The government will be treading the right path in rescuing private firms, especially micro, small and medium enterprises (MSMEs), if it trims the corporate income tax (CIT) rate to 25 percent the soonest, industry leaders said on Tuesday.
Legislative-Executive Development Advisory Council Private Sector Representative George T. Barcelon said a “drastic” CIT cut will relieve a lot of firms struggling to survive the ill effects of the coronavirus pandemic. In particular, MSMEs will benefit from any state move to reduce the CIT rate to 25 percent immediately, he added.
“This accelerated CIT reduction is a big help to business establishments, especially in view of present financial challenges,” Barcelon told the BusinessMirror.
Government economists are now proposing the legislation of the Corporate Recovery and Tax Incentives for Enterprises Act (CREATE) bill. The measure will serve as the repackaged version of the Corporate Income Tax and Incentives Rationalization Act (Citira), which got stuck in the Senate after its passage in the House of Representatives last year.
As the second package of the government’s Comprehensive Tax Reform Program, the CREATE bill seeks to lower CIT rate to attract investors to the country.
On the first year of its implementation, the CREATE bill will reduce CIT to 25 percent, from 30 percent at present, the highest rate in the whole of Southeast Asia. This is a drastic change in comparison to the Citira bill’s provision of gradual lowering by 1 percent yearly until corporate tax rate hits 20 percent by 2029.
However, government revenue is projected to decrease by as much as P227 billion until 2022 resulting from the immediate cutback in CIT rate.
In spite of the anticipated impact on state collection, Barcelon argued the largest concern right now for the government should be rescuing MSMEs from bankruptcy. Economic managers, he added, appear to be okay with budget deficit going beyond target for as long as the economy is revived at the end of the day.
“I believe the government is willing to accept bigger budget deficit to assist in the revival of our economy,” Barcelon explained.
For his part, Philippine Exporters Confederation Inc. President Sergio R. Ortiz-Luis Jr. said that an accelerated tax cut will only benefit a few firms. He argued there is little point in carrying out such fiscal move, as corporations and MSMEs alike are likely to declare losses this year.
“I think it’s a good move to make it [CIT rate] 25 percent on the first year,” Ortiz-Luis said over the phone. “However, it will not affect many companies because they will be declaring losses. Because of the pandemic, many firms won’t even declare income.”
The most important thing to do at the moment, Ortiz-Luis said, is to pass the stimulus package filed in Congress. The stimulus package will ensure there will be money going around, and this will boost business and consumer confidence in the time of the pandemic.
In a letter to legislators last week, exporters called for the passage within a month’s time of the Philippine Economic Stimulus Act bill that seeks to inject cash in various sectors, such as to MSMEs, to rejuvenate the economy in the lockdown aftermath.
Moreover, Ortiz-Luis pleaded with the government to stop worrying about a revenue drop as a result of a drastic CIT rate cut. The last three tax measures signed into law—the Tax Reform for Acceleration and Inclusion law, Rice Liberalization Act and the Tobacco Tax Law 2019—are all expected to bring in additional money to state coffers, he added.
“There are different laws that were passed that can balance out any deficit,” the industry leader argued. “The government can balance this out with the other tax laws. Let’s not act like it was a single tax reform package; it has many.”
“If there will be losses, and surely there will be, it was really assumed as a given because of the pandemic. There will be other areas where the government can source money,” he said.
The Citira bill, the initial version of the CREATE bill, hurdled the House of Representatives last year but failed to slip past the Senate, as senators are worried about the potential impact of the incentives rationalization component to investments and employment.
Aside from reducing corporate tax to 20 percent by 2029, the Citira bill will overhaul the fiscal incentives granted to firms operating in economic zones. As such, economic zone locators are strongly opposed to the measure, warning that the removal of their tax perks will compel them to relocate to another Southeast Asian country and leave thousands jobless here.