[In This Economy] Red flags in Marcos’ CREATE MORE

President Ferdinand Marcos Jr. signed on November 11 a new tax law called CREATE MORE, or the Corporate Recovery and Tax Incentives for Enterprises to Maximize Opportunities for Reinvigorating the Economy Act — phew. (Check out the full text here.)

On that day in Malacañang, a handout was distributed showing the potential impact of that law on the government’s revenues from 2025 to 2028. Official projections say the CREATE MORE will lower tax revenues by P5.9 billion.

That’s not a terribly large amount. In fact, such forgone revenues would be just 2% of the government’s revenues in September 2024. But still, it represents an erosion of much-needed revenues, at this time when the budget deficit and public debt remain too high compared to our nation’s income. (If you check the latest debt statistics, you’ll see that the debt-to-GDP ratio has inched up to 61.3% in September 2024. That’s higher than the 2023 level of 60.1%.)

So what if CREATE MORE erodes revenues? If you recall, the Duterte administration similarly said that their first tax reform law in 2017, called TRAIN (Tax Reform for Acceleration and Inclusion Act), was not supposed to earn much revenue. But it was still justified because it was supposed to fix many long-standing ills of the tax system, including the historically high personal income taxes.

Likewise, Marcos Jr.’s CREATE MORE Act is being justified now because it’s meant to make the Philippine economy “more inviting for investment—while remaining steadfast in the principles of fiscal prudence and stability,” according to President Ferdinand Marcos Jr. himself.

But is that true? Here are some first impressions of the law’s salient provisions, including some red flags.

Incentives galore

First, CREATE MORE is a pro-business measure: it reduces the corporate income tax of “registered business enterprises” (RBEs) from 25% to 20%.

On the one hand, this helps to make the Philippine economy a competitive destination for investments, insofar as our corporate income tax rate has been historically higher than in neighboring ASEAN countries. On the other hand, will a lower corporate income tax rate be enough as a come-on for prospective investors to flock into the country? I doubt; investors have also flagged before other bottlenecks, including corruption and the high cost of power.

Second, CREATE MORE extends the maximum time that corporations receiving fiscal incentives can enjoy such incentives — from 17 years to 27 years.

One might think that longer incentive periods can help draw in substantial investments and provide businesses with a predictable environment. But prolonging tax incentives may further reduce government revenues, potentially affecting the delivery of public services. More crucially, businesses enjoying incentives may become too reliant on those incentives, and delay efforts to become efficient or productive. Do they really need 27 years’ worth of tax exemptions to be productive? That’s too long a time, I think.

Third, CREATE MORE grants a 100% additional deduction on power expenses, significantly reducing costs for the manufacturing sector.

While this can lower operational costs, especially for energy-intensive industries, this might encourage continued reliance on fossil fuels by being silent on pivoting to renewable energy. This provision also benefits bigger firms that consume a lot of power — and not so much the vast majority of businesses which are micro, small, or medium.

Fourth, CREATE MORE simplifies local taxation on registered business enterprises by allowing local government units (LGUs) to impose an “RBE local tax” in lieu of all other local taxes, fees, and charges.

Sounds good, but the effects are likely to be uneven across LGUs, some of which are richer (and have a larger tax base, and better infrastructure) than others.

Fifth and most importantly, CREATE MORE changes the rules of the game when it comes to “fiscal incentives” given to businesses, such as income tax holidays, the special corporate income tax rate (5% for export enterprises), and enhanced deductions (e.g., on power expenses).

The power to grant these incentives will be concentrated in “investment promotion agencies” or IPAs, comprising the Board of Investments and a bunch of freeports and ecozones scattered across the country: including the Philippine Economic Zone Authority (PEZA); the Bases Conversion and Development Authority (BCDA); the Tourism Infrastructure and Enterprise Zone Authority (TIEZA); and the Mindanao Development Authority (MinDA).

Before, IPAs granted incentives to businesses whose capital didn’t exceed P1 billion. But CREATE MORE increased that threshold to P15 billion — making IPAs more powerful than ever in dispensing incentives.

Conversely, CREATE MORE enfeebles the Fiscal Incentives Review Board or FIRB, which under the Duterte-era CREATE Act (2021), was responsible for reviewing the dispensation of incentives. Before, they reviewed all applicants with capital more than P1 billion. But with CREATE MORE, they will be confined to reviewing businesses exceeding the P15 billion threshold.

Free-for-all?

Most disturbingly, CREATE MORE gives the sitting president massive powers in dispensing fiscal incentives.

It amended Section 301 of the National Internal Revenue Code to say that “the President may, in the interest of national economic development, or upon the recommendation of the Fiscal Incentives Review Board, modify the mix, period, or manner of availment of incentives provided under this Code or craft the appropriate fiscal and non-fiscal support package for a highly desirable project or a specific industrial activity based on defined development strategies for creating high-value jobs, building new industries to diversify economic activities, and attracting significant foreign and domestic capital or investment, and the fiscal requirements of the activity or project…”

All this is to say that the president will have wide latitude in handing out tax holidays or special tax rates to select businesses, based on their own judgment. But can we be confident in the president’s ability to dispense such incentives? Will they be objective? What if they favor businesses tied to his or her own family’s business interests? Are we about to see a free-for-all where fiscal incentives are given out indiscriminately, depending on who’s on the president’s good side? Who exactly stands to benefit from the president’s discretionary powers? Will politicians involved in businesses benefit a lot?

I hope you realize by now that Marcos Jr.’s CREATE MORE promises to be a significant reversal of the reforms put in place by Duterte’s CREATE Act, which at least endeavored to make fiscal incentives “performance-based, time-bound, targeted, and transparent.”

Remember a most crucial fact: Marcos Jr. is the son of a dictator who, by his pen, signed presidential decrees that similarly handed out tons of tax incentives, concessions, and other privileges to cronies during Martial Law. What’s to stop Marcos Jr. from doing the same thing, by way of his CREATE MORE?

Let’s not allow history to repeat itself any more than it already has. – Rappler.com

JC Punongbayan, PhD is an assistant professor at the UP School of Economics and the author of False Nostalgia: The Marcos “Golden Age” Myths and How to Debunk Them. In 2024, he received The Outstanding Young Men (TOYM) Award for economics. Follow him on Instagram (@jcpunongbayan) and Usapang Econ Podcast.