Package 2: Corporate Recovery and Tax Incentives for Enterprises Act (CREATE)

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.

Legislative status

  • 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)
Tax benefit for business enterprises
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
  • An outright 5 percentage point reduction in the tax rate will benefit all business enterprises in the country that have not enjoyed any type of income tax incentive. The reduction will boost the efforts of enterprises, especially MSMEs, to protect jobs and recover from the challenges they have encountered due to COVID-19.
  • 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.
Enhanced NOLCO for non-large taxpayers (non-LT) None Losses in taxable year 2020 can be carried over for the next 5 years
  • The proposed amendment, which recognizes the unique circumstances businesses face in 2020, will be made available to struggling MSMEs that make up 99 percent of corporate taxpayers.
  • The enhanced NOLCO will extend the carry-over period of net losses in 2020 by two more years, 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 NOLCO amendment helps companies hardest-hit by COVID-19 recover by allowing them to deduct incurred losses from tax payments for a longer period, providing them more time to set their finances in order.
  • The amendment will reduce tax payments by P2.03 billion in 2024 and P 1.94 billion in 2025, using the proposed CIT rates.
Flexibility in the grant of incentives
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.
  • To allow the Philippines to take advantage of opportunities to attract especially large or particularly attractive investments, the FIRB, composed of the Secretaries of Finance, Trade and Industry, and NEDA, will have the authority to recommend to the President appropriate non-fiscal support, in addition to tax incentives. Such support may include facilitation of registration and certification requirements from government agencies; logistics support; customs facilitation; product testing and certification; training support; and shared/common services facilities for targeted investors.
  • Upon the recommendation of the FIRB, the President can approve a set of incentives with longer periods of availment, if necessary, to attract highly-desirable investments that will bring more employment, higher level of skills training, and greater value-added to the economy.
  • The flexibility accorded to the President is neither novel nor unique. Among our ASEAN neighbors, the Malaysian, Indonesian, Thai and Vietnamese authorities have been exercising a similar level of discretion in granting incentives to boost their attractiveness and achieve their economic objectives.
  • Our proposal is to work within the boundaries of a performance-based, targeted, time-bound, and transparent system, but not be confined to a “one-size-fits-all” type of incentive regime that we have at present. As economic trends evolve faster than regulation can keep up with, we believe that this ability to tailor-fit incentives will help us attract highly desirable investments.
Longer sunset period for firms currently enjoying incentives
Additional 2-year sunset provision for currently registered firms with the various Investment Promotion Agencies (IPAs) Under 5% GIE:

Sunset No. of years under GIE
2 More than 10
3 5 to 10
5 Below 5
7 100% exporter; with at least 10,000 employment; footloose projects or activities
Under 5% GIE:

Sunset No. of years under GIE
4 More than 10
5 5 to 10
7 Below 5
9 100% exporter; with at least 10,000 employment; footloose projects or activities
  • By extending the sunset period for IPA-registered firms, we directly address their requests for ample time to adjust to the new incentive scheme.
  • Even with the extended sunset period, we believe that many, if not most, firms will find the modernized incentives system more attractive and better-suited to their needs. We have thus maintained the option to shift to the new tax incentives regime, instead of availing of the sunset period.

Why the reform is needed

Problem 1:

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.

Comparative CIT rates in ASEAN

Solution 1:

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%[1] 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.

[1]ASEAN average 2017, ASEAN briefing (https://www.aseanbriefing.com/news/comparing-tax-rates-across-asean/)

 

Problem 2:

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…

Foregone revenues in 2017

 

Solution 2:

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:

Package 2 principles

 

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