Availability of BIR Form No. 1702-MX January 2018 (ENCS) in the Electronic Filing and Payment system (eFPS)
This Circular is issued to announce the availability of BIR Form No. 1702-MX [Annual Income Tax Return for Corporation, Partnership and Other Non-Individual with MIXED income Subject to Multiple Income Tax Rates or with Income Subject to SPECIAL/PREFERENTIAL RATE] January 2018 (ENCS) in the Electronic Filing and Payment System (eFPS). The aforementioned BIR Form shall be filed electronically, with or without payment, on or before the 15th day of the 4th month following the close of the taxpayer’s taxable year.
All mandated eFPS taxpayers who are required to file the said return and pay the corresponding tax due thereon, if any, shall use the eFPS facility effective immediately.
In the Philippines, the “busy season” commences for taxpayers and practitioners in the field of accounting and taxation, as the year ends. During this season, they begin to prepare for the filing of year-end tax compliance requirements. One of the most common year-end tax compliance requirements in the Philippines is the filing of the Annual ITR. The Annual ITR determines the net taxable income from operations related to the pursuit of business activity during a given taxable year. But what do they need to consider during the preparation of the 2023 Annual ITR in the Philippines?
Here are some points to consider in the preparation of 2023 Annual ITR in Philippines:
I. Income Tax Rate – 20%/ 25% / 2% MCIT/ 5% GIT / ITH
Republic Act (R.A.) No. 11534 otherwise known as Corporate Recovery for Tax Incentives and Enterprises (CREATE) Act, amending further the Tax Code of the Philippines, has changed, among others, the tax rate of corporations from 32% of taxable net income to 25%, in general, for domestic and resident foreign corporations in the Philippines. For domestic corporations however, if the net taxable income does not exceed Five Million Pesos (P5,000,000) and total assets do not exceed One Hundred Million Pesos (P100,000,000) excluding the land on which the business entity’s office, plant, and equipment are located, it shall be taxed at twenty percent (20%) income tax rate, instead of 25%.
Please note as well that the Minimum Corporate Income Tax (MCIT) in the Philippines (for domestic and resident foreign corporations is imposed on corporations, beginning on the fourth (4th) taxable year immediately following the year in which such corporation commenced its business operations if such MCIT is higher than the normal income tax for the taxable year) was generally 2% but was made 1% under CREATE and reverted to 2% by July 1, 2023. Notably, Revenue Memorandum Circular (RMC) No. 69-2023 provides that the MCIT rate has reverted from one percent (1%) to two percent (2%) beginning July 1, 2023, and in Revenue Regulation (RR) No. 5-2021, the BIR provided MCIT matrix rates for the transition period as follows:
For non-resident foreign corporations (NRFC), the income tax rate imposed through the final withholding tax scheme is also 25%, in general, but they are not generally required to file an Annual ITR as the withholding agent payor is the one required to account for the applicable income tax of the NRFC’s income in the Philippines.
II. Applicable Allowable Deductions for income tax purposes
Please be reminded that under the rules, a corporate taxpayer in the Philippines engaged in trade or business has the following options for allowable deductions from gross income in determining its annual income tax returns in Philippines as follows:
Itemized Deductions. This itemized deduction in the Philippines is applicable, in general, the corporate taxpayer in the Philippines engaged in trade or business determines its deductible expenses in the Philippines by identifying each item of expense incurred or paid during the taxable year relative to its conduct of trade, business, or profession. For an expense to be deductible for ITR purposes, the following requirements should be met:
A. It should be ordinary and necessary expenses paid/incurred during the taxable year for the development, management, operation, and/or conduct of the trade, business, or profession;
B. It should be substantiated by adequate proof – documented by official receipts or adequate records which reflect the (a) amount being deducted and (b) connection or relation of expense to business/trade;
C. Not contrary to law, morals, public policy, or order (e.g., bribes, kickbacks, or similar payments); and
D. The taxes required to be withheld, if applicable, have been properly withheld and remitted on time.
Additionally, for some expenses, please be reminded about the limitations or maximum amounts imposed by the rules:
A. Interest expense should be reduced by an amount equivalent to 20% of interest income subjected to final tax unless domestic corporations using 20% income tax rate in which case there will be no reduction of interest expense;
B. Representation expense should not exceed 0.5% of net sales for the seller of goods or 1% of net receipts for the seller of service, and the taxpayer engaged in the sale of goods and services, it should segregate the amounts for goods and services for the purpose; and
C. Charitable contributions should not exceed 5% based on taxable income derived from trade, business, or profession before deducting charitable contribution unless allowed full deductibility, e.g. donations to the government, to certain foreign institutions or international organizations, and to accredited nongovernment organizations are entitled to be deductible in full.
