How to Maximize Philippines Tax Incentives
Explore the tax incentives for your business in the Philippines.
Table of contents
The article was updated in April 2023
Fully comprehending Philippines tax incentives will help you identify the actual capacity of your business. Southeast Asia is a major driver in the world economy today. Thus, it is crucial for foreign entrepreneurs to validate the best-fitted market entry strategy in the Philippines, pointing out potential risks next to the likely values.
About the Philippines Tax Incentives
The Philippines has already overtaken China with economic growth and it showed remarkable progress. However, not all the areas of the country are in balance, whereas foreign direct investment could support evening it out.
Selected projects or areas (also called Special Economic Zones) get tax incentives to, first and foremost, promote and increase awareness about the country, as well as receive the best return on capital for foreign investors.
The Special Economic Zones can contain:
- Industrial estates
- Export processing zones
- Free trade zones
- Tourist or recreational centers
However, the zones can potentially develop into the following:
- Financial Centers
PEZA and BOI in the Philippines
When considering the Philippines for investment purposes, note the importance of two governmental institutions – PEZA and BOI. PEZA stands for the Philippine Economic Zone Authority and BOI for Board of Investments. Most of the incentives do not appear to new companies by default, businesses are able to enjoy them due to registering with either of the aforementioned agencies.
The main agenda of these organizations is to promote and support investment, meanwhile working with well-developed incentive schemes, targeting both local and foreign entrepreneurs.
PEZA Incentives in the Philippines
As per the regulation of the Special Economic Zone Act of 1995 as amended, PEZA operates, administers, manages and develops Special Economic Zones or Ecozones. PEZA focus remains on export-oriented manufacturing and services. Precisely those that have their location in Special Economic Zones.
In addition, PEZA also covers incentives such as:
- Export manufacturing
- Information technology (IT) service export
- Medical tourism
- Agro-industrial export manufacturing
BOI Incentives in the Philippines
BOI takes the main responsibility for assisting foreign and Filipino nationals with their investments. In a country with such a booming economy as the Philippines, BOI has shown great initiative in supporting entrepreneurs and helping them to succeed in the desired field and area of economic activities. BOI separates its fiscal and non-fiscal incentives.
- Businesses that export may be granted an Income Tax Holiday of four (4) to seven (7) years, depending on the location and industry priorities.
- After ITH, export enterprises can benefit from either a 5% Special Corporate Income Tax OR Enhanced Deductions for ten years.
- Companies that avail of the 5% SCIT on gross income, will pay and remit as follows:
a) 3% to be remitted to the National Government
b) 2% to be remitted to the Treasury of the host Local Government Unit
Period of availing of incentives based on location and industry priorities
|Industries||Tier I||Tier II||Tier III|
|National Capital Region||4 years ITH + 10 years SCIT or ED||5 years ITH + 10 years SCIT or ED||6 years ITH + 10 years SCIT or ED|
|Metropolitan areas or areas contiguous and adjacent to NCR||5 years ITH + 10 years SCIT or ED||6 years ITH + 10 years SCIT or ED||7 years ITH + 10 years SCIT or ED|
|All other areas||6 years ITH + 10 years SCIT or ED||7 years ITH + 10 years SCIT or ED||7 years ITH + 10 years SCIT or ED|
Table source Peza.gov
TIER I activities:
- Have great job-creation potential
- Take place in areas where there is a failure of markets to provide certain essential goods and services.
- Generate value through innovation, upgrading existing products and services, or creating new ones.
- Support sectors that are essential to industrial development.
- Emerging markets are likely to benefit from their growth potential.
Activities that produce supplies, parts, components, and intermediate services e.g., oil refining or manufacturing of machinery that are not locally produced but are critical to industrial development.
TIER III activities:
- Research and development result in demonstrably significant value-added, higher productivity, improved efficiency or breakthroughs—and any jobs created as a result.
- Generation of new knowledge and intellectual property, which may be registered or licensed in the Philippines if applicable.
- The commercialization of patents, industrial designs, copyrights, and utility models owned by a registered business enterprise;
- A highly technical manufacturing environment.
