TAX INCENTIVES under TAX XIII of the TAX CODE (amended by CREATE-1

Thursday, October 10, 2024 6:06 AM

RECALL:
SCOPE & COVERAGE  TRAIN law - effective 2018
1. All existing Investment Priorities Agencies (IPA)  CREATE - effective 2021
□ In charge of promoting investments
□ Grants and administers tax and non-tax incentives
□ Oversees the operations of different ecozones & freeport.

2. Those newly-registered projects/ activities under the Strategic Investment Priority Plan (SIPP) - Upon approval of SIPP, or upon approval of its
- A plan prepared by BOI in coordination with other IPAs, the FIRB, and other Govt. Agencies amendment, the plan or the amendment, shall be
- Approved by the President published in at least one (1) newspaper of
- Contains the priority projects, their locations, recommendations of non-fiscal support, general circulation
and specific activities that requires / encouraged to have investments.
- Valid for three (3) years.

3. Registered Business Enterprises (RBEs)

- Could either be an Individual, partnership, corporation, or Philippine branch of a foreign company  Customs brokerage
- Registered with IPA excluding service enterprises such as:  Trucking/ forwarding services
- Subject to tax under NIRC of 1997  Security & Janitorial services
 Insurance, Banking, other financial services,
4. Other Govt. Agencies administering tax incentives  Consumers' cooperatives, credit unions,
 Consultancy services,
5. GOCCs, Govt. Instrumentalities, Commissaries,  Retail enterprises, restaurants
State universities and colleges that were granted tax subsidies under the GAA  Other similar services determined by FIRB,
outside or inside the zone.

SUMMARY OF TAX & DUTY INCENTIVES

1. INCOME TAX HOLIDAY (ITH) COVERAGE OF ITH
AVAILMENT: - LIMITED ONLY TO INCOME GENERATED FROM REGISTERED PROJECTS /
Applies to sale export processing zones
a. Registered Export Enterprises (REEs) / Export Oriented Enterprises ACTIVITIES
 Could either be an Individual, partnership, corporation, or Philippine branch of a foreign company registered with the IPA. - These taxes & fees shall not be imposed/exempted during the period of ITH:
○ Granted an ITH of four (4) to seven (7) years depending on location and industry priorities ○ RCIT
○ Followed by at the option of the enterprise: 5% Special Corporate Income Tax (SCIT) or Enhanced Deduction (ED) for a period of ten (10) years ○ MCIT
(in no case that these shall be granted simultaneously) ○ LOCAL taxes, licenses, imposts, and fees
CROSS BORDER DOCTRINE:
- no VAT shall be imposed to form part of COGS on expenses used for
○ REAL PROPERTY TAX (RPT) on machinery and equipment WITHIN THREE
• The option to avail shall be exercised AT THE TIME OF APPLICATION FOR REGISTRATION. consumption OUTSIDE THE TERRITORIAL BORDER OF THE TAXING (3) years from ACQUISITION
• The option is IRREVOCABLE for the entire duration of the incentive AUTHORITY
- (This means that no VAT shall be imposed on territories outside the
border of a taxing authority) OUT OF COVERAGE OF ITH
b. Domestic Market Enterprise  Actual export of goods & service from PH to foreign - These taxes shall be imposed during ITH:
 Any enterprise other than export enterprises that is registered with the IPA. country MUST BE FREE OF VAT ○ RCIT/MCIT/Income Tax on UNREGISTERED ACTIVITY
 Goods use for consumption WITHIN THE PH shall be
○ Granted an ITH of four (4) to seven (7) years depending on location and industry imposed VAT ○ VAT
○ Followed by: Enhanced Deduction (ED) for a period of five (5) years  ONLY goods and services directly used in the registered ○ DST
projects or activities of RBEs shall qualify as VAT zero-
rated local purchases. ○ FWT on Passive Income
OTHER AVAILMENT: ○ Withholding Tax Agent Obligations
c. Projects/Activities located in AREAS RECOVERING FROM ARMED CONFLICT/MAJOR DISASTER  Withholding tax on salaries of employees
– From the Declaration of the President /Authorized representative, and  " on income payment to entities OTHER THAN registered ECOZONE
– Issuance of Presidential directive for the implementation of recovery programs ○ RPT on non-exempt machineries
○ Entitled to two (2) additional years of ITH
They should have CETI as proof of entitlement to additional 3 years
d. Projects/Activities RELOCATING FROM THE NCR
 Activities REGISTERED PRIOR /UNDER CREATE that will COMPLETELY RELOCATE FROM NCR during the period of Incentive.
○ Entitled to three (3) additional years of ITH from the COMPLETION OF RELOCATION OF OPERATIONS OF AN EXISITNG REGISTERED PROJECT / In order to avail exemption from all Local taxes, fees, licenses, and imposts, PEZA
ACTIVITY: enterprises shall be exempted from all these taxes. To put it simply, PEZA-reg.
 shall commence AFTER EXPIRATION OF PERIOD OF THE INCENTIVE enterprises shall avail the FULL PACKAGE of ITH to be exempted from all local taxes,
 Those project / activity UNDER TRANSITION PERIOD, shall commence after such transition and etc.