Non-compliance of the above requirements for deductibility or claiming expense beyond the limitations could result in BIR disallowing such expenses during tax examination in the Philippines and imposing income tax that should have been paid had those expenses not been considered in computing income tax and imposing penalties – e.g. 25% surcharge, 12% interest and compromise penalties in the Philippines.
Optional Standard Deduction (OSD) in the Philippines. A corporate taxpayer engaged in trade or business in the Philippines other than non-resident foreign corporations may use OSD for computing its tax due on its annual ITR in the Philippines and should be opted for OSD in its first quarterly ITR. The deduction is an amount not exceeding 40% of gross income, without regard to substantiation and withholding tax on such expenses required above for those under itemized deductions. However, please note that OSD in Philippines is for income tax computation only and does not exempt the taxpayer from maintaining books of accounts and related documentation for bookkeeping purposes along with observance of proper withholding of taxes on expenses, if applicable.
III. Maximize Tax Assets – Net operating loss carry-over (NOLCO), excess MCIT carry-over, Creditable withholding tax certificate (CWTs), Other Deferred Tax Assets (DTA)
In computing income tax due for the 2023 annual income tax return of a corporate taxpayer in Philippines, please note as well to maximize the following tax assets that could be available:
Net Operating Loss Carry-over (NOLCO) in the Philippines. Under the rules, net operating loss for any taxable year immediately preceding the current year, which had not been previously offset as a deduction from gross income shall be carried over as a deduction from gross income for the next three (3) consecutive taxable years following such taxable year of loss. NOLCO is normally presented separately shown in the ITR of the taxpayer and unused NOLCO is likewise presented in the notes to financial statement so the taxpayer can easily identify and properly use it for 2023 corporate annual income tax return in the Philippines.
Notably, for taxable years 2020 and 2021, the Net Operating Loss may be carried for the next five (5) consecutive taxable years or until 2025 and 2026, respectively, pursuant to R.A. No. 11494, otherwise known as Bayanihan to Recover as One Act, and as implemented by Revenue Regulations (RR) No. 25-2020.
Excess of MCIT Carry-over. Any excess of the MCIT over the normal income tax (NIT) shall be carried forward and credited immediately against the NIT of the taxpayer for the next succeeding three (3) taxable years.
Creditable Withholding Taxes (CWTs) – e.g. BIR Form No. 2307. Upon payments of clients/ customers of specific income payments during 2023, the rules required them to withhold taxes, e.g. 1-15% of expanded withholding tax (EWT) commonly called creditable withholding tax (CWT) in the Philippines and would issue you withholding tax certificate or BIR Form No. 2307 as proof of such withholding.
The EWT or CWT in Philippines is the taxpayer’s advance income tax payments, a taxpayer can deduct this against the 2023 annual income tax liability. Please ensure that the BIR Form No. 2307s would have complete information such as name, designation, TIN, and signature either wet-signed or e-signed should be reflected in the certificate. Please note also that the information in the claimed CWTs will be reported in the Summary Alphalist of Withholding Taxes (SAWT) to be submitted in the es*********@*****ov.ph.
Other Deferred Tax Assets (DTA). Aside from the above, a taxpayer may have to be conscious as well about those items that could be deductible for the 2023 corporate annual ITR in the Philippines. One example is a different treatment of certain expenses for income tax purposes and for accounting purposes where a taxpayer has already taken the expense as deductible for accounting but not for tax purposes. Examples are unrealized loss and NOLCO.
Other deductible non-cash items. In most cases, accounting books only take up cash items as deductible expenses, and absent proper adjustments, non-cash items are missed out as deductions. Unrecorded accrual of expenses is a common item under this – interest expense accruing at year-end, depreciation expense, and year-end purchases with supporting documents becoming available later. If a taxpayer is not conscious of these items, you might end up missing them and losing their tax benefits.
IV. BIR Forms to be used for AITR.
Equally important is to use the proper annual ITR Form for the 2023 corporate annual ITR. In general, a corporate taxpayers subject to regular income tax rate are required to use BIR Form No. 1702-RT; while those corporation whose income is exempt under the Tax Code, as amended and other special Laws are required to use BIR Form No. 1702-EX; and, those who have mixed income subject to multiple income tax rates or with income subject to special/preferential rate are required to use BIR Form No. 1702-MX.
The rules are silent on penalties for using the wrong form but using the wrong one could have some negative implications on the computations of the 2023 corporate annual ITR so it would be best to use the right one.
