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Publication Detail
TRJ 2012-1: Taxation and Fiscal Incentives of the Philippine BPO Industry, January - February 2012

The paper provides a profile of the Philippines’ Business Process Outsourcing (BPO) industry. It examines the industry’s contribution to the economy, the different taxes imposed on the sector, and the incentives package available to them. It also identifies the setbacks that could hamper the sector’s competitiveness worldwide and provides possible recommendations beneficial for both government and the BPO sector. The BPO is defined as the “delegation of service-type business processes to a third-party service provider.” The Philippines started BPO services in the country around 1994 when the government instituted infrastructural and economic reforms to attract foreign investors to participate in the country’s IT sector and take advantage of the local labor pool. It started with the call centers or “voice” services and later evolved to higher value, non-voice BPO functions such as finance and accounting, human resource and administrative services, and transcription services. The low labor cost, proficiency of Filipinos in English, availability of workforce, and infrastructure as well as the unwavering support of the government to the sector, makes the Philippines a major force in the field of BPO services worldwide. The contribution of the BPO industry to the country cannot be denied. The industry has been the fastest growing segment of the Philippine economy. From a 2.4% share to the country’s Gross Domestic Product in 2005, it increased to 4.8% in 2010. It is expected to contribute 6% - 9% of the country’s GDP by 2016. From an estimated 615 industry players in 2008, the number increased to 741 in 2010, a growth of 20% in two years. As for employment generation, the BPO industry contributes an annual average share of 0.89% or almost 1% of the total employment of the country. BPO’s job creation is expected to increase by 1.3 million Filipinos in 2016. In terms of export revenue, the BPO industry contributed $34 billion or (PhP1.6 trillion) for the period covering 2004 – 2010, making it a major economic driver and perceived to remain the same for the years to come. The industry’s revenue share to the total exports totaled 11% annually and is estimated to bring in $25 billion in annual revenue by 2016. By 2020, the World Bank (WB) estimated the country’s BPO industry to generate $50 billion if the government is able to develop the IT-BPO service industry. The paper also enumerates the different taxes imposed on the industry and the incentives package provided by the Board of Investments (BOI) and the Philippine Economic Zone Authority (PEZA) to registered firms. The study also provides a comparative assessment of the tax incentives given to both BOI and PEZA-registered BPO firms as well as the amount of revenue waived in favor of the BOI and PEZA-registered firms. The paper further discusses the incentives granted to the BPO industry in major BPO destinations and found out that the country’s tax incentives for BPO companies are comparable, if not more generous than other BPO destinations like India, China, South Africa and Jamaica. In view of this, it is recommended that BOI and PEZA, in coordination with revenue agencies like the BIR and the BOC, the LGUs where the BPO is located should maintain good reporting mechanism on the revenue foregone to determine whether the cost on the part of the government has been compensated by the benefits that the economy derives from the BPO companies. Otherwise, the government may be unduly giving up tax revenues for naught. Aside from the provision of tax incentives, other factors should also be given importance by the government in order for the country to maintain leadership in the BPO sector. These include efficiency, infrastructure development, fiscal policy, institutional framework, business legislation, and societal framework. There are also several problems that the local BPO industry need to deal with. These are the strengthening of the peso to the US dollar, presence of competition from the growth of other sectors, the increasing number of OFWs, and the perceived instability in the country. Thus, both the government and BPO players should have continuous coordination in order for the country not to lag behind other BPO destinations worldwide especially since the outsourcing business competition has become steeper as time goes by. The country may lead in terms of contact center offshoring, but the business of outsourcing and offshoring has moved up the value chain. Hence, efforts should now be made to increase non-voice processes as well.

National Tax Research Center
Authors Keywords
NTRC; taxation; fiscal incentives; Philippine BPO Industry;
Download PDF Number of Downloads
Published in 2012 and available in the NTRC Library or Downloaded 185 times since January 02, 2014
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