Preferential Taxation CREATE Law Tax Incentives PDF

BACTEL2X Strategic Tax Management 1TAY2324 Preferential Taxation CREATE Law Tax Incentives  STRATEGIC INVESTMENT PRIORITIES PLAN The Board of Investments, in coo...

BACTEL2X Strategic Tax Management 1TAY2324 Preferential Taxation CREATE Law Tax Incentives  STRATEGIC INVESTMENT PRIORITIES PLAN The Board of Investments, in coordination with the Fiscal Incentives Review Board, Investment Promotion Agencies, other government agencies administering tax incentives, and the private sector, shall formulate the Strategic Investment Priority Plan to be submitted to the President for approval, which may contain recommendations for types of non-fiscal support needed to create high-skilled jobs to grow a local pool of enterprises, particularly micro, small and medium enterprises (MSMEs), that can supply to domestic and global value chains, to increase the sophistication of products and services that are produced and/or sourced domestically, to expand domestic supply and reduce dependence on imports, and to attract significant foreign capital or investment. The Strategic Investment Priority Plan shall be valid for a period of three (3) years, subject to review and amendment every three (3) years thereafter unless there would be a supervening event that would necessitate its review. The Strategic Investment Priority Plan shall contain the following: a. Priority projects or activities that are included in the Philippine Development Plan or its equivalent, or other government programs b. Scope and coverage of location and industry tiers c. Terms and conditions on the grant of enhanced deductions All sectors or industries that may be included in the Strategic Investment Priority Plan shall undergo an evaluation process to determine the suitability and potential of the industry or the sector in promoting long-term growth and sustainable Preferential Taxation CREATE Law Tax Incentives page 1 BACTEL2X  development, and the national interest. In no case shall a sector or industry be included in the Strategic Investment Priority Plan unless it is supported by a formal evaluation process or report. The projects or activities must comply with the specific qualification requirements or conditions for a particular sector or industry and other limitations as set and determined by the Board of Investments, and in coordination with the Fiscal Incentives Review Board. In no case shall the Investment Promotion Agencies accept applications unless the project or activity is listed in the Strategic Investment Priority Plan. Projects or activities not listed in the Strategic Investment Priority Plan shall be automatically disapproved. Subject to publication requirements and the criteria for investment priority determination, the Board of Investments may include additional areas in the Strategic Investment Priority Plan, alter any of the terms of the declaration of an investment area, and temporarily suspend projects or activities on the Strategic Investment Priority Plan if it considers that such project or activity is no longer a priority within the effectivity of the Strategic Investment Priority Plan. FISCAL INCENTIVES REVIEW BOARD The power to grant tax incentives is a function of the FIRB. However, where the investment capital equal to fifteen billion pesos or below, the FIRB shall delegate the power to grant tax incentives to concerned IPA. Preferential Taxation CREATE Law Tax Incentives page 2 BACTEL2X  The FIRB, upon the recommendation of the concerned IPA, shall approve or disapprove the grant of tax incentives to registered projects or activities with investment capital of more than one billion pesos. Splitting of the total amount of investment capital by breaking up the projects or activities into smaller projects or activities, for the purpose of evading or circumventing the jurisdiction of the FIRB to approve, shall not be allowed. A finding that splitting of investment capital occurred authorizes the FIRB to treat the separate application as a single project or activity. REGISTRATION OF BUSINESS ENTERPRISE Qualified Business Enterprise Subject to the qualifications under the SIPP, every project or activity of the following may qualify for registration under the Act: a. Export enterprises b. Domestic market enterprises Qualifications for Registration Every applicant, as far as applicable, must comply with the following: a. Every project or activity in which it is engaged or proposes to engage in is included in the SIPP and must satisfy the qualifications set forth therein; Preferential Taxation CREATE Law Tax Incentives page 3 BACTEL2X  b. If the project or activity in which it is engaged or proposes to engage in is nationalized by the Constitution or by law, the ownership requirement of the Constitution and/or such law has been complied with; c. If there is a law requiring a minimum percentage of its directors to be Philippine citizens, the same has been complied with. To determine compliance with the citizenship requirement for members of the Board of Directors, the basis shall be the positions actually filled, exclusive of vacancies, unless there is a specific