TWENTY-SIX economists from the top universities in the Philippines have issued a position paper opposing passage of the Corporate Recovery and Tax Incentives for Enterprises Act (CREATE) bill, saying it added undue uncertainty—the last thing that businesses need while trying to recover from the Covid-19 pandemic.
Some of them propose breaking up the CREATE into three bills to reflect its main goals, starting with the corporate income-tax reduction, which some economists had said would make Philippine businesses more competitive with their rivals, though some quarters now say the revenue loss to government at this time is not worth the price.
Economists from the University of the Philippines Diliman (UPD), University of the Philippines Los Baños (UPLB), Ateneo de Manila University (ADMU) and the De La Salle University (DLSU) said the bill was inequitable and inefficient.
The position was issued after three of its signatories—former UP School of Economics Deans Raul V. Fabella and Ramon L. Clarete and Ateneo School of Government Dean Ronald Mendoza—aired their personal opposition to the bill.
“It is in fact a mere tax relief for incorporated businesses, equivalent to a subsidy, leaving out microenterprises and unincorporated small and medium enterprises [MSMEs]. CREATE definitely falls short in terms of distributive justice,” the economists said.
Some of the economists had earlier expressed support for the initial incarnation of the second key package of the comprehensive tax reform package that was billed—before it became CREATE—as Trabaho bill, then Citira, for Corporate Income Tax and Incentives Rationalization Act. But, they said, this was before the Covid-19 pandemic, which has completely upended economic assumptions worldwide and driven countries into recession.
Apart from the decline in government revenues due to the corporate income tax (CIT) reduction to 25 percent from the current 30 percent, the economists expressed concern that passing the bill would negatively impact firms in export zones under the Philippine Export Zone Authority (Peza).
Under the proposed bill, the gross income tax of 5 percent of these firms will expire in 4 to 9 years and a flexible special incentive scheme will be in place, which may not be welcomed by foreign investors.
“[The bill] is fraught with risk and uncertainty. And we simply cannot afford to add more uncertainty during this fragile recovery period from the Covid-19 pandemic,” the economists said.
Break up into 3 bills
Instead, the economists are proposing that the aims of the CREATE be unbundled and included in three separate bills—one each for corporate tax reforms, special fiscal and investment incentives, and for Peza firms.
The economists also said the National Economic and Development Authority (Neda) should step up to draft a long-term development plan as head of the Inter-Agency Task Force for the Economy Moving Forward as One (IATF-EMF1).
The Neda, the economists said, should monitor Program Action Plans (PAPs) for outcomes and recommend which of them deserve to be permanent.
The priority should be on direct measures to strengthen the country’s health and social protection systems as part of a “build-back-better” plan.
“We underscore the importance of having a long-term development plan geared toward stable, sustainable and equitable growth that will accompany the business survival and economic recovery plan from the Covid-19 pandemic,” the economists said.
Expanding the social protection program and strengthening the health system of the country would make for a better legacy for the Duterte administration rather than the passage of additional tax measures.
In a paper presented in a recent joint hearing of the Senate Committees on Finance and Economic Affairs, Mendoza said the government should not rush into passing the CREATE bill, also known as Citira, Trabaho and Train 2.
Mendoza said the CREATE is a complicated reform which the current administration may not have enough time to implement. He added that the government’s efforts should be directed toward the response for the Covid-19 pandemic.
“With so little time left, and given the monster [i.e., Covid-19] staring us in the face right now, the de facto reform legacy of this administration could be the Universal Health Care [UHC Law] and social protection [4Ps Law], which can use further boosting and strengthening during the Covid-19 pandemic,” Mendoza said.
Mendoza said that while CREATE was a sound reform on paper, implementing it may be difficult given this administration’s track record of carrying out economic reforms.
He said the administration also encountered a lot of bad timing in the implementation of its recent reforms, particularly Train 1 and the Rice Trade Liberalization (RTL) law.
Mendoza said Train 1 was implemented during a time of high fuel prices, while the RTL was passed and signed into law shortly before a series of droughts was experienced by the country’s sources of imported rice.
