FINANCE Secretary Carlos G. Dominguez III said the timely enactment of the Corporate Recovery and Tax Incentives for Enterprises (CREATE) Act will provide the much-awaited relief for many businesses, including micro, small and medium enterprises (MSMEs), and their workers reeling from the Covid-driven recession.
President Duterte on Friday signed the CREATE law, which provides one of the largest stimulus packages ever in the country’s history through a drastic reduction of the corporate income tax (CIT) rates and redesigned fiscal incentives system to better attract investments and create jobs.
However, Duterte vetoed nine items.
Nonetheless, DOF said MSMEs, which employ a majority of Filipino workers in the country, will be the biggest beneficiaries of CREATE through the grant of the “largest ever CIT rate reduction” in the country.
“The CREATE Law will right away benefit MSMEs by way of lower CIT rates and other tax relief measures.
This culmination of years-long intense discussions on the rationalization of tax incentives for businesses spells finis to the prolonged investor uncertainty over the final shape of this corporate taxation reform, and signals to the rest of the world that the Philippines is back in the game to attract investments, create jobs and achieve inclusive growth,” Dominguez said in a statement on Sunday.
CREATE cuts the current CIT rate at 30 percent—the highest in the Southeast Asian region—to 20 percent, for domestic corporations with a taxable income of P5 million and below, and with total assets of not more than P100 million.
All other domestic corporations will benefit from an immediate reduction of the CIT rate from 30 percent to 25 percent. Foreign corporations currently paying the regular rate will also enjoy a reduced 25-percent CIT rate.
“In the long run, savings from the reduction in CIT rates will provide enterprises with more resources to re-invest in their businesses or expand their operations and thus create more jobs. The modernization of the fiscal incentives system with the inclusion of more generous or attractive come-ons will let the government attract the right kind of investors that it wants to do business in the country to provide quality jobs and better opportunities for the Filipino people,” he added.
The finance chief also thanked Duterte and legislators for supporting the swift recovery of the country’s enterprises hard-hit by the coronavirus-driven global economic recession.
“The enactment of CREATE amid the lingering pandemic is a much-awaited relief for many businesses, especially our MSMEs, and their millions of Filipino workers reeling from the unprecedented economic turmoil set off by Covid-19 across the globe,” he said.
Under the law, corporate taxpayers whose gross sales or receipts do not exceed the value-added tax (VAT)-exempt threshold of P3 million and are subject to the 3-percent percentage tax will only pay 1 percent instead from July 1, 2020 to June 30, 2023.
Proprietary and non-stock educational institutions and hospitals are also among the major beneficiaries of this law: CREATE will reduce the preferential tax rates they are paying from 10 percent to 1 percent from July 1, 2020 to June 30, 2023.
On the long-overdue fiscal incentives reform, CREATE proposes more flexibility in the grant of fiscal and non-fiscal incentives, deemed critical as the country competes for high-value investments from overseas now and in the post-pandemic era.
For enterprises undertaking activities considered priority by the government, DOF said CREATE provides for a “generous incentives menu” that offers tax discounts on the basis of their strategic benefit to the country, such as ability to create jobs and promote countryside development.
Investment promotion agencies (IPAs) will also maintain their key investment promotion functions and powers under their respective charters, but the Fiscal Incentives Review Board (FIRB) will have oversight power over them.
The governance of tax incentives will also be placed under the FIRB, to be chaired by the DOF and co-chaired by the DTI. Dominguez said this set-up mirrors international best practice and is a major win for the Filipino people. The FIRB will ensure accountability and transparency in the grant of tax incentives to private corporations.
A Strategic Investment Priority Plan (SIPP) will also be formulated every three years to identify priority projects or activities that will receive the new set of generous incentives.
P477-B tax perks
Prior to CREATE, the government gave away P477.17 billion in tax discounts and exemptions to favored enterprises in 2018 alone, based on a DOF study utilizing data made available through the Tax Incentives Management and Transparency Act (TIMTA). These were granted without any mechanism in place to assess the net benefit to the economy derived from this select group of enterprises.
With CREATE, Dominguez said the administration has already accomplished about 90 percent of the Comprehensive Tax Reform Program (CTRP), pursued since Duterte assumed office in 2016.
However, the initial success of the Tax Reform for Acceleration and Inclusion (TRAIN) Act—the first package of CTRP—and the passage of CREATE cannot be attributed solely to the current government efforts to push tax reforms in the Congress, Dominguez said.
“In fact, our tax reform program is a logical continuation of the decades of reforms arduously passed by previous administrations,” he said. “We are not navigating blindly in pursuing these reforms. Instead, we are marching forward guided by the paths already plotted out before us.”
The finance chief urged Congress to pass this year the remaining packages of the CTRP, specifically the reforms in the real property valuation system and the proposed Passive Income and Financial Intermediary Act (Pifita)—as well as the remaining economic recovery legislation, the Government Financial Institutions Unified Initiatives to Distressed Enterprises for Economic Recovery (GUIDE) bill.
Dominguez also asked Congress to pass “doable” reforms to attract more foreign direct investments, namely, the proposed amendments to the Foreign Investment Act, Public Service Act and Retail Trade Liberalization Act.