IN BRIEF:
• The CREATE MORE Act signals a renewed commitment to fostering a more attractive and competitive environment aimed at attracting more FDI into the economy.
• The Act intends to help the country gain a more significant share in the near-shoring activities of manufacturing plants and support the continued growth of the BPO industry, among others.
The government is taking bold steps to significantly enhance the investment landscape and address investor concerns with the signing of Republic Act No. 12066 (Maximize Opportunities for Reinvigorating the Economy) or the CREATE MORE Act. This landmark legislation signals a renewed commitment to fostering a more attractive and competitive environment for businesses. By introducing expanded tax incentives, streamlining VAT processes, and clearly defining eligibility criteria, the CREATE MORE Act aims to stimulate economic growth and position the Philippines as a prime destination for foreign direct investment (FDI).
Over the past three years, the Philippines has faced challenges in attracting FDI compared to its neighbors. The World Bank estimates that from 2021 to 2023, Indonesia outpaced the Philippines by 122% in FDI inflows. Similarly, Vietnam and Malaysia surpassed the Philippines by 70% and 41%, respectively. Thailand also surpassed the Philippines by 10%. However, with the CREATE MORE Act, the government is poised to arrest this trend and create a more vibrant and investor-friendly economy.
WHAT RBEs CAN EXPECTPre-CREATE RBEs are currently enjoying the sunset provisions under the CREATE Act which provides that those currently enjoying 5% Gross Income Tax (GIT) are given until April 2031 to continue under this regime. However, with the effectivity of CREATE MORE, these pre-CREATE RBEs have been given an extension to Dec. 31, 2034 to continue enjoying the 5% GIT. The clarification on VAT zero-rating as discussed below will also have a positive impact on pre-CREATE RBEs.
The CREATE MORE Act introduces the concept of High-Value Domestic Market Enterprise (HVDME) in addition to the existing Registered Export Enterprises (REEs) and Domestic Market Enterprises (DMEs). HVDMEs refer to registered domestic market enterprises with an investment capital exceeding P15 billion and are engaged in sectors classified as import-substituting, or with export sales in the immediately preceding year of at least $100 million or its equivalent. In other words, HVDMEs can have high export sales but fall short of the 70% threshold requirement to be considered REEs. In terms of incentives, HVDMEs appear to be a hybrid of REEs and DMEs since HVDMEs can enjoy VAT zero-rating on local purchases, VAT exemption on imports, and customs duty exemption, just like an REE. However, unlike REEs, HVDMEs are not eligible for 5% SCIT, which is also true for DMEs.
Another interesting provision is that RBEs now have the option to entirely skip the Income Tax Holiday (ITH). This is particularly advantageous for RBEs that anticipate losses during the initial years following the commencement of their commercial operations. As it is, RBEs now have more flexibility in electing the incentive package it deems most beneficial from a global perspective, taking into account the potential impact of BEPS 2.0.
DMEs can take advantage of favorable developments, as they are now eligible for the same duration of income tax-based incentives as REEs of up to 17 years if the project is approved by the Investment Promotion Agency (IPA), or has investment capital not exceeding P15 billion. Meanwhile, those approved by the Fiscal Incentives Review Board (FIRB) with investment capital exceeding P15 billion can enjoy up to 27 years.
Under the CREATE Act, RBEs generally preferred the 5% Special Corporate Income Tax (SCIT) due to its perceived advantages and the simplicity of its calculation. However, with the CREATE MORE Act, those enjoying the Enhanced Deductions Regime (EDR) will get to enjoy the reduced Corporate Income Tax rate of 20%. Moreover, the additional deduction for power expenses is increased from 50% to 100%, among others. This may be significant for companies, especially those in energy-reliant sectors like manufacturing and heavy industries, considering that high power costs, one of the long-standing challenges of operating in the Philippines, have generally been a deterrent to investment, especially from manufacturers with substantial energy requirements.
For RBEs enjoying 5% SCIT, the good news is the SCIT now covers local fees and charges. These two were explicitly excluded in the CREATE Act. Meanwhile, RBEs enjoying ITH or EDR will now be subject to a local tax of up to 2% (otherwise called the RBE Local Tax or RBELT), which is based on the gross income. The tax base to compute for the RBELT is the same as the MCIT, which is basically gross profit.
What’s interesting about RBELT is that this is already in lieu of all local taxes, local fees, and charges. This effectively tackles the concerns of RBEs encountering difficulties in renewing their business permits. However, for its imposition, the Local Government Units (LGUs) must pass an ordinance, and it is only then that the RBEs can avail of the RBELT and ascertain the exact rate applicable.
Another piece of exciting news for REEs is that VAT incentives are no longer timebound. This means that REEs can enjoy the VAT incentives for the entire duration of their registration provided that they continue to meet the conditions. Even after the expiration of the registration period, export-oriented enterprises, meaning those not necessarily registered in any IPAs, will get to enjoy the VAT incentives, subject to compliance with certain conditions. This is a very welcome development as this will address the cash flow issues arising from input VAT accumulated by exporters.
Customs duty exemption still seems to be timebound. As such, after the end of the registration period and expiration of income tax-based incentives, REEs no longer enjoy customs duty exemption unless there is an applicable Free Trade Agreement (FTA) with the country of origin. For DMEs, the customs duty exemption is coterminous with its income tax-based incentives.
The phrase “directly and exclusively used” has been one of the main concerns of the investors when the CREATE Act was implemented since it appears to be very limiting and restrictive. This has been abandoned in the CREATE MORE Act, which now uses the phrase “directly attributable” and refers to goods and services that are incidental to and reasonably necessary for the registered activity or export activity of the export-oriented enterprise. These include janitorial, security, financial, consultancy, marketing and promotion services, and services rendered for administrative operations such as human resources, legal, and accounting. Notably, the enumerated purchases are the exact purchases explicitly provided in RR No. 3-2023 as purchases that are previously excluded from VAT zero-rating. The determination of what constitutes as “directly attributable” will be made by the IPA.
It is important to highlight that the option to choose an incentive package is irrevocable and that it will be elected at the time of application. As it is, given several key amendments in the 5% SCIT and EDR, a simulation exercise is necessary for the companies to arrive at a decision that will be most advantageous for their intended investment.
REINVIGORATING THE ECONOMYInherent in the passage of a new law are the questions which we hope to be addressed in the coming weeks once the implementing rules and regulations are issued. With the end-goal to make the Philippines more attractive to investors, the Act intends to help the country gain a more significant share in the near-shoring activities of manufacturing plants and support the continued growth of the BPO industry, among others.
It remains to be seen though how these changes will influence economic indicators over time, but clearly the CREATE MORE Act reflects the government’s commitment to fostering an environment where businesses can thrive and contribute meaningfully to national prosperity.
This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinions expressed above are those of the authors and do not necessarily represent the views of SGV & Co.
Cheryl Edeline C. Ong is a tax partner and Virnee Agot-Ting is a tax senior manager of SGV & Co.
