Create law cultivates confidence, confusion; booster shot required

REP. Joey Sarte Salceda of Albay took off his sports jacket and ran a hand on his blue tie during an online discussion (https://www.youtube. com/watch?v=xziczr2awjk) on a law that he touts as “the most readily available tool for economic recovery.”

Salceda appeared exasperated, especially with the Bureau of Internal Revenue (BIR), in that online forum days after President Duterte signed Republic Act (RA) 11534 on March 26.

Four months later, the House Committee on Ways and Means Chairman remains bullish that the law, also called Corporate Recovery and Tax Incentives for Enterprises, or CREATE, that he helped craft is one of the country’s tools to climb out of the economic rut.

“We need a booster to prevent anemic post-pandemic growth,” Salceda said. “[The] CREATE [law] is the best tool for this, so we need to maximize its benefits by fully carrying it out early and selling it to the world aggressively.

His exasperation is no longer visible, noting there are already signs that RA 11534 has opened the doors to greater investments coming from outside the country’s borders.

According to Salceda, an economist, the net inflow of foreign direct investments (FDIS) more than doubled to $679 million in April from $317 million in 2020.

SIPP as bible

SALCEDA’S view of CREATE law as “a principal agent of economic recovery,” rests on the move of the Board of Investments (BOI) and its timely release of the Strategic Investment Priorities Plan (SIPP), which “will be our bible for industrial planning over the next few years.”

“The urgent release of the SIPP is also crucial, because investors need something to refer to as they decide whether prospective internal rates of return justify investing in the Philippines,” the lawmaker said. “The SIPP tiering, in particular, decides how much incentives they get. So I hope the BOI can release this soon, even a partial ‘no-brainer’ SIPP for now, while we tackle the nuances of the other more complicated sectors.”

According to Salceda, the business process outsourcing (BPO) industry, or at least certain segments of it, will qualify for the highest incentives under the Create law, once the SIPP is released.

“So I implore BOI to do it soon, and watch the BPO sector and other industries grow substantially.”

He noted that before CREATE was enacted, office space demand in the BPO sector in the first quarter of the year was just 35,000 square meters. Now it is up to 92,000, higher than it has been in 2020, even before the lockdown measures.

“That is also an eye-popping 162-percent growth in the industry’s office space needs,” Salceda cited.

“Of course, more office space needed also means more direct jobs. It also means more indirect jobs, through janitorial services, property sector jobs, transport, service provider jobs, among others.”

Tax cuts

SALCEDA points out that CREATE is “the largest tax stimulus for businesses in the country’s history.”

The law reduces the corporate income tax (CIT) to 25 percent for large corporations and 20 percent for small and medium-scale corporations (with net taxable income of up to P5 million and total assets of up to P100 million).

“The size of it, especially in the medium term, is hard to overstate,” Salceda said.

He explained that in net present value terms, the law grants businesses P7.2 trillion in financial resources to fund expansion and job creation.

“No fiscal reform package has come close to freeing up that much resources for business expansion,” Salceda added.

He also pointed out that the tax incentives regime under CREATE “is generous and partial” to countryside development, increases value-added activities and boosts research and development.

Added incentives

SALCEDA noted the law’s generosity in this: everyone gets four years to seven years of income tax holiday (ITH) as part of the basic package, the longest being for those who locate to the countryside and those higher up the industry tiers.

“If you are an exporter, you get 10 years more of a 5-percent tax on gross income, or enhanced deductions,” Salceda said. “It’s five more years of enhanced deductions for domestic enterprises.”

The lawmaker said that if a business relocates from Metro Manila, it receives three more years of income tax holiday.

“If you are in an area recovering from calamity, you get two more years of ITH,” he explained.

Salceda added that the countryside development aspect—the higher incentives for moving away from the highly urbanized centers—is crucial.

“The demand for real estate on the first half of 2021 is already 75 percent of demand from 2020. So expect the price of maintaining office space in Mega Manila will be up this year and in succeeding years,” the lawmaker further explained. “The tax differential combined with the cost differential of moving to less costly provinces will really make a difference.”

