CREATE: Tax reform response to COVID-19

(Second of two parts)

In last week’s article, we discussed the salient features of the CREATE bill: the immediate Corporate Income Tax (CIT) rate cut; the extended NOLCO application; the rationalization of fiscal incentives, and other notable features. This week’s article will focus on the proposed fiscal incentives available to prospective and existing investors as well as the strategies that investors may explore to maximize tax perks.

The fiscal incentives under CREATE aim to be targeted, tailor-fitted and transparent. They steer investors towards preferred industries, activities and locations. Similar to regimes in other ASEAN nations, they will be performance-based and time-bound to retain our competitiveness and attract high-valued investments.

CALIBRATED ITH AND GIE TAX REGIMES UNDER CREATE
The proposed Income Tax Holiday (ITH) available to qualified investments shall be two to four years depending on category-type, which is a combination of location and industry tiers. As CREATE promotes countryside development, fiscal incentives and industry priorities will be biased towards less developed areas and those outside the National Capital Region (NCR). Notably, agribusiness, infrastructure, transportation, utilities and logistics crucial to industrialization are the low-hanging fruit for industry investments within NCR and nearby provinces like Bulacan, Cavite, Laguna and Rizal.

After the expiration of the ITH, CREATE will grant a Special Corporate Income Tax (SCIT) rate of 8% based on the gross income earned effective January 2021. The SCIT rate will increase by 1% every year until it reaches 10% in 2023. The SCIT will be collected in lieu of all taxes, both national and local, and shall run for three to four years depending on category-tier which may be extended by three or four years at any one time, provided that the total period of incentive availment does not exceed 12 years.

Theoretically, SCIT is a recalibrated 5% Gross Income Earned (GIE) tax regime, of which the National Government’s share is increased to 6% (rising to 8% by 2023). Meanwhile, the respective Local Government Units’ share in the SCIT rate is still fixed at 2% during the entire SCIT regime.

Although location-biased and time-bound, the incentives under CREATE are aligned with the Balik Probinsya, Bagong Pag-asa Program in incentivizing provincial relocators. Ultimately, CREATE is designed to improve infrastructure and supply chains in these regions to compete alongside Metro Manila and other burgeoning centers.

ENHANCED DEDUCTIONS AND OTHER INCENTIVES
In lieu of ITH and SCIT regimes, CREATE retains the enhanced deductions for qualified investments to further tailor-fit incentives to investments.

The enhanced deductions include an additional deduction of up to 50% on the following: incurred labor expense, or domestic input expense directly related to registered activities or power expenses for power utilized; up to 100% on research and development (R&D) expense or training expense; depreciation allowance of assets acquired; and enhanced NOLCO, among others. After the ITH, the period of availing the enhanced deductions will be five to eight years depending on its category-type, and may be extended by three to four more years, provided that the total period of incentive availment does not exceed 12 years. CREATE provides that the enhanced deductions are not granted simultaneously with SCIT.

CREATE also retains the VAT and duties exemption on the import of capital equipment, raw materials, spare parts or accessories, and VAT zero-rating on the local purchases of goods or services used in registered activities within the ecozone, subject to certain conditions.

The grant of performance-based incentives will ultimately drive the registered enterprises to contribute measurably to the economy while ensuring high-level employment, high-value exports, continued use of inputs from local suppliers, and augmented training, R&D and modern technology, among others.

FISCAL INCENTIVES FOR EXISTING INVESTORS
Will this be the end of tax perks for existing investors? Not quite.

Existing activities registered under their respective Investment Promotion Agency (IPA), which will qualify for registration under the Strategic Investment Priority Plan (SIPP), may choose to be governed by CREATE by surrendering their certificates of registration. These will be deemed waivers of their incentives under their previous registrations.

However, CREATE did not elaborate on how the incentive periods will be continued or substituted. This may be clarified further in the implementing regulations.

Meanwhile, for those opting to keep their existing IPA-registrations, CREATE will grant a longer sunset period for incentives than the sunset provisions under the defunct CITIRA. Existing PEZA entities will enjoy the extended four to nine years without a change in their current incentives depending on their fiscal regimes — a sweeter and longer sendoff compared to CITIRA before the registered entities bid adieu to their current tax perks.

But will IPA-registered entities still have aces up their sleeves?

For PEZA-registered entities, they still do. CREATE retains the exemption from the 15% branch profit remittance tax which the CITIRA bill initially removed from PEZA entities. Furthermore, the VAT zero-rating on local purchases and the VAT and duty exemption on imports of capital equipment and raw materials will still be available to registered entities located within the ecozones or freeport zones applying the VAT system’s cross-border doctrine, subject to certain conditions. Needless to say, existing enterprises will be governed by the reduced CIT introduced by CREATE once the sunset period expires.

CAPITALIZING INCENTIVES UNDER CREATE
The time-bound feature of the fiscal incentives is patterned after those of our ASEAN neighbors. This is also one of the mechanisms to recover the revenue foregone from the drastic CIT cut. After all, the rising investments approved by the Board of Investments (BoI) suggest that not all firms need perpetual incentives to invest and PEZA-registered firms may, if qualified, still reapply for new incentives after the tax regime ends.

To capitalize on fiscal incentives, business owners and investors may explore, through cost-benefit analysis, varied approaches to maximize their capital and revenue. Potential investments may be reviewed in advance for capital, supply chain and market feasibility, apart from the tax impact and time-framed simulation studies.

Investors may consider the following for strategic analysis:

1. Identify strategic locations aligned with logistics and supply chain integration.

2. Consider priority industries to maximize incentive promotions (such as highly technical industries requiring modern science, engineering and research resulting in significant value-added and high-paying jobs with investments of at least $1 billion, which will yield the highest IPA incentives).

3. Evaluate capital and market feasibility to meet performance metrics and other conditions for IPA incentives.

4. Study the optimization of tax incentives under ITH plus SCIT vis-à-vis enhanced deductions.

5. Reassess current incentives during the sunset period vis-à-vis the CREATE-proposed incentives regime for existing registered investments that qualify under SIPP.

At this unprecedented time when companies are challenged for cash and by supply chain alignment issues — and despite the resulting revenue lost by the government — many are hopeful that CREATE will play a significant role towards an economic recovery. We also hope that rational implementation and policy execution will be pivotal towards an economic resurgence.

This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinions expressed above are those of the author and do not necessarily represent the views of SGV & Co.

Donna Frances G. Ylade-Torres is a Senior Manager from Private Client Services, a Tax Sub-Service Line of SGV & Co.

donna.frances.g.ylade@ph.ey.com