Congress urged to hasten approval of economic recovery bills
President Rodrigo Duterte’s Economic managers are pushing for the early congressional approval in 2021 of the Corporate Recovery and Tax Incentives for Enterprises (CREATE) bill and other legislative measures, designed to reinvigorate the economy and provide businesses with the stimulus they need to overcome the unprecedented global financial shock from the coronavirus pandemic.
Finance Secretary Carlos Dominguez III, who heads President Duterte’s economic team, called on Congress to pass CREATE when it resumes session this month, to finally erase the unpredictability in the country’s corporate tax and fiscal incentives system that have prompted foreign firms to adopt a wait-and-see attitude before investing or expanding their businesses here.
Dominguez said that with President Duterte’s signing into law last December 28, 2020 of the P4.506 trillion General Appropriations Act (GAA) for 2021, the government now has the largest financial component of its comprehensive economic recovery plan.
“However, the national budget needs to be complemented by other economic recovery measures, which include CREATE, the proposed Financial Institutions Strategic Transfer (FIST) Act, and the Government Financial Institutions Unified Initiatives to Distressed Enterprises for Economic Recovery (GUIDE) bill,” Dominguez said.
CREATE: the largest stimulus package for businesses
Dominguez said CREATE is the largest stimulus package for businesses in the country’s history as it would provide them with hefty corporate income tax (CIT) cuts of 5 to 10 percent in the version approved by the Senate in November last year.
This means the CIT rate will go down from the current 30 percent–the highest in the region–to 20 percent for micro, small, and medium enterprises (MSMEs) with net taxable income of P5 million pesos and below, and with total assets of not more than P100 million excluding land.
For the rest, including foreign firms, the CIT reduction is 25 percent.
A bicameral conference committee is expected to harmonize the conflicting provisions of the two chambers when the 18th Congress resumes session on January 18 following its traditional yearend recess.
Dominguez said the Department of Finance (DOF) has been pushing for a CREATE bill that will not only lower the CIT but also enhance the flexibility of the country’s fiscal incentives system “so that we can proactively attract investments that will bring exceptional benefits to the Filipino people.”
“We hope that the Congress can pass CREATE before the end of January 2021 as this measure is crucial for businesses to continue operating, retain their employees, and create more jobs,” Dominguez said. “This also provides taxpayers ample time to comply with adjustments to their returns due to the lowering of income taxes effective July 2020 before the tax filing season ends in April 2021.”
He said the latest DOF estimates show that CREATE will mean foregone revenues of around P251 billion in the next two years (P133.2 billion in 2021 and P117.6 billion in 2022), if the bill is implemented retroactively to July 2020.
Dominguez explained that these tax breaks are necessary to provide financial relief to businesses, mostly MSMEs that account for 99.5 percent of local businesses and employ about two-thirds of workers in the country’s labor force.
“CREATE is really about trusting the private sector. Instead of passing funds through what tend to be less efficient government programs, this will leave the money in the private sector’s hands to revitalize their businesses,” Dominguez said.
In coordination with the Bureau of Internal Revenue, Department of Trade and Industry, Department of Health, and Board of Investments, the DOF is ready to release the necessary implementing rules and regulations once the bill is enacted into law.
Tax reform: 90 percent accomplished
Dominguez said that once CREATE is passed into law in 2021, the Duterte administration will have accomplished about 90 percent of the comprehensive tax reform program (CTRP) that was put in place after the President assumed office in 2016.
However, he noted that the success of the Tax Reform for Acceleration and Inclusion (TRAIN) Act, CREATE, and the other tax reform measures cannot be attributed exclusively to current efforts.
“In fact, our tax reform program is a logical continuation of the decades of reforms arduously passed by previous administrations,” he said. “We are not navigating blindly in pursuing these reforms. Instead, we are marching forward guided by the paths already plotted out before us.”
In December 2017, the TRAIN Act was signed into law and implemented the first day of the following year to provide significant personal income tax (PIT) cuts for 99 percent of taxpayers and create a steady revenue stream for the Duterte administration’s “Build, Build, Build” program and increased investments in human capital development.
TRAIN also raised so-called “sin” or excise taxes on tobacco products.
The Duterte administration is the first government to have implemented three successive increases in “sin” taxes, hence enabling it to further raise spending on its priority programs to reduce poverty and attain financial inclusion for all Filipinos.
The Tax Amnesty Act was signed into law in February 2019, followed by the Tobacco Excise Tax Reform Act in July of the same year.
This law raised further the excise taxes on tobacco products and introduced a new tax on electronic or e-cigarettes.
A new “Sin” Tax Reform Law, which raised excise taxes on alcohol and imposed another round of tax hikes on e-cigarettes, was enacted in January 2020.
“We are the only administration in Philippine history that has increased ‘sin’ taxes three times within one presidential term,” Dominguez said.
He remains optimistic that the two remaining packages—the reforms in the property valuation system and in the taxation on passive income and financial intermediaries, would be passed by the Congress in 2021.
The DOF is also seeking amendments in the Agri-Agra Reform Credit Act to make it easier for banks to pump fresh capital into the farm sector, said Dominguez, who was agriculture secretary in the administration of the late President Corazon Aquino.
FIST: Enabling banks to extend more credit to MSMEs
On top of CREATE, another urgent measure is the FIST bill, which has already been ratified by both chambers of the Congress, and is now awaiting the signature of President Duterte.
The FIST Act will allow banks to dispose of their non-performing loans and assets through would-be asset management companies so they could ext, end more credit to coronavirus-hit businesses in need of assistance.
“This is an improved version of the Special Purpose Vehicle (SPV) law that we enacted in the early 2000s in response to the Asian financial crisis. The advantage this time is that we are acting much earlier, so the benefits of FIST will help banks respond quickly enough to the COVID-19 crisis,” Dominguez said.
Using the assumptions provided by the Bangko Sentral ng Pilipinas (BSP), FIST would result to foregone revenues of P2.9 billion to P11.6 billion. Assuming all tax benefits are availed of in the next five years, this size of losses is manageable when compared to the potential risks from another possible financial crash.
But to ensure that no public resources are wasted, the DOF has assured that the effectiveness of the incentives will be reviewed through a monitoring mechanism incorporated in the bill.
“This reform will be critical in keeping our banks strong and ready to finance productive economic activity,” Dominguez said.
GUIDE: Saving strategically important firms
The GUIDE bill, on the other hand, is on its second reading in the House of Representatives and remains at the committee level in the Senate.
The measure aims to enable government financial institutions (GFIs), such as the Land Bank of the Philippines (LandBank) and the Development Bank of the Philippines (DBP), to form a special holding company that will infuse equity, with strict conditions, into strategically important companies facing insolvency.
Dominguez said the government plans to invite multilateral agencies, as well as foreign and domestic investment companies, to participate in this joint venture.
“The bill is patterned after the TARP (Troubled Asset Relief Program) in the US, where you put in money in the company but then tell the executives that they can’t declare dividends until they pay off the debt; they can’t pay themselves large salaries, and buy fancy, unnecessary stuff,” Dominguez said.
Dominguez expects these bounce-back measures—CREATE, FIST, GUIDE, and the 2021 national budget—to enable the country to post a strong recovery and generate more jobs and investments this 2021 as the government takes calibrated steps to further open the economy as safely as possible.