Why the CREATE Law is a big scam

The CREATE (Corporate Recovery and Tax Incentives for Enterprises) Law, which is the second package of the Duterte administration’s Comprehensive Tax Reform Program (CTRP), has to be one of the biggest scams perpetrated on the Filipino people by this administration, and there have been many.

Looking at the blurbs set forth in the Department of Finance’s website, you would think that it was God’s gift to us: CREATE recalibrates the Citira (Corporate Income Tax and Incentives Reform Act, which was the original, and much better version presented last year), in order to “make it more relevant and responsive to the needs of businesses negatively affected by the COVID-19 pandemic, and to improve the ability of the Philippines to attract investments that will benefit the Filipino people.”

Further: “We believe that these amendments balance the interests of all stakeholders, while remaining faithful to the fundamental principles and mindful of the country’s fiscal challenges.”

Let’s start from the immediately preceding sentence. Excuse me, but isn’t the country’s main fiscal challenge its declining revenues in the face of increasing expenditures (both due to COVID-19)? Or is the President’s “wala tayong pera” and other similar statements a lie?

If so, then why is Finance crowing about CREATE being “the first-ever revenue-eroding tax reform package” of the country? Why should it be proud of a program that will surely rob the government of much needed resources to help the Filipino people cope with COVID-19?

Ah, but then Finance explains: CREATE is the “largest fiscal stimulus program for enterprises in the country’s history.” How so? Well, apparently its magic bullet is the reduction in the Corporate Income Tax rates. In the second half of this year alone, it explains, this reduction, which will result in foregone government revenues of P40 billion, can (not will) be used by all firms, especially the country’s micro, small, and medium enterprises (MSMEs), to fund their operations and retain employees.

And in the next five years, the total is about P600 billion of foregone government revenues, which the firms can (not will) invest in the “revitalization of their businesses and to create even more jobs for Filipino workers.”

Now here comes the leap of faith and logic: “This unprecedented investment reflects our resolve to vigorously fight the impact of COVID-19 and get businesses back on their feet as quickly as possible.”

That’s it. The country’s “largest fiscal stimulus program for enterprises in the country’s history” is based on the assumption that what these enterprises (especially MSMEs) save in corporate taxes will be spent on revitalizing and creating more jobs for Filipino people. Finance does not show any evidence that this indeed will be done.

So let’s look at the data. The Department of Trade and Industry website gives us the latest data on these MSMEs, from the PSA’s 2019 List of Establishments in the Philippines. This latest count shows that there are over a million (1,000,506) enterprises divided as follows: 89 percent are micro, 10 percent are small, 0.5 percent are medium, and 0.5 percent are large.

Here’s the kicker: Milwida Guevara, former finance undersecretary, quoting from a 2019 study by Flaminiano and Castillo, informs me that only 19 percent of the SMEs are incorporated (apparently no micro is incorporated), the rest are either individual proprietorships (64 percent) or partnerships (17 percent). If we do the arithmetic, that means that less than 2 percent of the MSMEs (0.19 x 0.105 x .995) will be benefited by CREATE.

Alternatively, we can also say that the large enterprises are going to have a bonanza of reduced tax rates. But anyway, Guevara pleads, don’t present CREATE as answering the needs of the micro, small, and medium enterprises.

In sum: The data show that only 2 percent of MSMEs will be benefited by CREATE. This, plus the 0.5 percent of enterprises which are large that will benefit hugely. What is the DOF talking about when it says CREATE has balanced the needs of stakeholders negatively affected by COVID-19? Seems pretty one-sided to me. Finance says CREATE will “improve the ability of the Philippines to attract investments that will benefit the Filipino people.” You think? Abangan.

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