Philippines as a China Plus One Manufacturing Base: Tax and Customs Rules

The Philippines is a viable China plus one manufacturing base because its tax and customs rules reward export-oriented production. Under Republic Act No. 12066, the regular corporate income tax rate is 25%, but registered business enterprises under the enhanced deductions regime pay 20% on income from registered projects or activities. Exporters that meet the 70% export-sales threshold enjoy VAT zero-rating on local purchases and can import goods exempt from VAT. The Board of Investments, PEZA, and other Investment Promotion Agencies administer these incentives.

What "China plus one" means for Philippine manufacturing

A China plus one strategy means adding a second manufacturing location outside China to reduce supply-chain risk. Philippine law supports this through two main channels: tax incentives for registered enterprises and customs rules that keep imported inputs and exported finished goods moving.

The Investment Incentives Act, Republic Act No. 5186, declares it state policy to encourage foreign investments in projects that increase exports and provide more employment opportunities. A registered enterprise must generally be a Philippine corporation with at least 60% Filipino voting stock, though the law allows exceptions under its own provisions.

The corporate income tax rates that apply

Republic Act No. 12066 sets the regular rate at 25% for domestic corporations and for resident foreign corporations engaged in trade or business in the Philippines.

Two lower rates matter for manufacturers:

• 20% for corporations with net taxable income not exceeding P5,000,000 and total assets not exceeding P100,000,000, excluding land where the office, plant, and equipment sit.
• 20% for registered business enterprises under the enhanced deductions regime, on taxable income from registered projects or activities.

VAT zero-rating for export-oriented manufacturers

This is where export manufacturers gain the most. Under Section 106 of the National Internal Revenue Code, as amended by Republic Act No. 12066, the following local sales are subject to zero percent (0%) VAT:

• Sale of raw materials or packaging materials to a non-resident buyer for delivery to a resident export-oriented enterprise, paid in acceptable foreign currency and accounted for under Bangko Sentral ng Pilipinas rules.
• Sale of goods to an export-oriented enterprise whose export sales are at least 70% of total annual production in the preceding taxable year.
• Sales to bonded manufacturing warehouses of export-oriented enterprises.

Section 108 likewise zero-rates services performed for an export-oriented enterprise that meets the same 70% threshold, provided the services are directly attributable to the export activity. The Export Marketing Bureau of the Department of Trade and Industry determines compliance. An enterprise that fails the threshold is disqualified from VAT zero-rating in the immediately succeeding year.

"Directly attributable" covers goods and services incidental to and reasonably necessary for the export activity, including janitorial, security, financial, consultancy, marketing and promotion services, and administrative services such as human resources, legal, and accounting.

Importing inputs and capital equipment

Section 109 of the Tax Code exempts from VAT the importation of goods by an export-oriented enterprise whose export sales are at least 70% of total annual production, if the goods are directly attributable to the export activity.

Under Republic Act No. 5186, a registered enterprise may import machinery, equipment, and spare parts free of tariff duties and compensating tax within seven years from registration, if the items are not manufactured domestically in reasonable quantity and quality at reasonable prices, are directly needed in production, and the Board of Investments approves the importation beforehand.

The Customs Modernization and Tariff Act (Republic Act No. 10863) governs clearance. Section 116 allows goods to be freely imported and exported without permits unless regulated. Section 109 mandates information and communications technology for a paperless customs environment, and Section 113 requires the Bureau of Customs to issue advance rulings within 30 days from submission of necessary documents.

VAT refunds: what exporters should expect

The Tax Code, as amended by Republic Act No. 12066, requires the Commissioner of Internal Revenue to grant a refund for creditable input taxes within 90 days from submission of certified true copies of invoices and supporting documents. Claims are classified as low-, medium-, or high-risk, and medium- and high-risk claims are subject to audit.

If the claim is denied, the taxpayer has 15 days from receipt to file a request for reconsideration, which the Commissioner must decide within 15 days. Appeal to the Court of Tax Appeals must be filed within 30 days from receipt of the denial or after the applicable periods lapse. The Department of Finance has established a VAT refund center in the Bureau of Internal Revenue and the Bureau of Customs for electronic processing.

Registering for incentives

An investor typically proceeds in this order:

1. Identify the registered project or activity under the Strategic Investment Priority Plan.
2. Register with an Investment Promotion Agency such as the Board of Investments or PEZA.
3. Obtain a certificate of registration, which supports entitlement to tax incentives; each registered project or activity requires a separate certificate.
4. Secure a certificate of authority to import for VAT- and duty-exempt capital equipment, raw materials, spare parts, or accessories directly attributable to production.
5. Maintain compliance with the 70% export-sales threshold if availing of VAT zero-rating.

Under the Tax Code, incentives are granted only to the extent of the approved registered project or activity, considering investment capital, direct local employment, and other performance metrics.

Frequently asked questions

Is the Philippines a good China plus one manufacturing location? It offers a 20% income tax rate for registered enterprises under the enhanced deductions regime, VAT zero-rating for qualifying exporters, and duty-free importation of capital equipment for registered projects.

What is the corporate tax rate for manufacturers in the Philippines? The regular rate is 25%. Corporations within the P5,000,000 income and P100,000,000 asset thresholds, and registered business enterprises under the enhanced deductions regime, are taxed at 20%.

How do exporters avoid VAT on local purchases? An export-oriented enterprise whose export sales reach at least 70% of total annual production may enjoy VAT zero-rating on local purchases of goods and services directly attributable to its export activity.

Practical takeaways

• The regular corporate income tax rate is 25%; qualifying corporations and registered business enterprises pay 20%.
• VAT zero-rating on local purchases requires export sales of at least 70% of total annual production, verified by the Export Marketing Bureau of the DTI.
• Importation of goods directly attributable to export activity may be VAT-exempt for qualifying export enterprises.
• Republic Act No. 5186 allows duty- and compensating-tax-free importation of machinery and equipment within seven years from registration, subject to prior Board approval.
• VAT refund claims must be acted on within 90 days, with a 15-day window for reconsideration and 30 days to appeal to the Court of Tax Appeals.

Primary sources

The rules discussed above are drawn from the following primary sources, as published in the Official Gazette and the national statute book.

• REPUBLIC ACT NO. 12066 - AN ACT AMENDING SECTIONS 27, 28, 32, 34, 57, 106, 108, 109, 112, 135, 237-A, 269, 292, 293, 294, 295, 296, 297, 300, 301, 308, 309, 310, AND 311, AND ADDING NEW SECTIONS 135-A, 295-A, 296-A, AND 297-A OF THE NATIONAL INTERNAL REVENUE CODE OF 1997, AS AMENDED, AND FOR OTHER PURPOSES

• REPUBLIC ACT NO. 5186 - AN ACT PRESCRIBING INCENTIVES AND GUARANTEES TO INVESTMENTS IN THE PHILIPPINES, CREATING A BOARD OF INVESTMENTS, APPROPRIATING THE NECESSARY FUNDS THEREFOR AND FOR OTHER PURPOSES.

• REPUBLIC ACT NO. 10863 - AN ACT MODERNIZING THE CUSTOMS AND TARIFF ADMINISTRATION

This article is general information and not legal advice. For your specific situation, consult a lawyer or ask ASG Legal AI.