By Kyle Aristophere T. Atienza, Reporter
THE PHILIPPINE government expects to forego P5.9 billion in tax revenue in the subsequent 4 years from a brand new law that expands fiscal incentives and lowers corporate income tax (CIT) on certain foreign enterprises.
But these losses under the Corporate Recovery and Tax Incentives for Enterprises to Maximize Opportunities for Reinvigorating the Economy (CREATE MORE) Act might be offset by a rise in foreign direct investments (FDI) and latest taxes, government officials said.
President Ferdinand R. Marcos, Jr. on Monday signed into law the CREATE MORE Act, which further reduces the CIT to twenty% from 25% for registered business enterprises (RBE).
“This law will certainly be useful in attracting investment because we’re reducing income tax rates after which reducing the price of doing business by reducing duties, especially for exporters,” Finance Secretary Ralph G. Recto told BusinessWorld on the sidelines of a signing ceremony on Monday.
The Philippines has been a laggard within the region in attracting foreign direct investments, with economists citing inadequate infrastructure, high power costs, unstable policies, red tape and foreign ownership limits.
In 2023, net inflows of FDI into the Philippines fell by 6.6% to $8.9 billion.
A Palace handout showed the majority or P4.06 billion of the revenue losses from CREATE MORE in the subsequent 4 years are as a consequence of the reduction in CIT for RBEs.
An estimated P926.82 billion in revenue losses are as a consequence of the law’s provision which doubled the RBEs’ additional power expense deduction to 100%.
The law also allows a further 50% deduction for expenses related to trade fairs and tourism reinvestments until 2034, which is able to lead to revenue losses of P601.89 billion.
Under the brand new law, application of the web operating loss carryover could also be carried out as a deduction from gross income inside the subsequent five years immediately following the last yr of the project’s income tax holiday. This provision will lead to P290.57 billion in revenue losses in 2028.
Asked how the federal government could offset the projected revenue losses, Mr. Recto said these are only “paper losses… estimates.”
“We have now other revenue measures which we’re pursuing. I just discussed also with the Speaker and the Senate President some financial taxes that we’re reconsidering,” he added.
Mr. Recto said the federal government faces a “tough balancing act between giving incentives and raising revenue.”
“You wish more volume of investments, and we’d like those investments. Jobs shall be created,” he explained. “There shall be withholding taxes. So, I don’t think it is going to erode the tax base.”
Asked whether or not the law could affect the country’s fiscal plan and budgetary requirements, Mr. Recto said: “We just plan accordingly. If there’s a revenue loss here, then we glance for one more bill that may gain the revenue.”
House Ways and Means Chair Jose Maria Clemente S. Salceda, speaking on the sidelines of the signing ceremony, said the brand new law’s impact on government revenues shall be felt “probably within the first phase” and shall be “short term.”
“But we expect the rate of the economy to offset the reduction in rates mainly through latest investments,” he added.
“In the event that they don’t invest, there’s nothing to erode,” he said when asked to react to earlier remarks that the measure could erode the federal government’s revenue base. “In other words, actually, it gives us a likelihood to are available in.”
Mr. Marcos, in his speech on the signing ceremony, said the law was “hard-fought and hard-won.”
It’s the federal government’s “resounding testament of our commitment to make the Philippines the destination of alternative for investments,” he added.
Under CREATE MORE, RBEs could have the choice to avail either of the special CIT of 5% or the improved deduction regime, which were each prolonged from the initial maximum 10-year period to a maximum duration of 10 to 27 years, immediately firstly of economic operations.
The law entitles labor-intensive projects to an extension of five to 10 years.
Under the brand new law, export-oriented enterprises’ local purchases are zero-rated while importations are exempted from value-added tax (VAT).
This is able to “address the money flow problems with direct exporters as they not need to tie up funds in VAT payments that might otherwise be refunded later,” the Department of Finance said in an announcement.
The Motion for Economic Reforms (AER), which was among the many supporters of the CREATE Act of 2021, said the brand new law “carries with it plenty of issues sure to worsen the country’s fiscal state.”
“For one, the law massively broadens the scope and coverage of incentives offered to investors in an try to drive investment inflow. Contrary to its proponents’ claims, nevertheless, this race to the underside approach won’t necessarily herald additional investments and can as a substitute lead to the shrinkage of much-needed revenue for development,” it said in an announcement.
Amongst the foremost concerns of AER is the transfer of many of the Fiscal Incentives Review Board’s (FIRB) functions to investment promotion agencies (IPAs), which the board is supposed to oversee.
The law also allows the President to grant incentives without the advice of the FIRB, whose board is chaired by the Department of Finance.
This opens “more doors for abuse and corruption,” AER said, adding that giving the President the ability to grant incentives “solely upon discretion” runs “contrary to the principles of excellent fiscal governance.”
“Such changes to our fiscal incentives system defeat the aim of the unique CREATE Act passed in 2021, which is to be certain that the inducement regime is time-bound, targeted, and performance-based,” AER said.
CREATE MORE fails to deal with “real hurdles” inhibiting investment within the country, including fiscal stability, sound governance, policy certainty, and reliable infrastructure, it added.
The Joint Foreign Chambers said the brand new law solidifies the Philippines’ “position as a competitive destination for investments and business expansion.”
“This laws addresses the urgent must review and revise the country’s investment incentive policies, ensuring they continue to be aligned with international standards,” it said in an announcement.
George T. Barcelon, chairman of the Philippine Chamber of Commerce and Industry, said CREATE MORE will heavily profit local manufacturers because it incentivizes exporters patronizing local products.
Secretary Frederick D. Go of the Office of the Special Assistant to the President for Investment and Economic Affairs said the brand new law has triggered “a whole lot of interest from foreign direct investors, especially the massive ones,” including those involved in shipyard constructing in addition to the electronics and renewable sectors.
Mr. Go said these investors are from South Korea, Japan, China, Australia, the UK, and the USA.
“The passage of CREATE MORE has triggered a lot interest from foreign and domestic direct investors, especially the massive scale ones. That is our most important tool to make the Philippines a sexy investment destination,” Mr. Go said in an announcement.
CREATE MORE also institutionalizes flexible work arrangements for RBEs operating inside economic zones and freeports, without compromising their tax incentives.
Pre-CREATE registered business enterprises will proceed to benefit from the national and native incentives previously granted to them until Dec. 31, 2034, based on the law.
In an announcement, the Bureau of Internal Revenue said it is going to conduct a public information campaign on tax incentives granted by the brand new law “for the aim of promoting the Philippines as a chief investment destination.”
Meanwhile, the Philippine Economic Zone Authority (PEZA) said domestic market enterprises can even benefit from the brand new incentive regime.
“This could stimulate domestic production by local manufacturers, including foreign investors going into import-substitution activities to cater to our growing domestic market,” it said in an announcement.
The German-Philippine Chamber of Commerce and Industry, Inc. (GPCCI) also welcomed the signing of the law, whose key reforms include extension of tax incentives for as much as 27 years and streamlining of tax refund processes.
“We share the goal of making a more favorable business landscape to foster growth and job opportunities,” GPCCI President Marie Antoniette Mariano said. — with Justine Irish D. Tabile
