The COVID-19 pandemic that swept across the globe left vulnerable communities facing enormous challenges, among them loss of income and job opportunities. The Philippines was no exception, with the economy going into a slump amid disruptions to business operations and movement restrictions.
To support economic recovery efforts, the administration of President Rodrigo Duterte introduced the Corporate Recovery and Tax Incentives for Enterprises (CREATE) Act as part of the government’s COVID-19 pandemic response, the second package of the President’s Comprehensive Tax Reform Program (CTRP), in March 2021.
CREATE accelerated a five-ten per cent Corporate Income Tax (CIT) cut, and redesigned the country’s fiscal incentives system to attract investments and create more, and better jobs.
Boost in business confidence despite COVID-19 uncertainty
There is no doubt that governments need to further equip their countries with the right fiscal policy tools to provide tailor-fit incentives for investors and prospective businesses, both local and foreign, to increase their global competitiveness.
The Duterte administration marked its final full year with an all-time high record of foreign direct investments (FDI) amounting to US$10.5 billion in 2021. This was 54.2 per cent higher than the 2020 level and 21 per cent more than the pre-pandemic level.
The increase in FDI is indicative of the enhanced confidence of foreign firms to invest and expand their business in the Philippines, further highlighting how CREATE made the country’s tax rates competitive with those in the region. More importantly, CREATE addressed the concern of investors regarding the unpredictability of the country’s corporate taxation system.
Given the hefty tax reductions, CREATE, in effect, will give out some US$2 billion worth of tax relief annually to the corporate sector and enable them to preserve employment, expand their businesses, or invest in new ones.
Apart from the provision of unparalleled business stimulus packages, nations should aim to spur stronger economic growth through increased investments as a top priority, which in turn will create much-needed employment at this time of COVID-19-induced job losses.
Pro-business and pro-worker
A strong workforce in the private sector is crucial to sustaining the domestic economy’s recovery from the unprecedented global crisis. Thus, the government’s stimulus packages for businesses aim to mitigate job losses in the short term, while its long-term goal is to create high-value or quality jobs for Filipino workers in the new normal.
Additionally, the grant of incentives will depend greatly on the job opportunities the proposed investment will generate, the advancement of workers through training, and the use of local supply.
The need for cutting-edge S&T skills
To revitalise growth and boost production, businesses should reinvest their tax savings into various aspects of innovation. In the Philippines, this includes the additional 100 per cent deduction on Research and Development (R&D) expenses for businesses to incentivise the creation of new knowledge and products.
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This would hopefully nurture a culture of R&D and innovation among Filipino enterprises and lead to the rise of more competitive companies in the years ahead.
The world has been moving towards a global economy where knowledge and digital technologies drive growth. As such, the country needs to ensure that workers are equipped with cutting-edge science and technology (S&T) skills and know-how to keep the economy driven and highly competitive.
Sharpening global competitiveness
The previously higher CIT rate of 30 per cent made it difficult for enterprises to grow in the Philippines, thus affecting the country’s competitiveness within the Asia-Pacific region.
With new initiatives undertaken by the Philippine government, such as CREATE which immediately reduced the corporate income tax to 25 per cent and will steadily decline to 20 per cent in 2027, the country’s appeal to foreign enterprises has increased, with fiscal and non-fiscal incentives provided to businesses seeking to penetrate the Asian market.
A year after CREATE’s enactment, the reconstituted Fiscal Incentives Review Board (FIRB) approved and granted incentives such as tax breaks for 11 big-ticket projects with a combined cost of US$7.38 billion.
These projects involve cement manufacturing activities, construction of mass housing units, rail operations of a subway, and development of telecommunication towers, most of which are located outside the National Capital Region (NCR) and thereby boosting development in rural areas.
As economies pivot from the pandemic towards the new normal, a challenge for leaders is to introduce programs and create incentives that will help their economy recover from the pandemic through inbound investments, and ensure sustainable and inclusive growth for generations to come by creating opportunities for highly skilled technology-driven jobs of the future.
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