THE Corporate Recovery and Tax Incentives for Enterprises (CREATE) law’s incentive-rationalization component harmed exporter competitiveness and warrants a review, the electronics industry association said.
“While CREATE’s reduction of corporate income tax of local companies is good, the incentives rationalization was ill-advised. With the high cost of operations (power, logistics, labor, cooling water, etc.), exporters have been rendered uncompetitive in the global market,” Semiconductor and Electronics Industries in the Philippines Foundation, Inc. (SEIPI) President Danilo C. Lachica said in a Viber message.
Last month, President Ferdinand R. Marcos, Jr. said that he was looking into amending CREATE to address concerns raised by businesses and investors.
Signed in 2021, CREATE reduced tax rates and amended the incentive system to support businesses recovering from the pandemic.
Under CREATE, the corporate income tax rate for micro, small and medium enterprises was lowered to 20% from 35%. Large corporations with taxable income above P5 million also saw rates reduced to 25% from 30%.
The law also grants incentives to registered companies and projects, including income tax holidays, special corporate income tax rates, enhanced deductions, duty exemptions on imports of selected materials, and value-added tax (VAT) zero-rating on local purchases.
However, some incentives like the VAT zero-rating provision have been singled out by export groups.
“Before CREATE, suppliers to exporters were VAT-free. With 12% VAT, local suppliers will not be competitive. Exporters will just import raw materials and kill local suppliers,” Mr. Lachica said.
CREATE requires claimants to VAT exemptions to prove that their local purchases are “directly and exclusively” used in their registered activities in order to enjoy the zero rating.
“I think there were certain provisions in CREATE in the beginning (that) created some confusion, especially those in the Philippine Economic Zone Authority (PEZA) zones. We approached the previous admin, and they were agreeable at the time to sort of have a remedy for that, (but) I think they have to make it clear,” Philippine Chamber of Commerce and Industry President George T. Barcelon said by telephone.
The government has released various circulars and regulations to address such concerns.
In April, the Bureau of Internal Revenue (BIR) allowed local suppliers of goods and services to registered export enterprises to forego BIR approval for VAT zero-rating of items they provide to locators. Instead, their VAT zero-rating may be claimed on the strength of certifications to be issued by investment promotion agencies such as PEZA.
Finance Secretary Benjamin E. Diokno said that the government will continue to review its tax reform measures, including CREATE.
“We continue to review the tax system. As I said, we inherited a superior tax system… That does not mean the tax system is perfect, so we continue to review it,” he told reporters on Friday.
Ateneo de Manila economics professor Leonardo A. Lanzona said that the CREATE law runs “contrary” to the government’s fiscal consolidation objectives.
“The overall goal of CREATE was precisely to attract investors and to accelerate the economic recovery after the pandemic. The proposed amendment indicates that the current law was unable to accomplish these two goals. If the plan is to reduce VAT, this would already be on top of the income tax reductions incorporated into the law, making the proposed amendment an obvious bonanza to investors,” he said in an e-mail.
“Reducing VAT cannot be possible if the plan is to reduce the overall debt obligations in the face of the decreasing prospects for overall economic growth due to the global economic slowdown,” he added.
At the end of March, the National Government’s debt-to-gross domestic product (GDP) ratio stood at 61%, still above the 60% threshold considered manageable by multilateral lenders for developing economies.
The government is aiming to reduce the debt-to-GDP ratio to less than 60% by 2025, and further to 51.1% by 2028.
Mr. Lanzona said that the government should instead focus on other measures to ramp up investment.
“It is time for the government to do away with simply revising tax measures in order to attract investment. There are other ways of increasing investment that involve structural reforms that will improve the productivity of our domestic resources, including the upskilling of our workers,” he said.
“An investor reading our CREATE law (will conclude that) it doesn’t give them flexibility in availing of local goods and services subject to VAT,” Mr. Barcelon added.
The Finance department has estimated foregone revenue resulting from CREATE at P80.4 billion in 2022, against the P68 billion posted in 2021. This included P59.2 billion arising from the reduction in corporate income tax rates. — Luisa Maria Jacinta C. Jocson