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

The economic team of the Duterte administration has proposed to the Senate several amendments to the Corporate Income Tax and Incentives Reform Act (CITIRA), the second package of the Duterte administration’s Comprehensive Tax Reform Program (CTRP), which was passed on 3rd and final reading by the Lower House in September, 2019 and has now been renamed CREATE.

We are proposing to recalibrate the bill to make it more relevant and responsive to the needs of businesses negatively affected by the COVID-19 pandemic, and to improve the ability of the Philippines to attract highly desirable investments that will serve the public interest.

The amendments make the proposed bill the first-ever revenue-eroding tax reform package proposed by the Department of Finance (DOF) and the largest fiscal stimulus program for enterprises in the country’s history. The revised bill also increases the ability of the President to approve tax and non-tax incentive packages to attract investments that will benefit the Filipino people.

The CITIRA bill, now the Corporate Recovery and Tax Incentives for Enterprises (CREATE) Act, was certified as urgent by President Duterte on March 9, 2020 and mentioned as a SONA priority this year as well as in previous years.

Legislative status

  • House of Representatives: Approved on third and final reading (13 September 2019).
  • Senate: Committee report filed (17 February 2020). Certified by the President for its immediate enactment on 9 March 2020. Currently under the period of interpellations.

Below is a summary of the economic team’s proposed amendments to 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. The corporate income tax rate will be reduced further by 1 percentage point every year from 2023 to 2027. In the second half of this year alone, this will result in a reduction of government revenues estimated at around PHP 37 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 about PHP 476.8 billion in foregone government revenues that these firms can invest in the revitalization of their businesses and to create even more jobs for Filipino workers. This unprecedented investment reflects our resolve to vigorously fight the impact of COVID-19 and get businesses back on their feet as quickly as possible.
  • Maintaining for up to 9 years the status quo for registered business activities enjoying the 5 percent tax on 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. This is a generous compromise for businesses that have been enjoying forever incentives, some for more than 40 years, which no other country offers.
  • More flexibility for the President to grant a combination of fiscal and non-fiscal incentives, which will be critical as the country competes internationally for high-value investments.

Even with these amendments, we maintain that the reform must continue to adhere to the basic principles of a system that is performance-based, targeted, time-bound, and transparent. These principles have been unanimously recognized by stakeholders during hearings and consultations. We believe that these amendments balance the interests of all stakeholders, while remaining faithful to the fundamental principles and mindful of the country’s fiscal challenges.

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 around 22% and will boost cost competitiveness in doing business. A lower CIT rate, combined with the country’s strong demographic and financial fundamentals, will strengthen the country’s case for more and better investments.
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 firms currently registered 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 micro, small, and medium enterprises (MSMEs) that are dealing with the effects of COVID-19. Even before the pandemic, the 30 percent CIT rate hindered local businesses from expanding, growing, and competing with their regional counterparts.

Solution 1:

CREATE seeks to vigorously fight the impact of COVID-19 and help get businesses back on their feet as quickly as possible. In the second half of this year alone, the accelerated reduction in the CIT rate will result in a reduction of government revenues estimated at around PHP 40 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 about PHP 600 billion in foregone government revenues that these firms can invest in the revitalization of their businesses and to create even more jobs for Filipino workers. This unprecedented investment reflects our resolve to vigorously fight the impact of COVID-19 and get businesses back on their feet as quickly as possible.

The larger reduction will also bring the country’s CIT rate closer to the ASEAN average of almost 22 percent[1] and will boost cost competitiveness in doing business. A lower CIT rate, combined with the country’s strong demographic and financial fundamentals, will strengthen the country’s case for more and better investments.

[1] Source: KPMG, Ernst & Young (EY)

Problem 2:

For decades, the Philippines has been too generous in granting tax incentives to a few investors, in perpetuity, and without a regular and in-depth review of the costs and benefits of doing so. We give away some of the most, if not the most, generous incentives in the region via a special rate of 5 percent on gross income earned (GIE) that is in lieu of all taxes, both local and national, and with no time limit.

While these companies are subjected to discounted tax rates equivalent to 6 to 13 percent of CIT, most other companies—including around 90,000 small and medium enterprises (SMEs)—pay the regular rate of 30 percent.

In 2017 alone, the Filipino people granted PHP 441 billion (or 2.8 percent of GDP) in tax incentives to only 3,150 companies, including those on the elite list of Top 1,000 corporations. This is just a fifth below the annual budget of the Department of Education (DepEd) and roughly four times larger than that of the Department of Health (DOH) in the same year.

PHP 441 billion of foregone revenues in 2017 could have funded…

Foregone revenues in 2017

In principle, granting incentives is justifiable if the recipients generate a net benefit to society, such as the creation of good jobs, investing in less developed areas, and if incentives are given for a generous but reasonable amount of time — not forever.

Solution 2:

Modernizing the fiscal incentive system will allow the government to offer superior incentives that are performance-based, strategically targeted, time-bound, and fully transparent. It will encourage businesses to invest in industries and sectors aligned with the Philippine development agenda; create higher-value jobs; incentivize upskilling and employee training, and promote investments in less-developed areas, and areas recovering from calamities or armed conflict.

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.

Under Package 2, incentives will be:

 

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