Incentives under the CREATE Act (as modified by CREATE More Act)

The Philippines introduced several tax incentive reforms through the Corporate Recovery and Tax Incentives for Enterprises (CREATE) Act, effective from 12 April 2021. Later, in September 2024, the Philippines parliament approved a new Corporate Recovery and Tax Incentives for Enterprises to Maximize Opportunities for Reinvigorating the Economy (CREATE More) Act, which modified certain provisions of the CREATE Act and introduced additional tax reforms. The CREATE More Act is yet to be published and shall take effect after 15 days of its publication. The incentives provided under the CREATE Act and as modified by the CREATE More Act are as follows:

Nature of Qualifying Activities

The incentives apply to qualifying registered projects or activities under the Strategic Investment Priority Plan (SIPP). On 24 May 2022, Memorandum Order No. 61 was signed that approved the 2022 SIPP. The activities in the SIPP are broken down into three tiers as follows:

Tier I contains the preferred activities under the 2020 IPP, which include all qualified activities relating to the fight against the COVID-19 pandemic (see below), job creation activities, all qualified manufacturing activities, agriculture, fishery and forestry, strategic services, activities creating value through innovation and upgradation of the value chain, exports and related activities, activities covered under special laws (such as laws relating to tree plantation, mining, renewable energy, publication, tourism etc.) and activities under the Bangsamoro Autonomous Region in Muslim Mindanao (BARMM) List;
Tier II contains activities related to green ecosystems, health systems, defense systems, industrial value-chain gaps, and food security; and
Tier III contains activities related to research and development, highly technical manufacturing and production, and establishment of innovation support facilities, including the use of automated systems, smart machines/systems, industrial internet of things (IIOT), cloud computing, cognitive computing, advanced robotics, artificial intelligence, and 3D printing, among others.

Tax Incentives

The CREATE Act classifies enterprises into export enterprises (i.e., enterprises that export at least 70% of total production) and domestic market enterprises. The incentives are based on the location and industry priorities of the registered project or activity.

Eligible export enterprises having income from qualifying registered projects and activities may opt for:

A corporate tax exemption for 4 to 7 years, depending on location and industry priorities, followed by:

a special corporate income tax (SCIT) at a rate of 5% on gross income earned, in lieu of all national and local taxes, for the next 10 years in respect of projects and activities approved by Investment Promotion Agencies (IPA) (20 years if approved by the Fiscal Incentives Review Board (FIRB)); or
enhanced deductions (renamed as enhanced deduction regime (EDR) by CREATE More Act) (see below) for the next 10 years in respect of projects and activities approved by IPA (20 years if approved by the FIRB); or

A SCIT for 14 to 17 years in respect of projects and activities approved by IPA (24 to 27 years if approved by the FIRB), depending on location and industry priorities; or
EDR for 14 to 17 years in respect of projects and activities approved by IPA (24 to 27 years if approved by the FIRB), depending on location and industry priorities.

Further, eligible domestic market enterprises may opt for:

A corporate tax exemption for 4 to 7 years, depending on location and industry priorities, followed by EDR for the next 10 years in respect of projects and activities approved by IPA (20 years if approved by FIRB); or
EDR for 14 to 17 years in respect of projects and activities approved by IPA (24 to 27 years if approved by the FIRB), depending on location and industry priorities.

The above corporate tax incentives are granted for additional 2 years for registered projects or activities in areas recovering from armed conflict or a major disaster, and for additional 3 years for registered projects or activities which relocate from the National Capital Region (NCR).

The CREATE More Act also introduces a reduced corporate tax rate of 20% on taxable income for registered enterprises (both export and domestic) opting for the EDR.

Additionally, a registered business enterprise (RBE) local tax is introduced at a maximum rate of 2% of gross sales for enterprises eligible for tax holiday or EDR, but does not apply to enterprises opting for SCIT. The RBE local tax applies in lieu of all other local taxes, fees, and charges levied by the local government and companies subject to RBE local tax will be exempt from all other local taxes.

