Tax Articles

Income Tax Incentives under CREATE MORE

By: Atty. Mabel L. Buted

Mabel L. Buted Partner   +632 8403-2001 loc.160 This email address is being protected from spambots. You need JavaScript enabled to view it. View Profile

The income tax incentives of Registered Business Enterprises (RBEs) under CREATE MORE Act – Income Tax Holiday or ITH, Special Corporate Income Tax or SCIT, and Enhanced Deductions or ED, were already being enjoyed under CREATE prior to its amendment. The CREATE MORE Act slightly modified the manner of availment of the tax incentives and expanded the coverage of these incentives.

In the new law, the RBEs can opt to (a) avail of ITH first, and after the expiration of the period of entitlement of ITH, avail of either SCIT or ED; or (b) avail outright SCIT or ED, immediately upon the start of their commercial operations, without enjoying ITH. Previously, the second option was not allowed in CREATE, in that the entity would undergo ITH period first. The elected incentive package shall be irrevocable for the entire duration of entitlement to such incentives.

Under CREATE MORE, the rule is still the same for enterprises enjoying ITH, in so far as their exemption and payment of national internal revenue taxes are concerned. They are exempted from paying income tax, but not all other kinds of national taxes, during ITH entitlement. With respect to payment of local business taxes, fees, and charges imposed by the LGUs, as a rule, they are also not exempt from paying these.

However, the Act introduced a new kind of tax called the RBE local tax or the RBELT that the entity enjoying ITH can pay in lieu of payment of all other kinds of local taxes, fees, and charges. The RBELT is a local tax that must be imposed only through the enactment of an ordinance by the LGU. The rate of RBELT must not be more than 2% of the RBE’s gross income. The RBELT can also be availed by enterprises covered under the ED regime. Once implemented, the payment of the RBE local tax will exempt the RBEs enjoying the ITH or ED incentives from paying all local business taxes, fees, and charges imposed by the LGUs.

Starting November 28, 2024, the effectivity of CREATE MORE, RBEs under the ED regime, is subject to income tax at a reduced rate of 20% on their taxable income derived from registered projects or activities. These enterprises availing of the ED are entitled to deduct additional 100% on their power expense incurred in the taxable year and additional 50% on expenses relating to exhibitions, trade missions, or trade fairs. Those who opted to avail of the ITH first, and then chose ED after the ITH period expires, can carry over their net operating loss incurred during the first three (3) years of commercial operations within a period of five (5) years immediately following the last year of the ITH entitlement, and no longer from the following year of loss.

Under CREATE MORE, enterprises enjoying 5% SCIT that used to be exempt from payment of all kinds of taxes, both national and local, but not from payment of all other kinds of local fees and charges imposed by LGUs, are now exempted from paying the latter kind.

These income tax-based incentives will be granted either by the Fiscal Incentives Review Board (FIRB) or the Investment Promotion Agency (IPA), with the period to avail the tax incentives depending on the granting authority. The IPAs grant the incentives for investments amounting to P15 billion and below. But the FIRB approves the incentives of those with more than P15 billion amount of investments. Entities with incentives approved by the FIRB enjoy longer period of entitlement.

The new law extended the period to enjoy ED or SCIT of the RBEs for up to 10 to 27 years, but not the period to avail ITH, which remains at four (4) to 7 years. In CREATE MORE, expansion activities or projects are granted only SCIT or ED, and there is no ITH.

Once the duration of entitlement of the tax incentives expires, the entities can reapply for extension, but subject to the condition that they must meet and maintain the required level of employment of local employees. If the re-application is granted, they can avail only SCIT or ED for a maximum period of five (5) to 10 years.

Based on these, it seems that the changes introduced by CREATE MORE focused on the grant of non-ITH incentives (SCIT or ED), with the government trying to strike a balance between the need to increase its revenues and the aim to improve the country’s competitiveness in offering tax incentives to priority and qualified sectors. The effects of the changes are yet to be significantly seen in the future, but we hope that the new law paved the way for CREATE-ing MORE business opportunities.