V. Filing and Payment of AITR
Annual ITR in the Philippines is normally due for filing not later than the 15th day of the 4th month following the end of the taxable year – e.g. April 15, 2024 (Monday) for the December 31, 2023, year-end. Taxpayers should be aware of the mode of filing and payment which may be in eBIRForms or the Electronic Filing and Payment System (EFPS). Taxpayers required to file in the EFPS but have filed in the eBIRForms without duly released advisory on the unavailability of EFPS, shall be tantamount to Wrong Venue Filing which is subject to a twenty-five percent (25%) surcharge.
Payment of the tax due shall be paid through any Accredited Authorized Banks (AABs) in the jurisdiction of the Revenue District Office where the taxpayer is registered (for eBIRForms filers) and EFPS-AABs where the taxpayer is enrolled (for EFPS filers). It should be noted that during 2022 AITR compliance, BIR has issued RMC No. 32-2023 that taxpayers may pay the tax due to any AABs, notwithstanding the RDO jurisdiction, without imposition of penalties for wrong venue filing. Hopefully, BIR will issue the same for 2023 AITR compliance.
VI. Attachments of AITR
Within fifteen (15) days from the deadline for filing of 2023 AITR or on April 30, 2024, a corporate taxpayer should submit the attachments of the AITR either manually or through Electronic Audited Financial Statements (eAFS). Here are the following applicable AITR attachments a corporate taxpayer should submit if applicable:
A. AITR with Tax Return Receipt Confirmation (for eBIR filers) / Filing Reference Number (for EFPS filers), and proof of payment, if any;
B. Audited Financial Statements (If gross sales/receipts exceed P3M and availing itemized deduction) or Financial Statements with Sworn Certification (if gross sales/receipts do not exceed P3M and availing itemized deduction);
C. BIR Form No. 2307 from customers/buyer or Certificate of creditable tax withheld as claimed as Tax credit, if applicable;
D. Summary Alphalist of Withholding Taxes with eSubmission Validation Report, if applicable. (shall be submitted to es*********@*****ov.ph);
E. BIR Form No. 1709 or Information Return on Transactions with Related Party, if applicable; and
F. Certificate of Entitlement to Tax Incentives, if any. (For PEZA, BOI, BMBE, etc.)
Summary
The government needs the contribution of its citizens to function and operate. This contribution is from the taxes paid by the taxpayers. Despite the fact that this contribution is indispensable to the existence of government, taxpayers must also prioritize their financial well-being by staying informed about the constantly changing tax regulations, to prevent them from paying huge amounts just for penalties.
With the enactment of the Republic Act. No. 10963, otherwise known as Tax Reform and Inclusion Law (TRAIN), and Republic Act No. 11534 otherwise known as Corporate Recovery and Tax Incentives for Enterprises Act (CREATE) amending Republic Act No. 8424, otherwise known as the National Internal Revenue Code of 1997 (Tax Code), particularly on the imposition and treatment of Value-Added Tax on local purchase of Registered Business Enterprise (RBE) such as those with Philippine Economic Zone (PEZA), VAT zero-rating on sales to PEZA registered entities in the Philippines have drawn so much attention and debates, if not confusion.
Let’s take a quick walkthrough of the significant events relative to the VAT Zero-rating of a PEZA Registered Business Enterprise to better appreciate these rules.
1. 0% VAT INCENTIVE ON EXPORT ENTERPRISES
Prior to CREATE, VAT zero-rating incentive in the Philippines for purchases from local suppliers was applicable to PEZA-registered entities without much emphasis on export volume. Under CREATE, registered business enterprises (RBEs) such as PEZA registered entities classified as export enterprises (EE) or one who exports at least 70% of its output, or a domestic market enterprise (DME), VAT zero-rating incentive in the Philippines is made applicable only to export enterprises.
2. INCLUSION OF ECOZONE LOGISTICS ENTERPRISE (ELSE) AS EXPORT ENTERPRISE
Under Revenue Memorandum Circular No. 15-2023 which published the full text of BOI Memorandum Circular No. 2023-001 and as further clarified by Revenue Memorandum Circular No. 24-2023, ELSEs that render at least 70% of their output/services to another registered export enterprise are covered by the definition of “export enterprise” under Section 293(E) of the Tax Code, as amended.
3. DIRECTLY AND EXCLUSIVELY USED IN THE REGISTERED PROJECT OR ACTIVITY
Prior to the enactment of TRAIN and CREATE, sale from customs territory to PEZA Registered Entity within the ecozone is classified as constructive export, thus, subject to Effectively Zero-Rated Sales on the premise of Cross Border Doctrine that treats the ecozone as foreign customs territory by operation of law.
