Tax Reform in the Philippines: 3 Critical Facts Businesses Must Know

June 15, 2017

The Tax Reform in the Philippines, particularly through the Corporate Recovery and Tax Incentives for Enterprises (CREATE) Act and its recent amendment, the CREATE MORE Act, has transformed the nation’s corporate tax landscape to foster economic growth and attract investment. As businesses navigate this evolving framework, staying informed about its key provisions, implications, and compliance requirements is vital for maximizing benefits and ensuring adherence. This article outlines three critical aspects of the tax reform, providing actionable insights for companies operating in or considering the Philippines as an investment destination.

Overview of the CREATE Act and Its Objectives

The Corporate Recovery and Tax Incentives for Enterprises (CREATE) Act, enacted in March 2021 as Republic Act No. 11534, represents a cornerstone of the Philippines’ tax reform agenda. Designed to enhance economic competitiveness and support post-pandemic recovery, the law fundamentally reshapes corporate taxation and incentives. Below are the key elements of the CREATE Act and its objectives:

Reduced Corporate Income Tax Rates: The CREATE Act lowered the corporate income tax (CIT) rate from 30% to 25% for large corporations, effective retroactively from July 1, 2020, with a planned 1% annual reduction until 2027, targeting a 20% rate. Small and medium enterprises (SMEs) with taxable income below PHP 5 million and assets under PHP 100 million benefit from a 20% CIT rate.
Streamlined Tax Incentives: The act replaced the previous complex incentive system with a performance-based, time-bound framework, offering income tax holidays (ITH) of 4–7 years, special CIT rates of 5% on gross income for up to 10 years, and duty exemptions for export-oriented businesses.
Economic Recovery Focus: By reducing tax burdens and enhancing incentives, the CREATE Act aims to stimulate investment, create jobs, and bolster industries critical to the Philippines’ recovery from the COVID-19 economic downturn.
Global Competitiveness: The reforms align the Philippines with other ASEAN nations, making it a more attractive destination for foreign direct investment (FDI) by offering predictable and transparent tax policies.

These provisions reflect the government’s commitment to fostering a business-friendly environment while ensuring fiscal sustainability. Businesses must stay updated on the phased CIT reductions and leverage available incentives to optimize their tax strategies.

Key Updates Introduced by the CREATE MORE Act

The CREATE MORE Act, signed into law on November 7, 2024, as Republic Act No. 12066, builds on the CREATE Act by refining and expanding its provisions to address emerging economic needs. This amendment introduces new opportunities and clarifications to enhance the Philippines’ appeal to investors. Here are the primary updates:

Enhanced Non-Fiscal Incentives: The act offers streamlined permitting processes and work-from-home arrangements for up to 50% of registered business enterprises (RBEs) employees, particularly in export-oriented sectors like IT-BPM.
VAT Clarifications: It provides VAT zero-rating on local purchases and VAT exemptions on imports for RBEs, reducing operational costs and improving cash flow for qualifying businesses.
Expanded Sector Coverage: New incentives target high-growth sectors such as renewable energy, agribusiness, and healthcare, aligning with the Strategic Investment Priority Plan (SIPP) to promote sustainable development.
Extended Incentive Periods: Certain industries, such as green technology and advanced manufacturing, may qualify for extended income tax holidays or special CIT rates, subject to Fiscal Incentives Review Board (FIRB) approval.

These updates demonstrate the government’s responsiveness to global economic trends and local business needs. Companies must evaluate their eligibility for these enhanced benefits to remain competitive in the Philippine market.

Role of the Fiscal Incentives Review Board (FIRB)

The Fiscal Incentives Review Board (FIRB), established under the CREATE Act, plays a pivotal role in overseeing the implementation of tax incentives and ensuring transparency and accountability. Its functions have been further refined under the CREATE MORE Act to support efficient incentive administration. Key aspects of the FIRB’s role include:

Incentive Approval: The FIRB evaluates and approves applications for tax incentives, ensuring that only qualifying businesses with significant economic contributions receive benefits.
Performance Monitoring: It enforces performance-based criteria, requiring businesses to meet job creation, export, or investment targets to maintain incentive eligibility.
Policy Oversight: The FIRB collaborates with investment promotion agencies (IPAs) to align incentives with national development goals, such as those outlined in the Philippine Development Plan 2023–2028.
Transparency Measures: The board publishes regular reports on incentive grants, enhancing investor confidence by ensuring fair and consistent application processes.

