Philippine Markets Newsletter

MONDAY MACRO: Among other factors, the CREATE Act of 2021 helped accelerate the recovery of the Philippine corporate market

July 4, 2022

In order to speed up businesses’ financial recovery, the Philippine government used a good deal of monetary and fiscal tools. One of these—a fiscal tool—is the Corporate Recovery and Tax Incentives for Enterprises (CREATE) Act in 2021.

Today we revisit what the CREATE Act is and its impact on the profitability of the top 100+ PSE-listed companies.

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In the event of a recession, the government can pull multiple levers in order to spur economic growth. These levers can be classified under two policies: monetary and fiscal.

Monetary policies, as the name suggests, relates to central bank activities that influence the flow of money and credit in an economy. On the other hand, fiscal policies refer to government decisions that influence taxes and spending.

Adjusting interest rates is the government’s main monetary tool to manage the economy’s stability and growth.

During the early months of the pandemic, the Bangko Sentral ng Pilipinas (BSP) decided to cut interest rates by 50bps each in March, April, and June 2020. One final cut was made in November that year, bringing interest rates to a low of 2%.

The government can also rely on infrastructure spending or tax reform in order to boost economic production.

We’ve talked about infrastructure spending in a previous Philippine Market Newsletter. Today, we will be focusing on tax reform.

Businesses and employees alike will be able to benefit from a reduction of corporate income tax. In general, a higher after-tax profit encourages new investments, which consequently leads to higher productivity and output, added capacity for increased wages and employment, and higher cash flows for improved R&D and innovation efforts.

Furthermore, a lower corporate tax rate likely discourages firms from shifting profits to lower-tax jurisdictions.

The U.S. seems to have these benefits in mind when it enacted the Tax Cuts and Jobs Act in 2017, reducing corporate tax rates from 35% to 21% and bringing it below the average for most other Organisation for Economic Co-operation and Development (OECD) countries.

The Philippines approved a similar tax overhaul with the Corporate Recovery and Tax Incentives for Enterprises (CREATE) Act in 2021.

The CREATE Act reduced corporate income taxes from 30% to 25% for large corporations, and will be reduced further by 1% annually up until it reaches 20% from 2027 onwards.

Predominantly, this was meant to serve as a fiscal relief to Philippine corporations as demand soured and businesses struggled through the pandemic.

Looking at the aggregate net income of the top 100+ PSE-listed companies, we can see the impact of favorable tax reforms on corporate profitability.

When the corporate income tax was reduced from 35% in 2008 to 30% in 2009, aggregate corporate income rebounded from PHP 81 billion to PHP 133 billion.

The tax rate remained at 30% over the next decade up until the enactment of the CREATE Act in 2021, which then reduced the tax rate further by 5%. From a low of PHP 81 billion in 2020, aggregate corporate income more than doubled to PHP 172 billion the following year.

That said, while the CREATE Act did have a hand in increasing corporate profitability in 2021, there are other factors that should be taken into account as well. Looser quarantine restrictions, increased demand, and increased operational capacity definitely contributed to the recovery.

Overall, the CREATE Act is still relatively in its early stages. More time is undoubtedly needed to evaluate the full impact of the tax reform.

About the Philippine Markets Newsletter
“The Monday Macro Report”

When just about anyone can post just about anything online, it gets increasingly difficult for an individual investor to sift through the plethora of information available.

Investors need a tool that will help them cut through any biased or misleading information and dive straight into reliable and useful data.

Every Monday, we publish an interesting chart on the Philippine economy and stock market. We highlight data that investors would normally look at, but through the lens of Uniform Accounting, a powerful tool that gets investors closer to understanding the economic reality of firms.

Understanding what kind of market we are in, what leading indicators we should be looking at, and what market expectations are, will make investing a less monumental task than finding a needle in a haystack.

Hope you’ve found this week’s macro chart interesting and insightful.

Stay tuned for next week’s Monday Macro report!


Angelica Lim
Research Director
Philippine Markets Newsletter
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