Economic Recovery?

By Art Jimenez

 

The curtains of Part 1 closed with a mention of two legislative measures about to be signed into law by President Duterte: CREATE and FIST. Both are babies of the Department of Finance under Secretary Carlos Dominguez III, the NEDA, and supported by both chambers of Congress.

 

Background

CREATE stands for “Corporate Recovery and Tax Incentives for Enterprises.” It was originally TRAIN Package 2 of Republic Act No. 10963 or the TRAIN law (Tax Reform for Acceleration and Inclusion) signed by President Duterte on December 19, 2017.

R.A. 10963 is the first of four packages of sweeping amendments to the National Internal Revenue Code, or simply the Tax Code. The four comprise the government’s Comprehensive Tax Reform Program (CTRP). For instance, it has drastically reduced the income tax rates of individuals and exempted from income tax the compensation of minimum wage earners.

TRAIN Package 2, however, did not gain traction especially when the first TRAIN coupled the tax cut with a raised consumption tax. Examples are the huge increases in the excise taxes of vital products (e.g., oil, gasoline, motorized vehicles, sweetened beverages, tobacco, and even cosmetic procedures). This move somehow balanced the revenue loss in reducing the income tax rates of mostly middle-income employees.

Thus, TRAIN Package 2 slept a peaceful slumber until it was revived and presented to the House of Representatives even before the onset of COVID-19 as TRABAHO bill for “Tax Reform for Attracting Better and Higher Quality Opportunities” with Congressman Joey Salcedo of Albay as its main sponsor.

With some changes introduced by the Finance Department itself, TRABAHO became the CITIRA bill or Corporate Income Tax and Incentives Reform Act. Its main sponsor in the Senate is Senate President Vicente Sotto III himself.

Further modifications made by Duterte’s economic team changed CITIRA to CREATE, which stands for Corporate Recovery and Tax Incentives for Enterprises.

Illustrated, TRAIN Package 2 à (became) TRABAHO àthen CITIRA à and then finally CREATE. The president could sign CREATE before end-2020 or by early January 2021.

 

CREATE

CREATE shall lower the corporate income tax (CIT) in one single blow from 30 percent to 25 percent. The CIT will be reduced further to 20 percent by 1 percentage point every year from 2023 to 2027. This incentive makes our CIT highly competitive among our ASEAN partners whose CIT averages around 23 percent.

For small firms whose income is below P5 million a year, taxes would be even lower at 20 percent.

In addition, non-fiscal (or non-tax) incentives granted by different agencies like the Board of Investments and PEZA are to be rationalized and unitized even as they are expanded to increase their attractiveness to foreign direct investments (FDI). Examples include 100 percent and 50 percent deduction from taxable income on purchases of local raw materials and R&D (research and development) and manpower training, research and development, respectively. The firms could use the tax savings derived from these for expansion and/or to hire more workers, the legislators say.

All these incentives, added Finance Secretary Dominguez are “performance-based, time-based, and transparent.”

In sum, CREATE proponents assert it will create an environment conducive to investments, which will generate an estimated 1.4 million jobs in the next decade mostly among MSMEs. MSMEs comprise almost 99 percent of all registered enterprises in the country and employ over 60 percent of Filipino workers

Congress awaits the presidential signature before 2020 is out or by early January 2021.

 

FIST

FIST is the other bill lined up for presidential signature into law expectedly sooner than later. FIST stands for Financial Institutions Strategic Transfer. It aims to assist banks and other financial institutions to manage and sell their non-performing assets from non-paying debtors to companies that specialize in asset management or financial institutions strategic transfer corporations (FISTCs).

The national government encourages investors to form FISTCs that can help ease the liquidity and lending capacity of banks and other lending institutions.

NPAs are the non-performing assets of Bangko Sentral-supervised financial institutions (BSFIs) that include banks, quasi-banks, nonstock savings and loan associations, credit card issuers, trust departments, pawnshops, and other credit-granting entities.

As of end-July 2020, non-performing loans spiked to P290.1 billion or 32.1 percent from P219.6 billion year-on-year. This is equivalent to an NPL ratio of 2.67 percent, up from 2.53 percent the previous month of June and is the highest since the NPL ratio of 2.74 percent recorded in August 2014, according to Bangko Sentral ng Pilipinas.

The BSP expects the banks’ NPL ratio to rise to 4.6% by end-December due to the impact of the pandemic on borrowers’ financial standing. The negative impact rebounds to the BSFIs who face liquidity problems due to the large past due accounts in their accounting books.

Senator Poe told media that NEDA estimates that by the end of this year, NPAs could reach P635 billion. Said projection is based on BSP data and assumptions of the banking sector, she added. Once liquefied through FISTCs, the BSFIs would have more than enough resources to lend to some 600,000 MSMEs and keep 3.5 million people in their jobs, Poe said.

Senator Grace Poe is chair of the Senate Banks, Financial Institutions, and Currencies Committee and shepherds the bill in the Senate. Her counterpart in the House is Banks and Financial Intermediaries Committee chair Junie Cua of Quirino Province.

The question now is, if enacted will CREATE and/or FIST cause economic recovery? If so, when?

Let’s first look at the cost of cutting corporate income tax (CIT). The DOF itself said CREATE will cut government tax income by at least P42 billion in the first six months of its implementation and P625 billion over the following five years when CIT is reduced from 25 percent to 20 percent. These estimated forgone income hedges on a single hoped-for occurrence: the entry of new investments, particularly foreign direct investments or FDIs. CREATE House sponsor Salceda, an economist, forecasts that $20 billion in annual FDIs could be generated. That is slightly more than double the $9.8 FDI welcomed in 2018 and the $10.3 billion generated in 2017.

Well and good.

However, 2017 and 2018, are pre-pandemic years and there were less constraints in FDIs traveling from one country to another. Last year, 2019, FDI in the Philippines contracted by 23 percent, the lowest in four years. In January 2020, BSP Governor Benjamin Diokno announced an FDI of $657 million or a 12.1 percent over the same month in 2019. If this amount is held constant, it will amount to $7,9 billion in 2021, lower than what Salceda expects.

Now here’s the rub. The United Nations Conference on Trade and Development (UNCTAD) projected a -30 percent to -40 percent decrease in global FDI in 2021-2022, which is much more than the earlier forecast -5 percent to -15 percent.

The element of time also has a lot to do with FDI entry, which all take time like months even going to a year or more depending on the capital intensity of a certain FDI project. First, of course, is the project feasibility study; the study of business laws of the country and sanctity of its policies, search, negotiation, closing of land purchase or lease; search for investment partners; architectural and engineering plans; etc. and finally, manufacturing run.

And third are the global constraints to investing in another country, including the psychological fear of investing at this time of pandemic from which they see no end in sight, particularly in the immediate future.

Much as I want to be proven wrong, I think the government reliance on FDI as a backbone of our planned economy recovery does not have many spines to stand on.

And equally, if not more important, our economic recovery efforts should stay closer to the ground. That is, help the MSMEs whose main problem is CASH FLOW. In other words, they do not have enough financial resources even to restart their halted operations.

Next to the MSMEs are their customers whose confidence must be regained by the national and local government. Surely, there must be more than just the basic health protocols to live by every day: wash hands, frequently, wear masks, wear face shields. As it is, the DOH just does and says the same things day in and day out. “Watch out, keep safe, observe protocols, avoid crowds, etc, etc, etc.”

With CREATE still way up there in the clouds and the DOH still on its repetitive warnings, how can the Philippines even aspire for economic recovery?