December 04, 2020 at 12:10 am
Ernesto M. Hilario
"It will help businesses recover from the economic crisis brought about by the COVID-19 pandemic."
Late last month, the Senate approved the proposed Corporate Recovery and Tax Incentives for Enterprises (CREATE) Act that seeks to provide micro, small and medium enterprises (MSMEs) with the largest stimulus package ever. It will help them recover from the economic crisis brought about by the COVID-19 pandemic via a hefty 10-percentage point cut in the corporate income tax (CIT).
If this bill is passed by the House of Representatives and signed by President Duterte, MSMEs will start paying only 20 percent in corporate income tax retroactive to July 1 this year from the previous 30 percent.
The proposed law classifies MSMEs as domestic corporations with total assets, excluding land, of not more than P100 million and net taxable income of P5 million and below. Businesses with net taxable income of P5 million and above, including foreign firms operating in the country, will pay 25 percent.
Sen. Pia Cayetano worked hard in the last 14 months to get the bill passed at the committee level, and defended the measure when it was elevated to the Senate plenary.
CREATE is not the only tax reform measure that Pia helped shepherd in Congress and succeeded in passing into law. She pushed for the approval of the Tax Reform for Acceleration and Inclusion (TRAIN) Act when she was Deputy Speaker of the House of Representatives in the previous Congress.
As chair of the Senate ways and means committee, Pia steered the passage of two other sin tax reform bills. One signed into law in July 2019 imposed another round of excise tax hikes on tobacco products and introduced taxes on electronic cigarettes. The other one, signed into law in January this year, finally increased after more than a decade of excise taxes on alcohol products and implemented another round of tax increases on electronic cigarettes. These laws help augment the massive funding for the Universal Health Care (UHC) program, which Pia also co-authored.
In the 15th Congress, Pia was also a key proponent of the first Sin Tax Reform Act (RA 10351).
As chair of the Senate ways and means committee in the 18th Congress, Pia ably defended the CREATE bill so that it would get approved this year. The Department of Finance (DOF) had described CREATE as a “legislative imperative” because it would help struggling businesses reeling from the pandemic-induced economic shock by giving them a big tax cut effective the second half of this year.
CREATE will benefit not only the business sector but also educational institutions and hospitals. CREATE reduced taxes for proprietary, non-profit educational institutions and hospitals to a 1-percent special income tax rate from July 1, 2020 to June 30, 2023.
The Senate version of CREATE, which the House will adopt, also increased the VAT-exempt thresholds for sales of real property, from P2.5 million to a maximum of P4.2 million.
During the interpellations on the bill, Pia said she was constantly being educated by her colleagues who provided valuable improvements to the CREATE provisions, most notably the 20-percent tax cut for MSMEs. She painstakingly went over each of the proposed amendments and ably explained why she was for or against them.
As a result, among the improvements included in the bill is the VAT-exempt sale and importation of electronic reading materials, in response to the requirements of online learning and the shift to a digital economy.
VAT-exempt taxpayers who are subject to the 3 percent percentage tax shall pay only 1 percent instead from July 1, 2020 to June 30, 2023 under CREATE.
The senator also fought hard to ensure that an indispensable feature of the CREATE bill—the modernization of the fiscal incentives system—would not be diluted. Under CREATE, all Investment Promotion Agencies (IPA), while maintaining their functions and powers under their respective charters, shall now follow a single menu of incentives and shall be supervised by the Fiscal Incentives Review Board (FIRB).
But she also recognized the fact that exporters need continuous support to thrive under a post-pandemic environment. Thus, CREATE provides differentiated incentives for export-oriented and domestic-oriented activities or projects. For export-oriented firms, CREATE provides an Income Tax Holiday (ITH) of four to seven years and a choice between paying 5 percent tax on gross income earned (GIE) or getting enhanced deductions for 10 years. Domestic-oriented enterprises get the same Income Tax Holiday (ITH) of 4 to 7 years and enhanced deductions for 10 years.
To encourage job-generating investments, CREATE provides projects with a minimum investment capital of P50 billion or those that can generate at least 10,000 employees a special incentive package of at least 40 years.
CREATE also calls for a Strategic Investment Priority Plan (SIPP) that shall be formulated every three years. This will include priority projects or activities that have substantial amounts of investments, considerable job generation capacity, and modern technology. In short, the SIPP list should include capital-intensive, job-creating investments that we want to relocate here.
The CREATE bill is significant because it was approved amid the coronavirus pandemic. Several administrations had pushed for corporate tax reform in the last 25 years, but it was only under Pia’s chairmanship of the ways and means committee that this reform bill was finally approved in the Senate, and is now well on its way to becoming part of the law of the land.