The FIRB’s oversight ensures that tax incentives are allocated effectively, supporting industries that drive economic growth while safeguarding public revenue.

Economic and Business Impacts of the Tax Reforms

The CREATE Act and CREATE MORE Act have significantly influenced the Philippines’ economic landscape, attracting investment and fostering growth in key sectors. Their impacts are evident across various dimensions of business operations. Below are the primary effects:

Increased Foreign Direct Investment: The reduced CIT rates and streamlined incentives have positioned the Philippines as a competitive destination, with FDI inflows rising by 15% in 2023, according to Department of Trade and Industry reports.
Support for SMEs: The 20% CIT rate for SMEs has eased financial pressures, enabling small businesses to reinvest profits into expansion and innovation.
Sector-Specific Growth: Industries like renewable energy and IT-BPM have increased activity due to targeted incentives, with over 200 new projects registered under the CREATE Act by mid-2024.
Job Creation: The reforms have spurred employment, particularly in export-oriented sectors, with an estimated 300,000 jobs created since 2021, based on FIRB data.

These outcomes highlight the reforms’ success in driving economic activity, though businesses must stay informed to capitalize on available opportunities fully.

Compliance Challenges and the Need for Expert Guidance

Navigating the complexities of the CREATE Act and CREATE MORE Act requires careful planning and expertise, as the application processes and compliance requirements can be intricate. Seeking professional assistance from trusted providers like Triple i Consulting is essential to ensure businesses maximize benefits while adhering to regulations. Key compliance challenges include:

Complex Application Processes: Applying for incentives involves detailed documentation and coordination with the FIRB or IPAs, which can be time-consuming and prone to errors without expert support.
Performance-Based Requirements: Businesses must meet stringent criteria, such as investment thresholds or export targets, to qualify for and retain incentives, necessitating robust tracking systems.
VAT and Tax Compliance: The CREATE MORE Act’s provisions require precise accounting to ensure eligibility for zero-rating or exemptions, which can be challenging for businesses unfamiliar with the rules.
Evolving Regulations: Frequent updates to the tax framework, such as the 2024 amendments, demand ongoing vigilance to remain compliant and competitive.

Given these complexities, it is critical to partner with Triple i Consulting, a trusted provider of tax and compliance services in the Philippines. Their expertise simplifies the process, ensuring businesses secure maximum benefits while avoiding costly errors.

Future Outlook for Tax Reform in the Philippines

As the Philippines continues positioning itself as a leading investment destination, the tax reform agenda is expected to evolve further to address global and domestic economic trends. Businesses must prepare for future changes to stay ahead. Key considerations for the future include:

Alignment with Global Tax Standards: The Philippines monitors international frameworks like the OECD’s Pillar 2, which sets a global minimum tax rate, potentially influencing future CIT adjustments.
Focus on Sustainability: Incentives for green industries, such as renewable energy and sustainable agriculture, will likely expand, reflecting global demand for eco-friendly investments.
Digital Economy Integration: Tax policies may increasingly target digital services and e-commerce, with potential new incentives or compliance requirements for tech-driven businesses.
Continuous Policy Refinement: Based on economic performance and investor feedback, the government is expected to introduce further amendments to the CREATE framework to maintain competitiveness.

To ensure long-term success, businesses should proactively monitor these developments and align their strategies with the evolving tax landscape.

Key Takeaways

The Tax Reform in the Philippines, driven by the CREATE Act and enhanced by the CREATE MORE Act, offers significant opportunities for businesses through reduced tax rates, streamlined incentives, and a focus on economic growth. By understanding the key provisions, compliance requirements, and future trends, companies can position themselves to thrive in the Philippines’ dynamic market. However, the complexity of these reforms underscores the need for expert guidance to navigate the system effectively.

Is Assistance Available?

Yes, Triple i Consulting, a trusted provider of tax and compliance services, can help businesses navigate the intricate requirements of the CREATE Act and CREATE MORE Act. Our expertise ensures that companies maximize benefits while maintaining full compliance. Contact us today to schedule an initial consultation with one of our experts: