In light of the COVID-19 pandemic, Package 2 of the Comprehensive Tax Reform Program (CTRP) was recalibrated to make it more relevant and responsive to the needs of businesses, especially those facing financial difficulties, and increase the ability of the Philippines to attract investments that will benefit the public interest.
Formerly the Corporate Income Tax and Incentives Reform Act (CITIRA), the recalibrated bill is referred to as the Corporate Recovery and Tax Incentives for Enterprises Act (CREATE). CREATE is one of instruments under the Philippine Program for Recovery with Equity and Solidarity or PH-PROGRESO, the proposed stimulus package of the economic team.
- House of Representatives: Approved on third and final reading (10 Sept 2019)
- Senate: Committee report filed (17 Feb 2020)
Below is a summary of key amendments that will make CREATE the largest fiscal stimulus program for enterprises in the country’s history. These are proposed to be incorporated into Senate Committee Report No. 50, the current Ways and Means committee report on CITIRA:
- An immediate 5 percentage point cut in the corporate income tax (CIT) rate starting July 2020. In the second half of this year alone, this will result in a reduction of government revenues estimated at P42 billion that all firms, especially the country’s micro, small, and medium enterprises (MSMEs), can use to fund their operations and retain employees. For the succeeding 5 years, the total estimate is P625 billion that these firms can invest in the revitalization of their businesses and create even more jobs for Filipino workers. This unprecedented investment reflects our resolve to vigorously fight the impacts of COVID-19 and get businesses back on their feet as quickly as possible.
- An extension of the applicability of the net operating loss carryover (NOLCO) for losses incurred in 2020, from the current 3, to 5 years for non-large taxpayers.
- Maintaining for up to 9 years the status quo for registered business activities enjoying the 5% gross income earned (GIE) incentive. The sunset period is prolonged by two years, from 2 to 7 years in the previous version, to 4 to 9 years under this proposal.
- More flexibility in granting fiscal and non-fiscal incentives, which will be critical as the country competes internationally for high-value investments.
|Provision||CITIRA||CREATE (Revised CITIRA)|
|Accelerated CIT rate reduction||1 ppt per year:
29% – 2020;
28% – 2021;
27% – 2022;
26% – 2023;
25% – 2024;
24% – 2025;
23% – 2026;
22% – 2027;
21% – 2028;
20% – 2029 onwards
|Outright drop to 25% until 2022; followed by a 1 ppt reduction yearly until 2027:
25% – July 1, 2020
25% – 2021
25% – 2022
24% – 2023
23% – 2024
22% – 2025
21% – 2026
20% – 2027 onwards
|Enhanced NOLCO for non-large taxpayers (non-LT)||None||Losses in taxable year 2020 can be carried over for the next 5 years|
|Power of the FIRB (Board)||None||Recommend to the President the grant of appropriate non-fiscal support, based on the SIPP, for highly desirable projects or very specific industrial activities.|
|Power of the President||Modify the period or manner of availment of incentives; availment of up to 40 years||Modify the mix, period or manner of availment of incentives for highly desirable projects or specific industrial activities to create high-value jobs and attract significant foreign capital or investment; incentives availment of up to 40 years|
|Strategic Investments Priority Plan (SIPP)||None||May contain recommendations for types of non-fiscal support needed to create high-value jobs and attract significant foreign capital or investment.|
|Additional 2-year sunset provision for currently registered firms with the various Investment Promotion Agencies (IPAs)||Under 5% GIE:
|Under 5% GIE:
Why the reform is needed
The Philippines currently imposes the highest CIT rate in the ASEAN region, which is a burden to MSMEs who are dealing with the effects of COVID-19. This hinders local businesses from expanding and growing. It also ultimately hampers the country’s ability to compete with other countries with a lower CIT rate.
CREATE seeks to vigorously fight the impacts of COVID-19 and get businesses back on their feet as quickly as possible. With an outright drop from in the CIT rate from 30% to 25% by July 2020, an estimated P42 billion in tax savings may be used by all firms, especially the country’s MSMEs, to fund their operations and retain employees. Over the next five years, an estimated P625 billion in tax savings can be reinvested by firms in the revitalization of their businesses and creation of even more jobs for Filipino workers. The DOF also proposed a 1 percentage point reduction yearly from 2023 to 2027 to bring down the rate to 20%.
The accelerated reduction in CIT also boosts the country’s bid to attract multinational firms seeking to diversify their production chains.
The larger reduction also brings the country closer to the ASEAN CIT rate average of 23% and will boost cost competitiveness in doing business. A lower CIT rate, combined with the country’s strong demographic and financial fundamentals, will make strengthen the country’s case for more and better investments.
ASEAN average 2017, ASEAN briefing (https://www.aseanbriefing.com/news/comparing-tax-rates-across-asean/)
We have a corporate tax incentive system that is overly generous to a few companies at the expense of the majority.
In 2017 alone, the Filipino people granted PHP 441 billion (or 2.8% of GDP) in tax incentives to only 3,150 companies, including those on the elite list of Top 1,000 corporations. These companies pay an effective discounted corporate income tax rate of 6 to 13%.
In contrast, under the current corporate taxation system, firms with no incentives, which include almost all of the country’s 90,000 SMEs, pay the regular CIT rate of 30 percent of their net taxable income–the highest in the region.
|Companies that do not receive incentives are subject to the regular rate of 30%||Companies that do receive incentives pay an effective rate of only 6 to 13%|
The Philippines is also the only major economy in the world with a system that grants incentives to companies in perpetuity or “forever.” All other countries have a maximum duration and it applies only to few highly targeted industries and is not automatically given.
Every peso granted as tax incentive is a peso off the budget that could have been spent for infrastructure, health, education, and social protection that benefit all, and not only a few. Around half of these incentives granted are worth it and yield a net positive benefit to the Filipino people; however, around half of these incentives are unnecessary or redundant.
PHP 441 billion of foregone revenues in 2017 could have funded…
CREATE seeks to promote a fair and accountable tax incentives system to make sure that every peso granted as a tax incentive yields a net positive benefit to society and that the industries and locations that deserve help are truly supported.
Under CREATE, incentives will be:
Under Package 2, incentives will be:
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UPSEAA CBA presentation delivered by Usec. Karl Kendrick Chua (Oct 21, 2019) Download File
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