Yoke of tax

CONGRESS, to note, is studying “corrective legislation” for the law.

Nonetheless, Salceda assures that the Department of Finance (DOF) will implement the provisions of CREATE Law, which allows exporters to enjoy zerovat rating on local purchases of goods and services directly and exclusively used in its registered project or activity.

This after the DOF and the BIR and the Department of Finance (DOF) agreed to suspend the implementation of Revenue Regulation (RR) 9-2021, which imposed a 12-percent value-added tax (VAT) on certain exporter transactions that were previously taxed at 0 percent.

RR 9-2021 was issued pursuant to the provisions of RA 10963 or the Tax Reform and Acceleration and Inclusion Act, or TRAIN, (Sections 106(A)(2)(a) and 108(B) of the Tax Code of 1997, as amended), which provide that certain transactions previously considered zero-rated shall be subject to that VAT rate upon satisfaction of two conditions.

Spirit of legislation

THE first condition to be satisfied is the successful establishment and implementation of an enhanced Vat-refund system. The second condition is that all pending Vat-refund claims as of December 31, 2017, were fully paid in cash by December 31, 2019.

But Section 5 of Rule 18 of the recently-signed implementing rules and regulations (IRR) for fiscal incentives under CREATE provides that VAT zero-rating on local purchases of registered business enterprises (RBES) may still apply. There is a catch: such locallypurchased goods and services are directly and exclusively used in the registered project or activity of the RBE during the period of registration of the registered project and/ or activity of the RBE.

The Philippine Economic Zone Authority (PEZA) had earlier said that charging additional VAT is an added burden to RBES and will be an “unnecessary expense that will make the Philippines unattractive to foreign investors.”

In an online forum organized by the Tax Management Association of the Philippines (TMAP), Finance Undersecretary Antonette C. Tionko said that the new regulation will now follow the CREATE law to pave the way for exporters to continuously enjoy zero-percent VAT on their local purchases of goods and services.

But according to Salceda, CREATE “hopes to ease the operations of exporters, enhance the country’s competitiveness and encourage sourcing of materials from local suppliers.”

“That’s the spirit of the legislation,” he said. “That’s why it insists on the zero-rating for local inputs, on top of enhanced deductions for them.”

Territorial concerns

DURING that forum, a PEZA official expressed concern that the CREATE law “breaks down economic-zone walls” as it gives the same incentives to all export enterprises whether they locate inside or outside the zone.

“As I understand this, export enterprises under the CREATE law, even if they are not inside PEZA economic zones, will get exactly the same incentives,” PEZA Deputy Director General for Operations Mary Harriet O. Abordo said. “So in effect, there’s no difference between locating in a PEZA zone that is in a separate customs territory and outside the zone because they will be subject to the same restrictions under the exemption and VAT zero-rating for exports.”

While Tionko noted such concern is under the BOI’S purview, she admitted there’s “still going to be some differences” for those inside and those outside the economic zone.

The finance official said they voiced out their apprehension over the uniformity of incentives for all export enterprises regardless of their location but this did not resonate with legislators during the crafting of the law.

Tionko said she kept telling legislators: “you don’t want the whole country to be a zone.”

“I kept saying that for the longest time but the way that legislation came out was a certain way so to the extent that we don’t want the whole country to be a zone,” she added. “That’s how we’re framing the IRR; subject to limitations of course.”

Relocation gains

DURING the online forum by TMAP, Finance Assistant Secretary Juvy C. Danofrata explained that the incentives became uniform for all export enterprises because some legislators do not want the exporters located outside the zone to be disadvantaged.

“Legislators, at that point, are trying to make a distinction but again not to disadvantage those exporters outside the zone because, in effect, the same benefits are also being generated for these exporters even though they are outside the zone. We’re also generating foreign exchange from them,” Danofrata said. “So, that’s why, again in terms of the grant of incentives, the incentives became uniform for all the exporters.”

Abordo pointed out it is “more expensive” for export enterprises to locate inside a PEZA economic zone, especially for those in the manufacturing sector.

