PHILIPPINES: An Introduction to Tax

Philippines: Tax Reforms Updates 

On the road to recovery from the adverse economic effects of the COVID-19 pandemic, the Philippine government has enacted and implemented numerous stimulus laws and initiatives to alleviate the serious consequences of the pandemic on the health and livelihood of the people. The Philippine Congress’ recently passed bills and pending/proposed measures on matters of taxation discussed below are viewed as welcome developments for existing taxpayers on the path to economic recovery and prospective investors eager to start a business in the Philippines.

•Corporate Tax Reforms under CREATE Act 

Republic Act (“RA”) No. 8424, or the “National Internal Revenue Code of 1997,” (“Tax Code”) which imposes various internal revenue taxes and provides for the rates, conditions for taxability, exemptions, administrative matters etc, has undergone several amendments since its passage. One of the most significant amendments that affects many taxpayers is RA No. 11534, or the “Corporate Recovery and Tax Incentives for Enterprises” (“CREATE”) Act which was designed to accelerate poverty reduction and ensure sustainable equality. The CREATE Act was enacted on 26 March 2021 and became effective on 11 April 2021 in the midst of the COVID-19 pandemic. Initially proposed as part of the Comprehensive Tax Reform Programme of the Philippine government, the CREATE Act has undergone several legislative revisions from its initial form geared towards curtailing the debilitating effects of the pandemic.

Reduction of Tax Rates and Repeal of Certain Taxes

Some of the most commendable changes introduced by the CREATE Act are as follows:

• Reduction of the Regular Corporate Income Taxes (“RCIT”) from 30% to 20% for SME-sized domestic corporations, or 25% for large domestic corporations and resident foreign corporations;

• Reduction of final income tax rate from 30% to 25% on gross income from Philippine sources of non-resident foreign corporations;

• Temporary reduction of the Minimum Corporate Income tax (“MCIT”), which is the minimum income tax imposed regardless of the corporation’s financial performance, from 2% to 1% of the gross income (ie, revenue less cost of sales) until 30 June 2023;

• The Improperly Accumulated Earnings Tax previously imposed on income not distributed as dividends has been repealed.

While the CREATE Act was only enacted and effective on 2021, some tax reductions generously retroact from 1 July 2020.

Tax-Free Exchange of Property 

Another welcome development under the CREATE Act that aims to address administrative bottlenecks is the removal of the requirement for a prior Bureau of Internal Revenue (“BIR”) confirmation or tax ruling for transactions that qualify as tax-free exchange of property. Previously, before a tax-free exchange of property can be authorised through the issuance of Certificate Authorising Registration (“CAR”), contracting parties must first secure a BIR Certification or ruling on the tax consequence of said transfer. While the CREATE Act effectively abolished the requirement of securing a BIR Ruling before the CAR can be issued, Revenue Memorandum Circular No. 19-2022 ("RMC") states that post-transactions audits will be conducted and any unpaid taxes due on the transaction must be paid, plus interest, penalty and surcharge. The same RMC clarifies that the taxpayer is not precluded from securing the BIR Ruling. Thus, taxpayers may opt to forego securing the BIR Ruling to expedite the issuance of CAR subject to a potential post-transaction audit or apply for a BIR Certification prior to effecting the transfer to remove the risk of imposition of deficiency taxes, interest, penalty and surcharge through a post-transaction audit.

•Fiscal Incentive Reforms under CREATE Act 

The CREATE Act was also enacted with the aim to streamline and rationalise the Philippine government’s fiscal incentives for investments. Business enterprises may register qualified activities either as: (i) export enterprises or (ii) domestic market enterprises (“DME”). Depending on the amount of the investment, the Fiscal Incentives Review Board (“FIRB”), or any of the Investment Promotion Agencies are authorised to grant incentives for prioritised activities identified in the Strategic Investment Priorities Plan (“SIPP”). The SIPP contains projects or activities that promote long-term growth and sustainable development.

Industry Qualifications 

The business industries to be engaged in are categorised by industry tier (ie, Tiers I, II and III) and have varying fiscal incentives depending on whether the applicant is classified as an export enterprise or a DME.

Fiscal Incentives 

Some of the key incentives in the CREATE Act include:

• Qualified export enterprises shall be entitled to four to seven years Income Tax Holiday (“ITH”) as a uniform primary incentive, to be followed by ten years of 5% Special Corporate Income Tax OR Enhanced Deductions (“ED”) as a uniform secondary incentive;

• Qualified DMEs shall be entitled to four to seven years ITH as a uniform primary incentive, to be followed by five years ED as a uniform secondary incentive;

• Exemption from customs duty on importation of capital equipment, raw materials, spare parts, or accessories directly and exclusively used in the registered project or activity.

Value-Added Tax (“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 (“RBE”).

The ITH period is granted based on the industry tier and location of the investment activity. The period of availment of the incentives shall commence from the actual start of commercial operations with the RBE availing of the tax incentives within three years from the date of registration, unless otherwise provided in the applicable SIPP.

A qualified expansion, an entirely new project, or existing registered projects or activities prior to the effectivity of the CREATE Act may register and avail of the incentives granted under the CREATE Act within the prescribed period, subject to certain criteria and conditions set forth in the SIPP in effect at the time of application, and performance review by the FIRB.

• Passive Income and Financial Intermediary Taxation Act (“PIFITA”) House Bill No. 4339, otherwise known as PIFITA, is a bill which aims to make passive income and financial intermediary taxes simpler, fairer, more efficient, and more competitive regionally. It was recently approved on third and final reading by the House of Representatives and is currently undergoing committee hearings in the Senate.

The key reforms to be introduced by PIFITA are as follows:

a. Reduction in the number of tax bases and rates applicable to passive income, financial intermediaries, and financial transactions from 74 to 52;

b. Rationalising the rates on passive income and financial intermediaries by:

o Gradually reducing the tax rates on royalties and interests from 20% to 15%;

o Imposing a single tax rate of 15% on interest income, royalties, dividends and capital gains on the sale of shares of stock not traded in the stock exchange;

o Imposing a single tax rate of 5% gross receipts tax on the income of banks, quasi-banks, and other non-bank financial intermediaries;

o Imposing a harmonised 2% tax on premiums of pre-need, life insurance, and health maintenance organisations products;

o Gradually reducing the stock transaction tax from 6/10 of 1% to 1/10 of 1%;

c. Rationalising the rates of documentary stamp tax;

d. Repealing exemption of foreign currency deposit from interest income tax;

e. Removing excise tax exemption of pick-up trucks; and

f. Adopting tax administration provisions originally proposed under the previous tax packages of the Comprehensive Tax Reform Programme.