Philippines Tax Reform Package 2

(Corporate Recovery and Tax Incentives for Enterprises or CREATE Act)

Date of signing into law: 26 March 2021 Publication date: 27 March 2021 Effective date: 11 April 2021

Income tax Imposition of Improperly

Accumulated Earnings Tax
(IAET) is repealed.
Corporation Regular Corporate Minimum Corporate
type Income Tax (RCIT) Income Tax (MCIT)

20%
1
or 25% 1% Regional Operating
Headquarters (ROHQs)
of gross income
of taxable income shall be subject to RCIT
Effective 1 July 2020
Effective 1 July 2020
Domestic until 30 June 2023 effective 1 January 2022.

25% 1% Final income tax rates for

of gross income
of taxable income Effective 1 July 2020
foreign corporations
Resident Effective 1 July 2020
until 30 June 2023
Foreign
15%
on interest income
derived under the
expanded foreign
currency deposit

25% system

of gross income
15%
on capital gains from
Non-resident Effective 1 January 2021 sale of shares of stock
Foreign not listed and traded in
the stock exchange

1 Total assets < P100 Million and Taxable income < P5 Million

Intercorporate dividends Proprietary Educational

Institutions and Non-profit
Hospitals

1%
of taxable income
Effective 1 July 2020
until 30 June 2023

Other percentage tax

2
Exempt Exempt
1%
of the gross quarterly
Domestic Domestic Foreign 2 Domestic
subject to minimum sales or receipts
shareholdings, holding period and Effective 1 July 2020
reinvestment conditions until 30 June 2023

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Philippines Tax Reform Package 2
(Corporate Recovery and Tax Incentives for Enterprises or CREATE Act)

Tax-free exchange of property under Section 40 (C) (2) of the Tax Code

• Transferor, alone or together

with others, not exceeding 4
Merger or consolidation Control and further control
persons, exchanges property
for stocks, collectively, gains
or maintains control of
transferee.
Reorganization
• Gain / loss on exchanges is
not recognized pursuant to
a plan of reorganization.

• Prior BIR confirmation or Recapitalization Reincorporation

ruling is no longer required.

Deductions from VAT-exempt transactions

gross income
Sale of real properties not primarily Sale or importation of prescription
held for sale or lease in the ordinary drugs and medicines
Training expenses
course of trade/business or real
property utilized for low-cost and
1 January 2020
150% socialized housing2

deduction of the value of Residential

No exemption
labor training expenses lot only Diabetes High Hypertension
cholesterol
Residential
subject to certain Exempt if 1 January 2021
house & lot
conditions / requirements. P2 Million
and other
and below
dwellings
Interest arbitrage
2 Socialized Cancer Mental Tuberculosis Kidney
Subdivision Project - Ranges from
illness diseases
P480,000 to P580,000 depending on the area

Socialized Condominium Project - Ranges from

P600,000 to P750,000 depending on the location
and area
Sale or importation of items for
COVID-19 prevention or treatment
20%
interest reduction Sale, importation, printing or 1. Capital equipment, spare parts and raw
if the applicable publication of the following: materials, necessary for PPE component
RCIT is 25% production
Books, newspaper,
magazine, journal, review 2. Drugs, vaccines and medical devices
0% bulletin, or any educational
reading material under the
specifically prescribed and directly used
for COVID-19 treatment, including
interest reduction UNESCO agreement, approved by FDA for use in clinical trials
if the applicable including digital / electronic. and necessary raw materials for drug
RCIT is 20% These should not be devoted production
principally to publish paid
ads. beginning 1 January 2021 to 31 December 2023

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Philippines Tax Reform Package 2
(Corporate Recovery and Tax Incentives for Enterprises or CREATE Act)

Who can qualify for incentives?

General qualifications:
Enterprise 1. Engaged in a project / activity
included in SIPP

2. Target performance metrics

3. Install an adequate accounting

Domestic Market
Export enterprise system
Enterprise
4. Comply with
e-receipting and e-sales
requirement
Direct export
5. Submit annual reports of
70% beneficial ownership and related
Indirect export parties

