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 under CREATE
Export-oriented enterprises and domestic enterprises engaged in strategic activities as defined under the Strategic Investment Priority Plan (SIPP) have the following incentives under the CREATE Law:
- Income tax holiday (ITH) for four to seven years, depending on the combination of both location and industry priorities, as determined in the SIPP.
- ITH shall be followed by:
- A ten-year 5% special CIT on gross income in lieu of all national and local taxes or enhanced deductions, at the option of the qualified exporters.
- Five-year enhanced deductions for qualified domestic market enterprises.
- Subject to certain conditions, the additional deductions or enhanced deductions 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 (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).
- 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 after such loss.
- Customs duty exemption for importations of capital equipment, raw materials, spare parts, or accessories.
- 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 relocated 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 period of availment 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.
Qualified expansion or entirely new project or activity may qualify to avail of incentives, subject to the qualifications in the SIPP and performance review by the Fiscal Incentives Review Board.
Entities that are registered with the investment promotion agencies (IPAs) that are still enjoying incentives prior to the effectivity of the CREATE Law will be allowed to continue the said enjoyment, subject to the following rules:
- Those granted only an ITH prior to the effectivity of CREATE shall be allowed to continue with its availment for the remaining period.
- Those that have been granted the ITH but have not yet availed of the incentive upon the effectivity of CREATE may use the ITH for the period specified in the terms and condition of their registration.
- Those granted ITH prior to effectivity of CREATE and entitled to 5% tax on gross income earned after the ITH shall be allowed to continue to avail of the 5% gross income earned incentive for ten years.
- Those availing of the 5% tax on gross income earned prior the effectivity of CREATE shall be allowed to continue availing the said incentive for ten years.