September 28, 2020
Transcript Highlights of interpellations on CREATE Bill (Day 2)
September 28, 2020
Sponsor: Senator Pia S. Cayetano (Chair, Senate Ways and Means Committee)
PART 1: SEN. BONG GO’S INTERPELLATION
Sen. Bong Go: Mr. President, will the good sponsor yield for a few questions?
Sen. Pia: It is considered a priority measure of the President. And for that reason, the urgency is upon us because we would like the immediate reduction of the corporate income tax from 30 to 25 percent, which is now embodied in CREATE.
It was not like this in the first version, which is CITIRA. We would like that immediately available to all the businesses. So that is the reason we need to pass it so that by next year, it can already be availed of.
As his honor knows, we have recalibrated the benefits under CITIRA to immediately address part of the impacts of COVID, and that is the reduction of income tax, because that is something that is welcomed by every and all businessmen.
To also include, if we had stuck with the CITIRA version, the provision extended to businesses that are registered and currently receiving incentives, that sunset provision would have been much shorter. So, we again recognize the impact of the pandemic, and we give a more generous, longer sunset provision for those who are currently availing of incentives. And when their incentives are over, and that is 4-9 years from now, there is some misunderstanding that it is totally over for them. No, they are allowed to reapply.
That is also something I want to emphasize. So the sooner we pass it, the sooner they can continue with their current incentives, and the sooner the transition to new incentives provided by CREATE.
I just also like to emphasize that there are.. The vast majority of the companies will benefit from CREATE because it lowers the CIT. For those, it’s a very small number compared to registered companies not receiving incentives. Those who receive incentives, they will continue to be profitable [inaudible] that is made by our administration. Thank you.
Mr. President, the Corporate Income Tax and Incentives Reform Act, CITIRA, or the CREATE bill was certified as urgent by President Duterte on March 9, 2020. It was mentioned as a State of the Nation priority this year and in previous years. What are the benefits of prioritizing the pass of CREATE as early as September? How does it benefit the existing businesses?
Sen. Go: Thank you, good sponsor. One of my advocacy programs is the Balik Probinsya, Bagong Pag-asa Program. That’s job opportunities in the countryside, and address overpopulation, traffic congestion, and pollution in Metro Manila. Can the good sponsor share how it can complement this program?
Sen. Pia: Mr. President, we are happy to do that. I also am an advocate of Balik Probinsya. As the chair of your Committee on Sustainable Development Goals, Innovation, and Futures Thinking, SDG 11 is creating sustainable cities and communities. And we can only do that if we try to decongest our metropolitan areas. So CREATE was especially drafted, and I would like to emphasize that I really push for provisions that would generally identify areas and give incentives to the probinsyas, the areas outside metropolitan areas.
So the thing with CREATE is it’s also targeting [inaudible] areas. This will be very specific in our strategic investment priority plan or SIPP. There are 4 proposed classifications of geographic location. Of course, there’s NCR and the metropolitan areas. The provinces or cities contiguous to the first, which is NCR and metropolitan areas. And then provinces and cities not contiguous to… And then I insisted on another category, which is less developed areas to really identify these areas that would really benefit from incentives there.
So, Mr. President, to summarize, regardless of what kind of industry is going to be invested in, the location will always matter. Less developed areas will always get incentives in the bigger type of incentives, balik probinsya, Mr. President.
Sen. Go: Thank you, good sponsor. The grant of tax incentives must be more target to the provinces because investors can invest outside of Manila and be more available in the countryside. Sa tuwing kinakausap ko ang mga biktima ng sunog at tinatanong ko sila kung gusto nila bumalik sa probinsya, marami pong nagtataas ng kamay pero nagdadalawang isip po sila dahil hindi sila sigurado kung may makukuha ba silang trabaho sa probinsya. Kailangan iencourage ang investors to put up businesses sa probinsya para dumami ang trabaho, dumami ang negosyo, plantasyon, factory, at iba pangkabuhayan ng mga Pilipino sa probinsya.