e. PEZA-registered enterprises availing ITH

- Exempted from payment of all local taxes, licenses, imposts and fees, EXCEPT REAL ESTATE TAXES
 Provided that they are also exempted from RPT ON MACHINERY
& EQUIPMENT during the first three (3) years use FROM
ACQUISITION

CERTIFICATE OF ENTITILEMENT TO TAX INCENTIVES (CETI)

○ IPA shall issue such certificate to RBE as proof of its entitlement to the additional three (3) years of ITH.
○ Prior to filing ITR, a RBE shall apply for CETI to CONFIRM whether it is entitled to ITH or 5% SCIT.
○ Every registered activity shall be issued a SEPARATE CETI.

2. 5% SPECIAL CORPORATE INCOME TAX (SCIT) or 5% GROSS INCOME TAX (GIT)

NATIONAL TAXES refers to:
○ ONLY to EXPORT ORIENTED ENTERPRISES
• RCIT
○ Based on the GROSS INCOME EARNED (GIE) NOT GIT IN LIEU of all NATIONAL & LOCAL TAXES
• MCIT
○ INCOME TAX in NATURE & a NATIONAL INTERNAL REVENUE TAX in character
• Transfer taxes
○ Allocation of 5% SCIT (shall be paid & remitted by enterprises as follows):
• VAT & Other Percentage Taxes
National Government 3% • Excise tax
○ (When REEs are under a 5% SCIT tax regime, they are exempted in the above taxes)
Treasurer's Office of the MUNICIPALITY / CITY 2%

a. PEZA-registered entities
○ PEZA registered companies are EXEMPT from CWT, except for UNREGISTERED OPERATIONS.
(However they are not exempted, from WITTHOLDING AGENT OBLIGATIONS)
○ Those ECOZONES compose of more than one (+1) city or municipality, the 2% share shall be determined in accordance with the rules & regulations of the PEZA board
 They shall then issue a certification with the EXACT SHARE of the concerned cities/municipalities
○ EXEMPTED from payment of ALL NATIONAL & LOCAL TAXES EXCEPT RPT OWNED BY DEVELOPERS

b. REEs now under 5% SCIT but remained VAT-registered are required to

 Change their registration to NON-VAT within two (2) months from expiration of ITH incentive
(because when under ITH, they are not exempted to VAT. However, after the period of ITH, when they chose the option of 5% SCIT, they are now exempted
from VAT.

3. ENHANCED DEDUCTIONS (ED)

i. Addtl. DEPRECIATION ALLOWANCE for ASSETS ACQUIRED FOR PRODUCTION (Qualified Capital Expenditures)
- From the total depreciable cost of the asset
Buildings 10%
-
Machinery & equipment 20%

ii. Addtl. DEDUCTION ON LABOR EXPENSE (w/ PEZA & BOI registered)
- FROM TAXABLE INCOME = 50% of TOTAL LABOR EXPENSE
□ Excluding: Salaries, wages, benefits, and other personnel costs incurred for managerial, administrative, indirect labor, and support services
- DURATION: 5 yrs from registration
- QUALIFICATION: MUST MEET CAPITAL EQUIPMENT TO WORKER RATIO < 10,000 (less than or equal to 10,000)