rule to the contrary; and d. That the project or activity in which the applicant is engaged in is within its corporate powers and is not otherwise prohibited by law. FISCAL INCENTIVES Start of Period of Availment The period of availing of the following income tax-based incentives shall commence from the actual start of commercial operations, with the RBE availing of the tax incentives within three years from the date of registration unless otherwise provided in the Strategic Investment Priority Plan and its corresponding guidelines. Income Tax Holiday Exemption from corporate income tax may availed which may be from four to seven years starting from the start of commercial operations depending on the location and kind of industry of export and domestic market enterprises. The basic ITH is four years which is available to registered activities under the Tier I classification and operating in National Capital Region. An Preferential Taxation CREATE Law Tax Incentives page 4 BACTEL2X  additional of one-year ITH is given if it is located in Metropolitan areas or areas adjacent to NCR. Two additional ITH years is available if it is to operate in other areas of the Philippines. An additional one year is also available for each step higher in the Tier classification. The total ITH period, however, must not exceed seven years. Incentives granted shall apply only to registered operations enterprise and only during the period its registration. The industry of the registered project or activity shall be prioritized according to 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. Tier I Activities Tier II Activities Tier III Activities have high potential for job creation produce supplies, parts and research and development resulting in take place in sectors with market components, and demonstrably significant value-added, higher failures resulting in underprovision of intermediate services that are productivity, improved efficiency, basic goods and services not locally produced but are breakthroughs in science and health, and generate value creation through critical to industrial high-paying jobs innovation, upgrading or moving up development and import- generation of new knowledge and intellectual the value chain substituting activities, property registered and/or licensed in the including crude oil refining Philippines Preferential Taxation CREATE Law Tax Incentives page 5 BACTEL2X  provide essential support for sectors commercialization of patents, industrial that are critical to industrial designs, copyrights and utility models owned development or co-owned by a registered business emerging owing to potential enterprise comparative advantage highly technical manufacturing critical to the structural transformation of the economy and require substantial catch-up efforts Those provided under the 2020 Green Ecosystems Research and Development and activities Investment Priorities Plan. Health-Related Services adopting advanced digital production Defense-Related Services technologies of Industrial Revolution 4.0 Industrial Value-Chain Gaps Highly technical manufacturing and Food Security-Related production of innovative products and Activities services Establishment of innovation support facilities Preferential Taxation CREATE Law Tax Incentives page 6 BACTEL2X  Extension ITH for Areas Recovering from Armed Conflicts or Major Disasters In addition, projects or activities of registered business enterprises located in areas recovering from armed conflict or a major disaster shall be entitled to two (2) additional years of ITH, subject to the following: a. Declaration of the President or his/her authorized representatives of the existence of an armed conflict or a major disaster, including pandemic, epidemic, super typhoon, or other analogous circumstances; or b. The issuance of a presidential directive for the implementation of recovery programs of the affected area or areas. Relocation ITH A project or activity registered that will completely relocate from NCR during the period of their incentives, shall be entitled to three (3) additional years of ITH which will commence: after the expiration of the period of incentives granted under the Existing project or activity registered under CREATE Law Certificate of Registration issued to the RBE Existing project or activity under the transition period after the expiration of the transition period The concerned IPA shall issue a CETI to the concerned RBE as proof of its entitlement to the additional three (3) years of ITH. Complete relocation shall mean the total physical relocation of the facilities outside of NCR, including the transfer of the full operations of the registered project or activity to the new area of operation. Preferential Taxation CREATE Law Tax Incentives page 7 BACTEL2X  Illustration 1.1 INCOME TAX HOLIDAY A Tier 2 registered export enterprise commenced its operations on January 1, 2022 in Bulacan. Following are its operating financials during 2026. Sales Direct Export Sales 7,400,000 Sales to Export Traders 3,400,000 Domestic Sales 1,200,000 12,000,000 Less: Cost of Sales Export Sales (Purchases of P4,700,000) 4,800,000 Domestic Sales (Purchases