Why ‘CREATE’ is worth the wait

The latest Corporate Recovery and Tax Incentives for Enterprises (CREATE) bill under SB 1357, which will hopefully be acceded to by the House and make its way to become law barring presidential veto, is the best version of this tax reform bill that evolved from TRABAHO, to CITIRA, to CREATE, or the adjusted CREATE.

The biggest backlash of the adjusted CREATE is that corporate income tax is no longer programmed to go down to 20 percent eventually. It will stay at 25 percent. My thought on this matter is, 25 percent would be merely lagging behind our neighbors in the region but it is not a rate that would fend off any investor that is trying to leverage on the vibrant Philippine domestic market.

Without further ado, here for me are five reasons, among others, that create tons of opportunities for the country with the CREATE bill.

1. A chance to bring back your money outside, tax-free.

It is not unusual for Filipino businessmen to have a regional or even global structure, for business or for tax reasons, or so it was thought. The problem is, if you earn money outside the Philippines and you bring it back here, it gets taxed at 30 percent on gross. Good luck on trying to get deductions against that income because your expenses here are not necessary business expenses that produced that foreign income.

The CREATE bill would now allow you to repatriate those profits back to the Philippines without any tax, provided that you reinvest them in your business here. This creates multipliers in the Philippine economy vs those resources being kept abroad for fear of the big chunk of tax if they ever return.

2. Smaller companies pay income tax at only 20 percent, immediately.

Net income tax rate is now two-tiered in the bill, with corporations in general to pay 25 percent net income tax, but the smaller corporations with an annual net taxable income of not more than P5 million and assets of not more than P100 million (excluding land) paying only 20 percent tax. Along with the retention of the 40 percent optional standard deduction, this may just really increase compliance.

I would however continue to argue for the barangay micro business enterprises (BMBEs) to be relieved of their income tax obligation via an updated BMBE law.

3. The 5 percent gross income tax for registered companies is status quo for 10 years.

The big-ticket issue that kept the bill at bay was the proposal to sunset the 5 percent gross income tax (GIT) quickly for existing enterprises. This got not a few investors thinking into bringing their operation or expansion elsewhere. But with the 5 percent status quo for 10 years, there is no talk of leaving anymore.

Also, for those who are better off going for the 25 percent net income tax regime with the enhanced deductions for registered enterprises provided in the bill, they can do so anytime. This net income tax regime is good for companies with huge ‘below the line’ expenses such as advertising, selling, travel, representation, and staff expenses.

4. Reinvesting profits for a registered manufacturer is a deductible expense.

The bill provides an alternative to being in the 5 percent GIT regime, which is to be subjected to regular corporate income tax but with special/enhanced deductions. Among these deductions is the reinvestment allowance for manufacturers. If the manufacturer, instead of declaring dividends, reinvests the money for working capital, capital equipment or expansion, they will get a deduction to the extent of 50 percent of the amount reinvested. This gives the right boost and message to our manufacturing sector.

5. Incentive rules can be liberalized if a gargantuan investor is in play.

One of the resounding stories on incentive competition is how we would sometimes lose big investors who were lured by our neighbors with superior incentives. Government hands would be tied because our incentive laws are precise.

In this regard, the bill now provides that the President may tailor incentives for a highly desirable project. For those exceptional projects, the President may grant income tax holiday for as long as eight years and thereafter, a special corporate tax rate of 5 percent may be granted for more than 30 years.

The above are not the only good things about the bill. There is for instance an emphasis on more favorable incentives for investments in less developed areas (localities with a low per capita gross domestic product, low levels of investments, employment, and infrastructure).

Under the CREATE bill, the period of incentives for registered business enterprises located in less developed areas can be as long as 17 years.

The success, however, of this particular initiative may not come from the incentive per se, but I would say from a sense of purpose. Areas like Northern Samar, Lanao del Sur, Maguindanao, Saranggani and Sulu have barely improved economically over the last few decades. These are targets for “shared prosperity” and for consideration of every entrepreneur who believes no one should be left behind. It is encouraging that the CREATE bill is somehow tasking the government to take the lead. This effort is now yearning for partnerships.

So let CREATE be law. Let it be passed as we rise from the depths of a pandemic, and let partnership between government and business proceed, but this time with more purpose and intensity.

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Alexander B. Cabrera is the chairman and senior partner of Isla Lipana & Co./PwC Philippines. He is the Chairman of the Integrity Initiative, Inc. (II, Inc.), a non-profit organization that promotes common ethical and acceptable integrity standards. Email your comments and questions to [email protected]. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.