Underperforming Philippines Extends Tax Breaks to Attract Tourism Investors

The Philippines is extending tax incentives for another decade to help stimulate investments in its tourism enterprise zones to help it achieve an ambitious goal of luring 12 million foreign arrivals by 2022.

The incentives were to have expired by the end of this year. The zones are designated and supervised by the Tourism Infrastructure and Enterprise Zone Authority. They include sites in destinations such as Cebu, Palawan, Manila, Bataan, Bohol, and Surigao del Norte.

The new law signed by President Rodrigo R. Duterte on April 10 but published only on May 27, packs an entire range of incentives, including a six-year income tax holiday, duty-free imports on capital goods and services, a net operating loss carryover as an alternative taxation scheme, and a tax deduction for environmental protection and cultural heritage activities, among others.

Since the Aquino administration in 2010, the Philippines has been keen on developing the tourism sector as a key engine of economic growth. Under a six-year masterplan, the Duterte administration is targeting the number of foreign tourist arrivals to reach 12 million by 2022, from six million in 2016. It aims to increase inbound tourism receipts to $17.7 billion (922 billion Philippine pesos) by the end of the administration’s term in 2022, from $6.8 billion in 2016.

The National Tourism Development Plan also aims to raise the sector’s employment share to 14.4 percent of total employment by 2022, benefiting 540,000 poor individuals, from a 13 percent share in 2016, benefiting 486,000 from the impoverished class.

Samie Lim, chairman of the tourism committee of the Philippine Chamber of Commerce and Industry told Skift, “There are five A’s in tourism — arrival, access, accommodations, attractions and activities — and these have to work hand-in-hand and should be infused with investments so that [the Philippines] can be at par with the best performers in regional and global tourism.”

“[The Philippines] may have beautiful attractions but these will be useless if there are no roads to bring the tourists there.”

Lim’s view was shared by Jose C. Clemente III, president of the 300-strong Tourism Congress of the Philippines, composed of private sector representatives across all tourism sectors. “The extended incentives [package] is a welcome development. That said, we should now go out and look for those investors that would be interested to enter the Philippine tourism industry so we can take full advantage of those incentives. Aside from the incentives, we need to make the process of setting up business here easier,” he said.

Critical Voices

The new law is not without its critics, however.

The Department of Finance thinks the law is unnecessary. In an interview, finance secretary Carlos G. Dominguez III said, “The guys who would have put up a hotel, would have put it up even without them [tax incentives].”

Carlos Dominguez, Philippines Finance Secretary

The department has been trying to repair the Philippines’ outmoded tax system by simplifying the corporate income tax structure and improving the fiscal incentives system to benefit foreign enterprises that actually contribute to the country’s growth.

Dominguez knows whereof he speaks. Before joining the Duterte administration, he was a hotelier, having enjoined his bosom buddy, the Sultan of Brunei Hassanal Bolkiah, in 1998 to set up Marco Polo Hotel. It was the first international hotel chain in Davao City in the island of Mindanao, an area often perceived as mired in problems due to the presence Islamic jihadists in remote locations in the south.

Dominguez’s family also owns a boutique hotel Linden Suites in the Ortigas business district, north of Makati, Metro Manila’s business capital.

Aside from Marco Polo, other international hotel chains have also planted their brands in the Philippines in the past 10 years, including Wyndham, Conrad, Radisson Blu, Marriott, Shangri-La, Peninsula, and Nobu in the City of Dreams, to name a few.

Barry Robinson, president and managing director of Wyndham Hotel Group for Southeast Asia and Pacific Rim, said, “We’ll have at least six brands in the Philippines in the next three years…so there could be Microtel, TRYP by Wyndham, Days Inn, Ramada and Wyndham, may be also Ramada Encore or Dolce or Super 8.”

He said this is the hotel group’s bid to hit all market segments in the Philippines, encouraged by rising tourist arrivals in the country.

Inbound arrivals grew by 15 percent to 7.2 million in 2018, over 2017, and by more than 100 percent from 3.5 million in 2010.

In the first quarter of 2019, the Philippines Board of Investments registered some $112 million in investments in six new accommodation facilities in the provinces of Cebu, the top tourist draw in the Philippines, and Marinduque, as well as in Metro Manila. This was almost a five-fold increase from the $19 million investments in two hotels in the same period in 2018 — one in South Cotobato City in Mindanao, and the other in Manila.

Underperformer in ASEAN

But while there have been gains, “there is no question that there is still much room for growth, especially in foreign tourist arrivals,” said Lim of the Philippine Chamber of Commerce and Industry.

“The Philippines — despite its natural beauty and the warm hospitality of its people — continues to be an underperformer in ASEAN tourism,” Lim told Skift.

Indeed, of 126 million international arrivals in South-east Asia in 2017, the Philippines ranked sixth with 6.6 million, after Thailand (35.6 million), Malaysia (26 million), Singapore (17.4 million), Indonesia (14 million), and Vietnam (13 million), according to latest available data from the ASEAN Secretariat.

To achieve its arrivals target by 2022, tourism undersecretary Arturo P. Boncato Jr. maintained more rooms are needed, and that those rooms are constructed faster and in key destinations in the countryside to disperse tourism.

Tourism secretary Bernadette Romulo Puyat said the new law “will make tourism investments in the country more commercially viable and attractive and they will be instrumental in making tourism a key driver of socioeconomic growth.”

The Department of Finance’s Dominguez said that remains to be seen. He said the department’s surveys show that foreign companies don’t invest in a particular country based on the fiscal incentives it extends. They prioritize peace-and-order as the number one factor, followed by stability of policy; availability of good workforce; good communications, roads, airports; and tax incentives.

“So why are we prioritizing the number five?” he shot.

Dominguez noted there are 14 government agencies that extend tax perks to investors, and more than 500 incentive zones nationwide. Despite the abundance of these incentives and economic zones, foreign direct investment slipped to $9.8 billion in 2018, from $10.3 billion in 2017, the highest recorded by the Philippines Central Bank.

For a country that’s hard-pressed to collect enough taxes for government to invest in much needed infrastructure projects, Dominguez said hard questions must be asked.