YELLOW PAD

By Pia Rodrigo

On 26 November 2020, the Corporate Recovery and Tax Incentives for Enterprises (CREATE) bill was passed on third and final reading in the Senate, marking the end of more than two decades of struggle for fiscal incentive reform.

CREATE, first and foremost, is a structural reform measure for the governance of incentives that are time-bound, performance-based, and transparent. As it is a structural reform, the biggest benefits will be cumulative in the long term.

It also addresses the reality of tax competitiveness among emerging markets, especially in the ASEAN region. CREATE lowers the corporate income tax rate, bringing the Philippines closer to the ASEAN average of 23 percent. The combination of fiscal incentive rationalization and a lower corporate income tax will boost both tax efficiency and investment promotion.

It also serves as a short-term stimulus by giving immediate relief to businesses, which will then spill over to their employees.

Formerly known as the Corporate Income Tax Incentives Rationalization Act (CITIRA)  and the Tax Reform for Attracting Better and High-Quality Opportunities (TRABAHO) Bill, CREATE has always been met with controversy and opposition from the Philippine Economic Zone Authority (PEZA) locators, foreign chambers of commerce, and some senators. Its provisions that modernize and rationalize our fiscal incentive system have drawn the most flak from these groups.

Up until the very end, the saga of CREATE was a nail-biter. At around 11 PM on November 25, the night the Senate planned to finalize key amendments and vote on the bill, Senator Richard Gordon asked to delay its passage until the next morning so he could craft and propose some last minute amendments.

Senator Gordon delivered a long, impassioned speech, even tearing up at one point. He feared that the new fiscal incentive regime for the Subic Bay Metropolitan Authority (SBMA), which he formerly chaired, would bring about job losses. He questioned the need for the Fiscal Incentives Review Board (FIRB) and its power to approve or disapprove incentives, saying this would impede the autonomy of local government units. The next morning, he proposed that the SBMA, Aurora Pacific Economic Zone and Freeport (APECO), Tourism Infrastructure and Enterprise Zone Authority (TIEZA), and other ecozones be exempted from the bill, and consequently, FIRB jurisdiction.

But the bill’s sponsor, Senator Pia Cayetano, Senate President pro tempore Ralph Recto, and the Department of Finance had already settled on a compromise on the bill’s provisions on incentives. This compromise came in the form of differentiating the treatment of domestic industries and exporters when it came to availing of incentives. Senator Cayetano emphasized that Gordon’s proposal of exempting certain ecozones from FIRB jurisdiction would defeat the purpose of rationalizing fiscal incentives.

And so Gordon’s proposals, which would have majorly diluted the reform (and would have likely led to a veto from the President), were rejected by both Senator Cayetano and the Senate body. CREATE was finally passed later on that day.

Senator Gordon was not the only senator who proposed controversial amendments. Senator Ralph Recto introduced dual rates for corporate income taxes, which we believe makes the tax system prone to gaming and tax evasion. However, looking at the big picture, we see that the gains outweigh the costs.

All in all, CREATE has achieved its main goal of making incentives targeted, time-bound, and performance-based, and rationalizing the governance of incentives through the Fiscal Incentives Review Board. The sharp reduction of corporate income tax is also significant, as it acts as a stimulus measure amid the pandemic-induced recession and makes Philippine businesses more competitive in the long run.

CREATE provides temporary stimulus measures to respond to the global economic downturn. These include VAT exemption for medicine, vaccines, and medical equipment for COVID-19, and the reduction of the minimum corporate income tax from 2% to 1%.

The passage of CREATE removes policy uncertainty, which has prevented investors from locating in the Philippines for the past years. The new incentive system will provide clarity for both foreign and domestic investors. We also hope to capitalize on CREATE to attract investments from manufacturers looking to exit China and move production sites to Southeast Asia.

Throughout the months of debate on CREATE, what stood out was the diligence of the sponsor of the bill and the Chairperson of the Senate Committee on Ways and Means, Senator Pia Cayetano. Despite the unpopularity and difficulty of tax reform as an advocacy, Senator Pia worked with urgency and dedication to defend the bill. On the Senate floor, she said the amendments she accepted provided “a balance between the need to rationalize our incentives and to provide an environment to keep businesses thriving.”

The struggle to pass CREATE was long and arduous, marked with numerous delays and jockeying from certain interests. It is commendable that after decades of pushing to restructure our outdated fiscal incentive system, reform is finally here, in the form of a strong bill that will hopefully revitalize our economy.

The author, a political science graduate of Ateneo de Manila University,  is the communications officer of Action for Economic Reforms (www.aer.ph).