Delivered by Senate President Pro Tempore Ralph G. Recto

21 October 2020

Good afternoon. It is my pleasure to be with you today – even though I was given 20 minutes to discuss a raft of bills which has taken us hundreds of hours to deliberate.

Imposing that cap on a politician is like asking an alcoholic to limit himself to a teaspoon of beer.

I would like to thank you for your active interest on bills brewing in Congress.

If the Senate is taking a longer time cooking the alphabet soup of bills – CREATE, FIST, GUIDE, ARISE – it is because legislation, to be palatable, must pass the Goldilocks rule: not too hot, not too cold, with the sweet spot in between.

Like the combination of drugs used against COVID, our job is to concoct a cocktail of responses to the pandemic—but carefully—because the socioeconomic patient which needs it suffers from pre-exisiting comorbidities.

Unfortunately, none of the bills is the legislative equivalent of a vaccine. But collectively, it will boost our resistance to the pandemic’s brutal effects on lives and livelihood.

Before I give you, because of time limitation, a movie trailer kind of preview on CREATE and FIST, let me touch briefly on three bills the Senate passed recently, which are new additions to the medicine cabinet of responses against the pandemic.

Just before we adjourned, we passed the EPART—if it sounds like erpat, it is because the Emergency Powers Against Red Tape gives Tatay Digong the power to suspend requirements for national permits, licenses and certifications.

The bill speeds up the process and shortens the requirements for permits as he desires.

It will allow the President to increase the velocity of the processing of permits. It grants him the power to set the minimum speed.

But the power to accelerate does not cover the power to run roughshod over the health of the people. For example: It may expedite the construction of cellphone towers, but not one beside the Rizal Monument.

We have also ratified the Medical Scholarship Bill to address the shortage of doctors the pandemic had laid bare.

One of the ways of choosing scholars is to crowdsource them from the town’s best and brightest and let them repay their free schooling by serving in their own community, as way of directly reimbursing in kind their own people.

The cost of producing one surgeon who is a future member of the Philippine Medical Association is only one fourth the P4.3 million price tag of training one soldier in the Philippine Military Academy.

There are other approved bills which flew under public radar, or the trolls’ attention, whose titles are unknown, unlike the MMDA spokesman’s controversial quotes.

For example, we have ratified the Alternative Learning System Bill, which brings the school to those who are too old, too poor or too far away to go to one.

We have also reauthorized the Bayanihan Act, and the second edition calls for P165.2 billion in fresh aid to hospitals, families and businesses – P30.5 billion for health, P53.5 billion to families and workers, and P42 billion to enterprises—the biggest of which is the P39.5 billion coursed through GFIs.

Sadly, while Congress huffed-and-puffed in cobbling together this bill, the implementation seems to have sputtered.

Out of the P165.2 billion, not all has been released. I however believe that the slow start can be rectified by a Last Quarter Storm in spending.

And of course, the most important in the cocktail of solutions, the national budget, for which the Senate committee hearings are nearing the finish line.

We are budgeting P4.506 trillion next year. Of which, only P2.717 trillion can be supported by revenues, which means the deficit of P1.749 trillion will have to be bridged by borrowings.

On a daily basis, this is how our budget meter ticks: P12.31 billion in expenditures. This is one bureaucracy which burns 500 million pesos every 30 minutes.

However, we can only raise P7.4 billion in taxes and other revenues.

This leaves a daily deficit of P4.78 billion, to be plugged by those in in his majesty’s debt service, who, in this season of high demand but low revenues, will have to pull off the fiscal equivalent of the miracle of multiplying wine of out of a single jug.

Speaking of wine, our alcohol-proof people, world champion drinkers in gin and brandy, have made our sin tax collections recession-proof, but not this time as the forecast alcohol tax of P113.7 billion for 2021 is P28.4 billion lower than the 2021 projections made in 2019.

Pag ang alcohol sa atay, ginawang alcohol sa kamay, ang koleksyon nadadamay.

But government will be borrowing not to simply finance the deficit, but to hoard an extra P513 billion as hedge, which brings net financing to P2.26 trillion next year, and moving the national debt needle to P11.98 trillion.

While the budget sports many zeros, in reality at least two-thirds are fixed expenses. Almost P3 trillion are open to scrutiny, but not to alteration.

Yung payroll, pension and premium contributions na lang po will be P1.31 trillion, about 30 percent of the budget, or a daily payout rate of P3.6 billion. Ganyan kalaki ang Personnel Services expense natin.

Despite this, we are confident we can carve enough budget space for critical expenses that the budget proponents missed.

For example, if a proven vaccine will be rolled out next year, the kind that Trump and Putin have not haphazardly tried on themselves, and will cost USD 20 for two shots, there is no provision yet in the budget for the P55 billion to initially cover half of the population.

There are other gaps, in health especially, which must be filled. And this can only be filled if we will not pound plows into pork barrels.

Let me now go to CREATE.

A good CREATE must create confidence and consistency in rules at a time when the pandemic is creating confusion, company closure, corporate tentativeness and consumer doubts.

When economies are retooling and revamping their rules to avert closures and attract investors, we must not take the opposite route.

Bureaucracy, they say, must be faster than the virus. And that nimbleness must extend to nurturing tax-paying, job-creating, poverty-eradicating enterprises in the new normal of a changed business landscape.

These are many takes and proposals on CREATE. Let me put on record that my agreements with the proponent outnumber our few points of divergence.

On the CIT, I am proposing multiple rates, based on income or based on assets:

First option is based on income. With 5 rates, lowest rate at 0% for those with taxable income below P250,000 and highest rate at 25%.

