Best time to pass ‘recalibrated’ corporate tax reform

May 28, 2020
Carlos Dominguez III
Carlos Dominguez III

Finance Sec.  Carlos Dominguez III said now is the best time to reform corporate taxation and modernize the country’s investment incentives system by way of the economic team’s ‘recalibrated’ tax reform package now known as the Corporate Recovery and Tax Incentives for Enterprises Act, which is designed to be largest fiscal stimulus program for businesses in the country’s history.

Dominguez said CREATE, which he described as the “most important economic reform in decades,” aims to squarely meet the challenges that enterprises face in this time of the coronavirus crisis, by addressing most of the concerns raised by business and industry groups regarding Package 2 of the Duterte administration’s comprehensive tax reform program.

The CTRP’s Package 2, or the original Corporate Income Tax and Incentives Rationalization Act, has been dubbed CREATE and recalibrated to make the measure more responsive to the needs of businesses reeling from the ravages of the coronavirus disease 2019 pandemic and improve the country’s ability to attract “highly desirable investments that will serve the public interest,” he said.

“There are weaknesses in our economic and fiscal policy that constrain our growth and hamper our people from realizing their full potential. If there is anything we have learned from past crises, it is that difficult times train people’s sights on what is necessary and important,” he  said in a virtual press briefing.

“Hence, there is no better time to reform our corporate income tax system and modernize our fiscal incentives than now. This could be the most important economic reform in decades. As the statements of our partners in industry and civil society show, the economy can no longer bear any delay in this reform. Now is the time do it,” the DoF chief added.

Also present at the virtual press briefing were Sen. Pia Cayetano and Albay Rep. Joey Salceda, who are the respective chairpersons of the Senate and House ways and means committees.

Dominguez thanked the Senate for committing to do its best in getting the recalibrated CREATE bill passed before the sine die adjournment of the Congress next month, and the House of Representatives for expressing its openness to adopting a “fiscally responsible Senate version” in order to speed up the approval of the measure and get it implemented by July.

“At this point, every session hour counts, and we thank the Congress for working hard on this historic reform,” he said.

With CREATE, he said the economic team has introduced four major reforms under CTRP Package 2, which is topped by the outright cut in the CIT rate from 30 percent to 25 percent, making it “the first-ever revenue-eroding package proposed by the Department of Finance.”.

The country’s CIT rate of 30 percent is the highest in the region.

The CIT would be reduced further by one percentage point every year from 2023 to 2027 until it reaches 20 percent under the CREATE bill.

Another key feature of the CREATE bill is the extension of the sunset period for current incentive recipients from two to seven years provided under the original CITIRA to four  to nine years, to help businesses adjust in this difficult time.

However, incentive recipients who believe that the new system under CREATE is more favorable can shift to the new regime immediately, Dominguez said.

The CREATE bill also extends the net operating loss carryover for non-large taxpayers from the current three years to five years, which would be credited for losses incurred in 2020.

The Finance chief said this enhanced NOLCO would allow as much as 99 percent of corporate taxpayers to utilize net losses in 2020 as additional deductions to their taxable income from 2021 to 2025.

A fourth feature that the economic team has introduced in the CREATE bill is the flexibility of the Fiscal Incentives Review Board, which would be allowed to recommend to the President the grant of longer incentives and additional non-fiscal incentives for deserving investments.

“The rigidity of existing tax incentives system has kept our hands tied in competition for super-investments in the region. The provision will allow us to tailor-fit our incentives according to the unique needs of specific investments with exceptional benefits to the public interest,” Dominguez said.

“Allow me to emphasize that these changes are made in recognition of the exceptionally tough challenge we face today. Overall, CREATE is a generous proposal that addresses most, if not all, of the concerns raised with us before by businesses and industry groups,” he added.

But he made it clear that while there is a need to “proactively make adjustments to help businesses from the taxation side, the proposed amendments outlined in the CREATE bill are for only for a limited period”.

“Once the country’s economic situation improves, our policy response will change accordingly. These amendments, in other words, are on offer for a limited time only,” the DoF chief noted.

He said this difficult period triggered by the Covid-19 pandemic might soon see the final stages of nearly 30 years of work to reform the fiscal incentives system and make it performance-based, time-bound, targeted, and transparent.

“Though it has been painful, this crisis has allowed us to see more clearly our country’s strengths and weaknesses,” Dominguez said.

As for the immediate five-percent cut in the CIT, he said this would result to a reduction of government revenues in the second half of this year alone estimated at P42 billion that all firms, especially the country’s micro, small, and medium enterprises, can use to fund their operations and retain their employees.

For the succeeding five years, the DoF’s total estimate is P625 billion in foregone government revenues that these firms can invest in to revitalize their businesses and create more jobs for the country’s young and highly skilled workforce, he added.

“The economic team has been forthright about where the needs of the economy and the means of our government meet. That is why we have introduced changes to the original CITIRA bill to respond to our present difficulties, without compromising the reform’s fundamental principles,” Dominguez noted.