of P550,000) 520,000 5,320,000 Gross Profit 6,680,000 Other Income: Sale of Scraps 170,000 Gross Income 6,850,000 Less: Expenses Administrative Expenses 2,400,000 Expenses related to Sale of Scraps 50,000 2,450,000 Net Income 4,400,000 Preferential Taxation CREATE Law Tax Incentives page 8 BACTEL2X  The entity is granted a six-year income tax holiday. The year 2026 is still within said period. The entity shall only be liable to income tax on the net gain on sale of scraps computation of which would be as follows: Sale of Scraps 170,000 Related Expenses 50,000 Net Gain 120,000 Regular Income Tax Rate 25% Regular Income Tax Due 30,000 Special Corporate Income Tax A special income 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 is available for registered export enterprises. The period that this will be available for ten years. Since REEs have the option to choose this in lieu of the enhanced deductions, said option is irrevocable for the duration of the project or activity. Deductions Allowed Only the following shall be considered as direct costs for purposes of computing the gross income earned to be imposed the five percent (5%) SCIT rate: a. Direct salaries, wages or labor expenses; b. Production supervision salaries; Preferential Taxation CREATE Law Tax Incentives page 9 BACTEL2X  c. Raw materials used in the manufacture of products; d. Goods in process (Intermediate goods); e. Finished goods; f. Supplies and fuels used in production; g. Depreciation of machinery, equipment, and building directly and exclusively used in the rendition/production of registered activity; h. Rent and utility charges associated with building, equipment, and warehouses, or handling of goods used directly and exclusively in the rendition/production of registered activity; i. Financing charges associated with fixed assets used directly and exclusively in the registered activity; j. Service supervision salaries; and k. Direct materials and supplies used. Illustration 1.2 SPECIAL CORPORATE INCOME TAX During 2029, an RBE reported the following a year after expiration of its income tax holiday: Registered Unregistered Gross Receipts 9,600,000 200,000 Cost 4,200,000 20,000 Gross Income 5,400,000 180,000 Preferential Taxation CREATE Law Tax Incentives page 10 BACTEL2X  Expenses 1,900,000 - Net Income 3,500,000 180,000 The total income tax will be computed and allocated as follows: Tax Base Tax Rate Tax Amount Gross Income Tax 5,400,000 5% 270,000 Regular Income Tax 180,000 25% 45,000 Total Income Tax 5,580,000 315,000 Illustration 1.3 YEARS NOT COINCIDING A Tier 1 export enterprise in Manila started its commercial operations on July 1, 2022. Following are the quarterly financial performance for the year 2026: Q1 Q2 Q3 Q4 Sales 900,000 1,000,000 1,400,000 1,200,000 Less: Cost of Sales 400,000 450,000 600,000 550,000 Gross Income 500,000 550,000 800,000 650,000 Less: Operating Expenses 200,000 300,000 350,000 250,000 Net Income 300,000 250,000 450,000 400,000 Preferential Taxation CREATE Law Tax Incentives page 11 BACTEL2X  The entity shall be covered by the 5% GIT starting the third quarter of 2020, thus, still will enjoy the income tax holiday for the first two quarters. The income tax due shall be computed as follows: Q1 Q2 Q3 Q4 Tax Base 0 0 800,000 650,000 Tax Rate 25% 25% 5% 5% Income Tax Due 0 0 40,000 32,500 Enhanced Deductions For export enterprise and critical domestic market enterprise, the following may be allowed as deductions. 10% Qualified Capital Expenditure for The depreciation allowance of the assets acquired for the entity's production of goods and services (qualified capital buildings, expenditure) shall be allowed for assets that are directly related to the registered enterprise's production of goods 20% and services other than administrative and other support services. for machineries & equipment Labor Expense 50% 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. Preferential Taxation CREATE Law Tax Incentives page 12 BACTEL2X  Research and Development Expense The additional deduction on research and development expense shall only apply to research and development 100% 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 R&D organizations. Training Expense The additional deduction on training expense shall only apply to trainings, as approved by the Investment 100% 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. Domestic Input Expense 50% 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. Power Expense 50% The additional deduction on power expense shall only apply to power utilized for the registered project or activity. Reinvestment Allowance 50% 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 Preferential Taxation CREATE Law Tax Incentives page 13 BACTEL2X  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. Enhanced Net Operating Loss Carryover 5 The net operating loss of the registered project or activity during the first three (3) years from the start of commercial years 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. Summary of Income Tax Regimes Export Tier I Tier II Tier III Domestic Tier I Tier II Tier III 4 ITH + 5 ITH + 6 ITH + 4 ITH + 5 ITH + 6 ITH + NCR NCR 10 ED/SCIT 10 ED/SCIT 10 ED/SCIT 5 ED 5 ED 5 ED Metro Metro 5 ITH + 6 ITH + 7 ITH + 5 ITH + 6 ITH + 7 ITH + Areas/NCR Areas/NCR 10 ED/SCIT 10 ED/SCIT 10 ED/SCIT 5 ED 5 ED 5 ED Adjacents Adjacents 6 ITH + 7 ITH + 7 ITH + 6 ITH + 7 ITH + 7 ITH + All other areas All other areas 10 ED/SCIT 10 ED/SCIT 10 ED/SCIT 5 ED 5 ED 5 ED Preferential Taxation CREATE Law Tax Incentives page 14 BACTEL2X  Duty Exemption 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: a. 