Other than the reduction in corporate income tax, the Corporate Recovery and Tax Incentives for Enterprises Act has likewise reformed the bundle of tax incentives available to corporate taxpayers. For this purpose, CREATE law expanded the function of the Fiscal Incentives Review Board to include policy making and oversight functions on the administration and grant of tax incentives, among others. It is vested with the authority to grant appropriate tax incentives to qualified registered business enterprises, although Investment Promotion Agencies, under a delegated authority from the FIRB, may still grant available incentives under CREATE.
Subject to certain conditions, types of incentives that may be granted to registered projects or activities include 1) Income Tax Holiday (ITH), 2) Special Corporate Income Tax (SCIT), 3) Enhanced Deductions (ED), 4) Duty exemption on importation of capital equipment, raw materials, spare parts, or accessories, and 5) Value Added Tax exemption on importation and VAT zero-rating on local purchases.
Income tax holiday
The period of availment of ITH shall be for a non-extendible period of four to seven years, depending on location and industry priorities. Registered enterprises that fully relocate outside the National Capital Region (NCR) will be entitled to an additional three years of ITH while registered enterprises that locate in areas recovering from disasters or conflict will be entitled to an additional two years of ITH. This is apparently consistent with the government’s objective of decongesting the National Capital Region and expanding growth and development in the countryside.
Registered business enterprises whose projects or activities were granted only ITH prior to the effectivity of the CREATE shall be allowed to continue with the availment of the ITH for the remaining period of the ITH as specified in the terms and conditions of their registration.
Special corporate income tax
The SCIT is a tax equivalent to 5 percent of gross income earned and is in lieu of all national and local taxes. This may be granted for export enterprises for a period of 10 years. This is akin to the 5 percent gross income tax under the old regime but the 5 percent SCIT is not available to domestic market enterprises by virtue of the President’s veto. Registered busines enterprises, whose projects or activities were granted ITH prior to the effectivity of CREATE and that are entitled to the 5 percent tax on gross income earned incentive after the ITH, shall be allowed to avail of the 5 percent tax on gross income for a period of 10 years. On the other hand, registered business enterprises currently availing of the 5 percent tax on gross income earned granted prior to the effectivity of the CREATE shall be allowed to continue availing the incentive at the rate of 5 percent for 10 years.
CREATE encourages job creation, research and development, training, and the use of local materials. Thus, the law grants several performance-based enhanced deductions for a maximum period of 10 years, as follows:
a) Depreciation allowance for assets acquired for the production of goods and services (qualified capital expenditure) of additional 10 percent for buildings and additional 20 percent for machineries and equipment.
b) Fifty percent additional deduction on labor expense incurred in the taxable year. This shall not include salaries, wages, benefits and other personnel costs incurred for managerial, administrative, indirect labor and support services.
c) One hundred percent additional deduction on research and development incurred in the taxable year.
d) One hundred percent additional deduction on training expense.
e) Fifty percent additional deduction on domestic input expense.
f) Fifty percent additional deduction on power expense.
g) Deduction for reinvestment allowance for manufacturing industry.
h) Enhanced Net Operating Loss Carry Over. Loss incurred by a registered project or activity during the first three years from the start of commercial operation may be carried over as deduction from gross income within the next five years following the loss.
The enhanced deductions shall not be granted simultaneously with the SCIT.
The duty exemption shall only apply to the importation of capital equipment, raw materials, spare parts, or accessories directly and exclusively used in the registered project or activity by the registered business enterprises. These must be directly and reasonably needed and will form part of the direct cost of the registered project or activity by the registered business enterprises. Also, these must not be produced or manufactured domestically in sufficient quantity or of comparable quality and at reasonable prices.
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 by a registered business enterprise.
The reformed tax incentives under CREATE are expected to result in employment generation, countrywide development and a more inclusive economic growth. Let’s support CREATE for it to fully serve well its purpose in uplifting the lives of every Filipino and in improving the country’s economy in general.
The author is a partner of Du-Baladad and Associates Law Offices (BDB Law), a member-firm of WTS Global.
The article is for general information only and is not intended, nor should be construed as a substitute for tax, legal or financial advice on any specific matter. Applicability of this article to any actual or particular tax or legal issue should be supported therefore by a professional study or advice. If you have any comments or questions concerning the article, you may e-mail the author at [email protected] or call 8403-2001 local 140.