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CREATE is the only choice!

At the forthcoming legislature’s bicameral conference on corporate tax reform, it should only be a choice between CITIRA (Corporate Income Tax and Incentives Reform Act, House Bill No. 4157) and CREATE (Corporate Recovery and Tax Incentives for Enterprises Act, Senate Bill No. 1357). CITIRA is the House version of Package 2 of the comprehensive tax reform. CREATE, on the other hand, is the Senate Version. Both are good packages, each complete and balanced on its own, and worthy of our support.

There should be no third choice — no hybrid of the two, no massive “picking and choosing” of favored provisions and combining them to form the third version of Package 2. Of course you can, legally, but you destroy the holistic framework of the package, in effect incapacitating it from addressing the very purpose of pursuing a tax reform. You also destroy the revenue mix, hence creating an imbalance that results in either overtaxing the people or lacking in funds to meet the needs of the country. You cannot, for example, retain CITIRA’s proposed 10-year annual 1% corporate tax reduction from the current 30% to 20%, yet keeping CREATE’s proposed 10-year incentive status quo because the resulting revenue loss would be substantial. When Congress designed CITIRA, or in the case of the Senate, the CREATE, each was meant to be a whole package by itself, each component carefully designed in relation to the other parts and to the totality of the package.

With all the lobbying by groups with varied interests, each House labored tirelessly to balance and re-balance those interests, adjusting every provision to eventually form a corporate tax package that, in totality, will best achieve the objective of having a simple, fair, competitive, and fiscally prudent tax system that can sustain the revenue needs of the government for a considerable long period of time. Tinkering with these packages at the bicameral level when there is limited time to do a full impact study of such changes, would not at all be safe and desirable.

Both are good packages, but with COVID-19 and after, CREATE is the only choice left for us. I explain why.

CITIRA and CREATE were conceptualized under two different time periods with completely different conditions. CITIRA was crafted pre-COVID when the country’s economy was at its best, promising brighter days ahead. CREATE, on the other hand, was crafted right in the middle of a pandemic, a hurting economy, a worldwide slump where chaos is the order of the day and survival of the fittest is the game. That made the big difference between the two.

CITIRA was meant to support an already blossoming economy pushing it further and faster forward, CREATE is meant to revive a heavily hurting economy, save businesses, restore consumer confidence, and give the country a fresh restart. It is meant to trigger the “great restart” after a pandemic, a perfect example of how tax can be used as a powerful tool to build an economy.

Thus, as structured, CREATE is not simply a tax reform meant to provide a simple, equitable, and a competitive tax system.

CREATE is, more than anything else, a fiscal response for the survival of our economy, our businesses, especially the micro, small and medium enterprises (MSMEs) employing more than 60% of our workforce. It is a fiscal response to mitigate widespread involuntary hunger now experienced by more than 4 million families, and counting. It is a fiscal response, the most direct and cost-efficient stimulus to revive what was once considered the fastest growing economy in the region.

CREATE is well-crafted and targeted to address COVID-19 priorities by first giving relief to small businesses, lowering outright their tax rate from 30% to 20%, an equivalent subsidy of 10% of net income effective July 2020 and every year onward. This savings could be used to retain employees or to cope with the required facilities of working under a new normal. The MSMEs entitled to this relief are those with taxable net income not exceeding P5 million and total assets (excluding land) not exceeding P100 million.

CREATE also provides immediate relief to MSMEs to recover quickly.

Provisional reduction in taxes for a period of three years from July 2020 up to June 2023 were granted. The 3% business tax collected on every one peso of sales was reduced from 3% to 1%, and the Minimum Corporate Income Tax (MCIT) from 2% to 1%. Both these taxes are not net-income based, hence are paid regardless of income. Both are based on gross — one on gross sales, the other on gross profit. The equivalent savings therefore is measured as a percentage of sales (not income), addressing the criticism that reducing the income tax rate has no benefit to businesses during this pandemic as there is no taxable income to speak of.

The bigger companies (those with net taxable income exceeding P5 million and with total assets exceeding P100 million) are not to be left behind. Their income tax rate was likewise reduced from 30% to 25%. This brings the country’s corporate income tax nearer the ASEAN average at 21.65%. With strong demographic and sound financial fundamentals, such a reduction will foster the country’s potential as an attractive site for investment and makes our local products more competitively priced in international markets.

Tax hindrances to business reorganizations on a wider scale were removed to empower businesses to expand, grow, innovate, and come up with creative solutions for recovery and responding to the challenges of a new normal. Such taxes include income tax and VAT. Administrative red-tape such as a request for a BIR (Bureau of Internal Revenue) ruling prior to such reorganizations were likewise removed.

Foreign-sourced dividends were exempted from tax for as long as these are remitted back home and invested here. Likewise, the 10% improperly accumulated earnings tax (IAET) imposed on excessive retention of income was repealed. All these are meant to encourage more investments to prompt the economy. Support by way of additional deduction for training expenses for on-the-job trainees was also provided.

Direct subsidy to CONSUMERS by way of granting VAT exemption on COVID-related basic health needs were likewise given under CREATE. COVID-19 vaccines, supplies, facilities, equipment, PPEs as well as prescription drugs, medical supplies and devices shall become cheaper by 12% at the hands of consumers as the government picks up the cost of the 12% VAT.

All the above features are lacking in CITIRA. So I say again, CREATE is the only choice we are left with.

As an endnote, the rationalization of incentives will be covered in a separate issue for lack of space. But as a general statement, CREATE’s version of the incentive is a well-balanced modernized incentive system that is performance-based, transparent and targeted, yet flexible, and with sufficient safeguard to exercise fiscal prudence.


Benedicta “Dick” Du-Baladad is the Chairperson of the Management Association of the Philippines Tax Committee for 2021 and the Founding Partner and CEO of Du-Baladad and Associates (BDB Law).

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