Investment Incentives for Foreign Manufacturers in the Philippines

Foreign manufacturers can access substantial investment incentives in the Philippines by registering with an Investment Promotion Agency (IPA) such as the Board of Investments. Under Republic Act No. 12066, which amended the National Internal Revenue Code, registered business enterprises may enjoy an Income Tax Holiday, a Special Corporate Income Tax rate of five percent (5%) on gross income for export enterprises, enhanced deductions, duty exemption on imported capital equipment and raw materials, and VAT exemption on importation plus VAT zero-rating on local purchases. Registration must cover a specific project or activity listed in the Strategic Investment Priority Plan.

Who Qualifies as a Registered Business Enterprise

A foreign manufacturer must register its project or activity with an IPA. Under Republic Act No. 12066, Investment Promotion Agencies include the Board of Investments, the Philippine Economic Zone Authority, the Subic Bay Metropolitan Authority, the Clark Development Corporation, and other similar authorities. Each registered project or activity requires a separate certificate of registration.

The incentives are granted only to the extent of the approved registered project or activity under the Strategic Investment Priority Plan, taking into account investment capital, generation of direct local employment, and other performance metrics.

Tax Incentives Available to Foreign Manufacturers

Income Tax Holiday. Registered business enterprises are exempt from income tax on their registered project or activity. For export enterprises, this may be followed by either the Special Corporate Income Tax or the Enhanced Deductions Regime.

Special Corporate Income Tax. Export enterprises may opt for a tax rate of five percent (5%) based on gross income earned, in lieu of all national and local taxes and local fees and charges.

Enhanced Deductions Regime. Both export and domestic market enterprises may avail of enhanced deductions, including a one hundred percent (100%) additional deduction on power expense, a deduction for reinvestment allowance for manufacturing industries of up to fifty percent (50%) of the amount reinvested, and an enhanced Net Operating Loss Carry-Over.

Duty Exemption. Capital equipment, raw materials, spare parts, or accessories directly attributable to the registered project or activity may be imported free of duties and taxes, provided these are not produced domestically in sufficient quantity or of comparable quality at reasonable prices, and prior approval of the IPA was obtained.

VAT Incentives. Registered business enterprises enjoy VAT exemption on importation and VAT zero-rating on local purchases.

Conditions for Availing Duty Exemption

The duty exemption applies only to items directly attributable to the registered project or activity. Prior approval of the IPA must be secured before importation. If the RBE uses these items for a non-registered activity within the first five years from importation, it must first seek prior approval and pay the taxes and customs duties that were not paid upon importation.

An IPA may authorize importation pending issuance of the certificate of registration, subject to posting a performance bond or bank guarantee equivalent to the duties and taxes waived.

VAT Zero-Rating on Local Purchases

Local purchases of goods and services directly attributable to the registered project or activity may be subject to zero percent (0%) VAT. For export enterprises, the Export Marketing Bureau of the Department of Trade and Industry determines compliance with the seventy percent (70%) export sales threshold. If an export-oriented enterprise fails to meet this threshold, it is disqualified from VAT zero-rating on local purchases in the immediately succeeding year.

Employment of Foreign Nationals

Under Republic Act No. 5186, a registered enterprise may employ foreign nationals in supervisory, technical, or advisory positions within five years from registration, not exceeding five percent (5%) of total personnel in each category, with each employment not exceeding five years. Pioneer enterprises may retain foreign nationals in the positions of president, treasurer, and general manager when the majority of capital stock is owned by foreign investors.

Frequently asked questions

What incentives can a foreign manufacturer get in the Philippines? A foreign manufacturer registered with an IPA may receive an Income Tax Holiday, a five percent (5%) Special Corporate Income Tax rate on gross income for export enterprises, enhanced deductions, duty-free importation of capital equipment and raw materials, and VAT exemption on importation and zero-rating on local purchases.

How does a foreign manufacturer register for incentives? The manufacturer must apply with an Investment Promotion Agency such as the Board of Investments. The IPA processes and approves applications for registration and issues the certificate of registration upon payment of fees.

Can a foreign manufacturer import machinery tax-free? Yes, if the machinery is directly attributable to the registered project or activity, is not produced domestically in sufficient quantity or quality at reasonable prices, and prior approval of the IPA was obtained before importation.

Practical takeaways

• Register the specific project or activity with an IPA to access tax incentives under Republic Act No. 12066.
• Export enterprises may choose between the Income Tax Holiday followed by the Special Corporate Income Tax or Enhanced Deductions Regime, but the election is irrevocable.
• Duty exemption requires prior IPA approval and that the items are not domestically produced in sufficient quantity or quality.
• VAT zero-rating on local purchases requires compliance with the seventy percent (70%) export sales threshold for export-oriented enterprises.
• Foreign nationals may be employed in supervisory, technical, or advisory positions within limits set by law.

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. 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. 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

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