- The restructuring of the economy and its conversion to market principles require substantial efforts.
The CREATE Law includes a 10-year transition period for companies that qualified under the old incentives scheme.
3. Companies can import capital equipment, raw materials, and other goods into a country without paying taxes.
4. For a registered project or activity, the enterprise is exempt from paying VAT on imports and can zero-rate local purchases of goods and services that are directly or exclusively used in the said project or activity.
5. Domestic sales allowance can be as much as 30% of total sales and exemption from payment of local government taxes and fees for a 5% SCIT incentive.
Registration of PEZA and BOI
Registering with either agency means you must respect specific commitments when it comes to exporting.
Meeting the Requirements of BOI
For BOI registration, the activity must be listed in the 2017 Investment Priorities Plan (IPP).
The latest, 2017 IPP, includes the following investment areas:
- Preferred Activities, namely, all qualified manufacturing activities
- Export Activities
- Activities based on Special Laws granting incentives
- Priority activities for projects located in the Autonomous Region of Muslim Mindanao (ARMM)
BOI does not include location requirements. However, for PEZA registration, companies need to physically position themselves within a special economic zone and engage in eligible activities.
To meet BOI requirements, the company should register its activity with the BOI in case the required field is also listed in the current IPP. If not, the company may still have the right to BOI incentives, meeting the following criteria:
|Required Export||Who is Eligible|
|Minimum 50% of the production is for export.||Companies with 60% Filipino and 40% foreign ownership|
|Minimum 70% of production is for export||Companies with over 40% of foreign-ownership|
Companies with foreign ownership exceeding 40% of the outstanding capital stock, proposing to participate in domestic business activities may receive BOI incentives. The requirement is that the activity must also be in the current IPP list and qualify as Pioneer.
Meeting the Requirements of PEZA
The Philippines has 98 proclaimed Special Economic Zones currently running. Companies planning on operating in the field of manufacturing and exporting, thus exporting 100% of their production, may qualify for PEZA registration.
However, the permission must be granted in case your company, located within the zone, is planning to have a lower than 100% export and have some production in the domestic market. For example, PEZA has allowed 30% production to remain local in the past.
What Should You Know About Foreign Tax Credit?
Known as the non-refundable tax credit, the Foreign Tax Credit (FTC) sums up from the income taxes paid to a foreign government as a result of foreign income tax withholdings. Philippine companies may claim a credit for any income taxes paid to a foreign country. However, it must be ensured that the taxes are not claimed as deductions. FTC’s are not allowed for foreign corporations.
FTC’s are assigned based on the country of location. However, note that the amount of FTC with reference to the tax paid in a country must not exceed the exact proportion of the tax against which the credit is taken (also, from which the taxpayer’s income from the country must bear to its full taxable income).
Hereby, a further limitation also applies, which is based on the full amount of foreign-sourced income of the taxpayer. Note that FTC total amount must not exceed the amount of the tax towards which the credit is taken. Which means that the taxpayer’s foreign-sourced income would also bear its full taxable income.
Philippines Tax Incentives for Export
Coming from the Export Development Act (RA No. 7844), there are several incentives granted to exporters in the Philippines. Once registered your export company with the Board of Investments(BOI), you will access the following Philippines tax incentives:
#1 Income Tax Holiday (ITH)
Full exemption from CIT for 6 years for pioneer companies and those located in less-developed areas. Though, 4 years apply for the non-pioneer companies.
The ITH period starts from the date of a commercial operation or target date of operation – whichever is earlier. You may extend the ITH period by up to 3 years. However, note that the total ITH period cannot exceed 8 years.
Expanding export companies can have 3-year ITH on the incremental income. With some exceptions, new and expansion projects in the National Capital Region (NCR) or Metro Manila can no longer have ITH.
#2 Tax and Duty Exemption
Granted tax and duty exemption on imported spare parts and supplies for export producers. The company must also include customs bonded manufacturing warehouse exporting – at least 70% of annual production if foreign-owned. For a Filipino-owned company, the annual production requirement is 50%.
