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April 1, 2021

Philippines enacts law reducing corporate income tax rates and rationalizing fiscal incentives

The Philippine President signed into law the proposed Corporate Recovery and Tax Incentives for Enterprises (CREATE) Act on 26 March 2021,1 but vetoed several provisions. The law amends the Philippine corporate income tax and incentives system in a bid to attract increased foreign investment and help the Philippine economy recover from the COVID-19 pandemic.

The law2 is set to take effect on 11 April 2021, that is 15 days after its complete publication, unless specifically provided in the law.

This Tax Alert summarizes the key amendments of the CREATE Act and the provisions vetoed by the President relevant to multinational corporations.

Amendments to corporate income tax and other taxes

  • Effective 1 July 2020, the corporate income tax (CIT) rate is reduced from 30% to:
    • 20% for domestic corporations with net taxable income not exceeding PHP5 million (US$100,000) and with total assets (excluding land where the business entity's office, plant and equipment are situated) not exceeding PHP100 million (US$2 million)
    • 25% for all other domestic corporations and resident foreign corporations (e.g., branches)
  • Effective 1 January 2021, the CIT rate is reduced from 30% to 25% for nonresident foreign corporations.
  • Effective 1 July 2020 until 30 June 2023, the minimum CIT rate is reduced from 2% to 1%. The minimum CIT is applicable to domestic and resident foreign corporations if the calculated minimum CIT is higher than the regular CIT amount.
  • Effective 1 January 2022, the CIT rate applicable to regional operating headquarters (ROHQs)3 is increased from 10% to 25%.
  • Capital gains derived by foreign corporations from the sale of shares of stock not traded on the Philippine stock exchange are subject to a flat tax rate of 15% (previously 5% on the first US$2,000 and 10% in excess thereof).
  • Increase of the final income tax rate for interest income derived under the expanded foreign currency deposit system by resident foreign corporations from 7.5% to 15%.
  • Allowance of 150% deduction for labor training expenses incurred for the skills development of enterprise-based trainees, subject to certain conditions.
  • Income tax exemption for foreign-sourced dividends received by domestic corporations which are reinvested in the Philippines, subject to certain conditions.
  • Removal of 1) tax exemption for income derived by offshore banking units (OBUs) from foreign currency transactions with nonresidents; and 2) 10% final tax on interest income derived by OBUs from foreign currency loans granted to residents. Such income will be subject to the 25% CIT rate.
  • Definition of "reorganization" for purposes of non-recognition of gain or loss on exchanges of property solely for stock is expanded to include: (i) a merger or consolidation; (ii) an acquisition resulting in gain of control or further control; (iii) an acquisition of all or substantially all properties of another corporation; (iv) a recapitalization; and (v) a reincorporation. Prior Bureau of Internal Revenue (BIR) confirmations or tax rulings are no longer required to avail of the tax exemption on the exchange.

Amendments to indirect tax and incentives related to COVID-19 prevention, control and treatment

  • Value-added tax (VAT) exemption on the sale or importation of the following goods:
    • Drugs, vaccines, medical devices, capital equipment, spare parts and raw materials for the prevention, control and treatment of COVID-19, subject to conditions, beginning 1 January 2021 to 31 December 2023; and
    • Prescription drugs and medicines for cancer, mental illness, tuberculosis and kidney diseases, beginning 1 January 2021 (previously 1 January 2023).
  • The importation of COVID-19 vaccines will be exempt from import duties, taxes and other fees, subject to the approval or licenses issued by the Department of Health or the Food and Drug Administration.

Revised fiscal incentives for registered projects and activities

  • Qualified export enterprises may be eligible for a four to seven-year income tax holiday (ITH), to be followed by a 10-year 5% special corporate income tax (SCIT) on gross income earned or 10-year enhanced deductions (ED).
  • Qualified domestic market enterprises may be eligible for a four- to seven-year ITH, to be followed by a five-year ED.
  • Customs duty exemption for the importation of capital equipment, raw materials, spare parts or accessories directly and exclusively used in the registered project or activity of registered enterprises.
  • VAT exemption for importation and VAT zero-rating for local purchases of goods and services directly and exclusively used in the registered project or activity, regardless of the registered enterprise's location (i.e., ecozone or free port zone).
  • Higher incentives for registered enterprises locating outside of metropolitan areas:
    • Additional two years ITH for enterprises located in areas recovering from armed conflict or a major disaster
    • Additional three years ITH for enterprises completely relocating outside of the National Capital Region
  • Transition provisions for existing registered activities:
    • Existing registered activities granted with an ITH only will be permitted to continue its remaining ITH period
    • Existing registered activities granted with an ITH and 5% gross income earned tax (GIT) after the ITH period, or are currently receiving the 5% GIT will be permitted to continue the 5% GIT for 10 years, regardless of the number of years they have been receiving the incentive
    • After the expiration of the transition period, existing registered export enterprises may reapply and receive the SCIT for 10 years, subject to certain conditions and performance reviews
  • The President of the Philippines may approve a modified set of incentives or financial support package aimed at attracting highly desirable projects or specific industrial activities for projects with a comprehensive sustainable development plan and with a minimum investment capital of PHP50 billion (US$1 billion) or minimum local employment generation of at least 10,000 personnel within three years, among other conditions. The grant of an ITH should not exceed eight years and, thereafter, a 5% SCIT may be granted, provided the total period of incentive does not exceed 40 years.

Vetoed provisions of the CREATE Act

  • Increasing the VAT-exempt threshold for the sale of real property
  • 90-day period for the processing of general tax refunds
  • Definition of investment capital to exclude land and working capital
  • Redundant incentives (i.e., SCIT) for domestic market enterprises (DMEs) and further classifications of DMEs (e.g., engaged in activities classified as "critical" and with minimum investment capital of PHP500 million (US$10 million))
  • Allowing existing registered activities to apply for further extension of new incentives for the same activity
  • Limitations on the power of the Fiscal Incentive Review Board (FIRB)
  • Specific industries mentioned under activity tiers
  • Provision granting the President the power to exempt any investment promotion agency from the reform
  • Automatic approval of applications for incentives if not acted upon


By reducing the CIT rate and rationalizing fiscal incentives, the CREATE Act intends to make the Philippine corporate tax system responsive, globally competitive and attractive to foreign investors, and at the same time, assist Philippine businesses recover from the economic impact of the COVID-19 pandemic. Multinational corporations looking to restructure their organization should also consider these amendments to achieve tax efficiency in their planning and future operations.


For additional information with respect to this Alert, please contact the following:

Ernst & Young Philippines (SGV & Co.), Makati City

Ernst & Young LLP (United States), Philippines Tax Desk, New York

Ernst & Young LLP (United States), Asia Pacific Business Group, New York


1 Republic Act No. 11534.

2 The CREATE Act is published in the Business Mirror on 27 March 2021.

3 Regional Operating Headquarters (ROHQ) is a foreign business entity which is permitted to derive income in the Philippines by performing qualifying services for its affiliates, subsidiaries or branches in the Philippines, in the Asia-Pacific region and in other foreign markets. ROHQs are currently entitled to a preferential income tax rate of 10% on taxable income and various fiscal and non-fiscal incentives such as exemption from local taxes, fees or charges and tax and duty-free importation of training materials and equipment not locally available, among others.