Philippines passes new tax reform law

President Ferdinand Marcos Jr. signed into law Republic Act No. 12066, or the Corporate Recovery and Tax Incentives for Enterprises to Maximize Opportunities for Reinvigorating the Economy (CREATE) Act.

Frederick D. Go, special assistant to the president for investment and economic affairs, expressed optimism about the law’s potential impact on the country’s business environment.

“The passage of CREATE MORE has triggered so much interest from foreign and domestic direct investors, especially large-scale ones,” Go said. “This is our main tool to make the Philippines an attractive investment destination.”

Bureau of Internal Revenue Commissioner Romeo D. Lumagui Jr. said the new law would make the Philippines a prime investment destination through enhancements to the country’s fiscal regime.

“The BIR fully supports PBBM’s thrust towards investments-led growth, through the CREATE MORE Act,” Lumagui said. “It is time to make the Philippines into a prime investment destination. The BIR will implement the tax incentives under the CREATE MORE Act without delay. The BIR will also do its part in promoting the different incentives under the CREATE MORE Act, so we can educate and entice more investors.”

The CREATE MORE Act amended the National Internal Revenue Code of the Philippines by improving tax incentives and streamlining related processes.

Finance Secretary and Fiscal Incentives Review Board (FIRB) Chair Ralph Recto lauded the law’s enactment, saying it’s a win-win for both local and international businesses and Filipinos.

“CREATE MORE will open the floodgates of more high-impact investments both from our international investors and domestic enterprises,” Recto said. “This will not only attract new investments and grow existing businesses to make more money but also enable us to create more high-quality jobs, increase our people’s income, and reduce poverty. Through CREATE MORE, we will secure a brighter future for every Filipino.”  

“As we open new doors of opportunity, we drive businesses to reinvest their capital, build upon the workforce, and initiate a ripple effect that will be felt across generations,” Marcos said during the ceremonial signing on Nov. 11.

The law will enhance the ease of doing business in the country, clarify value-added tax (VAT) rules, provide more attractive tax incentives, strengthen governance and accountability, and make clear transitory rules for pre-CREATE registered business enterprises (RBEs).

“CREATE MORE will certainly fast-track the entry of more foreign investors into the Philippines, as evidenced by the bullishness and strong interest from nearly a thousand investors who attended our recent economic briefings abroad,” Recto said.

Among the law’s key features is a more competitive and generous incentive package for strategic and highly desirable investments.

For instance, RBEs can choose between the Special Corporate Income Tax (SCIT) of 5% or the Enhanced Deductions Regime (EDR) from the start of their commercial operations.

The SCIT and EDR incentives, initially capped at 10 years, are now extended to up to 17 or 27 years. Labor-intensive projects can apply for an extension of another five or 10 years.

More incentives are given to registered export enterprises (REEs) and high-value domestic market enterprises (DMEs) with investment capital exceeding 15 billion Philippine pesos and engaged in sectors considered import-substituting or with export sales of at least $100 million in the preceding year.

CREATE MORE expands the EDR to reduce the corporate income tax rate to 20% from 25%.

The law also increased to 100% from 50% the additional deduction on power expenses, significantly cutting costs for the manufacturing sector.

To boost the tourism industry, an additional 50% deduction for expenses related to trade fairs and tourism reinvestments will be provided until 2034.

The law maximized the benefits of the Net Operating Loss Carry-Over (NOLCO) by changing the reckoning period from “year of loss” to the “last year of the project’s income tax holiday (ITH) entitlement period.”

Likewise, the law provides tax and duty exemption on donations of capital equipment, raw materials, spare parts, or accessories to the government, government-owned or -controlled corporations (GOCCs), the Technical Education and Skills Development Authority (TESDA), State Universities and Colleges (SUCs), and the Department of Education (DepEd) or the Commission on Higher Education (CHED)-accredited schools.

Moreover, CREATE MORE provides an optional imposition of an RBE local tax (RBELT) at a rate not exceeding 2% of gross income, which shall be in lieu of all local taxes, fees, and charges during the ITH or EDR.

In addition, the reform acknowledges the evolving business model by institutionalizing the adoption of flexible work arrangements for RBEs operating within economic zones and freeports, without compromising their tax incentives.

To address investors’ pain points, export-oriented enterprises’ local purchases are zero-rated while importations are VAT-exempt. This is expected to address the cash flow issues of direct exporters.

The law also liberalizes the condition for the availment of VAT incentives by shifting from “direct and exclusive use” to “directly attributable” requirements for goods and services. This broadens the scope of VAT incentives.

Pre-CREATE RBEs will be given until Dec. 31, 2034 to fully transition into the CREATE Act. REEs may continue to avail of duty and VAT incentives even after the transitory period, subject to the provisions of Title IV of the Tax Code and the Customs Modernization and Tariff Act (CMTA).

To strengthen the governance and accountability over fiscal incentives, CREATE MORE mandates the government to adopt the Ease of Doing Business and Efficient Government Service Delivery Act timeline for issuing a decision on incentive applications. This includes a 20-working-day turnaround for decisions once complete documents are submitted.

It institutes greater responsibility for investment promotion agencies (IPAs) by increasing the investment capital approval threshold from 1 billion pesos to 15 billion pesos.

The FIRB’s regulatory functions over IPAs will be strengthened to promote fiscal prudence and discipline. The FIRB is the interagency government body mandated by law to oversee the grant and administration of incentives of IPAs. The Department of Finance is the Chair of the FIRB Board, Chair of its Technical Committee, and Head of the Secretariat.