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By: Atty. Euney Marie Mata-Perez on May 28,2020

The coronavirus disease 2019 (Covid-19) pandemic gave rise to some benefits. The Department of Finance (DoF) recently added proposed enhancements or amendments to the Corporate Income Tax and Incentives Reform Act (Citira), now renamed the Corporate Recovery and Tax Incentives for Enterprises Act (Create).

These proposed enhancements, as posted on the DoF website, are discussed below.

Under Citira, it was proposed that the corporate income tax (CIT) rate be reduced by 1 percent yearly until it reaches 20 percent by 2030. Under Create, it is proposed that this rate be cut immediately to 25 percent by July 2020, and further reduced by 1 percent annually from 2023 to 2027 until it reaches 20 percent by 2027.

This, of course, is a much welcome development, as the lowering of the CIT rate is accelerated and would help us become more competitive with our Asian neighbors.

However, it should be kept in mind that, for the next few years, businesses may be incurring losses, and thus, may not be able to enjoy the CIT rate reduction. The government should also consider deferring the collection of the 2-percent minimum CIT (MCIT) to provide immediate relief to taxpayers. The MCIT is calculated based on gross income and is due and payable despite the losses incurred by a taxpayer. Under the Tax Code, the secretary of Finance has the authority to suspend the imposition of the MCIT on any corporation that suffered losses on account of a prolonged labor dispute or of a force majeure, as well as because of legitimate business reverses. The Covid-19 pandemic is undoubtedly a force majeure, which should give basis for the suspension of the MCIT.

Create also proposes to give a longer net operating loss carryover, or Nolco. Under the Tax Code, a taxpayer has the option to carry over operating losses, not offset against gross income, for the next three consecutive years following the year of such loss. Create proposes to make this option available for the next five years for nonlarge taxpayers.

This is another welcome development, but a loss carryover is beneficial if a taxpayer starts generating income during the carryover period. If the taxpayer closes shop or stops operating because of financial losses, the Nolco will be useless.

The immediate lowering of the CIT and the extension of the Nolco availment period should be accompanied by immediate relief granted to taxpayers, especially to micro, small and medium enterprises (MSMEs).

With the nearly-three-month lockdown, most MSMEs are suffering immediate losses, as well as severe liquidity problems. Without immediate relief or stimulus, these companies or entities are bound to close or become insolvent.

Thus, as I wrote in my May 21, 2020 article, relief or support to taxpayers can be granted through administrative leniency and issuances that have immediate effect. These reliefs could include deferring of obligations to remit withholding taxes, expediting tax refunds and issuances of tax credits, and holding off of tax audits. Of course, the suspension of the MCIT imposition could be a very welcome relief.

The other two proposals under Create are giving the Fiscal Incentives Review Board (FIRB) the power to recommend to the President the granting of appropriate nonfiscal support, based on the Strategic Investments Priorities Plan, for high desirable projects or activities; and granting a longer transitory period for entities enjoying the 5-percent gross income earned tax, or GIE.

We are not yet certain what are these “nonfiscal” support that could be granted. However, I believe these should include fast lanes, ease-in-doing-business incentives, the ability to obtain permits and licenses expeditiously, and the ability to move goods or products expeditiously, to enable new investments or businesses to immediately take off and operate, without being bogged down by administrative bureaucracy, corruption or inefficiency.

The longer transitory period will, of course, appease those currently availing themselves of the 5-percent GIE, and give them more time to make adjustments in their business and financial models.

There are, indeed, many ways to support businesses and taxpayers during this pandemic. However, the speed at which such efforts could be enjoyed, and thus, be effective in boosting or supporting businesses should always be considered. At the rate the economy is plunging, it is without a doubt that immediate reliefs are much needed. All these, of course, should be undertaken with the health and protection of our people in mind.

Euney Marie J. Mata-Perez is a CPA-lawyer and managing partner of Mata-Perez, Tamayo & Francisco (MTF Counsel). She is a corporate, M&A and tax lawyer, as well as the president of the Asia-Oceana Tax Consultants’ Association.

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Euney Marie J. Mata-Perez

Mark Anthony P. Tamayo

Gerardo Maximo V. Francisco