Love in the Time of CholeraGabriel Garcia Marquez
TAX INCENTIVES AND MEASURES IN THE TIME OF PANDEMIC
The Government of the Philippines has always tried to find ways to improve its corporate tax system and to progress more effective and competitive tax incentives to encourage Filipinos to hone their entrepreneurship spirit and also to attract foreign investors.
In February 2020, Congress, the legislative branch of the Government, proposed several tax measures to further the said purpose. One of the proposed tax measures is the Corporate Income Tax and Incentives Reform Act (CITIRA) Bill. The CITIRA Bill is part of the Government’s Comprehensive Tax Reform Program (CTRP). The Bill aims to reduce the corporate income tax (CIT) rate 1% every year starting Jan. 1, 2020, until it eventually reaches 20% by Jan. 1, 2029. The purpose of the Bill is to benefit small businesses in the country as well as attract high-value foreign investments.
However, then came COVID-19 Pandemic. It has affected day to day life and slowed down the global economy. It decelerated the manufacturing of essential goods and disrupted the supply chain of products. Consequently, it resulted in poor cash flow in the market and a significant slow-down in revenue growth.
As the spread of Covid-19 rages on for several months, businesses in the Philippines has been hit hard. And the CITIRA Bill was not spared. It was calibrated and a new proposed tax measure was created; the Corporate Recovery and Tax Incentives for Enterprises Act or the CREATE act.
It is one of the largest stimulus programs in the history of the Philippines in terms of tax incentives and the first-ever revenue–eroding measure.
Salient Portions of CREATE Act
- Under the CREATE act, the CIT for a corporation shall drop to 25% from 30% for the year 2020. The 25% CIT shall be in effect until year 2022. Starting 2023 until year 2027, there will 1% annual reduction of CIT. On 2027 onward, the CIT is 20%
- Moreover, the Net Operating Loss incurred by non-large taxpayers for the taxable year 2020 can be carried over as deduction from gross income for 2021 to 2026 or for the next three succeeding taxable years. Under the present tax code, the net operating loss can be carried over as a deduction from gross income only for the next three succeeding taxable years. This provision is a great help to the taxpayers as they can recover losses incurred during the lockdown due to the spread of Covid-19 Pandemic.
- The CREATE Act also provided for additional 2-year sunset provisions for firms or private corporations currently registered with the various Investment Promotion Agencies (IPAs).
Under the present rules, the Sunset Period is only for two (2) years to Seven (7) years for IPA-registered companies that are paying the existing five percent (5%) gross income earned (GIE) tax incentive instead of paying CIT Rate of 30%.
- For businesses that have spent more than 10 years under the GIE program – Four (4) years;
- For businesses that have spent 5-10 years under the GIE program – Five (5) years;
- For businesses that have spent 7 years under the GIE program – Seven (7) years; and
- For businesses that export 100 percent of their products/business and employ at least 10,000 people – Nine (9) years
Under the present rules, the FIRB is an existing interagency committee, chaired by the secretaries of the Department of Finance, Department of Trade and Industry, and National Economic Development Authority which currently grants tax subsidies to government-owned or -controlled corporations (GOCCs). However, per CREATE Act, the FIRB will have the authority to recommend to the President appropriate non-fiscal support, in addition to tax incentives. Such support may include facilitation of registration and certification requirements from government agencies; logistics support; customs facilitation; product testing and certification; training support; and shared/common services facilities for targeted investors.
The CREATE Act also gave powers to the Fiscal Incentives Review Board (FIRB) to recommend to the President the grant of fiscal and non-fiscal incentives to private corporations. It is significant progress, as the members of the Board can effectively create recommendations based on the data available in their Departments.
More so, under the CREATE Act, new investors will enjoy targeted, time-bound, and tailor-fitted tax incentives to proactively attract the right types of investment.
The President is given flexibility in granting tax incentives. The President may modify the mix, period, or manner of availing of incentives for a highly desirable project or a specific industrial activity based on defined development strategies, such as the creation of high-skilled jobs and attracting significant foreign capital or investment subject to the limitation that the period for availing of incentives shall not exceed 40 years. Under the present rules, the President has no powers. It is an important development as it can facilitate the grant of tax incentives as there would be no need for a legislative process for its grant.
Moreover, Private Companies that will be given Tax incentives will also be reviewed every two years and approved activities will be given incentives in set periods of five, seven, and 10 years. Furthermore, the names of the businesses receiving the incentives shall be made open to the public for transparency.