Philippines' new law cuts corporate tax, improves fiscal incentives system

Benefits for Japanese investors highlighted

MANILA, PHILIPPINES - Media OutReach - 12 April 2021 - The Philippines has enacted a landmark law that cuts corporate income tax by as much as 10 percent and rationalizes fiscal incentives, thereby serving as the biggest stimulus for businesses in the country's history.

On March 26, President Rodrigo R. Duterte signed Republic Act No. 11534 or the "Corporate Recovery and Tax Incentives for Enterprises Act" (CREATE) into law after a joint Philippine Congressional panel ratified it in February.

With the new law, the Philippine government is providing about P1 trillion (nearly JPY2.3 trillion) worth of tax relief to businesses over the next 10 years.

Finance Secretary Carlos Dominguez III said in a statement that the enactment of CREATE into law "signals to the rest of the world that the Philippines is back in the game to attract investments, create jobs, and achieve inclusive growth."

CREATE's Far-Reaching Impact

CREATE will help attract job-generating investment domestically and internationally from countries such as Japan. It will also aid the speedy recovery of businesses and the Philippine economy at large following the onset of the COVID-19 pandemic.

CREATE slashes the corporate income tax (CIT) from 30 percent to 20 percent for small enterprises with net taxable income of P5 million (about 11 million yen) and below, and with total assets of not more than P100 million (about 220 million yen), excluding land. It will also reduce CIT for large firms to 25 percent, which is within the range in other ASEAN countries.

CREATE also rationalizes the country's fiscal incentives system in a manner that will enable the government to provide competitive and well-targeted incentives to investors in priority industries and locations.

In particular, enterprises whose investments qualify under the government's Strategic Investment Priority Plan (SIPP) may avail themselves of an income tax holiday (ITH) of between four and seven years. Once the ITH lapses, other tax perks may still be applied for.

For exporters, either one of two options for tax incentives are available following the expiration of the ITH. One is a preferential tax of 5 percent on gross income earned (GIE) for 10 years. The other is the "enhanced deductions" scheme, which allows a more generous list of allowable deductions from taxable income for a period of 10 years.

For non-exporters, they can utilize the "enhanced deductions" scheme for a period of five years after their ITH expires.

Moreover, enterprises that choose to be located in areas outside the National Capital Region (NCR) will enjoy additional ITH for three years, while those located in areas recovering from disaster or conflict will enjoy ITH for two years.

Alongside this development, government-owned and -controlled corporation Bases Conversion and Development Authority (BCDA), which engages in public-private partnerships for vital infrastructure and real estate development, has cited the value that Japanese investors find in doing business in the Philippines.

BCDA President and CEO Vivencio B. Dizon noted that many Japanese firms have been doing business in the Philippines in industries such as real estate and manufacturing. In Clark, an area north of Manila developed by BCDA, there are 43 Japanese firms in operation, including those in various types of manufacturing, business process outsourcing, software development, warehousing, freight forwarding, tourism estate, and office space.

With the enactment of CREATE, the Philippines hopes to attract even more Japanese investors and businesspeople as well as other foreign investors.

"Our Japanese partners benefit from the presence of industrial zones that are supported by transport and logistics facilities. Further, the country's location in the Asia-Pacific allows them access to major trading routes," Dizon said.

"We [Filipinos] share similarities with the Japanese in terms of hard work, perseverance, and family values, making the quality of our labor force ideal for these firms," he added.

Aside from CREATE, the Philippines' economic managers are pushing for the speedy enactment of other reforms that will further liberalize the economy such as the amendments to the Foreign Investment Law, the Public Service Act, and the Trade Liberalization Law.

Philippine-Japan Relations

Recently, the Philippines and Japan reaffirmed their commitment to further build on their strong economic partnership.

Japan was the Philippines' top export market and second biggest source of imports in 2020. Japan was also the Philippines' biggest source of foreign direct investments (FDIs) last year, accounting for 47.35 percent of total net equity FDIs other than reinvestment earnings.

In recent separate courtesy calls Bangko Sentral ng Pilipinas (BSP) Governor Benjamin E. Diokno and Philippines' Finance Secretary Carlos Dominguez III, Japan Ambassador to the Philippines Koshikawa Kazuhiko cited plans to expand Japanese investment in the Philippines.

The Ambassador said Japanese companies are exploring ways of realigning their supply chains to other countries, including the Philippines.

The BSP Governor told the Ambassador that the Philippines and Japan will mutually benefit from enhanced economic ties—i.e., the Philippines from Japanese investments and Japan from the Philippines' young, educated, and English-speaking workforce.

The Ambassador also reiterated Japan's full support to the Philippines' efforts to develop micro, small, and medium enterprises (MSMEs). In fact, Japan International Cooperation Agency (JICA) has engaged in a joint initiative with the BSP for the Credit Risk Database project, which was launched in December last year. The project involves the creation of a centralized credit database for MSMEs, which is expected to significantly enhance their access to bank loans.

The Ambassador lauded the BSP Governor for the proactive response of the central bank in mitigating the impact of the COVID-19 pandemic on the economy, such as through cuts in the policy rate and the reserve requirement for banks.

In his meeting with the Finance Secretary, the Ambassador also congratulated him for the landmark CREATE law.

The Philippines' key indicators

The Philippines' favorable economic recovery prospects are well recognized internationally, partly due to its sound macroeconomic fundamentals that have provided the country with ample fiscal and monetary space to squarely deal with the effects of the pandemic. For this year, the government expects the economy to grow anywhere between 6.5 and 7.5 percent.

The Philippines has managed to keep its investment grade credit ratings, amid a wave of credit rating downgrades and negative outlook revisions globally. The country was rated "BBB" by Fitch and the equivalent "Baa2" by Moody's (both ratings are one notch higher than the minimum investment grade), and a higher rating of "BBB+" by S&P (delete as R&I upgrade is mentioned in the paragraph below)

last year, Japan Credit Rating Agency upgraded the Philippines' credit rating by a notch to "A-" while Rating and Investment Information Inc. (R&I), also a Japan-based debt watcher, upgraded the country's rating by a step to BBB+. All cited encouraging economic prospects.

Philippines issues Samurai bonds

Favorable assessment from the Japanese debt watchers bodes well for the financing activities of the Philippines as it issues Samurai bonds. The Philippines returned to the Samurai bond market March 30, with the issuance of a three-year zero-coupon bond.

The bond was priced at 21 basis points above benchmark, the tightest spread the country has achieved since returning to the Samurai market in 2018. Strong investor demand led to a hike in the size of the offering from the initial JPY30 billion to JPY55 billion.

These materials are distributed by BCW on behalf of the Government of the Republic of the Philippines. Additional information is on file with the US Department of Justice.