Let's Talk Tax

Government assistance to vulnerable MSMEs during the pandemic

Human society is composed not only of the privileged, the wise, and the good, but also of the vulnerable.

In ancient times, the fatherless boy, the orphan, and the widow were easily targets for oppression. Their welfare was, therefore, provided for under the Law, which ensured justice for the fatherless boy, the widow, and even alien residents, and the law also included provisions for their sustenance. People had a duty to look after orphans and widows.

Now, there is a sector of society reeling from the ravages of the COVID-19 pandemic. Due to the swift and undefined changes, micro, small and medium enterprises (MSMEs) have become vulnerable. Like the laws that protected the orphans and widows of old, regulations must be put in place to ensure that MSMEs thrive in a challenging milieu.

An MSME in the Philippines is defined as any business or enterprise engaged in industry, agri-business and/or services that has: (1) an asset size (less land) of up to P100 million; and (2) a workforce of less than 200.

Based on the 2018 List of Establishments issued by the Philippine Statistics Authority, the Philippines had a total of 1,003,111 business establishments. Of this total, MSMEs accounted for 99.52% or 998,342 establishments. In terms of employment, MSMEs jobs totaled 5,714,262 in 2018 or 63.19 % of the workforce.

Despite representing an array of industries and their ability to generate jobs, MSMEs face various barriers to growth and development. According to the Senate Economic Planning Office, the constraints that MSMEs often face can generally be categorized as: (1) non-financial barriers (cost of getting electricity, heavy regulation, high tax rates, and corruption); and (2) financial barriers (access to finance). Undeniably, the current pandemic unwittingly presents itself as an additional test confronting the MSMEs.

Fortunately, the government implemented several measures to help MSMEs endure and survive the tough times. For example, the Department of Finance (DoF), Bureau of Internal Revenue (BIR) and Social Security System (SSS) have issued Joint Memorandum Circular No. 001-2020 and 002-2020 providing for the Small Business Wage Subsidy (SBWS) program granting a wage subsidy of P5,000 to P8,000 to the eligible employees of small business employers affected by any form of quarantine.

Additionally, the Implementing Rules and Regulations of Section 4 (AA) of the Bayanihan to Heal as One Act (Republic Act No. 11469) require covered institutions to implement a minimum 30-day grace period for loans due during the quarantine period. It requires lenders not to impose interest on fees and other charges to future payments or amortizations of individuals, households, MSMEs and corporate borrowers. No additional documentary stamp tax (DST) will be imposed as a consequence of this relief granted.

The Department of Trade and Industry (DTI) also issued Memorandum Circular No. 20-12 which provides a 30-day grace period on commercial rent of MSMEs that have ceased operations due to the ECQ without incurring interest, penalties, fees and other charges. No eviction for failure to pay rent due may be enforced within the 30-day period after the lifting of the ECQ.

Philippine Economic Zone Authority (PEZA) Memorandum Circular No. 2020-023 also authorizes the deferment of rental payments for locators in certain public ecozones for April and May of 90 days from the due date. PEZA will not charge interest or penalties during the grace period. Payments for public ecozone utilities, including electricity, water, and wastewater treatment, will be deferred for 30 days with no interest or penalties.

There are also pending bills which aim to support vulnerable MSMEs. The proposed Corporate Recovery and Tax Incentives for Enterprises Act (CREATE) provides for an enhanced Net Operating Loss Carry Over (NOLCO) extended from 3 to 5 years for losses incurred in 2020 and will be applicable to all non-large taxpayers. The purpose of extending NOLCO is to give MSMEs more time to recoup their losses arising from the implementation of ECQ and other measures to contain the spread of COVID-19.

CREATE also proposes an across-the-board cut in the corporate income tax (CIT) rate from 30% to 25% which will be reduced further by 1 percentage point every year from 2023 to 2027 until it reaches 20%. An outright 5 percentage point reduction in the tax rate will benefit all business enterprises that have not enjoyed any type of income tax incentive. The reduction will boost the efforts of enterprises, especially MSMEs, to protect jobs and recover from the challenges they have encountered due to COVID-19.

Finally, the pending Bayanihan to Recover as One Act ensures, among others, that credit accommodations for MSMEs be imposed a low interest, payable within three years with no collateral required if the loan does not exceed P3 million. It likewise directs the Small Business Corp. to expand its loan programs for MSMEs by increasing available loanable funds, reducing eligibility requirements, increasing maximum loan amounts per borrower, reducing interest rates and extending loan terms. A standby fund is also being set for appropriation to support the activities of the MSME sector.

Notably, when the orphans and widows were cared for during ancient times, it served as evidence that God was their Helper and Father, giving them relief and preserving their lives.

Similarly, the proper execution of the regulations and pending bills mentioned above will ensure that the vulnerable sectors of society such as the MSMEs continue to blossom despite the harsh environment. Moreover, the jobs generated by the MSMEs will be protected. There will be reason for hope despite the uncertainty of these times.

Let’s Talk Tax is a weekly newspaper column of P&A Grant Thornton that aims to keep the public informed of various developments in taxation. This article is not intended to be a substitute for competent professional advice.

Renato R. Balisacan, Jr.  is a senior manager of Tax Advisory & Compliance division of P&A Grant Thornton, the Philippine member firm of Grant Thornton International Ltd.

 

As published in BusinessWorld, dated 19 August 2020