Better playing field

Domestic and foreign businessmen in the country, as well as prospective ones, who for a long time have been placed in a state of uncertainty due to deliberations in Congress in connection with overhauling the country’s tax incentive system, may finally breathe a sigh of relief.

Congress has finally approved the Corporate Recovery and Tax Incentives for Enterprises Act or CREATE, now awaiting action from the President, which if properly implemented can spell wonders in terms of increased investments for the country.

In its declaration of policy, the bill noted that the State aims to improve the equity and efficiency of the corporate tax system by lowering the rate, widening the tax base, and reducing tax distortions and leakages; develop a more responsive and globally competitive tax incentives regime that is performance-based, targeted, time-bound, and transparent; and create a more equitable tax incentive system that will allow for inclusive growth in all regions of the country especially in least developed areas.

Well said. So how does the CREATE bill hope to achieve all these?

Most notable of course is the reduction in the income tax imposed on domestic corporations to 25 percent effective July 1, 2020. The term domestic corporations now include one-person corporations.  Meanwhile, corporations with net taxable income not exceeding P5 million and with total assets not exceeding P100 million, excluding land on which the business entity’s office, plant, and equipment are situated, shall be taxed at a lower rate of 20 percent.

Meanwhile, from 35 percent, the income tax rate on foreign corporations engaged in trade or business in the Philippines will be reduced to 25 percent. For the minimum corporate income tax on resident foreign corporations, from July 1, 2020 to June 30, 2023, this will be reduced to one percent, from the two percent MCIT required under the Tax Code.

Another important provision of the CREATE bill is the amendment of the National Internal Revenue Code of 1997 to include a new title that will cover all existing investment promotion agencies, repealing portions of the Omnibus Investment Code. IPAs would include the Board of Investments for investments within the ARMM, TIEZA, Subic Bay Metropolitan Authority and Clark Development Corp., and other special economic zones created by law such as those in Aurora, Bataan, Zamboanga, Cagayan, among others.

Among the tax perks that the Fiscal Incentives Review Board or the investment promotion agencies under a delegated authority from the FIRB to registered business enterprises on their approved projects or activities under the Strategic Investment Priority Plan are income tax holidays; special corporate income tax of five percent in lieu of all national and local taxes for export and domestic enterprises with a minimum investment capital of P500 million; and enhanced deductions, among others.

Export enterprises and domestic market enterprises under the SIPP that are classified as critical may be given income tax holidays of from four to seven years depending on their location and industry priorities, and followed by the special corporate income tax rate or enhanced deductions for 10 years. The special CIT rate following the ITH used to be for an unlimited period.

For domestic enterprises under the SIPP not classified as critical, the ITH will also be for four to seven years, followed by the special CIT rate or enhanced deductions only for five years.

Export enterprises registered prior to the effectivity of the CREATE shall have the option to reapply and avail of the incentives granted under the bill, which may still be extended for a certain period not exceeding 10 years at any one time, subject to the conditions provided for under the SIPP and performance review by the FIRB.

Whether the enterprises will be granted four years of ITH, or up to seven years will depend partly on whether they are located in the National Capital Region, in metropolitan areas or areas contiguous or adjacent to the NCR, or other areas, where the period will be longer.

In addition to these periods, projects or activities in areas recovering from armed conflict or a major disaster will be entitled to two additional years of ITH. Those which completely relocate from the NCR will be entitled to three additional years of ITH.

One of the more controversial features of the CREATE bill is the expanded functions of the FIRB, which is now given oversight functions on the administration and grant of tax incentives by investment promotion agencies as well as government agencies administering tax incentives. This will include the power to approve or disapprove the grant of tax incentives by investment promotion agencies as well as the authority to cancel, suspend, or withdraw fiscal incentives on its own initiative or upon the recommendation of the investment promotion agency for those projects with capital over P1 billion.

The grant of tax incentives to registered projects or activities with investment capital of P1 billion and below will be delegated by the FIRB to the concerned investment promotion agency. For those above P1 billion, the investment promotion agency will be merely recommendatory to the FIRB.

The FIRB can also now require investment promotion agencies and other government agencies administering tax incentives to submit summaries of approved investments and incentives granted, public regularly at per firm data pertaining to amount of tax incentives.

In addition, the President of the Republic is given the power to grant incentives to so-called highly desirable projects with minimum investment capital of P50 billion or direct local employment generation of at least 10,000 within three years from the issuance of the certificate of entitlement, upon the recommendation of the FIRB.

With the devastation caused by the pandemic on our economy, our government needs to make sure that only enterprises deserving of tax incentives will receive it. But equally important of course, is that with the reduced corporate income tax, this can help us compete with our neighbors on a better playing field.

For comments, e-mail at [email protected]