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By: Atty. Euney Marie Mata-Perez on February 18,2021.

As many of us may be aware by now, the recently ratified Corporate Recovery and Tax Incentives for Enterprises (Create) bill, which now awaits President Rodrigo Duterte’s approval, proposes to reduce the regular corporate income tax (RCIT) rate from 30 percent to 25 percent for large businesses and to 20 percent for small and medium enterprises. In addition, Create contains several novel provisions that encourage investment and reinvestment in the Philippines, as well as investments in “critical” activities and areas outside Metro Manila.

Tax exemption of foreign-sourced dividends

Create also seeks to extend the tax exemption on intercorporate dividends, or dividends received by one domestic corporation from another, and foreign dividends, or dividends received by a domestic corporation from a foreign one. However, for foreign-sourced dividends to be exempt, the funds from these dividends actually received or remitted to the Philippines should be reinvested in the business operations of the domestic corporation within the next taxable year from the time the dividends were received. The use of these funds, however, shall be limited to funding working capital requirements, capital expenditures, dividend payments, investment in domestic subsidiaries and infrastructure.

Also, the domestic corporation must hold at least 20 percent of the outstanding shares of the foreign corporation. Without this special exemption, all dividends received from foreign sources are included in the taxpayer’s gross income in the calculation of its net taxable income, subject to the RCIT.

Special CIT rate

Create grants qualified registered enterprises an income tax holiday (ITH). After its ITH availment period, the enterprise may avail itself of either a special corporate income tax (SCIT) rate of 5 percent, based on gross income earned (which shall be in lieu of all taxes), or the RCIT with enhanced deductions.

The option to avail the SCIT is available to export enterprises; domestic enterprises with a minimum capital investment of P500 million; and domestic enterprises engaged in activities covered by the Strategic Investment Priority Plan (SIPP) and classified as critical. Critical activities are industries identified by the National Economic and Development Authority as crucial to national development.

Deduction for reinvestment allowance

In addition to certain enhanced deductions, Create also introduces a new tax deduction incentive to the manufacturing industry. When a registered manufacturing enterprise reinvests its undistributed profit or surplus in any project or activity listed in the SIPP, the amount reinvested up to a maximum of 50 percent shall be allowed as a deduction from its taxable income within five years from this reinvestment.

Prioritization of incentives according to level of development

Create also introduces provisions that prioritize the entitlement of incentives based on the location of the registered activity or according to the level of development of the area.

Export and domestic enterprises engaged in critical activities are entitled to an ITH of four to seven years, depending on location and industry priorities, followed by the SCIT or RCIT with enhanced deductions for 10 years. On the other hand, domestic enterprises not engaged in such activities are also entitled to the ITH of four to seven years, depending on location and industry priorities, followed by the SCIT or RCIT with enhanced deductions for five years, provided that the enterprise with an investment capital of not less than P500 million shall avail itself of the special rate.

Enterprises in Metro Manila are entitled to an ITH for four to six years only; those outside Metro Manila, five to seven years; and those in other areas, six or seven years.

Those who will do business in areas recovering from armed conflict will have two years added to the ITH, and those relocating from Metro Manila will have three years added.

Prioritization of incentives based on national industrial strategies

Create provides that the SIPP shall also define and classify activities of registered enterprises into tiers.

Tier 1 shall include activities that have a high potential for job creation; take place in sectors with market failures, resulting in the under provision of basic goods and services; generate value creation through innovation, upgrading or moving up the value chain; provide essential support for sectors critical to industrial development; and are emerging owing to potential comparative advantage.

Activities in Tier 1 shall include agriculture, fishing, forestry and agribusiness activities; handicrafts intended for export; energy; ecozone and freeport zone development; manufacturing of medical supplies, devices and equipment; construction of health care facilities; facilities for the environmentally sustainable disposal of waste; infrastructure; manufacturing and service industries emerging from innovation, upgrading or addressing gaps in the supply and value chain; mass housing, as well as infrastructure, transportation, utilities, logistics and support services; the provision of cybersecurity services; and planned developments that use technologies and digital solutions crucial to the country’s development.

Tier 2 shall include activities that produce supplies, parts and components, and intermediate services that are not locally produced, but are critical to industrial development; and import-substituting activities, including crude oil refining.

Tier 3 activities shall include research and development that would result in demonstrably significant value-added, higher productivity, improved efficiency, breakthroughs in science and health, and high paying jobs, generation of new knowledge and intellectual property registered and/or licensed in the Philippines, commercialization of patents, industrial designs, copyrights and utility models owned or co-owned by a registered enterprise, highly technical manufacturing; or are critical to the structural transformation of the economy and require substantial catchup efforts.

Activities in Tier 3 shall include agriculture, fishing, forestry, agribusiness and other activities and services that require the employment of knowledge processing, modern science, data analytics, creative content, engineering, state-of-the-art technologies, technologies available in other countries but not or yet to be widely used in the Philippines, research and development in producing goods and services, resulting in demonstrably significant value-added, productivity, efficiency, breakthroughs in science and health, high-paying jobs, and manufacturing of Food and Drug Administration-approved investigational drugs, medicines and medical devices.

Those in Tier 3 are generally entitled to longer incentive periods.

Without a doubt, incentives and exemptions proposed in Create will not just encourage reinvestment, but also investment in certain critical areas and other prioritized industries.
With the proper and clear implementation of the availment of these incentives, Create would definitely encourage investments and stimulate the country’s development.

Contact Information

Our office address:

15/f Unit A. ACT Tower, H.V. Dela Costa St.
Salcedo Village, Makati City 1227 Philippines

Telefax: +632 831-1297

Telephone: +632 808-5375 • +632 815-0069



Euney Marie J. Mata-Perez

Mark Anthony P. Tamayo

Gerardo Maximo V. Francisco