Corporate Recovery and Tax Incentives for Enterprises: A Way to Attract Investments in General Santos City

2021 CEMCDO CALENDAR
June 17, 2021

Corporate Recovery and Tax Incentives for Enterprises: A Way to Attract Investments in General Santos City

On 24, June 2021, Atty. Elyjean DC Portoza, Director of the Legal and Investment Compliance Service of the Board of Investments (BOI), guest speaker, comprehensively discussed the CREATE Law and the Strategic Investment Priorities Plan via an Online Briefing conducted by the Investment Division of the Local Government Unit of General Santos – City Economic Management and Cooperative Development Office.
The CREATE Law is a way of attracting investments and enticing locators to be open to other strategic locations in the country other than Metro Manila.

EFFECTIVITY OF THE CREATE LAW
In her presentation, Atty. Portoza informed the participants that the CREATE Law was signed by President Rodrigo Roa Duterte into law last 26 March 2021 and took effect on 11 April 2021 purposely to develop the national economy towards global competitiveness by implementing tax policies instrumental in attracting investments.

WHAT CREATE COVERS
“CREATE covers all Investment Promotion Agencies (IPAs). IPAs shall maintain their functions under the laws governing them, except to the extent modified by CREATE. It offers a menu of incentives such as Income Tax Holiday (ITH); Five percent (5%) Special Corporate Income Tax (SCIT) based on Gross Income Earned, in lieu of all national and local taxes for as long as 10 years; It also offers Enhanced Deductions (ED); Duty exemption on importation of Capital Equipment, raw materials, spare parts, or accessories; as well as VAT exemption on importation and VAT Zero-rating on local purchases.”, she further explained

ENHANCED DEDUCTIONS
Enhanced deductions (ED), according to Atty. Portoza are as follow: Depreciation allowance of assets-additional 10% for buildings; an additional 20% for machinery and equipment; 50% additional deduction on labor expense; 100% additional deduction on Research & Development (R&D); 100% additional deduction on training expense given to Filipino employees; 50% additional deduction on domestic input expense; 50% additional deduction on power expense; Deduction for reinvestment allowance to the manufacturing industry in connection to the amount reinvested to a maximum of 50% and lastly, Enhanced Net Operating Losses Carry Over (NOLCO) from taxable years.

THE 2020 IPP AS TRANSITIONAL SIPP
Accordingly, the 2020 Investment Priority Plan (IPP) and its General Policies and Specific Guidelines, will serve as the transitional provisions to be used as Strategic Investments Priority Plan (SIPP). Under this IPP, there are 12 preferred activities, 3 export activities, and 8 mandatory activities under special law Per Memorandum Order No. 50, titled “Approving the 2020 Investment Priorities Plan” issued by Malacanang dated 18 November 2020, the following are the preferred activities for Investment:


First, are All Qualified Relating to the Fight against the COVID-19 Pandemic such as essential goods and essential services. Examples of essential goods are the production or manufacture of medicines, medical equipment and devices, personal protective equipment (PPE), surgical equipment and supplies, laboratory equipment and its reagents, medical supplies, tools, and consumables such as but not limited to.

Second is Investment in activities, subject to the determination of the Board, supportive of programs to generated employment opportunities outside of congested urban areas such as but not limited to the proposed Balik Probinsya Program or similar program that may be implemented by the Government. Pursuant to Article 41 of EO 226, the Board may provide up to 6 years of Income Tax Holiday to qualified activities under Listing 1 and 2 upon the determination that it is highly essential to the attainment of the national goal under RA 11469 to mitigate or avoid a serious threat to the lives, health, safety and security of the Filipinos and address the long-term adverse effects on their livelihood and the severe disruption of economic activities in the country.

Third, are all Qualified  Manufacturing Activities including Agro-Processing which covers the manufacture of industrial goods and processing of agricultural and fishery products, including Halal and Kosher foods into (a) Semi-Finished/intermediate goods for use as inputs in the production of other goods, or (b) finished products or consumer goods for final consumption. The manufacture of modular housing components and machinery and equipment  including parts and components are also included activities.  On the other hand,  For Metro Manila, only modernization projects may qualify for registration.

Fourth, Agriculture, Fishery, and Forestry cover commercial production of agricultural, fishery, and forestry products.  This covers nurseries, hatcheries, post-harvest facilities, and other support services and infrastructures. 

For Metro Manila, only agricultural infrastructure and support services and urban agriculture projects may qualify for registration as new, expansion, or modernization.

Fifth are Strategic Services such as IC Design, Creative Industries/Knowledge-Based Services, Maintenance, Repair and Overhaul (MRO) of aircraft; Charging/Refueling Stations for Alternative Energy Vehicles; Industrial Waste Treatment; Telecommunications, State -of-the-art Engineering, Procurement, and Construction for industrial plants and infrastructure.

