Competitiveness enhancing bill

The business community is eagerly awaiting the passage of the law that will reduce corporate income taxes (CIT) to 20 percent by 2027 from the current 30 percent.

The Philippines currently has the highest CIT in the ASEAN region, which gives local businesses a disadvantage compared to its regional counterparts. On average, countries in the region impose a 20 percent CIT. Malaysia has 24 percent, followed by Indonesia with 22 percent; Cambodia, Thailand, Vietnam, Lao PDR all have 20 percent, while Brunei has 18.5 percent, Singapore 17 percent, and Myanmar, only two percent.

But then, there are other things that businesses and investors consider. For instance, the Philippines charges a 15 percent withholding tax on dividends, as compared to Vietnam and Myanmar which do not have such tax.

Singapore does not slap a capital gains tax on the sale of shares, properties or intangible assets, but the Philippines imposes as much as six percent on the sale of real property based on the gross selling price or fair market value, whichever is higher.

Additionally, the Philippines has other factors like labor and power costs, a peace and order situation, the state of public infrastructure, stability of rules, red tape, and corruption – which investors have to consider before they start doing business in the country.

With those additional factors, reducing the CIT is a good start.

Just last Nov. 26, the Senate finally approved the proposed Corporate Recovery and Tax Incentives for Enterprises (CREATE) Act on third and final reading, more than a year after the House of Representatives approved the Corporate Income Tax and Incentives Rationalization Act (CITIRA), which was the old name of CREATE.

The bill, sponsored by Senate committee on ways and means chairperson Pia Cayetano, seeks an outright five percent reduction in the CIT rate, after which it will go down to 20 percent by 2027, or a reduction of one percentage point annually from 2023 to 2027.

It is our micro, small and medium enterprises (MSMEs), which were the most badly hit by the pandemic, that will benefit greatly from the measure since the bill seeks to immediately reduce to 20 percent the CIT on companies with incomes below P5 million annually. Under the bill, MSMEs are classified as domestic corporations with total assets, excluding land, of not more than P100 million and net taxable income of P5 million and below.

While CREATE will have a strong impact on businesses, other sectors will likewise benefit. The Senate version reduced taxes for proprietary, non-profit educational institutions and hospitals to a one percent special income tax rate from July 1, 2020 to June 30, 2023. It also increased the VAT-exempt thresholds for sales of real property, from P2.5 million to a maximum of P4.2 million.

Meanwhile, VAT-exempt taxpayers who are subject to the three percent percentage tax shall pay only one percent instead from July 1, 2020 to June 30, 2023 under CREATE.

According to media reports, during the interpellations on the bill, Sen. Pia said she was constantly being educated by her colleagues who provided valuable improvements to the CREATE provisions, most notably the 20 percent tax cut for MSMEs. She then painstakingly went over each of the proposed amendments and explained well why she was for or against them.

As a result, among the improvements included in the bill was the VAT-exempt sale and importation of electronic reading materials in response to the requirements of online learning and the shift to a digital economy.

News reports also say that the senator fought hard to ensure that the modernization of the fiscal incentives system would not be diluted.

Under CREATE, all investment promotion agencies (IPAs), while maintaining their functions and powers under their respective charters, will now follow a single menu of incentives and shall be supervised by the Fiscal Incentives Review Board (FIRB).

But for exporters to continue receiving support in order to thrive under a post-pandemic environment, CREATE offers different incentives for export-oriented and domestic-oriented activities or projects. For instance, for export-oriented firms, they can avail of income tax holidays (ITH) of four to seven years after which they can choose between paying five percent tax on gross income earned (GIE) or getting enhanced deductions for 10 years. Meanwhile, domestic-oriented enterprises get the same ITH period followed by enhanced deductions for 10 years.

The bill also increased the sunset provisions to 10 years from the initial proposal of four to nine years.

To encourage job-generating investments, CREATE provides projects with a minimum investment capital of P50 billion, or those that can generate at least 10,000 employees, a special incentive package of at least 40 years.

The Senate version of CREATE also proposes the adoption of a Strategic Investment Priority Plan (SIPP) every three years. Under this, priority projects or activities that have substantial amounts of investments, considerable job generation capacity, and modern technology will be identified.

As mentioned in my previous piece, the finance department believes that it is of utmost importance that the grant of fiscal incentives in the country be rationalized, especially since for decades, the Philippines has been too generous in granting tax incentives to a few investors in perpetuity and without the benefit of a regular and in-depth review of the costs and benefits of doing so.

The DOF argued that the country gives away some of the most, if not the most, generous incentives in the region via a special rate of five percent on gross income earned in lieu of all taxes, both local and national, and with no time limit. It also explained that while these companies are given discounted tax rates equivalent to six to 13 percent of CIT, other companies -- including some 90,000 small and medium enterprises pay the regular rate of 30 percent.

In 2017 alone, about P441 billion or 2.8 percent of the gross domestic product was granted in terms of tax incentives to only 3,150 companies, some of which are even in the list of top 1,000 corporations in the country.

As proposed, incentives will now be performance-based, targeted to priority industries and areas, time-bound, transparent, and renewable only if the activities meet certain criteria.

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