THE PHILIPPINES posted the fourth-highest net inflows of foreign direct investments (FDIs) in Southeast Asia, although this may have been dampened by delays in value-added tax (VAT) rebates, according to the Association of Southeast Asian Nations (ASEAN) Investment Report 2024.
The Philippines saw FDI net inflows decline by 7% to $8.9 billion in 2023 from $9.5 billion in 2022.
Despite the drop, FDI net inflows into the Philippines were the fourth highest in terms of value among ASEAN member countries in 2023. It was behind Singapore, which posted net inflows of $160 billion, Indonesia with $21.6 billion and Vietnam with $18.5 billion
However, the Philippines surpassed Malaysia ($8.8 billion), Thailand ($4.5 billion), Cambodia ($4 billion), Myanmar ($2.2 billion) and Lao PDR ($1.8 billion). Brunei Darussalam posted a net outflow of $57 million in 2023.
Net FDI inflows in the ASEAN region reached a record $230 billion last year, up 0.3% from $229 billion in 2022.
According to the report, the Philippines saw a drop in investments in most of the industries, except for manufacturing and renewable energy (RE).
“Large wind power projects involving companies from Europe sustained investment in RE,” the report said.
Investments in RE projects increased after the Philippine government allowed full foreign ownership in the sector, which was previously capped at 40%.
However, issues related to the delays in the Philippine government’s repayment of VAT refunds affected investor sentiment.
“Divestment or scaling down of operations by some multinational enterprises in the face of challenges related to a VAT rebate also contributed to the declining situation,” the report said.
The Philippines, under Section 12 of the Tax Code, allows VAT-registered entities whose sales are zero-rated to apply for the issuance of a tax credit certificate or refund of creditable input tax.
Under the law, the Bureau of Internal Revenue (BIR) commissioner shall grant a refund for creditable input taxes within 90 days.
However, there was confusion over VAT exemptions and VAT zero-rating of local purchases of registered business entities due to inconsistencies between the Corporate Recovery and Tax Incentives for Enterprises (CREATE) Act and its implementing rules and regulations.
The Philippine government hopes to address this issue with the proposed CREATE MORE (Maximize Opportunities for Reinvigorating the Economy), which was ratified by the Congress last month.
Under CREATE MORE, the government plans to establish an enhanced VAT refund system that grants refunds of creditable input taxes within 90 days from the filing of the applications.
The measure also mandates the Department of Finance to establish a VAT refund center in the BIR and the Bureau of Customs to handle the electronic processing and granting of refunds of creditable input taxes.
The Bangko Sentral ng Pilipinas expects FDI net inflows to hit $10 billion at end-2024.
INVESTMENT TRENDS
Within ASEAN, the number of megadeals or international project finance deals exceeding $500 million fell to 38 last year from 60 in 2022, the report said. The Philippines and Indonesia received three-quarters of these mega-deals last year.
“Half (19) were in activities related to RE, such as electricity generation, battery production, and critical minerals mining and processing,” it said.
From 2020 to 2023, RE-related industries attracted an average of $27 billion in investments annually. These include critical minerals extraction and processing, renewables manufacturing, and renewable power generation.
“The five largest deals during this period were in solar and wind power generation. Most of the top 20 projects were in Vietnam, Indonesia, and the Philippines, in that order,” the report said.
The largest international project finance during the period was BlueFloat Energy’s Philippine Offshore Wind Portfolio, which has an estimated cost of $38 billion.
OUTLOOK
Meanwhile, net FDI inflows in the ASEAN region are projected to exceed an annual average of $300 billion from 2024 to 2030, the report said.
“The FDI outlook for the region is promising, with robust growth in announced greenfield investment in 2023, ongoing regional integration, and growing favorable investment sentiment,” said the report.
The stabilization of interest rates could also lead to a recovery in global international project finance, which may boost investments in the region.
Multinational enterprises in the region have continued to report higher profits and are optimistic about growth, the report said.
“Many reported plans to further invest in the region over the next few years because of the improving investment environment and expanding investment opportunities,” it added.
However, greater competition, concern over global economic growth and fracturing, financial tightening, inflationary pressures, and geopolitical tensions are among headwinds that could hamper FDI inflows into the region, the report said.
At the same time, internal challenges, including limitations on absorptive capacity, lack of skills development, will continue to pose concerns.
“Although these are longer-term structural challenges, actions to address them need to begin now to facilitate deeper integration and a post-ASEAN Economic Community 2025 era more conducive to investment,” it said.
The ASEAN Investment report was prepared by the ASEAN Secretariat and the United Nations Trade and Development. — Justine Irish D. Tabile