Sixth are Healthcare and Disaster Risk Reduction and Management Services which covers the establishment and operation of general and specialty hospitals, and other medical/healthcare facilities including drug rehabilitation, quarantine and evacuation centers.

Seventh is Mass Housing which covers the development of housing units based on a price ceiling of Php 2.0 Million. This also covers in-city-low-cost dwelling projects for lease/rent. For Metro Manila, only-in city-low cost dwelling for lease/rent may qualify for registration.


Eight are Infrastructure and Logistics including LGU-PPPs which covers the establishment and operation of physical infrastructures vital to the country’s economic development and prosperity such as, but not limited to: airports, seaports (air, land and water) transport, LNG storage and regasification facilities, pipeline projects for oil and gas, bulk water treatment and supply, training facilities, testing laboratories, and domestic industrial zones. This also covers PPP Projects including those initiated and/or implemented by Local Government Units (LGUs).


Ninth are Innovation Drivers which covers research and development (R & D) activities, conduct of clinical trials (including drug trials), establishment of Centers of Excellence, innovation centers, business incubation hubs, smart cities and fabrication laboratories (fablabs)/co-working spaces, and development of mobility solutions and digital trade.


These also cover commercialization of new and emerging technologies, uncommercialized patents on products and services, and products of locally undertaken R&D, such as, but not limited to: Agricultural biotechnology tools, Disaster mitigation/prevention hardware or software; Hardware or software for increasing agricultural productivity; Mechanized means for natural resources conservation; portable technologies – innovation on existing bulky or heavy device to make it portable, or a new device or service that can be brought virtually anywhere; Hardware or software for the prevention of disease outbreaks; remote monitoring devices or systems; professional services for remote sensing; hardware or software for the upgrading of local industries; photonics and nanotechnology;and natural health products.These include startup and startup enablers under Republic Act 1137 or the Innovative Startup Act.


Tenth, are the Inclusive Business (IB) Models which cover business activities of medium and large enterprises (MLEs) in the agribusiness and tourism sectors that provide business opportunities to micro and small enterprises (MSEs) as part of their value chains. IB may qualify for pioneer status.


Eleventh is Environment or Climate-Change-Related Projects which cover manufacture/assembly of goods and the establishment of energy efficiency-related facilities, except those covered under Republic Act (RA) No.11285 or Energy Efficiency and Conservation Act, where either utilization of which would significantly lead to either the efficient use of energy, natural resources or raw materials, minimize/prevent pollution, or reduce greenhouse gas emissions. These also cover green ship recycling based on international standards and the establishment of a privately-owned material recovery facility.


Twelfth, are power generation projects utilizing conventional fuels (i.e. coal, diesel, bunker, and natural gas), waste heat and other wastes, and the establishment of battery energy storage systems.

EXPORT ACTIVITIES
Also covered are the production and manufacture of export products; services exports and activities in support of exporters.


SPECIAL LAWS
These cover activities where inclusion in the IPP is mandated for purposes of incentives, as follows: Industrial Tree Plantation inline with PD 705, the Mining Law or RA 7942 which is limited to capital equipment incentive; Publication or Printing of Books/Textbooks in line with RA 8047; Refining, Storage, Marketing and Distribution of Petroleum Products in line with RA 8479; Rehabilitation, Self-Development, and Self-Reliance of Persons with Disability in line with RA 7277; Renewable Energy in line with RA 9513; Tourism inline with RA 9593; and Energy Efficiency and Conservation in line with R.A. 11285.

INDUSTRY TIERS AND ITS BENEFITS TO GENERAL SANTOS CITY
The industries are classified into three referred to as “Tiers’ ‘ such as Tier 1, Tier 2 and Tier 3 respectively. Since General Santos City has an agro-industrial and manufacturing industry its business stakeholders, if qualified, may be able to maximize the benefits under this law and will surely gain from the income tax holiday and enhanced deductions incentives.


Qualified projects or activities shall, at the minimum, be registered under Tier 1–without prejudice to upgrading if qualified under the new SIPP. Grant of incentives for projects or activities with investment capital of more than >P1B shall be submitted to the FIRB.


Industries falling under the Tier 1 are those that: have a high potential for job creation; take place in sectors with market failures resulting in under-provision of basic goods & services; generate through innovation, upgrading, moving up the value chain; provide essential support for sectors that are critical to industrial development and; are considered emerging owing to potential comparative advantage.

Tier 2 industries, on the other hand, cover those activities that produce supplies, parts and components, and intermediate services that are not locally produced but are critical to industrial development and import-substituting activities, including crude oil refining.