Qualified export enterprises and domestic market enterprises may avail of the following enhanced deductions:

Additional depreciation allowance at the rate of 10% for buildings and 20% for machinery and equipment;
Additional 50% deduction on labor expenses, excluding costs (viz. salaries, wages, benefits, and other personnel costs) incurred on managerial, administrative, indirect labor, and support services;
Additional 100% deduction on R&D expenses directly related to the registered project or activity of the enterprise, limited to the amount of local expenditure incurred for salaries of Filipino employees and consumables and payments to local R&D organizations;
Additional 100% deduction on approved training expenses incurred for training Filipino employees engaged directly in the production of goods and services;
Additional 50% deduction on domestic input expenses that are directly related to and actually used in the registered export project or activity of the enterprise;
Additional 100% (increased from 50% by CREATE More Act) deduction on power expenses incurred for the registered project or activity;
Deduction for reinvestment allowance of up to 50% of the amount reinvested by a manufacturing enterprise in any of the projects or activities listed in the SIPP within a period of 5 years from the time of such reinvestment. The benefit is extended to tourism enterprises under the CREATE More Act. The deduction for reinvestment allowance can be availed until 31 December 2034;
Net operating losses of a registered project or activity during the first 3 years from the commencement of commercial operations, may be carried forward and offset as a deduction from gross income within 5 consecutive taxable years immediately following the last year of the tax holiday period (normally carry forward is allowed for 3 years); and
Additional 50% deduction for expenses relating to exhibitions, trade missions, or trade fairs, including expenses incurred in promoting the export of goods or provision of services to foreign markets approved by the investment promotion agency (introduced by CREATE More Act).

Additionally, all qualified registered activities and projects can benefit from the following:

Duty exemption on importation of capital equipment, raw materials, spare parts, or accessories, including goods used for administrative purposes in the registered project or activity of the enterprise, subject to certain conditions; and
VAT exemption on goods and services imported and zero-VAT rate on local purchases directly attributable to the registered project or activity of the enterprise, including expenses incidental thereto, subject to certain conditions.

Further, qualified expansion projects meeting specified conditions can benefit from the SCIT or EDR (as applicable) for 8 years for IPA approved projects/ activities (13 years for FIRB approved projects/ activities), as well as benefit from duty exemption, VAT exemption and zero-rated VAT.

Prior to the introduction of the CREATE Act, various incentives were provided by Investment Promotion Agencies (IPAs) in the Philippines.

The CREATE Act includes certain transitional provisions for such existing incentives, as follows:

Existing registered activities that are granted an income tax holiday are allowed to continue the remaining period of the tax holiday;
Existing registered activities that are granted an income tax holiday followed by a tax rate of 5% on gross income are allowed to apply the tax rate of 5% until 31 December 2034; and
Existing registered activities that are granted import duty and VAT exemptions under the earlier regime can continue to benefit from the exemptions until 31 December 2034.

The existing incentives provided prior to the CREATE Act are detailed below:

Export Incentives

Export enterprises registered with the Philippine Board of Investments were eligible for a number of incentives when at least 50% of annual production is exported (70% if foreign ownership of more than 40%), including:

A 6-year corporate income tax exemption for pioneer firms (i.e., entities engaged in specified activities) and firms located in less-developed areas from the commencement of commercial operations, and a 4-year tax holiday for non-pioneer firms;
Tax and duty exemption on imported spare parts and supplies for export producers with a customs bonded manufacturing warehouse;
Full deduction of the cost of major infrastructure projects undertaken by enterprises in less-developed areas;
50% additional deduction for incremental labor expenses if the incremental labor was located in less-developed areas within 5 years from the date of registration of such enterprise, subject to certain conditions (this incentive could not be used with the tax holiday);
Exemption from wharfage and any export tax, duty, impost, or fees; and
Tax credits equal to taxes and duties paid on raw materials, supplies, and semi-manufactured products, forming part of products for export.

