31.3 Tax Incentives under CREATE MORE and Tax Treaties
Key Takeaways
Under CREATE MORE, investment promotion agencies approve incentives for projects up to PHP 15 billion, and the FIRB approves larger projects.
RBEs may use SCIT (5% of gross income earned, in lieu of all national and local taxes) or the enhanced deductions regime with a 20% income tax rate, outright or after an ITH.
LGUs may impose an RBELT of up to 2% of gross income on RBEs under ITH or EDR, but not on RBEs under SCIT.
Treaties tax business profits in the source country only through a permanent establishment and cap source-country tax on dividends, interest, and royalties.
Resident citizens and domestic corporations may credit foreign income taxes subject to the per-country and overall limitations.
Tax Incentives under CREATE MORE and Tax Treaties
Tax incentives and treaties reduce the tax burden on qualified investments and cross-border income. This section covers the CREATE and CREATE MORE incentives framework (approving authorities, income tax holiday, special corporate income tax, enhanced deductions, duty and VAT incentives, and the RBELT), tax treaties and permanent establishments, treaty relief procedures, and the foreign tax credit.
1. Fiscal Incentives under CREATE and CREATE MORE (Title XIII of the NIRC)
The CREATE Act (RA 11534) consolidated investment incentives in Title XIII of the NIRC. CREATE MORE (RA 12066, signed November 8, 2024) amended it to make the regime more competitive.
Approving Authorities
- Investment Promotion Agencies (IPAs) such as BOI, PEZA, SBMA, and CDC approve incentives for projects with investment capital of up to PHP 15 billion under CREATE MORE (PHP 1 billion under CREATE).
- The Fiscal Incentives Review Board (FIRB), chaired by the Secretary of Finance, approves incentives for projects above PHP 15 billion and oversees the whole incentives system.
- The Strategic Investment Priority Plan (SIPP) classifies qualified activities into Tiers I, II, and III, which, together with location, determine the incentive period.
Menu of Incentives for Registered Business Enterprises (RBEs)
| Incentive | Key features |
|---|---|
| Income tax holiday (ITH) | 4 to 7 years, depending on tier and location |
| Special corporate income tax (SCIT) | 5% of gross income earned, in lieu of all national and local taxes (3% to the national government and 2% to the LGU); no local tax may be added |
| Enhanced deductions regime (EDR) | Under CREATE MORE, a 20% corporate income tax rate on income from the registered activity, plus enhanced deductions such as additional depreciation, an additional 50% deduction for direct labor, 100% for research and development and for training, 50% for domestic inputs, 100% for power expenses (raised from 50% by CREATE MORE), and a five-year NOLCO |
| Duty exemption | Imports of capital equipment, raw materials, spare parts, and accessories directly attributable to the registered activity |
| VAT exemption and zero-rating | VAT-exempt importation and zero-rated local purchases directly attributable to the registered project of export enterprises and high-value domestic market enterprises |
CREATE MORE changes to remember:
- SCIT or EDR may be availed of outright, without first using an ITH, and the SCIT or EDR period can run for up to 20 years, for a total incentive period of up to 27 years including the ITH.
- LGUs may impose a registered business enterprise local tax (RBELT) of up to 2% of gross income on RBEs under the ITH or EDR, in lieu of local fees and charges. No RBELT may be collected from RBEs under SCIT.
- High-value domestic market enterprises, such as those with investment capital above PHP 15 billion, may receive export-type incentives.
Tax Treaties and Relief from Double Taxation
The Philippines has tax treaties with more than 40 countries, generally based on the OECD and UN model conventions. Treaties allocate taxing rights between the source and residence countries and cap source-country tax on passive income.
| Treaty concept | Rule |
|---|---|
| Business profits | Taxable in the source country only if the enterprise has a permanent establishment (PE) there, such as a fixed place of business or a service PE based on days of presence |
| Dividends, interest, and royalties | The source country may tax them at reduced treaty rates (often 10% to 15%) instead of the domestic rates |
| Methods of relief | The residence country gives relief by the credit method (credit for foreign tax paid) or the exemption method |
Availing of treaty relief (RMO No. 14-2021): for dividends, interest, and royalties, the nonresident gives the withholding agent a tax residency certificate and the prescribed application form, the agent applies the treaty rate, and the agent then asks the BIR International Tax Affairs Division to confirm the relief. For other income, a tax treaty relief application is filed with the BIR. Under Deutsche Bank AG Manila Branch v. CIR (2013), treaty benefits cannot be denied merely because an administrative filing was late, because the Philippines must observe its treaty obligations in good faith.
Domestic foreign tax credit (Section 34(C)(3)): resident citizens and domestic corporations may credit income taxes paid abroad against Philippine income tax, subject to the per-country and overall limitations, or they may deduct foreign taxes instead.
Transfer pricing (RR No. 2-2013). Transactions between related parties, such as intercompany sales, services, royalties, and loans, must follow the arm's length principle: the price must be what independent parties would agree on in comparable circumstances. Acceptable methods include the comparable uncontrolled price, resale price, cost plus, profit split, and transactional net margin methods. The BIR may reallocate income and deductions under Section 50 of the NIRC when related-party pricing distorts taxable income, and taxpayers covered by RR No. 34-2020 must attach the related party transaction form (BIR Form 1709) to their annual income tax returns.
Ecozones, freeports, and other investment laws. Special economic zones and freeports were created under laws such as the PEZA Law (RA 7916) and the Bases Conversion and Development Act of 1992 (RA 7227), which created the BCDA and the Subic and Clark freeport zones administered by SBMA and the Clark Development Corporation. The Board of Investments administers incentives under the Omnibus Investments Code (EO 226). Since CREATE, the incentives of enterprises registered with these investment promotion agencies are governed by Title XIII of the NIRC, and enterprises that enjoyed the 5% gross income regime before CREATE continue under its transitory provisions for a limited period.
In 2026, an export enterprise registered with PEZA plans a semiconductor plant with an investment capital of PHP 3,500,000,000. Under the CREATE Act as amended by CREATE MORE (RA 12066), which body approves the incentives, and which regime may the enterprise choose?
PEZA as the investment promotion agency, because the project is within the PHP 15 billion limit; and it may avail of the 5% SCIT, even without first using an ITH
The Fiscal Incentives Review Board, because the project exceeds PHP 1 billion; and it must first exhaust a 7-year ITH before any SCIT
The Department of Trade and Industry; and the enterprise is limited to a 4-year ITH with no subsequent incentive
The Board of Investments; and the enterprise receives a 20-year exemption from all national and local taxes
Under CREATE MORE, which registered business enterprises may be subjected by an LGU to the registered business enterprise local tax (RBELT) of up to 2% of gross income?
Only enterprises under the 5% special corporate income tax
Enterprises under the income tax holiday or the enhanced deductions regime
All enterprises, in addition to regular local business taxes
No enterprises, because RBEs are exempt from all local impositions
A nonresident foreign company with no permanent establishment in the Philippines earns business profits from Philippine customers. Its country has a tax treaty with the Philippines that follows the OECD model. How are these business profits generally treated?
They are taxable in the Philippines at 25% regardless of the treaty
They are taxable in the Philippines only at the treaty rate for royalties
They are taxable only in the residence country, because there is no permanent establishment in the Philippines
They are exempt in both countries
Sections you finish are checked off in the contents.