From Where We Sit

Redefining ‘bayanihan’: Tax incentives for businesses in the new normal

Atty. Lea Roque
By:
Atty. Lea Roque
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So much has transpired in the course of almost two years since the pandemic struck. The health crisis took global economies to a tumble and governments struggled to slowly get back on their feet. It’s a dire scenario that has left investors on a standstill, contemplating whether to continue planned investments or wait until things settle in the new normal. All matters considered, their investment woes are based on well-founded facts.

In the Philippines, foreign investments slid by over 30 percent year-on-year during the first quarter of 2021. Reports from the Philippine Statistics Authority (PSA) attributed the slump in the first three months of the year to investor uncertainty during the pandemic. This is the fifth straight annual decline in terms of foreign investments. While total investments, including domestic ones, saw a spike of more than 40 percent, the investment outlook might still be far from rosy in the eyes of potential foreign investors.

The quintessential question most investors probably ponder on is this – should you invest during the pandemic? The answer is YES. If you’re a foreign investor, setting up shop in the Philippines is still a good idea, and for good reasons.

A new face of bayanihan

For one, an array of tax incentives awaits businesses who will invest in the country. As discussed during Grant Thornton’s Manufacturing in ASEAN webinar, the government passed key measures providing tax assistance and incentives to investors. One of them is the Bayanihan to Recover as One Act (Bayanihan 2). This landmark measure aims to grant recovery interventions by promoting fiscal sustainability and capacity-building assistance to different economic sectors. One of the primary objectives of Bayanihan 2 is to help business entities adjust more easily to post-quarantine restrictions and gain organizational resilience to address future challenges in the new normal.

The good news is that for qualified businesses which have net operating losses in taxable years 2020 and 2021, the Bayanihan 2, through the provisions of Revenue Regulation No. 25-2020, now allows such entities to carry over such losses incurred and deduct the amount from their gross income in the next five consecutive taxable years. This is an additional two years from the usually three years to carry over the net losses.

On top of the tax measures granted under the Bayanihan 2 Act, the government approved the Corporate Recovery and Tax Incentives for Enterprises (CREATE) Act early this year in a bid to help cushion the blow of the pandemic on businesses. Among its overarching goals is to rationalize fiscal incentives and provide an attractive stimulus package for businesses keen on investing in the country.

The CREATE Act carried with it amendments to the Tax Code geared to assist corporate taxpayers cope with the challenges brought by the pandemic. Prior to its signing into law, the provisions of the CREATE Act was initially lumped under the proposed TRABAHO Bill and subsequently, the Corporate Income Tax and Incentives Reform Act (CITIRA). Realizing the need to inject new provisions aimed at assisting corporate taxpayers recover from the effect of the Covid-19 pandemic, lawmakers pivoted the provisions of the CREATE Bill. Some of the assistance and incentives provided by the CREATE Act include the following:

Lower corporate income tax (CIT)

One of the most awaited changes under the CREATE Act is the lowering of the corporate income tax rates. Prior to the effectivity of this law, the CIT was at 30% for domestic, resident foreign corporations, and non-resident foreign firms. This rate was decreased to 25% for regular corporate taxpayers and 20% for domestic corporations with a taxable income not exceeding P5M and total assets not exceeding P100M. The lower CIT rate for domestic and resident foreign corporations is retroactive to July 1, 2020.

Incentives for approved registered projects

The CREATE Act rationalized fiscal incentives by providing uniform rules and two sets of incentives to registered business enterprises. Prior to CREATE, incentives are found in hundreds of different laws covering different industries and providing a myriad of confusing incentives.

Projects or activities that will qualify for incentives shall only be those listed under the Strategic Investment Priorities Plan (SIPP).

Income tax holiday (ITH)

Qualified business entities, exporters, and domestic corporations alike, may avail of income tax holiday for 4-7 years depending on the location of the project and their industry tier. After the ITH, export enterprises have the option to choose either the 5% Special Corporate Income Tax or regular tax rate with enhanced deductions for the next 10 years. For domestic enterprises, they will be entitled to regular corporate income tax with enhanced deductions for the next five years after the ITH.

Meanwhile, businesses may also avail of an additional ITH depending on their circumstances. To help entities in locations recovering from armed conflict, an additional ITH period of two years may be availed, while registered firms relocating outside the National Capital Region are entitled to have an additional ITH period of three years.

Nothing is set in stone. Even without the pandemic, there are no guarantees that an organization will be free from disruptions. For now, it is comforting to know that there are government-led initiatives to help existing and interested investors grow and thrive.

 

As published in The Manila Times, dated 15 September 2021

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