Creative tax adjustments

Governments are now out to find ways to revive their ailing economies in the wake of the pandemic. It’s already a foregone conclusion that the second quarter will show dire economic numbers on the incomes and jobs front. If government statisticians were able to proceed with the regular April round of the quarterly Labor Force Survey in the midst of lockdown, a drastic jump in unemployment (from 5.3 percent last January) up to the double digits is quite likely.

The sobering fact is that many of the local jobs frozen by the lockdown will not return beyond the pandemic. Restaurants are just one example where downscaling of the workforce will be inevitable. Many other types of business where physical distancing forces scaled-down operations will similarly let go of workers, if not close down altogether. On top of that, tens of thousands of our overseas workers are expected to return home, having lost their jobs in their similarly affected host economies. We need to protect existing jobs, but we must create even more for the substantial numbers of displaced workers as well.

This is why government’s ongoing tax reform program has to be part of the effort to protect and create even more jobs. The Department of Finance (DOF) has been quick to make needed adjustments on the major tax proposal now in the legislative mill, known as Citira (Corporate Income Tax and Incentives Rationalization Act). Partly giving in to earlier objections, but mostly in view of the urgent need to revive the battered economy, the DOF is now prepared to forego large revenues for the sake of economic revival—up to P42 billion this year, and P625 billion over the next five years. After all, like most other governments in the world, ours has accepted that it would have to incur a much larger deficit now and effectively absorb a higher level of indebtedness in the face of urgent needs. When the patient is in the sickbed, you first worry about bringing her back to health, before fretting over the hospital bills.

Thus, Citira—previously dubbed Trabaho, for Tax Reform for Attracting Better and High-Quality Opportunities, and before that, as Package 2 of TRAIN or Tax Reform for Acceleration and Inclusion—has undergone yet another name change, this time to CREATE, for Corporate Recovery and Tax Incentives for Enterprises. Even as it aims for the same ultimate tax changes pursued by Citira, the new name reflects its primary motivation, which leads to differences in the timing and manner of achieving the intended outcomes. The essence of the reform lies in two changes: (1) reduce the corporate income tax rate from 30 to 20 percent ultimately, to better align ourselves with the rest of our Asean neighbors, whose current rates range from 17 to 25 percent; and (2) rationalize various tax incentives that have bled the government of massive revenues in past years, many of them having been found unwarranted and unnecessary.

On the first, Citira would have lowered the tax rate yearly by one percentage point for 10 years (presumably to ease government’s revenue losses); CREATE will immediately reduce the rate to 25 percent until 2022, then lower it one percentage point yearly till it reaches 20 percent by 2027. On the second, Citira would have phased out perpetual incentives currently enjoyed by eligible firms within 2 to 7 years; CREATE lengthens that period to 4 to 9 years. Net operating losses incurred in 2020 may also be carried over up to five years, a relief to firms badly hit this year.

An important new feature allows government to offer tailored incentives to targeted major investors, something already done for years by our competing Asean neighbors. Using this strategically, Indonesia has reportedly grabbed a large share of investments exiting China because of both COVID-19 and the US-China trade war. Some worry that this authority could be misused and abused by a corrupt government. But like what I’ve said of the national ID, any good thing in the wrong hands could be used for evil ends. That’s why we need to ensure that we vote responsible leaders into office.

Via tax reforms or otherwise, now indeed is the time to create economic opportunities.

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