BPO competitiveness to suffer from removal of incentives — Colliers

THE removal of tax incentives under the government’s proposed tax reform program could stifle the growth of the business process outsourcing (BPO) industry, as these incentives have been attractive to foreign firms, a property consultancy said.

In a statement released after Malacañang certified as urgent legislation covering the Comprehensive Tax Reform Program (CTRP) program, Colliers International said the removal of value added tax (VAT) exemptions on BPO sales and imports is expected to have a negative effect on an industry that has contributed significantly to the economy’s growth.

“Removing this incentive from the current set of fiscal perks granted to outsourcing companies will derail existing firms’ expansion and prospective investors’ plans of opening shop in the country. Eventually, these will weaken the Philippines’ position as one of the most attractive sites for BPO and KPO (knowledge process outsourcing) operations in the world,” Colliers said.

Once approved, the first package of the CTRP would direct the government to subject the gross receipts of BPO firms to 12% VAT. Colliers said these tax perks have been substantial factors in the BPO firms’ decision to set up shop in the country.

To date, Metro Manila is regarded as the second most competitive BPO destination in the world, with Cebu ranking 7th and Davao in 66th, according to global outsourcing and research firm Tholons’ list of top 100 outsourcing sites in the world. The list includes six other Philippine cities: Santa Rosa, Laguna, Bacolod City, Iloilo City, Dumaguete, Baguio City, and Metro Clark.

“Once the government rationalizes the fiscal perks, these urban areas would face stiffer competition from their ASEAN peers as they lose a major competitive edge and as other cities in the region try to lure companies by dangling a more attractive tax incentives package,” Colliers said.

The consultancy noted that Kuala Lumpur, Ho Chi Minh City, Hanoi, and Singapore are the emerging BPO hubs in the region that could be more competitive once the tax reform package is implemented.

The outsourcing sector currently employs around 1.1 million Filipinos, generating $23 billion in revenue in 2016. Colliers said legislators should consider the impact of the tax proposal on employment and foreign exchange reserves.

“Their expenditures spill over to other segments of the economy, including telecommunications, banking and finance, and hotel and leisure. The removal of zero VAT benefit will put these economic gains in peril,” it added.

The tax reform proposal would further offset other government-led initiatives implemented to boost the outsourcing sector in the past, which includes the establishment of the Department of Information and Communications Technology, the implementation of the Data Privacy Act, Cybercrime Prevention Act, and also the plan to build a national broadband network.

Colliers maintained that the CTRP’s intention to reduce personal income and corporate income tax rates, raise purchasing power, and create more jobs are commendable.

“However, the government shouldn’t limit the incentives it grants to a sector that has played a crucial role in boosting domestic demand and keeping the economy afloat amidst a precarious global economic environment,” the firm said. —