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House of Representatives committee on Thursday endorsed to members a bill that seeks to lower the income tax on both local and foreign companies to 20% under a so-called enhanced deduction regime, while streamlining the tax refund system for corporations.

Substitute House Bill No. 9794 or the CREATE MORE (CREATE to Maximize Opportunities for Reinvigorating the Economy) bill will amend Republic Act No. 11534 or the Corporate Recovery and Tax Incentives for Enterprises (CREATE) Act.

The committee report will be taken up at the House Ways and Means panel next week before it is debated at the plenary.

The measure seeks to enhance fiscal and nonfiscal provisions of the Tax Code and “reconcile disparities between the CREATE Act and its implementing rules,” Albay Rep. Jose Ma. Clemente S. Salceda, who heads the Ways and Means Committee, said in a fact sheet that accompanied the committee report.

The CREATE law had imposed a 25% income tax on companies and limited the 20% rate to local enterprises with income not exceeding P5 million ($89,513) and assets worth P100 million and below. It also restricted the zero-rating on value-added tax (VAT) on local purchases to the sale of goods and services directly used in a project of a registered exporter.

Under the proposed CREATE MORE, domestic and export companies, including those inside ecozones and freeports, will be entitled duty exemptions, VAT exemption on importation, and the VAT zero-rating of local purchases.

Companies outside ecozones and freeports will also enjoy VAT zero-rating on local purchases as well as duty exemption on the importation of capital equipment, raw materials, spare parts, or accessories, according to a copy of the committee report.

The proposed law also seeks to establish a 20% corporate income tax rate on local and foreign corporations under the enhanced deduction income tax regime.

Registered business enterprises (RBEs) will also enjoy a 200% additional deduction for power cost, to be accumulated during the Income Tax Holiday (ITH) period. They may also enjoy 100% additional deductions in expenses for trade fairs, missions or exhibitions.

The bill also seeks to include the tourism industry under the coverage of the reinvestment allowance, and to apply the net operating loss carryover within five years after the ITH entitlement period.

The proposed law also seeks to impose a 1 1/2% RBEs local tax in lieu of any and all taxes to be collected by IPA.

VAT incentives for RBEs that enjoy incentives prior to the enactment of CREATE will be extended from 10 to 12 years, if there is no tax refund or credit granted. RBEs may also enjoy duty incentives for the remainder of the 10-year transitory period.

Under the measure, the power to grant and approve tax incentives would be returned to investment promotion agencies (IPAs), which is currently handled by the Fiscal Incentives and Review Board (FIRB).

“The President may, in the interest of national economic development, or upon the recommendation of the FIRB, modify the mix, period or manner of availment of incentives provided under this Code or craft the appropriate financial support package for a highly desirable project or a specific industrial activity,” according to a copy of the committee report.

The bill essentially limits the FIRB’s power to grant and approve fiscal incentives, upon the recommendation of President Ferdinand R. Marcos, Jr.

The measure also allows the information technology and business process outsourcing sector to “conduct business under alternative work arrangements.”

Under the CREATE MORE bill, the Bangsamoro Board of Investments and the Bangsamoro Economic Zone Authority will also be included under the list of IPAs.

If enacted into law, foreign nationals with executive positions and nonresident aliens in supervisory, technical and advisory positions will receive a working visa, while a special skills visa may be granted to foreign nationals with “highly specialized skills.”

Domestic market enterprises in creative industries listed under RA 11904 or the Philippine Creative Industries Development Act will also be entitled to the ITH period.

Eleanor L. Roque, tax principal of P&A Grant Thornton, said lawmakers must ensure that the bill’s tax provisions take into account the Philippines’ membership in the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting (BEPS).

The OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting (BEPS) seeks to address tax avoidance schemes among its 140 member countries.

“An improvement of the set of incentives granted to qualified investors is expected to improve our attractiveness as an investment destination. The 20% income tax rate with the enhanced deduction is a generous incentive to investors. Depending on their cost structures, it can lead to a really low tax payable,” Ms. Roque said in a Viber chat.

“However, since the Philippines has joined the international efforts against tax avoidance by joining the OECD/G20 Inclusive Framework on BEPS and Pillar 2 initiatives, the bill should also consider how the incentives will impact on companies covered by BEPS-Pillar 2,” she said.

“We must ensure that taxes for transactions and activities in the Philippines are paid in the Philippines and not in other jurisdictions who have adopted local rules to implement Pillar 2.”

