Do not CREATE
Ifelt somewhat intimidated in expressing my reservations on Corporate Recovery and Tax Incentives for Enterprises Act (CREATE), the fiscal stimulus package authored by the Department of Finance. I was uncomfortable in playing the role of a villain in a bill prioritized by the administration and heavily supported by the private sector. But I kept remembering the words of my high school history teacher— “Silence is complicity and consent.” He reminded us to speak for what we think is right by quoting Thomas Jefferson:
“All tyranny needs to gain a foothold is for people of good conscience to remain silent.”
I also need to practice what I preach, i.e. that good governance can only flourish when ordinary citizens articulate their views and participate in the discussion.
CREATE is hugely popular because of the immediate reduction in the corporate tax rate from 30% to 25%. Who would not be attracted to a reduction in the tax burden? But in the short term, a tax cut does not mean much to firms who have no income because of the pandemic. It will not also mean so much for SMES. Only a small number of them, 19%, are organized as corporations. But thinking long term, a tax cut would enhance profitability and competitiveness.
The tax cut comes as part of a package—a huge set of incentives that are made attractive because of “one size does not fit all.” The bill gives the President, upon the recommendation of the Fiscal Incentives Review Board, chaired by the Secretary of Finance the power to modify the period and manner of availment of tax incentives for “highly desirable projects or specific industrial activities that would create higher value jobs and attract foreign direct investment.” Incentives can be provided for as long as 40 years—why 40, the bill does not explain.
A tax incentive program that provides for the use of discretion is a No-No in good governance. Rules that are not certain, unwritten and are flexible breed rent seeking behavior on the part of the investor, and corruption, plus, abuse of authority on the part of the administrator. An ideal scenario is for the eligibility rules to be clear, and, the performance indicators to be measurable. The space for subjective interpretation and negotiation need to be limited to the max for transparency and accountability. In contrast to what needs to be, the bill provides motherhood statements which are subjective and open to interpretation, e.g. the promoted firm must have a “comprehensive and sustainable development plan with inclusive business approaches and innovations”.
The DOF cites that flexibility and discretion are practiced in many countries, e.g. Indonesia, Malaysia, Thailand, and Vietnam. But these are also practiced in countries like Haiti, Nigeria, Tanzania, and Myanmar. The incentive program of Myanmar provides that incentives can be negotiated depending on the strategic nature of the investment. While Tanzania allows for negotiated tax breaks. Are these the best practices that our government wants to emulate?
The grant of tax incentives entails benefits. But its costs are hidden—these are in terms of revenue foregone, distortions, and inequity in price and resource allocations. Promoted firms become more profitable and can lower their prices because they are exempt from taxes which reduce their costs. But the most painful costs of tax incentives is the continuing tax burden borne by wage earners and ordinary corporations that are caught in the tax net.