Speed up the CREATE reform

(Continued from the series on the COVID-19 recession)

Many of the current pressing measures of the government are designed to help sectors of the economy badly affected by the COVID-19 lockdown improve and recover from losses.

Need for strong measures favorable to growth. One unique proposal that would give strength to the government’s efforts to restore growth and resilience is to complete the second tax reform on the corporate income tax and its component effects on investment incentives.

The tax reform package helps to strengthen the government’s fiscal position and will enable it to finance the nation’s development objectives as well as strengthen the country’s economic fundamentals.

One major point to remember is that it is not clear that the path toward a robust recovery can be had without strengthening the factors that contribute toward attracting new investments at a time when the world economy is also in uncertain waters.

The reform package, CREATE. Now renamed “CREATE” (to mean “corporate recovery and tax incentives for enterprises act”), the revised bill is still for consideration by the Senate. The bill is due for third reading and passage by the House, based on the original bill embodied in package2 of the fiscal tax reform, known initially as TRAIN 2 and as CITIRA.

CREATE is essentially a cut of the corporate income tax designed to improve the fiscal tax base, while also providing incentives for companies to recover from the COVID-19 economic effects.

The main stimulus from CREATE, in contrast with the earlier CITIRA plan, is to accelerate the reduction of the corporate income tax and to extend more liberality in the enjoyment of fiscal incentives which had originally been proposed to terminate within a scheduled time-frame.

Incorporated in the bill is an important flexibility provision to allow the government to introduce a bargaining tool for providing tax and other incentives for new and significant foreign investment proposals to locate within the country. This flexibility is an added weapon to improve the country’s ability to attract very high-valued investment proposals that will significantly benefit the country.

CREATE is designed to put the nation’s fiscal house on a steady footing while continuing to nurture investment promotion.

Features of CREATE. The key point about the corporate income tax reform is to reduce rates so that it is aligned with the prevailing tax rate in the ASEAN region. By itself, low rates of taxes could be seen as an incentive to attract new investments.

The present top rate of the tax of 30 percent in the Philippines is the highest in the ASEAN region. CREATE now proposes to cut this in announced stages.

CREATE will cut the rate by five percentage points in the first year, from the present rate to 25 percent. (This is more drastic than in the pre-COVID reform plan.) Then this goes down yearly until, by 2022, when the Duterte administration ends its term, it is down to 23 percent.

Prospectively for the next government to be elected in 2023, the rate will fall until by 2027, to 20 percent. The tax cut provides a decreasing corporate income tax rate to prospective, new investors.

Not only does this help to incentivize companies to help them during this perilous period of adjustment to the economic crisis. It also achieves to put the country on a level basis with other competing ASEAN economies along fiscal lines.

The CREATE reform proposes to extend the applicability of the “net operating loss carryover” (NOLCO) provision in incentives from three to five more years for non-large taxpayers. This is to help medium and small company recipients of this incentive.

An objective of CREATE is to rely more on the feature of providing registered businesses with the five percent gross income earned (GIE) incentive as a basis for investment incentives to replace NOLCO. In the past, NOLCO was popularly used in the investment incentives policy. However, it has been judged to be an excessive and unnecessary cause of large government tax losses.

With respect to the five percent GIE incentive, this is proposed to be prolonged by two years more, thus, extending it from four to nine years under the CREATE proposal compared to the two to seven years in extending it for the termination or sunset provision.

The flexibility provision. The last provision in the reform bill is designed to give the executive greater leeway in granting fiscal and non-fiscal incentives to very significant and critically needed investments, to compete for high-value investments to be located in the country. It is stated that other countries, notably Malaysia, Indonesia and Vietnam have used such a weapon to great effectiveness.

The discretionary part in providing further tax and non-fiscal incentives, including even the possible grant of NOLCO, is powerful and should be qualified.

Put to good use, it could become a tipping point in the competition for locating strategic and high-impact foreign direct investments into the country. The country has lost out in many such competition for large and important foreign investments that have found their way to other countries in the ASEAN region.

The legislation would need to elaborate on how such a flexible bargaining weapon would be used – which gives further tax and non-fiscal incentives to new enterprises, possibly even including NOLCO.

That legislative guidance could suggest the minimum level of foreign investments that might be considered “high-valued” (in pesos or in dollars indexed to 2020 values – because a law is passed at one point in time and values change from year-to-year) and it could contain the following features: (1) It is a highly strategic investment in manufacturing industry, agriculture, services, or infrastructure; (2) It achieves a specific national development purpose, e.g., regional dispersal, science or technological development (3) it involves very high employment impact. And (4) It has high agglomeration effect on other firms relocating into the country.

My email is: [email protected]. For archives of previous Crossroads essays, go to: https://www.philstar.com/authors/1336383/gerardo-p-sicat. Visit this site for more information, feedback and commentary: http://econ.upd.edu.p h/gpsicat/