The Comprehensive Income Tax and Incentives Rationalization Act (CITIRA) Bill, now known as the Corporate Recovery and Tax Incentives for Enterprises Act (CREATE), has been a topic of much discussion and anticipation in the Philippines.
Passed in 2020, CREATE aims to reform the country’s tax system, particularly the estate tax return by reducing corporate income tax rates gradually over several years.
Recently, there have been talks about concluding select and property tax and rate cuts under the CREATE law in July 2023, which may have significant implications for the real estate industry.
After this month, significant changes may be seen in real estate taxes, including annual ad valorem tax, real property tax, and estate tax, among others.
Read on to know more about the possible effects of the potential changes on real property taxes, estate, and property taxes here.
CREATE Law’s Effects on Real Estate Tax and Tax Rate Cuts
The CREATE Act, which replaced the previous CITIRA Bill, aims to lower the corporate income tax (CIT) rate gradually to attract more investments and promote economic growth.
Under the CREATE Act, the CIT rate for domestic corporations will be reduced by 1 percentage point each year, eventually reaching 20 percent in 2027. For businesses with a gross income of up to PHP 5 million, the CIT rate will be set at 1 percent, benefiting small and medium-sized enterprises (SMEs).
Impact on the Real Estate Sector
The real estate sector plays a crucial role in the Philippine economy, and any changes in the property tax landscape can have significant ramifications. The net estate tax rate reversion under the CREATE law may lead to the following effects on the real estate industry:
Attracts More Real Property Investors
With lower corporate income tax rates to be paid, real estate developers may find it more appealing to invest in new projects and expand their portfolios with more land and immovable property.
The reduced taxes may free up capital for further improvements to real properties and encourage developers to explore other properties in untapped markets.
In addition to internal revenue, the reduction in tax paid may attract foreign investors to the Philippine real estate market. Foreign property owners looking to invest within the country may see paying lower tax rates as an advantage, leading to increased foreign direct investment in the sector.
It also increases their trust in the government. With the new law, the country would also have property rates within the global fair market value.
Increased Personal Property and Housing Supply
Lower tax rates translate to more affordable real estate tax. This, in turn, would incentivize real estate developers to increase their housing and land supply, potentially leading to more affordable housing options for Filipinos.
As more listings enter the residential real estate market, the assessed value of the property will be forced to become more competitive.
This increased gross estate supply may help address the country’s housing backlog and enable more families to become property owners.
Enhanced Consumer Spending
As the real estate market becomes more active, there may be a positive impact on consumer spending. Property owners and investors may have more confidence in the value of the property.
This leads to them investing more in personal property, including paying more in related industries like home furnishings and construction materials.
Effects on Other Industries
The reverting tax rate under the CREATE law may not only influence the real estate sector but also have ripple effects on other industries in the Philippines:
Manufacturing Sector
The reduced corporate income tax rates can benefit manufacturing companies, encouraging them to expand their operations and invest in technology and innovation.
This expansion may lead to job creation and stimulate economic growth, which the government has been aiming to do in the post-pandemic world.
Technology and IT Industries
Lower corporate income and personal property tax rates may attract technology companies and startups to the Philippines. This could foster the growth of the technology and IT industries, leading to increased innovation and digital transformation.
Retail and Consumer Goods
The potential increase in consumer spending, driven by a more active real estate market, may positively impact the retail and consumer goods sectors. Increased demand for housing may also result in higher sales of home appliances, furniture, and other related products.
Considerations for the Government and Businesses
While the potential effects of the tax rate reversion appear promising, there are several considerations for local government units and businesses:
Fiscal Impact
The government must carefully assess the fiscal impact of the reduced tax rates on revenue collection.
It is essential to strike a balance between promoting economic growth through tax incentives such as net estate and ensuring sufficient funds for public services and government infrastructure improvements.
Policy Stability
Consistency in tax declaration and stability in tax policies are crucial for businesses to make long-term investment decisions. The government should consider providing clear guidance on future tax reforms to give businesses confidence in their strategic planning.
Monitoring and Evaluation
As the tax rate reversion takes effect, it is vital for the government to monitor its impact closely. Evaluating the results of annual tax, and adjusting policies as needed will be essential to maximize the benefits of the CREATE law while addressing any potential challenges that arise.
Onward and Forward with CREATE Law
The conclusion of select tax rate cuts under the CREATE law in July 2023 has the potential to significantly impact various industries in the Philippines, including the real estate sector.
With the corporate income tax rates set to decrease gradually, the real estate industry may experience increased investments, a boost in housing supply, less real estate taxes and property tax, and potentially attract foreign investors.
Moreover, the effects of the tax rate reversion are likely to ripple through other industries, such as manufacturing, technology, and retail.
As the country moves forward, it is essential for the government and businesses to collaborate and adapt to these changes to foster sustainable economic growth and development in the Philippines.
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