Crucial tax reform
Finally, a major economic accomplishment from Congress. After three years of discussions, a bill reducing corporate income tax rates and revamping a flawed incentives scheme was recently passed by the legislature, and is now just awaiting the signature of the President for it to become law.
It is the second part of the Duterte administration’s tax reform package, the first being the landmark TRAIN law (Tax Reform for Acceleration and Inclusion). It started in 2018 as the Trabaho bill (Tax Reform for Attracting Better and High-Quality Opportunities). Unlike TRAIN, which focused on personal taxes, the Trabaho bill dealt with corporate taxation. When that bill failed to pass, the first version of what became the Corporate Income Tax and Incentives Reform Act was discussed in 2019. There was still stiff opposition and lobbying, so a more palatable version emerged last year, the CREATE bill (Corporate Recovery and Tax Incentives for Enterprises).
The main feature of the bill is the reduction in the corporate income tax rate by 5 percentage points to 25 percent, retroactive to July 2020, from 30 percent, the highest in the region. The reduction is bigger for MSMEs (micro, small, and medium enterprises), which will go down to 20 percent depending on certain conditions. The bill describes these firms as domestic corporations with total assets not exceeding P100 million (excluding land) and total net taxable income not exceeding P5 million.
Sen. Sherwin Gatchalian has described the CREATE bill as a much-needed tax break for many pandemic-hit companies struggling with their finances, and a measure that may help prevent a wave of insolvencies that could affect the country’s economic growth in the long run. It is estimated that CREATE will result in some P931 billion in immediate tax savings for businesses—money that the government is hoping will be used by companies to keep more of their workers.
The other component of CREATE revamps the government’s fiscal incentives system to give tax perks only to those deemed deserving of them. As House tax panel chief Albay Rep. Joey Salceda said, fixing the incentives regime to make it more performance-based was crucial. The current Investment Priorities Plan covers about 70 percent of gross domestic product. While willing to give incentives, the government now believes this should be linked with economic outcomes, which Salceda said would include better jobs, higher wages, more training
and research and development, and increased competitiveness. The bill proposes up to 17 years of incentives for exporters and “critical” domestic enterprises, with four to seven years of income tax holiday and 10 years of special corporate income tax. The critical industries will be defined by the National Economic and Development Authority. The bill has done away with perpetual tax incentives.
To help the government’s thrust of pushing investors to the countryside, the bill provides higher incentives for enterprises located outside of metropolitan areas, as well as additional incentives for enterprises that fully relocate outside the National Capital Region, and additional incentives for those that will locate to areas that are recovering from disasters or armed conflict.
Given the lingering pandemic, legislators decided to include some provisions that would help address the ill effects of the health crisis. The most important provision is the VAT-free (value-added tax) importation and sale of COVID-19 medicines and personal protective equipment from Jan. 1, 2021, to Dec. 31, 2023. Similarly, VAT exemption was given for medicines for cancer, mental illness, tuberculosis, and kidney diseases beginning Jan. 1, 2021.
Another important provision in CREATE is the higher VAT exemption threshold for socialized and low-cost housing of P2.5 million, and P4.2 million for house and lot.
Legislators deserve kudos for passing this crucial bill that is expected to be of significant help to the struggling economy. If Congress can now focus on discussing and transparently presenting to the public the pros and cons of liberalizing the restrictive economic provisions of the Constitution, and veer away from tinkering with political provisions that would arouse public suspicion of their motives and lead to social turbulence—the last thing the country needs at this time—then the momentum for economic recovery out of this pandemic may truly be on surer footing.
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