Philippines

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.

Incentives

Export-oriented enterprises and domestic market enterprises (DMEs) engaged in strategic activities as defined under the Strategic Investment Priority Plan (SIPP) are eligible for various incentives.

Availment period of incentives approved by investment promotion agencies

Export enterprises under the SIPP may be entitled to either (i) an income tax holiday (ITH) of four to seven years followed by 5% special corporate income tax (SCIT) or enhanced deductions regime (EDR) for ten years, or (ii) SCIT or EDR for a maximum period of 14 to 17 years. DMEs under the SIPP may be entitled to (i) an ITH of four to seven years followed by EDR for ten years, or (ii) EDR for a maximum period of 14 to 17 years.

The application for extension of availment of incentives shall only be allowed for the same registered project or activity if the latter employs at least 10,000 direct local employees and maintains such number during registration. The extension shall not exceed five years. The period of availment of the above income tax-based incentives shall commence from the actual start of commercial operations, with the registered business enterprise availing of the tax incentives within three years from the date of registration, unless otherwise provided in the SIPP.

Tier III activities shall include those that are critical to the structural transformation of the economy and require substantial catch-up efforts, including cyber-security, artificial intelligence, and data-centre facilities.

Registered business enterprises may continue to avail of the VAT zero-rating on local purchases, VAT exemption on importation, and duty exemption on importation for the entire registration period as a registered business enterprise commencing from the date of registration, provided that the registered business enterprises continue to meet the terms and conditions of registration and maintain at least 70% of total annual production/output as export sales.

Registered DMEs may avail of duty exemption from the date of registration until the expiration of their income tax-based incentives.

After the expiration of entitlement to VAT zero-rating on local purchases and VAT exemption of importations, registered business enterprises may avail of the VAT zero-rating on local purchases and VAT exemption on importations under Sections 106, 108, and 109 of the Tax Code.

Registered business enterprises may institute telecommuting programs as defined under Republic Act No. 11165, including work-from-home arrangements, which shall not cover more than 50% of the total workforce and shall be subject to the rules and regulations of the investment promotion agencies.

Availment period of incentives approved by the Fiscal Incentives Review Board (FIRB)

Export enterprises under the SIPP may be entitled to either (i) an ITH of four to seven years followed by SCIT or EDR for 20 years or (ii) SCIT or EDR for a maximum period of 24 to 27 years. Extension shall not exceed ten years. No ITH for registered business enterprises that applied for extension of availment for the same project or activity. A qualified expansion project or activity may qualify for EDR for 13 years. Existing registered projects or activities prior to the CREATE MORE Act may avail of the incentives, subject to the criteria and conditions in the SIPP.

DMEs under the SIPP may avail of either (i) an ITH of four to seven years followed by EDR for 20 years or (ii) EDR for a maximum period of 24 to 27 years. Extension shall also be up to ten years. No ITH for DMEs that applied for extension of availment for the same project or activity. A qualified expansion project or activity may qualify for EDR for 13 years. Existing registered projects or activities prior to the CREATE MORE Act may avail of the incentives subject to the criteria and conditions in the SIPP. The qualified expansion project or activity may be entitled to VAT/duty exemption on importation and VAT zero-rating on local purchases.

The period of availment of income tax-based incentives shall commence from actual start of commercial operations with the registered business enterprise availing of the tax incentives within three years from date of registration, unless otherwise provided in the SIPP. The FIRB shall decide on applications for tax incentives within 20 working days from the receipt of all requirements.

* Depending on location and industry priorities.

Enhanced Deduction Regime (EDR)

Subject to certain conditions, the additional deductions EDR list are as follows:

• Depreciation of qualified capital expenditure (10% for buildings and 20% for machinery and equipment).
• Labour expense (50%).
• Research and development (100%).
• Training expense (100%).
• Domestic input expense (50%).

• Power expense (100%).

• Expenses on exhibitions, trade missions, or trade fairs (50%).
• Reinvestment allowance for manufacturing industry (maximum of 50% and can be deducted within a period of five years from the time of such reinvestment). This also applies to tourism registered business enterprises until 31 December 2034, according to the CREATE MORE Act.
• Net operating loss carry over during the first three years from the start of commercial operations may be claimed for the next five consecutive years immediately following the last year of the ITH entitlement period of the project.

Income tax holiday (ITH) and exemptions

There shall be customs duty exemption for importations of capital equipment, raw materials, spare parts, or accessories, and VAT exemption on importation and VAT zero-rating on domestic purchases.

Additional two years ITH shall be granted to projects or activities of registered enterprises located in areas recovering from armed conflict or a major disaster. Additional three years ITH shall be granted to projects or activities of registered entities prior to the effectivity of CREATE, or under the incentive system when such entities relocate from the National Capital Region (NCR). For the second classification, the ITH period shall only commence at the completion of the relocation of operations.

The VAT exemption on importation or the VAT zero-rating of local purchases only applies to goods and services directly attributable to the registered project or activity of an export enterprise or of a registered high-value DME, including incidental expenses.

Local sales of goods and services by a registered business enterprise, regardless of income tax incentives regime and location, shall be subject to the 12% VAT unless otherwise VAT-exempt or VAT zero-rated. The term ’local sales‘ covers sales to DMEs or non-registered business enterprises, regardless of where the sales take place.

Any export enterprise that fails to meet the 70% export sales threshold in the immediately preceding year or any high-value DME that fails to meet the export sale or investment capital requirement shall be disqualified from availing the duty exemption on importation and the VAT zero-rating of local purchases.

Other available incentives

ITH applies to all registered business enterprises with respect to their registered project or activity. Double registration for purposes of availing of other incentives under special laws is prohibited.

Local government units (LGUs) may impose a local tax on registered business enterprises not to exceed 2% of gross income. This registered business enterprise local tax (RBELT) is in lieu of all local taxes and local fees and charges imposed by LGUs. The RBELT shall not apply to registered business enterprises under the SCIT regime.

The President of the Philippines has the power to craft the appropriate fiscal and non-fiscal support package for a highly desirable project or a specific industrial activity based on defined development strategies for creating high-value jobs, building new industries, and attracting capital or investment.

Certain income tax provisions have been introduced or amended by the CREATE MORE Act, as follows:

• Registered business enterprises under EDR are now subject to the 20% CIT rate.
• Income exempt under treaty includes income exempt under agreements entered by the President with economies and administrative regions.
• Allowable deductions from gross income now expressly include input tax paid on local purchases that are attributable to VAT-exempt sales.
• Creditable WHTs cannot exceed 15%.