Declare now, pay later

To give credit where credit is due, the government has come up with several good financial stimulus programs for MSMEs. The question remains to be access. How difficult, and how long will the application process take to secure those loans, when for an MSME, time is of the essence? The other valid issue is, how can bigger but troubled corporations have access to financial stimuli as MSMEs don’t have a monopoly on financial problems?

In fact, in the latest and still ongoing PwC survey, respondents show both MSMEs and bigger corporations having problems with financial runways, with MSMEs indicating one to five months, while bigger corporations, six months or over, but no luxury of time or extra resources for both. Only a few, but a consequential few, have fat to burn this COVID-19 summer time.

Congress is moving for new tax breaks to the rescue, but truth be told, there are important powers already vested in the government by virtue of the Tax Code, and in addition, the President’s newfound powers in the Bayanihan Law. They are for every sector, or any business that needs it. Compared to loans that may be applied for, these tax breaks are instant and go directly to those who need them again, without need of new legislation. Allow me to share some of these with you this Sunday:

1. Suspend withholding taxes on income payments

Admittedly, withholding tax is one of the most effective ways for the government to collect tax. The problem is, it is a tax on gross sales, ranging from one percent to 15 percent and applies invariably, even if the payee is losing money. Withholding tax allows for a partial advance of tax on a monthly basis. Yet, even without the withholding tax system, corporations that have taxable net income will anyway pay the government every quarter. No tax should be missed.

The Secretary of Finance is given the authority in the Tax Code to impose withholding taxes on whatever item the latter so selects (Section 57 B). If the Secretary has the power to select and impose, he also has the power to deselect, lower the rate, or not to impose any at all. The last thing the government wants to do these days is overcollect.

2. Relief from minimum corporate income tax (MCIT)

Regardless of losses for the year, every corporation pays a minimum corporate income tax of two percent of its gross income. It is useful as tax credit but with a three-year expiration, before it becomes a permanent cost or additional loss.

The Tax Code gives the Secretary of Finance authority to suspend the imposition of MCIT on any corporation which suffers losses from business reversals or because of force majeure. (Section 27(E)(3)). The last thing the government should do these days is overtax.

3. Moratorium on VAT collection from corporations up to those classified as medium

Using the definition set by the Securities and Exchange Commission, a small corporation has assets of up to P100 million while a medium one has total assets of up to P350 million. There are pending bills in Congress that seek to grant VAT exemptions for MSMEs during the pandemic. With all due respect, I think that that is the wrong way to go because they would pay nothing but also get nothing, and you bore holes in the VAT chain. Instead, the MSMEs should be allowed to pass on the VAT and declare such sales in their VAT returns, but they should be allowed to borrow the money from the government for the meantime (for example, up to one year, interest-free). This is instant access to financing for MSMEs without the need to apply for them. The President can do this with his powers under the Bayanihan Law.

4. Deferment of income tax for cash strapped companies

We can follow Taiwan’s example of allowing income tax deferment up to one year and installment payments up to three years if the taxpayer applies for it. We can make this available to companies with a cash runway of six months or less. What the company would need to show is its cash projections for the next six months to get the reprieve. The President has the power to do this under the Bayanihan Law.

5. The Commissioner of Internal Revenue (CIR) can impose a “ceasefire” on tax investigations for the next six months

We should allow businesses, especially the MSMEs, to focus on making their businesses survive in the meantime, and not deal with all the troubles that come with a tax investigation. The CIR has powers to ease the burden in many other areas as well: speed up tax refunds, and simplify or make electronic the administrative procedures for computerized accounting permits, registration of books and invoices/official receipts, and authority to print, to name some.

Allow me to say though that it’s not the time for advocacy on tax amnesties. We do not want crooks taking advantage of the country’s difficulties during a pandemic.

Finally, on this special Sunday, allow me to pay all mothers a heartfelt tribute. For those who still have moms, you never had it so good. For those who miss their moms like me and my brothers, how can things ever be the same? For this, there is just no reprieve.

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Alexander B. Cabrera is the chairman and senior partner of Isla Lipana & Co./PwC Philippines. He is the Chairman of the Integrity Initiative, Inc. (II, Inc.), a non-profit organization that promotes common ethical and acceptable integrity standards. Email your comments and questions to [email protected]. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.