The signing of the CREATE law on March 26, 2021 was welcomed by various business sectors in the country, including PEZA or the Philippine Economic Zone Authority.
However, if you’re planning to register a business with PEZA, it’s best to keep in mind that the Implementing Rules and Regulations (IRR) of CREATE have been finalized only on June 23, 2021, and have yet to be released to the public as of July, 2021.
The framework for the Strategic Investment Priorities Plan (SIPP), which is the list of investment sectors that may receive fiscal incentives, has also just been finalized but not yet announced. The SIPP will replace the 2020 Investment Priorities Plan IPP, which President Duterte signed in December, 2020.
Pending updates on the CREATE IRR and the SIPP, existing and potential PEZA investors will do well to keep themselves informed about details on the new law that can impact their investments.
We list below a few of these:
- Greater flexibility given to the Fiscal Incentives Review Board (FIRB) and the President on granting incentives
One of the most contentious aspects of the CREATE law is the granting of more power to the President and the FIRB on the issuance of incentives. The FIRB, which was previously tasked to grant tax incentives to government owned or controlled corporations (GOCCs) only, now has the authority to approve tax incentives for private companies.
Many investors feel this shift from rules to discretion can result in risk and uncertainty, and add a layer of bureaucracy that may mean extra transaction costs for lobbying with the powers that be. The soon-to-be-released IRR may shed more light on the FIRB process in granting fiscal incentives.
- Changes on PEZA rules for newly registered businesses
Before the CREATE law, PEZA and other investment promotion agencies (IPAs) such as the BOI and the SBMA, had greater autonomy in creating and granting incentives to qualified enterprises. Under CREATE, tax incentives are centralized through the Title of the Tax Code provision, which makes tax incentives uniform regardless of the IPA.
The existing PEZA rules (RA7196) and IRR make a distinction between pioneer enterprises, non-pioneer enterprises, and expanding firms in determining the duration or sunset period of their income tax holiday incentives.
Under the CREATE law, the duration of tax holidays is from four to seven years, and is determined by the tier on where the registered business enterprise (RBE) falls. Among other things, the tiers are determined by the enterprise’s location, with priority given to activities conducted outside of the National Capital Region.
- Sunset period for 5% Gross Income Tax incentive
Under pre-CREATE PEZA rules, registered enterprises can enjoy a special 5% Gross Income Tax (GIT) incentive after their income tax holidays. Instead of paying regular corporate taxes, they are taxed 5% of their gross income, which is determined by taking their gross sales and deducting their direct costs.
CREATE now includes a sunset period of four to seven years for the 5% GIT incentive, depending on the type and location of the activity. After the sunset period, registered enterprises are levied the same tax rate as other corporations.
The CREATE law is certainly creating a stir in the business community, and is met with both anticipation and anxiety especially by existing and potential PEZA investors. Before taking the next step, make sure to get the guidance of experts who are intimately familiar with PEZA and its rules and regulations.
With our considerable experience in assisting PEZA registered businesses, we can help. Call us at (632) 478 5826 for more information.