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 iii. Addtl. DEDUCTION ON RESEARCH & DEVELOPMENT (R&D) EXPENSE
- 100% on the R&D expense that are directly related. to the’ registered project or activity
□ Limited to LOCAL EXPENDITURE ON RESEARCH FOR SALARIES OF FILIPINO EMPLOYEES, CONSUMABLES, PAYMENT to LOCAL R&D orgs.

iv. Addtl. DEDUCTION ON TRAINING EXPENSE

- 100% of the total expense on trainings conducted given to Filipino employees engaged directly in reg. business' production (approved by IPAs & based on SIPP)
- Not eligible for addtl. training expense:
• Workshops for newly-hired
• Team building activities, field trips, tours
• Executive education & leadership programs for Senior management & executive-level management (c-suite)
• Professional & legal trainings on sexual harassment, discrimination & fraud
• Safety trainings such as evacuation plans, fire drills, workplace violence and first aid.
□ OTHER SAFETY TRAININGS MAY BE COVERED BUT IT SHOULD BE PART OF TECHNICAL TRAINING PROGRAM
• Quality trainings such as ISO processes and standards not related to the performance of employee's core job functions

v. Addtl. DEDUCTION ON DOMESTIC INPUT EXPENSE

- 50% on domestic inputs directly related to and actually used in the project or activity.

vi. Addtl. DEDUCTION ON POWER EXPENSE

- FROM TOTAL POWER COSTS INCURRED IN THE PRODUCTION = 50% of the total power costs

vii. DEDUCTION FOR REINVESTMENT ALLOWANCE ON MANUFACTURING INDUSTRY

- The reinvestment of undistributed profit or surplus shall be allowed as deduction to a maximum of 50% FROM TAXABLE INCOME

viii. ENHANCED NET OPERATING LOSS CARRY OVER (NOLCO)

- Net operating loss of registered project/activity DURING FIRST 3 YEARS FROM START OF COMMERCIAL OPERATION which had not been previously offset as
deduction from GROSS INCOME MAY BE CARRIED OVER as deduction W/IN THE NEXT 5 consecutive taxable years, IMMEDIATELY FOLLOWING THE YEAR OF LOSS.

AVAILMENT OF ITH, SCIT & ED

- Period of availment: Start of commercial operations, within three (3) years from date of registration.

PRIORITIZATION & TIERING

- Location of the reg. project / activity shall be prioritized according to:
i. NCR
ii. Metropolitan areas (determined by NEDA such as METRO CEBU and METRO DAVAO) OR areas adjacent to NCR
iii. All other areas

- Industry of the reg. project/activity shall be prioritized according to national industry strategy specified in SIPP. These tiers should include activities that:
TIER I TIER II TIER III
High potential for job creation Produce supplies, parts, & components, not locally R & D resulting in significant value-added, breakthroughs in
produced but critical to industrial development & science & health, & high paying jobs
import-substituting including crude oil refining
Sectors w/ market failures resulting in under Generation of new knowledge & intellectual property in the
provisions of basic goods PH
Generate value creation through innovation Commercialization of patents, industrial designs, and
copyrights owned or co-owned by reg. enterprise
Provide essential support for sectors that are Highly technical manufacturing
critical to industrial developments
Emerging owing to potential comparative Critical to structural transformation of economy
advantage

EXPORT ORIENTED ENTERPRISES

Industry tiers TIER I TIER II TIER III
NCR 4 ITH + 10 ED/SCIT 5 ITH + 10 ED/SCIT 6 ITH + 10 ED/SCIT
Metropolitan areas (determined by NEDA 5 ITH + 10 ED/SCIT 6 ITH + 10 ED/SCIT 7 ITH + 10 ED/SCIT
such as METRO CEBU and METRO DAVAO)
OR areas adjacent to NCR
All other areas 6 ITH + 10 ED/SCIT 7 ITH + 10 ED/SCIT 7 ITH + 10 ED/SCIT