With the passage of CREATE Act, the cross-border doctrine is rendered ineffectual and VAT Zero-Rating on local purchases shall only apply to goods and services directly and exclusively used in the registered project or activity with the concerned IPA and is defined under Section 5, Rule 2 of its Implementing Rules and Regulation as circularized by Revenue Memorandum Circular No. 83-2021 as follows:
“The direct and exclusive use in the registered project or activity refers to raw materials, inventories, supplies, equipment, goods, services and other expenditures necessary for the registered project or activity without which the registered project or activity cannot be carried out”
Recently, Revenue Regulation No. 3-2023 was issued to further amend RR 21-2021 with notable amendments such as providing a list of local purchases of goods relating to services or local purchase of services shall not be considered as “directly and exclusively used” in the registered project or activity of a registered project or activity of a registered export enterprise (REE) as follows:
a. Janitorial Services; b. Security Services; c. Financial Services; d. Consultancy Services; e. Marketing and Promotion; and f. Services rendered for administrative operations such as Human Resources (HR), legal, and accounting,
However, the REE is not precluded from further proving, with supporting evidence, to the concerned IPA that any of the above-listed local purchases of services are indeed directly and exclusively used in its registered project or activity;
4. PROPER DOCUMENTATION ON VAT 0% IN THE PHILIPPINES
PEZA then issues Memorandum Circular (MC) 2022-11 on clarification that the VAT Zero-Rating Certificate it issued annually to qualified and compliant enterprises should be sufficient basis for the enjoyment of the incentives and RBE should ensure and justify whether a specific transaction which involves goods and services are directly and exclusively used in the registered activity or project.
RMC 84-2022 prescribes the template for a sworn declaration to be executed by RBE on goods and/or services directly and exclusively used in registered activity and/or projects.
RR 3-2023 amended RR 21-2021 which provides that the VAT zero-rating on local purchase of goods or services shall be availed on the basis of the VAT zero-rating certification issued by the concerned IPA, without prejudice to the conduct of post-audit investigation/verification by the BIR
5. IS PRIOR BIR APPROVAL ON VAT ZERO-RATING ALLOWED?
RR 3-2023 provides that local suppliers of goods or services of REE shall no longer be required to apply for approval of VAT zero-rating with the BIR which repeals RMC 24-2022 and RMC 49-2022 that requires prior approval to avail VAT Zero-rating.
6. 90-DAY REFUND OF EXCESS INPUT VAT FROM VAT ZERO-RATING PHILIPPINES
Under Section 112 (A) of the Tax Code, as amended, any VAT-registered person, whose sales are zero-rated or effectively zero-rated may, within two (2) years after the close of the taxable quarter when the sales were made, apply for the issuance of a tax credit certificate or refund of creditable input tax due or paid attributable to such sales, except transitional input tax, to the extent that such input tax has not been applied against output tax. Consequently, Section 112(C) as consolidated by Revenue Memorandum Order No. 47-2020, provides that the time frame to grant claims for VAT refund is ninety (90) days from the actual filing of the application with complete documents duly received by the processing office..
CONCLUSION: Let’s hope that the relevant issuances will harmonize and bring light to the cloudy minds of our dear Registered Business Enterprises regarding this provision of law to help them pay the correct taxes for the welfare of the nation. After all, our Tax Laws adhere to one of the attributes of a sound taxation system which is Administrative Feasibility, in which tax laws must be capable of effective and efficient enforcement.
By: Garry Pagaspas, CPA
As we are all aware, Republic Act No. 11534 (RA 11534) or Corporate Recovery and Tax Incentives for Enterprises (CREATE) in Philippines has been signed into law last March 26, 2021 with Vetoed Provisions and became effective last April 11, 2021.
One notable aspect of RA 11534 CREATE Philippines is the rationalization of incentives thereby harmonizing the available tax incentives that Investment Promotion Agencies could grant (e.g. income tax holiday (ITH), enhanced deductions (ED), and 5% special corporate income tax (SCIT) among others), creating a new set of standards for those who can avail in certain locations throughout the Philippines. Under this, the question is how would RA 11534 CREATE Philippines affect the tax incentives of existing registered business enterprises (RBE) with the fourteen (14) Investment Promotion Agencies (IPA) such as Philippine Economic Zones Authority (PEZA) and Board of Investments (BOI)?
