Finance Secretary Carlos Dominguez III has sought the support of the business community in helping the economic team convince the Congress to pass in its last session week prior to its sine die adjournment a long-due corporate tax reform measure that will usher in the country’s biggest stimulus program for enterprises and send the strongest signal that the Philippines is “back in the game” amid the coronavirus pandemic.
Dominguez told business leaders this reform package, which provides for an outright 5 percent cut in the corporate income tax (CIT) rate and an improved set of flexible tax and non-tax incentives for investors, entrusts in the private sector the funds and resources needed to fire up the economy and quickly bring back the country to the path of high-and inclusive-growth.
Rather than increase the national budget and pass funds through less efficient government programs, Dominguez said the Duterte administration has decided that the more prudent and effective approach in ensuring the country’s recovery from the coronavirus disease 2019 (COVID-19) crisis is by reenergizing the business community through this tax reform, now dubbed the Corporate Recovery and Tax Incentives for Enterprises Act (CREATE).
Dominguez, who heads President Duterte’s economic team, said the large and immediate CIT cut from 30 percent to 25 percent will send “a strong signal to the world that the Philippines is positioning itself as a premier investment destination for companies that are looking to diversify their supply chains” in the wake of the global health emergency triggered by COVID-19.
“I invite all of you to participate in convincing our Congress of the need to urgently pass this bold reform. There is no better time to reform our corporate income tax system, and modernize our fiscal incentives system than now. This could be the most important economic reform in decades. As statements of our partners in industry and civil society show, the economy can no longer bear any delay in this reform. Now is the best time to do it,” Dominguez said during a virtual joint meeting of local and foreign business groups.
Held on Thursday afternoon through the Zoom video conference tool, the meeting was hosted by the Financial Executives Institute of the Philippines (FINEX), Management Association of the Philippines (MAP) and other business organizations.
“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,” the Finance chief added.
With the theme “Recovering with Resilience: The Philippine Economic Bounce Back Plan,” the meeting also included presentations by Bangko Sentral ng Pilipinas (BSP) Gov. Benjamin Diokno, Acting Socioeconomic Planning Secretary Karl Kendrick Chua, and Presidential Adviser for Flagship Programs and Projects Vivencio Dizon, who is also the president-CEO of the Bases Conversion and Development Authority (BCDA).
CREATE, which is the new version of the Corporate Income Tax and Incentives Rationalization Act (CITIRA), has been “recalibrated” to make it more responsive to the needs of businesses reeling from the pandemic and aims to upgrade the country’s ability to attract highly desirable investments at this time of a COVID-induced global economic slump, Dominguez said.
The 5 percent CIT reduction is estimated to reduce government revenues by P42 billion in the second half of the year alone if CREATE is implemented by July, and by another P625 billion over the next five years. These foregone revenues to fuel economic activity can be used by businesses, especially micro, small and medium enterprises (MSMEs), to fund their operations and retain their employees.
The urgent passage of the CREATE bill, Dominguez said, is one of the five measures that he has recommended to President Duterte to help the country beat the pandemic and bring it back to the path of inclusive and shared prosperity.
Aside from the outright tax cut, among the major features of the CREATE bill are the additional 1-percentage point reduction every year from 2023 to 2027 until the CIT rate reaches 20 percent; the extension of the sunset period for current incentive recipients from 2 to 7 years provided under the original CITIRA to 4 to 9 years to help them adjust in this difficult time; lengthening the period of the net operating loss carryover (NOLCO) for non-large taxpayers from the current three years to five years, which will be credited for losses incurred in 2020; and the flexibility of the Fiscal Incentives Review Board (FIRB), which will be allowed to recommend to the President the grant of longer incentives and additional non-fiscal incentives for deserving investments.
“Be assured that the Duterte administration will do its very best to protect the economic gains together we have made, support our recovery, strengthen our resilience, and bring us back to the path of inclusive and shared prosperity,” Dominguez told the business leaders during the virtual meeting. “This challenge will be surmounted with decisiveness, agility, and determination. We will beat this pandemic and come out even stronger and more resilient than before.”
Before COVID-19 plunged the world into a global recession, the Philippines was among Asia’s fastest-growing economies and enjoyed a stable and strong financial position as a result of President Duterte’s prudent fiscal management policies and his implementation of economic and tax reform measures, Dominguez said.
Even in the midst of the pandemic, the Philippines enjoyed a credit rating of “BBB+”–the highest rating we have ever received and only one notch below the sterling A territory–and was ranked 6th among 66 selected emerging economies in terms of fiscal strength, Dominguez added.
He said the President’s quick and decisive action to impose strict lockdowns in March following the local community transmission of the highly contagious virus helped the government meet President Duterte’s priority goal of saving lives and protecting communities in the face of the COVID-19 contagion.
The Congress also moved quickly by passing Republic Act (RA) 11469 or the Bayanihan to Heal As One Act, which grants the President expanded but limited budgetary powers to effectively carry out the government’s COVID-19 response.
This, in turn, enabled the government to pursue its four-pillar strategy to defeat the pandemic that has a combined value of P1.74 billion or 9.1 percent of the country’s GDP.
The four-pillar strategy covers the following: (1) providing poor and low-income households, small-business employees and other vulnerable groups emergency and wage subsidies (P595.6 billion); (2) marshalling the country’s medical resources and ensuring the safety of healthcare front-liners (P58.6 billion); (3) fiscal and monetary actions to finance emergency initiatives and keep the economy afloat (P1.1 trillion), and (4) an economic recovery plan to create jobs and sustain growth under a post-quarantine scenario, which will be funded largely by pillar No. 3.
On top of the urgent congressional approval of the CREATE bill, Dominguez has also recommended to the President the following priority measures: (1) reviving and accelerating the “Build, Build, Build” infrastructure modernization program, subject to compliance with minimum health standards; (2) hiring contact tracers to boost our efforts to treat infected persons and slow down viral transmission; (3)promoting the manufacturing of products that have strong, inelastic demand, such as food production and logistics, to stimulate demand; and (4) supporting their whole value chains, from inputs to packaging and logistics.
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