Philippines’ Investment Incentives: Opportunities in 2023
The Philippines, as part of the ASEAN, boasts a complex investment incentive scheme that stands out among its regional peers. These incentives are largely shaped by the country’s legal framework, specifically the Omnibus Investments Code (Executive Order 226/1987 along with its subsequent amendments). This legal framework has been instrumental in fostering a conducive environment for foreign and domestic investment.
To avail themselves of these incentives, companies must be eligible for registration with the Philippines’ Board of Investments (BOI). The BOI is the primary government body responsible for foreign investments in the country and compiles the Strategic Investment Priorities Plan (SIPP) on a regular basis. The SIPP outlines the activities that can benefit from these incentives. The BOI typically prefers new projects, but also makes allowances for expansion and modernization projects in the SIPP as it deems necessary.
The BOI incentives are targeted at companies that are at least 60% Philippine-owned. However, companies that do not meet this ownership requirement can still access these incentives by ensuring that at least 70% of their production is exported or their project attains pioneer status. Pioneer status is conferred on enterprises that bring new goods or technologies to the Philippine market, support national economic goals, or involve substantial investment and carry an above-normal risk. Notably, fully foreign-owned companies producing solely for the domestic market, and engaged in non-pioneer activities, are ineligible for BOI registration.
In 2021, Congress enacted the Republic Act (RA) 11,534, which made significant amendments to the tax law and incentives regime under EO 226/1987, as well as various laws governing freeports and economic zones. The key amendment was a reduction in the corporate tax rate from 30% to 25% (20% for small and medium-sized companies), applied retroactively from July 2020. In line with the Organization for Economic Co-operation and Development’s (OECD) guidance, the tax rate on regional operating headquarters of multinational companies was increased from 10% to the standard rate of 25% by January 2022.
Under the RA 11,534/2021, also known as the Corporate Recovery and Tax Incentives for Enterprises (CREATE) Act, companies registered with the BOI, Philippine Economic Zone Authority (PEZA), Tourism Infrastructure and Enterprise Zone Authority, and ten other investment-promotion agencies may be granted the following incentives uniformly. An income tax holiday lasting from four to seven years is available depending on the location and industry of the investment project. An extra two to three years of income tax holiday may also be granted if the project is located in areas recovering from armed conflict or a major disaster, or is relocating from the national capital region.
Moreover, certain enterprises such as export-oriented firms, domestic companies with an investment capital of not less than P500 million, or domestic firms deemed critical to national development may choose between a Special Corporate Income Tax (SCIT) rate of 5% on gross income for ten years or a regular tax rate of 25% with enhanced deductions for ten years. If a domestic company is not an exporter or deemed critical to national development, it qualifies for the SCIT or special deductions incentive for a maximum of only five years.
RA 11,534/2021 also offers an additional deduction of 50% of labour training expenses incurred in employing apprentices enrolled in public schools, capped at 10% of total direct wage expenses. The law retains several incentives from the previous regime including exemption from customs duties on importation of qualifying capital equipment, raw materials, and spare parts, and exemption from the Value Added Tax (VAT) or zero VAT rating on local purchases of goods and services by companies in special economic zones.
The Act also establishes the Fiscal Incentives Review Board (FIRB), headed by the Secretaries of Finance and Trade and Industry. The FIRB approves investment projects costing more than P1 billion, except those granted legislative franchise. Investment projects costing P1 billion or less may be registered by the investment-promotion agencies such as the BOI, PEZA, and the administrators of several freeports and special economic zones. This harmonises the incentives regimes of the BOI, PEZA, and similar agencies. The Act also gives the president the power to grant “highly desirable projects” (those costing at least P50 billion and generating 10,000 jobs) an income tax holiday of up to eight years, followed by a special 5% tax rate for a maximum of 32 years.
Under the RA 11,534/2021, companies are required to submit reports on their progress in achieving job creation, export, or productivity targets, and provide an annual report on beneficial ownership. Companies that are granted tax incentives are also required to use the electronic filing and payment system of the Bureau of Internal Revenue. Failure to comply with these requirements may result in fines ranging from P100,000 to P500,000 and could eventually lead to the cancellation of the incentives.
From 2020, in response to the coronavirus pandemic, the Philippine government has implemented several relief measures to protect workers and businesses from the ensuing economic downturn. However, most of these measures had been phased out by the end of 2022. State-owned lenders such as the Development Bank of the Philippines and the Land Bank of the Philippines continue to offer longstanding credit programmes for specific priority sectors. Also, import duties, taxes, and other fees on certain healthcare equipment and supplies are suspended until the end of 2023.
Incentives By Sectors
The Philippine government, in May 2022, issued Memorandum Order (MO) 61, which took effect in the subsequent month. Under this order, the 2022 Strategic Investment Priorities Plan (SIPP) was released, outlining a comprehensive list of business activities eligible for incentives granted by the Board of Investments (BOI) and other investment-promotion agencies. This memorandum adopted the entire content of the previous SIPP issued in 2020 as activities qualified for Tier I incentives, whilst also identifying activities eligible for Tier II and Tier III incentives.