DOMESTIC MARKET ENTERPRISES

Industry tiers TIER I TIER II TIER III
NCR 4 ITH + 5 ED 5 ITH + 5 ED 6 ITH + 5 ED
Metropolitan areas (determined by NEDA 5 ITH + 5 ED 6 ITH + 5 ED 7 ITH + 5 ED
such as METRO CEBU and METRO DAVAO)
OR areas adjacent to NCR
All other areas 6 ITH + 5 ED 7 ITH + 5 ED 7 ITH + 5 ED

4. 0% VAT AND EXEMPTION

• ONLY goods and services directly used in the registered projects or activities of RBEs shall qualify as VAT zero-rated local purchases.
• Any costs incurred prior to the registration of a project or activity with the IPA shall NOT be allowed.

a. DOMESTIC MARKET ENTERPRISE (DME)

 NOT ENTITLED TO 0% VAT ON LOCAL PURCHASES (Sale of goods or services to a registered domestic market enterprise shall be subject to VAT at 12%.)
 Including the following service enterprises:
◊ Customs brokerage
◊ Trucking/ forwarding services
◊ Security & Janitorial services
◊ Insurance, Banking, other financial services,
◊ Consumers' cooperatives, credit unions,
◊ Consultancy services,
◊ Retail enterprises, restaurants
◊ Other similar services determined by FIRB, outside or inside the zone.

 SALE by DME to a REEs

 Sale of goods & services such as manufactured, assembled, processed product / IT/BPO services that will form part of final export product, 70% of its
TOTAL PRODUCTION / OUTPUT shall be VAT-exempt.

b. REGISTERED EXPORT ENTERPRISES (REEs)

 SALE by REEs to another REEs
 If seller is VAT-reg. under ITH, the sale is 0% VAT, (provided goods & services are directly & exclusively used in reg. project/activity)
 If seller is under 5% SCIT, sale (goods & services such as manufactured, assembled, processed product / IT/BPO services that will form part of final
export product) to another REEs, 70% of TOTAL PRODUCTION / OUTPUT shall be VAT-exempt.
 SALE by NON-RBE export-oriented to REEs
 NON-RBE export enterprises' incentives shall be limited to 0% VAT on DIRECT EXPORT SALE OF GOODS / SERVICES
 If NON-RBE export enterprise is VAT-reg., the sale is 0% VAT, (provided goods & services are directly & exclusively used in reg. project/activity)
 BOI-reg., ECOZONE & Freeport enterprises, Renewable Energy (RE) Enterprises
 Subject to 0% VAT
 SALE by VAT-reg. to REEs

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  SALE by VAT-reg. to REEs
 Subject to 0% VAT on DIRECT EXPORT SALE OF GOODS / SERVICES
 Enjoyed for a maximum period of seventeen (17) years from date of registration, unless extended under SIPP

5. CUSTOMS DUTY EXEMPTION

 The following shall be exempt from customs duties on:
 Importation of Capital Equipment,
 Raw Materials,
 Spare Parts, and
 Accessories made by RBEs
◊ PROVIDED THAT THE FOLLOWING CONDITIONS ARE COMPLIED:
 Directly and exclusively used in the registered project or activity by RBEs.
 With approval of the IPA prior to the importation of goods
 THAT AFTER THE APPROVAL FROM IPA, sale, or transfer, or disposition of the capital equipment, raw materials, spare parts, or
accessories within (5) years from date of importation shall require the payment of duties based on the net book value
 IF W/O APPROVAL, the RBE and the vendee, transferee, or assignee shall be solidarity liable to pay twice the amount of the duty
exemption that should have been paid during its importation,
 IF WILL BE USED FOR NON-REG. PROJECT/ACTIVITY of the RBE, at any time within the first five (5) years from date of importation, the
RBE shall secure prior approval of the concerned IPA and pay the corresponding amount of the exempt duties on importation.

FISCAL INCENTIVES FOR RENEWABLE ENERGY (RE) PROJECTS & ACTIVITIES

- DOE-certified EXISTING & NEW RE developers of RE facilities in consultation w/ BOI, including hybrid systems
1. INCOME TAX HOLIDAY (ITH)
2. NET OPERATING LOSS CARRY-OVER (NOLCO)
3. 10% CORPORATE TAX RATE (after ITH)
4. ACCELERATED DEPRECIATION
5. 0% VAT
6. TAX EXEMPTION OF CARBON CREDITS

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