Jose Enrique A. Africa, executive director of think tank IBON Foundation, said lowering taxes under the CREATE MORE would reduce government revenues.

“One of the big selling points of the CREATE law, [is to] make our corporate income taxes quote unquote competitive with others in the region,” Mr. Africa said at a news briefing. “That attitude is eroding our fiscal space.”

“The resources for development won’t come if the government is choosing to lower income taxes, [on] those [who] should contribute more to the revenues of the government,” he added. – By Beatriz Marie D. Cruz, Reporter

The Philippines is projected to be the fastest-growing economy in the region this year amid resilient domestic demand, the ASEAN+3 Macroeconomic Research Office (AMRO) said on Thursday.

“The Philippine economy has held up very well despite high inflation and interest rates, and it’s much less dependent on exports than other countries in the region,” AMRO Chief Economist Hoe Ee Khor said in a virtual briefing on Thursday.

In its latest Regional Economic Outlook quarterly update, AMRO kept its Philippine gross domestic product (GDP) growth projection at 6.3% for this year, unchanged from its annual consultation report in November.

The Philippines’ growth is the fastest among Association of Southeast Asian Nations (ASEAN) members, ahead of Cambodia (6.2%), Vietnam (6%), Indonesia (5.2%), Malaysia (5%), Laos (4.7%), Thailand (3.3%), Myanmar (3.2%), Singapore (2.6%), and Brunei Darussalam (2.4%).

In the ASEAN+3 region, the Philippines is also ahead of China (5.3%), Hong Kong (3.5%), South Korea (2.3%), and Japan (1.1%).

If the 6.3% GDP growth is realized, however, this would be below the Philippine government’s 6.5-7.5% target for 2024.

However, Mr. Khor cited several risks that could dampen growth this year, such as a spike in global commodity prices; weaker economic growth in China, financial spillovers from tighter US monetary policy, a potential recession in the US and Europe, and US-China geopolitical tensions.

He also flagged the possible impact of the El Niño, which may stoke rice prices.

The latest data from the state weather bureau showed that a strong El Niño is expected to continue through January and is seen to persist until May.

AMRO said the Philippines likely grew by 5.6% in 2023, the same projection it gave in November. This also makes it the economy with the fastest growth in the region but falls short of the government’s 6-7% target.

“As it turns out, I think we were too optimistic on the growth momentum. Momentum is weaker than expected,” Mr. Khor said.

Latest data from the Philippine Statistics Authority (PSA) showed that the economy grew by 5.5% in the nine-month period. Fourth-quarter and full-year 2023 GDP data will be released on Jan. 31.

For ASEAN+3, AMRO expects stronger growth this year at 4.5%, slightly higher than its projection of 4.4% for 2023.

“The region did relatively well last year, better than what we expected, based on better exports and moderating inflation. We expect growth to pick up this year on strong exports and resilient domestic demand,” Mr. Khor added.

AMRO also noted that the recovery of China’s property sector and the rebound in tourism will help support growth in the region this year.

Tighter for longer
Meanwhile, AMRO kept its inflation forecast for the Philippines at 3.6% this year, slightly slower than the Bangko Sentral ng Pilipinas’ (BSP) forecast of 3.7%

“In 2024, headline inflation is likely to remain on a moderating trend in line with the continued normalization of global commodity prices,” AMRO said.

Headline inflation averaged 6% in 2023, the second straight year that inflation breached the BSP’s 2-4% target band.

AMRO also said that the BSP must continue to keep rates tighter for longer until inflation remains within target.

“We agree with the BSP view that the rates should remain tight until inflation is down to within target,” Mr. Khor said.

The Philippine central bank has raised rates by a cumulative 450 bps from May 2022 to October 2023, bringing the benchmark rate to a 16-year high of 6.5%.

BSP Governor Eli M. Remolona, Jr. also earlier signaled that policy easing will only be considered if inflation settles firmly within the 2-4% target.

“As long as the economy is doing strongly, we don’t see the urgency for the BSP to cut rates,” Mr. Khor added. — By Luisa Maria Jacinta C. Jocson, Reporter

Philippine banks may see an improvement in loan growth this year, as monetary policy easing in the second half may encourage borrowers to take out more credit, BMI Country Risk & Industry Research said.

BMI, a unit of Fitch Solutions, said they expect stronger loan growth in 2024 as better macroeconomic conditions and lower interest rates in the second half may boost credit demand. 

