Thirty one leading business groups including the prestigious Financial Executives Institute of the Philippines (FINEX), the Management Association of the Philippines (MAP), the Philippine Chamber of Commerce and Industry (PCCI), GoNegosyo, and the Chambers of Commerce from the Americas and Europe recently signed a manifesto expressing their support for the passage of the Corporate Recovery and Tax Incentives for Enterprises Act or the CREATE Law.
CREATE replaces CITIRA (Corporate Income Tax and Incentives Reform Act), the second tranche of tax reforms that has been stalled in the Senate for more than six months. It is vital that CREATE passes both Congress and the Senate before they go on recess on the sixth of June. The country’s economic future depends on it.
CREATE was crafted to save businesses in distress, stimulate the economy, and restore growth following the onslaught of the Wuhan virus. It is also designed to make the country more competitive in attracting the foreign direct investment (FDIs) we badly need.
As Finance Secretary Sonny Dominguez puts it, CREATE is the first ever revenue-eroding tax reform package proposed by the Department of Finance. In other words, instead of proposing more taxes and/or higher tax rates, CREATE aims to reduce it. With its passage, the government will forgo P625 billion in annual revenues and instead put these funds in the hands of the private sector. It is an expression of trust on the government’s part towards the private sector as it relies on the latter to use the tax savings to expand and create jobs.
CREATE is composed of four components.
The first is the immediate cut of corporate income tax from 30% to 25% starting July. The one-time 5% cut will be followed by an annual cut of one percent from 2023 to 2027. Not only will this relieve Filipino corporations of its heavy tax burden, it will also put the Philippines in step with the corporate income tax rates of our regional neighbors.
The standard corporate income tax rate in Singapore is 17%, it is 20% in Vietnam and Thailand, and 24% in Indonesia. One can understand why foreign investors shy away from the Philippines with our 30% tax rate. CREATE will even the playing field and make us more competitive.
The second component is to maintain, for a period of nine years, the tax rate of 5%-of-gross-income for companies already operating in the Philippines. This is meant to dissuade investors from leaving our shores whilst other incentives are rationalized.
The third component is to extend the applicable years to carryover net operating loss, from three to five years.
Small businesses are among the most severely hit by this pandemic and will surely book massive losses this year. This provision allows them to carry over the losses, thus lowering their tax obligations for the next five years. Small businesses can use their tax savings for re-investment.
The fourth component is to make our tax system more flexible by allowing the Fiscal Incentives Review Board (FIRB) to recommend to the President the grant of longer incentives and additional non-fiscal incentives for desirable foreign investors.
Secretary Dominguez made a very good point. He asserts that the Philippines has offered generous tax incentives to potential investors for 40 years, yet, has always had the least share of FDI among ASEAN-6. It is about time we accept that this one-size-fits-all approach does not work.
What the good secretary proposes is a one-on-one approach whereby our Investment Promotions Agencies speak to particular companies who are strategic to us. With flexibility in fiscal and non-fiscal incentives, we can tailor-fit the package of incentives to one that is most meaningful to them. We will have a higher probability of bagging investors this way.
What constitutes a strategic investor? It is one that offers pioneering technology, one that promises recurring and substantial export earnings, one that offers massive employment opportunities.
This law is critical especially since we have stiff competition to attract manufacturing companies leaving China. At least 2,000 companies from America, Japan, Korea, and the European Union are leaving China mainly for three reasons: 1.) To release their supply chains from dependence on the communist republic; 2.) Because of rising costs (labor and rent) and stricter environmental laws; and, 3.) As retaliation for not being forthright and withholding information on the lethality of the Wuhan virus during the first months of the outbreak.
I cannot overstate the urgency of implementing this tailor-fit approach to attract FDIs. Last week, Japanese Chamber of Commerce, Inc. estimated there could be at least 300 Japanese companies leaving China and the first choice of country to relocate to is Thailand at 28%, then Vietnam at 22%, then some to either Malaysia and Indonesia. No company said they would relocate to the Philippines. Instead, some of the 300 Japanese companies who have manufacturing bases in the Philippines may leave to consolidate their manufacturing in their new sites. This is aside from the US companies who have already left China but did not relocate to their oldest friend in Asia but instead went mostly to Vietnam.
Attracting FDIs is a high priority since we must generate jobs for nearly 3 million displaced Filipinos (possibly 6 million by July) and half a million returning OFWs. We need FDIs to hasten our transition from being a consumer-driven economy, which will only take us so far, to one that is led by production.
CREATE is a law that is long overdue. We could not enact it before because the government’s revenue collection ratio (vs. GDP) was low and to reduce tax rates would further starve the government of funds. But thanks to the TRAIN law, the revenues to GDP ratio has improved to an all time high of 16.1% (as of end 2019). We can now afford to enact this long-overdue tax reform.
I applaud the Department of Finance for coming-up with CREATE. It is a bold law that will forever change the business landscape of the country. It will have a profound effect on our economic future as we move forward.
I urge Congress and the Senate to please pass the CREATE bill before you go on break. We need this bill to help Filipino companies survive, revive the economy, and attract our fair share of FDIs. I, along with 31 business groups make this urgent appeal.
Andrew J. Masigan is an economist