Duterte wins stimulus, incentive battle with CREATE passage

By Ian Nicolas Cigaral(Philstar.com), 3 Feb 2021

MANILA, Philippines — A priority bill that reduces taxes on local and foreign companies while slowly dismantling their tax perks to recoup revenues is now on its way to President Rodrigo Duterte for signature.

The House of Representatives and the Senate ratified on Wednesday the Corporate Recovery and Tax Incentives for Enterprises (CREATE) bill after a grueling month of negotiations to thresh out differences on the contentious measure devised as a pandemic recovery scheme.

The bill is widely expected to be approved by Duterte once transmitted to Malacañang. Apart from CREATE, the Financial Institutions Strategic Transfer bill that aims to lighten the burden of unpaid loans in banks is also awaiting the president’s approval.

CREATE’s passage is a win for the tax reform program which economic managers refused to abandon despite unprecedented hardships brought by the health crisis. Critics have said CREATE is unlikely to deliver on its pledge of a rebound, while credit rating agencies applauded policymakers’ undaunted commitment to reform the Philippines’ tax system and generate more revenues.

Indeed, under the approved consolidated version, CREATE is expected to generate up to P931 billion in “tax savings for businesses,” Albay Rep. Joey Salceda, who co-authored the bill at the Lower House, said in a statement. How will that materialize remains less clear though, given that economic officials estimated only P44 billion in savings for enterprises on the law’s first year.

What’s sure is that savings would come almost entirely from a single reduction in corporate income tax rate (CIT) that will be enforced retroactively from July 2020, except for foreign corporations where the rate will be effective after December 2020. Large firms with assets above P100 million and income exceeding P5 million will get charged 25% income tax, down from the prevailing 30%. Smaller firms, which represent 99% of local entities, will see a lower tax rate of 20%.

But CIT reduction was the easy part of the bill, which saw lawmakers butted heads at the very last minute on the other equally important component of CREATE: tax incentives. After all, CREATE was an offshoot of its more ambitious predecessors TRAIN 2, CITIRA and TRABAHO, all with the intent of removing some of the generous fiscal incentives to companies operating in economic zones.

When the pandemic struck, the finance department recalibrated the bill supposedly to allow firms already availing tax perks longer time to benefit from incentives while reducing their taxes over the next 5 years by permitting the transfer of net losses from last year. That was enough to entice Congress to reconsider the measure and ultimately pass it on Wednesday.

Either flat rate or deductions

But CREATE’s final version also puts primacy on the reduction of fiscal incentives, one that has been repeatedly pushed for by fiscal managers since the Ramos administration. For one, future investments in ecozones will no longer get charged the 5% flat tax rate in perpetuity after their tax holidays expire. Instead, that rate will only be good for a maximum of 14 years, depending on investment type.

This flat rate as well may no longer be availed together with other perks such as duty-free imports of raw materials or deductions in taxable income equivalent to spending in items like training for workers or research. In short, the company only has to choose either the 5% rate or these so-called “enhanced deductions.”

On the flip side, income tax holidays will now run for a maximum of 8 years, up from the current 6 years. But these holidays may no longer be extended as currently practiced.

FIRB incentive review

Perhaps the biggest change is the establishment of the Fiscal Incentives Review Board. Led by the finance department, FIRB is tasked of assessing whether investments are qualified for incentives using metrics such as whether they fall in the government’s priority sectors as well as the location of investment, among others. Investments worth at least P1 billion fall within FIRB’s scope, and the interagency body’s recommendations are subject to the president’s approval.

Exempted from the FIRB’s coverage are tax perks granted under legislative franchises. For instance, FIRB is not allowed to review or revoke incentives granted to San Miguel Corp. for the building of the Bulacan Airport last year.

Other changes

Under the consolidated bill, the government is likewise mandated to provide incentives for the importation of coronavirus vaccines and fuel. Regional headquarters of multinationals are likewise charged a lower tax rate of 10% for this year. They will get slapped the regular tax by December 31, 2022.