"CREATE embodies a bias in the opposite direction with dim prospects of success."
"CREATE embodies a bias in the opposite direction with dim prospects of success."
A few months ago, President Rodrigo Duterte of the CREATE (Corporate Recovery and Tax Incentives for Enterprises) Act has again brought to mind two basic facts about the development of any economy. As its name suggests, CREATE is an incentives-for-business measure, and its most important mission is a reduction of the CIT (corporate income tax) from 32 percent to 25 percent.
One of the economic-development facts to which I refer is that it is the government’s responsibility to finance the installation of the infrastructural facilities – the highways, bridges, airports, seaports, irrigation systems, schoolhouses, hospitals etc. – without which an economy cannot develop. The second fact is that taxation and borrowing are the two principal ways by which the government can finance its infrastructure spending and the government has to borrow in order to finance expenses that cannot be covered by tax revenue.
Given this pair of facts, the bias of taxation policy changes must be toward revenue generation, and lateralization of taxation policy – and the resulting reduction of tax rates – must be undertaken on an exceptional, well-thought-out bias.
One of the accepted exceptions to the revenue-generation rule is the giving of fiscal incentives to productive activities considered to be highly valuable to the development and growth of the economy. The theory underlying the foregoing of government revenue – as is CREATE’s CIT reduction – is that investors that would otherwise be reluctant or disinclined to make an investment in the Philippines would change their attitudes when offered incentives that would have a positive impact on the projected net incomes from their proposed operations. An added consideration in the case of CREATE’s CIT reduction was that this country’s 32-percent rate was higher than the CIT rates of the other ASEAN (Association of Southeast Asian Nations) members, which are in the 25 percent area.
Two questions are raised by CREATE’s CIT reduction. One is, is the total incremental investment likely to be higher than the foregone government revenue? The other question is, was the CIT reduction necessary in order to attract more domestic and foreign investments?
Obviously, the total incremental investments generated by the CIT reduction should be substantially greater than the foregone government revenue if the CIT reduction can be said to have been worth the effort. I am doubtful that it will be. Like the Biblical “Man does not live by bread alone,” investors generally do not make decisions on the basis of reduced tax liabilities alone.
This brings me to my answer to the second question. I don’t think it was necessary for the tax authorities of this country to match the CIT rates of the other ASEAN members. The Philippines has had well-crafted incentives-granting programs for decades – including the Investment Incentives Act of 1967 and the EPZA (Economic Processing Zone Authority) law – yet investors have not set up shop in the expected numbers. The conclusion is clear. It’s not fiscal incentives alone that investors look for in deciding to invest or not to invest in a particular location; they look for a good overall business environment. This country’s sustainedly poor investment-attraction performance suggests that it does not have such an environment.
Summing up, the bias for taxation policy should be for revenue generation to enable the government to finance its development expenditures. CREATE embodies a bias in the opposite direction with dim prospects of success.
