The Philippines lowers corporate taxes to boost competitiveness

The Corporate Recovery and Tax Incentives for Enterprises (CREATE) Act, was passed into law on March 26 this year and has been effective since April 11. The Act’s purpose is to grant tax relief for both foreign and domestic companies, provide transparent tax provisions and further increase the competitiveness of the Philippines.

Retroactive reduction of regular corporate income tax rate

• For domestic and resident foreign corporations

The CREATE Law reduces the regular corporate income tax (CIT) of domestic corporations and resident foreign corporations (e.g., branch offices) from 30% to 25% effective 1 July 2020. Further, for domestic MSME corporations (i.e., micro, small and medium enterprises whose total assets do not exceed Php 100 million) with net taxable income not exceeding Php 5 million for the taxable year, the regular CIT will only be 20% effective 1 July 2020.

• For non-resident foreign corporations

The regular CIT of non-resident foreign corporations has been reduced from 30% to 25%, but such reduced rate is effective only from 1 January 2021, a later date as compared to the tax cut extended to domestic and resident foreign corporations.

Improperly accumulated earnings tax repealed

Domestic corporations will benefit from the repeal of the improperly accumulated earnings tax (IAET) for the taxable or fiscal years ending after the effectivity of the CREATE Law.

The 10% IAET was a deterrent for shareholders to avoid tax on dividends, and functioned as a “penalty” to discourage domestic corporations from retaining surplus profits in excess of its paid-up capital and beyond the reasonable needs of the business, when these could have been declared as dividends to shareholders for each taxable year.

Forecast and desired effects

These tax incentives are a welcome relief for many SMEs who have been significantly affected by the pandemic.

This new tax regime reduces the significant discrepancy in regard to CIT that existed between the country and other ASEAN members. At 30%, the Philippines had the highest CIT rate in the ASEAN bloc, as compared to other member states, which only imposed regular CIT rates within the range of 17% (Singapore) to 25% (Myanmar).

Through the CREATE Act, the Philippine government also hopes to increase the country’s investment appeal, particularly for businesses based in China looking to diversify their supply chain in the region.

For further information about taxation in the Philippines, feel free to contact our team at contact@orbis-alliance.com.