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CREATE bill not the way to help MSMEs

Reader, I have two documents regarding a bill being considered in Congress, entitled “CREATE” (formerly Citira).

One is a letter written by Finance Secretary Carlos Dominguez to Senate President Vicente Sotto III, extolling the bill as the “first-ever revenue eroding package proposed by the Department of Finance and the largest fiscal stimulus program for enterprises in the country’s history” (emphasis his), adding that the resulting reduction in government revenues, estimated at P625 billion over the next five years, could be used by all firms, “especially the micro, small and medium enterprises (MSMEs)” to fund their operations and retain employees.”

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The other is a “Joint Statement of Support for CREATE (revised Citira),” apparently the same day of the Dominguez letter to Sotto. This was signed by 33 associations, mostly business: Finex, PCCI, MAP, PMAP, Federation of Filipino-Chinese Chambers of Commerce, Bankers Association of the Philippines—the big guns of business. I was glad to see that the Makati Business Club was not one of them. And was horrified that Alyansa Agrikultura and the UPSE Alumni Association signed. You will understand my horror, as you read on.

Understand, Reader, I was in favor of Citira—the Corporate Income Tax and Incentives Reform Act. Who would not be? It was the second package of the Comprehensive Tax Reform Program, reducing the corporate income tax rates (revenue-negative for the government), but then also rationalizing the current investment tax incentive schemes (revenue-positive) which were costing the country at least 1 percent of GDP a year. In other words, the net effect of the reform would be revenue-neutral.

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Comes COVID-19—at least that is the excuse—and the above letter to Senator Sotto, which amends Citira in favor of CREATE, an acronym for Corporate Recovery and Tax Incentives for Enterprises Act (how that becomes CREATE is beyond me). Citira would reduce corporate income tax rates by 1 percentage point a year (from the current 30 percent), but CREATE would immediately reduce by 5, and then reduce it again by 1 percent a year in 2023 until 2027, when it would reach 20 percent. And the incentives rationalization, the sunset period for those firms now enjoying incentives, would be extended. Result? P625 billion revenue loss to government in the next five years.

Which would apparently, serve as a stimulus to enterprises, “ESPECIALLY the micro, small and medium enterprises (MSMEs).” Wait a minute. How much of that P625 billion would go to MSMEs and how much to large enterprises (corporations)? Because that would tell us whether the MSMEs would be ESPECIALLY stimulated.

No figures are given in the Department of Finance website to answer that question. All I see is a footnote that says that MSMEs make up 99 percent of corporate taxpayers. But that doesn’t say how much of the corporate income tax collected comes from MSMEs.

Let me give a stab at it. I will use a document from the Senate Economic Planning Office, “The MSME Sector At a Glance.” According to this document, in 2010 there were 777,687 business enterprises in the Philippines per the Philippine Statistics Authority. Of these, 99.6 percent (774, 664) are MSMEs, and only 0.4 percent (3,023) are large. Micros (709,899) have less than 10 employees, smalls (61,979) have 10-99 employees, mediums (2,786) have 100-199 employees, and large have 200 or more employees.

There is no way that 99.6 of the number of enterprises means that they pay 99.6 percent of the corporate income taxes. Only 19 percent of the small and medium enterprises (SMEs) are incorporated. Applying it to the above data, that means about 12,305 small and medium (only 2,786 are medium) enterprises are corporations. Most, if not all, of the large enterprises are corporations. Who do you think is going to benefit most from reduced income taxes and extended incentive periods—the large or the SMEs?

More to the point, my fiscal guru Nene Guevara says: “DOF reported that on average, SME firms lost 73 percent of their sales. Losing firms are not subject to a corporate income tax and will not benefit from a tax rate reduction. A corporate tax rate cut will not answer the liquidity problems of firms. Paying the corporate tax is perhaps the least concern of small enterprises.”

So how can this be a stimulus to MSMEs?

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Please. The MSMEs need help. This is not the way to help them.

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TAGS: business, Citira, CREATE, DOF, Dominguez, MSMEs, Sotto, Tax reform
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