YELLOW PAD

By Pia Rodrigo

The Corporate Recovery and Tax Incentives for Enterprises (CREATE) Law is now ready to be implemented.

On June 21, Department of Trade and Industry (DTI) Secretary Ramon Lopez and Department of Finance (DoF) Secretary Carlos Dominguez III signed the implementing rules and regulations (IRR) detailing CREATE’s fiscal incentive provisions. The framework for the Strategic Investment Priority Plan (SIPP) drafted by the DTI’s Board of Investments has also been approved.

The IRR was crafted after lengthy public consultations with private sector stakeholders who raised concerns on how current incentives would be affected, the scope of enhanced deductions, and the incentive application process.

Transitioning to a new corporate income tax rate and fiscal incentive system is a complicated undertaking, which is why it is crucial that the IRR is clear and comprehensive.

We believe that the signed IRR is consistent with the law’s most essential principles and features. It ensures that the general provisions in the law will have a clear and airtight interpretation, reducing the likelihood of arbitrariness.

The most significant achievement of CREATE is making fiscal incentives performance-based, time-bound, targeted, and trans parent. CREATE uses rigorous economic criteria for rewarding incentives and strengthens governance through the Fiscal Incentives Review Board (FIRB).

After decades of struggle for fiscal incentive reform, CREATE finally gets rid of our outdated, redundant, arbitrary incentive system. Our incentive system was costing us billions in forgone revenues by rewarding incentives (some in perpetuity) to investors who would have invested even without these tax perks.

Despite the strength of the reform, there are also some weaknesses, compromises, and dangerous provisions present in the law.

The accommodation of corporate interests was snuck in at the very last minute during an unexpected assembly of the bicameral conference committee. A provision was inserted exempting local oil refineries from paying taxes on imported crude oil, clearly to grant incentives to the only existing local refinery, which is owned by Petron. These provisions lead to forgone revenues in an attempt to save an industry that is not competitive.

Provisions were inserted exempting legislative franchises from the jurisdiction of the FIRB, and the President to suspend or cancel incentives, possibly to avoid conflict between CREATE and the generous incentives Congress granted to the San Miguel Aerocity franchise in November of 2020. CREATE aims to make the granting of incentives transparent, fair, and justifiable, requires firms to meet performance targets in order to continue receiving incentives, and mandates the FIRB to conduct periodic performance reviews of said firms. The inserted provisions go against these key principles and may lead to abuse.

Unfortunately, despite calls on the President to veto the provisions unfairly favoring legislative franchises and the Petron refinery, these provisions remained in the final version of CREATE.

Additionally, the Bureau of Internal Revenue’s (BIR) Revenue Regulation 5-2021 misinterprets a provision in CREATE and effectively hikes taxes on private schools from 10% to 25%. The BIR was arbitrary in prohibiting for-profit proprietary schools from corporate tax benefits given to similarly situated parties. We urge the BIR and DoF to immediately repeal this unfair tax hike on private schools, which are already burdened by decreased enrollment as students have shifted to state universities and colleges as a consequence of free college education. The pandemic has also burdened private schools.

Some quarters have questioned the reduction of corporate income taxes at a time that government needs revenues for its pandemic spending. Although we believe that corporate tax relief is a tool for stimulus, the immediate reduction of corporate tax rates from 30% to 25% has limited stimulus effects, especially without safeguards on job preservation. We thus view the corporate income tax reduction as a compromise to get the political support of the business community and politicians for the successful passage of fiscal incentive rationalization.

The weaknesses in the law can be corrected, and addressing these weaknesses will be a continuing advocacy for Action for Economic Reforms. However, these weaknesses and compromises should not lead us to reject the great significance of the reform of the fiscal incentive system, a reform that took decades to happen.

Proper implementation of CREATE entails putting in place strong systems to prevent abuse and ensure transparency, which we believe are present in the IRR. We believe that the DoF and DTI have the ability to maximize CREATE’s gains and ensure that it creates jobs, enhances tax efficiency, encourages innovation, and promotes investments during our worst economic recession.