“We expect loan growth to accelerate from an estimated 5.7% year on year in 2023 to 10% by the end of 2024,” BMI said in a report dated Jan. 17.

“We also see limited risks to financial stability as the Philippine banking system is underpinned by a strong balance sheet and robust capital buffers.”

Based on the latest data from the central bank, outstanding loans issued by big banks increased by 7% year on year to P11.4 trillion in November 2023 from P10.65 trillion in the same period in 2022.

At 7%, the loan growth rate was a tad slower than the 7.1% expansion recorded in October 2023.

According to BMI, easing inflation will prompt the Bangko Sentral ng Pilipinas (BSP) to start cutting borrowing costs by the second half of the year.

To tame inflation, the BSP tightened policy rates by 450 basis points from May 2022 to October 2023. This brought the benchmark interest rate to a 16-year high of 6.5%.

The overall year-on-year increase in prices of widely used goods and services eased to 3.9% in December from 4.1% in November and 8.1% a year ago, settling within the central bank’s 2-4% target range for the first time in nearly two years.

However, full-year inflation stood at 6% in 2023, the highest in 14 years and above 5.8% in 2022. This marked the second straight year that average inflation breached the BSP’s 2-4% target band.

“This set the stage for policy loosening in the second half, which will encourage lending as borrowing costs decline,” BMI said. “What surprised us was the resilience of household loans in 2023.

Despite the aggressive pace of domestic tightening, loans for household consumption still grew.” 

BSP data showed that outstanding loans for retail borrowers grew by 23.6% to PHP 1.25 trillion in November from PHP 1.01 trillion a year ago. Loan growth grew from the 22.8% expansion in October.

“Considering the possibility for cuts to materialize in the latter half of the year, we think these figures will remain robust in 2024 as well,” BMI said.

Better domestic conditions may also boost credit demand this year as the Philippine economy has proven to be resilient so far, the research firm noted.

Philippine gross domestic product (GDP) expanded by 5.9% in the third quarter of 2023, faster than the 4.3% growth in the previous quarter due to increased private and public spending. This brought the year-to-date GDP growth to 5.5%.

“We believe 2024 will also be a stellar year and expect real GDP growth to inch up from 5.7% in 2023 to 6.2% in 2024. This will be driven by private consumption which we expect to hold up pretty well on the back of easing inflationary pressures,” BMI said.

However, lackluster external demand in loans from the manufacturing sector, which makes up around 11% of banks’ total loan portfolio, may continue to drag lending growth this year, it said.

“Loans to the industry contracted by 0.1% year on year in November 2023, as a result of lackluster external demand. And a turnaround seems unlikely. Our global team is forecasting the global economy to expand by just 2.1% in 2024, a considerable slowdown from the 2.6% we estimate in 2023,” it said.

Loans for the manufacturing sector dipped by 0.1% to P1.23 trillion in November 2023 from a year ago. Credit growth, however, improved from the 3.6% contraction recorded in October.

Bank asset quality may also see some challenges this year, but its drop is not expected to be as severe as the decline during the coronavirus pandemic, BMI said.

“Tight monetary policy will put pressure on borrowers’ ability to repay loans,” it said. “We expect loan delinquencies to increase over the next few quarters against the backdrop of high interest rates.

Data from the BSP showed banks’ nonperforming loan ratio stood at 3.41% in November, easing from the five-month high of 3.44% in October but still above 3.35% a year prior.

The November bad loan ratio marked the lowest in two months or since 3.4% logged in September.

However, bad loans inched up by 1.1% to PHP 454.281 billion in November from PHP 449.454 billion in the prior month. Year on year, it rose by 11.3% from PHP 408.097 billion in November 2022.

“Nevertheless, risks to financial stability are minimal. The Philippine banking system is supported by robust capital buffers, with the capital adequacy ratio standing at a healthy 16% in the third quarter of 2023, well above the 10% regulatory minimum,” BMI said.

Better bank profitability this year would also build up buffers, it noted.

“Elevated interest rates are expected to enhance net interest margins, as historical data show a positive relationship between the two. The tightening cycle has already led to significant improvements in profitability ratios,” BMI added.

The banking industry’s return on assets and return on equity stood at 1.6% and 12.8%, respectively, as of August 2023, based on the latest BSP data.

The cumulative net income of banks also rose by 10.4% to PHP 270.352 billion in the January-to-September period from PHP 244.876 billion last year.

