COVID-19 and corporate income taxes

A retailer manages to conduct business despite the tight lockdown implemented on the Philippines’ largest island of Luzon in this photo taken in April last year.

As of this writing, a proposed law that will cut income taxes paid by corporations is awaiting the signature of President Rodrigo R. Duterte. [See: CREATE up for Duterte signature]

Once it secures presidential approval, the Corporate Recovery and Tax Incentives for Enterprises Act (CREATE) will reduce income tax rates to 25% from 30% for companies with assets P100 million and above. 

Meanwhile, a larger rate cut will be enjoyed by businesses with assets below that financial threshold. 

Companies in that category will only need to pay 20% in income taxes compared to the previous 30%. 

Those expected to enjoy these lower tax rates are micro, small, and medium-sized enterprises (MSMEs), defined as businesses with total assets of not more than P100 million. 

Based on latest data from the Philippine Statistics Authority (PSA), 99.5% of registered businesses in the country are MSMEs.

As of 2018, of the total 1,003,111 business establishments, 998,342 are MSMEs, according to the PSA. 

And just like everyone else, MSMEs were hit hard by the quarantine caused by the coronavirus. 

Last year’s lockdown has led to the temporary closure of 436,000 SMEs, the Asian Development Bank (ADB) said in a document dated April 2020. [See: ADB CARES program]

Only 117,666 MSMEs managed to remain open, the same document said. 

This is the kind of situation where lower tax rates — as indicated in CREATE — are supposed to help. 

By cutting MSMEs’ income tax rates to 20% from 30%, policy makers and officials alike are hopeful that MSMEs would stay afloat and continue operations.    

After all, MSMEs employ 63% of the country’s workforce. 

Moreover, owing to their importance, MSMEs have figured in a loan package prepared and partially funded by the ADB through a $1.5 billion facility. 

Other funders of the COVID-19 Active Response and Expenditure Support (CARES) program are the Asian Infrastructure Investment Bank (AIIB) through a $750-million loan and the Japan International Cooperation Agency (JICA) through a $459-million package. 

The AIIB loan is the focus of a citizens’ monitoring project organized by Social Watch Philippines and Oxfam Pilipinas.

One of the performance indicators of the CARES program is that by December 2020, the government — which already has availed of the loan package — should already have provided tax relief for at least one million MSMEs. 

This performance indicator raises several questions, including, but not limited to, this one: Is the tax relief envisioned in the CARES program the same one indicated in CREATE? 

If so, isn’t tax relief a policy decision where the government need not borrow money for? Or will the money borrowed for the CARES loan package used to cover a deficit that will be brought about by the tax relief? 

In October 2020, six months after the CARES program was put together, Social Watch Philippines tried to get additional details from an official who spoke about the AIIB loan during an online forum. 

However, the official only said that the AIIB loan proceeds were intended for budget support. 

This much was mentioned by a scoping study about the AIIB loan that was authored by Alvic Padilla, who is also the team lead of the citizens’ monitoring project. 

“No rigid determination on how much of the loan proceeds have been allocated to any specific agency or PAPs [programs/activities/projects],” said the study. [See: AIIB loan scoping study]

This just shows that the loans that co-financed the CARES program — especially the one from AIIB — deserves to be scrutinized further. This scrutiny is especially crucial because among the loan’s beneficiaries are MSMEs, which provide employment and has the potential to reduce poverty and inequality in the country.

While these loans may have allowed the government to finance its COVID-19 response, they nevertheless increase the country’s debt burden which will be paid for by the Filipino people. 

Borrowing new loans — especially for COVID-19 response — may indeed be necessary but the government must ensure that these are spent efficiently and effectively.