In 2021, the Philippine government legislated a breakthrough reform called the Corporate Recovery and Tax Incentives for Enterprises (CREATE) Act.
CREATE, formerly packaged as the TRABAHO or CITIRA bill, was commended by different stakeholders, including Action for Economic Reforms, for rationalizing fiscal incentives by making incentives performance-based, time-bound, and targeted.
For more than 20 years, the Philippines had an outdated and arbitrary incentive system that excessively awarded fiscal incentives to investors, generally in perpetuity, that resulted in billions of pesos in forgone revenues.
CREATE provides stringent economic criteria for the qualification of industrial activities for incentive packages. The firms that are granted incentives are required to meet target performances for continuous grants as periodically monitored by the Fiscal Incentives Review Board (FIRB).
The law also reduced corporate income tax rates as a stimulus measure intended to help businesses recover from the pandemic-induced recession and make Philippine taxes more competitive. The lowering of the corporate income tax would nevertheless have an impact on revenue generation for the longer term, but this problem could be alleviated by recovering huge forgone revenues through CREATE’s rationalization of fiscal incentives.
Unfortunately, less than three years after its enactment, the government is amending the law through House Bill 8968 or the CREATE MORE (CREATE to Maximize Opportunities for Reinvigorating the Economy) Bill, currently being sponsored in the House Ways and Means Committee by its Chair, Representative Joey Salceda.
CREATE MORE essentially renders CREATE toothless. According to Mr. Salceda himself during a Nov. 7 hearing, CREATE MORE “essentially abolishes FIRB.” The governance issue CREATE aims to address, expressed through the FIRB, is the very purpose of the law.
The champions of CREATE made it clear from the beginning that CREATE is a structural reform whose gains will not be reaped in the immediate term. The benefits of rationalizing fiscal incentives will be truly and fully realized, not immediately, but in a number of years.
Despite this, after the passage of the law in April 2021, our net foreign direct investment (FDI) reached its highest point, at $12 billion, a 75.7% increase from 2020. The share of net FDI increased significantly in 2021, more than doubling from the 33.8% share in 2020. From April 2021 to August 2023, the FIRB has granted incentives to 45 big-ticket projects with a committed investment capital of P721.3 billion.
The ostensible purpose of CREATE MORE is to clarify the implementation of VAT (value-added tax) regimes for registered business enterprises. But the issues raised regarding the CREATE Act do not relate to the law itself, but arise from the implementing rules and regulations (IRR) and administrative issuances of relevant agencies.
The Department of Finance (DoF) and lawmakers have acknowledged inconsistencies between the law’s provisions and its IRR, as well as Bureau of Internal Revenue (BIR) revenue regulations and circulars. This has led to erroneous interpretations.
One of the issues is the perverse incentive caused by the revenue targets set for the BIR. To hit these targets, the BIR is stricter in collecting taxes, including refunds, and often denies enterprises their VAT refunds.
However, to address these issues, it is not necessary to amend the CREATE Act; clarifying the IRR and other issuances would suffice.
The Ease of Paying Taxes (EOPT) bill, which has hurdled bicameral ratification and is awaiting the signature of the President, already addresses these tax administration problems by simplifying the process for VAT refunds. Further, putting in place a data-driven tax administration system with features such as the digitalization of invoices (e-invoices) would enhance efficiency and enable tax compliance.
What is most concerning is that CREATE MORE kills the heart of the fiscal incentive reform by stripping the FIRB of its powers.
The heart and soul of CREATE is in the FIRB, housed in the DoF. The FIRB, under CREATE, is tasked to strengthen the governance of fiscal incentives through a rigorous, fair, and transparent system. CREATE MORE removes the FIRB entirely.
The bill empowers the President to motu proprio grant incentive packages, paving the way for investment promotion agencies to circumvent the FIRB process. Under the present law, the President has the residual power to grant incentive packages, but the president’s decisions are based on the criteria and recommendations of the FIRB.
Further, CREATE MORE creates new overgenerous and even unwarranted and abused incentives, defeating the very purpose of the law of rationalizing incentives.
The looseness of giving incentives being pushed in CREATE MORE will erode government revenues further. The DoF estimates that CREATE MORE will lead to billions of pesos of forgone revenues annually. This will further endanger the narrowing fiscal space. The consequence of the loss of revenues is to borrow more or tax more. Thus, the risk of a credit downgrade and its effects on investments and growth become more real. Hastily undoing a crucial reform so soon after its enactment will spell out more trouble for investor confidence.
In short, CREATE MORE is no longer rationalization, but fragmentation, politicization, and arbitrariness. It creates a situation for the rise of rent-seeking and subdues the merit of rigor, transparency, and accountability.
We reject any attempt to undermine the jurisdiction and oversight functions of the FIRB. Removing the FIRB defeats CREATE’s objective of strengthening the governance of fiscal incentives through a rigorous, fair, and transparent system.
Representative Salceda swiftly passed a good version of CREATE in the House as early as September 2019, more than a year before the bill’s enactment into law in 2021. Reformers expect Mr. Salceda, an economist who was instrumental in the success of a number of tax reforms, to defend the essential features of CREATE and resist its dilution the way he did as the bill’s sponsor.
Congress must protect CREATE, a hard-won and game-changing victory for the Filipino people. If Congress and the Executive insist on pushing for CREATE MORE, they must protect the core of the reform, which is granting fiscal incentives based on rigor, merit and performance, fairness, and transparency through the FIRB. Otherwise, CREATE MORE will mean creating more troubles.
Pia Rodrigo heads the health policy team of Action for Economic Reforms.