The New Year is a time of renewal and fresh beginnings. For businesses, it is a time to revisit existing policies, and keep abreast of new developments.
In the spirit of new opportunities and progress, the government recently passed Republic Act No. 12066 or the Corporate Recovery and Tax Incentives for Enterprises to Maximize Opportunities for Reinvigorating the Economy (CREATE MORE), with the goal of making the Philippines a more attractive destination for foreign investors wishing to set up their businesses. CREATE MORE builds on the foundations of the CREATE law by introducing, among others, additional enhanced deductions and tax incentives. The new tax law also lowered the corporate income tax (CIT) rate of registered enterprises availing of the enhanced deductions regime to 20%.
From a global tax perspective, I wonder if this is a step for the Philippines to slowly align with the adoption of Base Erosion and Profit Shifting (BEPS), specifically Pillar 2.
Pillar 2 aims to introduce a global minimum 15% tax rate to help ensure that multinational companies with a global annual revenue of 750 million euros or more pay a minimum level of tax on income generated in each jurisdiction where they operate. These rules hope to reduce the instances of profit shifting to low-tax jurisdictions.
While the Philippines signed on to the OECD’s Inclusive Framework on BEPS, we have yet to put in place clear rules on Pillar 2. There are certain intricacies in the adoption of the Pillar 2 rules, as the Philippines would still want to keep a competitive edge in attracting foreign investment. From a regional perspective, neighboring countries have begun adopting Pillar 2 rules. Vietnam and Thailand currently both offer a standard CIT rate of 20%; whereas Malaysia has a standard CIT rate of 24%. Nonetheless, while these countries are also adopting Pillar 2, they continue to offer incentives to qualified projects or enterprises.
Further delving into the incentives in line with Pillar 2, Vietnam adopted Pillar 2 rules effective Jan. 1, 2024. It still offers tax incentives, but if the effective tax rate of the Vietnamese entity falls below 15%, the Qualified Domestic Minimum Top-Up Tax (QDMTT) ensures that the difference is collected domestically rather than by foreign jurisdictions. This allows Vietnam to retain the additional tax revenue (which may otherwise be collected by other jurisdictions) and reinvest it into its own economic and industry development. Malaysia is expected to implement the same in 2025.
On the other hand, Thailand has taken significant steps towards adopting Pillar 2. Currently, the necessary legislation is being drafted and is expected to be effective in 2025. Among its priorities are ensuring that a top-up tax will be applied to ensure that multinational companies operating in Thailand pay a minimum effective tax rate of 15%; and the Thai Board of Investment will propose measures to mitigate the impact of the new tax rules on existing tax incentive programs and to support the country’s competitiveness.
The recently passed CREATE MORE Act appears to be a significant step in the same direction, offering competitive tax incentives similar to those in neighboring ASEAN countries. One of the salient provisions of CREATE MORE is the reduction of the CIT rate to 20% under the Enhanced Deductions Regime (EDR). Specifically for businesses in energy-intensive industries, the EDR may be more attractive because the deduction for power expenses increased from 50% to 100%. The CREATE MORE Act also introduced new deductible expense items related to trade fairs and exhibitions. In addition to these, the incentive period has also been extended to a maximum of 24 to 27 years for entities registered with the Fiscal Incentives Review Board.
Taxpayers also have the option of forgoing the Income Tax Holiday (ITH) and directly availing of the 5% special CIT or EDR. The new law also amended the reckoning period to carry over net operating losses as a deduction for registered enterprises to the last year of the ITH period (previously from the year of loss) to maximize the recovery period.
With the expanded list of enhanced deductions offered by CREATE MORE and lower CIT rate of 20%, qualified entities forming part of a multinational group of companies may be in a better position to still enjoy incentives without paying top-up tax in another jurisdiction. However, as the 15% minimum tax under Pillar 2 is based on financial reporting income, this will need to be validated by crunching the numbers. On the other hand, entities which are not bound to observe Pillar 2 rules might still find the reduced tax rates, enhanced deductions, and longer availment of incentives beneficial. This dual advantage is poised to attract increased investments and stimulate economic activity within the Philippines, reinforcing its position as a prime destination for global business.
In conclusion, as we embrace the New Year with optimism and a forward-looking mindset, the CREATE MORE Act represents a significant step forward in the Philippines’ efforts to create a more favorable investment climate yet still align with global tax standards. By lowering corporate tax rates and offering enhanced incentives, the Philippines is positioning itself as a competitive destination for foreign investment. While promising, careful implementation and monitoring are essential to ensure that these incentives are appropriately targeted and that the country continues to progress towards a fair and transparent tax system yet adopting global tax trends.
The government may also need to take a closer look at how we could properly and effectively integrate Pillar 2 in our taxing environment, maybe following the footsteps of our neighbors. It would need to find the right balance to capture top-up tax from entities which would not meet the minimum 15% effective tax rate (ETR), rather than allowing foreign jurisdictions to collect this, without sacrificing the attractiveness of the incentives being offered to foreign investors. Ultimately, as the global tax landscape evolves, the Philippines must remain vigilant and adaptable to maintain its competitive edge and attract sustainable investments. Here’s to a prosperous and transformative year ahead!
The views or opinions expressed in this article are solely those of the author and do not necessarily represent those of Isla Lipana & Co. The content is for general information purposes only, and should not be used as a substitute for specific advice.
Ruthie Mae G. Clemente is a manager at the Tax Services department of Isla Lipana & Co., the Philippine member firm of the PwC network.
