The proposed new bill, termed the Corporate Recovery and Tax Incentives for Enterprises Act (CREATE), is targeted at reallocating tax incentives and reducing Corporate Income Tax (CIT) rates.
In a virtual briefing to national COVID-19 response co-ordination movement COVID-19 Action Network (CAN) Phlippines, Department of Finance (DOF) Strategy, Economucs and Results Group Assistant Secretary Tony Lambino said that micro, small and medium enterprises (MSMEs) in industries such as food and agriculture were losing out under the current tax structure by paying more taxes than bigger firms.
“Companies that are paying taxes without any incentives provided to them by the government are paying at a 30% tax rate – and that’s what just about all of the MSMEs in the country across industries [from agriculture to F&B] are paying,” he said.
“Our research has shown that on the other hand, companies that can afford very good accountants are able to get higher tax incentives [by claiming back larger amounts] and pay just 6% to 13% effective tax rates – this is a very unfair situation.”
Although not specifically mentioned, the implication was clear: Larger companies or MNCs that can afford to pay for expensive accountants can find ways under the current tax incentives system to claim back more money from the taxes paid, helping them to pay less than MSMEs.
CREATE aims to change this by introducing new targets for firms such as local job creation and locating the business further from central urbanised areas – both conditions that are favourable for MSMEs.
“Overall DOF research found that at present, of PHP441bn (US$8.9bn) given in tax incentives, just 3150 of over 980,000 firms in the country were benefitting from these, most of which were not MSMEs,” added Lambino.
“[CREATE’s new measures] are to ensure more incentives reach MSMEs in priority areas [outside of central areas like Metro Manila] which are less developed and need more help.
“The further the business is located from the central urbanised area, [the] more local jobs are created [and] the more productivity is driven, the higher the tax incentives that the firm will receive.”
According to an Asia Pacific Foundation of Canada report, some over 890,000 establishments in the Philippines are MSMEs and around 31,000 of these are engaged in food manufacturing, particularly in food and food preparation, coconut products and seaweed/carrageenan production.
“[Common] examples of agri-food MSMEs [in the Philippines are those in] rice milling, sugar milling, rubber processing, banana chip production, dried foods processing, sardine bottling, tuna canning, sardine canning, feed milling, virgin coconut oil production, coconut sugar production, and cocoa product production,” said the report.
Besides providing more tax incentives for these MSMEs, CREATE also intends to immediately cut the local Corporate Income Tax (CIT) rate from 30% to 25% until 2022, followed by a 1% yearly reduction until 2027 when it hits 20%.
“Philippines’ current CIT rate is the highest in ASEAN, a factor that has hindered local businesses from expanding and hampered our local firms’ ability to compete with regional neighbours,” said Lambino.
Focus on COVID-19
Local economists have come forth to oppose CREATE, calling for more focus on the current pandemic crisis instead.
Ateneo School of Government Dean Ronald Mendoza presented a paper to the Philippines Senate Committees on Finance and Economic Affairs last month saying that CREATE is ‘too complicated’ an endeavour to be implemented given the unresolved COVID-19 situation.
“Given [that COVID-19 is] staring us in the face right now, the de facto reform legacy of this administration should be Universal Health Care and social protection which can use further boosting and strengthening during this pandemic,” Mendoza said.
“Although CREATE is sound on paper, implementation might be difficult [given the government’s track record], and investments from other countries [who are also experiencing economic downturn] will be difficult at this time.”
Despite these dissenting opinions, the government looks pretty much set to push ahead with CREATE, insisting that this is the right way forward.
“We need a fair and accountable tax incentive system [which drives] beneficial outcomes for the country like increasing exports, creating jobs and raising productivity,” said Lambino.
“So far, on average we’ve found there is no significant difference between firms that receive these incentives and those that do not. CREATE will change this and reward those with high performance with incentives, but not those that do not perform.”
Priority industries under this tax reform would include agriculture, agribusiness, R&D in the processes to produce goods, emerging and innovative product manufacturing (e.g. plant-based and cell-based foods) and logistics, though the full list has not yet been published publicly.