As of end-September, banks’ net interest income jumped by 20.4% to PHP 663.240 billion from PHP 550.666 billion last year. — By Keisha B. Ta-asan, Reporter

The Department of Finance (DoF) is studying the establishment of a “responsive and economically sensitive” system of carbon pricing for the country, its top official said.

“The development of carbon pricing instruments through a carbon tax and emissions trading system (ETS) is one of the crucial steps we are undertaking towards a greener future,” Finance Secretary Ralph G. Recto was quoted as saying in a speech.

“Carbon pricing instruments serve as a powerful fiscal tool, allowing us to incorporate the social and external costs associated with carbon emissions,” he added.

The DoF held a technical working group meeting on Tuesday to discuss the development of carbon pricing instruments. Among the attendees were representatives from the World Bank, the Economic Consulting Associates, the Asian Development Bank, and the United Nations Development Programme (UNDP).

The Finance department under then-Secretary Benjamin E. Diokno earlier said it was studying a carbon pricing system to encourage businesses to shift to sustainable practices. Former Finance Secretary Carlos G. Dominguez III had also proposed a carbon tax under the outgoing administration’s fiscal consolidation plan, which was initially expected to be implemented in 2025.

A carbon pricing scheme encourages companies to reduce their own emissions in order to minimize their tax exposure. Proceeds typically go towards supporting greenhouse gas mitigation projects.

The Philippines currently does not have any explicit form of carbon pricing.

“Despite our miniscule contribution to global carbon emissions at 0.48%, the Philippines bears the brunt of the worsening effects of global warming,” Mr. Recto said.

The Philippines is targeting to reduce greenhouse gas emissions by 75% by 2030.

Mr. Recto said the system aims to push businesses and individuals to reduce their carbon footprint and ultimately contribute to a low-carbon economy.

“All these while helping us mobilize financial resources to bolster our fiscal space for stronger economic recovery,” he added.

The Finance chief also noted that it will be crucial to identify an “optimal combination” of pricing instruments that is mutually beneficial to all stakeholders.

“We must extend our focus beyond mere transformations within industrial sectors. Emphasizing research and development for low-carbon technologies and incentivizing behavioral change is equally crucial,” Mr. Recto said.

A study by the International Monetary Fund (IMF) last year showed that the Philippines could generate up to USD 7 billion in revenues through a carbon pricing scheme.

Implementing a carbon price of USD 50 per ton by 2030 could reduce carbon dioxide emissions to 144 million tons or 13% below baseline levels, it added.

“The work should also not just focus on ambition, it should assess the fiscal impact — how different sectors will be affected, how jobs will be affected — so that the policy makers around here can see the different dimensions of the problem and can adopt a policy that is environmentally sustainable, socially just, and economically sound,” World Bank Country Director for the Philippines Ndiame Diop was quoted saying.

The Department of Environment and Natural Resources (DENR) is also working with ADB and UNDP to explore carbon markets and carbon trading.

Meanwhile, the Climate Reality Project Philippines manager Nazrin Camille D. Castro said that the Finance department’s study on carbon pricing is a welcome development, however, it must be approached with “utmost caution,” especially for tools such as ETS.

“The Philippines, at the moment, faces limitations in institutional capacity, regulatory infrastructure, and data management. If left unaddressed, these can cripple any form of ETS, making it more of a burden than a solution,” she said in a Viber message.

“Any future ETS must be meticulously designed and shielded by robust safeguards. Stringent caps, aligned with the Philippine Nationally Determined Contribution, are crucial to ensure genuine climate progress,” she added.

Ms. Castro said there is a need for good governance and strict regulations to “prevent market manipulation and leakages that will allow polluters to simply shift their emissions to unregulated sectors or regions, negating the overall reductions.”

“Equity must also be a cornerstone of our approach. ETS can disproportionately harm low-income communities through cost pass-through, job losses, and worsened pollution if permit allocation and trading mechanisms are not designed fairly,” she said.

“ETS should be designed with a transparent allocation process, revenue redistribution for clean energy projects in affected areas, and auctions designed to favor smaller companies,” she added.

Ms. Castro said the DoF must also ensure that the ETS prioritizes direct emission cuts as companies should not be encouraged to rely on offsets.

“Offsets, while tempting, are a slippery slope. Their unreliability casts doubt on actual emissions reductions at source… A sustainable future cannot be built on isolated strategies. It demands a holistic approach. Carbon pricing and ETS are pieces of a broader puzzle. We implore the DoF to pursue them alongside essential measures like renewable energy investments, energy efficiency promotion, and ecosystem protection,” she added.