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. b. 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. Sale, Transfer or Disposition Within the first five (5) years from date of Importation, the RBE shall secure the approval of the concerned IPA before the sale, transfer, or disposition of the capital equipment, raw materials, spare parts, or accessories which were granted customs duty exemption provided the payment of duties based on the net book value of the capital equipment, raw materials, spare parts, or accessories. The sale, transfer, or disposition thereof 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 for its direct and exclusive use; Preferential Taxation CREATE Law Tax Incentives page 15 BACTEL2X  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, SUCs, or DepEd and CHED accredited schools; provided, that the donation shall be exempt from import duties and taxes, including donor's tax. If the RBE sells, transfers, or disposes the aforementioned imported items without prior approval of the concerned IPA, the RBE 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, without prejudice to any penalties or sanctions the concerned IPA may impose. VAT Exposure Sales made to registered business enterprises are in general subject to 12% VAT, except when such sales are made to registered export enterprises on their purchases of goods or services directly and exclusively used in their registered activity. In such case, it shall be subject to zero-rating for a maximum period of 17 years from the date of registration indicated in its Certificate of Registration. Preferential Taxation CREATE Law Tax Incentives page 16 BACTEL2X  REE RDME Directly for Registered Activity 0% VAT 12% VAT Other Purposes 12% VAT 12% VAT Local purchases of goods and services relating to the following shall not be considered as "directly and exclusively used" in the registered project or activity of a registered export enterprise, to wit: 1. janitorial services; 3. financial services; 5. marketing and promotion; and 2. security services; 4. consultancy services; 6. administrative services This notwithstanding, the registered export enterprise is not precluded from further proving, with supporting evidence, to the concerned Investment Promotion Agency (IPA) that any of these local purchase of goods and/or services are indeed directly and exclusively used in its registered project or activity. In all instances, in issuing the VAT zero-rating certification, the concerned IPA shall be guided by the rule that such local purchases are directly attributable to the registered project or activity without which such registered project or activity cannot be carried out. These are costs that are indispensable to the project or activity, i.e., without which the project or activity cannot proceed, and these include expenses that are necessary or required depending on the nature of the registered project or activity of the export enterprise. Preferential Taxation CREATE Law Tax Incentives page 17 BACTEL2X  If the purchased goods and/or services are used in both the registered project or activity and administrative operations, the registered export enterprise shall adopt a method to best allocate the same. If a proper allocation could not be determined, the purchase of such goods shall be subject to twelve percent (12%) VAT. Health maintenance organization (HMO) plans acquired by registered export enterprise for its employees who are directly and exclusively involved in the operations of their registered projects or activities and forming part of their compensation package shall be considered as "directly and exclusively used" in the registered project or activity of a registered export enterprise subject to the conditions provided under the existing laws, rules and regulations regarding the availment thereof. The VAT treatments on the sale, transfer, or disposition of an RBE on the previously VAT-exempt importation of capital equipment, raw materials, spare parts, or accessories are as follows with non-registered export enterprises included as RDMEs for this purpose: Seller (up) / Buyer (left) Registered Export Enterprise Registered Domestic Market Enterprise Registered Export Enterprise 0% VAT 0% VAT Exempt if buyer is also exempt, Exempt if seller is on 5% GIT, Registered Domestic Market Enterprise otherwise, 12% VAT otherwise, 12% VAT Preferential Taxation CREATE Law Tax Incentives page 1 BACTEL2X  Other Incentives Importation of Petroleum Products 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: a. 