Tax Articles

Implementing the Tax Incentives Provisions of CREATE

By: Atty. Rodel C. Unciano

Pursuant to Section 21 of the Corporate Recovery and Tax Incentives for Enterprises Act (CREATE), the Secretary of Finance and the Secretary of Trade and Industry, after consultations with the Commissioner of Internal Revenue, the Board of Investments (BOI), and other Investment Promotion Agencies (IPAs), has finally issued the Implementing Rules and Regulations (IRR) of the tax incentives provisions of CREATE.

The Fiscal Incentives Review Board (FIRB) or IPAs, under the delegated authority from the FIRB, shall grant tax incentives to qualified business enterprises only to the extent of their approved registered project or activity under the Strategic Investment Priority Plan (SIPP) which is prepared by the BOI, in coordination with the FIRB, IPAs and the private sector and which is approved by the President.

The tax and duty incentives include 1) Income Tax Holiday (ITH), 2) Special Corporate Income Tax (SCIT), 3) Enhanced Deductions (ED), 4) Customs duty exemption on importation of capital equipment, raw materials, spare parts, or accessories, and 5) Value Added Tax (VAT) exemption on importation and VAT zero-rating on local purchases.

Income Tax Holiday

The ITH shall be limited to the income generated by a Registered Business Enterprise (RBE) from a registered project or activity. Export enterprises as well as qualified domestic market enterprises may be granted an ITH of four (4) to seven (7) years, depending on location and industry priorities.

Special Corporate Income Tax

The SCIT is a tax equivalent to a tax rate of five percent (5%) of gross income earned (GIE) and is in lieu of all national and local taxes. For this purpose, GIE refers to gross sales or gross revenues derived from the registered project or activity, net of sales discounts, sales returns and allowances and minus costs of sales or direct costs but before any deduction is made for administrative expenses or incidental losses during a given taxable period.

For the purpose of availing the 5% tax on GIE, local taxes, fees and charges for the regulation or inspection of a business or activity as defined under Section 131 (l) and (g) of the Local Government Code of 1991 are not included.

The 5% SCIT may be granted for export enterprises for a period of ten (10) years. This is akin to the five percent (5%) gross income tax under the old regime but the 5% SCIT is not available to domestic market enterprises by virtue of the President’s veto.

Enhanced Deductions

Registered business enterprises may be granted enhanced deductions in addition to the allowable ordinary and necessary deductions under Section 34 of the Tax Code. Export enterprises may, at their option, avail of the enhanced deductions or the SCIT rate, but the enhanced deductions shall not be granted simultaneously with the SCIT. The allowable enhanced deductions are as follows:

a) Additional depreciation allowance for assets acquired for the production of goods and services, equivalent to ten percent (10%) for buildings and twenty percent (20%) for machinery and equipment.
b) Additional fifty percent (50%) deduction on labor expense incurred. This shall not include salaries, wages, benefits and other personnel costs incurred for managerial, administrative, indirect labor and support services.
c) Additional deduction of one hundred percent (100%) of expenses incurred for research and development that is directly related to the registered project or activity of the registered business entity.
d) Additional deduction on training expense.
e) Additional deduction on domestic input expense.
f) Additional deduction on power expense.
g) Deduction for reinvestment allowance for manufacturing industry.
h) Enhanced Net Operating Loss Carry Over (NOLCO). Net operating loss incurred by a registered project or activity during the first three (3) years from the start of commercial operations may be carried over as deduction from gross income within the next five (5) consecutive taxable years following the year of such loss.

Duty exemption

The importation of capital equipment, raw materials, spare parts, and accessories made by RBEs shall be exempt from customs duties provided that the importation is 1) directly and exclusively used in the registered project or activity by the registered business enterprises, and 2) The capital equipment, raw materials, spare parts, or accessories are directly and reasonably needed by the RBE; will be used exclusively in and as part of the direct cost of the registered project or activity; and are not produced or manufactured domestically in sufficient quantity or of comparable quality and at reasonable prices.

VAT zero-rating and exemption

The VAT exemption on importation and VAT zero-rating on local purchases shall only apply to goods and services directly and exclusively used in the registered project or activity of export enterprises. Transactions falling under Section 106(A)(2)(a)3,(4), and (5) and Section 108(B)(1) and (5) of the Tax Code shall be subject to the twelve percent (12%) VAT pursuant to Revenue Regulations 9-2021.

The importation of Covid-19 vaccines by RBEs shall be exempt from import duties, taxes and other fees, subject to the approval or licenses issued by the Department of Health (DOH) or the Food and Drug Administration (FDA). For the exemptions to apply, the Covid-19 vaccines must not be intended for resale or other commercial use and shall be distributed without any consideration from persons to be vaccinated.

The tax incentives under CREATE are expected to provide relief to small businesses, attract new investments and create new employment opportunities especially in less developed areas resulting to countrywide development and a more inclusive economic growth.