Tax Incentives

In the Philippines, government regulatory authority is delegated to entities such as the Philippine Economic Zone Authority (PEZA) and the Board of Investments (BOI) to oversee tax incentives offered to eligible enterprises. These incentives encompass tax holidays, exemptions, credits, as well as tax and duty-free importation of capital equipment.

To qualify for tax incentives through PEZA, foreign companies are required to establish their operations within one of its Special Economic Zones (SEZs). In contrast, BOI necessitates that foreign companies engage in government-prioritized investment sectors.

Philippine Economic Zone Authority (PEZA)

Foreign enterprises involved in export manufacturing, IT service exports, tourism, and similar activities can register with PEZA. As a fundamental condition, foreign enterprises wishing to register with PEZA must base their operations within any of its Special Economic Zones (SEZs) and qualify as export-oriented entities (i.e., 100% of their products/services must be intended for export). However, under certain conditions, PEZA may permit up to 30% of total products/services to be sold in the domestic market.

PEZA-registered enterprises are entitled to a range of tax incentives, including but not limited to:

– Income tax holidays (ITH) lasting 4 to 7 years (as specified under RA 11534)

– A preferential final tax rate of 5% on gross income, replacing all national and local taxes (after the ITH period)

– Tax and duty-free importation of capital equipment, spare parts, and accessories

– Tax credits for exporters using local materials (as stipulated under RA 7844)

– Exemption from expanded withholding tax

– Additional deductions for labor expenses

– Employment of foreign nationals in supervisory, technical, or advisory positions

The prerequisites for PEZA registration include the following (additional requirements may apply to specific industries):

– SEC Certificate of Registration

– Articles of Incorporation and By-Laws

– Board Resolution signed by an authorized company representative

– Project Brief

– Anti-Graft Certificate

– Project Feasibility Study

Foreign companies engaged in economic activities listed in the Foreign Investments Negative List (FINL) are ineligible for PEZA registration. Additionally, it’s crucial to note that the approval of applications and the specific incentives granted by PEZA are determined on a case-by-case basis.

Fully foreign-owned companies engaged in export-oriented operations (70-100% export), including outsourcing and offshoring, can register with BOI. Companies in other industries can also apply for BOI incentives if their business activities align with government development priorities or are part of BOI’s investment priorities plan (IPP). Furthermore, foreign enterprises can qualify for BOI incentives by establishing their operations in areas designated as Less Developed Areas (LDAs) by BOI.

BOI offers similar tax incentives to PEZA, including:

– ITH lasting 4 to 7 years (as provided under RA 11534)

– Exemption from duties on imported capital equipment, spare parts, and accessories

– Exemption from wharfage dues, export taxes, duties, imposts, and fees

– Tax credits for imported raw materials

– Tax and duty-free importation of consigned equipment

– Additional deductions for labor expenses

– Employment of foreign nationals in supervisory, technical, or advisory roles

Eligible foreign enterprises must provide the following to BOI for incentive applications:

– SEC Certificate of Registration

– Articles of Incorporation and By-Laws

– Audited financial statements (including a feasibility study projecting financial reports for the next 5 years)

– Income tax returns for the past 3 years (if applicable)

– Board resolution signed by an authorized company representative

– Project report (encompassing activities aligned with or related to those listed in the IPP)

Companies planning to engage in activities such as Information Technology – Business Process Outsourcing (IT-BPO), Knowledge Process Outsourcing (KPO), Legal Process Outsourcing (LPO), Contact/Call Center, Back-Office Outsourcing, or Staff Leasing/Augmentation are recommended to register with BOI.

Foreign companies involved in gaming, recreational, and tourism-related operations (e.g., online gaming, amusement, gambling, and sports facilities) can register with CEZA.

CEZA-registered enterprises are entitled to tax incentives similar to those provided by PEZA, including zero-rating for items authorized by CEZA under legal permits. CEZA has the authority to grant online gaming licenses to eligible enterprises under Philippine law.

To apply for tax incentives with CEZA, the following documentation is required:

– SEC Certificate of Registration

– Articles of Incorporation and By-Laws

– Project Feasibility Study

– Evidence of the intended enterprise’s physical location within the Cagayan Special Economic Zone and Freeport

– List of assets and other properties

Foreign enterprises engaged in tourism-related activities (e.g., travel and tour agencies, restaurants, spas, theme parks, and galleries) within the Tourism Enterprise Zone (TEZ) can register their business with TIEZA. To be eligible, the primary purpose of their business must be to attract both local and foreign tourists to travel within and to the Philippines. Other tourism enterprises can also avail of TIEZA incentives if their activities align with the IPP.