To address the above question, RA 11534 provides in Sections 311 and Section 296 some transition rules for existing registered business enterprises with PEZA (those in economic zones/ IT parks/ IT buildings, etc.), with BOI, and other IPAs. Below is the summary of tax incentives of existing PEZA, BOI, etc. existing entities under RA 11534 CREATE Philippines:
Impact on those under ITH and 5% GIT;
As provided under RA 11534 CREATE Philippines, existing registered business enterprises with PEZA, BOI, and other IPAs will continue as follows:
On comment, the transition provisions under Section 311 of the RA 11534 CREATE Philippines is a bit silent about the impact on other incentives (e.g. such as VAT exemptions on importation, machineries, etc.) as provided in the respective charters of the IPAs. The author could just speculate that with the tenor of the law on extending the existing incentives, it could follow that the rest of the incentives would still continue to be enjoyed, unless otherwise, expressly provided. Hope this area would be clarified soon.
Eligibility for new incentives under RA 11534 CREATE Philippines
RA 11534 CREATE Philippines provides as well that existing registered business enterprises with PEZA, BOI, and other IPAs could be eligible for new incentives under RA 11534 CREATE, subject to the conditions and qualifications under Strategic Investments Priorities Plan (SIPP). The original text (enrolled bill forwarded to President for approval) actually provides for an extension of up to 10 years but was Vetoed by the President justifying among others that only new export enterprises should be allowed new incentives. As such, we will have to wait and see how the Strategic Investments Priorities Plan would deal with this.
Export enterprises’ option to apply for new incentives under RA 11534 CREATE Philippines
RA 11534 CREATE Philippines likewise provides that existing registered business enterprises with PEZA, BOI, and other IPAs may have the option to apply for new incentives under RA 11534 CREATE. This is something they would have to carefully evaluate as it seems they can still continue their existing incentives until expiration of the ITH granted to them and up to 10 years of 5% gross income taxation or until April 10, 2031.
Relocation to avail of ITH extension for 3 years under RA 11534 CREATE Philippines
Under RA 11534 CREATE Philippines, existing registered business enterprises with PEZA, BOI, and other IPAs may as well consider relocating their business from National Capital Region (NCR) to metropolitan areas or areas adjacent to NCR or to other areas within the Philippines to avail of an ITH extension for 3 years from completion of relocation. Notably, the rationalization of tax incentives under RA 11534 CREATE has put much consideration to developing other areas outside NCR so that relocating an existing registered enterprise with IPAs could be an option for avail of the new tax incentives based on qualification.
In summary, existing registered business enterprises under IPAs (e.g. PEZA BOI) would seem unaffected in short to mid-term as they could continue their ITH until expiration of the granted term and continue further their 5% gross income tax for 10 years from effectivity of RA 11534 CREATE Philippines on April 11, 2021 or until April 10, 2031.
Existing registered business enterprises under IPAs (e.g. PEZA BOI) could qualify for the incentives under RA 11534 CREATE subject to the conditions and qualifications under the Strategic Investments Priorities Plan (SIPP) that is yet to be promulgated and issued. For those export enterprises, they could have the option to apply for the new incentives under RA 11534 CREATE Philippines based on the SIPP guidelines. Finally, they may also consider relocating their business outside NCR should they wish to avail of the new incentives under RA 11534 CREATE.
The above rules are premised on Section 296 and 311 of RA 11534 CREATE Philippines supplemented by personal views of the author. These are further subject to guidelines under the SIPP that will hopefully be issued soon. Will make necessary updates as soon as SIPP becomes available.
Garry is a Certified Public Accountant (CPA) and a law degree holder in tax practice for almost two (2) decades now helping further taxpayers on securing BIR Rulings, appeal of BIR Ruling denials, company registrations in Philippines, tax compliance, tax savings, tax assessments, tax refunds, and other related professional tax services. He has likewise been helping out local and foreign investors/clients determine the most appropriate legal entity to register in the Philippines based on intended operations, the eventual registration of such legal business entity and other related professional services such as securing Ph Visa, payroll, and business consultancy. He was formerly with the academe and is presently a frequent speaker of Tax and Accounting Center, Inc. and other seminar entities.
Disclaimer: This is for purposes of academic discussions only as personally summarized by the author, not of Tax and Accounting Center, Inc. and is not a substitute for an expert opinion. Please consult your preferred tax and/or legal consultant for the specific details applicable to your circumstances.
