PRESIDENT Duterte finally signed on Friday the much-awaited Republic Act 11534 or the Corporate Income Tax and Incentives System (CREATE) Act, which is expected to provide P600 billion worth of tax relief for local companies, but vetoed several provisions.
The law cuts corporate income tax (CIT) rate — the highest in the Asean region — and rationalizes the country’s fiscal incentives system.
The signing of the law marks the end of three years of uncertainty over the final form of the measure, albeit with some vetoed provisions.
RA 11534 cuts the CIT rate from 30 percent to 20 percent for micro, small and medium corporation (MSMEs) and 25 percent for other corporations with retroactive application to July 1, 2020.
Veto message
In his eight-page veto message, Duterte declared 7 “line item” vetoes on the provision of RA 11534, saying such is intended to protect the integrity of the government and the legislation itself in the long term.
“Crucial portions of the CREATE Act were intended to be emergency tax relief for struggling enterprises, but we must not lose sight of this reform’s long-term objectives,” Duterte said.
He scrapped the provision raising the value-added tax (VAT)-exempt threshold on sale of real property.
“The amendment in CREATE Act increases the VAT-threshold to up to P4.2 million. In effect, this will benefit even those not originally targeted for the VAT exemption–those who could actually afford proper housing,” Duterte said.
The President also junked the 90-day period for processing of general tax refunds for being “administratively impracticable,” as well as the definition of “investment capital,” which excluded land and operating expenses from the measure of an investment’s total scale. He said such “may lead to underestimation of our investment promotion performance.”
Another vetoed provision is on “incentives for domestic enterprises,” which Duterte deemed redundant and unfair for taxpayers. “Allowing and additional 14 to 17 years and another 10 year-extension for the same activity on top of the original period of incentives enjoyment is fiscally irresponsible and utterly unfair to the ordinary taxpayer and to unincentivized enterprises.”
Duterte removed the provision limiting the powers of the Fiscal Incentive Review Board (FIRB), which, he maintained, ensures proper granting and monitoring of tax incentives.
He likewise rejected provisions which are industry-specific under activity tiers since it might hinder the “flexibility” of CREATE Act in these “changing times.”
Duterte clipped an item allowing the President to exempt any investment promotion agency from provisions of the law, saying could be abused as a “highly political tool that could allow subsequent Presidents to dismantle decades of studies, disregard discussions based on empirical evidence, and even subvert the will of Congress itself.”
Last, the President rejected an item for automatic approval of application of incentives, saying, the “declared policy [is] to approve or disapprove applications based on merit.”
Light at tunnel’s end
House Committee on Ways and Means Chairman Joey Sarte Salceda, principal author of CREATE, welcomed its passage. “CREATE has been created. This is one of the pins of light signaling the end of this dark economic tunnel,” he said in a statement.
Apart from the lowering of CIT rate, Salceda said the law also includes key forms of pandemic relief, such as the lowering of Minimum Corporate Income Tax (MCIT) from 2 percent to 1 percent, effective July 1 to June 30, 2023.
It also lowered percentage tax from 3 percent to 1 percent for small businesses whose gross sales or receipts do not exceed the VAT-exempt threshold of P3 million, effective July 1, 2021 to June 30, 2023.
Salceda added that proprietary educational institutions and hospitals which are nonprofit will pay CIT rate of 1 percent instead of the current 10 percent, from July 1, 2021 to June 30, 2023.
“This will help schools and hospitals which are crucial to the country’s post-Covid-19 recovery,” he added.
Salceda noted Duterte has also retained the pro-countryside preference of Congress’s version of CREATE.
“Under CREATE, places like Bicol will receive the longest and biggest tax incentives, of up to 17 years for new locators, and a bonus of 3 years of income tax holiday for those relocating from NCR to these areas. We will also grant a bonus 2-year ITH [income tax holiday] to areas recovering from calamities. This brings the maximum length of incentives for less-developed, disaster-recovering areas to 22 years, among the most generous in Asia,” he said.
Registered enterprises may also be granted up to 50-percent additional deduction on their labor expense in the taxable year; up to 100 percent additional deduction on research and development; up to 100 percent deduction on training expense; up to 50 percent domestic input expense; and up to 50 percent additional deduction on power expense incurred in the taxable year.
The law also enhanced the net operating loss carryover (Nolco). The law provides that the net operating loss of the registered project or activity during the first three years from the start of commercial operation, which had not been previously offset as deduction from gross income, may be carried over as deduction from gross income within the next 5 consecutive taxable years following the year of such loss.
Meanwhile, Salceda vowed that the House Committee on Ways and Means will coordinate with the Executive Branch and Finance Secretary Carlos G. Dominguez III to see what Congress can do on tax administration to ensure that people have enough time or leeway during the April 15 deadline of the filing of income tax returns.
“The changes in the tax code due to CREATE will clearly entail some significant accounting work on the part of businesses. If an extension is not doable, we may work out other arrangements,” he added.
Image credits: MALACANANG PHOTO