“If there is no distinction, and there is no such strict implementation or the movement of goods of every export enterprise outside the customs territory, if I were an exporter, I can get cheaper land in a NON-PEZA economic zone area,” she said.

But Tionko said it would be better to see first how things will work out as the BOI has yet to approve a project from export enterprises under CREATE.

Optimism on FIRB

APART from the uniformity of incentives to export enterprises, Abordo said they also fear that CREATE may stymie PEZA’S efforts to develop economic zones unless it is considered part of the SIPP.

Abordo added that the oversight function of the Fiscal Incentives Review Board (FIRB) over investment promotions agencies like PEZA hampers them from making quick decisions on the grant of incentives, noting that they are now afraid to move because they fear the consequences if they acted in excess of their authority.

The FIRB is tasked to review and approve fiscal incentives for projects with a total investment capital of more than P1 billion, while those amounting to P1 billion and below are delegated to IPAS.

“It now ties PEZA’S hands on how to direct its investments and all of its actions and to respond very quickly to the needs of the industry because we are very afraid,” Abordo said. “And, in fact, my own staff, they are now very afraid to move, because it is provided in the Create law that the FIRB has the power to grant and administer incentives and has oversight.”

Still, Abordo expressed optimism that the FIRB will have a process and mechanism to address gray areas on the granting of incentives.

New opportunity

ONE company that welcomes the adjustments in VAT rates is Petron Corp., the country’s remaining oil refiner.

Prior to CREATE law, refineries in the country were inherently disadvantaged in terms of the timing of VAT payments for crude importations.

A provision of the law states that “crude oil that is intended to be refined at a local refinery, including the volumes that are lost and not converted to petroleum products when the crude oil actually undergoes the refining process, shall be exempt from payment of applicable duties and taxes upon importation.”

With this, Petron is exempted from paying taxes upon crude importation. Both refiners and importers pay taxes at the same time—upon product withdrawal.

Petron has previously raised the issue on “inequitable tax regime” between oil refiners and petroleum product importers. Petron President Ramon S. Ang said an oil refiner has to pay taxes—valueadded and excise—upon landing of imported crude oil. On the other hand, importers of refined fuels pay up only when they make sales.

“We need a level playing field, but that requires a new law or an executive order from Malacañang,” Ang had said.

This led the oil firm to shut down its 180,000 barrel-per-day Petron Bataan Refinery last February 10 and reopened starting June. During the shutdown, Petron successfully sought a registration with the Authority of the Freeport Area of Bataan (Afab) so it can avail of incentives being granted to locators at special economic zones.

Getting incentives

FOLLOWING its approval as an RBE in December last year, the Petron Bataan Refinery has started to transition into AFAB and has also begun to avail itself of fiscal incentives from operating in a freeport zone.

Petron, which supplies more than a third of the country’s oil requirements, has set aside P11 billion for its 2021 capital expenditures, higher than the P8.5 billion it allocated last year. The amount covers its ongoing construction of steam generator plants, strategic retail network expansion and maintenance requirements.

Improving oil prices in the world market, savings on operational expenses and financing cost contributed to the oil firm’s P1.73-billion net income registered in the first quarter of the year—a turnaround from the P4.9 billion net loss posted in the same quarter last year and higher than the P1.2 billion net income in the fourth quarter of 2020.

First quarter volumes reached 19.38 million barrels, 21 percent lower than the 24.66 million barrels sold in the same period last year. Consolidated revenues likewise decreased 20 percent to P83.3 billion from P104.62 billion a year ago.

Juggling costs

DESPITE lower revenues, Petron delivered a turnaround in the first quarter with a P3.7 billion operating income coming from its P4.4 billion operating loss in the same period last year.

It also recorded inventory gains due to the recent improvements in international oil prices in contrast with the inventory loss in the first quarter last year. In addition, Petron recorded savings on operating expenses and financing costs.

