Tax Incentives for Export Businesses under the CREATE Law in the Philippines

Title: Tax Incentives for Export Businesses under the CREATE Law in the Philippines

I. Introduction

Republic Act No. 11534, otherwise known as the Corporate Recovery and Tax Incentives for Enterprises (CREATE) Act, significantly overhauled the Philippine tax incentives regime when it was signed into law on March 26, 2021. One of its primary aims is to rationalize the country’s incentives framework, making it more performance-based, targeted, time-bound, and transparent.

Export-oriented businesses—long recognized as catalysts of economic growth—stand to benefit considerably from CREATE. This article discusses key provisions that specifically apply to export businesses, the nature of available incentives, and the processes involved in qualifying for these benefits.

II. Legislative Background and Policy Objectives

  1. Rationalization of Incentives
    Prior to CREATE, incentives were granted under various laws and regulations overseen by Investment Promotion Agencies (IPAs) such as the Philippine Economic Zone Authority (PEZA), Board of Investments (BOI), and several others. Incentives were also sometimes layered, resulting in inconsistencies and complexities.
    The CREATE Act addresses these issues by providing a uniform set of rules for registered business enterprises (RBEs). It consolidates and rationalizes incentives to ensure that they are aligned with the government’s Strategic Investment Priority Plan (SIPP).

  2. Fostering Competitiveness
    The Philippines had one of the highest corporate income tax (CIT) rates in Southeast Asia. By lowering CIT rates and streamlining incentives, CREATE aims to attract foreign direct investments (FDIs) and encourage domestic investors to expand operations—particularly in export-oriented activities deemed essential for economic recovery.

  3. Role of the Fiscal Incentives Review Board (FIRB)
    Under CREATE, the FIRB is granted greater authority to oversee and approve incentives, especially for large-scale or high-value investments. This move centralizes the decision-making process for incentives that previously fell under the authority of multiple bodies.

III. Defining “Export Enterprise” Under CREATE

Under the CREATE Act and its Implementing Rules and Regulations (IRR), an “Export Enterprise” is generally defined as one that exports at least seventy percent (70%) of its total output (goods or services). This definition is critical because many of the enhanced incentives—particularly the long-term tax benefits—are granted only to RBEs classified as export enterprises.

A. Minimum Export Threshold

  • 70% Threshold: To maintain export enterprise status, the company must consistently sell at least 70% of its total production or output abroad.
  • Domestic Market Sales: Should domestic sales exceed 30% of total sales, the enterprise may be reclassified as a Domestic Market Enterprise. Certain incentives could be lost or reduced if this threshold is breached.

IV. Overview of Tax Incentives Under CREATE

A. Reduced Corporate Income Tax Rates

  1. Regular Corporate Income Tax (RCIT)

    • 25% CIT: For corporations with taxable income above the threshold set by law (i.e., large enterprises).
    • 20% CIT: For domestic corporations classified as micro, small, or medium enterprises (MSMEs) with net taxable income not exceeding PHP 5 million and total assets not exceeding PHP 100 million (excluding land).

    While these are not exclusively export-related incentives, the lowered CIT rate under CREATE benefits all enterprises, including export businesses that do not qualify for special incentives or are beyond their incentive period.

  2. Transitory Provisions for Existing Export Enterprises
    Enterprises currently enjoying incentives under previous laws (e.g., PEZA-registered enterprises benefitting from the 5% Gross Income Tax in lieu of all taxes) may continue to do so for a limited “sunset period.” After the transition period, they are to migrate to CREATE’s new incentives framework.

B. Incentives for Registered Export Enterprises

Under CREATE, an export enterprise that qualifies and registers its project or activity with an Investment Promotion Agency (IPA) for incentives may enjoy:

  1. Income Tax Holiday (ITH)

    • Period: Typically from four (4) to seven (7) years, depending on the location, industry, and classification of the project under the SIPP.
    • Coverage: The enterprise pays no income tax during the ITH period, significantly reducing the venture’s start-up costs.

  2. Special Corporate Income Tax (SCIT) or Enhanced Deductions (ED) After ITH
    After the expiration of the ITH period, an export enterprise may choose between:

    • (a) Special Corporate Income Tax (SCIT) at the rate of 5% on Gross Income Earned (GIE), in lieu of all national and local taxes (except real property tax on land).
    • (b) Enhanced Deductions (ED) option, which allows the registered enterprise to claim additional deductions from taxable income for certain expenses (e.g., power expense, labor expense, training expense, etc.).

    This post-ITH incentive may be availed for a period of up to ten (10) years.

  3. Exemptions from Local Business Taxes
    For enterprises availing of the SCIT, it generally serves as a substitute for local taxes and fees (with some exceptions, such as real property tax on land). Under the ED regime, local business tax exemptions may be provided depending on the specific arrangement with the relevant local government unit (LGU) and in accordance with CREATE and local ordinances.

  4. Duty Exemption on Importations
    Export enterprises may enjoy exemptions on import duties for capital equipment, raw materials, spare parts, or accessories required for their registered project or activity—subject to the terms set out by the relevant IPA and the Bureau of Customs.

C. Other Non-Fiscal Incentives

Beyond tax breaks, export-oriented RBEs may also benefit from:

  • Simplified Import-Export Procedures: Some IPAs, like PEZA, streamline import-export documentation and procedures.
  • Employment of Foreign Nationals: Certain managerial, technical, or highly specialized positions can be filled by non-residents, subject to applicable rules of the Department of Labor and Employment (DOLE) and the Bureau of Immigration (BI).
  • Special Visas: Export enterprises located in special economic zones or freeports may facilitate the issuance of special visas for expatriates and their dependents.

