YELLOW PAD

By Arjay Mercado and Filomeno S. Sta. Ana III

Corporate Recovery and Tax Incentives for Enterprises (CREATE) is designated as a priority bill. It has also been issued a certificate of urgency by the President. In late November 2020, the Senate passed CREATE on third reading.  It was anticipated that soon after, a bicameral conference committee would reconcile the Senate and House versions. But it has taken a long time for the bicameral conference committee to formally approve the bill.

What’s going on?

CREATE provides game-changing fiscal reforms. It addresses issues relating to the rationalization of fiscal incentives and the competitiveness of corporate income taxation. Also, CREATE contributes to the stimulus package by significantly reducing the corporate income tax. The intention is to help businesses and their workers cope with the economic impact of the pandemic.

The biggest issue, however, revolves around fiscal incentives reform, which has met strong resistance from vested interests.

The reforms on fiscal incentives are straightforward: Make the incentives performance-based, time-bound, targeted, and transparent. Base the incentives on sound economic criteria, and discourage redundant incentives.

Clearly, the passage of CREATE is an urgent matter. Further delay will only add another layer of investor uncertainty.

The delay in the passage of CREATE is thus surprising and alarming. The House passed the bill (then known as the Corporate Income Tax and Incentive Rationalization Act or CITIRA) as early as September 2019. The House bill is a good version as it contains all the essential reform features enumerated above. The Chair of the House’s Ways and Means Committee, Representative Joey Salceda, deserves credit for the swift passage of a good bill.

In the Senate, the bill went through intense and through debate before its passage in November 2020. The Senate bill was a compromise version of the House bill, as Senator Ralph Recto insisted on putting in place questionable amendments. The realpolitik and the compromises nevertheless did not undermine the bottom-line reforms. Thus, the reformers accepted the Senate version.

The Chair of the Senate Ways and Means Committee, Senator Pia Cayetano, should be cited and given appreciation for shepherding CREATE and preventing its mangling.

Following the statement of the Chair of the House of Representatives that the House could accept the Senate version, everyone expected that the House’s adoption of the Senate version would have resulted in the immediate ratification of the bill. That meant it was no longer necessary to have a bicameral conference committee. The view was that the Senate bill was acceptable. Through the long deliberations and debate, the Senate retained the essential reforms and found the formula in dealing with the most contentious provisions.

However, in a move that caught everyone by surprise, House Speaker Lord Allan Velasco called for a bicameral conference committee meeting. More worrisome, two months passed, but the bicameral conference committee did not convene. The public was not aware of what was being bargained in the corridors of power.

The bicameral conference committee is dangerous territory. The members of the committee can totally exclude the public from the discussions. Hence, the threat of last-minute insertions is real. This is utterly wrong because the role of the bicameral conference committee is to reconcile whatever differences are there between the House and Senate versions of the bill. The bicameral conference committee cannot and should not make insertions of provisions not found in the House and Senate bills.

In this light, transparency is crucial. All stakeholders must demand that the bicameral conference committee be transparent in resolving CREATE.

What we do not want to happen is to have insertions that will run counter to the objectives of the reforms. In particular, we do not want giving fiscal incentives without sound or solid economic justification. Further, we do not want insertions that have not been subject to a thorough study and debate.

At present, we already see tension between CREATE and recently passed legislation or legislation being lobbied.

Take the case of the new law that gives San Miguel Aerocity a franchise together with fiscal incentives. The franchise bill ratified by Congress lapsed into law, given that President Rodrigo Duterte neither signed nor vetoed it. Elsewhere, we have argued that fiscal incentives can only be justified in this case when market failure exists. But it is established that the Ninoy Aquino International Airport (NAIA) and the Clark International Airport, together with their improvement and expansion, are sufficient to meet present and future passenger demand.

So let San Miguel have the freedom to operate its airport and compete with the two other international airports. But giving tax incentives to San Miguel is unnecessary and unsound.

The franchise with incentives is already a law. Yet, it conflicts with the pending ratification of CREATE.

Also being pushed is the Petron application for PEZA (Philippine Economic Zone Authority) incentives. (See “DoE inclined to back Petron’s refinery’s bid to apply for PEZA incentives,” Manila Standard, Dec. 22, 2020.)

Ramon Ang, concurrent president of Petron and San Miguel Corp., once told reporters that Petron needs tax relief. Three months ago, the Philippine Daily Inquirer (“Petron warns of refinery shutdown ‘very soon’”) quoted Mr. Ang as saying: “We need a level playing field, but that requires a new law or an executive order from Malacañang.” The Inquirer added, “the first would take a very long time while the second posed political risks such as being branded as a crony of the President.”

Whether Petron needs exemption from taxes is a policy question that must go through the scrutiny of Congress and the public. We grant that Mr. Ang’s concerns deserve to be heard, but they have to be studied well and debated. Granting incentives must be informed by the trade-offs and a cost-benefit analysis.

To illustrate a contentious point, giving Petron tax and duty exemptions can lead to disadvantaging importing competitors. Note, too, that Petron also imports crude oil.

The bicameral conference committee is aware of these tensions and dilemmas that will affect CREATE.

Thus, we reiterate our calls. Have full transparency of the bicameral conference committee. Resist any insertions that deviate from either the House or Senate bill. Oppose any attempt to weaken the governance of fiscal incentives through the Fiscal Incentives Review Board. And uphold the essential features of making fiscal incentives time-bound and performance-based.

May our champions heed this plea.

Filomeno S. Sta. Ana III coordinates the Action for Economic Reforms while Arjay Mercado heads AER’s tax reform team.