“Despite numerous challenges we encountered, we are mindful to cushion the impact of the pandemic on our business,” Petron Chief Financial Officer Emmanuel E. Eraña had said. The refiner, he said, pursued cost-savings efforts “and did our best to rise above this unprecedented obstacle.”

“We have yet to completely overcome the effects of the pandemic as restrictions continue to be implemented worldwide but are hopeful of gradual recovery evident in the upward trajectory of our volume and income performance.”

On Wednesday, Petron shares closed at P3.13 per share, up by P0.05 from the previous close. Volume of trade reached 1.35 million shares valued at P4.26 million.

Ongoing actions

TOUTED by the DOF as the “largest fiscal stimulus to firms in recent history,” the CREATE law is expected to provide P1 trillion in tax relief to businesses in 10 years.

The law also cuts the regular CIT rate by 10 percentage points, from 30 percent to 20 percent, for domestic corporations with a taxable income of P5 million and below, and with total assets of not more than P100 million.

Domestic corporations that earn a taxable income above P5 million benefit from an immediate reduction of the CIT rate from 30 percent to 25 percent. Foreign corporations currently paying the regular rate will also enjoy a reduced 25-percent CIT rate.

Following the issuance of CREATE in June, the DOF Office of the Spokesperson told the Businessmirror last July 16 that it is hoping to come up with an “effective, efficient and fiscally responsible incentive system” that “will set the standard in the region.”

Moving forward, the issuance of the SIPP and the promotion of the incentives package by the IPAS will be critical to maximizing the benefits of the reform,” the DOF said in an e-mailed response.

It also said the Board and Technical Committee of the FIRB have begun discussing the traditional SIPP and the use of online FIRB system to capture in one platform the activities or projects that are being registered with incentives. Also, cost-benefit analyses on applications received by the FIRB are also being conducted by the FIRB Secretariat.

“The FIRB is also working to adopt and implement an end-toend fiscal incentives registration and monitoring system. It would link all IPAS and provide a more

convenient platform to applying and current investors,” it said.

Valuing gaming

TO offset the expected revenue losses under CREATE as well as the decline in revenues amid the pandemic, the DOF also told the Businessmirror it has pushed for the passage of several bills, including one establishing a tax regime for Philippine Offshore Gaming Operations.

Among the provisions being supported by DOF on the measure include the consideration of Offshore Gaming Licensees (OGLS) as entities engaged in doing business in the Philippines.

The DOF also expects that the proposed 25-percent final withholding tax on the presumed minimum gross income of P600,000 of alien individual employees of OGLS will generate some P24.8 billion in incremental revenues in 2022.

Meanwhile, another P22.8 billion is expected from a 5-percent gaming tax on gross revenue or receipts derived from gaming operations in lieu of all taxes, including franchise taxes, levies, fees or assessment of any kind.

Enforcing rules

THE DOF also backs taxing offsite and online betting on cockfighting or e-sabong and the efforts of Congress to close the loopholes on the imposition of taxes on digital transactions, such as income tax and VAT.

The finance department is also studying ways to enforce tax obligations of non-resident corporations and individuals who conduct remote business transactions in the country, notably the VAT on electronic or digital transactions.

It said it is working with international institutions such as the Organization for Economic Cooperation and Development (OECD) and learning from other tax jurisdictions, to improve the taxation of the digital economy.

“Foreign corporations, such as

Netflix or Lazada, that earn income from their services in the Philippines, should rightfully pay the corresponding taxes similar to other business entities,” the DOF said. “The government is studying the evolving business models in the digital economy to enforce tax rules effectively.”

Exercise remedies

PRIOR to deferring the implementation of the BIR RR 9-2021, TMAP President Priscilla B. Valer told the Businessmirror that she found the implementation of some CREATE provisions “confusing.” Valer added that the government seemed to lack the needed preparation ahead of the law’s implementation.

She is also hoping that the government’s implementation of the rationalization of tax incentives under CREATE law would be consistent with the legislative intent.

“In any government [the application of the law should be] smooth-sailing. If your interpretation is different or if those governed disagree with your position, they should exercise their remedies para mas malinaw kung ano [so that matters would be clear],” she said.