The paper provides a profile of the country’s electronics industry and its contribution to the Philippine economy. It discusses and examines the taxation of the industry. It also assesses and compares the incentives granted to industry players with those available in other neighboring countries.
The Philippine electronics industry began in the 1960s when electronics companies from the United States and other liberalized countries located their subsidiaries in the country primarily due to rising labor costs. From then on, the Philippine electronics industry has expanded and has become an import-export base of electronic products. In fact, in the mid-1990s, agricultural products were overtaken by electronic products as the leading exported products of the country. In 2011, electronic products shared almost half of the total exports of the Philippines. Moreover, the electronics industry contributed significantly to the manufacturing sector’s total output, investments, as well as employment generation.
It is worthy to note that the industry is dominated by multinational companies. Among the 936 major players in the country, 72% or 674 companies are foreign-owned while the remaining 28% or 262 companies are locally-owned.
The Philippine electronics industry is both highly export-oriented and import-reliant industry. Also, the industry is considered a highly technical labor-intensive business since it mainly involves activities like assembly and testing. In order to be globally competitive, industry players operate with international standards (ISO) and conduct regular and timely in-house training programs for their employees. They also practice the best known methods in manufacturing such as the 5S method.
Due to the impressive contribution of the electronics industry to the country’s total exports and the economy as a whole, the government deems it proper to extend tax incentives to the sector in order to provide assistance as well as to encourage more international electronic companies to locate their subsidiaries in the country. Electronic and semiconductor enterprises locate their businesses in economic zones (ECOZONES) and register with the Philippine Economic Zone Authority (PEZA) to be entitled to a wide array of incentives. The mere grant of tax incentives to investors is not enough to entice them to invest in the country. According to literatures, investors give more emphasis on having a sound investment climate, political and economic stability, provision of infrastructure and a stable financial system. It is also alleged that tax incentives are used by many governments to make up for its inability to provide adequate infrastructure, deficiencies in skilled labor, and scarcity in raw materials.
Fiscal incentives extended to investors entail cost to the government in the form of foregone revenue. Since the Philippines, like any other economies, offers fiscal incentives to attract investments, it is imperative that these are properly designed, administered and are ultimately able to achieve the ends for which they are extended. The main rationale for the grant of tax incentives is to forego revenue for a limited period of time so as to attract investments that will in turn spur employment, exports, upstream and downstream linkages, and economic growth.
The country’s tax incentives package to electronic manufacturers are comparable with other neighboring countries. In fact, the Philippines is even more liberal as it offers income tax holiday (ITH) unlike Korea, Thailand and Malaysia. However, it cannot be denied that the Philippines is not at par with the said countries when it comes to attracting investments.
While the importance of providing adequate tax incentives is emphasized, the provision of a good investment climate (peace and order, adequate infrastructure and sound macroeconomic policies, among others) is deemed equally significant. A sound investment climate coupled with tax incentives would offset foregone revenues via expanded tax base created by such investments, providing government with array of economic activities that it can tax.
There are problems which are not only peculiar to the electronics industry but are nonetheless considered obstacles that hamper the industry’s growth and global competitiveness such as scarcity of raw materials and low investments in research and development (R&D) in the country. Addressing these issues would lower the import requirements of the electronic companies which would consequently translate to higher net income for the industry and higher revenue collection for the government.
