CREATE to stimulate business

MANILA, Philippines — Business groups welcomed the signing of the much-awaited Corporate Recovery and Tax Incentives for Enterprises (CREATE) Act into law, noting the reduction in corporate income tax (CIT) rate would support recovery.

Finance Secretary Carlos Dominguez III lauded the passage of the CREATE Act, which he said would be one of the largest stimulus packages ever in the country’s history in the form of sizable cuts in corporate income taxes and a redesigned fiscal incentives system to better attract investments and create jobs.

“This culmination of years-long intense discussions on the rationalization of tax incentives for businesses spells finis to the prolonged investor uncertainty over the final shape of this corporate taxation reform and signals to the rest of the world that the Philippines is back in the game to attract investments, create jobs and achieve inclusive growth,” Dominguez said.

Dominguez said the enactment of the measure will provide relief for MSMEs that account for 99 percent of local businesses, end the climate of investor uncertainty spawned by the delay in the passage of the then-proposed reforms in the corporate income tax incentives system, and send a strong signal to the international community that the Philippines is open for business despite the pandemic.

The law cuts the regular CIT rate by 10 percentage points, from 30 to 20 percent for domestic corporations with a taxable income of P5 million and below, and with total assets of not more than P100 million.

All other domestic corporations will benefit from an immediate reduction of the CIT rate from 30 to 25 percent. Foreign corporations currently paying the regular rate will also enjoy a reduced 25 percent CIT rate.

Corporate taxpayers whose gross sales or receipts do not exceed the value-added tax (VAT)-exempt threshold of P3 million and are subject to the three percent percentage tax will only pay one percent instead retroactive to July 1, 2020 up to June 30, 2023.

Proprietary and non-stock educational institutions and hospitals are also among the major beneficiaries of this law as CREATE will reduce the preferential tax rates enjoyed by these entities from 10 percent to one percent also retroactive to July 1, 2020 up to June 30, 2023.

Dominguez said CREATE allows more flexibility in the grant of fiscal and non-fiscal incentives, which will be critical as the country competes for high-value investments from overseas now and in the post-pandemic era.

For enterprises that undertake activities considered priority by the government, CREATE provides for a generous incentives menu that offers tax discounts on the basis of their strategic benefit to the country, such as their ability to create jobs and promote countryside development.

Investment promotion agencies (IPAs) will maintain their key investment promotion functions and powers under their respective charters, but the Fiscal Incentives Review Board (FIRB) will have oversight power over them.

The governance of tax incentives will also be placed under the FIRB, which will be chaired by the Department of Finance and co-chaired by the Department of Trade and Industry.

Dominguez said this would be aligned with international best practices.

He said that with  CREATE’s passage into law, the government has already accomplished about 90 percent of the Comprehensive Tax Reform Program (CTRP), which President Duterte has pursued since he assumed office in 2016.

PCCI president Benedicto Yujuico, meanwhile, said the organization considers CREATE a landmark economic stimulus program that will significantly accelerate the country’s economic recovery and make the Philippines a more competitive and attractive investment destination.

He said the lowering of CIT, and the exemption of duties and value-added tax (VAT) of vaccines for the coronavirus disease 2019 under the measure would be a big help as well.

Philippine Exporters Confederation Inc. president Sergio Ortiz-Luis Jr. said in a text message the approval of CREATE is expected “to attract more and the right kind of investments particularly in underdeveloped regions in the country.”

American Chamber of Commerce of the Philippines Inc. senior advisor John Forbes said they also welcome the reductions in the CIT.

Both Lachica and Forbes, however, declined to comment on the rationalization of incentives, citing the need to study the law further and to consult with their members.

While the measure has been approved into law, Duterte vetoed some provisions such as increasing the threshold of housing exempt from VAT; the power of the President to exempt an investment promotion agency from the coverage of the law; as well as the authority of the Fiscal Incentives Review Board (FIRB) to review and approve only projects with investments worth at least P1 billion.

Think tank Action for Economic Reforms (AER) which earlier, called on Duterte to veto some provisions of CREATE, welcomed the move to strike down the increased VAT-exempt threshold on the sale of real property noting this would prevent revenue loss and ensure the exemption would benefit the poor.

AER said it is also backing the veto of the provision limiting the power of the FIRB to grant incentives as this would provide transparency, accountability and consistency and prevent rent-seeking and corruption from investment promotion agencies.

The provision exempting local crude oil refinery from duties and taxes, however, escaped the veto.

“It is clear that the government is protecting a firm that is objectively uncompetitive. This shows that while the administration can have the political will to be uncompromising by striking out many questionable or weak provisions, it succumbed to the powerful lobby of one particular oligarch,” AER said.

Despite this, AER is of the view the gains from the law outweigh the costs.

“Regardless of the insertion of questionable provisions that go against CREATE’s main principles, we welcome the signing into law of this long-overdue reform. We hope that the rationalization of fiscal incentives will provide clarity for our investors and attract foreign investment, and that the lowering of CIT will be responsive to a stimulus during this pandemic-induced economic downturn,” AER said.

Meanwhile, Union Bank of the Philippines chief economist Ruben Carlo Asuncion said the effects of CREATE would not be felt in the immediate term.

“I believe that this year, it’s impact would be minimal and the succeeding years would dictate a clearer picture of how CREATE will contribute to the economy,” Asuncion said in a text message.

“Implementation may take time. Plus, the pandemic is still raging and investment sentiment is getting hit again. We have to consider the impact of the recent surge in COVID-19 infections,” he said.

Rizal Commercial Banking Corp. chief economist Michael Ricafort, for his part, said CREATE would be equivalent to about one percent of the country’s gross domestic product (GDP) per year in terms of reduced taxes for corporations and MSMEs.

He argued that CREATE would help in cost-cutting measures, spur more investments and establish more employment.

“It puts greater certainty on investment incentives to make foreign investors more decisive to invest in the country. It would help improve economic recovery prospects and boost GDP growth by about one percent per year,” Ricafort said.

“Reduced tax revenue collections would also result in wider budget deficit, with effects similar to deficit spending, though offset by increased business and economic activities that also entail more tax revenue collections,” he said.

However, Foundation for Economic Freedom (FEF) president Calixto Chikiamco believes otherwise.

“It will not lead to greater investments because investors do not decide on the basis of tax rate, but factors such as cost of doing business, barriers to competition, rule of law, and respecting sanctity of contracts,” Chikiamco said.

“It’s unlikely that the tax cut will lead to increased investment spending especially during this time of great uncertainty. Companies will probably hoard the extra cash from the tax savings as a precautionary measure,” he said.

For investments to happen, he maintained that the government must pass the Retail Trade Liberalization Act, Foreign Investments Act and Public Service Act, all of which are also priority measures of the government.

“CREATE merely curbs the abuses in the old system and hopes to promote a more level playing field for old and new investors,” Chikiamco said. – Maureen Simeon