ARISE, not CREATE!

Bayanihan to Recover as One act, Part 2 (Bayanihan 2) was signed by the President on september 11, 2020. Many businessmen, non-government organizations and progressive legislators find the allotted P165.5 billion of the law too trifle and small in comparison to the earlier act passed by the Lower House (but not yet a law) called accelerated Recovery and Investments stimulus for the Economy (ARISE).

Arise—sponsored by Rep. Stella Quimbo and Rep. Joey Salceda. ARISE allotted P1.3 trillion for (a three-year) fiscal stimulus including a large amount of much-needed infrastructure building (over and beyond “Build, Build, Build”) employing the many unemployed.

The fact that the Covid situation will last at least one more year and will most likely take two years or more, had sacrificed the long-term and forwardlooking economic view over short and medium-term concerns. Bayanihan 2 had reduced the potential multiplier effects of infrastructure investments especially outside National Capital Region and nearby provinces. The current Bayanihan 2 Act is more focused on NCR and nearby provinces—the biggest hotspots of Covid infections—except for the P24 billion allotted for agriculture and the funds for overseas Filipino workers living in other regions. Fiscal Stimulus in Bayanihan 2 has been turned into more of a Social Amelioration Program for those hard-hit by the Covid pandemic. Of course, SAP itself is also a fiscal stimulus, but does not include the construction of very needed infrastructure we really need in the post-covid economy. These include, aside from better health care and hospital systems, not only in Metro Manila but in the provinces, better land, rail and water transportation systems linking provinces and cities, and a bigger

capacity and use of clean energy.

When the Lower House passed ARISE in June, there was a lot of optimism from the business sector that a strong fiscal stimulus would be finally enacted to revive a collapsing economy. The elements of the act included, over three years:

n P650 billion infrastructure (beyond “Build, Build, Build”)—using the many unemployed as workers.

n P150 billion—economic relief for MSMES.

n P110 billion—wage subsidies.

n P70 billion—assistance to transportation industry.

n P66 billion—assistance to agrifishery sector.

n P58 billion—assistance to tourism industry.

n P50 billion—loans for agrarian reform beneficiaries.

n P44 billion—assistance to industry and services sectors.

n P42 billion—subsidy for students.

n P25 billion—assistance to displaced, vocational workers.

n P15 billion—p10 billion Covid19, P5 billion Tesda.

All of these had been heavily slashed in Bayanihan 2, leaving the Philippines with one of the smallest fiscal stimulus among the countries in the world.

The economic managers, Department of Finance Secretary Carlos Dominguez and National Economic and

Development Authority (Neda) Director General Karl Chua said that there are just not enough revenues to back up the P1.3 trillion three-year program of ARISE. They instead said that they just can afford P300 billion (including “Build, Build, Build” projects) or P165 billion without the Build, Build, Build projects. This is coincidentally the total amount allotted to the Bayanihan 2 Act. They said this would result in a fiscal deficit, which would already reach 9 percent of gross dometic product. Beyond this, we will weaken our “macroeconomic fundamentals” and the international credit agencies may downgrade us.

Instead they recommended a fiscal stimulus of P300 billion (mentioned in previous paragraph), and micro, small and medium enterprises (MSME) lending of P200 billion (total for the whole year) via Landbank with guarantee from Philguarantee.

But their most important recommendation is a tax-cut stimulus called CREATE—WHICH they wanted to substitute for ARISE. CREATE is Corporate Recovery and Tax Incentives for Enterprises Act. Its elements are:

n Corporate Income Tax Cut—from 30 percent to 25 percent starting this year to 2022, 1 percent reduction from 2023 to 2027 to reach 20 percent in 2017 (controversial)—target saving MSMES.

n Fiscal Incentives Review Board (FIRB) will give fiscal and non-fiscal incentives to what government sees are priority and beneficial industries.

n NOLCO increased to five years— Net operating loss carryover where losses by companies this year can be used as tax deduction for the next five years, instead of the currently allowed three years by the Bureau of Internal Revenue (BIR).

The first two items above were part of TR AIN 2, the Tax Reform Acceleration and Inclusion part 2 plan of the Duterte administration before the pandemic. The second item was supposed to include the stoppage of income tax holidays and other tax incentives for firms that have enjoyed it for the last decade or so. Many multinational corporations objected to this negative list, so it was removed in

CREATE and these fiscal incentives are allowed a stay of another nine more years.

The best part of CREATE is the increase of NOLCO from three years to five years. NOLCO is net operating loss cover, allowing tax deductions of corporate income losses for this year to continue up to three years. This is part of the regulations of the BIR. Given the extent of income losses across the firms in the entire economy because of the worldwide calamity of Covid and lockdowns, the CREATE bill extends it from three years to five years. This is but fair.

But the most objectionable part of CREATE is its main focus, which is the cut in the corporate income tax. The reasons for my objections are: a) it is more reasonable to stimulate the economy by fiscal spending and employment of the unemployed. Tax cuts will just be saved instead of either spent or invested if firms and households believe that the pandemic will last a long time (which it most likely will) and the Covid cases do not decrease, and firms’ employees are being infected, b) Tax cuts will mean more revenue losses which is really needed to finance spending in health, SAP, infrastructure building and employing the unemployed, c) Most companies will have reduced and negative incomes this year, and very likely the next year, so tax cuts in the early years will not benefit them and will not lead to a stimulus, and d) Despite having the highest nominal corporate income tax in Asean, the actual collected income tax collection (using the effective tax rate) is actually much lower. (We have a lower tax revenue capacity than Vietnam and Cambodia—both poorer than us). This is due to under-declaration of receipts and over-declaration of expenses, and abuse of exemptions, oftentimes with the connivance of BIR officials. This certainly must be corrected in CREATE, simultaneous with the cut in the nominal tax rate, but it IS NOT.

So it is: ARISE (plus 5-year NOLCO), not CREATE! Add another stimulus bill to Bayanihan 2 using the ARISE bill.