The Corporate Recovery and Tax Incentives for Enterprises (CREATE) bill pending before Congress seeks to accelerate the lowering of taxes for corporations to help them rebound from the COVID-19 crisis and be more competitive with businesses in other Southeast Asian nations.
In September 2019, CREATE was passed by the House of Representatives but the bill has now been subject to scrutiny intended to add beneficial enhancements at the Senate where plenary debates are still ongoing. Legislators are looking into the possibility of expanding the incentives for investors benchmarked against those being given by neighboring economies and their most advanced companies.
CREATE will entice foreign companies eager to tap the millions of young and educated members of the Philippine workforce, as well as those looking for a new environment to host their manufacturing, research and development, technology, food security, and knowledge process outsourcing industries.
Expediting the passage of the CREATE bill can hasten business recovery from the current economic and health crisis. It will immediately lower the corporate income tax from 30% to 25% and extend the net operating loss carryover for non-large taxpayers to five years. The longer transition period of four to nine years for companies receiving incentives under this proposed law strikes a generous balance while allowing companies to reapply for such incentives after the transition is over.
Prominent economists, former Department of Finance (DOF) secretaries, and major business groups have expressed support for the urgent passage of the CREATE bill. According to DOF Secretary Carlos Dominguez III, this will be part of the stimulus package for the private sector to assist businesses in surviving the economic fallout from the COVID-19 crisis. More significantly, it will not require any budget appropriations from the national government.
At the DOF’s recent Sulong Pilipinas conference, a position paper was presented by the business community to critically include equity compensation in the CREATE bill as a way of leveling the playing field and leapfrogging our talent acquisition, while preserving cash for our companies. Cited as the key ingredient in the success of America’s Silicon Valley is employee ownership – which attracts the best talent to join startups with limited cash but near-limitless potential. The result is that early on, these startups have the people they need to succeed who later create more jobs and a larger tax base.
In the US, where a crucial presidential election is currently underway, stock option grants are driven by intense competition for talent with established benchmarks for employees at all levels and stages. Silicon Valley’s startup workforce has benefitted financially following company exits. Many have been inspired to become founders or angel investors who create a virtuous cycle of innovation and a strong middle class, proving that equity compensation is one of the best ways to democratize wealth distribution.
When Facebook had its initial public offering (IPO) in 2012, around 1,000 of its rank-and-file employees became millionaires overnight. Mark Zuckerberg and his co-founders, along with their earliest employees who were given ownership stakes, got the biggest paychecks from the IPO. As most employees receive some form of equity compensation, the wealth trickled down to other staffers who later joined the company.
Microsoft Corp. has created seven billionaires and more than 10,000 millionaires among its employees ever since it went public in 1986. Its founder Bill Gates went on to become the world’s richest man while his late co-founder Paul Allen owned three professional sports teams and founded the Museum of Pop Culture in Seattle. Even for Microsoft’s early employees who did not get to those heights, the rewards were huge – thanks to the stock options given by the tech giant.
Employee ownership correlates to how deeply technical a startup becomes. For instance, enterprise software and artificial intelligence startups require more tech-savvy people than an e-commerce startup. These employees are at a premium in today’s digital economy and are more likely to seek stock options when the company is unable to pay high salaries.
Based on DOF estimates, the CREATE bill will free up around P42 billion in capital for enterprises during the first semester from the date of its enactment. These funds can be used as incentives for entrepreneurs to launch startups patterned after Silicon Valley’s business model.
It is heartening to know that Senators Pia Cayetano, Manny Pacquiao, and Koko Pimentel are actively working to enhance the CREATE bill. They have been enlightened with the idea of correcting tax measures to promote the use of equity compensation as a means of attracting better workers and saving cash for startups. Those with business backgrounds such as Senators Sherwin Gatchalian, Grace Poe, Ralph Recto, Joel Villanueva, Cynthia Villar, and Miguel Zubiri should show more support to the youth sector as stalwarts of the Philippine startup community.
Aside from CREATE, there is a need to fast-track the government’s flagship infrastructure program and pass laws that shall reduce the costs of doing business, minimize unproductive hours, and continue to provide jobs for millions of Filipinos. Saving jobs will also save lives and at the same time, remind the world that the Philippines is a safe beacon amid this uncertainty.
Public officials should therefore treat the new normal as an opportunity to serve Filipinos with a clearer purpose. They must focus on rebuilding an economy that not only survives but also emerges stronger in the post-pandemic world. The worst thing that could happen to a nation during times of crisis is to be paralyzed by fear and lose the will to fight.