Philippines Refines Tax Policies with CREATE MORE Act

In October, the Philippine government approved the Tax Incentives for Enterprises to Maximize Opportunities for Reinvigorating the Economy (CREATE MORE) Act with the aim of making the country an attractive destination for foreign investment.

The CREATE MORE Act builds upon the foundations of the 2021 Corporate Recovery and Tax Incentives for Enterprises (CREATE) Act by introducing several key enhancements to the Philippines’ tax incentive framework. These enhancements include the introduction of a 20 percent corporate income tax (CIT) rate, VAT incentives, and deductions for energy and research and development, among others.

The Act emerges at a time when countries in Southeast Asia are vying for foreign direct investment to bolster their economic recovery in the post-pandemic era. With its focus on predictable and business-friendly policies, the Act is designed to address long-standing concerns about the complexity and inefficiency of the Philippine tax system while positioning the nation as a competitive player in sectors such as manufacturing, technology, and renewable energy.

What are the key provisions under the CREATE MORE Act?

Corporate income tax rate

One of the most significant amendments under CREATE MORE is the introduction of a 20 percent CIT rate for Registered Business Enterprises (RBEs) under the Enhanced Deductions Regime (EDR). This rate applies to taxable income derived from registered projects or activities during the taxable year, effectively reducing overall tax liabilities.

The CREATE MORE Act aligns the Philippines with the Organization for Economic Co-operation and Development’s (OECD) Global Minimum Tax (GMT) requirement of 15 percent, making the country more competitive while allowing businesses to benefit from enhanced deductions on R&D, training, and other qualifying expenses. This amendment provides both compliance with international standards and significant local incentives.

Expanded deductions under EDR

To further incentivize investments, the CREATE MORE Act increases the range and percentage of deductible expenses under the EDR:

• Power expenses: Additional deductions for power expenses are increased to 100% from the previous 50 percent, making the Philippines a more attractive destination for energy-intensive industries like manufacturing and logistics.
• Trade fairs and exhibitions: Businesses can now deduct expenses related to trade fairs and exhibitions, encouraging market expansion both locally and internationally.
• Net operating loss carry-over (NOLCO): Companies can carry over net operating losses as deductions within five years following the Income Tax Holiday (ITH) period of a project, rather than within the taxable year of the loss.

Enhancements in eligibility and incentives

Broadened eligibility for RBEs

Under the CREATE MORE Act, the eligibility for tax incentives has been expanded to include both foreign and local enterprises meeting specific conditions. This adjustment, which replaces the narrower focus on export enterprises under the CREATE Act, is intended to encourage a wider range of businesses to invest in the Philippines. By broadening the scope, the government aims to attract strategic industries that can drive economic growth and create jobs.

Extended period of incentives

The Act also extends the maximum period for tax incentives to 27 years, up from the 17 years provided under CREATE. This long-term benefit aims to give businesses more time to recover investments and realize profits, making the Philippines a more attractive destination for large-scale, high-value projects.

Revised VAT Incentives

Clarified VAT rules

CREATE MORE addresses ambiguities in VAT provisions under the CREATE Act, specifying the goods and services eligible for VAT exemptions and zero-rating. Eligible items include:

• Janitorial and security services;
• Financial and consultancy services; and
• Marketing, promotional, and administrative operations.

Special provisions for high-value domestic market enterprises (HVDME)

DMEs with at least PHP 15 billion (US$255 million) in investment capital or export sales of at least US$100 million enjoy enhanced 0 percent VAT on local purchases and VAT exemptions on imports. These incentives are expected to attract major investments in infrastructure, heavy industries, and export-oriented manufacturing.

Simplification of local taxation

The CREATE MORE Act imposes a local tax of up to 2 percent of gross income for RBEs during their ITH or EDR period to reduce administrative burdens. This replaces various local taxes and fees, simplifying compliance and allowing businesses to focus on operations rather than navigating complex tax requirements.

Implications for businesses

The CREATE MORE Act aims to transform the Philippine business landscape by making it more attractive for foreign and local investors. With its globally competitive tax rates and streamlined incentives, the law addresses long-standing concerns about the complexity of the country’s tax system.

Enhanced deductions for energy expenses and VAT relief for export-oriented enterprises can attract businesses in energy-intensive sectors, which the country’s high electricity costs have long deterred. This strategic support for critical industries is expected to stimulate innovation, increase production capacity, and enhance the Philippines’ competitiveness in the global market.

 

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