House, Senate approve corporate tax breaks

The Senate and the House of Representatives on Wednesday ratified a key economic reform bill that would give companies a “much needed tax break” by lowering the corporate income tax after the two chambers agreed on a consensus version.

The Senate approved the final, uniform version of the proposed Corporate Recovery and Tax Incentives Reform Act, or CREATE, on Wednesday afternoon, a few hours after it was passed by the House.

CREATE, formerly called Citira, or the Corporate Income Tax and Incentives Reform Act, will lower the corporate income tax immediately from 30 percent to 25 percent.

Sen. Pia Cayetano, who led the Senate contingent during bicameral discussions on the bill, said she was happy over finally finding common ground with the House on the bill after it was sidelined for years.

“I am elated, I am giddy with excitement to report to the Senate on the approved version of the CREATE Bill,” she told her colleagues.
Cayetano outlined the major provisions of the bill in the bicameral report:

• Exemption of COVID-19 vaccines from import duties
• Enterprises given the option to choose between the Special Corporate Income Tax of 5 percent or Enhanced Deductions after enjoying Income Tax Holiday (ITH)
• Higher incentives for enterprises located outside of metropolitan areas
• Additional incentives for enterprises that fully relocate outside the National Capital Region
• Additional incentives for those that will locate to areas that are recovering from disasters or armed conflict

Some key provisions in the Senate version that were retained in the bicameral report were:

• Immediate reduction of the corporate income tax to 20 percent for domestic corporations with total assets not exceeding P100 million (excluding land) and total net taxable income not exceeding P5 million; 25 percent for all other corporations
• 1 percent minimum Corporate Income Tax (MCIT) effective July 1, 2020, until June 30, 2023;
• 1 percent tax rate for Proprietary Educational Institutions and Hospitals which are nonprofit effective July 1, 2020, until June 30, 2023
• Value added tax (VAT) exemption threshold for socialized and lowcost housing to P2.5million and P4.2 million for house and lot
• VAT exemption for medicines for cancer, mental illness, tuberculosis, and kidney diseases beginning Jan. 1, 2021
• VAT free importation and sale of COVID-19 medicines, PPEs from Jan. 1, 2021 to Dec. 31, 2023.

“Instead of just a 1 percent drop in corporate income tax, we are giving an immediate 5 percent drop, reduction of our corporate income tax rate. It will now stand at 25 percent. And for MSMEs (micro, small and medium enterprises), it will be 20 percent depending on certain conditions as reported earlier,” Cayetano said.

Sen. Sherwin Gatchalian described the CREATE bill as a “much-needed tax break” for many pandemic-hit companies that were still struggling with their finances. It could prevent “a wave of insolvencies that could affect the country’s economic growth in the long run,” he said.

House tax panel chief Albay Rep. Joey Salceda said that with CREATE, “we are lowering corporate income tax to bring it closer to the Asean region’s average.”

Asean is the 10-nation Association of Southeast Asia Nations that includes the Philippines, Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Singapore, Thailand and Vietnam.

“I expect at least P12 trillion pesos in combined domestic and foreign investment over the next decade due to CREATE alone. $90 billion of that will be FDI (foreign direct investment),” he said.

Once passed into law, he said, it would create about 1.8 million jobs over the next ten years.

“Combined with economic amendments to the constitution to maximize impact, we can produce some 8.4 million jobs,” he added.

According to him, the measure would end the “hesitation” of foreigners to invest in the Philippines.

Salceda said that before the Senate and the House agreed to the consensus version, the Philippines lost $18 billion in foregone FDI from 2018 to 2020.

“The bleeding stops now,” he said.

CREATE would result in about P931 billion in tax savings for businesses over ten years and foregone revenues for the government, and this would “frontload relief and cover the economic gap brought about by COVID-19,” Salceda said.

The proposed law would be “the greatest economic reform of the post-EDSA years, second only to economic amendments to the Constitution,” he said.

Speaker Lord Allan Velasco said that the approval of CREATE and efforts to amend the Constitution, “we are confident that we can hasten our economic recovery, attract more local and foreign investors and create jobs for the Filipino people.”

When the Philippines slid into a pandemic-induced recession last year, the Department of Finance and Congress agreed to tweak the CREATE bill to attune it to the harder times as businesses struggled and investments halted.

Last month, Finance Secretary Carlos Dominguez III said the tax savings from lower rates which were expected to be reinvested by companies, plus the array of perks in CREATE would be “the largest economic stimulus package for private enterprises in our country’s history.” 

“CREATE proposes more flexibility in granting fiscal and non-fiscal incentives, which will be critical as the Philippines competes internationally for high-value investments. Increased foreign investors will mean more job opportunities and economic progress for our country,” he said.

While CREATE is being lauded for the tax reforms that it promises to institute, an economic think tank said insertions were made in the bill that would tie the hands of the president and the future Fiscal Incentives Review Board (FIRB) from regulating corporate incentives granted by lawmakers.

The final bill kept many of the good provisions of the Senate version, but a number of questionable provisions were inserted, according to an economic think tank.

Under the CREATE Act, the Fiscal Incentives Review Board (FIRB), which is co-chaired by finance and trade chiefs, can approve or disapprove the grant of tax incentives to projects above P1 billion.

The president can modify these tax breaks to attract certain big ticket investments, letting them enjoy these for up to four decades, “in the interest of national economic development,” according to the bill.

The inserted provisions essentially exempted legislative franchises from being reviewed by either the FIRB or the president, which might lead to abuse, said the independent think tank Action for Economic Reforms (AER).

But the tax and duty incentives granted through legislative franchises “shall be excepted” from the powers of the president to “review, withdraw, suspend, or cancel tax incentives and subsidies,” according to a copy of the consensus bill obtained by the Inquirer.

Another provision will also exempt legislative franchises from having their tax breaks reviewed or cancelled by the FIRB.

“This provision opens the floodgates for gaming by vested interests who want to receive incentives without being subject to rigorous scrutiny,” AER said in a statement.

“The governance of the FIRB keeps firms accountable and competitive, and removing the FIRB’s power to withdraw incentives from legislative franchises goes against the core principles of CREATE,” AER said. 

Filomeno Sta. Ana III, AER cofounder and coordinator, told the Inquirer that this provision were not found in the Senate’s CREATE bill or in the House’s Citira.

According to an opinion piece by Tony La Viña, a professor of constitutional law, the primary objective of a legislative franchise is to benefit the public, while the rights and interests of the franchisee are second.

A recent example of this is San Miguel Corp.’s airport project in Bulacan, which had quickly secured a 50-year legislative franchise.

Crude oil imports of local refineries would also be exempted from applicable duties and taxes, AER said.

This exemption would be “discriminatory” and gives advantages to certain importers, AER said, adding that oil refineries were not a part of the Strategic Investment Priority Plan (SIPP), which defines what activities would qualify for incentives.

The think tank also flagged the VAT exemption for low-cost and socialized housing, which raised the exemption from P1.5 million previously for residential lot to P2.5 million, and from the previous P2.5 million for house and lot to P4.2 million. It said such exemptions were not “a focal point of CREATE.”

“For the poor to substantially benefit, these exemptions must be limited to goods and services that are consumed by the poor,” AER said.

“Poor households do not benefit from VAT exemptions on housing; these exemptions only benefit the rich while funneling funds away from development programs for the marginalized,” it added.

The group called on President Duterte to exercise his line item veto powers to strike out these three “questionable” provisions that were inserted into the final CREATE bill. WITH A REPORT FROM BEN O. DE VERA