Better future in sight

The future seems brighter for Philippine business.

The Senate finally approved on third and final reading  last Thursday the proposed Corporate Recovery and Tax Incentives for Enterprises or CREATE Act that will reduce the corporate income tax from the current 30 percent to 25 percent.

The Senate’s approval came more than a year after the House of Representatives approved the bill when it was still called the Corporate Income Tax and Incentives Rationalization Act (CITIRA).

The Senate version seeks an outright five percent reduction in the country’s CIT rate, after which it will gradually go down to 20 percent by 2027, or by one percentage point annually from 2023 to 2027.

According to Senate Committee on Ways and Means chairperson Sen. Pia Cayetano who sponsored Senate Bill 1357, the CIT of companies with income below P5 million annually will be lowered to 20 percent under the measure immediately.

Aside from the reduction in CIT rates, the proposed bill also includes provisions to rationalize fiscal incentives by making them time-bound and performance-based, giving the Fiscal Incentives Review Board (FIRB) chaired by the Finance Secretary additional powers, including the power to oversee the grant of incentives by ecozones created by special law.

Before it was called CREATE, the bill was called the TRAIN Package 2, after which it was renamed to TDRABAHO, and then CITIRA.

The Senate version did not exempt existing ecozones from the powers of the FIRB. Under the proposed bill, the FIRB will oversee incentives granted by investment promotion agencies (IPAs) and other government agencies, which will include the Subic Bay Metropolitan Authority. Sen. Richard Gordon, former SBMA chairman and the only one who opposed the measure, wanted to exempt investment promotion agencies from CREATE, saying this would mean loss of investments in Clark and Subic.

Gordon had proposed to exclude SBMA, Clark Development Corp., Authority of Freeport Area of Bataan, Cagayan Economic Zone Authority, Zamboanga City Special Economic Zone Authority, and Tourism Infrastructure and Enterprise Zone Authority (TIEZA), among others, from the bill’s coverage.

The FIRB will now have the power to grant incentives to registered projects or activities with capital of over P1 billion.

Cayetano explained that for investments P1 billion and below, IPAs would handle it, but for those with capital above P1 billion, FIRB would have the authority, although the incentives would still go through the IPA. For those P1 billion and above, the IPAs need to submit them for approval by the FIRB.

According to Socioeconomic Planning Secretary Karl Kendrick Chua, the passage of the bill will help the economy bounce back faster from the recession and give small and medium enterprises the needed incentive to be more productive and competitive.

The CREATE bill will grant exporters and domestic industries between four to seven years of income tax holiday, after which they will pay the five percent gross income earned (GIE) for 10 years. It also increased the sunset provisions to 10 years from the initially proposed four to nine years.

The bill forms part of the government’s economic stimulus package, along with the Bayanihan to Recover as One Act. The government will forego P40 billion in revenues for fiscal year 2020, and P650 billion in the next five years.

Earlier, the finance department explained that the accelerated reduction in the CIT rate would boost the country’s bid to attract multinational firms seeking to diversity their production chains. The larger reduction, it said, would bring the country closer to the ASEAN CIT rate average of around 22 percent and would boost cost competitiveness in doing business.

At 30 percent, the Philippines, the DOF said, currently imposes the highest CIT rate in the region. Singapore has 17 percent, Brunei 18.5 percent, with Cambodia, Thailand, Vietnam, and Lao PDR all offering 20 percent, Indonesia 22 percent, Malaysia 24 percent, and Myanmar two percent.

The Philippines’ 30 percent rate burdens MSMEs that are dealing with the effects of COVID-19. Even before the pandemic, the 30 percent CIT rate has hindered local businesses from expanding, growing, and competing with their regional counterparts.

More importantly, the bill will rationalize the grant of fiscal incentives in the country. The DOF noted that for decades, the Philippines had been too generous in granting tax incentives to a few investors in perpetuity, and without a regular and in-depth review of the costs and benefits of doing so.

The DOF  says that the Philippines 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.

The DOF added that while these companies are subjected to discounted tax rates equivalent to six to 13 percent of CIT, most other companies, including around 90,000 of SMEs, pay the regular rate of 30 percent. In 2017 alone, about P441 billion or 2.8 percent of the GDP was granted in terms of tax incentives to only 3,150 companies, including those in the elite list of Top 1,000 corporations.

With the proposed measure, incentives will now be performance-based, targeted to priority industries and areas, time-bound for a five, seven, eight, or 10-year period and to be renewed only if the activities meet the criteria. Most importantly, the grant of incentives will be transparent, since the amount of tax incentives and benefits will be published regularly per industry group.

However, reducing corporate income taxes and rationalizing the grant of business incentives is not enough for us to win foreign investments over. After all, other countries also offer incentives, if not better than ours, and some even have lower CIT rates. There are other costs and factors that have to be considered by investors, including labor and power, the peace and order situation, manpower skills, availability and cost of raw materials, and the investment climate in general, which include economic, financial, and socio-political conditions.

Hopefully, as we open more industries to foreign investors and as we improve the way we do business and reduce red tape, the foreign investment community will start favoring us more over our neighbors in the region.

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