By Eric R. Recalde
The Angara Abello Concepcion Regala Cruz Law Offices or ACCRALAW recently concluded a seminar on the latest laws geared to promote foreign investments. It was part of a year-long celebration of ACCRALAW’s golden anniversary and a way of giving back to its valued clients. The presenters provided insights on what prompted the government to pass these legislations, considering the challenges of foreign clients and their costs for doing business in the country.
As one of the speakers, I naturally highlighted the government’s industrial strategy reflected in the 2022 Strategic Investment Priority Plan (SIPP). This is an important component of the country’s incentives system, which CREATE (RA 11534 or the Corporate Recovery and Tax Incentives for Enterprises Act) overhauled early last year. The extent of incentives depends on the SIPP, which differentiates export and domestic market activities. The special corporate income tax and zero-rated purchase incentives are only granted to registered export entities.
The 2022 SIPP identifies the government target activities for the next three years. They are classified into tiers, and not into mere pioneer and non-pioneer categories.
The 2020 and 2021 priority activities are generally carried over as Tier 1 activities. They focus on job and value creation, and support for strategic or emerging industries. Export- and BPO- related activities, major infrastructure, and telecommunications projects (specifically the establishment of connectivity facilities for broadband services) fall under Tier 1 category.
Foreign investors may now fully participate in construction activities (PCAB v. Manila Water Co., Inc., 2021). With the recent Public Service Act (PSA) amendment, they may operate, manage, or control major infrastructure and telecommunications projects. Safeguards are in place when foreign investors own strategic industries. Foreign government investments in public utilities and critical infrastructures are prohibited on a prospective basis.
Tier 2 activities cover environment, health, food security, industrial value-chain, and defense-related activities. Those not specifically listed may fall under Tier 1. They have been government’s priority except for defense-related activities. Electric Vehicle (EV) assembly and related support activities, renewable energy (RE), energy efficiency, conservation, and storage technology-related projects enjoy Tier 2 incentives.
The incentives on EV-related projects align with the PSA’s clarificatory amendment. EVs are not considered as PUVs (public utility vehicles). Foreign investors may now engage in the public transport business, especially using EVs.
The more generous RE law incentives are still in place. CREATE did not remove and instead complemented them. RE developers may enjoy a longer income tax holiday (or net operating loss carry-over privilege, as applicable), reduced corporate income tax, and VAT zero-rating treatment of local sales. They may apply for duty- and VAT-free importation under CREATE and just not for a limited period under the RE law.
Crude oil refining is a Tier 2 activity. Oil storage and distribution may continue to enjoy the Oil Industry Deregulation Act fiscal incentives but as Tier 1 activities.
Government endorsed defense-related activities are now considered priority projects. The Foreign Investments Act amendment removed substantial export requirements, which in the past foreign investors had to meet to undertake such projects.
Tier 3 activities are the truly pioneer activities. They focus on innovation and R&D. Their extensive incentives complement the 2019 innovation legislations, and the recent FIA amendment liberalizing the ownership and capital requirements for startups and startup enablers. The aim is to attract venture capital (VC) investors and establish a Silicon Valley-type hub in the country.
There is concern about the certainty of the rules. Fortunately, the Supreme Court has clarified some issues.
The focus of the incentives is on the registered activity and not on the location of activity (CIR v. JP Morgan, 2018). It follows that the unregistered activities of an entity registered with an Investment Promotions Agency (IPA) may be subject to a default taxation regime even if such activities are carried out inside the IPA administered special zone. The government has yet to clarify the extent of local government units’ (LGUs) authority over unregistered activities inside the special zones. LGUs are required to issue a resolution of concurrence in the creation and special administration by the concerned IPAs of these special zones.
Direct costs should be broadly understood (CIR v. East Asia Utilities, 2020). CREATE’s implementing rules describe them. Judgment is required and East Asia clarification is relevant in their application.
The government may not impose a specific cost allocation methodology (DoF v. AUB, 2021). ACCRALAW successfully litigated this theory for the banks. It has utility when an IPA-registered enterprise adopts a reasonable costs allocation methodology for its numerous (registered and unregistered) activities.
Recent legislation and the 2022 SIPP will create business opportunities. The government must only ensure its implementing issuances enlighten — instead of confuse — investors and other stakeholders.
The views and opinions expressed in this article are those of the author. This article is for general information and educational purposes, and is not offered as, and does not constitute, legal advice or legal opinion.
Eric R. Recalde is a partner and the head of the Tax department of the Angara Abello Concepcion Regal Cruz Law Offices.