9/8/21, 11:26 PM Philippines enacts law reducing corporate income tax rates and rationalizing fiscal incentives

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April 1, 2021
2021-0679

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

Effective 1 July 2020, the corporate income tax (CIT) rate is reduced from 30% to:
20% for domestic corporations with net taxable income not exceeding PHP5 million (US$100,000) and with total assets
(excluding land where the business entity's office, plant and equipment are situated) not exceeding PHP100 million
(US$2 million)
25% for all other domestic corporations and resident foreign corporations (e.g., branches)
Effective 1 January 2021, the CIT rate is reduced from 30% to 25% for nonresident foreign corporations.
Effective 1 July 2020 until 30 June 2023, the minimum CIT rate is reduced from 2% to 1%. The minimum CIT is applicable to
domestic and resident foreign corporations if the calculated minimum CIT is higher than the regular CIT amount.
Effective 1 January 2022, the CIT rate applicable to regional operating headquarters (ROHQs)3 is increased from 10% to
25%.
Capital gains derived by foreign corporations from the sale of shares of stock not traded on the Philippine stock exchange are
subject to a flat tax rate of 15% (previously 5% on the first US$2,000 and 10% in excess thereof).
Increase of the final income tax rate for interest income derived under the expanded foreign currency deposit system by
resident foreign corporations from 7.5% to 15%.
Allowance of 150% deduction for labor training expenses incurred for the skills development of enterprise-based trainees,
subject to certain conditions.
Income tax exemption for foreign-sourced dividends received by domestic corporations which are reinvested in the
Philippines, subject to certain conditions.
Removal of 1) tax exemption for income derived by offshore banking units (OBUs) from foreign currency transactions with
nonresidents; and 2) 10% final tax on interest income derived by OBUs from foreign currency loans granted to residents.
Such income will be subject to the 25% CIT rate.
Definition of "reorganization" for purposes of non-recognition of gain or loss on exchanges of property solely for stock is
expanded to include: (i) a merger or consolidation; (ii) an acquisition resulting in gain of control or further control; (iii) an
acquisition of all or substantially all properties of another corporation; (iv) a recapitalization; and (v) a reincorporation. Prior
Bureau of Internal Revenue (BIR) confirmations or tax rulings are no longer required to avail of the tax exemption on the
exchange.

Amendments to indirect tax and incentives related to COVID-19 prevention, control and treatment
Value-added tax (VAT) exemption on the sale or importation of the following goods:
Drugs, vaccines, medical devices, capital equipment, spare parts and raw materials for the prevention, control and
treatment of COVID-19, subject to conditions, beginning 1 January 2021 to 31 December 2023; and
Prescription drugs and medicines for cancer, mental illness, tuberculosis and kidney diseases, beginning 1 January
2021 (previously 1 January 2023).
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

Qualified export enterprises may be eligible for a four to seven-year income tax holiday (ITH), to be followed by a 10-year 5%
special corporate income tax (SCIT) on gross income earned or 10-year enhanced deductions (ED).
Qualified domestic market enterprises may be eligible for a four- to seven-year ITH, to be followed by a five-year ED.

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9/8/21, 11:26 PM Philippines enacts law reducing corporate income tax rates and rationalizing fiscal incentives
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

Increasing the VAT-exempt threshold for the sale of real property
90-day period for the processing of general tax refunds
Definition of investment capital to exclude land and working capital
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))
Allowing existing registered activities to apply for further extension of new incentives for the same activity
Limitations on the power of the Fiscal Incentive Review Board (FIRB)
Specific industries mentioned under activity tiers
Provision granting the President the power to exempt any investment promotion agency from the reform
Automatic approval of applications for incentives if not acted upon

Implications

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.

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For additional information with respect to this Alert, please contact the following:

Ernst & Young Philippines (SGV & Co.), Makati City

Fabian K. Delos Santos | fabian.k.delos.santos@ph.ey.com

Fidela T. Isip-Reyes | fidela.t.isip-reyes@ph.ey.com

Ernst & Young LLP (United States), Philippines Tax Desk, New York
Michelle C. Arias | michelle.arias@ey.com

Ernst & Young LLP (United States), Asia Pacific Business Group, New York
Chris J. Finnerty | chris.finnerty1@ey.com

Bee Khun Yap | bee-khun.yap@ey.com

Dhara Sampat | dhara.sampat2@ey.com

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ENDNOTES
1 Republic Act No. 11534.

2 The CREATE Act is published in the Business Mirror on 27 March 2021.

3 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
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9/8/21, 11:26 PM Philippines enacts law reducing corporate income tax rates and rationalizing fiscal incentives

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.

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& Young LLP to the reader. The reader also is cautioned that this material may not be applicable to, or suitable for, the reader's specific circumstances or needs, and
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