The future turned brighter with CREATE

Until last week, the country’s prospects for economic recovery was bleak. Despite the mystifyingly optimistic forecast of our economic managers, think tanks around the world agree that ours will be a crawling recovery wherein pre-COVID levels of economic output will only be realized by the second half of 2023.

At the heart of our problems is government’s disorganized vaccine procurement and distribution strategy. As we all know, herd immunity is fundamental for the economy to operate on all cylinders. Despite government’s targets of achieving herd immunity by end 2021, a study conducted by UK-based Economic Intelligence Unit (EIU) asserts that the Philippines will only achieve vaccination for 60 percent of its population by the fourth quarter of 2023. The study was based on the present state of government’s vaccine procurement program and the readiness of its logistics chain.

But regardless of how long it will take for us to achieve herd immunity, recent events give us reason to hope for a faster recovery. Last week, the members of the House and Senate reconciled their conflicting versions of the CREATE Bill at the bicameral committee. Although the final version of the law is still subject to review by both chambers (to check the wordings), it is only a matter of time before President Duterte signs it into law. It is safe to say that CREATE is as good as passed.

With luck, CREATE will be enacted in the next few months. Should this happen, we can expect a windfall of fresh investments to turbocharge the system, particularly from investors who were previously on a wait-and-see mode.

CREATE is the most significant economic reform in decades, one that can potentially be a game changer for the country. Not only does it make our tax system more competitive with that of our neighbors, it also encourages more investments in manufacturing and export industries. It rewards those who invest in research and development and skills training. We credit House ways and means committee chair, Joey Salceda, who shepherded the bill from the beginning. The economist from Albay has been consistent in championing reforms to make the country more competitive. If only other legislators were more like him, we would be a much stronger republic.

The Philippines has the highest corporate income tax (CIT) in ASEAN. This has worked to our disadvantage in so far as attracting investors are concerned. While the Philippines levies a CIT of 30 percent, it is only 24 percent in Malaysia, 22 percent in Indonesia, 20 percent in Cambodia, Thailand, Vietnam and Laos, 18.5 percent in Brunei and 17 percent in Singapore.

With the passage of CREATE, Philippine CIT will be lowered to 25 percent Although it is not the lowest rate in the region, it is no longer at a stratospheric level that it would repel foreign investors.

As for investors already operating in the Philippines, the 5 percent gross income tax (GIT) they presently enjoy will hold true for the next ten years. This is long enough for them not to entertain thoughts of relocating elsewhere. Any should it make more sense for them to shift to a 25 percent CIT rather than continue with the 5 percent GIT, they have the option to do so.

For exporters and critical domestic enterprises, they can enjoy four to seven years of income tax holidays (ITH) and ten years of a special income tax rate. An additional three years ITH awaits those who locate in disaster stricken areas.

The imminent passage of CREATE dispels the uncertainty that has kept investors on a wait-and-see mode since government started the conversation on tax reform back in 2018. This uncertainty has caused us to miss out on some P18 billion worth of investments, claims Salceda. With CREATE’s passage, we can reasonably expect some $250 billion in fresh investments (domestic and foreign) over ten years, and jobs for 1.8 million of our countrymen.

As for wooing highly sought after investors, CREATE gives the President the latitude to customize incentives according to the needs of certain coveted investors. Having this flexibility allows us to compete with our more aggressive neighbors in attracting businesses that hire by the thousands or those that export by the billions.

CREATE supports small- and medium-sized industries too. Enterprises whose assets are worth less than P100 million (without land) and whose net taxable income is less than P5 million need only to pay 20 percent CIT. This is a far cry from the 30 percent to 32 percent they are made to pay today. Moreover, SMEs can offset their operating loss from the last three years against their taxable net income.

As for micro businesses whose sales are less than P3 million a year, they are now exempt from VAT and need only to pay one percent of their gross income as tax and not three percent. This will help them get back on their feet following the pandemic.

The law also extends support towards the manufacturing sector, a move I strongly approve of. CREATE lowers the minimum CIT for manufacturing concerns from two to one percent. And if a manufacturer reinvests its profits for expansion, it can deduct up to 50 percent of the amount invested against taxable income. This is a great incentive to encourage manufacturing enterprises to expand.

To encourage research & development and up-skilling, CREATE allows companies to deduct up to 100 percent of their expenses in these endeavors.

Mass vaccination is a key to our full recovery. Thus, to hasten the process, the law exempts vaccines and personal protective equipment from VAT and import duties. The same holds true for cancer, mental illness, tuberculosis and kidney disease medicines.

As for Filipinos with businesses abroad (and there are many), they can now repatriate their profits without having to pay 30 percent tax as they did before. Repatriated profits can now enter the country, tax free, provided it is reinvested. On this provision alone, we can expect billions to return to the motherland to contribute to our recovery.

CREATE gives us reason to be hopeful for a faster recovery. Now, if Eco Cha-cha were to be passed too, our recovery period could easily be cut in half and our prospects for future growth could be considerably brighter.

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Email: [email protected]. Follow him on Twitter @aj_masigan