Special Economic Zone Incentives

Export and free-trade enterprises, information technology enterprises, and special economic zone developers/ operators registered with the Philippine Economic Zone Authority were eligible for certain incentives, including:

A 6-year corporate income tax exemption for pioneer firms (i.e., entities engaged in specified activities) and a 4-year tax holiday for non-pioneer firms from the commencement of commercial operations;
Following the tax holiday, a final tax at the rate of 5% on gross income;
Goods imported into a zone were exempt from duties and taxes; and
Goods purchased locally (i.e., from outside of the special economic zone) from VAT-registered suppliers were zero-rated.

Incentives under the Investment Priorities Plan

An ‘Investment Priorities Plan’ was introduced in the year 2020, providing an income tax holiday of up to 6 years for companies investing in the following preferred activities (Tier I):

The production or manufacture of essential goods relating to the fight against the COVID-19 pandemic, including medicines, medical equipment and devices, personal protective equipment (PPE), surgical equipment and supplies, laboratory equipment and its reagents, etc., including the repurposing of manufacturing activities to produce such goods;
The provision of services relating to the fight against the COVID-19 pandemic, including crematoriums, health waste treatment and disposal, laboratories, test facilities, hospitals, and quarantine facilities; and
Investments in activities that are supportive of programs to generate employment opportunities outside of congested urban areas, such as, but not limited to, the proposed Balik Probinsya Program or any similar program that may be implemented by the government.

The Investment Priorities Plan is repealed by the CREATE Act, and the above activities are covered under Tier 1 of the 2022 SIPP.

Regional Headquarters

Companies established as regional headquarters in the Philippines that act as supervisory, communication, and coordination center for a company’s subsidiaries, affiliates, and branches in the Asia-Pacific region, and do not derive income from the Philippines, are exempt from corporate income tax and VAT.

When a regional headquarters also provides business services for subsidiaries, affiliates, and branches in the Philippines, the following incentives apply:

Reduced income tax rate of 10% until 31 December 2021; thereafter, the standard corporate tax rate of 25% applies;
Exemption from most local taxes; and
Import duty and tax exemption for equipment not available locally that is imported solely for the regional headquarters functions.

Offshore Banking Units (OBUs)

Effective 12 April 2021, companies established as Offshore Banking Units (OBUs) are subject to tax at the standard corporate tax rate of 25%.

Until 11 April 2021, the following tax incentives were available to OBUs:

Tax exemption for income derived by OBUs from foreign-currency transactions with non-residents; and
Reduced income tax rate of 10% on interest income derived by OBUs from foreign-currency loans granted to residents.

Green Jobs Tax Incentive

A special tax incentive has been introduced effective from 27 April 2019 for qualifying business enterprises as part of the Philippines Green Jobs Act of 2016. Qualifying business enterprises are eligible for:

A special expense deduction equivalent to 50% of the qualifying expenses incurred on skills training and research and development expenses; and
Exemption from tax and duty on import of capital equipment, directly and exclusively used for promoting green jobs.

The deduction is available subject to the following conditions:

The deduction is availed in the taxable year in which the expenses have been paid or incurred;
The business enterprise can substantiate the deduction with sufficient evidence, such as official receipts, delivery receipts, and other adequate records of:

the amount of expense being claimed as a deduction; and
the direct connection or relation of the expenses incurred for skills training and research development of the business enterprise; and

Such special deduction is over and above the allowable deduction for ordinary and necessary business expenses.

The deduction is available to establishments engaged in the production, manufacturing, processing, repacking, assembly, or sale of goods and/or services, including self-employed or own-account workers, micro, small, and medium enterprises, and community-based enterprises. Qualifying green jobs refer to employment that contributes to preserving or restoring the quality of the environment, be it in the agriculture, industry, or services sector, including jobs that help to protect ecosystems and biodiversity, reduced energy, materials, and water consumption through high-efficiency strategies, decarbonize the economy and minimize or altogether avoid the generation of all forms of waste and pollution.

A business enterprise may register for the tax incentive by submitting with the Revenue District Office the certification issued by the Climate Change Commission that the enterprise is qualified.

