In November, Republic Act 12066 (otherwise known as CREATE MORE), which amended CREATE, was finally signed into law. The new law seeks to enhance the competitiveness of the Philippines’ incentive regime.
As we anticipate the issuance of the implementing rules in the coming weeks, enterprises registered with Investment Promotion Agencies (IPAs) are curious as to how this new law will potentially affect their registrations and incentives availments going forward.
Today, I’d like to discuss the salient features and significant changes under CREATE MORE that will directly impact registered business enterprises (RBE) insofar as their existing registered and future/new projects are concerned.
One of the notable changes is the coverage of the VAT zero-rating incentive enjoyed by RBEs. A lot of us may recall that before CREATE, all purchases of goods and services of RBEs were entitled to 0% VAT without distinction. However, CREATE limited this by providing that only expenses which are “directly and exclusively used” in the registered activity are entitled to VAT zero-rating. While the limitation was made with the intention of restricting the incentives to those expenses that actually formed part of the registered activities, several issues were raised during its implementation, particularly in determining which expenses or purchases qualified for these incentives. Eventually, this resulted in additional administrative requirements on both the RBEs and their suppliers, as they needed to prove that their expenses qualified for VAT zero-rating.
CREATE MORE now expands the coverage by using the term “directly attributable,” which refers to goods and services that are incidental to and reasonably necessary for the registered project or activity of the RBE. This includes janitorial security, financial, consultancy services, marketing and promotion, and administrative functions such as human resources, legal and accounting. Interestingly, these were the expenses that were previously specifically disallowed for VAT zero-rating in the implementing rules of CREATE. Thus, the amendment brings much relief to both RBEs and their suppliers. The IPA is vested with the authority to determine what is “directly attributable” depending on the registered project or activity of the RBE.
Another significant amendment under CREATE MORE is the reduction of the corporate income tax (CIT) rate applied to RBEs availing of the Enhanced Deductions (ED) incentive. Under CREATE, those under ED were generally subject to the 25% regular CIT. Under CREATE MORE, those availing of ED are now entitled to the lower CIT rate of 20% on income arising from the registered activity/project.
Contrary to some misconceptions, it is worth noting that the reduced CIT rate only applies to the RBEs availing of the ED incentive. Regular corporations not registered with IPAs are not entitled to the lowered CIT rate. The lower CIT rate for ED may have been introduced to make the ED regime a more viable option, along with the 5% Special Corporate Income Tax (SCIT) regime.
A crucial gap that CREATE MORE seeks to address is the imposition of Local Business Tax (LBT) on RBEs that are availing of the Income Tax Holiday (ITH) and ED incentives. While it is settled that those under the SCIT regime are paying the 5% in lieu of national and local taxes, the same is not clearly provided for those under ITH and ED. Even in practice, we have observed that Local Government Units (LGU) have differing views and rules on this issue.
CREATE MORE now includes an item specifically dedicated to RBE Local Tax (RBELT) among the list of incentives under Section 194 (F). Under this newly added provision, LGUs may pass an ordinance imposing an RBELT for those under ITH and ED, at a rate of not more than 2% of the RBE’s gross income. The 2% RBELT shall be in lieu of local fees and charges that the LGU imposes. No RBELT may be collected from RBEs under the SCIT.
As to the order of availment, under CREATE, the ITH should be availed of first, followed by SCIT or ED, with the choice between SCIT and ED required to be made at the start, when the RBE is applying for IPA registration. Under CREATE MORE, SCIT or ED may be availed of outright, without having to go through ITH first. This means that in the first year of commercial operations, the RBE may already enjoy either the SCIT or ED regime. This is expected to give RBEs flexibility especially if directly availing of SCIT or ED will be more beneficial to the company.
With respect to imports, the duty exemption incentive now covers capital equipment, raw materials, spare parts, or accessories “directly attributable” to the registered activity (instead of “directly and exclusively” under CREATE), and goods used for administrative purposes. Also, CREATE MORE now allows imports prior to issuance of the Certificate of Registration (CoR). In the past, registration with the IPA must be completed first, as evidenced by the CoR, before tax and duty-free imports are allowed.
Under CREATE MORE, imports prior to the issuance of the CoR are allowed on the condition that the RBE posts a performance bond or bank guarantee equivalent to the duties and taxes waived. While a performance bond will result in additional cost to RBEs, this is still expected to benefit them as it will reduce the time involved in setting up their facilities in preparation for the start of commercial operations.
In the spirit of Valentine’s Day, let me end this with a quote about hope that is often shared to those who have loved and failed — when love visits you again, may it be safe, secure, genuine and reassuring. May CREATE MORE (as an improved version of CREATE) give RBEs and investors such a level of assurance of the Philippines’ earnest efforts towards improving the investment landscape through the notable positive changes it offers.
The views or opinions expressed in this article are solely those of the author and do not necessarily represent those of Isla Lipana & Co. The content is for general information purposes only, and should not be used as a substitute for specific advice.
Aimee Rose Dela Cruz is a director at the Tax Services department of Isla Lipana & Co., the Philippine member firm of the PwC network.
aimee.rose.d.dela.cruz@pwc.com
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