Responses of Senate Ways and Means Chair Pia S. Cayetano To the questions of Sen. Richard Gordon on the CREATE bill

Sen. Pia: In previous discussions, I am aware, I was told that they are in touch with companies leaving China and they are ready to make our offer but all of these companies they have met with are in a wait and see mode, basically awaiting the passage of CREATE for certainty. And this is consistent with what I was told with industry leaders when I met them just before lockdown on COVID, that they said at this point, what they want is certainty so they can crunch their numbers and they can make their commitments.

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Sen. Pia: Regarding the Samsung case in Vietnam, I recall that I was also briefed on this, we also tried to invite or woo Samsung to the Philippines but we lost out because they were able to offer land and our Constitution prohibits foreign ownership of land. And of course, their package was also attractive, and as I said, we were still in the period of transition. We have been in that period of discussion, not even in the period of transition, for the past years.

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Sen. Pia: Those are two major companies - Samsung and LG. And what I wanted to add is through my studies of different factors, one factor I believe is we may not have been aggressive enough also in pursuing trade agreements. So Vietnam, next to Singapore in Southeast Asia, Vietnam is the country that already has the most foreign trade agreements with other countries, and that includes Korea. All these little things add to the ability of these other Southeast Asian countries to attract foreign investors because these FTAs lay the basis. It's just one of the things we need to do. And I agree with his honor about the wooing, that is important. Because you honor them, show them how important they are to you, and when you are able to woo them, [inaudible] I agree with everything his honor says.

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Sen. Pia: I couldn't agree more. Marketing is very, very important. In fact, I have seen the success of marketing for even bad products. So considering, as his honor says, we do have marketable skills, expertise that we can be proud of, I feel that we can do much more to market ourselves better.

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Sen. Pia: If I can share a short anecdote... It was around 2005 and the Philippines hosted the Inter-Parliamentary Union. And there was a security issue with one delegate. I think he was from an African country. I think he went out very late in the night, rode the tricycle and he was mugged. And his honor fast tracked the prosecution of that case because he said it's a matter of honor, a matter of being able to show these countries that justice is important in our country.

I remember that. I was a new senator then. And I know that the point we wanted to make is this is a safe country, but if something happens, we will ensure that justice is done.

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Sen. Pia: "Freeport zones refers to an isolated and policed area adjacent to a port of entry, which shall be operated and managed as a separate customs territory to ensure free flow or movement of goods, except those expressly prohibited by law, within, into, and exported out of the freeport zone where imported goods may be unloaded for immediate transshipment or stored, repacked, sorted, mixed, or otherwise manipulated without being subject to import duties. However, movement of these imported goods from the free-trade area to a non-free trade area in the country shall be subject to all applicable internal revenue taxes and duties: provided, that for the freeport to qualify as a separate customs territory, a freeport shall have a permanent customs control or customs office at its perimeter."

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Sen. Pia: May I interject, just to say that CREATE does not change the treatment of taxes in the freeport? Customs duties and VAT will continue to be the same. No exemption from custom duties and VAT.

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Sen. Pia: Definitely, his honor is very knowledgeable in this subject matter and I fail in comparison to the experience he's had in bringing in investors and understanding their concerns. The only thing that I would like to bring to the discussion is the fact that we are the only country in the world that currently offers a GIE of 5 percent, which is basically considered as "forever." There is no other country that offers this GIE forever in lieu of all other taxes. So my understanding is that what we would like to do is rationalize this. We do not intend to do it in a rash manner. This matter has been discussed for a number of years, way before I became chairman of the Committee on Ways and Means. In fact, I repeatedly mentioned that after many hearings and individual dialogues that I've had with leaders of various sectors, eventually, they said that they just want certainty.

And in fact, I have a list from DTI of major companies that are very interested in coming in. Perhaps they can give you the names because I am told they are bound by confidentiality. So even I don't know their names. But they are waiting for the finalization of CREATE. So I must emphasize that I agree with his honor that these freeports are vibrant, are a source of much economic growth for our country and we must protect it and really continue to make it a place where we invite economic activities. But I will simply add to that discussion the need to consider a rate that would be acceptable that is not rash, not pabigla-bigla, or as mentioned by some groups, done whimsically and capriciously, because those who are currently receiving those kinds of incentives have a transition period of 4-9 years. And then after that, they can still avail. They can still apply. So I believe that it is a difficult decision to be made. I understand the concerns of all our colleagues. However, similar to the analogy I gave on our requiring beneficiaries of the 4Ps to be accountable, that is also what we want for these companies, that we have a way of accounting for the benefit we give them, which is basically foregone revenues, and what they bring into the country. That is what CREATE hopes to achieve.

I just also like to clarify that it's not really a reduction for many companies because for example, currently, BOI only offers income tax holiday. They don't offer the GIE of 5 percent, similar to PEZA and other zones. So basically, when we rationalize and give that array of incentives, which can be offered to any company depending on what their business is, those who will be applying will actually have an added benefit that is currently not available with BOI. So it's not just a negative as many people understand it to be. It's rationalizing, which means in some cases that have been given generously and it's time to determine, have we gained anything from this? It's rationalizing and they would be given a transition period. And for others, they would be given more.

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Sen. Pia: But, those areas that his honor mentioned do not have the forever GIEs. And these forever GIEs have been around for decades. And like his honor said, where has this gotten us? So his honor mentioned earlier other factors that companies look at when they want to invest. This is good governance, competency, policy and stability. All of these factors matter. Like I said, I don't pretend to be an expert here. But I think, logically, we should also be able to review and say, wait. These GIEs that were offered without a term, it actually didn't say you will enjoy it until 2020, 2050, 2090. It's just silent. Having said that, it's been available for decades. And it doesn't really show that that in itself has made a difference.

