After months of intense wrangling, the Philippines moves to seal a key tax reform that the pandemic has rendered complicated—combining the urgency for an economic stimulus while overhauling a fiscal incentives system.
No one said tax reforms will be easy—not when they are being crafted, not when they are submitted to Congress, and certainly not when lawmakers are deliberating on them. Nowhere was this more true than in the case of the Corporate Recovery and Tax Incentives for Enterprises (CREATE), which finally hurdled the Senate on Thursday (November 26), nine months after the House of Representatives approved it.
Even before the Covid-19 pandemic, CREATE—or its previous incarnations in the House (Trabaho bill and Citira)—had already been contentious, mainly because of its key second plank, i.e., the rationalization of fiscal incentives.
When the lockdowns began in March, economic managers, especially Finance Secretary Carlos G. Dominguez III, found a good pitch for CREATE, in order to hasten its passage. The first plank of the bill, the reduction in corporate income taxes from 30 to 25 percent upon effectivity, would put Philippine business on a par with regional rivals. More than this, it would serve, said the DOF chief, as the single biggest stimulus badly needed by an economy pushed into recession by the virus-induced quarantines that shuttered businesses.
Still, the deliberations did not hinge simply on this “stimulus” card. Dozens of business groups, as well as the Joint Foreign Chambers of Commerce, pointed out that instead of being a stimulus, the CREATE bill as is would even deepen the misery of businesses by wiping out incentives that had lured investors into the country and encouraged them to stay.
Not that simple
As it turned out, senior senators pointed to this internal contradictions during their interpellations of the bill’s chief sponsor, Ways and Means committee chief Sen. Pia Cayetano. To her credit, Cayetano patiently walked the tightrope, brokering valid concerns raised on both sides—the executive and the legislative.
Much of the key amendments were introduced by Senate President Pro Tempore Ralph Recto, a former director general of the National Economic and Development Authority (Neda). At some point, the articulate senator clashed with think tank Action for Economic Reforms (AER), which opposed what it called his “killer amendments” that would so dilute the bill as to render it inutile as a tax reform.
In truth, balancing these two valid agenda—an economic stimulus for a prostrate economy (which was not in the original CREATE context since it was conceived prepandemic), while ensuring long-awaited tax reforms—made passage of the legislation truly challenging.
Primary goals met–AER
NONETHELESS, from the initial reactions of AER which watched over the proceedings hawk-like, the final product passed on final reading on November 26 served the purpose.
“The bill has met its primary objectives of making incentives time-bound and performance-based and rationalizing the governance of incentives through the Fiscal Incentives Review Board. We also hope that the sharp reduction of corporate income tax can be responsive to the stimulus and in the longer term, help make Philippine businesses competitive,” the AER said in a statement on Thursday night.
Another think tank that followed the CREATE’s long journey closely saw it quite differently, though.
In the view of IBON data bank, “CREATE is for big business more than MSMEs. The economic managers are being deceitful about CREATE as one of the largest stimulus measures in the country’s history to respond to Covid.”
IBON noted that CREATE will allow for some P139 billion in corporate income tax (CIT) cuts for 2020 and 2021, but, since large taxpayers represent more than 70 percent of collections from companies, then “CREATE isn’t really for MSMEs but for large firms most of all.”
IBON also pointed out that while “the revenue losses are certain and immediate,” the gains “are uncertain and may not even materialize.” The latter are “better collected and spent on Covid response instead of being added to the pockets of corporations.”
Compromises, fact of life
For its part, the AER, which counts some of the most tested political economists, the compromises made along the way, “specifically in having a longer transition for the ending of incentives” which Recto advocated, “are tolerable and will do no harm.” AER recognized “that the dynamics of the political economy led to these compromises.”
AER also disagreed with dual rates for corporate income taxes, “as this complication does not optimize revenues and could lead to the gaming of the system, thus abetting tax avoidance if not evasion.”
Nonetheless, AER concluded, “on balance, the gains are heavy and outweigh the costs.”
Most important signal
Perhaps the most immediate salutary effect awaited from passage of CREATE is its removal of what AER calls “policy uncertainty”—a real risk that business groups have long flagged, as this hindered investment decisions and supposedly even led to some investors that were looking to relocate from China during the pandemic to choose other Asean nations because they were tired of waiting for the Philippines to get its act together.
Better late than never, still. And AER expressed the hope “that the bill’s passage will signal to investors that the new rules, which are fair, predictable and simpler, are responsive and friendly to new foreign and domestic investors alike.” It added, “The bill’s passage will hopefully help rekindle animal spirits of investors to do business in the Philippines.”
CREATE also serves as a stimulus while the economy is in a slump from the pandemic, AER asserts, and thus goes along with the senators’ move to impose temporary “VAT exemption for medicines, vaccines, and medical equipment that are needed to fight Covid-19 and the reduction of the minimum corporate income tax from 2 percent to 1 percent, but all effective until the middle of 2023.”
Nonetheless, stimulus measures by their nature are temporary and these concessions are no exception, AER noted.
It celebrated moves in the Senate to prevent “a major dilution of the bill like excluding different economic zones from the reform of the fiscal incentive system.”
AER commended Senator Cayetano and other senators who supported the bill, as well as Albay Rep. Joey Salceda, the chairman of the House’s Committee on Ways and Means, “for the swift passage of the House version.”
The House and Senate versions “are easily reconcilable, for they both contain the major features of the reform,” said AER.
Yet even that concern of reconciliation has been mooted.
The House will adopt the Senate version, Salceda announced late Thursday, after earlier telling reporters that congressmen will first review the Senate version’s fiscal sustainability before deciding whether to push for a bicameral conference committee being convened, or going along with the bill approved by the Senate.
Salceda couldn’t resist preaching his gospel of reform at the end of the long bumpy ride to creating CREATE: “Reform of the fiscal incentives regime took more than two decades. Our outdated incentive system could have been reformed earlier had there been political will and less jockeying from vested interests. However, it is still a big win that the opportunity was seized at this time, and that this long-overdue reform has finally come to fruition.”
For the breaking story on CREATE’s passage in the Senate, please read: “Senate okays CREATE bill, Dominguez eyes new tax reform law by yearend”
Image credits: Joseph Vidal/Senate PRIB via AP, Contributed Image