Tier I of the latest SIPP is divided into four general categories. The first is a regular list of preferred activities. The second category caters to export activities. The third is a mandatory list of industries required by law to be included under the SIPP. Lastly, the fourth category includes projects located in the Autonomous Region of Muslim Mindanao. These four categories capture a wide range of activities, providing a variety of opportunities for investors.
The regular list of preferred activities under Tier I is wide-ranging. It includes goods and services related to the fight against the COVID-19 pandemic, activities supportive of government programs that generate jobs outside major urban centres, and the manufacture of industrial goods and processing of agricultural and fishery products. Other activities in this category include commercial production of agricultural, fishery, and forestry products, strategic services such as creative industries and telecommunications, healthcare services, low-cost housing, infrastructure and logistics, and research and development projects, among others.
Export activities, including those supporting exporters, are catered for under Tier I of the SIPP. Activities located in the Autonomous Region of Muslim Mindanao, a resource-rich but poverty-stricken region, are also eligible for Tier I incentives. This inclusion aims to spur economic development in the region by incentivizing investment.
The mandatory list qualified for Tier I incentives is also diverse. It includes tree-plantation projects, book publishing, mining, manufacture of appliances for disabled persons, renewable energy projects, tourism projects outside tourism enterprise zones, projects for energy efficiency and conservation, and the refining, storage, and marketing of petroleum products. This mandatory list ensures that key areas of development are not overlooked.
Finally, Tier II and III incentives cater to activities promoting green ecosystems, health-related initiatives, defence-related activities, industries addressing value-chain gaps, food security-related activities, research and development, and high-tech manufacturing, among others. This diverse range of activities underscores the government’s comprehensive approach to promoting a variety of industries, fostering innovation, and advancing the country’s socio-economic development.
The following industries also qualify for incentives under various laws (some of them appearing in the 2020–23 SIPP’s mandatory list):
Mobility & Automotive Sector
Executive Order 182/2015 puts forth the Comprehensive Automotive Resurgence Strategy, a scheme designed to provide incentives to bolster the automotive industry in the Philippines. This programme offers a sum of P27bn (US$520m) as incentives over a span of six years, accompanied by local content and production prerequisites.
Under the newly enacted Republic Act 11,697/2022, several government departments are mandated to formulate a Comprehensive Roadmap for the Electric Vehicle Industry. This roadmap is anticipated to encompass fiscal incentives for the manufacturing and assembly of electric vehicles, their components, and the associated charging stations.
Additionally, the legislation provides an exemption from import duties for fully assembled electric vehicles and charging stations, a provision which will be in effect until April 2030. The completion of this comprehensive roadmap for the electric vehicle industry is projected for early 2023.
Oils & Gas
Section 9 of Republic Act 8,479/1998 provides a set of incentives to encourage new investments in the refining, storage, distribution, and retailing of petroleum products. One notable incentive is an income tax holiday, lasting for five years from the commencement of commercial operation. Other benefits include an extra 50% deduction from taxable income for labour expenses, a preferential 3% duty and VAT on imported capital equipment, and a tax credit on domestically acquired capital equipment.
Further benefits under this Act comprise unrestricted utilization of consigned equipment, and exemption from various taxes and duties. These include exemptions on imported spare parts, real-property tax on production machinery, contractor’s tax, and wharfage dues and export tax. Furthermore, Republic Act 9,367/2006 sets the tax on local or imported biofuels at zero, exempting the sale of raw materials used in the production of biofuels from VAT.
Minings & Metals
Presidential Decree 972/1976 designates coal production as a sector eligible for specific incentives. Similarly, the iron and steel industries are granted incentives under Republic Act 7,103/1991.
Through Administrative Order 53/2004, the Department of Environment and Natural Resources encourages eco-friendly innovations and projects by offering incentives to companies that invest in devices that mitigate air pollution. Companies can avail tax credits on the purchase of air-pollution-control devices and are exempted from real-property tax on machinery and equipment used for this purpose.
Amendments to the Tourism Act of 2009 were made through Republic Act 11,262/2019, granting the Tourism Infrastructure and Enterprise Zone Authority (TIEZA) the power to provide incentives to tourism businesses for ten years, until April 2029. Among other benefits, TIEZA can offer income tax holidays up to seven years and duty exemption on capital equipment and parts, including transportation-related ones. After the tax holiday, TIEZA can grant either a special 5% corporate income tax rate on gross income for ten years or the regular tax rate of 25% with enhanced deductions for ten years to qualifying firms.
Republic Act 9,513/2008 incentivizes renewable-energy projects by offering them a seven-year income tax holiday, followed by a preferential 5% corporate tax rate for ten years. These projects also benefit from duty-free importation of machinery, equipment, and materials, accelerated depreciation of tangible assets, zero VAT rate on generated fuel or electricity sales, tax exemption on carbon credits, and tax credits on domestic capital equipment and services. Additionally, a feed-in tariff scheme ensures profitable returns for companies generating electricity from renewable sources. Detailed guidelines for availing these incentives are provided in Revenue Regulation No. 7-2022, issued by the Bureau of Internal Revenue.