March 26, 2021
THE HONORABLE SPEAKER AND
THE LADIES AND GENTLEMEN OF
THE HOUSE OF REPRESENTATIVES
In accordance with my firm commitment to uplift the lives of the Filipino people and pave the path for economic recovery and inclusive growth, I sign into law Republic Act (RA) No. 11534, entitled “ AN ACT REFORMING THE CORPORATE INCOME TAX AND INCENTIVES SYSTEM, AMENDING FOR THE PURPOSE SECTIONS 20, 22, 25, 27, 28, 29, 34, 40 57, 109, 116, 204 QND 290 OF THE NATIONAL INTERNAL REVENUE CODE OF 1997, AS AMENDED, AND CREATING THEREIN NEW TITLE XIII, AND FOR OTHER PURPOSES,” or the “ Corporate Recovery and Tax Incentives for Enterprises (CREATE) Act”.
I.GENERAL COMMENTS
After more than twenty years of deliberations on the countless versions filed in Congress, corporate income tax reform and fiscal incentives rationalization has finally come to fruition. It comes at an opportune time, since it will serve as a fiscal relief and recovery measure for Filipino businesses still suffering from the effects of the COVID- 19 pandemic.
This Act lowers the highest ASEAN corporate income tax rate of thirty (30) percent to (20) percent for micro, small, and medium enterprises (MSMEs) and twenty-five (25) percent for other corporate taxpayers. It also plugs tax leakages through the rationalization of the fiscal incentives granted to our investors, and shifts the administration of such incentives towards a system that is performance- based, targeted, time- bound, and transparent.
We thank the legislators of the 18th Congress for this monumental breakthrough, particularly the Chairpersons of the House Committee on Ways and Means and the Senate Committee on Ways and Means, and the capable leadership of both Houses of Congress
II. DIRECT VETO
To ensure that the objectives of vital piece of legislation is achieved, I invoke the power vested in me by Article VI, Section 27 (2) of the Constitution, which provides that the “the President shall have the power to veto any particular item or items in an appropriation, revenue, or tariff bill”, and hereby register the following line-item vetoes to this bill:
A. Increasing the value’-added tax (VAT)- exempt threshold on sale of real property
I am constrained to veto item (P) of the amended Section 109 of the National Internal Revenue Code of 1997, as amended (Tax Code), under Section 12 of this Act, to wit:
“(P) Sale of real properties not primarily held for sale to customers or held for lease in the ordinary course of trade or business or real property utilized for low-cost and socialized housing as defined by Republic Act No. 7279, otherwise known as the ‘Urban Development and Housing Act of 1992’, and other related laws, residential lot valued at Two million five hundred thousand Pesos (P 2, 500,000.00) and below, house and lot, and other residential dwellings valued at Four million two hundred thousand Pesos (P4,200,000.00) and below: Provided, That beginning January 1, 2024 and every three (3) years thereafter, the amounts herein stated shall be adjusted to present values using the Consumer Price Index, as published by the Philippine Statistics Authority (PSA)”;
Under the Tax Code, as amended by the TRAIN Law, the sales of the houses and lot and other residential dwellings valued at not more than P2.5 million shall be VAT- exempt. The exemption is targeted to provide relief to buyers of socialized housing and base-level economic housing. The amendment in the CREATE Act increases the VAT- threshold to up to P4.2 million. In effect, this will benefit even those not originally targeted for the VAT- exemption- those who can actually afford proper housing. This results in a tax exemption that is highly distortive and exacts a heavy price on the taxpaying community. The provision is also prone to abuse, as properties can be parceled into lots so that their individual values fall within the VAT- exempt threshold.
If not vetoed, the estimated revenue loss from the foregoing is P115.3 billion from 2020 to 2030, which could be used in public goods to benefit the poor directly.
B. 90-day period for the processing of general tax refunds
For being administratively impracticable, I am constrained to veto the whole of Section 14 of this Act, to wit:
“SEC. 14. Section 204 of the National Internal Revenue Code of 1997, as amended, is hereby further amended to read as follows:
“SEC.204. Authority of the Commissioner to Compromise, Abate, and Refund or Credit Taxes.- The Commissioner may-
“(A) x xx
“(B) x xx
“(C) Credit or refund taxes erroneously or illegally received or penalties imposed without authority, refund the value of internal revenue stamps when they are returned in good condition by the purchaser, and in his discretion, redeem or change unused stamps that have been rendered unfit for use and refund their value upon proof of destruction. No credit or refund of taxes or penalties shall be allowed ,unless the taxpayer files in writing with the Commissioner a claim or refund within two (2) years after the payment of the tax penalty: Provided, however, That a return filed showing an overpayment shall be considered as written claim for credit or refund: Provided, further, That in proper cases, the Commissioner shall grant a refund for taxes or penalties within (90) days from the date of complete submission of the documents in support of the application filed: Provided, furthermore, That should the Commissioner find that the grant of refund is not proper, the Commissioner find that the grant of refund is not proper , the Commissioner must state in writing the legal and factual basis for the denial: Provided, finally, That in case of full or partial denial of the claim for the tax refund, the taxpayer affected may, within thirty (30) days from the receipt of the decision denying the claim, appeal the decision with the Court of Tax Appeals.”