Those who say that because of CREATE, firms will leave the country and jobs will be lost. Is this true? Because of passage of CREATE, incentives that have been granted already will be taken away. Mawawala na po. Can you please explain this and how it will affect our investors?
Sen. Pia: I am happy to explain that because that is really part of defending it, to really ensure the business effect of CREATE.
So, there are two main components of CREATE. One is reduction of CIT, which will be from 30 to 25 percent, and the second part is the rationalization of incentives. With the reduction of CIT, the estimate of DOLE is that we will create 1.23 million jobs over the years. So this is very important because we cannot discuss the rationalization of incentives separate from the reduction of CIT. These two go together because if you discuss one without the other, obviously, it is one-sided. So we have to see the bigger [picture].
CREATE is expected to create 1.23 million jobs, coming from DOLE.
And I’d like to point out that our data shows foreign direct investments from 2010-2017 continued to increase in a very sharp increase between 2015-2017. Meanwhile, the number of those firms seeking incentives with PEZA went down. So how do you reconcile this? FDI and yet registration with PEZA goes down. I think the logical explanation is that foreign investors continued to choose to invest in the Philippines with or without incentives, because they continued to invest and that is data that we have that the investment kept on going up, even for companies that do not seek incentives.
Moreover, it is important to also point out that yes, we are concerned and we have carved out the incentives for those firms that seek incentives. But let’s also not lose sight of the fact that our MSMEs continued to grow between 2015 to [inaudible]. It kept on increasing from roughly 896,000 registered MSMEs… I won’t go through all the numbers, but close to 1 million by 2018. So business continued. MSMEs, small businesses, which is really the bulk of businesses, continued to grow during this time.
Finally, I’d also like to add, because the question of his honor is how does it affect the economy and what do we say to investors. We’d like to believe that by providing a good business environment by the strong [inaudible] that we do have, businesses will continue to invest in our country. The World Bank Global Investment Competitiveness Report for 2019-2020 indicated that incentives are not often a deal breaker for foreign investments. So importante pa rin siya, I would like to say, pero hindi siya deal breaker. And that comes from no less than the World Bank Global Investment Competitiveness Report.
We also have received a lot of statements of support from various business organizations, including Business Club chapters, various chapters of Philippine Chamber of Commerce, and so on.
Sen. Go: Thank you. Dapat po siguraduhin natin na walang mawawalan ng trabaho at hindi umalis ang mga investors habang nilalabanan natin ang COVID-19. Kailangan natin ng New Normal kung saan haharapin natin itong krisis sa ekonomiya, sa pang-araw-araw na buhay. In terms of lowering the corporate income tax, how will it affect sectors and industries severely affected by the COVID-19 pandemic, particularly po ‘yung MSMEs, Mr. President?
Sen. Pia:The record tells us that the vast majority of registered are in the bracket of MSMEs, 90-plus percent of them are MSMEs. So when we lower CIT, then sila talaga, it’s for them. The bulk of these beneficiaries would really be the MSMEs. Nagsisikap talaga, nag-uumpisa ng trabaho all over the country. Yung mas mababa lang ang kapital, sila talaga ang [inaudible].
To be specific, itong pagpasa natin ng CREATE, aside from the lowering of the CIT, the other component nga is the rationalizing of incentives. And what happens after CREATE, we will have incentives that are targeted, time-bound, transparent, performance-based, and with these kinds of targeted investments, it becomes more [inaudible] for the country because we will be able to focus on industries that add value, that target our sustainable development goals, that innovate and create jobs.
And we also specifically want to attract investments that will stimulate domestic industries and promote research and development. So very targeted po ang CREATE. Kapag hindi natin ito pinasa, ang nangyayari po is pasok lang nang pasok ang investments and wala tayong targeted industries, and we do not even know what are the clear benefits we receive by giving up the taxes for those industries.
Sen. Go: Thank you, Madam Sponsor. Kailangan po talaga nating alalayan ang mga sektor at mga industriyang naapektuhan ng pandemyang ito. Importante po ito para mapagaan ang mga pinapasan ng mga negosyo at mga empleyado nila. I want to commend and congratulate the good sponsor.
