JETRO Monthly Philippine IT Industry Update Report No.3

Transcription

1 JETRO Monthly Philippine IT Industry Update Report No.3 Introduction In the 10-point agenda of the Philippine government under president Arroyo, who was reelected in the election in May 2004, employment generation (creation of more than six million jobs during the next six years) is listed at the very top. High hopes are placed in the role of the IT and IT services industry in employment generation, and the government is exerting its efforts towards creating the appropriate incentives. In this report, we will discuss the investment incentives of the Philippine government, the current status of e-government and investment trends. Introduction of Government Policies Overview of Incentives for Investments by IT Companies Two major investment incentives given by the Philippine government to IT related businesses are incentives for companies registered with Board of Investment (BOI) and incentives for companies registered with Philippine Economic Zone Authority (PEZA). To qualify fore registration with the BOI, a company s proposed business activity should principally be listed in the current Investment Priority Plan 1 (IPP) 2. To qualify for registration with PEZA, the company must export at least 70% of its production 3. In the 2004 IPP of the BOI, the following are among the priority areas for IT related companies: 4 IT Services: Software Development, Animation, Computer Graphics IT Enabled Services: Call Centers, Contact 1 IPP is drafted by BOI every year and authorized by the Office of the President. IPP serves as a basis of investment incentives for all investment promotion agencies in the Philippines. 2 Source: BOI Make IT Philippines FAQ (No. 7). You may inquire Mr. Takeura at Asia Support Section of JETRO in Tokyo for more detail about registration to BOI and/or PEZA. 3 Ditto 4 Source: Department of Trade and Industry, Board of Investments 2004 Investments Priorities Plan (IPP) Centers, Medical/Legal Transcription, Engineering Design, BPO. IT Support: R&D Centers, Incubation Centers, Educational Institutions, Community Access Facilities to Less-developed Areas [Excluding Internet Service Providers (ISPs).] Incentives for BOI-registered Companies Details of the major incentives available to companies whose activities fall under the Investments Priorities Plan, and which register with the BOI are as follow: Income Tax Holiday (ITH) (a) For newly-registered enterprises, income tax holiday for a maximum period of 6 years from start of commercial operation if qualified for pioneer status 6 ; or for a maximum period of 4 years if non-pioneer status. (b) For expansion projects, as a general rule, exemption is for 3 years, for the incremental sales revenue (volume). (c) For new and expansion projects in less 5 Detailed contents of investment incentives are available in Japanese at the JETRO Manila Center website at 6 In order to qualify for pioneer status in the IT sector, the company must meet one of these 3 criteria: 1) utilizes new or untried technology; 2) introduces a major innovation in software development; 3) with project cost of at least US$ 2.5 million to be put up during the first year of operations. (Source: 2004 IPP) P 1

2 developed areas, 6 years income tax holiday. Other Incentives (a) Aside from the positions of President, General Manager and Treasurer, a registered enterprise may be allowed to employ foreign nationals in supervisory, technical or advisory positions for five (5) years from date of registration. (b) Simplification of customs procedures. State of e-government Initiatives According to the survey results issued by the National Computer Center, 99.5% or 372 out of 375 government agencies had their own websites as of 31 July The United Nations ranked its 191 member nations in an e-government Readiness Index, where the Philippines was ranked No. 33 in (Japan ranked No. 18). While the Philippines ranked very high in terms of website assessment, and human resource Incentives for PEZA-registered Enterprises The following are the incentives for Export Companies registered with PEZA: Basically the same ITH as BOI registered companies. (For newly-registered enterprises, income tax holiday for a maximum period of 6 years from start of commercial operation if qualified for pioneer status; or for a maximum period of 4 years if non-pioneer status.) Option to pay a special 5% gross income tax, after expiration of income tax holiday. 7 endowment, the rating of telecommunication infrastructure and other related facilities was very low and pulled down the overall ranking. Among the Asian countries, the Philippines ranked 4 th after Singapore, South Korea and Japan. Philippines ranking was higher than Malaysia, Thailand, Indonesia, China and others. Table 1 Top 10 Asian Countries of e-government Readiness Index by United Nations (2003) Exemption from duties and taxes on imported capital equipment, spare parts, supplies, raw materials. Equivalent tax credit on capital equipment, when sourced locally. Additional deductions for incremental labor expense. Additional deductions for training expenses of employees. Net Operating Loss Carryover and other incentives under Presidential Decree No. 66 Unrestricted use of consigned capital equipment. Permanent resident status for foreign investors and immediate family members. Employment of foreign nationals. Repatriation of after tax profits without prior approval of Central Bank. The same survey included an e-participation Index (a qualitative analysis of the quality and convenience of e-government services and the information and tools being provided by government online) where the Philippines ranked 6 th (Japan was 15 th ). The Philippine Government s Digitization Policies are promoted based on the Government Information System Plan (GISP). Listed below are some of the 7 Normal corporate income tax rate is 32% on Net Income Before Tax (NIBT) P 2 major e-government systems in the.

