Transitioning into CREATE incentives entitlement

The Corporate Recovery and Tax Incentives for Enterprises (CREATE) Act is the latest installment of the government’s efforts to reform the Philippine tax system. Apart from codifying the updated incentives for qualifying enterprises (such as income tax holiday (ITH), special corporate income tax (SCIT) or enhanced deductions, customs duty exemptions, value-added tax (VAT) exemption, and other incentives on importation of COVID-19 vaccines and petroleum products, to name a few), CREATE also introduced new registration requirements and processes to qualify for incentives. For instance, a qualified project or activity of the business enterprise under CREATE should be included in the government’s formulated priority investment list and must comply with certain qualifications. Guidance has been given by CREATE, the Fiscal Incentives Review Board (FIRB), and the Board of Investment (BOI) on what these industries are based on recent issuances. Thus, new applicants for registration to avail of CREATE incentives should be mindful of the SIPP as discussed below.

Strategic Investment Priority Plan

The SIPP contemplated under CREATE is a strategic plan to be prepared by the BOI, in coordination with the concerned government agencies which administer tax incentives and must be approved by the President. It provides for fiscal or non-fiscal support to industries, projects or activities which can promote long-term growth and sustainable development based on the country’s strategic economic goals. The SIPP contemplated under CREATE should be revisited every three years from its issuance. It should be noted that the SIPP under CREATE is yet to be issued to date.

Indeed, CREATE and its IRR provides for a high-level three-tier categorization of industries (based on business activity and location) that limits the incentives and corresponding duration of incentives availment for entitled enterprises. However, the SIPP to be issued shall definitively identify covered projects or activities per industry tier and the corresponding conditions to qualify for incentives. Apart from providing for the terms and conditions of incentives availment, the SIPP shall also promulgate rules on the grant of enhanced deductions, qualifications for expansion, and conditions for existing projects to qualify for incentives under CREATE.

Transitional SIPP

Pending issuance of the SIPP, the 2020 Investment Priorities Plan (IPP) and the BOI-issued general policies and specific guidelines (GPSG) to implement the 2020 IPP shall serve as the transitional SIPP (pursuant to FIRB Resolution 05-21) to ensure that investors can register and avail of CREATE incentives. In addition, the said FIRB Resolution provides that qualifying projects or activities under the transitional SIPP shall, at the minimum, be registered under Tier 1 based on CREATE without prejudice to an upgrade if qualified under the SIPP to be released. It also reiterates that the grant of incentives for projects or activities with investment capital of more than P1 billion shall be submitted to the FIRB as mandated by CREATE and that FIRB resolutions shall remain valid and subsisting unless subsequently modified or superseded by a resolution of the FIRB.

Pertinent provisions of the 2020 IPP, as well as the GPSG, should be taken note of especially by entities which contemplate on registering to avail of incentives under CREATE. It contains a list of investment priority economic activities or preferred investment areas that qualify for fiscal incentives. The qualifying activities under the 2020 IPP include, among others, (i) Projects or activities to combat the COVID-19 pandemic. (ii) Those that will generate employment opportunities outside urban areas, such as Balik Probinsya Program. (iii) All qualified manufacturing activities including agro-processing. (iv) Investment activities in agriculture, fishery, and forestry. (v) Strategic services including integrated circuit design, creative industries, maintenance, repair and overhaul of aircraft, industrial waste treatment and telecommunications. (vi) Health care and disaster risk reduction management services. (vii) Mass housing. (viii) Infrastructure and logistics including local government unit – public private partnership projects. (ix) Innovation drivers. (x) Inclusive business models such as environment or climate change-related projects and energy. (xi) Export activities. (xii) Projects in the Bangsamoro Autonomous Region in Muslim Mindanao (BARMM). (xiii) As well as those covered by special laws.

To fully implement the 2020 IPP, the BOI has issued the GPSG on Feb. 17, to further provide guidance on the contemplated priority industries for investment under the 2020 IPP.

Areas that require further clarification

While there are efforts from the government to ensure the unhampered registration and enjoyment of incentives under CREATE by new investors, notwithstanding the absence of an SIPP, certain concerns may arise as the SIPP is expected to be released by the first half of 2022.

The parameters to be used by the FIRB and the Investment Promotion Agencies (IPAs) in evaluating whether an activity is entitled to tax incentives under CREATE should be clearly laid down. Considering that the 2020 IPP shall be used as transitional SIPP, new registrants must be apprised of the factors and parameters considered by these agencies in determining entitlement to tax incentives under CREATE. Considering that the SIPP is expected to be released next year, applicants with pending applications under the transitional SIPP with the FIRB and IPAs whose activities may no longer be contemplated under the SIPP to be issued should also be guided on whether they can proceed with registration despite the release of the SIPP.

Once registered, in the event that there are inconsistencies between the SIPP to be released and the transitional SIPP, registered business enterprises (RBEs) should not be estopped from continuing to enjoy their approved incentives under the transitional SIPP. As set forth in the IRR, any amendment to the SIPP shall not prejudice the availment of fiscal incentives already granted to RBEs. Can registrants under the transitional SIPP rely on this provision to ensure continued incentives availment?

Further, if an RBE under the transitional SIPP is granted an upgrade (e.g. from Tier 1 to Tier 2 or Tier 3) under the SIPP to be issued, will the enterprise enjoy a fresh period of tax incentives on top of what has been enjoyed under the transitional SIPP? Or will the upgraded incentives already include the periods already enjoyed by such enterprise under the transitional SIPP?

Although the requirements and conditions for registration and incentives entitlement can still be further clarified, the benefit of availing incentives soon may be beneficial to some business enterprises. Hopefully, the government can give proper, consistent, and cohesive guidance to properly implement the provisions of CREATE. This is to assure interested investors of an efficient registration and evaluation process pending the release of the SIPP.

Erika Jane F. Manguin is a supervisor from the tax group of KPMG R.G. Manabat & Co. (KPMG RGM&Co.), the Philippine member firm of KPMG International. KPMG RGM&Co. has been recognized as a Tier 1 tax practice and Tier 1 transfer pricing practice by the International Tax Review.

This article is for general information purposes only and should not be considered as professional advice to a specific issue or entity.

The views and opinions expressed herein are those of the author and do not necessarily represent the views and opinions of KPMG International or KPMG RGM&Co. For comments or inquiries, please email [email protected].