Firms allowed to deduct direct costs from taxes

by Elijah Felice Rosales (The Philippine Star), 26 Jun 2021

MANILA, Philippines — The government has identified 11 direct costs that firms can deduct from their taxes for a period of 10 years under the implementing rules and regulations (IRR) of the new fiscal law.

Based on the IRR of the Corporate Recovery and Tax Incentives for Enterprises (CREATE) Act, the government listed 11 direct costs that enterprises can deduct to arrive at their gross income and avail of the special corporate income tax (SCIT).

The deductions are: direct salaries, wages or labor expenses; production supervision salaries; raw materials used in the manufacture of products; goods in process; and finished goods.

Firms can deduct the cost of supplies and fuels used in production; depreciation of machineries, equipment and building; and rent and utility charges. They can also subtract financing charges; service supervision salaries; and direct materials and supplies used.

Under the CREATE Act’s IRR, exporters can secure an income tax holiday (ITH) of up to seven years depending on the activity they will embark on and where they will locate the new project. Afterward, they can choose to obtain enhanced deductions or pay an SCIT rate of five percent for 10 years.

If an exporter opts for the SCIT, they must pay the government five percent of their gross income minus the direct costs identified in the IRR.

Once they exhausted all of their fiscal incentives, they will graduate to the corporate income tax (CIT) rate of 25 percent similar to what domestic firms are settling.

The CREATE Act’s IRR also upheld the law’s provision that economic zone locators should give up their tax perks, including the five percent tax on gross income paid in lieu of local and national taxes, within 10 years.

Finance Secretary Carlos Dominguez said the approval of the IRR prior to the July 10 deadline proves the government’s dedication to reforming the fiscal structure.

With the IRR now in place, he asked investment promotion agencies to proceed with their programs to market the Philippines to potential investors.

The CREATE Act brings down the CIT rate to 25 percent, from 30 percent – the highest among Southeast Asian nations – providing private firms a tax relief of about P1 trillion over the next 10 years. On the other hand, the measure removes incentives granted to exporters and introduces a new set of tax perks.

Likewise, it creates the Fiscal Incentives Review Board, chaired by the finance chief, mandated to approve the grant of privileges to projects with an investment capital of more than P1 billion.