CREATE: A tale of two kindnesses

People are not into praising new tax measures because oftentimes, that just means more burden.

Not in the case of the Corporate Recovery and Tax Incentives for Enterprises (CREATE) bill, which would lapse into law in a few days.

CREATE did not look this way when a new tax bill was first proposed and pushed for support but, as we would say in the office, good work is always revised. Now, it’s praiseworthy.

CREATE lowers corporate income tax to 25 percent (20 for small businesses). While no incentive is forever, there is wiggle room for incentives so long as your activity is in the strategic investment priorities plan (SIPP) for the year.

Case in point is that registered enterprises whose five percent tax regime that will sunset in 10 years can technically reapply for incentives under the new regime of incentives, provided their activity is in the SIPP. And the fact that domestic market enterprises doing crucial things for the economy can now enjoy incentives like those enjoyed by exporters is just quite sensible.

What we also appreciate in CREATE are two subtle things that can really help facilitate transactions. There are showstoppers and very disadvantageous rules that taxpayers and registered enterprises can be subjected to. I discuss in this article two neutralizers in CREATE to pay tribute to the bill’s load-lightening effect to taxpayers and the fairness it can bring to registered enterprises.

1. No ruling is required to avail of tax exemption.

There was a time when many corporate reorganizations and exchanges of properties, supposedly tax-free under the law, did not proceed or were held in suspended animation--not without cost to the economy, on account of expansion, job generation, and value creation that business plans could produce. But the BIR then, although not deliberately, kept the transactions at bay – the rule was that unless you get a BIR ruling, your transaction was subject to tax.

Imagine your family owns a very valuable property that had negligible cost decades ago when your ancestors bought it. You need to put that land as your contribution to the joint venture company that will develop it. Even if that property is now worth P100 million, you would practically pay P30 million just to transfer it to a development company even prior to any development, if you cannot do it in a tax-free manner.

Many cases have gone to court on this because the amounts involved are significant. The courts on several occasions have said on this matter that the law granting tax exemption does not say that you need to get a BIR ruling before you can enjoy the exemption. Much-appreciated decisions. But that also means a gruelling court battle that goes all the way up to the Supreme Court. The CREATE law codified these decisions and said that “prior Bureau of Internal Revenue confirmation or tax ruling shall not be required for purposes of availing the tax exemption”.

Even before CREATE, the BIR already heeded these court decisions. But the battlefield transferred to securing the Certificate Authorizing Registration (CAR) as the BIR still required a ruling at that point, even without a legal issue that the transaction is tax-free. To give life to the spirit of the law, a BIR ruling should also NOT be a showstopper in registering the property in the name of the new owner (securing the CAR) because anyway, the BIR can still investigate the taxpayer in a regular examination and the taxpayer can still be in a whole lot of trouble if found deficient.

2. Tax incentives are not implemented by the BIR.

One of the most horrifying proposals in the old bill was the amendment of the tax code to create “a separate title under the Tax Code for the Administration of Incentives”. This seemingly harmless provision in the Tax Code could have spelled the end of incentives as we know it, or the removal of any protection that a registered enterprise deserves.

If the BIR implemented those tax incentives, it would treat the incentives as tax exemption. The rule in tax exemption is that any doubt shall be construed against the taxpayer and in favor of the government, making it easy to defeat an exemption claim. The BIR can find doubt in so far as it is concerned, and even small infractions can be used against the registered enterprise to question or disallow their incentives.

This Tax Code amendment to virtually make the BIR the implementing agency of the tax incentives was dropped under CREATE. Yes, there is a new agency created, which is the Fiscal Incentives Review Board (FIRB). It will consist of economic secretaries and representatives from other agencies, to be headed by the Secretary of Finance. Investment promotion agencies like the Board of Investments (BOI) and the Philippine Economic Zone Authority (PEZA) shall now merely recommend and report to the FIRB. We expect the FIRB, however, to balance interests of promoting investments and economic activity with tax collection by using objectivity and existing law.

What was not amended under CREATE is the principle enshrined in the Omnibus Investment Code that “all doubts” in availing incentives “shall be resolved in favor of investors and registered enterprises”.

Investors are lured, and will be lured, with the incentives. It’s good for them but it’s also good for us. That is why we encourage them and bring them here. Government can keep its promise by remembering the principle of how to resolve doubts. Protection and confidence of investors can begin there.

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Alexander B. Cabrera is the chairman and senior partner of Isla Lipana & Co./PwC Philippines. He is the chairman of the Integrity Initiative, Inc. (II, Inc.), a non-profit organization that promotes common ethical and acceptable integrity standards. Email your comments and questions to [email protected]. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.