Create

Not all economic stimulus measures involve dole-out or direct subsidies. The best measures involve providing a supportive environment for our enterprises.

Last week, after 14 months of hearings and deliberations, the Senate finally passed on third and final reading its version of the Corporate Recovery and Tax Incentives for Enterprises (CREATE) Act. The House of Representatives passed its version last year.

Early enactment of this law will be the legislature’s best Christmas gift to our micro, small and medium enterprises (MSMEs) now struggling under the adverse economic conditions induced by the pandemic. It will help us build back better after the devastation of this year.

The headline item of the CREATE Act is the immediate reduction by 10 percent of the corporate tax rate for MSMEs. From the current 30 percent, the rate will be brought down to 20 percent retroactive to July 1 of this year.

As defined in this bill, MSMEs are domestic corporations with total assets (excluding land) of not more than P100 million with a net taxable income of P5 million or less. For businesses with a net taxable income of P5 million and above, including foreign firms, the immediate rate reduction will be from 30 percent to 25 percent.

MSMEs provide the bulk of employment for our people. The reduction in tax rate will help them weather present economic difficulties and continue to keep their employees. This will help us recover many of the jobs that might have been lost this year.

By bringing down the corporate tax rate to 20 percent, MSMEs will enjoy a fiscal environment that is at par or better than the rest of the region. That should enable them to attract investments in the coming year – especially since the Bangko Sentral moved decisively to bring down the cost of money.

In the Senate version, spearheaded by Senator Pia Cayetano, educational institutions and hospitals are provided added benefits. Taxes for proprietary, non-profit educational institutions and hospitals will be assessed a special income tax rate of just 1 percent from July 2020 to June 2023. This should help arrest the slew of school closures we saw the past few months.

The Senate version (that the House indicated it would support) also increased the VAT-exempt thresholds for sales of real property from the current P2.5 million to a maximum of P4.2 million. The proposed law likewise removes VAT on the sale and importation of electronic reading materials, supporting the shift to online learning and the encouragement of a digital economy.

All the features mentioned above will translate into a reduction in government revenues. This loss will be offset by the rationalization of the fiscal incentives system.

Over the years, lack of coordination among our investment promotion agencies led to a confusing tangle of tax exemptions for large corporations. Many foreign corporations that were attracted to the country by the promise of income tax holidays have been enjoying these benefits for decades without demonstrable contributions to improving employment. These benefits serve to dissuade new investors who will be up against entrenched corporations enjoying tax incentives.

Instead of encouraging investments, the chaotic system dissuaded them. This is a system long crying out for change. That change has been inhibited by vested interests trying to keep their unfair advantages.

As sponsor of the Senate version of CREATE, Pia Cayetano resisted intense pressures to water down the reforms of the counterproductive incentives system. She made sure the proposed Fiscal Incentives Review Board (FIRB) is retained in the proposed law. The FIRB will ensure a single menu of incentives is followed and the incentives will be subject to review in shorter cycles.

In the old system, each investment promotion agency was free to craft whatever incentives they wanted to offer investors. This was not only unwieldy. It was subject to much abuse and, possibly, corruption.

Under FIRB, a Strategic Investments Priorities Plan updated every three years will guide the grant of incentives. The incentives will likewise differentiate between export-oriented industries and those catering to the domestic market.

Senator Richard Gordon tried to exempt the Subic Freeport from FIRB supervision. This led to a rather tense debate before the final Senate vote and produced the 20-1 voting outcome (with Gordon voting against the bill).

Senator Pia Cayetano deserves credit for standing firm on this aspect of the reform law. So many questionable business ventures flourished in the free ports because they were able to grant incentives without supervision by the national government. Among the questionable businesses were those that opened the gates to smuggling of second-hand vehicles and those that indulged in online gambling.

CREATE is not the first fiscal measure Pia Cayetano supported. When she was deputy Speaker during the last Congress, she played a major role in crafting the TRAIN Law that reduced the tax rate for 99 percent of our workers. As congressman, she also helped pass the first Sin Tax Reform Act.

As chair of the ways and means committee in the Senate, she steered the passage of two additional sin tax bills. The three sin tax laws, the most done under a single administration, now help fund the Universal Health Care program.

The tough stance she took in advocating the much-needed reform of the incentives regime required some courage. One can only imagine the amount of pressure applied by vested interests to prevent reform.

It helped that Pia is a trained economist from the UP. That prepares her to grasp the long-term repercussions of the reform measures currently being pushed by the Duterte administration.