The CREATE Act: A Silver Lining for MSMEs
The Philippine Statistics Authority reported that Micro, Small, and Medium Enterprises (MSMEs) comprise 99.5% of the more than one (1) million business enterprises in the Philippines.
Together, these MSMEs generated a total of 5,510,760 jobs or 62.4% of the country’s total employment. The micro-enterprises produced the biggest share (29.8%), closely followed by small enterprises (25.2%) while medium enterprises were far behind at 7.4%. Meanwhile, large enterprises generated a total of 3,315,575 jobs or 37.6% of the country’s overall employment. MSMEs account for 25% of the country’s total export revenue. It is also estimated that 60% of all exporters in the country belong to the MSME category. MSMEs are able to contribute to exports through a subcontracting arrangement with large firms or as suppliers to exporting companies. (www.dti.gov.ph)
Whether organized as a sole proprietorship business or a corporation, MSMEs have been facing one of the highest income tax rates for several years already with tax rates that go as high as 35% despite generating 62.4% of the total jobs in the country and contributing a quarter of the country’s exports.
According to a study by the Asian Development Bank (ADB), MSMEs continue to face a sharp drop in demand and revenue even if Asian economies have moved to the recovery stage. Although employment returns to normal, wage cut remains. MSMEs overcame serious no cash condition, but working capital shortage in 3-6 months has risen. Loan repayments and tax payments remain top concerns for MSMEs. These are just a few of the hardships that our MSMEs face today during this pandemic.
Despite a gloomy business environment, the recently passed Corporate Recovery and Tax Incentives for Enterprises (CREATE) Act (Republic Act No. 11354) offers a silver lining to struggling business enterprises. The CREATE Act gives substantial relief from high-income tax rates that had been imposed on business enterprises in the Philippines. Under the new law, the corporate income tax rate is reduced to 20% or 25% retroactive July 1, 2020. The 20% rate applies to domestic corporations with a net taxable income not exceeding P5 million AND with total assets not exceeding P100 million. In computing the total assets, the value of the land where the office, plant, and equipment are situated during the taxable year is to be excluded.All other domestic corporations are subject to the 25% corporate income tax rate except for proprietary educational institutions and hospitals, which are nonprofit and are subject to a tax of one percent (1%) on their taxable income beginning July 1, 2020, until June 30, 2023. Business enterprises whose gross annual sales do not exceed P3 million will enjoy a reduced percentage tax of 1% from July 1, 2020, to June 30, 2023.
The CREATE Act will certainly provide much-needed relief to the MSMEs. But as recommended by ADB, the government needs to elaborate phased approach and differentiated policy measures by firm size and sector. A prolonged pandemic requires the government to consider an optimal approach, neither impeding national revenues nor increasing budgetary burden in the post-COVID-19.