Foreign tax credit
Domestic corporations are allowed to claim a credit for any income taxes paid to a foreign country, provided that the taxes are not claimed as deductions. Foreign corporations are not allowed foreign tax credits.
Credits for foreign taxes are determined on a country-by-country basis. The amount of foreign tax credit in respect of the tax paid in a country shall not exceed the same proportion of the tax against which the tax credit is taken, which the taxpayer’s income from the country bears to its entire taxable income. There is, however, a further limitation based on the total amount of foreign-sourced income that the taxpayer earns. The total amount of foreign tax credits shall not exceed the same proportion of the tax against which the tax credit is taken that the taxpayer’s foreign-sourced income bears to its entire taxable income.
Tax incentives available to export enterprises registered with the Board of Investments (BOI) are as follows:
- Income tax holiday (ITH) giving full exemption from CIT for six years for pioneer firms and those locating in less-developed areas and four years for non-pioneer firms. The ITH period starts to run from the date of commercial operation, or target date of operation, whichever is earlier. If prescribed conditions are met, the ITH period may be extended by up to three years. In no case, however, can the total ITH period exceed eight years. Expanding export-oriented firms are also allowed a three-year ITH on the incremental income. Subject to certain exceptions, new and expansion projects located in the National Capital Region (NCR) or Metro Manila are no longer entitled to ITH.
- Tax and duty exemption on imported spare parts and supplies for registered enterprises with a customs bonded manufacturing warehouse exporting at least 70% of annual production if foreign-owned, or 50% if Filipino-owned.
- Full deduction of the cost of major infrastructure undertaken by enterprises in less-developed areas.
- Additional deduction of 50% of the incremental labour expense if the prescribed ratio of capital assets to annual labour is met and 100% of the incremental labour if located in less-developed areas within five years from date of registration (this incentive cannot be availed of simultaneously with the ITH).
- Exemption from wharfage, any export tax, duty, impost, or fees.
- Tax credits equivalent to taxes and duties paid on purchases of raw materials, supplies, and semi-manufactured products forming part of the products for export.
- Exemption from real property tax for machinery for the first three years of operation.
The Office of the President released a memorandum directing all concerned agencies to review all relevant policies, programmes, and projects to ensure the implementation of the Philippine Export Development Plan (PEDP) 2018-2022. The PEDP aims to improve the country’s export growth and facilitate the flow of trade by boosting services exports.
Enterprises duly registered with PEZA may be entitled to income tax holiday (ITH) for four years for non-pioneer projects and six years for pioneer projects.
After the expiration of ITH entitlement, the enterprise shall be subject to 5% CIT in lieu of all national and local taxes, except real property taxes on land owned by developers. The registered enterprise shall also be entitled to avail of incentives such as tax and duty free importation of equipment and parts, VAT zero-rating of local purchases of goods and services, including land-based telecommunications, electrical power, water bills, and lease on the building, subject to compliance with BIR and PEZA requirements, and exemption from payment of any and all local government imposts, fees, licenses, or taxes, among others.
A regional or area headquarters established in the country as a supervisory, communications, and coordination centre for a corporation’s subsidiaries, affiliates, and branches in the Asia-Pacific region, and whose headquarters do not derive income from the Philippines, are not subject to any CIT nor VAT and are entitled to certain non-tax incentives.
An ROHQ that is allowed to derive income in the Philippines by performing qualifying business services to its affiliates, subsidiaries, or branches in the Philippines, in the Asia-Pacific Region, and other foreign markets may avail itself of the following incentives:
- Income tax at the preferential rate of 10% of its taxable income.
- Exemption from all kinds of local taxes, fees, or charges imposed by a local government unit, except real property tax on land improvements and equipment.
- Tax and duty-free importation of equipment and materials for training and conferences that are needed and used solely for its functions as an ROHQ and are not locally available, subject to the prior approval of the BOI.
- Importation of new motor vehicles, subject to the payment of corresponding duties and taxes.
- Exemption from travel tax, specific immigration fees, and requirements, subject to certain conditions.