So I think it is incumbent upon us to also have an open mind and see if we can rationalize it in such a way, like his honor has said now that tama naman na magka-sunset [period] naman yung ibang ano diyan, yun lang naman po ang gusto natin mangyari. And when his honor mentioned that let's not do anything rash especially during this time of COVID, if we pass this bill this month, the sonnet effect this would have on any company is 4 years from now. So, I believe that that is fairly reasonable, because there would be no immediate effect.

And like I said, many companies have been waiting for the final outcome of CREATE so that they can make their commitments.

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Sen. Pia: First of all, to clarify, we are not removing the incentives. We are rationalizing it. So yes, there will be changes. But as I mentioned earlier, it's not meant to be whimsical and capricious. These are changes that will be eased in so that those who are currently enjoying them have 4-9 years to transition.

His honor himself has said he doesn't believe nga naman na may forever. So I thank his honor for that. And we'd be very interested to hear some thoughts he has on the transition. Because what we have right now are 4-9 years to transition. And then they can reapply and they could now apply for the income tax holiday and a new GIE of 10 percent. That's the special corporate income tax.

I also agree with his honor that lack of enforcement is a problem. And this is one of the things that CREATE seeks to address. Because the FIRB will now have the power to demand that the data is submitted to them by the registered companies. That is the problem we have right now. We know there are companies that are non-performing. We know there are companies that, based on a cost-benefit analysis, would not make the mark. And therefore, like his honor himself said, they should be the ones who should not gain from these kinds of incentives. Because let us remember, these incentives are foregone revenue that could be used somewhere else. I know his honor knows that. I am just spreading it into the record. So we give these incentives in exchange for something else. These would be jobs, capital investment they put in, the technology they bring. Well and good, and I feel that we should be generous with what we offer so that we can attract them.

But why be generous for a company that is non-performing? And that is what the FIRB seeks to do to be able to make accurate assessments on their performance, because they will now be required, and their registrations can be cancelled and suspended. This is something that is not really being done by IPAs. In fact, I have asked to see what companies have been suspended, cancelled because of non-performance. And I am not really aware. I don't have a list with me. I don't know if there even is... I believe this is also the information that our team has been trying to get.

I do believe that his honor and I agree on most points, if not on all points. It's really just a question of how to roll out these changes that we need to make to make our offer to potential investors very attractive and to also continue to be a welcome investment hub for those who are already here and who are performing. ---

Sen. Pia: I would just like to express my appreciation for the vision for Subic. As his honor knows, I love to go to Subic, I love to bike there, I've joined races there many times. I've biked, I swam in different developments all over Subic.

Actually, when his honor mentioned Hong Kong, I think very few people will realize the similarity, as his honor pointed out. And I am one of them because I actually hiked in Hong Kong. And you're right, the forests in Subic remind me of the forest in Hong Kong. And what I love about my hiking there is, I take a taxi for 10 minutes, I hike for 2-5 hours, and then I am back in the city. And that is exactly how I feel when I am in Subic. Check into a hotel, bike for hours, get lost in the forest, and then you're back and have a nice meal and relax in your hotel. So you're right there is so much similarity. And truly what we lack is that vision to see it come true. So thank you for spreading that into the record, and I am your supporter when it comes to this.

I appreciate all the other comments. Like I said, I believe that we agree on everything and really it's a question of how to transition, the best way to transition. Because his honor mentioned the building of a railway and everything that needs to be done. And I just want to point out that for thousands of companies that have been receiving incentives that are not being analyzed, they are not accountable for the incentives that they have [received] then they really are foregone revenues for the Philippines. And what these revenues could be used for these purposes that his honor mentioned: building railways, airports, etc. So that's really the reason for this rationalization.

And I'd like to point out that in 2017, which is the latest data I have, the foregone revenues for these companies - we do not know how many of them are actually giving back, are they really training, is there really transfer of technology, are they really employing the number of people they said they would employ... The loss for us is P441 billion in 2017. That's an average actually of P300-plus billion. It changes, and again, we do not have the complete data.

I do not see any difference between my views and his honor's views. His honor obviously just has more experience than I do and has the experience to really help us craft something that could really be stronger. I'd be very happy to receive his honor's further comments or amendments to the CREATE bill.

--- Sen. Pia: That is really our objective, that the number of corporations that we have, the bulk of them are MSMEs and we do want this to trickle down to them, not just for the large corporations. Both contribute to our economy.

So for the MSMEs, I'd also like to put on record that the goal also is to encourage them to also apply for incentives. There is no capital requirement. I would suppose it would depend on the industry. But definitely, in the industries without much capital requirement, they would already be qualified and they are encouraged so that they can benefit because the bulk of those that benefit are the large companies. The figure I saw was there were three. Such a small number of MSMEs that registered. A really low number. So we want to also encourage them so that it's not tilted only on the side of larger companies that benefit from the incentives. Because the scenario that we have now is that the bulk of the companies which are MSMEs do not receive any incentives and are paying the full 30 percent CIT.

Of course, we are aware that under the TRAIN Law, for those not registered, there are other schemes to allow them to pay lower taxes. But over and above, the goal is to make these incentives under the CREATE Law available to MSMEs. And I think his honor again would be in the best position to understand and appreciate that because in his experience not just in Subic but in Central Luzon, he mentioned how almost like the whole of society interacts to make it a vibrant freeport. And that's where the MSMEs can come in.

--- Sen. Pia: Thank you. I always appreciate his honor's wisdom, experience that he shares very generously with all of us. And I do hope that he can continue to guide us and give his comments so that when we finalize this, it can be a much, much better version. Thank you, Mr. President.