Improving the country’s chances

Amid the economic uncertainties brought about by rising cases of COVID-19 infections and more stringent quarantine measures comes a glimmer of hope.

The bill lowering the country’s corporate income tax (CIT), the highest so far in Southeast Asia, has been signed into law by President Duterte. From the current rate of 30 percent, it will be reduced to 25 percent for corporate taxpayers and 20 percent for small businesses or micro, small, and medium enterprises (MSMEs). Singapore has the lowest CIT in the region at 17 percent, but the regional average is around 23 percent. By 2027, the Philippines’ CIT will be reduced to 20 percent.

To help schools and hospitals, Republic Act 11534 or the Corporate Recovery and Tax Incentives for Enterprises Act (CREATE) also lowered the CIT rate for nonprofit proprietary educational institutions and hospitals from the current 10 percent to only one percent, effective from July 1, 2021 to June 30, 2023.

Also among those looking forward to the reduced CIT rate are one-person corporations (OPCs) created under RA 11232 or the Revised Corporation Code, which was signed into law in November 2018. OPCs only have one stockholder/ director, who is also the president, but they are taxed just like regular corporations or those with generally at least two, but not more than 15 directors. With the onset of the pandemic last year, the creation of OPCs became popular, especially for small businesses that did not want the absence of a limited liability feature of sole proprietorships. Just like regular corporations, OPCs have a juridical personality which is separate and distinct from its single shareholder, so that its assets and liabilities (as well as rights and obligations) are not the liabilities of the shareholder and vice versa.

Under the CREATE Act, corporations with net taxable income not exceeding P5 million and with total assets not exceeding P100 million shall be taxed at 20 percent. This will augur well for many OPCs which are also MSMEs and will hopefully encourage entrepreneurship, especially among the youth.

Meanwhile, the minimum corporate income tax (MCIT) of two percent of the gross income, which is imposed on corporations beginning on the fourth taxable year immediately following the year in which it commenced business operations when the minimum income tax is greater than the tax computed for the taxable year, will be reduced effective July 1, 2020 until June 30, 2023 to one percent.

Foreign corporations engaged in trade or business in the Philippines will also benefit from the 25 percent income tax rate to be imposed on their income from all sources within the Philippines effective July 1, 2020, as well as from the reduced MCIT of one percent from July 1, 2020 to June 30, 2023.

The CREATE Act also overhauled the country’s tax incentives system to make it targeted, performance-based, and time bound.

The President, however, has vetoed certain provisions in the law. Under the 1987 Constitution, the President has the power to veto any particular item or items in an appropriation, revenue or tariff bill, but the veto shall not affect the item/s to which he does not object.

The President thumbed down a line that exempts house and lot and residential dwellings valued at P4.2 million from the value-added tax (VAT). Under the Tax Code, only residential dwellings valued at a maximum of P2.5 million are VAT exempt in order to assist buyers of socialized housing units.

He also vetoed a line that limits the oversight power of the Fiscal Incentives Review Board (FIRB) to projects or activities with total investment capital of over P1 billion, one which provides for automatic approval of applications for incentives if not acted upon within 20 days from submission, among others.

The CREATE Act provides that the FIRB will delegate to investment promotion agencies like the Subic Bay Metropolitan Authority (SBMA), Clark Development Corp., John Hay Management Corp., and even the Tourism Infrastructure and Enterprise Zone Authority or TIEZA, which is under the Department of Tourism, its power to grant tax incentives for registered projects or activities with investment capital of P1 billion and below.

To recall, Sen. Richard Gordon, who used to chair the SBMA, vehemently opposed placing SBMA and the other freeport zones under the proposed CREATE Act, saying empowering FIRB to approve investors’ tax perks for investments beyond P1 billion will only add another layer of bureaucracy.

But Sen. Pia Cayetano, sponsor of the bill in the Senate, rejected Gordon’s proposed amendment saying the whole essence of CREATE is to make all IPAs accountable through the FIRB.

The President, in his veto message, clarified that even with the line veto, IPAs would retain the delegated power to grant incentives up to a certain threshold amount, but insisted that the FIRB’s oversight power would extend even to tax perks granted by IPAs for investments P1 billion and below.

While admittedly many IPAs have achieved much on their own to attract investments into their respective economic zones, we cannot deny the fact that the power given to IPAs to grant these tax perks, which includes income tax holidays and the autonomy that they enjoy, has been abused.

With the reduction in corporate income taxes, the government will have to find some other way to conserve our limited fiscal resources. Limiting the power of IPAs, as well as making incentives time-bound and performance-based instead of being unlimited, is one way to make sure that only those who are truly deserving should receive them.