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Column in BUSINESSWORLDEase of doing business, FDIs, and the outsourcing industry
written by Mr. DOM FREDRICK “Dom” S. ANDAYA - October 10, 2023The COVID-19 pandemic caused the immediate migration to work-from-home (WFH) to save and protect lives. In the case of the Offshoring and Outsourcing (O&O) industry, which is mostly registered with the Philippine Economic Zone Authority (PEZA), this meant suspending the requirement for the Registered Business Enterprises (RBEs) to operate within the economic zones. Fast forward to the tail-end of the pandemic and the easing of restrictions. PEZA set deadlines for the RBEs to comply with the minimum 70% of the business to be conducted within the ecozones. The 1.3 million employees of the O&O industry who went home to their home provinces during the pandemic resisted, hence, attrition rates rose quickly as many employees resigned.
The industry association, the IT and Business Process Association of the Philippines (IBPAP), stepped in to protect the O&O industry since a higher attrition rate meant the disruption of service delivery to the detriment of the country’s positioning in the global O&O stage. The deadline set by PEZA was extended twice, and then the Fiscal Incentives Review Board (FIRB) decided to implement a “paper transfer” by virtue of Resolution No. 026-2022. This was made possible by the passage of the CREATE Law (Corporate Recovery and Tax Incentives for Enterprises, RA 11534) that created the FIRB and harmonized the tax incentives across all the Investment Promotion Agencies (IPAs) such as, among others, PEZA and the Board of Investments (BoI), the latter being the immediate solution to the flexible implementation of the WFH or work-from-anywhere (WFA) while still enjoying the tax incentives of PEZA RBEs. In case of expansions, O&O companies can create new entities that can be registered with the BoI to avail themselves of the same tax incentives without the need to operate within specific zones.
Is then PEZA still relevant for the O&O industry?
There are several ways to respond to this question depending on the situation, concerns, and/or objectives of the RBEs. For example:
• PEZA-registered buildings are built specifically for the O&O companies that require robust facilities, like telecom and power redundancies, for them to minimize disruptions in operations in case of calamities. Signing up in PEZA-registered buildings is a guarantee of compliance with clients’ service level agreements which reduces the risk of penalties and increases client satisfaction.
• Transferring existing operations to another IPA is not allowed, hence, existing PEZA RBEs must remain with PEZA while availing of the “paper transfer.”
• If it is for expansion and WFH or WFA, then the BoI route makes more sense.
• If provincial expansion is the strategy and the supply of PEZA-registered buildings is limited, then registering with the BoI is the way to go.
• PEZA has a one-stop shop (OSS) facility that is meant for ease of doing business. Opting for the BoI means foregoing this benefit and being exposed to red tape, hence, some PEZA RBEs still prefer being governed by PEZA.
The OSS is being raised as a concern of both office occupiers and landlords that affects their decision in choosing to register with PEZA or the BoI. Section 310 of the CREATE Law mandates all IPAs to establish “…a one-stop shop or one-stop action center that will facilitate and expedite, to the extent possible, the setting up and conduct of registered projects or activities, including the assistance in coordinating with the local government units and other government agencies to comply with Republic Act No. 11032, otherwise known as the Ease of Doing Business and Efficient Government Service Delivery Act of 2018.”
In a survey conducted by Colliers a few months ago about the OSS facility, almost 80% of the respondents considered the PEZA OSS as important and very important. Of these respondents, 39% said that OSS is better, while 42% said that it remains the same after the implementation of the “paper transfer.” Some of the reasons cited are:
• It lessens the burden of RBEs in dealing with long and complicated processes.
• Avoid confusions on who to talk to, what department to deal with.
• Makes the whole process easier and faster, more convenient.
• Allows access to immediate assistance and ease of doing business in every locality.
On the other hand, 20% said that the OSS is worse than before because of the following:
• There are issues with BoI, Bureau of Customs, and Department of Finance. The ease of doing business is no longer realized.
• PEZA’s OSS diminished in value when it allowed the local government units and the BFP to extend their scope to PEZA zones.
• PEZA and the BoI should work out as inter-agency on the paper transfers due to numerous RBE requests and the complexity of respective RBEs local setup.
In line with the creation of OSS of other IPAs, the respondents were also asked if they were aware of this mandate. Two-thirds (67%) said they were aware, while the rest were not aware. Finally, the respondents were asked how hopeful they are that the BoI can establish OSS facility soon, 51% said they are hopeful and very hopeful, while the rest are indifferent and not hopeful.
More investments and job creation are necessary in the post-pandemic recovery. However, based on the Corruption Perception Index as of 2022, the Philippines ranked 116th in the list of 180 countries by scoring 33% (below the global average of 43%). Meanwhile, the ranking of the Philippines in terms of the Ease of Doing Business Index by World Bank in 2019 was 95th. The above indices are major indicators that investors consider in choosing investment destinations. Among the ASEAN members, our country ranked 6th in terms of net foreign direct investment (FDI) inflows in 2022, behind Singapore, Indonesia, and Vietnam who scored better in terms of the said indices.
The goal of the government is to have the 2nd highest FDIs by 2028. Improving the country’s ranking with these indices will increase our chance of securing more FDIs, which are needed to recover from the COVID-19 pandemic-induced economic recession. We then urge the government to investigate the status of the implementation of this mandate and set deadlines to show its seriousness and urgency to potential investors for our country to be more competitive and successful in securing investments.
Dom Fredrick S. Andaya is member of the Management Association of the Philippines. He is also a senior director and head of Tenant Representation of Colliers Philippines.