Redefining Philippine Taxation: CREATE

Third of four parts

Republic Act No. 11534, also known as the Corporate Recovery and Tax Incentives for Enterprises Act (CREATE), is said to be the first-ever revenue-eroding tax reform package. The largest economic stimulus program in the country’s history, it provides major amendments to our tax and incentives laws with the goal of helping businesses move into post-pandemic recovery while encouraging foreign investments into the country. The law took effect on April 11, 2021.

The first and second parts of this four-part article discussed the passage and goals of the CREATE Act, as well as the exemption of foreign-sourced dividends, the repeal of improperly accumulated earnings tax, tax-free exchange, additional provisions to consider and provisions that were vetoed.

We continue by discussing the second salient feature of the CREATE Act: the codification and rationalization of Fiscal Incentives. In this third part, we cover the nature of incentives before CREATE, their centralization and administration, and how they are now more performance-based and targeted.

INCENTIVES BEFORE CREATE
The Department of Finance (DoF) had long since been pushing for tax reform and the rationalization of fiscal incentives to improve governance in the grant of incentives and promote a fair and accountable incentive system that is performance-based, targeted, time-bound and transparent.

Before the passage of CREATE, the various Investment Promotion Agencies (IPAs), such as the Philippine Economic Zone Authority (PEZA), Board of Investments (BoI), Bases Conversion and Development Authority (BCDA), Clark Development Corp. (CDC), and Tourism Infrastructure and Enterprise Zone Authority (TIEZA), administered their own investment regimes to registered business enterprises (RBEs) within their purview. In granting incentives, these IPAs exercised wide discretion, which allegedly resulted in detrimental and economically damaging competition among the IPAs.

As ASEAN integration progresses, a regional comparison of tax incentives becomes more relevant. Pre-CREATE, it was indisputable that the scope of tax incentives in the Philippines was far more generous than the rest of ASEAN. The Philippines appears to be the only ASEAN country that grants incentives in perpetuity. The perpetual grant of incentives, which is believed not to have attracted the commensurate new investments, expansion projects or measurable economic contributions, may have discouraged growth and resulted in tax leakages or foregone revenue (estimated at P441 billion in 2017).

By adopting a uniform policy and offering a single menu of incentives, the government hopes to cut down on redundancy and lost revenue.

CENTRALIZATION OF INCENTIVES IN THE FIRB
The consolidation of IPAs into one centralized agency has been long proposed in order to centralize the promotion and administration of incentives in a single agency, consistent with international best practice.

In a nutshell, CREATE centralized the oversight of the grant of incentives in the Fiscal Incentives and Review Board (FIRB). The primary role of the FIRB is to exercise policymaking and oversight functions on all RBEs and IPAs. As such, under CREATE, it is the FIRB that will, among other expanded functions, have the power to approve or disapprove the grant of fiscal incentives upon the recommendation of the IPA. The FIRB shall meanwhile delegate the grant of tax incentives to the IPA for investment projects involving P1 billion and below, though the President has clarified that the power of the IPAs to grant incentives only stems from a delegated authority from the FIRB. The FIRB is authorized to check whether the incentives granted by the IPAs conform with the intent to modernize the incentive system. The threshold, nonetheless, may be increased by the FIRB in the future.

Consistent with the declared policy to approve or disapprove applications on merit, the provision granting automatic approval of applications with complete documentary requirements within 20 days of submission was vetoed by the President, who said that there are other mechanisms to address inaction in the approval process.

TARGETING OF INCENTIVES
Codifying the longstanding intention to make incentives performance-based and targeted, CREATE categorized RBEs into export enterprises, which export at least 70% of their total production or output directly or indirectly; and domestic market enterprises (DMEs). The President vetoed provisions further categorizing DMEs into those that are engaged in activities classified as “critical” by the NEDA, and those with a minimum investment capital of P500 million.

Determining the availment period for incentives will be based on both the location and industry of the registered project or activity. This also includes other relevant factors as may be defined in the Strategic Investment Priorities Plan (SIPP), which is currently being worked on by various government agencies in consultation with the private sector.

Location is prioritized according to the level of development such that activities in areas outside or not adjacent to the National Capital Region (NCR) or other metropolitan areas can avail of longer incentive periods.

Meanwhile, the industry tiering of the registered project or activity is prioritized according to the national industrial strategy specified in the SIPP. We should note that the President vetoed the enumeration of specific industries in the CREATE Act to keep the law flexible enough to meet changing needs. As such, the activities and projects that may qualify should not be hardwired in the law so that the government does not keep on incentivizing obsolete industries and close its doors to technological advances and industries of the future.

With the targeted grant of incentives, the government hopes to attract the right kind of investors to do business in the country, particularly those that offer quality jobs and technology transfer, and can introduce new industries that would allow the economy to flourish.

In the fourth and final part of this article, we cover the periods of availment and the kind of incentives registered enterprises may enjoy.

This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinions expressed above are those of the authors and do not necessarily represent the views of SGV & Co.

Karen Mae L. Calam-Ibañez And Aiza P. Giltendez are a Tax Senior Manager and Manager, respectively, of SGV & Co.