Title XIII, Chapter II – Tax and Duty Incentives

Sec. 294. Incentives. – Subject to the conditions and period of availment in Sections 295 and 296, respectively, the following types of tax incentives may be granted to registered projects or activities:

(A) Income Tax Holiday (ITH);

(B) Special Corporate Income Tax (SCIT) rate – for export enterprise, domestic market enterprise with a minimum investment capital of five hundred million pesos (P500,000,000.00), and domestic market enterprise under the strategic investment priority plan engaged in activities that are classified as “critical,” a tax rate equivalent to five percent (5%) effective July 1, 2020, based on the gross income earned, in lieu of all national and local taxes. (Vetoed by the President)

The domestic market enterprise under the Strategic Investment Priority Plan engaged in activities that are classified as “critical” shall refer to those enterprises belonging to industries identified by the national economic and development authority to be crucial to national development. (Vetoed by the president)

The period of availment of the Special Corporate Income Tax shall be subject to the conditions set under paragraphs (A) and (B) of Section 296 of this Act:

Provided, That the national government share shall be three percent (3%) of the gross income earned effective July 1, 2020: Provided, further, That, if applicable, the shares of the local government units and the Investment Promotion Agencies under the special laws governing the latter shall be observed and shall not result in the diminution of their respective shares: Provided, finally, That the share of the local government unit which has jurisdiction over the place of the registered activity of registered business enterprise outside ecozones and freeports shall be two percent (2%) and shall be directly remitted by the registered business enterprise to such local government units. (Vetoed by the President)

(c) Enhanced Deductions (ED) – For export enterprise, domestic market enterprise, and critical domestic market enterprise, the following may be allowed as deductions: (Vetoed by the President)

• (1) Depreciation allowance of the assets acquired for the entity’s production of goods and services (qualified capital expenditure) – additional ten percent (10%) for buildings; and additional twenty percent (20%) for machineries and equipment;
• (2) Fifty percent (50%) additional deduction on the labor expense incurred in the taxable year;
• (3) One hundred percent (100%) additional deduction on research and development expense incurred in the taxable year;
• (4) One hundred percent (100%) additional deduction on training expense incurred in the taxable year;
• (5) Fifty percent (50%) additional deduction on domestic input expense incurred in the taxable year;
• (6) Fifty percent (50%) additional deduction on power expense incurred in the taxable year;
• (7) Deduction for reinvestment allowance to manufacturing industry – When a manufacturing registered business enterprise reinvests its undistributed profit or surplus in any of the projects or activities listed in the strategic investment priority plan, the amount reinvested to a maximum of fifty percent (50%) shall be allowed as a deduction from its taxable income within a period of five (5) years from the time of such reinvestment; and
• (8) Enhanced Net Operating Loss Carry-Over (NOLCO). – the net operating loss of the registered project or activity during the first three (3) years from the start of commercial operation which had not been previously offset as deduction from gross income may be carried over as deduction from gross income within the next five (5) consecutive taxable years immediately following the year of such loss.

(D) Duty exemption on importation of capital equipment, raw materials, spare parts, or accessories; and

(E) Value-added tax (VAT) exemption on importation and vat zero-rating on local purchases.”

Sec. 295. Conditions of Availment. – The tax incentives in the preceding Section shall be governed by the following rules:

(A) The income tax holiday shall be followed by the Special Corporate Income Tax rate or Enhanced Deductions;

(B) At the option of the export enterprise, the domestic market enterprise with a minimum investment capital of five hundred million pesos (P500,000,000.00), and the domestic market enterprise engaged in activities that are classified as “critical,” the Special Corporate Income Tax rate or enhanced deductions shall be granted: Provided, That in no case shall the enhanced deductions be granted simultaneously with the special corporate income tax. (Vetoed by the President)

The following conditions for the availment of each enhanced deductions shall be complied with:

• (1) The depreciation allowance of the assets acquired for the entity’s production of goods and services (qualified capital expenditure) shall be allowed for assets that are directly related to the registered enterprise’s production of goods and services other than administrative and other support services;
• (2) The additional deduction on the labor expense shall not include salaries, wages, benefits, and other personnel costs incurred for managerial, administrative, indirect labor, and support services;
• (3) The additional deduction on research and development expense shall only apply to research and development directly related to the registered project or activity of the entity and shall be limited to local expenditure incurred for salaries of Filipino employees and consumables and payments to local research and development organizations.
• (4) The additional deduction on training expense shall only apply to trainings, as approved by the Investment Promotion Agencies based on the Strategic Investment Priority Plan, given to the Filipino employees engaged directly in the registered business enterprise’s production of goods and services.
• (5) The additional deduction on domestic input expense shall only apply to domestic input that are directly related to and actually used in the registered export project or activity of the registered business enterprise.
• (6) The additional deduction on power expense shall only apply to power utilized for the registered project or activity.
• (7) The deduction for reinvestment allowance to manufacturing industry shall be determined in the Strategic Investment Priority Plan.

(C) The duty exemption shall only apply to the importation of capital equipment, raw materials, spare parts, or accessories directly and exclusively used in the registered project or activity by registered business enterprises: Provided, That the following conditions are complied with:

(1) The capital equipment, raw materials, spare parts, or accessories are directly and reasonably needed and will be used exclusively in and as part of the direct cost of the registered project or activity of the registered business enterprise, and are not produced or manufactured domestically in sufficient quantity or of comparable quality and at reasonable prices. Prior approval of the Investment Promotion Agency may be secured for the part-time utilization of said capital equipment, raw materials, spare parts, or accessories in a non-registered project or activity to maximize usage thereof: Provided, That the proportionate taxes and duties are paid on a specific capital equipment, raw materials, spare parts, or accessories in proportion to the utilization for non-registered projects or activities. In the event that the capital equipment, raw materials, spare parts, or accessories shall be used for a non-registered project or activity of the registered business enterprise at any time within the first five (5) years from date of importation, the registered business enterprise shall first seek prior approval of the concerned Investment Promotion Agency and pay the taxes and customs duties that were not paid upon the importation; and

(2) The approval of the Investment Promotion Agency was obtained by the registered business enterprise prior to the importation of such capital equipment, raw materials, spare parts, or accessories.

Within the first five (5) years from date of importation, approval of the Investment Promotion Agency must be secured before the sale, transfer, or disposition of the capital equipment, raw materials, spare parts, or accessories which were granted tax and customs duty exemption hereunder, and shall be allowed only under the following circumstances:

• (A) If made to another enterprise availing customs duty exemption on imported capital equipment, raw materials, spare parts, or accessories;
• (B) If made to another enterprise not availing of duty exemption on imported capital equipment, raw materials, spare parts, or accessories, upon payment of any taxes and duties due on the net book value of the capital equipment, raw materials, spare parts, or accessories to be sold;
• (C) Exportation of capital equipment, raw materials, spare parts, accessories, source documents, or those required for pollution abatement and control;
• (D) Proven technical obsolescence of the capital equipment, raw materials, spare parts, or accessories; or “(e) if donated to the TESDA, state universities and colleges (SUCS), or DepEd and CHED-accredited schools: Provided, that the donation shall be exempt from import duties and taxes, including donor’s tax.

Provided, That if the registered business enterprise sells, transfers, or disposes the aforementioned imported items without prior approval, the registered business enterprise and the vendee, transferee, or assignee shall be solidarily liable to pay twice the amount of the duty exemption that should have been paid during its importation: Provided, further, That the sale, transfer, or disposition of the capital equipment, raw materials, spare parts, or accessories made after five (5) years from date of importation shall require that prior notice be given by the registered business enterprise to the Investment Promotion Agency: Provided, finally, That even if the sale, transfer, or disposition of the capital equipment, raw materials, spare parts or accessories was made after five (5) years from date of importation with notice to the Investment Promotion Agency, the registered business enterprise is still liable to pay the duties based on the net book value of the capital equipment, raw materials, spare parts, or accessories if it has violated any of its registration terms and conditions.

(D) The VAT exemption on importation and VAT zero-rating on local purchases shall only apply to goods and services directly and exclusively used in the registered project or activity by a registered business enterprise.

Notwithstanding the provisions in the preceding paragraphs, sales receipts and other income derived from non-registered project or activity shall be subject to appropriate taxes imposed under this Code.

