Gov’t urged to extend pandemic-era tax cuts by another two years

The Marcos administration is being urged to extend by another two years the pandemic-era tax cuts for businesses, which are set to expire on Friday.

“In view of the fact that we encountered more than two years of COVID-19, they should extend (the tax reductions),” Philippine Chamber of Commerce and Industry (PCCI) President George T. Barcelon said in a phone call. “They can extend it for another two years, because we are just getting adjusted.”

He said businesses “are not ready” for the reversion to the higher, pre-pandemic tax rates.

“Give them a breather. We know very well that we are just coming back. It hasn’t been normal yet. The exchange rate has been high, the peso has been weakening,” he said.

The government granted tax relief under the Corporate Recovery and Tax Incentives for Enterprises (CREATE) to help businesses cope with the pandemic in 2020. Some of the lower tax rates, including percentage tax and minimum corporate income tax, will expire on June 30 and revert to their original tax rate on July 1.

The percentage tax will revert to 3% from 1% under CREATE. This applies to corporations, self-employed individuals and professionals whose gross sales or gross receipts do not exceed PHP 3 million.

The minimum corporate income tax will also revert to the original 2% rate based on gross income of corporations from 1%.

Starting July 1, nonprofit proprietary educational institutions and hospitals will return to the 10% income tax rate from 1%.

Mr. Barcelon said the government could also consider extending the lower tax rates for the rest of the year or even until 2024.

“For any businessmen that will factor in (the higher tax rates), it will affect their bottomline and at the same time if they need to recover, they may have to adjust their prices,” he said.

Higher tax rates might also discourage companies from making new investments, Mr. Barcelon said.

“The important thing is we do want to maintain the certainty for companies abroad that are looking into the Philippines. If these companies say that the Philippines is a good ideal destination to invest in, all these things play into the fact that we want to be competitive,” he said.

“The rates of our Association of Southeast Asian Nations (ASEAN) neighbors are different from ours. They have more attractive rates. We have to consider that,” he added.

ING Bank N.V. Manila Senior Economist Nicholas Antonio T. Mapa said economic reopening is enough to support businesses.

“The reduction of rates was done during the pandemic to afford businesses some support during the lockdowns,” he said in an e-mail. “Despite the pending reversion in rates, the brisk resumption of economic activity should be enough to compensate taxpayers.”

“With the lockdowns behind us, this should restore some revenue stream to the government as fiscal authorities attempt to carry out their arduous fiscal consolidation,” he added.

Data from the Department of Finance (DoF) showed that revenue losses from the CREATE law reached PHP 80.4 billion in 2022, up by 18% from PHP 68 billion in losses in the previous year. Of the total, PHP 59.2 billion came from the reduction in corporate income taxes.

Ateneo de Manila University economics professor Leonardo A. Lanzona said the government should assess whether the country has recovered from the pandemic.

“Data seem to indicate that much of the pre-pandemic supply chains have been restored and jobs have been created. However, the nature of these jobs remains questionable, as these comprise mostly informal and contractual employment,” he said in an e-mail.

“The reversion to the old tax rates will reinforce these movements towards declining middle-wage and increasing low-wage jobs. Moreover, corporations are less likely to invest more. Without these investments, the chances of a high growth recovery with improving labor conditions are being compromised,” he added.

Mr. Lanzona also noted the government’s lack of a comprehensive economic program to address the impact of the pandemic on businesses. 

“The CREATE law was fundamentally the key structural policy that will tide the country from pandemic to the post-pandemic periods,” he said. “In addition, the expectation was this would attract investments large enough to offset the resulting reduced revenues. Obviously, these increased investments did not happen.”

The DoF has called the CREATE law the “largest fiscal stimulus for businesses in recent history.” Apart from tax cuts, the law also rationalized fiscal incentives for enterprises. — Luisa Maria Jacinta C. Jocson