Sen. Pia: May data din tayo na matutuwa ang ating Senator from Davao. Ninety-nine percent of businesses are MSMEs as I mentioned, and they employ around 65 percent of our workers. So kapag tinulungan natin ang MSMEs, 65 percent of our workforce, natutulungan din. Kapag bumaba ang income nila, ang CIT, they can use that extra money to innovate, to build on their capital, to improve on their labor force, and so on and so forth.
I just wanted to add that because may nabanggit ang gentleman from Davao about employees, kung ano ang benefits. Sila rin ho ang makikinabang.
Sen. Go: Thank you, Madam Sponsor. I want to commend and congratulate the good sponsor for pushing this important measure. And I urge my colleagues to support its immediate passage. Thank you, Mr. President. #
PART 2: SEN. CAYETANO’S RESPONSE TO SEN. RALPH RECTO’S POINTS FROM LAST WEEK’S INTERPELLATION
Sen. Pia: Mr. President, before we continue with the interpellation of Sen. Ralph, I would like to respond to some of the questions that he raised…
May I just put on record some responses to the questions of the gentleman from Batangas last week.
The statement made by the gentleman was, why are we changing the incentives of these [inaudible] these people who have been in our country for a long time?
I’d like to respond in this way. Investors make a decision as a business endeavor, not for charity. But regardless, what CREATE aims to provide is a set of standards to ensure that there is accountability on the part of investors so that we can account for the investments that are made. If they will not pay the same tax as the rest, then they must show the benefit we derive from it.
Because we need to see if there are jobs generated, investments made, and so on and so forth.
I’d like to present an analogy to my colleagues. Let’s use the 4Ps. For roughly P1,600 a month, or P20,000 a year, we grant the 4Ps to families on very strict conditions. They [inaudible] their children to school 85% of the time, they must bring them to clinics for regular preventive health checkups, vaccination, deworming, and so on and so forth. So we put conditions on these people for a mere P20,000 a year. But we have been, and we give freely P140 million on the average to every firm without any conditions attached. That is, Mr. President, the status of the incentives that we are giving. That is the analogy I would like us all to digest, because that is what CREATE simply intends to achieve, rationalizing and accountability of incentives.
So we now proceed with another question. The currently registered businesses will be disincentivized because they will be hit hard based on the GIE rate currently at 5% to 10%. The 5% GIE is admittedly very low and very generous to begin with. And please note that this is in lieu of all other taxes and this is not time-bound, and it is without performance conditions.
So, that is what they are all currently using right now, availing of. It is not very difficult for us to… It is not being ungenerous or selfish on us to impose [inaudible] GIE, in exchange for performance-based industries. And this will only apply after 4 years at the earliest, 4-9 years. This is a new provision under CREATE.
We recognize that some firms would need support to start their businesses, but precisely, the support by way of incentives we would be giving should be time-bound and performance-based.
In 2017, 1,169 firms have been enjoying the 5% GIE for more than a decade; 291 firms have been enjoying the special tax rates for more than 20 years. If we continue to provide these incentives in perpetuity, that amounts to P50 trillion in present value. Incentivized firms will remain profitable even under a 10% GIE and they will still pay just around half of regular firms – meaning to say, regular firms without incentives – are paying.
In addition, our electronics and BPO sector will remain competitive compared to Vietnam and India. In conversations with businesses, investors make investment decisions based on fundamental criteria which include support infrastructure, ease of doing business, market size, competition, and supply chain among others. Incentives are considered icing on top of the cake. This is corroborated by the World Bank Global Investment Competitiveness Report for 2019-2020, which indicated that incentives are not often a deal breaker for foreign investments.
Next argument, our gentleman from Batangas said that people will lose jobs since the investors will no longer be interested in investing. Mr. President, I’d like to point out that CREATE has two main components, and you cannot take one without the other. We cannot talk about the rationalization of tax incentives in isolation. We must also remember that there is an immediate and substantial reduction in CIT that will encourage investments and result in the retention and creation even of new jobs. In fact, DOLE estimates that an additional 1.23 million jobs will be created.
