By Euney Marie Mata-Perez on April 1, 2021.

President Rodrigo Duterte finally signed into law the much-awaited Corporate Recovery and Tax Incentives for Enterprises (Create) Act, or Republic Act 11534, on Mar. 26, 2021 — more than a year since the House of Representatives approved House Bill 4157 in September 2019.

The passage of Create finally confirmed the lowering of our regular corporate income tax (RCIT) rate from 30 percent to 25 percent (or 20 percent for those with total assets not exceeding P100 million and with net taxable income not exceeding P5 million). Create also added provisions that aim to provide relief to the negative impact of the coronavirus disease 2019 (Covid-19) pandemic. Most of all, it rationalized and revised our tax incentives regime to make it performance-based, targeted, time-bound and transparent.

With the passage of Create, it is expected and hoped that our country will rise in its competitive advantage over our Southeast Asian neighbors.

As expected, however, the President vetoed certain important provisions of Create, the effects of which are discussed below:

1. The President limited the availment of the 5-percent special income tax (SCIT) rate only to exporters, thus disallowing any domestic corporation (regardless of capital or nature of activity engaged in) from enjoying the privilege.

The President reasoned that it would be redundant and would weaken the economy to allow domestic enterprises to avail of the 5-percent SCIT, which is in lieu of all taxes. Export enterprises are those which directly export, or which supply another registered enterprise that exports 60 percent of their product or output.  Domestic enterprises are those that do not meet the definition of an export enterprise.

In effect, all registered domestic enterprises shall only be entitled to income tax holiday, and thereafter, be subject to the RCIT but with enhanced deductions over a certain period.

2. The President rejected the definition of “investment capital” in the incentives reform section (Section 293[g]), which excludes the value of land and working capital from the scope of the definition.

The President believes that excluding land and operating expenses from the measure of an investment’s total scale may lead to an underestimation of an enterprise’s investment promotion performance.

3. The President deleted the provision that limits the exercise of the powers of the Fiscal Incentives Review Board (FIRB) to registered enterprises with total investment capital of more than P1 billion.

While the investment promotion agencies (IPAs) retain the power to recommend the grant of incentives for those with investment capital of P1 billion or less subject to the approval of the FIRB, the FIRB should continue to have supervisory powers over the grant of the incentives. These powers include the power to: cancel, suspend or withdraw the enjoyment of incentives, on its own or upon recommendation of the IPAs, for material violation of registration conditions; to require the submission of summaries of incentives from IPAs and other agencies monitoring the grant of tax incentives; and to decide on issues, after due hearing, concerning the approval, disapproval, cancellation, suspension, withdrawal or forfeiture of tax incentives.

The enrolled bill, as drafted, would have prohibited the FIRB from exercising the above powers over registered enterprises with investment capital of P1 billion or less. This would have watered down the powers of the FIRB and would have defeated the objective of centralizing the grant and supervision of the grant of incentives with the FIRB.

4. The President deleted the provision that allows the President to exempt an IPA from the coverage of Create.

According to the President, such provision would defeat the rationalization of the fiscal incentives system and could be a political tool, which if not be exercised properly would lead to the non-uniform application of the incentives.

5. The President deleted the provision that provides for automatic approval of incentives within 20 days from submission.

The President believes that the FIRB and IPAs should be allowed to carefully review the application for incentives.

6. The President deleted the enumeration of specific industries which would form part of Tiers I and II for tax incentives purposes.

The President believes that Create must be kept flexible and be able to keep up with the changing times. Some of the industries mentioned may not permit support or may become obsolete in the short term.

Other items vetoed were:

1. The provision providing for a higher threshold for value added tax exemption on sale of real properties (Section 109[P], Tax Code); and
2. The provision requiring the Bureau of Internal Revenue to act on claims for refund for erroneously or illegally paid taxes within 90 days (Section 204, Tax Code).

The President’s veto of certain provisions in Create had valid justifications and rationales. It sought to make Create more faithful to its purpose and long-term objectives, making it a guiding document for Philippine business and industry in the next few decades. As he aptly said at the end of his veto message: “With over P600 billion in tax relief for job creation in the next five years, we lay our faith and invest in Filipino businesses for them to reinvigorate the economy, create more quality jobs and generate more revisions for the government to tide us along these trying times.”

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The Rationale behind the President’s Veto of certain CREATEProvisions