Duterte vetoes some provisions of newly signed law reducing corporate taxes, improving fiscal incentives

Metro Manila (CNN Philippines, March 26) — President Rodrigo Duterte has signed into law a bill seeking to slash corporate income taxes and provide better fiscal incentives for certain industries, Malacañang confirmed Friday.

However, the President also vetoed several provisions of the new law.

"I confirm that CREATE law has been signed with some items vetoed," Presidential spokesman Harry Roque said.

The CREATE will reduce corporate taxes from 30%, the highest in the ASEAN region, to 25% for large corporations, and 20% for small and medium enterprises earning ₱5 million a year.

It also seeks up to seven years of income tax holiday and 10 years of special corporate income tax or enhanced deductions for exporters and key domestic enterprises, which will be identified by the National Economic and Development Authority.

These features aim to help distressed businesses recover from the COVID-19 pandemic and encourage more investors to place capital into the country. Foreign direct investments are a key source of employment for Filipinos, with more capital often expected to generate more jobs.

In his veto message dated March 26, Duterte vetoed nine provisions of the CREATE Act, including increasing value-added tax-exempt threshold on sale of real property. He noted that under the amended Tax Code, only residential dwelling not more than ₱2.5 million are VAT-exempt to provide relief to buyers of socialized housing and base-level economic housing.

Duterte said the move to increase the exemption to ₱4.2 million will also benefit those not originally targeted and is also prone to abuse. This may also lead to a revenue loss of ₱155.3 billion from 2020 to 2030, he noted.

He also vetoed the 90-day period for processing of general tax refunds, since it may be difficult for the Bureau of Internal Revenue to implement and may lead to delayed or erroneous processing of refund claims. He suggested that the Department of Finance and the BIR develop a better process to refund tax in another tax administration bill.

The President also questioned the term "investment capital" that excluded land and operating expenses, which could lead to an underestimation of the country's investment promotion performance. He said it is better to adopt existing measures used by investment promotion agencies (IPA) to evaluate an investment.

Duterte also noted 10 provisions that he considered as redundant incentives for domestic enterprises, which include the mention of special corporate income tax, or SCIT. He said this is redundant, unnecessary, and weakens the fiscal incentives system.

The chief executive also vetoed the provision allowing existing registered activities to apply for new incentives for the same activity, noting that allowing additional 14-17 years of incentives and another 10-year extension for the same activity is "fiscally irresponsible and utterly unfair to the ordinary taxpayer and to unincentivized enterprises."

He also noted that limiting the authority of the Fiscal Incentives Review Board to projects with investment capital of more than ₱1 billion may affect its oversight function to ensure the proper grant and monitoring of tax incentives.

On some industries mentioned under activity tiers, Duterte said there should be flexibility in the law to ensure it is able to adapt to the changing times. These should not be hard coded so that obsolete industries will not be continuously incentivized.

Duterte also vetoed the provision granting the chief executive the power to exempt any IPA from the new law, saying this could become a highly political tool that could allow future presidents to “dismantle decades of studies, disregard discussion based on empirical evidence, and even subvert the will of the Congress."

Lastly, Duterte also questioned the automatic approval of applications for incentives. He noted that this goes against the policy to approve or disapprove applications based on merit, which is the main goal of the reform that is to develop a performance-based tax incentives system.

"Crucial portions of the CREATE Act were intended to be emergency tax relief for struggling enterprises, but we must not lose sight of this reform's long-term objectives" Duterte said. "We must keep this reform's provisions reasonable and not redundant."

In a separate statement, Albay Rep. Joey Salceda, key author of the measure, thanked the President for finally approving CREATE. He assured the public that the core tax reform provisions were retained. He said he will also work with Finance Secretary Carlos Dominguez III to see what can be done on tax administration prior to the tax filing deadline on April 15.

"CREATE has been created. This is one of the pins of light signaling the end of this dark economic tunnel," Salceda said.