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Startup nation 2.0

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FINEX Folio — By J. Albert Gamboa-125

FINEX FOLIO

A relatively new state with a population of 8.5 million is fast becoming the closest competitor of America’s Silicon Valley as a global technology hub. Founded in 1948, the State of Israel has earned the nickname “Startup Nation” for having the biggest number of startups per capita in the world at the rate of one for every 1,400 people.

This phenomenon has attracted the attention of industry giants due to the outside-the-box entrepreneurship prevalent among young Israeli professionals. Next to the US and China, Israel now has the most number of companies listed in the tech-heavy Nasdaq stock exchange. A culture of innovation is embedded in the citizens of this Mediterranean country, with many startups being promoted and sold — fueling the motivation to create more technological solutions.

An example is FreeMap Israel, a community project set up by programmer Ehud Shabtai in 2006 aimed at crowdsourcing a free digital database map in Hebrew using GPS navigation software. To commercialize the project, he founded Waze Mobile Ltd. in 2008 together with entrepreneurs Uri Levine and Amir Shinar.

After several rounds of funding, Waze maps were upgraded to display real-time, community-curated points of interest that allowed the founders to monetize their mobile app through location-based advertising. Service coverage expanded to the US and Brazil, becoming such a big hit there and luring many buyers. In 2013, Google acquired Waze Mobile for almost $1 billion.

The Philippines can become the next Israel because we have the competitive advantage in terms of creativity, innovativeness, and English proficiency. Like Israeli society, Filipinos have a unique DNA that strives for quick and creative solutions. One way of accelerating the growth of startups is to encourage equity compensation in the form of stock options and stock grants. These are rights granted by an employer to an employee to purchase shares in the corporation.

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Based on our existing laws, equity compensation is considered an income subject to taxation. Most Filipino employees do not choose to avail of equity compensation since there is no tangible gain derived vis-à-vis the tax liability, which is considered a disincentive. Thus, they are unable to participate in the ownership of the company or partake of its long-term growth and success — following Israel’s way that deems this form of compensation essential, thereby taxing it upon sale and not upon issuance.

Congress, therefore, needs to revise the National Internal Revenue Code (NIRC), specifically by excluding in the computation of gross income under NIRC section 32 any gain derived from the exercise of stock options and stock grants. Instead, taxes shall be imposed on any gain derived from the subsequent sale, barter, or disposition of the shares of stock obtained from these options and grants.

For expediency, the proposed revisions should be included in the Corporate Recovery and Tax Incentives for Enterprises (CREATE) bill pending at the Senate. Although its counterpart in the House of Representatives was approved last year, there’s still time to include these vital provisions in the Senate version of the economic stimulus bill that seeks to reduce the corporate income tax rate and modernize the country’s tax incentives system for businesses.

During the recent Sulong Pilipinas consultative workshop organized by the Department of Finance (DoF), business leaders from the Philippine Chamber of Commerce and Industry (PCCI) expressed support for the urgent passage of the CREATE Act to level the playing field and assist businesses that were hardest-hit by the COVID-19 crisis.

PCCI’s position paper on CREATE was presented by DFNN, Inc. Executive Director Ramon Garcia, Jr. and SAS Philippines Partner Liberty Abid-Ali. According to Mr. Garcia, the pandemic highlighted companies such as Zoom, Tesla, and SpaceX but he lamented that “none of these could ever be Filipino companies because of the irregularity in the way equity compensation in this country is recognized.” Ms. Abid-Ali said the passage of the stimulus law should be fast-tracked so the business sector can immediately feel the government’s assistance through a reduced income tax rate.

Estimates from the DoF show that the CREATE bill will free up P42 billion in capital for enterprises during the first six months from the date it is signed into law. Some of these funds may be channeled to technopreneurs who will be incentivized to launch startups similar to Israel’s development model.

Younger Filipino generations that are tech-savvy combined with a supporting ecosystem will create a fertile ground for innovative ideas that can propel the Philippines to become Southeast Asia’s equivalent of the booming Israeli economy.

J. Albert Gamboa is CFO of the Asian Center for Legal Excellence and chairman of FINEX Publications.

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