Much has been said and done now that the government’s earnest effort to pass Package 2 of its Tax Reform program has come to fruition. Finally, RA No. 11534 or the Corporate Recovery and Tax Incentives for Enterprises Act (CREATE) was passed into law last March 26, 2021 and took effect last April 11, 2021. Other than its amendatory provisions to the Tax Code, the CREATE Law notably introduced a set of provisions which seek to create a more equitable, responsive, and globally competitive tax incentive system. 

In taxation, basic are the rules that exemption is the exception and that the grant of tax incentives is a privilege that may be modified or taken away by the granting authority. In availing these exemptions or incentives, taxpayers must adhere to the double nexus rule of: (1) proving the existence of the statutory provision granting the exemption or incentive, and (2) ensuring that the claimant is qualified and compliant with the conditions (if any). Hence, the need for business owners to know these new tax incentives cannot be undermined so as not to be amiss of the opportunities it could usher.

Who may avail?

Both export enterprises and domestic market enterprises can avail of the new tax incentives as long as they are registered business enterprises with an Investment Promotions Agency (IPA) such as the Board of Investment (BOI) and the Philippine Economic Zone Authority (PEZA). To be a registered business enterprise, the project or activity that these companies seek to register must be listed under the Strategic Investment Priority Plan (SIPP). The SIPP is yet to be formulated by the BOI) in coordination with the Fiscal Incentives Review Board (FIRB), IPAs and other government agencies.  Thereafter, it will be submitted to the President for approval and publication. In the application and approval of the incentives, the FIRB exercises oversight function.

Granted tax incentives apply only to the registered project or activity before the IPA which could differ based on several factors, including the type of entity registering (i.e., export or domestic market), the location of the business (National Capital Region, metropolitan areas, and other locations), and other performance commitments as may be set by the FIRB, among others.

Export vs. Domestic Market Enterprises

An export enterprise refers to any individual, partnership, corporation, Philippine branch of a foreign corporation, or other entity organized and existing under Philippine laws and registered with the IPA. It also refers to firms offering manufacturing, assembly or processing activity, and services such as Information Technology (IT) and business process outsourcing (BPO) solutions whose final export product or export services are directly exported, and/or the sale of manufactured, assembled, or processed products or IT/BPO services is made to another registered export enterprise that will form part of the final export product or export service of the latter or at least 70% of total production or output.

Domestic market enterprises, on the other hand, refer to entities duly registered with the IPA that cannot be classified as export enterprises.

Note, however, that service enterprises are excluded from the coverage. This exclusion covers firms that offer customs brokerage, trucking or forwarding services, security services, insurance, banking and other financial services, consumers’ cooperatives, credit unions, consultancy services, as well as retail enterprises, restaurants, and companies providing other similar services as may be identified by the FIRB.

The New Tax Incentives Menu

Prior to the CREATE law’s approval, the President vetoed some line item provisions in the new section. However, Congress may override the veto of the President by a 2/3 vote of all its members. Failing to do so, the vetoed provisions will not be enacted into law. Historically though, Congress rarely exercises this power against the President’s vetoes. Henceforth is a summary of the post-veto tax incentives under Sections 294 to 296 of the CREATE Law:

I. Income Tax Holiday (ITH) - This incentive is available for both export and domestic market enterprises for a period ranging from 4 to 7 years, depending on location and industry priorities, without option for extension. Additional ITH duration incentives may be granted if the registered business enterprise relocates outside of NCR, or in areas recovering from armed conflict or a major disaster which must be 3 years or 2 years, respectively.

II. Special Corporate Income Tax (SCIT) - The SCIT rate shall be 5% of the Gross Income Earned (GIE) effective July 1, 2020 in lieu of all national and local taxes. This incentive may be availed right after the expiration of the ITH period by Export Enterprises for a maximum duration of 10 years in lieu of the enhanced deductions.

III. Enhanced Deductions - This may be availed by both export and domestic market enterprises, albeit for a different duration depending on the industry and location of the taxpayer. The following allowable deductions are “enhanced”, as additional deductions may be claimed, subject to the general condition that the expenditure is directly related to the company’s registered production of goods and service activities:

  1. Depreciation Expense (qualified capital expenditure) – 110% for buildings, 20% for machineries, and equipment
  2. Labor expense – 150%
  3. Research and Development Expense – 200%
  4. Training Expenses – 200%
  5. Domestic Input Expense – 150%
  6. Power Expense – 150%
  7. Reinvesting allowance to the manufacturing industry – Up to 50% of reinvested profit (within 5 years from time of reinvestment)
  8. Enhanced Net Operating Loss Carry-over (NOLCO) of 5 years for net operating loss of the registered project or activity during the first three (3) years from the start of commercial operation

IV. Duty exemption on importation of capital equipment, raw materials, spare parts, or accessories subject to various conditions for availment and limitations on transfer and disposal

V. Value-Added Tax (VAT) exemption on importation and VAT zero-rating on local purchases on goods and services directly and exclusively used in the registered project or activity by a registered business enterprise

Based on the foregoing, export enterprises have two primary options:

  • ITH + 5% SCIT on GIE with a maximum duration of 14 to 17 years (ITH up to 7 years while SCIT on GIE up to 10 years); or,
  • ITH + Enhanced Deductions (ED) which could last 14 to 17 years (ITH: Up to 7 years and ED: 10 years)

On the other hand, domestic market enterprises may only avail of the ITH and the ED thereafter. Depending on industry priority and location of the registered business enterprise, the maximum duration shall be 7 years and 5 years for the ITH and ED availment, respectively. As mentioned, the duration of the incentive depends on industry priority and location.

Give and take

To whom much is given, much shall also be required. As the grant of tax incentives has to be performance-based and transparent, registered business enterprises are required to meet their target performance metrics, adopt an adequate accounting system, comply with requirements on e-receipts and e-sales, submit annual beneficial ownership, tax incentives, and benefits reports, among others, to retain their tax incentives and avoid penalties, or worse, cancellation of registration.

Indeed, foregoing tax incentives went beyond the usual as the government seeks to level the playing field between incentivized activities vis-à-vis forgone revenues of the government. To date, the SIPP is yet to be crafted. Ultimately, this could serve as a guidepost on whether this set of re-CREATEd incentives is more equitable and would promote inclusive growth and generation of jobs and opportunities across the country.


As published in Mindanao Times, dated 07 May 2021