Forgone revenue from CIT reduction may reach P480 billion

by Elijah Felice Rosales – The Philippine Star, 3 Oct 2021

MANILA, Philippines — Forgone revenue of the government may reach P480 billion until 2024 as a result of a decision to cut the corporate income tax (CIT) rates.

In a report, the Development Budget Coordination Committee (DBCC) said the country’s fiscal position may improve from 2021 to 2024, sustaining the government’s revenue target of P2.88 trillion for the year.

However, the DBCC also said income losses due to the passage of the Corporate Recovery and Tax Incentives for Enterprises (CREATE) Act may reach P478.5 billion until 2024

Forgone revenue of the government may reach P138.2 billion this year, P118.8 billion in 2022, P115 billion in 2023 and P106.5 billion in 2024.

Signed into law in March, CREATE brings down the corporate income tax from 30 percent to 20 percent for domestic corporations with total assets of not more than P100 million excluding land and with a net taxable income of not more than P5 million.

The corporate income tax for all other corporations will be lowered from 30 percent to 25 percdnt.

The measure also reduces the percentage tax from three percent to one percent for small businesses whose gross sales or receipts do not exceed the value added tax-exempt threshold of P3 million. Minimum corporate income tax will also be cut from two percent to one percent. The lower percentage and minimum corporate income taxes will take effect from July 1, 2021 to June 30, 2023.

Ateneo de Manila University economics professor Leonardo Lanzona Jr. said the costs brought by CREATE on the fiscal position outweigh its benefits on the business environment.

“This is the worst time to lower the CIT. In the midst of the significant costs in responding to the crisis and the huge debt incurred, the country cannot afford to decrease taxes, especially for the big corporations,” Lanzona told The STAR.

Some private firms may reinvest their savings in new and expansion projects, as envisioned by the economic team in pushing for the passage of CREATE.

However, Lanzona doubts that the reinvestments will match, if not exceed, the almost P500 billion in forgone revenue.

The Ateneo economist said CREATE’s tax cuts spare corporations from contributing their share in funding COVID measures, leaving the burden on the poor who never received any tax break during the pandemic.

“Such reinvestment will be lower than losses the government will experience from the measure. In the end, the rich keep their profits. The poor workers will end up paying for the costs brought by the pandemic,” Lanzona said.

Former socioeconomic planning secretary Ernesto Pernia also said the government should pair the CREATE, a supply stimulus, with a demand stimulus like the Bayanihan to Arise as One Act, or Bayanihan 3.

Bayanihan 3 requires P400 billion in capital to bankroll its measures encouraging Filipinos to spend as a way to revive the consumption-based economy. More than half at P216 billion will be used to give out P2,000 in ayuda to each Filipino.

Pernia said the government would only pile up losses from CREATE if it disregards the shortfall on the demand side. Once families get up on their feet and return to their pre-pandemic spending, only then will private firms find the reason to reinvest their savings and expand their output.

In the report, the DBCC stood by its medium-term fiscal program of sustaining a budget deficit of P1.85 trillion this year, or 9.3 percent of gross domestic product (GDP).

As industries reopen, the government looks to narrow its deficit spending to 7.5 percent of GDP in 2022, 5.9 percent in 2023 and 4.9 percent in 2024.

To do this, revenues should expand by an average of nearly 12 percent to P3.99 trillion in 2024, outpacing disbursements seen to grow by about four percent to P5.29 trillion.