While the last, Tier 3 industries, are those companies that are into research and development resulting in demonstrably significant value-added, higher productivity, improved efficiency, breakthroughs in science and health, and high-paying jobs; Generation of new knowledge and intellectual property registered and/or licensed in the Philippines; Commercialization of patents, industrial designs, copyrights, and utility models owned or co-owned by a registered business enterprise; Highly technical manufacturing and those industries that are critical to the structural transformation of the economy and require substantial catch-up efforts.

PERIOD OF AVAILMENT 

        For the period of availment, industries may avail depending on the location of the enterprise and its market activities, whether it is an exporter or domestic market enterprise.   The table below shows the incentives and the corresponding allowable period of incentive availment:

Table 1 & 2  Period of Availment

For Tier 1 industries with export market activities (see first column of  Table 1, For Exporters) may avail of higher period of and bigger incentives also depending on their location as follow:  if the company’s location is in the National Capital Region, once qualified, it can avail of up to 4 years of Income Tax Holiday (ITH,) plus 10 years of Enhanced Deductions, (ED) and Special Corporate Income Tax (SCIT). However if it is located in the Metropolitan Areas or Areas Contiguous and Adjacent to the National Capital Region, it can avail of up to 5 years of ITH plus 10 years of ED and SCIT and if it is located in all other areas, it can avail up to 6 years of ITH plus 10 years of ED and SCIT.      

Meanwhile, Tier 1 industries with the domestic market (see the first column of Table 2, Domestic Market Activities), if the enterprise’s location is in the National Capital Region, once qualified, it can avail of up to 4 years of Income Tax Holiday (ITH) plus 5 years of Enhanced Deductions (ED). However, if it is located in the Metropolitan Areas or Areas Contiguous and Adjacent to the National Capital Region,  it can avail of up to 5 years of ITH plus 5 years of ED and lastly, if it is located in all other areas, it can avail up to 6 years of ITH plus 5 years of ED.

On the other hand, Tier 2 Export industries (see the second column of  Table 1, For Exporters), may also enjoy longer incentives as follow:  if the company’s location is in the National Capital Region, once qualified, it can avail of up to 5 years of Income Tax Holiday (ITH) plus 10 years of Enhanced Deductions (ED) and Special Corporation Income Tax (SCIT). However, if the company is located in the Metropolitan Areas or Areas Contiguous and Adjacent to the National Capital Region, it can avail of up to 6 years of ITH plus 10 years of ED  and SCIT. For a company located in all other areas, it can avail up to 7 years of ITH plus 10 years of ED and SCIT.

Meanwhile,  Tier 2 domestic industries (see second column of the Table 2, Domestic Market Activities)may enjoy incentives, also depending on their location: if the enterprise’s location is in the National Capital Region, once qualified, it can avail of up to 5 years of Income Tax Holiday (ITH) plus 5 years of Enhanced Deductions (ED). However if it is located in the Metropolitan Areas or Areas Contiguous and Adjacent to the National Capital Region, it can avail of up to 6 years of ITH plus 5 years of ED and lastly, if it is  located in all other areas, it can avail up to 6 years of ITH plus 5 years of ED.                         

Moreover, Tier 3 with export activities (see the third column of Table 1, Export Activities), may avail of the incentives based on the following:  if the company’s location is in the National Capital Region, once qualified, it can avail of up to 6 years of Income Tax Holiday (ITH) plus 10 years of Enhanced Deductions, (ED) and Special Corporate Income Tax (SCIT). However, if the company is located in the Metropolitan Areas or Areas Contiguous and Adjacent to the National Capital Region, it can avail of up to 7 years of ITH plus 10 years of ED  and SCIT. For a company located in all other areas, it can avail up to 7 years of ITH plus 10 years of ED and SCIT.     

 On the other hand, businesses that fall under the Tier 3 industries with domestic activities (see the third column of Table 2, Domestic Market Activities) may avail of incentives as follow: if the enterprise’s location is in the National Capital Region, once qualified, it can avail of up to 6 years of Income Tax Holiday (ITH) plus 5 years of Enhanced Deductions (ED). However, if it is located in the Metropolitan Areas or Areas Contiguous and Adjacent to the National Capital Region or all other areas,  it can avail of up to 7 years of ITH plus 5 years of ED.

ADDITIONAL INCENTIVES                                                                                                  

Furthermore, Atty. Portoza cited additional incentives that shall be given to selected company relocators as follows:  Additional 3 years of Income Tax Holiday (ITH) to registered enterprises that fully relocate outside of NCR; and an additional 2 years of ITH to registered enterprises that locate in areas recovering from disasters or conflict.

