The government’s economic team asked the business community to help convince Congress to pass in its last session week the proposed Corporate Recovery and Tax Incentives for Enterprises (CREATE) bill that will mark the country as a “premier investment destination” for companies looking to diversify their supply chains in the wake of COVID-19 pandemic.
Rather than increasing the national budget and passing funds through less efficient government programs to ensure the country’s recovery from the COVID-19 pandemic, Dominguez told business leaders on Thursday that the Duterte administration decided to “leave the money in the hands of the private sector” through the passage of CREATE bill.
“Let me emphasize that this reform measure is really about trusting the private sector. Instead of increasing our budget and passing funds through what tend to be less efficient government programs, we will leave the money in the hands of the private sector,” Dominguez said in a webinar hosted by Financial Executives Institute of the Philippines (FINEX), Management Association of the Philippines (MAP) and other business organizations.
CREATE, the “recalibrated” version of Corporate Income Tax and Incentives Rationalization Act (CITIRA), is being touted by the Department of Finance as the “largest fiscal stimulus program for enterprises in the country’s history.”
Under the “first-ever revenue-eroding tax reform package” proposed by the Philippine Department of Finance, the government will be foregoing at least P667 billion in government revenues between 2020 and 2027 as a result of cutting the current 30 percent CIT rate — the highest in the Asean region.
The bill seeks an outright five percent cut in the CIT rate to 25 percent by July this year and a 1-percentage point reduction every year from 2023 to 2027 until the CIT rate reaches 20 percent.
“The firms can invest these funds in the revitalization of their businesses and create even more jobs for Filipino workers. This is a simple yet effective measure to fire up our economy and quickly bring us back to the track of high growth,” he said.
Moreover, Dominguez said the CREATE bill is the “most important economic reform in decades.”
“I strongly believe that your collective voice will finally get us over the hill in this policy effort. The unequivocal support of the business sector is crucial in urging our lawmakers to rally behind this long-overdue reform. There could not be a stronger signal that this country is back in the game than the passage of CREATE,” he said.
In the same forum, 32 business groups have reiterated their strong support for the passage of CREATE which they said will act as a stimulus package that will be “a life-restoring boost to market confidence, providing the most direct, cost-efficient and instant relief to businesses suffering from business reverses due to COVID-19.”
“We humbly request the Senate and the House of Representatives to move quickly and decisively to push CREATE forward and to ensure its passage urgently, ideally before Congress adjourns on June 3. Any further delay comes at the risk of of losing more jobs and hemorrhaging more investments. Pass CREATE now!,” the business groups said in a joint statement.
However, IBON Foundation Executive Director Sonny Africa recently criticized the move to pass the CREATE bill, saying that it is the rich that will be benefit from the biggest corporate tax break in the Philippine history.”
Africa also lamented in the same commentary that the Duterte administration is “being hugely opportunistic in exploiting the COVID-19 crisis to push their long-standing TRAIN (Tax Reform for Acceleration and Inclusion) agenda of raising consumption taxes on poor and low-income groups while reducing taxes on the rich”, citing the proposal of Socioeconomic Planning Secretary Karl Chua to impose higher consumption taxes.
Responding to the criticism that the government is “giving up P667 billion in potential COVID-19 response funds to boost corporate profits,” Finance Assistant Secretary and spokesperson Tony Lambino told BusinessMirror that micro, small and medium enterprises are the main beneficiaries of the CREATE through the reduction of CIT rate.
“This will help them retain workers and pay their bills during this crisis period. Our current CIT rate is the highest in the ASEAN region and a burden especially to small businesses,” Lambino said in a text message.
Under the current setup, the finance official argued that smaller businesses pay the higher CIT rate at 30 percent while many of the largest companies are effectively paying 6 to 13 percent because of special tax treatment.
“In stark contrast, many of the largest companies receive special tax treatment—only 3,150 companies out of more than 989,000 BIR-registered firms in the country. This minority effectively pays 6 to 13 percent versus the 30 percent CIT rate that smaller businesses pay. This group that receives special treatment was granted this type of incentive indefinitely, with no time limit,” he said.
“Given the current crisis, the CREATE bill proposes a longer extension or sunset period for this group, from four to nine years, but not forever. Under the bill, however, they can also apply for new incentives,” he added.
In the same commentary, Africa also suggested that the funds for the COVID-19 response could instead be sourced from the accumulated wealth and income of the rich.
The non-profit research group is proposing that the government impose wealth tax, higher taxes on large corporations and higher taxes on the richest Filipinos.
“There’s no reasonable argument that taxing their wealth above P1 billion will adversely affect their well-being and welfare. A wealth tax of 1 percent on wealth above Php1 billion, another 2 percent above P2 billion, and another 3 percent above P3 billion will raise P236.7 billion annually from these 50 richest alone. They are not going to be spending this anyway versus the huge social, economic and health returns from using this for COVID-19 response,” Africa said.
“Other tax measures can also be considered. A two-tiered corporate income tax scheme with higher taxes on large firms and lower taxes on micro, small and medium enterprises can be designed to generate about Php70 billion annually. Similarly, a personal income tax scheme with higher taxes on just the richest 2.5% of Filipino families can raise about Php127 billion annually,” he added.
But Lambino said there is a downside to the proposed two tier system by IBON Foundation as “global experience shows that a two-tier system gets gamed by firms.”
“For example, larger companies split into multiple, smaller companies so that they can enjoy a lower tax rate,” he said.
Image credits: AP/Wong Maye-E
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