[TAX TABLE FLASHED ONSCREEN]

Second option is based on assets. 3 rates depending if you are a Micro, Small, Medium, or Large enterprise. Lowest rate at 15% for our Micro and Small Enterprises, which make up 99% of DTI registered establishments.

[TAX TABLE FLASHED ONSCREEN]

These schedules were not born in some policy sandlot. They are inspired by the Constitution, which calls for a progressive tax system.

If a hardware store with a taxable earning of P1 million pays the same rate as a conglomerate which rakes in P10 billion, then this system fails the equitable rule.

On housing, I have proposed to increase the VAT-exempt threshold on the sale of real properties – in the case of residential lots from P1.5 million to P2.5 million, and P2.5 million to P4.2 million for house and lot.

I have likewise taken the position of exempting foreign dividends from income tax. Taxing them will only discourage their repatriation.

At present, the earnings of a foreign investee company distributed as dividends to a Philippine company are potentially taxed a total of three times.

A higher dividend tax rate creates numerous distortions. It adds to the income tax code’s general bias against savings and investment.

High dividend taxes also cause corporations to rely too much on debt rather than equity financing, because interest is deductible against the corporate income tax but dividends are not.

It also reduces the incentive to pay out dividends in favor of retained earnings, and trigger financial engineering efforts to avoid tax.

I am also in favor of lowering the Minimum Income Corporate Taxes from two percent to one percent but suspended for three taxable years.

Levying a minimum income tax to a company that is already operating at a net loss is not investor-friendly. This is burdensome, as an investor already losing capital will still be required to pay income tax. Even if the MCIT operates as a tax credit, such tax credit expires, which renders ineffective the full recovery of the economic cost of the investor.

I have also warned against the danger of the Improperly Accumulated Earnings Tax.

The Supreme Court said that the tax on improper accumulation of surplus is essentially a penalty tax designed to compel corporations to distribute earnings so that the said earnings by shareholders could, in turn, be taxed.

But why are we penalizing a company for accumulating a legitimate income which has already been subjected to corporate income tax?

Also, this penalty tax will not apply in instances where the accumulation of earnings is for the reasonable needs of the business such as for definite corporate expansion projects or programs, or reserved for building, plants or equipment acquisition.

This IAET is just an additional burden on the taxpayers that warrants its abolition in our Tax Code.

On the Creditable Withholding Tax, or CWT, TRAIN provides for a 1% to 15% CWT rate on income payment.

Under existing BIR Revenue Regulation, how many CWT rates are there?

For purchase of goods: 1%;

For purchase of services: 2%;

For rentals: 5%; and

Professionals including lawyers, CPA, engineers: 5%, 10%, 15%.

I am advocating a rate of 1% for the sale of goods, and 2% for the sale of services or the exercise of profession.

And before we adjourned, we tabled my proposal for three frameworks in treating incentives, which were products of broad consultations.

I have canvassed the views of business leaders, heads of foreign chambers, some of whom I see are in this online summit, regarding the new fiscal incentives regime, which is at the core of CREATE.

I have also solicited the opinion of locators, who have sunk billions in projects, kept tens of thousands employed, stuck it out here rather than evacuate to Vietnam, and run real factories instead of running tabletop theoretical exercises.

They are calling for fixed rules, anchored in predictability, and not on discretionary powers of a review board.

I have proposed three options which provide a more granular classification, instead of putting all of them under one big roof run by a powerful Big Brother.

Option One excludes the IPAs from the coverage of the FIRB. These are PEZA, SBMA, Clark Development Corporation, the Freeport Area of Bataan, and APECO. PEZA alone accounts for 60% of exporters, a scale it had built up over the years.

Option Two is based on the market they cater. Firms that sell domestically will enjoy fiscal incentives other than the existing income tax holiday, if their industry is listed under the Strategic Investments Priority Plan. Export enterprises, on the other hand, will continue to enjoy the existing rates and sets of incentives.

Option Three is the “grandfather rule” which recognizes and honors the contracts held by the investors when they decided to invest in the country, which places these incentives beyond the dilution or deletion of CREATE.

These three options may still evolve, pending the inputs of my colleagues in the Senate. It can be adopted in toto, defeated completely, or a hybrid may emerge.

My work is to present an alternative, other than the straitjacket championed by the executive. I would be happy to win the arguments but lose the vote, than the other way around.

Lastly, a quick rundown on FIST, which is the SPV Law improved and rebadged. The bill will help banks and other financial institutions clean up their books of bad loans and free up their capital to maintain stability, in anticipation of the unprecedented increase in non-performing loans due to the pandemic.

One, only the private sector can participate in the establishment of financial institutions strategic transfer corporation. It does not, however, allow foreign-owned FISTCs to participate in foreclosure proceedings and to take possession of the property.

The window of opportunity to register with the SEC is within 36 months from the law’s approval.

Prior notice to the borrowers NPLs is required before the transfer of NPLs to a FISTC shall take effect. The borrower has 90 days upon receipt of notice to restructure or renegotiate the loan.

The following taxes are exempted: Documentary stamp tax, capital gains tax, creditable withholding income taxes and value-added tax.

I would like end my presentation here because a minute more and it would be wordy and windy privilege speech.

I would like to close with this exhortation: Robust legislation involves civic participation. Never allow Congress to forge laws unilaterally. You are not a mere sounding board, but a supplier of good, tested, sound, pragmatic policies—more so at a time when policymakers have the tendency to believe that because a rose smells better than a cabbage, it will make a better soup.

Maraming salamat po.