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BPO industry may miss job creation goal by 40% if incentives removed

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BPO

By Janina C. Lim
Reporter

THE information technology and business process outsourcing (IT-BPO) industry said it may fall 40% short of its 2018 job creation target in a high-tax regime.

“There’s a balancing act between job generation and tax revenue creation. There’s an inflection point. You make us more expensive than we are, then our ability to be effective in generating jobs will also be affected,” Information Technology and Business Process Association of the Philippines (IBPAP) President and CEO Rey C. Untal said in an interview on Thursday at the group’s headquarters in Taguig City.

He noted the potential of the latest round of tax reform legislation, known as the TRABAHO bill, to make future BPO projects competitive. However, Mr. Untal said it may have negative effects on existing firms. He cited the impending transition to a corporate income tax (CIT).

“The jump from the 5% GIE (gross income earned) to a 28% CIT, will increase your tax by as much as threefold. That impacts your cost structure. The only way that you can recover that cost structure is to pass it on to your customers. But if you pass on the cost to your customers then your perceived value versus cost becomes higher also. So that’s what we are avoiding,” Mr. Untal said.

“…If we move to a regime where our cost model will increase substantially, then our ability to create jobs will be impacted by 40%,” he added, noting the estimates were produced by a study of the impact of taxes on the BPO industry’s ability to generate employment.

Under its five-year road map, the group aims to create 1.8 million jobs by 2022, against 1.15 million jobs in 2016.

“So instead of growing 100,000 a year, we could grow by 60,000. We could grow by 50,000. I don’t know,” Mr. Untal said.

In terms of online hiring activity, the Monster.com employment index indicates that the IT-BPO sector declined 4% in the second quarter. In June, hiring activity by the sector declined 7%.

“This conversation around the TRABAHO bill and about the bigger context of the BPO industry needs to be put together. This industry’s one critical attribute is the ability to generate jobs,” he added.

Mr. Untal said the industry now employs, directly and indirectly, close to five million Filipinos, which is expected to expand to 7.6 million by 2022.

“This industry is also one of the largest creators of the new middle class,” Mr. Untal said.

“Our growth has to be Philippine-wide,” he added. “That’s why, right now, we are employing an excess of a quarter of a million Filipinos in 21 to 23 provinces,” Mr. Untal said.

By 2022, employment in the provinces is expected to double to 500,000.

In the past decade, the industry has carved out a global market share of about 11% to 12%.

The industry’s calling card over the past few years was always being number two to India, Mr. Untal said, but the 2017 Tholons report showed the Philippines to be third behind China.

Mr. Untal said the industry is cautious of competition with BPO markets behind the Philippines, particularly Vietnam which is becoming a top BPO destination.

“People seem to be fixated with the idea that this industry and other industries will be impacted once TRABAHO is in place. That’s not true. In reality, all of this ambiguity about the rationalization of incentives has already created an impact in terms of uncertainty,” Mr. Untal said.

“Investors when they now look at the Philippines are now aware that the incentive scheme as they have understood it will no longer be there next year,” said Mr. Untal noting that several expansion plans have been deferred due to the pending finalization of the second part of the tax policy overhaul.

IBPAP is batting for a 10-year transition period for the removal of current incentives instead of the currently proposed five-year maximum; inclusion in the strategic investment priorities plan; and the retention of the zero value-added tax rating for locators whose export sales comprise 30% of total sales.