#3 Full deduction
Full deduction of the cost of major infrastructure. This aims the actions undertaken by companies in less-developed areas.
#4 Additional deduction
The company enjoys an additional deduction of 50% of the incremental labor expense. This is if you meet the agreed ratio of capital assets to annual labor.
Additional deduction of 100% of the incremental labor follows when located in less-developed areas within five years from the date of registration. Note that this incentive cannot be in use simultaneously with the ITH.
#5 10-year Exemption from Taxes and Duties
A 10-year exemption from taxes and duties applies in case your company plans on importing breeding stock and genetic materials.
#6 Tax credit
The tax credit applies to companies handling domestic breeding stocks and also genetic materials (10 years).
One of the tax incentives available to export enterprises registered with the Board of Investments is becoming exempt from wharfage, any export tax, duty, impost, or fees.
#8 Additional Tax Credits
Companies access additional Tax Credits. These are equivalent to taxes and duties paid on purchases of raw materials, supplies, and semi-manufactured products, as part of the products for export.
Further Exemptions in the Philippine Tax Incentives For Export
You will find a list of useful incentives granted to exporters, knowing that there are a few exemptions will be a valuable knowledge as well. First of all, according to the Export Development Act (RA No. 7844), an exemption comes from Presidential Decree No. 1853, which requires 100% letter of credit. That is, knowing you will use the importation for the production of goods and services in export.
As well, another noteworthy Philippines tax incentive is the tax credit for incremental export performance. The tax credit for an increase in current export revenues is computed as a percentage and is applied to the revenue – depending on the current rate of pesos, the incremental export revenue is converted.
Rates and percentages are as follows:
|First 5% increase in annual export revenues over the previous year||2.5%|
|Following 5% increase||5.0%|
|Next 5% increase||7.5%|
Now about the exemption – the incentive is not available for exporters having ITH or VAT exemption already. Also, you are exempt from this benefit in case your local VAT is below 10%.
Additional Tax Incentives in the Philippines
Note that you may benefit from a few more tax incentives when doing business in the Philippines.
How Foreign Articles Qualify Under Philippines Tax Incentives
Foreign articles that are brought into the zones are tax-exempt, meaning no import duties and taxes are added. Goods bought locally from VAT-registered suppliers out of the economic zones are zero-rated.
Post ITH period, registered and operating companies in the export processing zones pay 5% special tax on gross income (from registered activities in lieu of all local as well as national taxes).
Philippines Tax Incentives for Regional or Area Headquarters
Regional or area headquarters (ROHQ), filling supervisory duties for a corporation’s subsidiaries, affiliates or branches in APAC while not receiving income from the Philippines, are not subject to CIT(corporate income tax), neither VAT(value-added tax). However, certain non-tax incentives apply:
- Income tax – a preferential rate of 10% of its taxable income
- Exemption from all kinds of local taxes, fees, or charges imposed by a local government unit – an exception is real property tax on land improvements and equipment
- Tax and duty-free equipment and material import for training and conferences, required and used solely for its functions as ROHQ. These are not locally available, subject to the prior approval of the BOI
- Importation of new motor vehicles, subject to the payment of corresponding duties and taxes
- Exemption from travel tax, specific immigration fees, and requirements, subject to certain conditions
Bureau of Internal Revenue online payment for Business Tax For Non-EFPS users:
STEP 1: Visit the link below to download and install the eBIRForms package. http://www.bir.gov.ph/index.php/eservices/ebirforms
STEP 2: Next, fill out BIR registration form with the details based on your BIR Certificate of Registration.
STEP 3: Review the BIR return and make sure all necessary details are included.
STEP 4: Once completed, click submit. Your information will be validated upon submission, and an email confirmation will be sent to your email address.
STEP 5: Pay the registration fee in an authorized bank or via ePayment facilities. For more details, you may visit ePay BIR
Do not hesitate to contact Emerhub to further discuss and take necessary actions on Philippines tax incentives. Developing market entry strategies for years, our team of experts is also here in case you need a credible partner, suggesting various ways of being more accountable for your business and knowledgeable about the market. In case of unanswered questions or consultation requests, fill out the form below.
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