ON Nov. 8, the much-awaited Create More Law, or Republic Act (RA) 12066, was formally signed and published in the Official Gazette. This law is touted to boost the Philippines’ global competitiveness in business.
Create More (Corporate Recovery and Tax Incentives for Enterprises to Maximize Opportunities for Reinvigorating the Economy) introduced amendments to provisions in the National Internal Revenue Code (“Tax Code”) on income tax, value-added tax (VAT), particularly on VAT zero-rating on purchases, incentives enjoyed by Registered Business Enterprises (RBEs), powers of the Fiscal Incentives Board (FIRB) and the Investment Promotion Agencies (IPAs), refunds of excise taxes on petroleum products sold to international carriers, and electronic invoicing, among others.
We will discuss the amendments relating to income tax and VAT and why such amendments are significant.
Income tax amendments:
– Applies the lower 20 percent regular corporate income tax (RCIT) rate to RBEs operating under the Enhanced Deductions Regime (EDR). Prior to the amendment, the 20 percent tax generally applied only to corporations with net taxable income not exceeding P5 million and with total assets not exceeding P100 million. Now, the lower 20 percent rate is also extended to RBEs, which enjoy enhanced business deductions.
– Broadens the scope of income exempted from treaty obligations, specifying that income earned under any treaty and agreements entered into by the President, with the concurrence of the Senate, will also be binding and exempt under the law.
– Adds that input tax paid on local purchases attributable to VAT-exempt sales shall be deductible from the gross income of the taxpayer. This settles the issue of whether such input VAT can be used as an allowable business deduction for tax purposes.
– Sets a cap on withholding tax rates at not more than 15 percent for payments to individuals and corporations residing in the Philippines. With the lowering of the income tax rate from 30 to 25 or 20 percent, it’s just proper to lower the cap of the creditable or expanded withholding tax, which is an advance collection of the RCIT.
Expansion of VAT zero-rating on purchases
Among the most significant amendments introduced by Create More are in Sections 106 and 108 of the Tax Code on VAT on sale of goods or properties and services and Sections 295 on incentives granted to RBEs.
As amended, Sections 106 and 108 now provide that goods or services sold to export-oriented enterprises qualify for VAT zero-rating if: (a) the enterprises export at least 70 percent of their annual production from the previous year, and (b) the sales are “directly attributable” to the export activity, as certified by the Export Marketing Bureau.
In addition, Section 295(D) of the Tax Code on incentives was also amended to provide that VAT exemption on importation and VAT zero-rating on local purchases now apply to goods and services “directly attributable” to the registered project or activity, including incidental expenses, of a registered export enterprise or high-value domestic market enterprise (HV DME), regardless of the location of these enterprises.
A definition of “directly attributable” was added to refer to goods and services that are incidental to and reasonably necessary for the export activity of the export-oriented enterprise. It should be noted that “incidental expenses” are allowed, and these include janitorial, security, financial, consultancy, marketing, and promotion services. It also covers services for administrative operations such as human resources, legal, and accounting services.
Prior to Create More, the rule (as introduced by the Create Act or RA 11534) was that VAT exemption on importation and VAT zero-rating on local purchases apply to goods and services “directly and exclusively used” in the registered project or activity of an RBE. The term “directly and exclusively used” referred to raw materials, supplies, equipment, goods, packaging materials, services (including infrastructure, utilities, maintenance), and other expenditures essential to the operation of the registered project and which are not used for administrative purposes. (Revenue Memorandum Circular No. 24-2022). These criteria and definition posed many issues to exporters and RBEs.
Significantly, the incentive of VAT zero-rating on purchases was also extended to HV DMEs or domestic enterprises that have investment capital exceeding P15 billion, engaged in import-substituting sectors, or with significant export sales.
Location of sales and local sales
Section 295(D) was further amended to clarify that the sale of goods or services by a VAT-registered seller to a registered export enterprise is VAT zero-rated, regardless of location of said enterprise.
On the other hand, it was also clarified that local sales of goods and services by RBEs, regardless of their income tax incentives regime and location, are still generally subject to 12-percent VAT unless otherwise exempt or zero-rated under specific provisions of the Tax code.
A definition of “local sales” was added to mean sales to domestic market enterprises or non-RBEs, regardless of whether the sale is made within freeports or economic zones.
Create More increased the additional allowable deduction of RBEs for power expenses from 50 to 100 percent. It also amended and clarified other incentives, including the VAT on transfers of previously-VAT exempt equipment and materials, which we will discuss in a subsequent article.
Euney Marie J. Mata-Perez is a CPA lawyer and the managing partner of Mata-Perez, Tamayo & Francisco (MTF counsel). She is a corporate, M&A and tax lawyer and has been ranked as one of the top 100 lawyers in the Philippines by Asia Business Law Journal and chair of the tax committee of the Management Association of the Philippines. She acknowledges the contribution of Ms. Elaisha Nelle C. Espinosa to this article. Email the author at [email protected] or visit the MTF website at www.mtfcounsel.com.
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