Home Business Delays in VAT rebates dampen net inflows of foreign direct investment into the Philippines

Delays in VAT rebates dampen net inflows of foreign direct investment into the Philippines

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Delays in VAT rebates dampen net inflows of foreign direct investment into the Philippines

THE PHILIPPINES have the fourth highest net inFThe trough in foreign direct investment (FDI) in Southeast Asia may have been tempered by delays in VAT rebates, the Association of Southeast Asian Nations (ASEAN) Investment Report 2024 shows.

The Philippines saw a net increase in foreign direct investmentFThe lows fall 7% to $8.9 billion in 2023, down from $9.5 billion in 2022.

Despite the decline, foreign direct investment has continued to flowFLows to the Philippines in 2023 were the fourth highest by value among ASEAN member states. This was behind Singapore, which posted net inflows of $160 billion, Indonesia with $21.6 billion and Vietnam with $18.5 billion.

However, the Philippines surpassed Malaysia ($8.8 billion), Thailand ($4.5 billion), Cambodia ($4 billion), Myanmar ($2.2 billion) and Laos ($1.8 billion). Brunei Darussalam recorded a net zeroFlow of $57 million in 2023.

Net foreign direct investment inFThe ASEAN region bottomed out at a record $230 billion last year, up 0.3% from $229 billion in 2022.

According to the report, the Philippines saw a decline in investments in most industries, with the exception of manufacturing and renewable energy (RE).

“Large wind energy projects involving companies from Europe generated sustainable investments in renewable energy,” the report said.

Investments in RE projects increased after the Philippine government allowed full foreign ownership in the sector, which was previously limited to 40%.

However, there are issues related to the delays in VAT refund refunds by the Philippine governmentFaffected investor sentiment.

“Divestment or reduction of operations by some multinational companies in the face of VAT rebate challenges has also contributed to the deteriorating situation,” the report said.

The Philippines, under Article 12 of the Tax Code, allows VAT-registered entities whose turnover is zero-rated to apply for the issuance of a tax credit certificate.Fication or refund of deductible input tax.

By law, the Commissioner of the Bureau of Internal Revenue (BIR) shall grant refunds of creditable input taxes within 90 days.

However, there was confusion over VAT exemptions and zero VAT rate for local purchases from registered business entities due to inconsistencies between the Corporate Recovery and Tax Incentives for Enterprises (CREATE) Act and its implementing rules and regulations.

The Philippine government hopes to address this issue with the proposed CREATE MORE (Maximize Opportunities for Reinvigorating the Economy), which was endorsed by Congress last month.

Under CREATE MORE, the government plans to introduce an enhanced VAT refund system that will allow refund of input tax credits within 90 days from the date Fdrawing up the applications.

The measure also directs the Department of Finance to establish a VAT Refund Center in the BIR and the Bureau of Customs to handle the electronic processing and refund of creditable input taxes.

The Bangko Sentral ng Pilipinas expects net foreign direct investment inflows to reach $10 billion by the end of 2024.

INVESTMENT TRENDS
Within ASEAN, the number of megadeals, or international project financing agreements of more than $500 million, fell from 60 in 2022 to 38 last year, the report said. The Philippines and Indonesia received three-quarters of these mega deals last year.

“Half (19) were engaged in activities related to renewable energy, such as electricity generation, battery production and mining and processing of critical minerals,” the report said.

From 2020 to 2023, RE-related industries attracted an average of $27 billion in investments annually. These include the extraction and processing of critical minerals, the production of renewable energy sources and the generation of renewable energy.

“The five largest deals during this period involved solar and wind energy generation. Most of the top 20 projects took place in Vietnam, Indonesia and the Philippines, in that order,” the report said.

The largest international project financing during the period was BlueFloat Energy’s Philippine Offshore Wind Portfolio, estimated at US$38 billion.

OUTLOOK
Meanwhile, net inflows of foreign direct investment into the ASEAN region are expected to exceed the annual average of $300 billion between 2024 and 2030, the report said.

“The FDI outlook for the region is promising, with robust growth in announced greenfield investments in 2023, continued regional integration and growing favorable investment sentiment,” the report said.

The stabilization of interest rates could also lead to a recovery in global international project financing, which could boost investment in the region.

Multinational companies in the region continue to report higher profits and are optimistic about growth, the report said.

“Many reported plans to invest further in the region in the coming years due to the improving investment climate and growing investment opportunities,” it added.

However, increased competition, concerns over global economic growth and ruptures, financial tightening, inflationary pressures and geopolitical tensions are among the headwinds that could hinder the inflow of foreign direct investment into the region, the report said.

At the same time, internal challenges, including absorptive capacity limitations and a lack of skills development, will continue to raise concerns.

“While these are longer-term structural challenges, action must be taken now to address them, to facilitate deeper integration and a post-ASEAN Economic Community era in 2025 that is more conducive to investment ,” the report said.

The ASEAN Investment Report was prepared by the ASEAN Secretariat and the United Nations Trade and Development Office. — Justine Irish D. Table

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