CREATE passage – A major achievement

CROSSROADS TOWARD PHILIPPINE ECONOMIC AND SOCIAL PROGRESS - Gerardo P. Sicat (The Philippine Star) - December 2, 2020 - 12:00am

The Senate version of the CREATE (Corporate Recovery and Tax Incentives for Enterprises) bill was approved last week. The next step in the legislation is the meeting of the bicameral conference committee to approve the final bill of the two houses of Congress.

According to reports, the House, which approved its own version last year, will likely adopt the Senate version.

A milestone in finance and investment incentives legislation.

If all goes well as planned, the Duterte government will have achieved a milestone legislation.

The law rationalizes and unifies the investment incentives framework through amendments to the corporate income tax. Previous administrations had tried and failed to consolidate the corporate income tax framework under a cohesive fiscal-and-investment-promotion framework.

Only two years ago, the Duterte administration achieved the lowering of the personal income tax, along with reforms that raised energy and other sales taxation. That important feat enabled the country to attain fiscal soundness so that it can raise the government’s capacity to finance important programs.

CREATE is the “twin” to that early tax reform law. For this reason, the government undertakes a double-achievement in fiscal reform. The big battles in national tax reform has been won.

In essence, the new tax reform reduces the corporate income tax to a level that is more aligned to the corporate tax levels within ASEAN. In getting this done, it is able to put a definite lifetime to some types of investment incentives – stopping big losses in fiscal revenues.

By putting a cap – or an end to the time horizon of some of the investment incentives – and replacing these with a low-enough tax level, the nation is enabled to attract industrial investments to continue their operations in the country while also contributing to the tax coffers.

Such is the reasoning behind sound tax and investment incentives tax reform.

Main provisions. CREATE will reduce the corporate income tax from the current 30 percent to 25 percent from July 2020. The objective is to reduce it further to 20 percent by the year 2027.

The reduction of the corporate income tax aligns it with the level of most ASEAN countries, which is around 20 percent. Therefore, this enhances Philippine competitiveness insofar as corporate tax levels are in question. To protect the national revenues, the reduction in tax rate is done in annual stages of one percent.

In the case of businesses with annual incomes lower than P5 million per year, however, the applicable rate of corporate income tax will be reduced immediately to 20 percent. This is in consideration of the so-called SMEs, or small-and-medium-scale enterprises.

With respect to investment incentives, a variety of provisions apply. Both exporters and domestic industries are allowed to avail of income tax holidays (ITH) between four to seven years. After using the ITH, exporters may enjoy the special corporate tax of five percent on gross income earned (GIE) or enhanced deductions for 10 years. Domestic enterprises are allowed enhanced deductions for 10 years.

These provisions of the bill indicate that the Senate legislators were able to extract further lowering of tax rates from the earlier versions of the bills submitted by the executive branch. The result is a bill that is more generous than the earlier plan covering the transition period.

The investment promotion agencies (IPAs) will continue undertaking their functions according to their specific mandates. These are the Board of Investments, the Export Processing Zone Authority, and special area development authorities (like Clark, Subic, and other special area zones), which grant specific investment amenities and facilitations, including land and factory spaces.

The IPAs will administer the applications and monitor the operations of the incentives. However, a super-board, the Fiscal Incentives Review Board (FIRB) – a cabinet-committee headed by the DOF, with members representing industry, budget, and the NEDA – will approve all fiscal incentives involving investment projects with a value of P1 billion or more. The IPAs will continue to approve fiscal incentives of projects under P1 billion.

Can we now attract all the FDIs we need? The CREATE tax reform enters the scene at an opportune time, although it was needed many years ago.

The country needs to put in place a recovery program to get the economy out of a deep recession due to the impact of the COVID-19 pandemic.

Opportunity knocks as the country enters the expansion of the ASEAN framework into an expanded Asia-wide and the biggest free trade zone, known as RCEP (Regional Comprehensive Economic Partnership), which includes China, Japan, South Korea, and Australia and New Zealand.

To be equipped with a better weapon is better than without, but there are other hurdles.

The investment community – existing businesses, foreign chambers, and other institutions and countries – look forward to the further clarification of rules and procedures covering the implementation of the new tax and incentives regime.

Uncertainty has been removed with respect to the competitive position of the country concerning the corporate income tax and on the nature of transitional measures for export firms and foreign investors in particular.

But immediate attention will have to be made with regard to the next important steps.

The fiscal branch of government must pay attention to the suspicion that the creation of a super-body on fiscal incentives will impede speed and encouragement in promoting investments. Some speed and agility is needed in attracting important investments.

There is suspicion – perhaps exaggerated – that the added bureaucracy could dismantle initiative at the other end of promoting new investments.

It is also as important to be aware that the improvement of tax and incentives legislation is just one element of the problem in creating a highly progressive, vibrant investment community.

The creation of more investments – and exports in particular – depends on other issues. For instance, the peso exchange rate should only appreciate under fundamental circumstances, otherwise it could discourage export industries.

The labor market situation must not be a barrier to entry and must be guided by productivity gains. Some reforms in labor markets – or the maintenance of labor peace – is so critical toward promoting a growing economy.

Remember, too, the constitutional restrictions concerning foreign investments!

 

 

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.ph/gpsicat/

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