While I laud the intention to improve tax administration, this provision is administratively difficult for the Bureau of Internal Revenue (BIR) to implement and may cause delayed or erroneous processing of refund claims. The general form of tax refund under Section 204 of the Tax Code, as distinguished from VAT refunds in and examination of the tax payments, books, and returns filed by a taxpayer. Aside from this, the Tax Code itself requires the Commission on Audit to examine refunds. Thus, it is incumbent upon the BIR to exercise utmost diligence in granting a general tax refund. This is not possible within a 90-day period for all cases. I do not want the BIR to be forced to choose between only two (2) awful choices: grant tax refunds haphazardly, or deny an application outright considering the short period given to the BIR to process the same and then have the taxpayer go to court with his refund being unnecessarily delayed. Thus, while imposing a hard deadline may appear good on paper, the actual experience n the conduct of a full audit in general tax refund will either cause damage to the government if the BIR acts haphazardly, or cause more delays to the prejudice of the taxpayers if the BIR chooses the more convenient option of simply denying applications given the time constraints. As alternative, I suggest that the legislature, the Department of Finance, and the BIR, come up with mechanisms to streamline the process of tax refunds in a separate tax administration bill.
C. Definition of investment capital
I am constrained to veto item (g) of the new Section 293 of the Tax Code under Section 16 of this Act:
“(g) Investment capital refers to the value of investment indicated in Philippine currency, excluding the value of land and working capital, that shall be used to carry out a registered project or activity, except that land shall be included as investment capital for registered real estate development, Investment capital may include the cost of land improvements, buildings, leasehold improvements, machinery and equipment, and other non-current tangible assets.”
The term “investment capital” is relevant in determining which registered projects or activities shall fall within the approving jurisdiction of the Fiscal Incentives Review Board (FIRB). To ensure that currently operational administrative processes are not unduly disturbed, I prefer that we adopt the measures now used by investment promotion performance.
D. Redundant incentives for domestic enterprises
I am compelled to veto portions of the new Sections 294, 295, and 296 of the Tax Code, under Section 16 of the CREATE Act, to wit:
“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,”
“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”.
“The national government share shall be three percent (3%) of the gross income earned effective July 1, 2020: Provided, further, That”
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”.
“The domestic market enterprise with a minimum investment capital of Five hundred million Pesos (5,000,000.00), and the domestic market enterprise engaged in activities that are classified as’ critical””
“And for domestic market enterprise under the Strategic Investment Priority Plan engaged in activities that are classified as ‘ critical’’
3. The line “and may still be extended for a certain period not exceeding ten (10) years at any one time” in the fourth paragraph of Section 296 (B).
Allowing an additional fourteen (14) to seventeen) years of incentives and another ten (10) year-extension for the same activity on top of the original period of incentives enjoyment is fiscally irresponsible and utterly unfair to the ordinary taxpayer and to unincentivized enterprises. Registered business enterprises interested in further enjoying incentives must engage in new activities or projects incentivized in the Strategic Investment Priority Plan. My principle on this matter is simple: only new activities and projects deserve new incentives.
F. Limitations on the power of the FIRB
I am constrained to veto the proviso under the new Section 297 of the Tax Code under Section 16 of this Act, to wit:
“The functions of the Fiscal Incentives Review Board under Sections 297 (A) (1) and (5), (E), (G), (H), (J), and (K) shall be exercised in relation to the grant of tax incentives to registered projects or activities with the total investment capital of more than One Billion Pesos (P 1,000,000,000.00) as provided herein”.
The primary role of the FIRB in the fiscal incentives system of the Philippines is to exercise policy-making and oversight functions on all registered business enterprises and investment promotion agencies to grant incentives only stems from a delegated authority from the FIRB.
Corollary to this, the current practice of granting incentives without a regular impact analysis conducted and without regard to the final cost to the government is unacceptable, given our economic aims under the CREATE Act. Consistent with the theme of the “ Tax Incentives Management and Transparency Act (TIMTA)” emphasizing fiscal accountability and transparency in the grant and management of tax incentives, the oversight functions of the FIRB will ensure the proper grant and monitoring of ta incentives, as well as assure Filipinos that in every peso invested, we get our tax’s worth. These powers must remain plenary over those of the investment promotion agencies.