Finally, Republic Act 10,771/2016 encourages the creation of “green jobs” – employment in sectors that contribute to environmental preservation. These positions must be certified by the Climate Change Commission. Incentives for companies generating such jobs include special deductions from taxable income equivalent to 50% of the expenses for skills training and research and development, and tax- and duty-free importation of relevant capital equipment.
Republic Act 11,337/2019 stipulates that chosen start-ups qualify for comprehensive or partial subsidies for the utilization of facilities, equipment, and office spaces. Moreover, they can access grants-in-aid, which can be utilized for research, training, and expansion projects. These start-ups also have the privilege of tapping into the Start-up Grant Fund and the Start-up Venture Fund. Furthermore, the owners or investors of these start-ups are granted special visas, which remain valid for five years and can be extended for an additional three years.
Incentives By Regions
The Omnibus Investments Code, enacted through Executive Order 226/1987 along with its subsequent amendments, provides enterprises with supplementary incentives to establish operations in the less-developed regions of the country. The benefits conferred under this code include a six-year income tax holiday and the ability to deduct 100% of costs incurred from investments in or the construction of major infrastructure and public facilities from taxes.
The Strategic Investment Priorities Plan, which was most recently updated in 2022, regularly mandates the authorities to take into account the location of a project when determining its eligibility for incentives.
Special Economic Zones & EPZ
Republic Act (RA) 7,844/1994 extends specific incentives to exporters. These incentives include an exemption from duties and taxes on opening letters of credit for imports utilized in export production. Additionally, tax credits for a duration of five years are provided for imported raw materials intended for production and packaging. In order to qualify for these incentives, companies are required to derive at least 50% of their total revenues from exports. Furthermore, these companies must be accredited by the relevant authorities, with the specifics of the accreditation varying depending on the incentives, sector, and location.
Tax credits are also made available to existing companies that expand their export sales and utilize local materials and equipment. A tax credit is given to companies increasing their export sales on a year-on-year basis, adjusted for inflation, within a four-tiered incentive system. The tax credit can be deducted from their final tax bill. The more the export proceeds are increased, the larger the tax break.
However, it’s important to note that these tax credits are only granted to direct merchandise exporters accredited by the Bureau of Export Trade Promotion under the Department of Trade and Industry. These exporters must have been exporting for at least two consecutive years at the time of the incentive application. Certain exporters are deemed ineligible for these tax credits. These include those enjoying income tax holidays, those exempt from the value-added tax, those engaged in re-exporting imported goods, and those whose exports have local value-added content of 10% or less.
In addition to these incentives, RA 7,916/1995 established special economic zones (ecozones) in 37 areas across the country, along with any additional areas that may be designated as ecozones by presidential proclamation. Within these ecozones, both private developers and the government can establish industrial estates and export-processing zones. The general management and administration of all ecozones are placed under the Philippine Economic Zone Authority (PEZA), although private developers of industrial estates within the zones maintain their autonomy.
Beyond the PEZA, several other government agencies offer incentives within the ecozones under their administration. These include the Bases Conversion and Development Authority, the Subic Bay Metropolitan Authority, Clark Development Corp, John Hay Management Corp, Poro Point Management Corp, the Cagayan Economic Zone Authority, Zamboanga City Special Economic Zone, Phividec Industrial Authority, Aurora Pacific Economic Zone and Freeport Authority, Authority of the Freeport Area of Bataan, and the Tourism Infrastructure and Enterprise Zone Authority. Five of these ecozones are former US military bases converted under RA 7,227/1992.
Under RA 11,534/2021, the PEZA and these agencies can grant income tax holidays ranging from four to seven years to exporters and domestic enterprises deemed “critical to national development”. Following this, these entities are eligible for ten years of a special corporate income tax (SCIT) rate of 5% of gross income. Therefore, the total incentive period under this scheme could range from 14 years (four years of income tax holiday and ten years of SCIT) to 17 years. Alternatively, these agencies may apply the regular corporate tax rate of 25% but with enhanced deductions for ten years after the income tax holiday. These incentives mirror those granted to projects registered with the Board of Investments.
Lastly, enterprises in export-processing zones and ecozones, as well as their developers, may also be granted several additional incentives. These include exemption from duties and taxes on imported capital equipment, spare parts, raw materials, and supplies, exemption from wharfage dues, export tax, imposts and fees, exemption from expanded withholding tax, and zero rating on the value-added tax for local purchases. They can also avail special non-immigrant visas with multiple-entry privileges for investors, officers, and employees in supervisory, technical, and advisory positions, and for their immediate families. The ecozones offer further benefits such as simplified registration procedures, exemption from local-government business permits, and assistance in obtaining environmental clearances.