Thank you everyone for accepting our invitation. We thank Senator Pia and Congressman Joey—the champions of tax reform and vanguards of sound economic and fiscal policy—for joining us today. We appreciate the work that you do for our country.
As you know, we may be seeing the final stages of nearly three decades of work to ensure that the country has a performance-based, time-bound, targeted, and transparent tax incentives system. Though it has been painful, this crisis has allowed us to see more clearly our country’s strengths and weaknesses.
As most international observers validate, conservative financial management and sensible fiscal and economic reforms are at the core of our socioeconomic resilience. You will remember that recently, the Economist magazine ranked the Philippines sixth out of 66 emerging economies in terms of fiscal strength.
On the other hand, there are weaknesses in our economic and fiscal policy that constrain our growth and hamper our people from realizing their full potential. If there is anything we have learned from past crises, it is that difficult times train people’s sights on what is necessary and important.
Hence, there is no better time to reform our corporate income tax system and modernize our fiscal incentives than now. This could be the most important economic reform in decades. As the statements of our partners in industry and civil society show, the economy can no longer bear any delay in this reform. Now is the time do it.
The economic team has been forthright about where the needs of the economy and the means of our government meet. That is why we have introduced changes to the original CITIRA bill to respond to our present difficulties, without compromising the reform’s fundamental principles.
Now called CREATE or Corporate Recovery and Tax Incentives for Enterprises Act, package 2 has been recalibrated to make it more responsive to the needs of businesses negatively affected by the COVID-19 pandemic. This will also improve the ability of the Philippines to attract highly desirable investments that will serve the public interest.
The amendments make the proposed bill the first-ever revenue-eroding tax reform package proposed by the Department of Finance (DOF) and the largest fiscal stimulus program for enterprises in the country’s history.
First, we propose an immediate across-the-board cut of the corporate income tax rate for all firms from 30 percent to 25 percent starting in July 2020, if Congress can pass the bill before sine die adjournment on June 3.
The corporate income tax rate will be reduced further by 1 percentage point for every year from 2023 to 2027.
In the second half of this year alone, this will result in a reduction of government revenues estimated at 42 billion pesos that all firms, especially the country’s micro, small, and medium enterprises, can use to fund their operations and retain their employees. For the succeeding 5 years, the total estimate is 625 billion pesos foregone government revenues that these firms can invest in the revitalization of their businesses and create even more jobs for Filipino workers.
Second, to allay the fears of current incentive recipients who may not have been able to project a pandemic in their financial planning, we have extended the sunset period for firms from two to seven years, to four to nine years. However, firms who believe that the new incentives regime is more favorable, they can shift to the new system immediately.
Third, we have extended the applicability of the net operating loss carryover for non-large taxpayers. Losses in 2020 can be carried over by two more years, prolonging the carry-over period from three to five years. This will allow firms to utilize net losses in 2020 as additional deductions to their taxable income from 2021 to 2025. As much as 99 percent of corporate taxpayers, should they incur net operating losses, are eligible for this benefit.
Fourth, we are making the system more flexible by allowing the Fiscal Incentives Review Board to recommend to the President the grant of longer incentives and additional non-fiscal incentives for deserving investments. The rigidity of existing tax incentives system has kept our hands tied in competition for super-investments in the region. The provision will allow us to tailor-fit our incentives according to the unique needs of specific investments with exceptional benefits to the public interest.
Allow me to emphasize that these changes are made in recognition of the exceptionally tough challenges we face today. Overall, CREATE is a generous proposal that addresses most, if not all, of the concerns raised with us before by businesses and industry groups.
We understand where businesses are now, and we have proactively made adjustments to help them from the taxation side. Once the country’s economic situation improves, our policy response will change accordingly. These amendments, in other words, are on offer for a limited time only.
We thank the Senate for committing to doing its best to get the bill through the legislative process before adjournment. We thank the House for being open to adopting a fiscally-responsible Senate version. At this point, every session hour counts, and we thank Congress for working hard on this historic reform.
Thank you very much.
-@@@-
Copyright © 2021 Department of Finance