The concern that the FIRB oversight will result in inordinate delays is highly speculative. Even with the veto of the foregoing provision, the investment promotion agencies retain the delegated power to grant incentives up to a certain threshold amount. The FIRB does not create another layer in the approval process but is simply granted the authority to check whether the incentives granted by the investment promotion agencies conform to the overarching aim of the reform to modernize our incentive system into one that is performance- based, targeted, time- bound, and transparent. The oversight power of the FIRB supports its policy-making function since analyzing important data on all granted incentives is crucial in crafting sound, sustainable, and fiscally responsible incentives policy.
G. Specific industries mentioned under activity tiers
I am compelled to veto the provisions in the new Section 296 (B) of the Tax Code, under Section 16 of this Act, to wit:
“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 cyber security services; and planned developments that use technologies and digital solutions that are crucial to the country’s development”,
“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”.
On the hand, there are industries in the enumeration that either do not merit support through incentives or are expected to become obsolete in the short-term. On the other hand, there might be economic activities in the mid- to long-term that need to be prioritized and granted tax incentives which are not captured in the current enumeration. The CREATE Act must be kept flexible to be able to keep up with the changing times. Activities and projects should not be hardcoded in the law so that we do not keep on incentivizing obsolete industries and close our doors to technological advances and industries of the future.
H. Provision granting the President the power to exempt any investment promotion agency from the reform
I am constrained to veto the following provisions under new Section 301 of the Tax Code under Section 16 of this Act:
“The President may, upon request of an Investment Promotion Agency, exempt the latter from the coverage of the provisions of Title XIII of this Code with respect to the review and approval of applications for incentives, or modify the policy on thresholds for FIscal Incentives Review Board approvals, pursuant to Section 297, should any of the following conditions exist:
“Provide, further, That such request is supported by a cost-benefit analysis reviewed by the Fiscal Incentives Review Board, and other quantitative and qualitative evidence demonstrating the Investment Promotion Agency’s performance.
“Provided, finally, That the Investment Promotion Agency shall abide by the incentives regime provided herein”.
The provisions allowing any future President the power to exempt an investment promotion agency from the coverage of the CREATE Act disregards the huge steps we have taken to rationalize our fiscal incentives system. It could become a highly political tool that could allow subsequent Presidents to dismantle decades of studies, disregard discussions based on empirical evidence, and even subvert the will of Congress itself. Fair and sensible public policy must bear the quality of uniform application. Exempting any investment promotion agency from the CREATE Act, which provides for transparency, accountability, and proper administration of tax incentives may be used as an escape from the accountability measures institutionalized in that law, and opens a wide path for discretion and capture by vested interests.
I. Automatic approval of applications for incentives
I am constrained to veto the proviso under the new Section 297 (B) of the Tax Code, to wit:
“Provided, finally, that the application for the tax incentives shall be deemed approved if not acted upon within twenty (20) dys from the date of submission of the application and complete relevant supporting documents to the Fiscal Incentives Review Board or the Investment Promotion Agency, as the case may be”.
The automatic approval of applications runs counter to the declared policy to approve or disapprove applications based on merit. The core of the reform is to develop a performance-based tax incentives system. The FIRB or the investment promotion agencies, as the case may be, should be allowed to carefully review the application for tax incentives since these are privileges granted by the State. This important function should not be sacrificed for the sake of expediency.
Moreover, concerns over inaction can be addressed by the Ease of Doing Business and Efficient Government Service Delivery Act of 2018, which punishes the failure to render government services within a prescribed time.
III. CLOSING STATEMENT
Crucial portions of the CREATE Act were intended to be emergency tax relief for struggling enterprises, but we must not lose sight of this reform’s long- term objectives. As fiscal resources will be much needed for the government’s economic recovery efforts, we must keep this reform’s provisions reasonable and not redundant.
The CREATE Act will be the guiding document for much of Philippine business and industry over the next decades. WIth over P600 billion in tax relief for job creation in the next five years, we lay our faith and invest in Filipino businesses for them to reinvigorate the economy, create more quality jobs, and generate more revenues for the government to tide us along these trying times.
Very truly yours,
Signed by the President of the Republic of the Philippines
SEN. VICENTE C. SOTTO III
Senate President
The Philippine Senate
Pasay City
SEC. ADELINO B. SITOY
Head, Presidential Legislative Liaison Office
2/F New Executive Bldg., Malacanang, Manila
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