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Let's Talk Tax

Ho Ho Ho! CREATE is coming to town

For Filipinos, Christmas is the most anticipated event of the year. Preparation for the festivities starts as early as September with Christmas celebrations lasting until January of the following year. While this year’s festivities will inevitably be different due to restrictions on gatherings, Filipinos can undoubtedly make the most of the situation and make the Christmas spirit come alive.

Known for our resilience, we usually rebound from setbacks, rise above the challenges, and recover. Even the pandemic and recent typhoons are unable to dampen the Filipino spirit. For us, Christmas must go on, and so will the CREATE bill, which aims to help enterprises bounce back from the pandemic, thereby create ripple effects to boost economic recovery.

The Senate version of the measure was approved on Nov. 26. On Dec. 7, the Committee on Ways and Means recommended to the Speaker of the House of Representatives the acceptance of the amendments introduced under Senate Bill 1357 or the Corporate Recovery and Tax Incentives for Enterprises Act (CREATE). The House still has to act on the recommendation. It is hoped that the bill will be signed into law by President Rodrigo R. Duterte before the year ends particularly as some provisions have retroactive effect.

Among the indispensable features of the CREATE bill is the rationalization of the fiscal incentives system. For years, various reforms have been undertaken to improve the management and provision of tax incentives.

The Philippines has been very generous in granting tax incentives with neither time limits nor thorough cost-benefit analyses. With CREATE, tax incentives will be performance-based, targeted, time-bound and transparent to ensure that every peso granted as a tax incentive yields a positive benefit to the country.

Under CREATE, a Strategic Investment Priority Plan (SIPP) is to be formulated every three years to identify priority projects and activities that will receive incentives, taking into account the size of the investment being contemplated, employment generation prospects especially in less developed areas, the potential for export, and the introduction of innovative processes and technologies.

The Fiscal Incentives Review Board (FIRB), or the investment promotion agencies (IPAs) under a delegated authority from the FIRB, are authorized to grant incentives pursuant to the Tax Code only to the extent of their approved registered project or activity under the SIPP. Approval of registered projects or activities of P1 billion pesos and below is to be delegated by the FIRB to the IPAs. To compel efficient processing, all applications for tax incentives are to be deemed approved if not acted upon within 20 days.

To qualify for the fiscal incentives, registered business enterprises must comply with the following: (i) they must be engaged in an activity included in the SIPP; (ii) they must meet the target performance metrics after an agreed time period; (iii) they must install adequate accounting systems that can identify the investments, revenue, costs and profits for each activity or establish a separate corporation for each registered project or activity; (iv) they must comply with e-receipting and e-sales requirement; and (v) they must submit annual reports of beneficial ownership of the organization and related parties.

Although some enterprises may find it challenging to comply with some of the foregoing conditions, particularly having a computerized accounting system with e-receipting, which will entail extra costs and resources, still these conditions are reasonably necessary if we are to implement a system to assess the net benefits of incentive granted to Philippine economy.

The income tax incentives under CREATE are as follows: (i) income tax holiday (ITH) for four to seven years followed by special corporate income tax (SCIT) of 5% based on gross income earned, in lieu of all taxes for 10 years; or (ii) regular corporate income tax (CIT) with enhanced deductions for 14 to 17 years. Thus, enhanced deductions can in no case be granted simultaneously with the SCIT. Enhanced deductions include additional deductions for depreciation, labor, training, research and development, domestic input expense, power expense, investment allowance and claiming of NOLCO for next 5 years.

The fiscal incentives are also available to projects or activities that were registered prior to effectivity of CREATE Bill. Firms enjoying ITH may continue to enjoy the same within the remaining ITH period. On the other hand, firms enjoying ITH and 5% gross income tax (GIT) after the ITH or enjoying 5% GIT only, may continue to enjoy these for 10 years. Qualified expansions or entirely new projects or activities may also qualify for a new set of incentives.

CREATE offers a total period of incentive availment of up to 17 years. The duration of income tax incentives depends on the category (basic, enhanced, advances, superior), which in turn is based on location and industry priorities.

Other fiscal incentives under CREATE are: (i) exemption from customs duties on imports of capital equipment, raw materials, spare parts or accessories directly and exclusively used in the registered project or activity, which are not produced or manufactured domestically in sufficient quantity at reasonable prices; and (ii) a VAT exemption on imports and VAT zero-rating on local purchases of goods and services directly and exclusively used in the registered project or activity by a registered enterprise located inside an ecozone or freeport.

CREATE also gives the President the flexibility to modify the mix, period or manner of availment of incentives for a highly desirable project involving a minimum investment P50 billion, or those that generate employment of at least 10,000, subject to certain conditions and the recommendation of the FIRB. In such cases the ITH is not to exceed eight years; thereafter, a 5% SCIT may be granted, provided that the total period of availment not exceed 40 years. Further, the President may also grant non-fiscal support incentives such as facilitation of registration and certification requirements from government agencies, logistical support, training support, product testing and certification with the recommendation of the FIRB.

As in any other grant of incentives, the grantee-enterprise should meet the reporting requirements, specifically: (i) the use of electronic systems for filing and payment with the BIR; and (ii) filing with the respective IPA and with the FIRB a complete annual tax incentives report and an annual benefits report within 30 calendar days from the statutory deadline for filing of returns and payment of taxes.

Non-compliance with reporting requirements and failure to use the electronic system for filing and payment of taxes to the BIR makes the investor liable for penalties (first offense — P100,000; second offense — P500,000). On third offense, the fiscal incentives are to be canceled.

Our resiliency has been tested many times, in many ways. Despite the lingering uncertainty brought by the pandemic, Filipinos’ high hopes for a better life have never wavered. As we usher in a new decade, Filipinos are eager for better times. With CREATE, it is hoped that the long-overdue fiscal incentives reform will bring a much-needed recovery boost which will allow us to thrive in a post-pandemic environment.

Let’s Talk Tax is a weekly newspaper column of P&A Grant Thornton that aims to keep the public informed of various developments in taxation. This article is not intended to be a substitute for competent professional advice.

Farrah Andres-Neagoe is a senior manager of Tax Advisory & Compliance division of P&A Grant Thornton, the Philippine member firm of Grant Thornton International Ltd.


As published in BusinessWorld, dated 15 December 2020