COVER STORY

CREATE-ing opportunities through better fiscal incentives, lower corp taxes

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Metro Manila (CNN Philippines) — The Corporate Recovery and Tax Incentives for Enterprises, or the CREATE bill, was ratified by Congress earlier this month and is just awaiting the signature of President Rodrigo Duterte before becoming a law.

The second tax reform package of the government is the second version of the Corporate Income Tax and Incentives Rationalization Act or CITIRA. The measure generally aims to improve fiscal incentives and lower corporate income taxes. Here is a breakdown of what you need to know about the measure.

Tax cuts for businesses

Retroactively taking effect on July 1, 2020, CREATE will slash corporate income tax (CIT) from 30%, the highest in ASEAN, to 25% for large domestic and foreign firms that engage business in the country through a branch office. For small and medium corporations, this will be reduced to 20% if they have net taxable income below ₱5 million and total assets below ₱100 million.

READ: Lower corporate income taxes to be retroactive once CREATE is passed – DOF

A 25% CIT will also be applied to non-resident foreign firms, effective Jan. 1, 2021.

Minimum CIT typically charged to manufacturing firms will be reduced to 1% from 2% from July 1, 2020 to June 30, 2023. During the same period, taxes on non-profit hospitals and educational institutions will be lowered to 1% from 10%.

Small business, with sales less than ₱3 million, will be paying lower duties as well from 3% to 1% of gross sales during the three-year period.

Better business incentives

The tax measure will allot four to seven years of income tax holiday (ITH), and 10 years of Special Corporate Income Tax or enhanced deductions for exporters and “critical” domestic enterprises to be defined by the National Economic and Development Authority.

For enterprises with investment capital of at least ₱500 million, they will be given four to seven years of ITH and five years of Special Corporate Income Tax or enhanced deductions. On the other hand, firms with investment capital of less than ₱500 million will be given four to seven years of ITH and five years of enhanced deductions.

To encourage job creation, research and development, and use of local materials, additional deductions will also be given depending on the performance of a business. Additional three years of ITH will also be granted to those that will fully relocate outside of the capital region, while additional two years will be given to those that will locate in areas recovering from disaster or conflict.

READ: Businesses back CREATE bill as 'instant relief' for struggling firms

READ: Filipino-Chinese businessmen want CITIRA bill passed

VAT-exemptions

With the goal of addressing challenges caused by the COVID-19 pandemic, lawmakers added provisions that would exempt COVID-19 vaccines from value-added tax and import duties. Importation and sale of COVID-19 medicines, and personal protective equipment will be also free from VAT until December 2023.

Also VAT-exempted are medicines for cancer, mental illness, tuberculosis, and kidney diseases starting Jan. 1, 2021.

The future of CREATE

Albay 2nd Dist. Rep. Joey Salceda, key author of the bill, said with the bill nearing its completion, he expects “investment overhand to close” and “investors can now stand on more solid footing.”

He is expecting at least ₱12 trillion of total trade investments in the next 10 years due to CREATE, of which $90 billion will be foreign direct investments.

Senator Pia Cayetano, another proponent of the measure, said unpredictability and the wait-and-see attitude adopted by many investors can now be eliminated. As more investments come in and establish themselves in the country, more jobs will also be created, and new technologies and innovations will also be introduced, she added.

RCBC chief economist Michael Ricafort told CNN Philippines that as the measure’s goals are met -- improving investments and job creation -- its benefits will be further realized in the coming years, especially if the economy further recovers from the pandemic.

However, UnionBank chief economist Ruben Carlo Asuncion said it may be hard to determine what will be CREATE’s impact coming from a crisis, but he noted that its prospects are bright.

“Economic recovery, at this point, largely hinge on the vaccine drive implementation," Asuncion said. "No success in rollout, it would be difficult to see a strong economic recovery."