Implementing the CREATE at this time, Mendoza said, would not be beneficial given the economic downturn being experienced by countries whose investors the Philippines was looking forward to attract.
“Many of us economists actually once supported them. But in practice and once implemented under this administration, many of our economic reforms hit into the stark reality of weak state capability to execute policy. And also quite a bit of bad timing,” Mendoza said.
However, some economists still feel that passing the CREATE was still needed at this time given the kind of relief it would bring to local firms.
Unionbank Chief Economist Ruben Carlo O. Asuncion said CREATE can help the economy bounce back from the current crisis. He added that suggestions to split CREATE would not be beneficial.
Asuncion said policy reforms such as CREATE need to be implemented in its entirety and not piecemeal, like the suggestion of Sen. Imee Marcos. (See: businessmirror.com.ph/2020/05/26/imees-pitch-lets-approve-cit-cut-first/)
“Parts of the bill addressing corporate taxes and the one rationalizing incentives are very related and equally important in reforming our industrial development policy,” Asuncion told this newspaper.
“The flexibility CREATE affords will help us address our lack of industrial development focus and we will be able to target what we want to have for this country finally,” he added.
DLSU economist Maria Ella C. Oplas agreed but told the BusinessMirror the CREATE needs some tweaking, especially in light of the current situation.
Oplas said the reduction in corporate income tax is of particular importance at this time, but the elimination of tax incentives could wait.
She said the elimination of incentives can be reviewed in light of the Covid-19 situation. The government can consider extending the incentives due to the crisis.
“While there is wisdom in passing the Citira [CREATE] bill, I believe that our government must recognize that large or small, no business was spared from the wrath of Covid-19,” Oplas said.
For its part, the Action for Economic Reforms (AER) recommended to retain the current fiscal incentive system instead of shelving the CREATE bill.
In a statement, AER said cutting the corporate income tax to 25 percent from 30 percent is “contingent on job preservation or job creation.”
The reduction in corporate income tax will help firms retain their workforce and could even expand it by hiring additional workers.
“This is a social bargain,” AER said. “The heart of the stimulus is found in the bill’s title: CREATE. Tying the corporate tax reduction to creating jobs is thus essential.”
Two former deans of the University of the Philippines School of Economics (UPSE) have already voiced out their reservations with the passage of the CREATE bill.
Former UPSE Deans Fabella and Clarete believe the revenues that government stands to lose due to the CREATE are too high a price to pay at this time when there is a need to increase the tax effort.
Clarete said that while past crises such as the Asian Financial Crisis and the Global Economic Crisis have forced the country to bring down corporate income taxes to encourage more firms to pay their taxes, it was only when the economy recovered that government revenues improved.
He added that CREATE will not allow the country to attract businesses to boost the economy. Clarete said it is only at the end of the Covid-19 crisis that investors can regain the confidence they once had when investing.
Fabella said the looming U-shaped recovery will make it harder for the government to realize the gains of the new tax reform. Whether the tax rate is 30 percent or 25 percent, if the income of firms is zero, no taxes will come of it.
He added that the expanded net operating loss carryover (Nolco) will also not do any good given that many firms may not survive the current crisis.
“The massive multiplier argument parlayed by the Department of Finance (DOF) for CREATE seems dreamy in a free-falling economy,” Fabella said in a recent column in a business daily.
The changes to the second package of tax reform, which will now be named CREATE, include an immediate cut in corporate income taxes by 5 percent starting July 2020, up to 2022, to be followed by a 1-percent cut every year until the rate reaches 20 percent, or 3 percent lower than the Asean average of around 23 percent.
Other amendments include a more universal Nolco provision, which will extend the carryover period of net losses in 2020 by two more years, prolonging the carryover period from three to five years. This will allow firms to utilize net losses in 2020 as additional deductions to their taxable income from 2021 to 2025.
The Fiscal Incentives Review Board, whose functions will be expanded under the bill, will also have the power to recommend the grant of longer tax incentives and nonfiscal incentives to deserving companies.