PEZA warns of investor exodus after key CREATE provision vetoed

Freeport Area of Bataan

REGISTERED INVESTORS’ inability to apply for new incentives could lead to their departure from the country, the Philippine Economic Zone Authority (PEZA) said on Wednesday.

While it welcomed the signing of Republic Act No. 11534 or the Corporate Recovery and Tax Incentives for Enterprises (CREATE) Act, PEZA noted one of the items vetoed by President Rodrigo R.Duterte may have a “big effect” on the existing foreign direct investors in the country.

The vetoed provision under CREATE would have allowed existing registered businesses to apply for extended incentives for the same activity, which Mr. Duterte called “fiscally irresponsible” and unfair to taxpayers and enterprises with no incentives.

Noting that only new activities should get fresh incentives, Mr. Duterte vetoed the section that would provide a 10-year extension, on top of the additional 14 to 17 years enjoyed by companies, even if they engage in the same activity. Exporters and domestic enterprises identified by the National Economic and Development Authority would be able to enjoy income tax holidays for 4-7 years, then special corporate income tax for 10 years for a 14- to 17-year total.

In a statement, PEZA said that the registered businesses would have “no choice but to make do” with the 10-year sunset period after their income tax holiday lapses, and then graduate to the regular 25% corporate income tax rate.

“This scenario could be a make or break for the Philippines as the affected ecozone locators, for example, might decide to retain their facilities and invest in new projects to be entitled to a longer ITH (income tax holiday) and SCIT (special corporate income tax) period,” PEZA Deputy Director General for Policy and Planning Tereso Panga said.

“Or worse, they might just pack up and transfer to a more willing host country that can offer better incentives for their investments as their availment of more advantageous incentives for sunk projects with the IPAs (investment promotion agencies) prior to CREATE were cut short by the mandatory sunset period for RBEs (registered business enterprises).”

But PEZA Director General Charito B. Plaza said that the agency recognizes a need to gradually reform the national tax system.

“Although CREATE may offer ‘win some, lose some’ opportunities for the different industries, we are glad that CREATE sustained our argument and has placed a high premium on export-oriented enterprises with their availment of superior fiscal incentives particularly for new projects,” she said.

“We believe that effective governance will be pivotal in our resolve to retain, expand and attract investments into the ecozones under the CREATE regime and in due time, our existing locators will be able to adjust to CREATE and continue to secure their investments in the Philippines.”

The Department of Trade and Industry had supported the signing of the law, which Trade Secretary Ramon M. Lopez said “modernized and improved the investment incentive regime to one that is performance-based, focused and innovation-oriented.”

Meanwhile, Finance Secretary Carlos G. Dominguez III wants the Fiscal Incentives Review Board (FIRB) to have its first meeting as early as next week to discuss its expanded role under CREATE. Mr. Dominguez co-chairs the FIRB along with Mr. Lopez. 

Since CREATE will only take effect on Monday (April 12), the meeting could be held as early as next week, according to Finance Assistant Secretary Juvy C. Danofrata

CREATE expanded the power of FIRB as the oversight committee in granting tax incentives to government-owned and -controlled corporations (GOCCs) and those approved by investment promotion agencies.

The FIRB is tasked to set the target performance metrics that businesses have to reach to avail of tax incentives and make sure these are being met, as well as monitor and assess the economic impact of investments that are enjoying perks.

For projects with capital of less than P1 billion, FIRB delegated the power to grant tax incentives to investment promotion agencies but the oversight committee still has the power to raise the threshold of minimum capital requirement.

CREATE’s implementing rules and regulations (IRR) is currently being finalized by the Department of Finance and National Tax Research Center (NTRC). — Jenina P. Ibañez and Beatrice M. Laforga