Presidential power to grant tax incentives coming soon

MANILA, Philippines—President Rodrigo Duterte will soon have the power to grant hefty fiscal perks to elephant-sized investments as mandated by the Corporate Recovery and Tax Incentives for Enterprises (CREATE) Act, with the law’s implementing guidelines expected to be out next week.

The draft implementing rules and regulations (IRR) of CREATE’s provisions on tax incentives and the reconstituted Fiscal Incentives Review Board (FIRB), a copy of which was posted on the DOF’s website, had been eyed for signing on May 17 or Monday next week.

Finance Secretary Carlos Dominguez III and Trade Secretary Ramon Lopez, as co-chairs of the FIRB, had been tasked with coming out with the IRR before July 11, or 90 days after CREATE took effect last April 11. Duterte signed CREATE into law on March 26.

Under CREATE, the President “may, in the interest of national economic development and upon the recommendation of the FIRB, modify the mix, period, or manner of availment of tax incentives, or craft the appropriate financial support package for a highly desirable project or a specific industrial activity based on defined development strategies for creating high-value jobs, building new industries to diversify economic activities, and attracting significant foreign and domestic capital or investment, and the fiscal requirements of the activity or project, subject to maximum incentive levels recommended by the FIRB.”

The proposed IRR said the government’s financial support can include land use, water appropriation, power provision, as well as budgetary support through the yearly national budget.

In particular, the President can grant qualified firms a maximum of 40-years of fiscal incentives, with a maximum of eight-year income tax holiday (ITH).

The remaining period of incentives allowed a special corporate income tax rate of 5 percent.

Before the President decided whether to give away hefty perks, the FIRB shall first “determine whether the benefits that the government may derive from such investment are clear and convincing and far outweigh the cost of incentives that will be granted in determining whether a project or activity is highly desirable.”

Upon the FIRB’s recommendation, the President can exercise his power as long as the incoming project had “a comprehensive sustainable development plan with clear inclusive business approaches, and high level of sophistication and innovation.”

The qualifications included investment capital of a minimum P50 billion, or its equivalent in US dollars, or a minimum direct local employment generation of at least 10,000 jobs within three years from the issuance of the certificate of registration.

This criteria will be reviewed every three years and benchmarked to global standards and economic indicators.

However, “if the project fails to substantially meet the projected impact on the economy and agreed performance targets, the FIRB shall recommend to the President the cancellation of the tax incentive or financial support package or the modified period or manner of availment of incentives, after due hearing and an adequate opportunity to substantially comply with the agreed performance targets and outputs,” the draft IRR read.

During times when the economy faced an “unmanageable fiscal deficit” as declared by the President following advice from the Development Budget Coordination Committee (DBCC), this presidential power to grant tax perks under CREATE will be suspended.

In April, the Bureau of Internal Revenue (BIR) also issued four revenue regulations (RRs) containing the implementing guidelines of CREATE’s provisions on corporations’ new income tax rates, withholding tax, passive income, percentage tax, and value-added tax (VAT).

CREATE retroactively reduced the annual income tax rate slapped on firms to 25 percent effective July 2020, from 30 percent previously — which had been the highest in Asean. It also slashed the rate to an even lower 20 percent for micro, small and medium enterprises (MSMEs).

TSB