V. Qualifying for and Maintaining Tax Incentives

A. Registration with Investment Promotion Agencies

  1. Strategic Investment Priority Plan (SIPP)
    The Board of Investments (BOI), in collaboration with other government agencies, periodically prepares the SIPP which identifies priority industries and activities eligible for incentives. To benefit from CREATE incentives, an export enterprise must register its project or activity under a category recognized in the prevailing SIPP.

  2. Application Process

    • Submission of Project Proposal: The enterprise must submit documents and feasibility studies demonstrating compliance with the minimum investment, export market, or employment generation requirements.
    • Compliance with Performance Commitments: The IPA typically requires submission of annual reports indicating actual export sales, employment levels, and other performance metrics to determine continued eligibility.

  3. Approval by the IPA and FIRB

    • IPAs can directly approve incentives for certain investments below thresholds set by law.
    • FIRB approval is needed for large-scale or specific strategic investments above the prescribed threshold.

B. Key Compliance Obligations

  1. Maintenance of Export Ratio
    Export enterprises must keep their export-to-total sales ratio at or above 70%. Failure to maintain this ratio can lead to reclassification as a domestic enterprise, resulting in potential loss or reduction of incentives.

  2. Regular Reporting and Monitoring
    Enterprises are required to submit periodic reports on their operations, financial performance, and employment data. IPAs and the Bureau of Internal Revenue (BIR) often conduct audits or verifications to ensure compliance with CREATE requirements.

  3. Observance of Timelines
    The validity period of each incentive is strictly monitored. Once an enterprise’s ITH or SCIT/ED period expires, it must shift to the regular corporate income tax regime unless otherwise qualified for extensions under specific circumstances (e.g., expansion projects under the SIPP).

  4. Sanctions for Non-Compliance
    The CREATE Act empowers IPAs and the FIRB to suspend or cancel incentives if an enterprise is found to be non-compliant or if it has committed material misrepresentation. Potential penalties include the obligation to pay back all taxes waived plus surcharges and penalties.

VI. Transition Provisions for Existing Export Enterprises

Many export enterprises registered under earlier incentive laws (e.g., those that enjoyed the 4-6 years income tax holiday under the Omnibus Investments Code, or 5% Gross Income Tax with PEZA registration) are covered by “sunset periods” under CREATE. The key points are:

  1. Existing Incentives Continue

    • Registered enterprises may continue availing of their existing incentives for the period specified in their certificate of registration or specific law.
    • Once the set period expires, they transition into CREATE incentives.

  2. Grace Period (“Sunset Period”)
    A specific number of years are granted as a transition phase during which enterprises can either keep their existing incentives or shift to CREATE incentives if more favorable. The length of this period depends on the nature of the registered project and other factors enumerated in the IRR.

  3. Option to Shift Early
    Some export enterprises may opt to migrate to CREATE incentives before the end of their original incentive period if they anticipate more significant benefits (e.g., the reduced 5% SCIT or enhanced deductions).

VII. Advantages and Considerations for Export Enterprises

A. Advantages

  1. Lower Effective Tax Burden
    With a mix of ITH, 5% SCIT, or enhanced deductions, export enterprises significantly reduce their tax expenses. The option of a prolonged period (up to 17 years: 4-7 years of ITH + 10 years of SCIT/ED) is especially attractive.

  2. Competitive Edge in the Region
    CREATE’s reduced corporate tax rate and rationalized incentives help Philippine-registered export enterprises become more cost-competitive, which is particularly relevant in labor- and capital-intensive sectors.

  3. Clear and Transparent Framework
    CREATE’s performance-based criteria and streamlined procedures aim to reduce uncertainty. Exporters can better map out their financial and operational strategies knowing the incentives and conditions set by law.

B. Potential Challenges

  1. Strict Compliance Requirements
    The law mandates rigorous and continuous reporting, including monitoring of export ratios and other metrics. Enterprises unprepared for these regulatory demands risk losing incentives.

  2. FIRB Oversight
    For large-scale investments, the FIRB plays a central role in approving incentives. This can extend processing times, especially if the investment is substantial or involves complex structures.

  3. Sunset Provisions and Policy Shifts
    Enterprises that benefited under previous, more lenient regimes may face stricter compliance under CREATE. The change may require adjustments in budgeting, operations, and corporate structuring.

VIII. Conclusion

The CREATE Act marks a significant milestone in the Philippines’ efforts to streamline its tax system and enhance its appeal to both local and foreign investors. Export-oriented enterprises, in particular, stand to gain from a robust package of incentives—ranging from income tax holidays, special corporate tax rates, enhanced deductions, and streamlined administrative processes.

However, these incentives come with stricter compliance requirements and active monitoring by both IPAs and the FIRB. Export enterprises must ensure that they regularly meet the 70% export threshold, fulfill their performance commitments, and provide accurate and timely reports. Proper legal and tax planning is therefore crucial to fully maximize the benefits available under CREATE.

For businesses seeking to establish or expand export activities in the Philippines, the CREATE law’s incentives can be a game-changer. Yet, as with any incentive regime, due diligence, proper registration, and thorough compliance management remain imperative to maintain eligibility and safeguard the enterprise’s competitive advantage.

Disclaimer

This article is intended for informational purposes only and does not constitute legal advice. For specific concerns or complex transactions involving CREATE incentives, businesses are encouraged to consult with legal and tax professionals experienced in Philippine investment laws and regulations.

Disclaimer: This content is not legal advice and may involve AI assistance. Information may be inaccurate.

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