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. b. in case of withdrawal of the petroleum products produced from the imported crude oil, for introduction into the customs territory, all applicable duties, taxes and other charges shall be paid to the Bureau before release from custody subject to the prior requirement of authority to release imported goods (ATRIG). CANCELLATION, SUSPENSION, OR WITHDRAWAL OF THE ENJOYMENT OF TAX INCENTIVES The FIRB may cancel, suspend, or withdraw, on its own initiative or upon the recommendation of the IPA after due process, the enjoyment of fiscal incentives granted to qualified recipients in the following instances: Preferential Taxation CREATE Law Tax Incentives page 2 BACTEL2X  a. Non-compliance with the agreed performance targets or material violation of any of the conditions imposed in the grant of fiscal incentives or tax; b. Material misrepresentation of information for the purpose of availing more incentives than what it is entitled to under the Code; or c. Non-compliance of the registered business enterprise with the reportorial requirements. RULES ON TRANSITION Registered business enterprises with incentives granted prior to the effectivity of the Act shall be subject to the following rules: Allowed to continue with the availment of the income tax Granted an income tax holiday only holiday for the remaining period of the income tax holiday Currently availing of the 5% gross income tax on gross Allowed to continue availing the 5% GIT for ten years income earned Granted an income tax holiday and entitled to the five Allowed to exhaust unused income tax holiday and continue percent (5%) tax on gross income earned incentive after the availing the 5% GIT, both for a total of ten years income tax holiday A qualified expansion, entirely new project, or existing registered projects or activities prior to the effectivity of this Act, may register and avail of the incentives granted under the Act for the prescribed period, subject to the criteria and conditions set Preferential Taxation CREATE Law Tax Incentives page 3 BACTEL2X  forth in the SIPP in effect at the time of application, and performance review by the FIRB, provided that after the expiration of the transitory period, export enterprises registered prior to the effectivity of this Act shall have the option to reapply and avail of the incentives granted under the Act. For this purpose, RBEs who avail of the transitory provision and incentives on reapplication will not be eligible to apply for new incentives under the Act for their existing activities unless there is qualified expansion, entirely new project or additional investments. Qualified expansion projects or activities may be granted an ITH for three (3) years, Provided, That the application for tax incentives for a qualified expansion project or activity shall be approved by the FIRB or concerned IPA, as the case may be, based on the amount of investment capital of the expansion project or activity. PROHIBITION ON REGISTERED ACTIVITIES A qualified registered project or activity under an Investment Promotion Agency administering an economic zone or freeport shall be exclusively conducted or operated within the geographical boundaries of the zone or freeport being administered by the Investment Promotion Agency in which the project or activity is registered, provided; a. registered business enterprise may conduct or operate more than one qualified registered project or activity within the same zone or freeport under the same Investment Promotion Agency Preferential Taxation CREATE Law Tax Incentives page 4 BACTEL2X  b. any project or activity conducted or performed outside the geographical boundaries of the zone or freeport shall not be entitled to the incentives provided in this Act, unless such project or activity is conducted or operated under another Investment Promotion Agency Preferential Taxation CREATE Law Tax Incentives page 5 BACTEL2X  Self-Check! Basing on your readings, answer the following questions. 1. What are the contents of the Strategic Investment Priorities Plan? 2. What are the qualifications of eligible enterprise for tax incentives? 3. What are the tax incentives under the CREATE Law? 4. What are the rules on the registered activities of eligible enterprises? 5. What are the transitory rules for enterprises enjoying preferential taxes before the effectivity of CREATE Law? Exercise 1.1 IDENTIFICATION Identify the terminologies best described by the following statements. 1. Any enterprise registered with Investment Promotion Agencies to engage in manufacturing, assembling or processing activity and IT services resulting to direct exportation 2. Any enterprise registered with Investment Promotion Agencies other than export enterprise 3. An isolated and policed area adjacent to a port of entry which shall be operated and managed as a separate customs territory to ensure free flow or movement of goods 4. Purchases of capital goods with a useful life of more than one year acquired for an entity’s production of goods and services to be directly used in its registered activity 5. A special incentive providing additional special deductions to registered enterprises on specific types of expenses Preferential Taxation CREATE Law Tax Incentives page 6 BACTEL2X  6. Document serving as proof of entitlement for tax and duty free importation 7. Document serving as proof of entitlement for incentives 8. Government entities created to grant, administer incentives and oversee operation in ecozones 9. Plan prepared by BOI containing the priority projects, scope and coverage of location and industry tiers wherein investments are encouraged 10. The value of investment that shall be used to carry out a registered project Exercise 4.2 MULTIPLE CHOICE Choose the best answer from the choices provided. 