In addition, she also presented other features of the CREATE Law such as the removal of nationality and export bias wherein the requirement for a Foreign-Owned Business Enterprise to be either a pioneer project or export 70% of its total production is no longer required.  Also, Expansion Projects, and Existing Registered Projects prior to the effectivity of the CREATE Law may qualify to avail of incentives under CREATE,   subject to the qualifications set forth in the SIPP and performance review by the Fiscal Incentives Review Board (FIRB).     

POWER OF THE PRESIDENT

     Furthermore, Atty. Portoza elaborated on the Power of the President, upon the recommendation of the FIRB, to modify the mix, period or manner of availment of incentives provided under CREATE; or Craft the appropriate financial support package for a highly desirable project or a specific industrial activity.  For highly desirable projects, for example, the minimum investment capital of Php50B or at least 10,000 direct local employment generation is required. Once qualified, a company’s total Period of availment will not exceed forty (40) years, and ITH availment will not exceed 8 years. For this purpose, financial support includes utilization of government resources such as land use, water appropriation, power provision, budgetary support provision under the Annual General Appropriations Act is being considered.

     Atty. Portoza further said,  those under ITH  may continue to avail based on their existing terms and conditions, while those under the 5% Gross Income Earned (GIE) regime may avail it for 10 years of 5% GIE.

PROCESS OF APPLICATION

       Atty. Portoza also presented the process of applying for incentives under the new law. For those who are interested to avail of the incentives. She mentions that the concerned Investment Promotion Agency (IPA) shall have the exclusive jurisdiction to register all projects or activities, regardless of investment capital.

        Concerned IPA shall have the authority to approve or disapprove grant of tax incentives to registered projects or activities with investment capital of P1B and below under a delegated authority. 

        Registration of projects and grant of incentives covered by special laws not repealed by the Create Act shall continue to be administered by the IPA vested with such authority.

         All Application for registration shall be filed electronically through a system prescribed by the Fiscal Incentives Review Board (FIRB).

         The IPA, then checks the application documents by referring to a checklist. If it is complete, it shall issue order of payment for filing fee and Notice of Official Acceptance. If it is not, the IPA notifies the applicant of requirements not complied with. 

        Once found complete, publication of notice of application will be done by the applicant. 

      The IPA then prepares an evaluation report.

      If the Board approves, the IPA issues Notice of Board Action (NOBA) to the applicant. If not, the IPA notifies the applicant of the denial of its application.

     Once its application is approved, the Business Enterprise complies with the pre-registration requirements. After completion of the said requirements, the IPA issues Certificate of Registration to the Applicants. If it does not able to complete said requirements, the IPA shall notify the applicant of the denial of its application. 

  PROJECTS MORE THAN P1B

     For Projects over one billion pesos (P1B), the Investment Priority Agency shall recommend to the Fiscal Incentives Review Board the approval or disapproval of the grant of the incentives.

The FIRB Secretariat then reviews the application and recommendations of the IPA. The FIRB Secretariat then prepares an evaluation report and submits it to the FIRB Technical Committee who shall either adapt or disregard the secretariat’s recommendation. The technical committee then submits its recommendations to the FIRB. The FIRB decides on the application and issues board resolutions. If it’s approved, the Business Enterprise shall comply with the existing pre-registration requirements. Once completed, the IPA shall issue Certificate of Registration to the Applicant.

AVAILMENT OF THE INCENTIVES

    Once registered, the Business Enterprise may now apply for the availment of incentives. Registered Business Enterprise fills out an online application form for issuance of Certificate for Entitlement for Tax Incentives (CETI) and electronically submits requirements to the concerned IPA. 

     After which, the IPA checks the Registered Business Enterprise’s Compliance with the Terms and Conditions of its Registration.

    The IPA then issues Order of Payment for filing fee and Notice of Official Acceptance and notifies applicant of requirements complied with. Then the IPA issues CETI to the RBE.  The RBE then attaches CETI to its Income Tax Return (ITR) prior to filing with the Bureau of Internal Revenue.

CONDITIONS FOR THE GRANT OF INCENTIVES

        The following are the conditions for the grant of incentives: First is the fulfilment to the requirements and conditions under the SIPP. Second is the compliance with the target performance metrics specified under the terms and conditions of the registration to include performance metrics on employment, investment capital, and domestic inputs, among others. Third is the compliance with the e-receipting and e-sales requirement of the NIRC. Fourth is the Installation of an adequate accounting system or separate books of accounts for each project and fifth, submission of annual reports of beneficial ownership of the organization and related parties.

OTHER OBLIGATIONS 

         The Registered Business Enterprise is also expected to fulfill its obligations through compliance with performance commitments such as submission of Annual Tax Incentives Report and Annual Benefits Report and other reports or documents as described in the Terms and conditions of its registration. ##### (VTP/EDC/LVF)