Decades-long fight to overhaul tax perks nears end as Senate OKs CREATE

by Prinz Magtulis (Philstar.com), 26 Nov 2020

MANILA, Philippines (UPDATE 7:55 p.m., Nov. 26) — A highly contentious bill that rolls back some tax perks is on its way to enactment, bringing to close decades of grueling fight by government to recoup revenue losses which critics have consistently feared would only discourage much-needed foreign investments.

Those assumptions will now be put to test with the passage of the Corporate Recovery and Tax Incentives for Enterprises (CREATE) bill in Congress. The Senate put its final stamp on the measure filed under Senate Bill 1357 on Thursday by a vote of 21-1 with zero abstentions.

The bill will now be examined by the bicameral conference committee composed of select House and Senate members to thresh out their differences, although Senate Minority Leader Franklin Drilon indicated the lower chamber would adopt the Senate version. Once that happens, the bill goes directly to President Rodrigo Duterte for signature.

The fight to get CREATE passed however was not easy. In the Duterte administration alone, the measure was rehashed three times carrying different names TRABAHO and CITIRA. What gave the bill a fresh wind was the urgency cited by economic managers who touted the measure as a critical component of their stimulus to assist the economy’s rebound from the health crisis.

“We see light at the end of the tunnel, and we expect this to be done by the end of this year,” Finance Secretary Carlos Dominguez III said in a recent webinar.

But the measure’s intentions can be traced way back from the Ramos administration, which sought to reform what finance officials deemed as “too generous” tax incentives given at the expense of state revenues. Last year, budget data showed various tax exemptions likely cost government P540.8 billion.

These perks including income tax holidays and waivers on Customs duties are offered on economic zones to lure investments and generate jobs, but that they are in effect in perpetuity was considered unfair to firms operating and paying taxes outside these designated areas.

Succeeding governments tried but failed to pass the reform over fears that doing so would deter foreign investments, set for a third straight year of decline in 2020. That has been the point of contention up to the last minute of the bill’s amendments on Thursday that led Senator Richard Gordon to oppose CREATE.

“I swear to God that I will not kneel down to a co-equal branch of government just because they say so. I will not follow them just because they say so. We would have to do something as a collegial body to say that this is the best,” Gordon said in the plenary.

Gordon says no

Most details of the bill remained unavailable as of this posting, but what is clear is that CREATE would automatically lower corporate income tax (CIT) to 25% from the prevailing 30% for firms with assets above P100 million and taxable income of above P5 million.

Micro, small and medium enterprises, which account for 99% of local companies and have lower assets and taxable income, will get a lower rate of 20% instantly upon the bill’s passage. Overall once enforced, CREATE promises to give as much as P44.6 billion in tax savings from a lower CIT to companies to help them restart their pandemic-battered business.

At the same time though, some companies would see their tax perks slowly dismantled, including regional headquarters of multinational companies that will see getting taxed after 2 years. For some, this is a process that would far offset the reprieve from tax cuts at the onset of the law.

New foreign investments would also have to be assessed by Fiscal Incentives Review Board, an interagency body led by the finance department, to qualify for any tax perks.

Before the voting, Gordon wanted six economic zones in Subic, Aurora, Bataan, Cagayan, Clark in Pampanga and Zamboanga exempted from the bill, as well as the Tourism Infrastructure and Enterprise Zone Authority. Senator Pia Cayetano, CREATE’s sponsor, rejected this, prompting the entire Senate to vote on the matter which Gordon eventually lost.

Sought for comment, Ruben Carlo Asuncion, chief economist at UnionBank of the Philippines, said CREATE’s passage would provide certainty on the investment climate held back the lengthy debate on the measure.

“The law is a step toward the right direction for a more deliberate industry development policy,” he said in a text message.

But other observers are more cautious. “Removal of incentives later on may have to be accompanied with a bigger cut in the CIT to offset the losses that benefit from these tax benefits,” Emilio Neri Jr., lead economist at Bank of the Philippine Islands, said.

Sonny Africa, executive director at IBON Foundation, a think tank, likewise asked whether it was a good move for government to give up revenues that may fund public programs during a crisis.

“Giving up tax revenues defies logic. The resulting P139 billion in CIT cuts for 2020 and 2021 would be a stimulus if this was spent for COVID-19 response rather than just added to the pockets of corporations,” he said in a text message.