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 (1) an income tax holiday (ITH) of 4 to 7 years followed by 5% special corporate income tax (SCIT) or enhanced deductions regime (EDR) for 10 years, or (2) SCIT or EDR for a maximum period of 14 to 17 years. DMEs under the SIPP may be entitled to (1) an ITH of 4 to 7 years followed by EDR for 10 years, or (2) 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 5 years. The period of availment of the above income tax-based incentives shall commence from the actual start of commercial operations with the RBE availing of the tax incentives within 3 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-center facilities.

RBEs 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 an RBE commencing from the date of registration provided that the RBEs 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, REEs 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.

RBEs 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 IPA.

Availment Period of Incentives Approved by Fiscal Incentives Review Board

Export enterprises under the SIPP may be entitled to either (a) an ITH of 4 to 7 years followed by SCIT or EDR for 20 years, or (b) SCIT or EDR for a maximum period of 24 to 27 years. Extension shall not exceed 10 years. No ITH for REEs 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 (a) an ITH of 4 to 7 years followed by EDR for 20 years, or (b) EDR for a maximum period of 24 to 27 years. Extension shall also be up to 10 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 RBE availing of the tax incentives within 3 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

Subject to certain conditions, the additional deductions or Enhanced Deduction Regime (“EDR”) list are as follows:

• Depreciation of qualified capital expenditure (10% for buildings and 20% for machinery and equipment)
• Labor 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 [5] years from the time of such reinvestment). This also applies to tourism RBEs until 31 December 2034, according to the CREATE MORE Act.
• NOLCO during the first three (3) years from the start of commercial operations may be claimed for the next five (5) consecutive years immediately following the last year of the ITH entitlement period of the project

Income Tax Holiday 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 (2) 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 (3) 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 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 REE or of a registered high-value DME including incidental expenses.

Local sales of goods and services by an RBE, 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-RBEs, regardless of where the sales take place.

Any REE 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 RBEs 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 RBEs not to exceed 2% of gross income. This RBE local tax (RBELT) is in lieu of all local taxes and local fees and charges imposed by LGUs. The RBELT shall not apply to RBEs 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 provisions under Income Tax have been introduced or amended by the CREATE MORE Act:

• RBEs under EDR are now subject to the 20% corporate income tax 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 withholding taxes cannot exceed 15%.