Fourth of four parts
The first-ever revenue-eroding tax reform package and the largest economic stimulus program in the country’s history, Republic Act No. 11534, or the Corporate Recovery and Tax Incentives for Enterprises Act (CREATE), provides for major amendments to our tax and incentives laws. These changes are enacted with the goal of helping businesses move into post-pandemic recovery while encouraging more foreign investment. The law took effect on April 11.
The first and second parts of this four-part article discussed the passage and goals of the CREATE Act, as well as the exemption of foreign-sourced dividends, the repeal of improperly accumulated earnings tax, tax-free exchange, additional provisions to consider and provisions that were vetoed.
In the third part last week, we covered the nature of incentives before CREATE, their centralization and administration, and how they become performance-based and targeted. In this fourth and final part, we cover the periods of availment and the kind of incentives registered enterprises may enjoy.
PERIOD OF INCENTIVES
With the intention to make incentives time-bound to encourage growth, CREATE no longer accords registered business enterprises (RBEs) incentives in perpetuity.
Qualified export enterprises may be eligible for a four to seven-year income tax holiday (ITH), followed by either 10 years of 5% special corporate income tax (SCIT) on gross income earned (GIE) or 10 years of enhanced deductions (ED).
On the other hand, qualified domestic market enterprises (DMEs) may be eligible for a four to seven-year ITH followed by five years of ED.
As for DMEs, the grant of 5% SCIT incentives was vetoed since the same, according to the President, is redundant, unnecessary, and weakens the fiscal incentives system. If the government is to grant 5% SCIT to registered DMEs, then homegrown firms that are not registered, and make up most of the country’s micro, small and medium enterprises (MSMEs), will have to pay more taxes than registered DMEs. In the process, registered DMEs will have more legroom to reduce prices and secure more contracts, ultimately taking over the market and potentially threatening to put MSMEs out of business.
An additional two years of ITH will be given to projects or activities of RBEs located in areas recovering from armed conflict or a major disaster.
An additional three years of ITH will also be given to projects or activities registered prior to the effectivity of the CREATE Act that will, in the duration of their incentives, completely relocate from the NCR.
In the interest of national economic development and upon positive recommendation of the FIRB, the President can approve extraordinary incentives for up to 40 years, where the ITH does not exceed eight years, followed by a 5% SCIT.
The modified set of incentives or financial support package favors projects with comprehensive sustainable development plans, complying with set minimum investment capital or minimum local employment generation, among other conditions.
The flexibility and range of authority conferred to the President in granting incentives is not new. ASEAN neighbors like Malaysia, Indonesia, Thailand and Vietnam have been exercising a similar level of discretion in granting incentives to boost their attractiveness and achieve their economic objectives.
KINDS OF INCENTIVES
In computing the taxes due, the 5% SCIT is based on GIE, in lieu of all national and local taxes, just like the old 5% GIT. Nevertheless, the allowable deductions for purposes of computing the GIE must be clarified in the IRR to be promulgated by the DoF after consultations with the IPAs and other government agencies.
Pre-CREATE, the issue on whether the enumeration of direct costs for purposes of GIE computation is exclusive or not has been the subject of various cases brought before the BIR and the courts. For PEZA-registered entities, the issue has finally been settled by the Supreme Court (SC) in the case of Commissioner of Internal Revenue vs. East Asia Utilities Corp. (G.R. 225266, Nov. 16, 2020) wherein the SC confirmed the non-exclusivity of the list of allowable deductions for purposes of computing PEZA-registered enterprises’ 5% GIT. This pronouncement by the SC on the proper interpretation of the allowable deductions for GIE computation, when articulated in the IRR, will, it is hoped, provide clear direction for the guidance of the implementing agencies and taxpayers alike.
Meanwhile, at the regular CIT rate, registered enterprises may claim enhanced deductions that are expected to cushion the income tax effect. These enhanced deductions are: additional depreciation allowance of 10% for buildings and 20% for machinery and equipment; additional 50% direct labor expense; additional 100% research and development cost; additional 100% training expense; additional 50% domestic inputs expense; additional 50% power expense; a deduction of a maximum of 50% of the reinvested undistributed profits or surplus (for those in the manufacturing industry); and an enhanced Net Operating Loss Carry Over (NOLCO) of five years following the year of loss (incurred during the first three years from the start of commercial operations). In addition to the above incentives, all registered enterprises may enjoy duty exemption on the importation of capital equipment, raw materials, spare parts, or accessories directly and exclusively used in the registered project or activity. Registered enterprises may also enjoy VAT exemption on importation and VAT zero-rating on local purchases of goods and services directly and exclusively used in the registered project or activities.
INCENTIVES SUNSET PROVISION
To give IPA-registered enterprises ample time to adjust to the new incentives, RBEs with incentives granted prior to the effectivity of the Act are given a transitory period.
Existing registered activities granted only an ITH will be permitted to continue the remaining ITH period.
On the other hand, existing registered activities granted either an ITH and 5% gross income tax (GIT), or are currently receiving the 5% GIT, will be able to enjoy a 10-year 5% GIT. After the expiration of such 10-year 5% GIT transition period, existing registered export enterprises may reapply and enjoy the SCIT for 10 years, subject to certain conditions and performance reviews, and without further extension.
The provision allowing export enterprises to further extend the 10-year SCIT has been vetoed by the President.
Notably, unlike in the CITIRA Bill where existing RBEs were given the option to shift to the new tax incentives regime by surrendering their Certificate of Registration instead of availing of the sunset period, such a provision is wanting in the CREATE Act.
With the passage of CREATE, provisions of the prior laws to the extent inconsistent with CREATE are repealed or amended.
While fiscal incentives are not the only determinant for the country to attract investment, adjusting corporate taxes and modernizing fiscal incentives serve as a means for the country to remain competitive with its ASEAN neighbors. Redefining our taxation puts it in a better position to compete for investments and CREATE a better economic future for the Philippines.
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 authors and do not necessarily represent the views of SGV & Co.
Karen Mae L. Calam-Ibañez and Aiza P. Giltendez are a Tax Senior Manager and Manager, respectively, of SGV & Co.