What are qualified activities? Activity / project may be located in any of the following areas:
1. National Capital Region (NCR)
2. Metropolitan areas or areas contiguous and adjacent to NCR
Tier I Includes activities that: 3. All other areas in the Philippines
a) have high potential for job creation;
b) take place in sectors with market failures
resulting in underprovision of basic goods
and services; What are the fiscal incentives?
c) generate value creation through
innovation, upgrading or moving up the
value chain; 1. Income 2. Special 3. Enhanced
d) provide essential support for sectors
critical to industrial development; or
Tax Holiday Corporate Deductions
e) emerging owing to potential comparative (ITH) Income subject to
advantage Tax (SCIT) certain
of 5% conditions
Tier II Includes activities that produce supplies,
parts and components, and intermediate
services not locally produced but critical to
industrial development and import-
substituting activities, including crude oil
refining Other incentives
Tier III Activities that include:
Customs Duty Exemption for Capital Equipment,
a) Research and development resulting in
demonstrably significant value-added,
Raw Materials, Spare Parts and Accessories
higher productivity, improved efficiency,
breakthroughs in science and health, and • Directly and exclusively used in registered activity
high-paying jobs; • Part of direct cost
b) Generation of new knowledge and • Not produced / manufactured domestically in sufficient
intellectual property registered and/or quantity / of comparable quality at reasonable prices
licensed in the Philippines; • IPA approval prior to importation
c) Commercialization of patents, industrial
designs, copyrights and utility models by
registered business enterprise;
d) Highly technical manufacturing; or
e) Critical to structural transformation of VAT Exemption on importation and VAT zero-rating on
economy and require substantial catch-up local purchases
efforts

• Directly and exclusively used in registered activity

Tiering shall be determined by the Fiscal Incentives Regulatory Board
(FIRB) or Investment Promotion Agencies (IPAs), as applicable, under
Strategic Investment Priorities Plan (SIPP).

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Philippines Tax Reform Package 2
(Corporate Recovery and Tax Incentives for Enterprises or CREATE Act)

Rationalization of fiscal incentives based on location and industry

Enterprise Tax incentives Location Tier I Tier II Tier III
NCR 4 years 5 years 6 years

ITH Metropolitan areas 5 years 6 years 7 years

Exporter
+ Other areas in Philippines 6 years 7 years 7 years

SCIT or
Regardless of location 10 years 10 years 10 years
Enhanced deductions

NCR 4 years 5 years 6 years

ITH Metropolitan areas 5 years 6 years 7 years

DME
+ Other areas in Philippines 6 years 7 years 7 years

Enhanced deductions Regardless of location 5 years 5 years 5 years

+ 2 years ITH for projects of registered enterprises located in armed conflict / major disaster recovering areas
+ 3 years ITH for project registered prior to or under CREATE’s incentive system that shall completely relocate from NCR

Enhanced deductions Sunset periods for existing

Depreciation
projects
Domestic Inputs
150%
Allowance - +10% Purchased
Building Current registration Sunset period
Power Expense 150%
Depreciation
Allowance – Reinvestment Maximum 50% Finish remaining
+20% Granted ITH only
Machineries & Allowance of ITH period
Equipment (for manufacturing reinvested
industry) profit
Direct Labor Granted ITH and 5% GIT
150%
Expense 5 years (incurred after ITH
Net Operating 5% GIT for 10
during 1st three
R&D Costs 200% Loss Carry-Over years from start of years
(NOLCO) commercial
Training Expense 200% operations) Currently availing 5% GIT

Authority to grant incentives Presidential power to modify set of incentives as

recommended by FIRB
Investment capital Granting authority
1. Modify mix, period / manner of availment of incentives
2. Craft appropriate financial support package for highly desirable
Exceeding P1 Billion FIRB project / specific industrial activity
Maximum 8 years ITH plus may grant SCIT. Up to 40 years total incentive period.

Not exceeding IPA, as delegated In recommending, FIRB shall consider:

P1 Billion by FIRB • Project with comprehensive sustainable development plan, clear inclusive
business approaches, high level of sophistication and innovations
• Minimum Investment Capital of P50 Billion / equivalent USD OR minimum
10,000 direct local employment within 3 years from Certificate of
Note: FIRB may increase threshold. Entitlement.

This publication contains information in summary form and is therefore intended for general guidance only. It is not intended to be a substitute for detailed research or the exercise of
professional judgment. Neither SGV & Co. nor any other member of the global Ernst & Young organization can accept any responsibility for loss occasioned to any person acting or
refraining from action as a result of any material in this publication. On any specific matter, reference should be made to the appropriate advisor.

Fabian K. delos Santos Jules E. Riego Cheryl Edeline C. Ong Margaux A. Advincula
Tax Leader PH and ASEAN Partner, BTS Partner, BTS
fabian.k.delos.santos@ph.ey.com Business Tax Services (BTS) Leader cheryl.edeline.c.ong@ph.ey.com margaux.a.advincula@ph.ey.com
(632) 8894 8219 jules.e.riego@ph.ey.com (632) 8962 1593 (632) 8894 8203
(+63) 920 961 8324 (632) 8894 8117 (+63) 998 962 1593 (+63) 919 914 8203
(+63) 917 894 8117 (+63) 977 894 8203

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