Tax leak dilemma
By: Atty. Mark Anthony P. Tamayo on December 25, 2025
THE Pillar Two initiative of the Organization for Economic Cooperation and Development (OECD) has reshaped the landscape of global commerce. By mandating a 15 percent minimum effective corporate tax rate for large multinational enterprises (MNEs) with consolidated group revenue of at least €750 million, the regime marks a paradigm shift in international taxation.
While intended to foster global tax fairness, the framework introduces significant disruptions for manufacturing and export hubs like the Philippines. For companies operating within Special Economic Zones or benefiting from various local tax incentives, this new compliance necessitates a reevaluation of business models and incentive structures to remain viable.
Historically, MNEs navigated global commerce using fundamentally opposed strategies to optimize their overall tax liabilities.
The Income Tax Strategy focused on minimizing Corporate Income Tax (CIT) exposure in relatively high-tax jurisdictions like the Philippines. MNEs achieved this by leveraging domestic fiscal incentives, such as Income Tax Holidays (ITH) or special preferential regimes, to drive their Effective Tax Rate (ETR) significantly below the standard CIT rate.
In the absence of such incentives, MNEs shift toward Base Erosion mechanisms. By utilizing transfer pricing, they relocate profits from high-tax jurisdictions to low-tax affiliates abroad, structurally reducing the local taxable base.
In direct contrast, the Customs Strategy focuses on minimizing import duties and VAT. To achieve this, MNEs declare the lowest possible transfer price (TP) for goods. A lower declared value reduces the dutiable base, decreasing the total landed cost of the products.
This inherent conflict between these competing objectives creates the “Transfer Pricing Dilemma.“ This was resolved by the global adoption of the Arm’s Length Principle (ALP).
The ALP mandates that the TP to be used between related MNE units must mirror the prices charged between unrelated parties under identical market conditions. By requiring a consistent, market-based pricing standard for intercompany transactions, the ALP enforced a unified global approach for both income tax and customs reporting. This ensured that a single price served the requirements of both the tax and customs authorities.
The advent of Pillar Two disrupts the traditional tax landscape by neutralizing low-tax incentives through its 15 percent Global Minimum Tax (GMT) framework. Under this mechanism, any ETR falling below the 15-percent floor triggers a Top-up Tax (TUT), typically captured by the MNE’s home jurisdiction.
This shifts the financial benefit of local incentives away from the host country. For example, if a Philippine Registered Business Enterprise (RBE) enjoys a 5-percent Special Corporate Income Tax (SCIT) but realizes an ETR of only 10 percent, the 5-percent differential is collected as a TUT by the parent company’s home country.
In other words, the fiscal benefits intended to attract investment via the Create and Create More Acts are “clawed back“ by foreign treasuries, nullifying the competitive advantage of the Philippines’ incentive regime. In essence, the less tax an MNE pays in the Philippines, the more it must pay abroad to meet the 15 percent global minimum.
Consequently, MNEs are incentivized to apply higher transfer prices to goods exported from their Philippine manufacturing hubs. By elevating these prices, an MNE increases the revenue and taxable income of its Philippine subsidiaries.
Although this higher valuation incurs greater customs duties, the resulting increase in local taxable income helps the subsidiary reach or exceed the 15 percent ETR threshold. This approach reduces or eliminates the foreign TUT liability, optimizing the total tax cost for the entire corporate group.
This shift creates a paradox for manufacturing hubs like the Philippines. For decades, MNEs utilized “profit shifting“ to move income away from high-tax production centers and into low-tax jurisdictions. Under the 15 percent GMT, MNEs are moving away from seeking aggressive tax incentives and are instead incentivized to maximize income within the local jurisdiction. This approach simplifies their global compliance.
Extraterritorial impact
The Philippines is already experiencing the impact of the GMT due to its international reach, regardless of the status of local legislation. Since 2024, the Income Inclusion Rule (IIR), enacted by the home jurisdictions of major MNEs, has effectively subjected Philippine subsidiaries to the GMT.
Specifically, Philippine RBEs enjoying the 5 percent SCIT incentive often maintain an ETR well below the 15-percent minimum. This disparity triggers the IIR in the MNE’s parent jurisdiction, allowing foreign governments to tax profits generated within the Philippines.
To address this structural “tax leak,” the Philippine government must prioritize the implementation of a Qualified Domestic Minimum Top-up Tax (QDMTT). This rule would allow the Philippines to collect the TUT, ensuring that revenue generated in the country stays in the National Treasury rather than being ceded to foreign jurisdictions.
While the QDMTT aims to secure domestic tax revenue, the Create More Act ensures the Philippines remains a competitive investment destination. The law tactically aligns with the OECD’s Substance-Based Income Exclusion (SBIE), which shields or exempts a portion of the profits linked to genuine economic activity (such as payroll and tangible assets) from the 15-percent GMT calculation.
Furthermore, the Act promotes the Enhanced Deductions Regime (EDR) as a sustainable alternative to traditional incentives. Unlike the ITH or the 5 percent SCIT, which drive a firm’s ETR significantly below the 15-percent global floor, the EDR sets the CIT rate for RBEs at 20 percent.
By combining this base rate with substantial “above-the-line“ deductions — including a 100-percent additional deduction for power expenses and expanded credits for labor and R&D — the law enables companies to lower their tax liability while maintaining an ETR that minimizes the risk of triggering the GMT.
On behalf of MTF, we wish you a meaningful season of reflection and celebration.
(Mark Anthony P. Tamayo is a CPA-Lawyer and a Partner at Mata-Perez, Tamayo & Francisco Law Offices (MTF Counsel). He was honored as the 2016 Asia Tax Practice Leader and is regularly cited by the International Tax Review as one of the Philippines’ foremost leaders in indirect tax.)
This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. If you have any questions or comments regarding this article, you may email the author at info@mtfcounsel.com or visit the MTF website at www.mtfcounsel.com.
The article was published at the More to Follow Column at The Manila Times on December 25, 2025. Please see this link.
https://www.manilatimes.net/2025/12/25/business/top-business/tax-leak-dilemma/2249369