Incentives under the Renewable Energy Act

Effective 15 July 2022, the Philippines Bureau of Internal Revenue issued regulations to provide updated policies and guidelines in relation to the tax incentives provided under the Renewable Energy Act of 2008 to promote the development of renewable energy sources. As per the regulations, renewable energy resources refer to energy resources that do not have an upper limit on the total quantity to be used, including biomass, solar, wind, geothermal, ocean energy, hydropower, dams, and other emerging renewable energy technologies.

The following incentives apply to accredited and registered renewable energy developers and manufacturers, fabricators, and suppliers of locally produced renewable energy equipment:

Tax Holiday and Reduced Corporate Tax Rates

Registered renewable energy developers are exempt from corporate tax as follows:

A 7-year corporate income tax exemption from the start of commercial operations for existing renewable energy projects. Projects that have been in commercial operations for more than 7 years are not entitled to the exemption, except to the extent of any additional investment made in renewable energy resources;
A 7-year corporate income tax exemption from the start of commercial operations resulting from new investments in renewable energy resources. Renewable energy developers undertaking the discovery and development of new renewable energy resources that are distinct from their registered projects may qualify as new projects, subject to the preparation of separate books of accounts and approval from the Board of Investments; and
Additional investments in renewable energy resources are provided a corporate income tax exemption for a period not exceeding 3 times the period for which the initial exemption for an existing or new renewable energy project was availed.

Following the tax holiday period, a reduced corporate income tax rate of 10% will apply on the net taxable income, provided the tax savings are passed on to the end-users in the form of lower power rates.

Other incentives include:

The net operating losses for the first 3 years of commercial operations can be carried forward and offset as a deduction from gross income within 7 consecutive taxable years immediately following the year of the loss (normally the carry forward of losses is allowed for 3 years, (see Sec.7.1.), subject to the following conditions:

the net operating loss was not previously offset as a deduction from gross income; and
the net operating loss is incurred from the commercial operations and not from the application of the incentives;

Plant, machinery, and equipment that are reasonably needed and actually used for the exploration, development, and utilization of renewable energy resources are eligible for accelerated depreciation at a rate of up to twice the normal depreciation rate under the declining balance method or the sum-of-the years digit method (see Sec. 6.2.), provided the renewable energy project did not benefit from the corporate income tax exemption before the commencement of full operations. If accelerated depreciation is applied, the project or its expansion will not be entitled to the corporate income tax exemption;
Proceeds from the sale of carbon emission credits are exempt from all taxes;
A zero-rated VAT applies to the following goods and services:

sale of power or fuel generated through renewable sources of energy including biomass, solar, wind, hydropower, geothermal, ocean energy, and other emerging energy sources using technologies such as fuel cells and hydrogen fuels;
ancillary services necessary to support the transmission of capacity and energy generated from renewable sources of energy; and
purchase by a renewable energy developer of local goods, properties, and services needed for the development, construction, and installation of plant facilities, and the whole process of exploration and development of renewable energy sources up to its conversion into power, including the services performed by subcontractors and/or contractors.

Hybrid and Co-generation Systems

The above corporate tax and other incentives apply to hybrid and co-generation systems utilizing both renewable energy sources and conventional energy in proportion to the renewable energy component. Further, tax exemptions and incentives apply only to equipment, machinery, and devices utilizing renewable energy resources.

Incentives for Commercialization

The following incentives are provided to registered and accredited manufacturers, fabricators, and suppliers of locally produced renewable energy equipment and components, on the sale of renewable energy equipment to renewable energy developers:

A 7-year corporate income tax exemption on net income derived from the sale of renewable energy equipment, machinery, parts, and services;
Exemption from VAT on importation of shipments necessary for the manufacture or fabrication of renewable energy equipment, subject to certain conditions and prior approval from the department of energy; and
Zero-rated VAT on transactions with local suppliers of goods, properties, and services needed in the manufacture or fabrication of renewable energy equipment provided the required registration documents are available.

The regulations also provide incentives for farmers engaged in the planting of biomass resources, and tax rebates for the purchase of renewable energy equipment and components.

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