By Kyle Aristophere T. Atienza, Reporter
THE PHILIPPINE government expects to forego P5.9 billion in tax revenue in the next four years from a new law that expands fiscal incentives and lowers corporate income tax (CIT) on certain foreign enterprises.
But these losses under the Corporate Recovery and Tax Incentives for Enterprises to Maximize Opportunities for Reinvigorating the Economy (CREATE MORE) Act could be offset by an increase in foreign direct investments (FDI) and new taxes, government officials said.
President Ferdinand R. Marcos, Jr. on Monday signed into law the CREATE MORE Act, which further reduces the CIT to 20% from 25% for registered business enterprises (RBE).
“This law will surely be useful in attracting investment because we’re reducing income tax rates and then reducing the cost of doing business by reducing duties, especially for exporters,” Finance Secretary Ralph G. Recto told BusinessWorld on the sidelines of a signing ceremony on Monday.
The Philippines has been a laggard in the region in attracting foreign direct investments, with economists citing inadequate infrastructure, high power costs, unstable policies, red tape and foreign ownership limits.
In 2023, net inflows of FDI into the Philippines fell by 6.6% to $8.9 billion.
A Palace handout showed the bulk or P4.06 billion of the revenue losses from CREATE MORE in the next four years are due to the reduction in CIT for RBEs.
An estimated P926.82 billion in revenue losses are due to the law’s provision which doubled the RBEs’ additional power expense deduction to 100%.
The law also allows an additional 50% deduction for expenses related to trade fairs and tourism reinvestments until 2034, which will result in revenue losses of P601.89 billion.
Under the new law, application of the net operating loss carryover may be carried out as a deduction from gross income within the next five years immediately following the last year of the project’s income tax holiday. This provision will result in P290.57 billion in revenue losses in 2028.
Asked how the government could offset the projected revenue losses, Mr. Recto said these are just “paper losses… estimates.”
“We have other revenue measures which we’re pursuing. I just discussed also with the Speaker and the Senate President some financial taxes that we are reconsidering,” he added.
Mr. Recto said the government faces a “tough balancing act between giving incentives and raising revenue.”
“You want more volume of investments, and we need those investments. Jobs will be created,” he explained. “There will be withholding taxes. So, I don’t think it will erode the tax base.”
Asked whether or not the law could affect the country’s fiscal plan and budgetary requirements, Mr. Recto said: “We just plan accordingly. If there’s a revenue loss here, then we look for another bill that will gain the revenue.”
House Ways and Means Chair Jose Maria Clemente S. Salceda, speaking on the sidelines of the signing ceremony, said the new law’s impact on government revenues will be felt “probably in the first phase” and will be “short term.”
“But we expect the velocity of the economy to offset the reduction in rates basically through new investments,” he added.
“If they don’t invest, there’s nothing to erode,” he said when asked to react to earlier remarks that the measure could erode the government’s revenue base. “In other words, in fact, it gives us a chance to come in.”
Mr. Marcos, in his speech at the signing ceremony, said the law was “hard-fought and hard-won.”
It’s the government’s “resounding testament of our commitment to make the Philippines the destination of choice for investments,” he added.
Under CREATE MORE, RBEs will have the option to avail either of the special CIT of 5% or the enhanced deduction regime, which were both extended from the initial maximum 10-year period to a maximum duration of 10 to 27 years, immediately at the start of commercial operations.
The law entitles labor-intensive projects to an extension of five to 10 years.
Under the new law, export-oriented enterprises’ local purchases are zero-rated while importations are exempted from value-added tax (VAT).
This would “address the cash flow issues of direct exporters as they no longer have to tie up funds in VAT payments that would otherwise be refunded later,” the Department of Finance said in a statement.
The Action for Economic Reforms (AER), which was among the supporters of the CREATE Act of 2021, said the new law “carries with it a number of issues sure to worsen the country’s fiscal state.”
“For one, the law massively broadens the scope and coverage of incentives offered to investors in an attempt to drive investment inflow. Contrary to its proponents’ claims, however, this race to the bottom approach will not necessarily bring in additional investments and will instead result in the shrinkage of much-needed revenue for development,” it said in a statement.
Among the major concerns of AER is the transfer of most of the Fiscal Incentives Review Board’s (FIRB) functions to investment promotion agencies (IPAs), which the board is meant to oversee.
The law also allows the President to grant incentives without the recommendation of the FIRB, whose board is chaired by the Department of Finance.
This opens “more doors for abuse and corruption,” AER said, adding that giving the President the power to grant incentives “solely upon discretion” runs “contrary to the principles of good fiscal governance.”
“Such changes to our fiscal incentives system defeat the purpose of the original CREATE Act passed in 2021, which is to ensure that the incentive regime is time-bound, targeted, and performance-based,” AER said.
CREATE MORE fails to address “real hurdles” inhibiting investment in the country, including fiscal stability, sound governance, policy certainty, and reliable infrastructure, it added.
The Joint Foreign Chambers said the new law solidifies the Philippines’ “position as a competitive destination for investments and business expansion.”
“This legislation addresses the urgent need to review and revise the country’s investment incentive policies, ensuring they remain aligned with international standards,” it said in a statement.
George T. Barcelon, chairman of the Philippine Chamber of Commerce and Industry, said CREATE MORE will heavily benefit local manufacturers as it incentivizes exporters patronizing local products.
Secretary Frederick D. Go of the Office of the Special Assistant to the President for Investment and Economic Affairs said the new law has triggered “a lot of interest from foreign direct investors, especially the big ones,” including those involved in shipyard building as well as the electronics and renewable sectors.
Mr. Go said these investors are from South Korea, Japan, China, Australia, the United Kingdom, and the United States.
“The passage of CREATE MORE has triggered so much interest from foreign and domestic direct investors, especially the large scale ones. This is our main tool to make the Philippines an attractive investment destination,” Mr. Go said in a statement.
CREATE MORE also institutionalizes flexible work arrangements for RBEs operating within economic zones and freeports, without compromising their tax incentives.
Pre-CREATE registered business enterprises will continue to enjoy the national and local incentives previously granted to them until Dec. 31, 2034, according to the law.
In a statement, the Bureau of Internal Revenue said it will conduct a public information campaign on tax incentives granted by the new law “for the purpose of promoting the Philippines as a prime investment destination.”
Meanwhile, the Philippine Economic Zone Authority (PEZA) said domestic market enterprises will also benefit from the new incentive regime.
“This should stimulate domestic production by local manufacturers, including foreign investors going into import-substitution activities to cater to our growing domestic market,” it said in a statement.
The German-Philippine Chamber of Commerce and Industry, Inc. (GPCCI) also welcomed the signing of the law, whose key reforms include extension of tax incentives for up to 27 years and streamlining of tax refund processes.
“We share the goal of creating a more favorable business landscape to foster growth and job opportunities,” GPCCI President Marie Antoniette Mariano said. — with Justine Irish D. Tabile