3 Bureau of Internal Revenue TIN (Taxpayer Identification Number) issuance, Electronic Filing and Payment, and other services are currently operational. A budget of P680M has been approved and many other digitization projects are being implemented. Securities & Exchange Commission: Online Company Registration (In Operation), Publication online of Audited Financial Statements (Under testing, scheduled to be operational in 2005). Department of Trade and Industry: Online Company Registration (In Operation) National Statistics Office: Birth/Marriage/Death Certificate Issuance (In Operation) National Bureau of Investigation: Computerized Clearance Processing System (In Operation) JETRO Business Support Center Philippines (BSCP) JETRO established the JETRO Business Support Center Philippines (BSCP) in March 2003 in order to assist Japanese companies considering investments or technical cooperation in the Philippines as well as Japanese companies already in the Philippines. In collaboration with the Philippine government and local experts, BSCP offers office space for short periods, as well as information and consulting services, among others. 8 BSCP welcomes all Japanese companies interested in investing in the Philippines, or studying the prospects for technical cooperation with Philippine companies (e.g. those who want to prepare their feasibility study, or are looking for joint venture or technical cooperation partners, or who wish to register their company, etc.) Trends in IT Sector Companies Just like the rest of the world, the Philippine IT sector did not escape the adverse effects of the IT recession following the crash of the dot.com bubble. Total investments in the service sector (which includes IT services) amounted to P26B in 2001, 16.6B in 2002, and P9.8B in 2003 a rapidly declining negative growth rate of nearly 40% yearly. BOI-registered IT service sector investments reflect the same trend. (Refer to Figure 1) Figure 1 Investment Trend in Philippines Service Industry (2001 1Q/2004, in Billion Peso) Since it opened in Ma ch 2003 until September 2004, 16 companies have utilized the BSCP. Among them were 10 IT-related companies (63%) of which 9 have started operations in the Philippines while 1 is currently staying within BSCP premises. These IT companies are classified as follows: engineering and design (5), software development (3) and other IT services (2). Despite the disheartening investment trend however, software development companies, call centers, BPO, medical transcription and others are showing a firm 8 Please refer to for deta P 3

4 upward trend in terms of number of new projects registration and approval. Table 2 No. of BOI Registered IT/IT Service Projects (New Registration of Each Year) According to the Bureau of Export Trade Promotion (BETP), the number of IT related companies increased from 1,739 in 1999 to 3,311 in 2002 a two-fold increase in three years. Of these, software-related service companies numbered 186 in 1999 to 742 in 2002, an almost four-fold increase. As of January 2004, there were 14 PEZA-registered IT parks with the latest IT infrastructure where 76 companies were in operation (of which 16 were Japanese companies). Table 3 Estimated Number of Companies in the Priority Sectors of IT/IT Enabled Services Industry 9 Table 3 shows the number of IT and IT service companies registered with PEZA IT Parks and BOI based on available data. We have also tried to estimate the total number of these companies in the Philippines, and the priority investment areas. The IT and IT service sector will remain as the driving force of the Philippine economy 10, even as its main activity is geared towards meeting the outsourcing requirements of its overseas clients. The next reports will focus on information about the investment priority sectors and introduction to the companies in these sectors. (JETRO Monthly Philippine IT Industry Update Report No. 3 END 9 Sources: Number of IT Park Companies: Based on company data published in the PEZA website (as of January 2004), the companies were classified according to the business activity indicated. Number of BOI Registered Companies: Based on the annual data of BOI registered companies published in their website from 2000 until May 2004, the companies were classified according to the business activity indicated, and an estimate was made on the total for the 4 year period. For total number of BOI registered software development companies however, DTI website data was used. Because there were no statistics available indicating country of origin for the investments, it was not possible to identify Japanese investments. Totals From the Bureau of Export Trade Promotion (BETP) of the DTI. (Statistics based on 2002 data from the Securities and Exchange Commission). 10 According to the estimate of the Asian Development Bank announced in October 2004, the GDP growth rate for the Philippines for both 2004 and 2005 will be 5.5%. P 4

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