1. Which of the following is not an investment promotion agency? a. Philippine Economic Zone Authority b. Board of Investments c. Bases Conversion and Development Authority d. National Irrigation Authority 2. Enterprises enjoying both income tax holiday and 5% GIT prior to the effectivity of the CREATE Law are a. to exhaust the remaining unused ITH only b. to exhaust the remaining unused ITH and be subject to 5% GIT, both for a total of ten years Preferential Taxation CREATE Law Tax Incentives page 7 BACTEL2X  c. subject to the 5% GIT for ten years only d. should re-register as an eligible enterprise 3. Which of the following is not a fiscal incentive specifically identified under Title XIII of the CREATE Law? a. Income tax holiday b. Exemption from expanded withholding tax c. 5% SCIT or enhanced deductions d. VAT zero-rating on local purchases 4. The maximum ITH for domestic market enterprises is a. 5 years b. 6 years c. 7 years d. 8 years 5. The maximum years that export enterprises may avail the 5% SCIT or enhanced deductions is a. 5 years b. 7 years c. 8 years d. 10 years Preferential Taxation CREATE Law Tax Incentives page 8 BACTEL2X  6. Jackie Palubos is an employee of a pioneer PEZA enterprise. How will her compensation income be taxed? a. Exempt due to income tax holiday b. 5% income tax c. 35% fringe benefit tax d. Progressive tax table 7. The reckoning date of the income tax holiday is a. Date of filing registration b. Date of approval of registration c. Date of release of Certificate of Registration d. Date of start of commercial operation 8. A Tier II enterprise in Bulacan applied for registration status on January 10, 2022. Its Certificate of Registration was dated March 18, 2022, ten days after it was approved by PEZA Board. It started its commercial operation on June 19, 2022. When will its income tax holiday expire? a. March 8, 2026 b. June 19, 2026 c. March 8, 2028 d. June 19, 2028 Preferential Taxation CREATE Law Tax Incentives page 9 BACTEL2X  9. Income derived from unregistered activities are taxed at, except a. Final withholding tax b. Regular income tax c. 5% Gross income tax d. Capital gains tax 10. The following types of tax incentives, except one, may be granted to domestic market enterprises a. Special Corporate Income Tax b. Enhanced Deductions c. Income Tax Holiday d. Duty Importation Problem 1.1 INCOME TAX HOLIDAY AND SPECIAL CORPORATE INCOME TAX Stand Company started its commercial operations on June 30, 2022 registered to avail tax incentives. Following is its financial performance for the year 2028. Jan-Jun Jul-Dec Gross Sales 15,600,000 18,700,000 Cost of Sales 6,200,000 7,500,000 Preferential Taxation CREATE Law Tax Incentives page 10 BACTEL2X  Operating Expenses 2,900,000 3,700,000 Compute the Income Tax Payable under each of the following scenarios: a. It is a Tier-I domestic enterprise operating in NCR b. It is a Tier-II export enterprise operating in Bulacan c. It is a Tier-III export enterprise operating in Isabela d. It is a Tier-I domestic enterprise operating in Cavite (with declaration of a major disaster in the area) e. It is a Tier-I domestic enterprise operating in Bicol (relocated from NCR during 2028) Problem 1.2 ENHANCED DEDUCTIONS A registered export enterprise whose ITH is already expired chose to be taxed at the regular corporate tax rate with enhanced deductions. Following is its financial performance during the year. Gross Sales 68,000,000 Cost of Sales 23,500,000 Regular Deductions 10,600,000 Included in the deductions to gross sales are P800,000 depreciation of qualified capital expenditure on machineries, P200,000 power expenses, P1,500,000 direct labor expense and P300,000 training expenses. Compute the amount of income tax payable. Preferential Taxation CREATE Law Tax Incentives page 11 BACTEL2X  Problem 1.3 TRANSITION A qualified enterprise started its commercial operations on April 1, 2019. Following is its 2025 financial performance. Q1 Q2 Q3 Q4 Sales 8,000,000 11,000,000 9,000,000 9,600,000 Cost of Sales 4,400,000 5,000,000 4,600,000 4,600,000 Gross Profit 3,600,000 6,000,000 4,400,000 5,000,000 Expenses 3,000,000 2,400,000 2,800,000 2,400,000 Net Income 600,000 3,600,000 2,400,000 2,600,000 Compute the income tax payable under each of the following scenarios: a. It is a pioneer BOI-registered enterprise b. It is non-pioneer BOI-registered enterprise c. It is a pioneer PEZA-registered enterprise d. It is a non-pioneer PEZA-registered enterprise e. It is a BCDA-registered enterprise f. A non-pioneer BOI-registered enterprise relocating from Manila in 2024 Preferential Taxation CREATE Law Tax Incentives page 12 BACTEL2X