March 31, 2021
Philippines enacts law reducing corporate income tax rates and rationalizing fiscal incentives
The Philippine President signed into law the proposed Corporate Recovery and Tax Incentives for Enterprises (CREATE) Act on 26 March 2021,1 but vetoed several provisions. The law amends the Philippine corporate income tax and incentives system in a bid to attract increased foreign investment and help the Philippine economy recover from the COVID-19 pandemic.
The law2 is set to take effect on 11 April 2021, that is 15 days after its complete publication, unless specifically provided in the law.
This Tax Alert summarizes the key amendments of the CREATE Act and the provisions vetoed by the President relevant to multinational corporations.
Amendments to corporate income tax and other taxes
Amendments to indirect tax and incentives related to COVID-19 prevention, control and treatment
The importation of COVID-19 vaccines will be exempt from import duties, taxes and other fees, subject to the approval or licenses issued by the Department of Health or the Food and Drug Administration.
Revised fiscal incentives for registered projects and activities
Customs duty exemption for the importation of capital equipment, raw materials, spare parts or accessories directly and exclusively used in the registered project or activity of registered enterprises.
VAT exemption for importation and VAT zero-rating for local purchases of goods and services directly and exclusively used in the registered project or activity, regardless of the registered enterprise’s location (i.e., ecozone or free port zone).
Higher incentives for registered enterprises locating outside of metropolitan areas:
Additional two years ITH for enterprises located in areas recovering from armed conflict or a major disaster
Additional three years ITH for enterprises completely relocating outside of the National Capital Region
Transition provisions for existing registered activities:
Existing registered activities granted with an ITH only will be permitted to continue its remaining ITH period
Existing registered activities granted with an ITH and 5% gross income earned tax (GIT) after the ITH period, or are currently receiving the 5% GIT will be permitted to continue the 5% GIT for 10 years, regardless of the number of years they have been receiving the incentive
After the expiration of the transition period, existing registered export enterprises may reapply and receive the SCIT for 10 years, subject to certain conditions and performance reviews
The President of the Philippines may approve a modified set of incentives or financial support package aimed at attracting highly desirable projects or specific industrial activities for projects with a comprehensive sustainable development plan and with a minimum investment capital of PHP50 billion (US$1 billion) or minimum local employment generation of at least 10,000 personnel within three years, among other conditions. The grant of an ITH should not exceed eight years and, thereafter, a 5% SCIT may be granted, provided the total period of incentive does not exceed 40 years.
Vetoed provisions of the CREATE Act
Redundant incentives (i.e., SCIT) for domestic market enterprises (DMEs) and further classifications of DMEs (e.g., engaged in activities classified as “critical” and with minimum investment capital of PHP500 million (US$10 million))
By reducing the CIT rate and rationalizing fiscal incentives, the CREATE Act intends to make the Philippine corporate tax system responsive, globally competitive and attractive to foreign investors, and at the same time, assist Philippine businesses recover from the economic impact of the COVID-19 pandemic. Multinational corporations looking to restructure their organization should also consider these amendments to achieve tax efficiency in their planning and future operations.
For additional information with respect to this Alert, please contact the following:
Ernst & Young Philippines (SGV & Co.), Makati City
Ernst & Young LLP (United States), Philippines Tax Desk, New York
Ernst & Young LLP (United States), Asia Pacific Business Group, New York
Republic Act No. 11534.
The CREATE Act is published in the Business Mirror on 27 March 2021.
Regional Operating Headquarters (ROHQ) is a foreign business entity which is permitted to derive income in the Philippines by performing qualifying services for its affiliates, subsidiaries or branches in the Philippines, in the Asia-Pacific region and in other foreign markets. ROHQs are currently entitled to a preferential income tax rate of 10% on taxable income and various fiscal and non-fiscal incentives such as exemption from local taxes, fees or charges and tax and duty-free importation of training materials and equipment not locally available, among others.