And in addition to the lowering of the CIT rate, CREATE also offers performance-based incentives including 150% deduction on labor expense, up to 200% deduction on training expense, up to 150% deduction on domestic input expense, and so on and so forth.
Also, the proposed measure will serve the long-term objective of creating high-value jobs. We deserve the best. Why should we not create that environment that would encourage these high-value jobs? An example given is the watch industry. We have BPOs that are putting together watches. But upon scrutiny, it turns out, something as simple as the leather strap only is the value added by the business registered in the Philippines.
Mr. President, my question is, hanggang strap na lang ba tayo? When you look at this and break it down, the bulk of the components were all imported. Compared to a handicraft industry na wala man lang natatanggap na incentives, pero lahat local, yung pinanggalingan ng materials, local lahat, and yet that industry will not receive any incentives and yet the example I gave would be receiving industries. And that is what CREATE intends to do, to be able to scrutinize, to be able to determine what is the value added so that we go up the value chain.
The DOF performed simulation based on a sample of 1,332 firms using 2017 financial statements and found that 99% of companies currently receiving incentives continue to be profitable even under CREATE. And to add, there are non-fiscal support being given which I can give in detail if there is any senator who is interested later on.
The next argument is that the BPO industry will struggle if we increase their special tax rate incentive that they are currently receiving. Industry consultations revealed that the usual payback for BPO investment ranges from 18 to 24 months. Therefore, somebody who has been here for 3 years bawi na po sila. For 6 years, double bawi and profitable na profitable sila. So in the transition period that we are giving them, they will be able to generate 2-6 times the amount of their investment on top of what they have [inaudible] in the past.
The DOF compared the profit margins of BPOs, our BPOs, compared it to India and found that even under the 10% GIE, Philippine BPOs remain very competitive. The DOF also simulated the incentives provided under CREATE on 1,332 firms and found that all 366 BPOs included in the study are expected to remain profitable and generate competitive industry returns.
Finally, on the argument that enhanced deductions are tailor-fit only for footloose industries like the garment industry, we would like to clarify and emphasize that enhanced deduction [inaudible] and will be a benefit to any registered business enterprise if they opt to do so, it doesn’t matter what industry theta re in. in fact, when we had meetings with Lufthansa. They told us that they would most likely benefit from the enhanced deduction. Enhanced deduction may be even more beneficial to companies that truly perform. His honor mentioned that we have to be careful because the BPO industries are also “under attack” because of AI, changes in technology. And that is something I am very conscious of. My studies on futures thinking in the Committee on SDGs, Innovation, and Futures Thinking tell us that we must be prepared. But we do not prepare by just giving incentives or continuing incentives that do not have the built in structure to monitor and make it performance-based. We prepare by using strategic thinking and prepare for the different futures, and that includes improving the skills of our workforce. And that is enhanced deduction that companies may avail of; training and upgrading their skills is part of the enhanced deduction.
Moreover, it includes research and development, local input, power and reinvestment. All of these will contribute to the economic prosperity of the investors.
And I actually have one last point on the grandfathering rule. I clarify that existing companies will benefit from the grandfather rule. This means there is a special sunset provision made just [inaudible]. And siguro by now, alam na alam niyo na ho lahat, it’s 4-9 years depending on how long they have been here. What we cannot extend is the continuing 5% GIE forever. I asked for a copy of a contract that says we promise 5% forever. I have not been shown any. What I have are application forms that provide conditions and then [inaudible] applications are granted. [Inaudible] forever granted yun. So I would surmise that a businessman, a decent businessman or lawyer would know that this is subject to change, not without warning, as we are doing now, that I think would not be fair. But the fact that the power to grant and reduce taxes will remain with Congress, we can do that. Tanggap naman po nila ang power natin na yun. What is important is we give them reasonable time, which we believe that the 4-9 years is that reasonable time. And this would already enable them to make the proper adjustments. So I think I leave it at that. #