deliver a more even playing field, simplify collection procedures, bring greater transparency and reward genuine efficiency.”
In a statement, the Department of Finance (DOF) said reducing the corporate income tax rates and “modernizing” business incentives would help level the playing field for over 800,000 registered local corporations that had been paying regular taxes.
Of the estimated 5,000 companies with registered activities in the 14 investment promotion agencies (IPAs) in 2015, about 3,000 firms registered under PEZA claimed tax incentives amounting to more than P300 billion combined.
This data did not include estimates of potential leakages and cost of local tax incentives, according to the DOF.
In contrast, over 800,000 other corporations registered in 2015 paid regular taxes, which meant that the PEZA only covered the relatively privileged few, mostly large firms, that had been enjoying incentives and would to continue to enjoy them unless the TRAIN 2 was passed, the DOF said.
Package 2 aims to lower the corporate income tax paid by some 95 percent of businesses, while at the same time retaining and providing new fiscal incentives for “deserving recipients” that would contribute to national development and help generate pro-poor investments and jobs.
But in 2017, PEZA said that total investments in the IT-BPM industry for 2017 went down to P15.57 billion — a 48 percent drop compared to the P30.44 billion in 2016.
Still, the BPO industry remained optimistic.
Uligan said they expected a seven to nine percent growth in 2018.
Currently, the Philippines remains the biggest source of contact center services, ahead of its biggest competitor which is India.
Citing data from Texas-based global consulting and research firm The Everest Group, CCAP said the Philippines was expected to take 16 to 18 percent of the total outsourced services globally in 2018. In Cebu City, one of the most supportive local government units to the sector, CCAP said the city government is aiming to add at least 50,000 agents to its current roster of call center professionals, a move that is estimated to increase revenue infusion into the city to P10 billion monthly from the current P7 billion monthly from its over 100,000 agents.
For their part, CIB.O said there are more than 300 IT companies currently located in Cebu that are employing around 150,000 employees.
Collectively, these companies generate an annual income of P29.3 billion.
The local IT-BPM industry is also supported by 450,000 indirect employees who contribute P46.8 billion a year.