(E) Notwithstanding any law to the contrary, the importation of COVID-19 vaccine shall be exempt from import duties, taxes and other fees, subject to the approval or licenses issued by the Department of Health or the Food and Drug Administration;

(F) Persons who directly import petroleum products defined under Republic Act No. 8479, otherwise known as the “Downstream Oil Industry Deregulation Act of 1998, for resale in the Philippine customs territory and/or in free zones as defined under Republic Act No. 10863, otherwise known as the Customs Modernization and Tariff Act, shall not be entitled to the foregoing tax and duty incentives, and shall be subject to appropriate taxes imposed under this Code;

Any law to the contrary notwithstanding, the importation of petroleum products by any person, including registered business enterprises, shall be subject to the payment of applicable duties and taxes as provided under Republic Act No. 10863, otherwise known as the Customs Modernization and Tariff Act, and this Code, respectively, upon importation into the Philippine customs territory and/or into free zones as defined under Republic Act No. 10863, otherwise known as the Customs Modernization and Tariff Act: “Provided, That the importer can file for claims for the refund of duties and taxes applicable under Republic Act No. 10863, otherwise known as the Customs Modernization and Tariff Act, and this Code, respectively, for direct or indirect export of petroleum products, and/or other tax-exempt sales under the Customs Modernization and Tariff Act and other special laws within the period provided therein;

Provided, further, That the importers who subsequently export fuel, subject to the appropriate rules of the fuel marking program, may apply for a refund of duties and taxes, as applicable under Republic Act No. 10863, otherwise known as the Customs Modernization and Tariff Act, and this Code.

(G) Crude oil that is intended to be refined at a local refinery, including the volumes that are lost and not converted to petroleum products when the crude oil actually undergoes the refining process, shall be exempt from payment of applicable duties and taxes upon importation;

Provided, That applicable duties and taxes on petroleum products shall be payable only upon lifting of the petroleum products produced from the imported crude oil, subject to rules and regulations that may be prescribed by the Bureau of Customs and the Bureau of Internal Revenue to ensure that crude oil shall not be lifted from the refinery without payment of appropriate duties and taxes.

Registered business enterprises, whose performance commitments include job generation, shall maintain their employment levels to the extent practicable, and in the case of reduced employment or when the performance commitment for job generation is not met, the registered business enterprises must submit to their respective Investment Promotion Agencies and the Fiscal Incentives Review Board their justification for the same.”

Sec. 296. Period of Availment. – The period of availment of incentive by the registered business enterprise shall be as follows:

(A) For export enterprise and for domestic market enterprise under the strategic investment priority plan engaged in activities that are classified as “critical”: income tax holiday of four (4) to seven (7) years depending on location and industry priorities as specified in this Section, and followed by Special Corporate Income Tax rate or Enhanced Deductions for ten (10) years. (Vetoed by the President)

A qualified expansion or entirely new project or activity registered under this act may qualify to avail of a new set of incentives and its period of availment, granted under Sections 294 and 296 of this act, respectively, subject to the qualifications set forth in the Strategic Investment Priority Plan and performance review by the Fiscal Incentives Review Board: Provided, That existing registered projects or activities prior to the effectivity of this Act may qualify to register and avail of the incentives granted under this Act for the prescribed period, subject to the criteria and conditions set forth in the Strategic Investment Priority Plan; (Vetoed by the President)

(B) For domestic market enterprise under the Strategic Investment Priority Plan not classified as critical, income tax holiday for four (4) to seven (7) years followed by special corporate income tax or enhanced deductions for five (5) years;

Provided, that only domestic market enterprise, which has an investment capital of not less than five hundred million pesos (P500,000,000.00), shall be eligible for the special corporate income tax rate. (Vetoed by the President)

A qualified expansion or entirely new project or activity registered under this Act may qualify to avail of a new set of incentives and its period of availment granted under Sections 294 and 296 of this Act, respectively, subject to the qualifications set forth in the Strategic Investment Priority Plan and performance review by the Fiscal Incentives Review Board: provided, that existing registered projects or activities prior to the effectivity of this act may qualify to register and avail of the incentives granted under this Act for the prescribed period, subject to the criteria and conditions set forth in the Strategic Investment Priority Plan. (Vetoed by the President)

