The CREATE MORE Bill: Transformations in Philippine Tax Incentives
On March 18, 2024, the Philippines House of Representatives showcased a significant legislative shift by approving amendments to the Corporate Recovery and Tax Incentives for Enterprises (CREATE) Act. Following a rigorous third reading, the new amendment, known as the CREATE MORE bill, aims to enhance the existing tax regime and synchronize the Philippines’ tax policies with the OECD’s Pillar Two Global Minimum Tax (GMT).
Background of the CREATE Act
Originally enacted in April 2021, the CREATE Act was designed as a lifeline for companies grappling with the economic repercussions of the COVID-19 pandemic. The Act sought not only to provide tax relief but also to foster a transparent tax framework to position the Philippines as an enticing destination for investments. By building on previous tax reforms, it endeavored to enhance the nation’s global competitive standing.
Key Features of the CREATE MORE Bill
The CREATE MORE bill emerged as a response to the evolving economic landscape, introducing crucial amendments that sharpen the tax and administrative incentives available to both local and foreign companies. This includes clarifications around implementing Value Added Tax (VAT) incentives, previously introduced under the original CREATE Act.
Increased Tax Rate Flexibility: One of the centerpiece proposals of the CREATE MORE bill is to allow companies opting for the enhanced deduction regime (EDR) to experience a preferential 20% tax rate on taxable income derived from registered projects. This substantial amendment aims to motivate businesses to leverage various deductions, thereby boosting their investments.
Enhanced Deduction Regime (EDR)
The EDR, a feature initially introduced in the CREATE Act, provides export companies and domestic market companies with the ability to deduct a wider range of assets and expenses. This includes a 100% additional deduction for research and development (R&D) expenditures and training costs.
Under the CREATE MORE bill, notable amendments are proposed to the EDR, such as increasing the additional deduction on power expenses from 50% to 100%. Additionally, the bill proposes new deductible items, including expenses related to trade fairs and exhibitions, further incentivizing business activity.
Tax Holiday Benefits: Under the CREATE Act, eligible companies can enjoy a four to seven-year tax holiday, which can be followed by further incentives, including a Special Corporate Income Tax (SCIT) rate of 5% for a minimum investment capital of PHP 500 million (approximately USD 8.67 million). However, this SCIT rate is significantly lower than the 15% GMT mandated by the OECD. The CREATE MORE bill aims to address this disparity by proposing to lower the standard corporate income tax (CIT) rate for companies opting for the EDR.
Introduction of the Registered Business Enterprise (RBE) Local Tax
The CREATE MORE bill proposes replacing existing local taxes with a unified RBE local tax at a rate of up to 2% of gross sales for those eligible for tax holidays or the EDR. This move seeks to simplify the tax burden on registered businesses by exempting them from multiple local taxes, which could significantly reduce operational expenses.
Eligible companies will enjoy exemptions from various local levies, including franchise tax, amusement tax, and real property taxes (with some exceptions). Importantly, businesses pursuing the SCIT route will only be able to benefit from the RBE local tax after their SCIT period concludes.
Special Visa Incentives for Foreign Talent
As part of its broader strategy to attract international business, the CREATE MORE bill includes provisions that allow Investment Promotion Agencies (IPAs) to issue special visas to draw highly skilled foreign professionals. These visas, including a special skills visa for individuals with expertise deemed crucial for operational needs, and an executive working visa for high-level positions, reflect a keen focus on enhancing the talent pool available in the Philippines.
Clarification of VAT Incentive Policies
The CREATE MORE bill also addresses the vagueness surrounding VAT incentives that were part of the original CREATE Act. A clearer framework will specify how VAT exemptions on importation and zero-rating on local purchases apply, now streamlined to focus on services and goods directly linked to registered activities. This includes crucial services like financial consultancy and administrative operations.
Conclusion
Through the CREATE MORE bill, the Philippines is taking significant steps to enhance its economic landscape, shifting toward a more competitive and attractive investment climate. By aligning with international standards such as the OECD’s Pillar Two rules and providing clearer guidelines on tax incentives, the Philippines is positioning itself as a dynamic player in the global market.
For more detailed insights into the CREATE MORE bill and its implications for businesses operating in the Philippines, interested parties can consult the available resources from Dezan Shira & Associates or reach out for further clarifications.