The Philippines CREATE Act Comes into Effect, Pushing for Accelerated Economic Recovery

• The CREATE Act is a time-bound and tailor-made set of corporate and tax reforms to counter the effects of COVID-19 on the Philippines’ economy.
• The Act reduces the financial burden on foreign and domestic companies through various tax incentives.
• Through the CREATE Act, the government hopes to increase the country’s investment appeal and better compete with its ASEAN counterparts.

The Corporate Recovery and Tax Incentives for Enterprises Act (CREATE Act), was passed into law on March 26 this year. The Act’s purpose is to grant tax relief for companies in financial need, provide transparent tax provisions, and further increase the competitiveness of the Philippines. The Act is part of corporate fiscal reforms undertaken by the country since 2019. The CREATE Act still needs to be officially published to take effect.

The CREATE Act was previously named the Corporate Income Tax, and Incentives Rationalization Act (CITIRA), which was then approved in September 2019. 

While the CITIRA Act reflected the desire to establish the country as an attractive market for foreign investments, the CREATE Act, still with the same objective, is rather a quick answer to the urgency of the economic situation in the Philippines arising from the COVID-19 pandemic.

The call for such recalibrated legislation was made jointly by several business and professional groups before the country’s Congress in May 2020, when the effects of the pandemic were already hitting the economies of Southeast Asia. Specific requests were made regarding the taxation of companies and the granting of tax perks.

An accelerated but time-bound implementation of market- boosting measures

The law provides a wide range of provisions aimed at reducing the COVID-19 burden on both foreign and domestic companies.

Reduction in the corporate income tax rate

From July 2020 to 2022, foreign companies will be eligible for a reduction in the corporate income tax (CIT) rate to 25 percent compared to the regular rate of 30 percent — the highest in ASEAN. While the CITIRA Act provides a gradual reduction of CIT from 2020 to 2029, at a rate of one percentage point per year, the CREATE Act opts for a five-percentage point reduction once implemented. As a result, the CIT rate will remain at 25 percent until 2022. Domestic micro, small, and medium-sized companies will directly benefit from a preferential rate of 20 percent (businesses with taxable income of up to PHP5 million (US$103,318) and not exceeding PHP100 million (US$2,066,437).

From 2022 to 2027, the 25 percent CIT will steadily decline by one percent per year, to finally reach 20 percent in 2027 for foreign companies.

It should be noted that these preferential CIT rates will supersede all other national and local taxes until the due date, as a ‘one-stop shop’ corporate tax system.

The sunset provision

An additional two-year ‘sunset’ provision is granted to firms currently registered with the Philippine Investment Promotion Agencies and paying the five percent gross income earned (GIE) tax incentive. The sunset period has been extended by two years. While the CITIRA Act provided a status quo of two to seven years, the CREATE Act adds two years, maintaining the provision from four years up to nine years.

There are four levels to the sunset provision:

• Companies benefitting from the GIE tax incentive for 10 years can benefit from a sunset period of four years;
• Companies benefiting from the GIE tax incentive for five to 10 years can benefit from a sunset period of five years;
• For companies benefiting from the GIE tax incentive for less than five years, will be granted a sunset period of seven years; and
• A sunset period of nine years is guaranteed for industries or activities that export their products or services and employ at least 10,000 people.

Companies are entitled to the extension of the sunset period if they have been granted the six-year income tax holiday (ITH) that has already come to an end.

It must be noted that it will not be possible to apply for an extended ITH or an ITH renewal.

Greater flexibility to grant incentives

The CREATE Act has attributed more powers to the President and the Fiscal Incentives Review Board (FIRB), to facilitate the issuance of incentives.

The FIRB, a governmental agency dedicated to incentive policy making and supervising tax breaks, has now the power to recommend to the President the appropriate fiscal and non-fiscal incentives. These powers are in line with the Strategic Investments Priority Plan, which aims to attract high-value investments and boost job creation. The FIRB will make recommendations for companies that add significant value to the economy, meaning companies undertaking “highly desirable projects” or “very specific industrial activities” (as specified by the Department of Finance).

The President can then choose to approve and grant these incentives for the activities mentioned above, which may last up to 40 years.

By giving such powers to the FIRB and the President, the CREATE Act provides a tool to adopt measures that best fit the specific needs of both business activities and government interests.

Net operation loss carryover

An extended net operating loss carryover (NOLCO) has been provided for registered projects or activities during their first three years from the start of business activities. The NOLCO can be carried over the following five years and will be deducted from the business activity or the project’s gross income during this period. Thus, two additional years have been added to the previous three-year NOLCO granted to non-large taxpayers.

Forecast and desired effects

Through the CREATE Act, the Philippine government hopes to increase the country’s investment appeal, particularly for businesses based in China looking to diversify their supply chain in the region.

The tax incentives are a welcome relief for many SMEs who have been significantly affected by the pandemic. The expected reduction in government revenues by an estimated PHP476 billion (US$9 billion) is hoped to be offset by the CREATE Act’s fostering of a business competitive environment for the near- to medium-term. Firms benefitting from the Act can reinvest in the revitalization of their businesses and create more jobs for local workers.

The CREATE Act will also reduce the significant discrepancy in regard to CIT that existed between the country and other ASEAN members. The Philippines had the highest CIT rates in the ASEAN bloc, which was a tremendous disincentive for entrepreneurs as well as a major hindrance to local businesses from expanding and competing with their regional counterparts.

Moreover, the CREATE Act enables the government to provide incentives that are performance-based, transparent and strategically targeted. This, in turn, will encourage foreign investments in sectors and industries that are aligned with the country’s development agenda – that is, creating higher-value jobs, the expansion of pioneer industries, and promoting investments in less-developed regions.

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