The period of availment of the foregoing incentives shall commence from the actual start of commercial operations with the registered business enterprise availing of the tax incentives within three (3) years from the date of registration, unless otherwise provided in the Strategic Investment Priority Plan and its corresponding guidelines: Provided, That after the expiration of the transitory period under Section 311(C), export enterprises registered prior to the effectivity of this Act shall have the option to reapply and avail of the incentives granted under Section 294(B) for the same period provided under this Section, and may still be extended for a certain period provided under this section, and may still be extended for a certain period not exceeding ten (10) years at any one time subject to the conditions and qualifications set forth in the Strategic Investment Priority Plan and performance review by the Fiscal Incentives Review Board. (Vetoed by the President)

For the purpose of this Section the determination of the category shall be based on both location and industry of the registered project or activity, and other relevant factors as may be defined in the Strategic Investment Priority Plan.

The location of the registered project or activity shall be prioritized according to the level of development as follow: (1) National Capital Region; (2) Metropolitan areas or areas contiguous and adjacent to the national capital region; and, (3) All other areas. The metropolitan area shall be determined by the National Economic and Development Authority.

The industry of the registered project or activity shall be prioritized according to the national industrial strategy specified in the Strategic Investment Priority Plan. The Strategic Investment Priority Plan shall define the coverage of the tiers and provide the conditions for qualifying the activities:

(1) Tier I shall include activities that (i) have high potential for job creation (ii) take place in sectors with market failures resulting in underprovision of basic goods and services: (iii) generate value creation through innovation, upgrading of moving up the value chain; (iv) provide essential support for sectors that are critical to industrial development; or (v) are emerging owing to potential comparative advantage.

“These activities shall include agriculture, fishing, forestry, and agribusiness activities, including handicrafts intended for export, and energy; ecozone and freeport zone development; manufacturing of medical supplies, devices and equipment, and construction of healthcare facilities; facilities for environmentally-sustainable disposal of waste; infrastructure manufacturing and service industries that are emerging resulting from innovation upgrading or addressing gaps in the supply and value chain; mass housing, as well as infrastructure, transportation, utilities, logistics and support services; the provision of cybersecurity services; and planned developments that use technologies and digital solutions that are crucial to the countries development; (Vetoed by the President)

(2) Tier II shall include activities that produce supplies, parts and components, and intermediate services that are not locally produced but are not locally produced but are critical to industrial development and import-substituting activities, including crude oil refining.

(3) Tier III activities shall include (i) research and development resulting in demonstrably significant value-added, higher productivity, improved efficiency, breakthrough in science and health, and high-paying jobs; (ii) generation of new knowledge and intellectual property registered and/ or licensed in the Philippines (iii) commercialization of patents, industrial designs, copyrights and utility models owned or co-owned by a registered business enterprise; (iv) highly technical manufacturing or (v) are critical to the structural transformation of the economy and require substantial catch up efforts.

“These activities shall include agriculture, fishing, forestry, agribusiness, and other activities and services that indispensably  require the employment of knowledge processing, modern science; data analytics; creative content; engineering; state of the art technologies; technologies that are available in other countries but are not yet available or widely used in the Philippines; and research and development in the process of production of goods and services, resulting in demonstrably significant value-added, productivity, efficiency, breakthroughs in science and health, and high paying jobs; and manufacturing of FDA-approved investigational drugs, medicines and medical devices. (Vetoed by the President)

The period of availment of incentives based on the combination of both location and industry priorities as determined in the strategic investment priority plan, shall be as follows:

For exporters and critical domestic market activities: (Vetoed by the president)

For domestic market activities: (Vetoed by the President)

In addition to the incentives provided in tiers above, projects or activities or registered enterprises located in areas recovering from armed conflict or a major disaster, as determined by the Office of the President, shall be entitled to two (2) additional years of income tax holiday.

Projects or activities registered prior to the effectivity of this Act or under the incentive system provided herein that shall, in the duration of their incentives, completely relocate from the National Capital Region, shall be entitled to three (3) additional years of income tax holiday: Provided, that the additional incentive shall commence at the completion of the relocation of operations.

The industry and locational prioritization specified herein shall be subject to review and revision every three (3) years in accordance with the Strategic Investment Priority Plan, subject to the standards in Section 300 hereof or in exceptional circumstances to attract substantial investment to respond to a situation or crisis or to target specific industries.