Tax Incentives for SMEs and Startups: Are You Missing Out?

In starting up a business, it is crucial to understand the do’s and don’ts of operations to ensure smooth and seamless management. In terms of taxes, no matter how complex they may be, we must comply as they are an integral part of our day-to-day transactions. But what if we are missing out on the good part?

Many startups and small business owners often overlook that the tax system also offers benefits, not just obligations. The tax system is designed to support businesses through providing incentives and allowable deductions, special programs for registered enterprises, as set out.

In order to maximize savings while improving your cash flow, it is integral to stay in the loop and be proactive in taking the right steps. To confidently grow your business, you should know your rights as a taxpayer, as it is as important as knowing your tax responsibilities.

So, let’s dive into our main question: Are you making the most out of the tax benefits available for your business?

Understanding PEZA Tax Incentives

The Philippine Economic Zone Authority (PEZA) oversees the regulation and development of economic zones. In order to promote export-oriented investments, they provide tax and non-tax incentives to registered enterprises. Here are the qualifications below:

• Startups and SMEs that are PEZA-registered enterprises (PEs) within designated economic zones
• Export-oriented businesses across various sectors such as IT, manufacturing, tourism, agriculture, and logistics

In terms of PEZA key tax incentives, here are the following:

1. Income Tax Holiday (ITH)
   • PEZA-registered enterprises enjoy an income tax holiday of 4-7 years and availment of Special Corporate Income Tax (SCIT) of 5%, or an option for Enhanced Deductions (ED) for 10 years for Expert-oriented Enterprises, and;
   • Income tax holiday of 4-7 years and availment of ED for 5 years
   • After the ITH period, Export-oriented enterprises may enjoy SCIT rate of 5%, or Enhanced Deduction (ED)
2. Refined Local Taxation
   • Local Government Units (LGUs) impose a 2% tax on gross income in lieu of all local taxes and fees
3. VAT Exemption and Customs Duties
   • Unless it is a business that is DSP (Digital Service Provider), PEZA companies enjoy VAT exemption on local purchases and zero-rating on export sales
   • Exemption from customs duties on importations of capital equipment, raw materials, and supplies
4. Enhanced Deduction Regime (EDR)
   • Under the CREATE MORE Law, PEZA-registered businesses can apply enhanced deductions such as:
   • 100% additional deduction on power expenses;
   • 50% additional deduction on expenses relating to exhibitions and trade fairs;
   • Training, research and development (R&D) deductions, and reinvestment allowances.

PEZA Incentives: Why is it Important?

Fiscal and non-fiscal incentives are provided by PEZA and vary depending on the business location and industry. They continuously seek opportunities to give compliant members the rewards they deserve. Through PEZA incentives, it reduces upfront tax burdens, improves your business cash flow, and encourages reinvestment. This is helpful for startups or small business owners in scaling up their operations, aiming for them to be globally competitive by providing the best tax deduction available.

Understanding CREATE MORE Law Incentives

To further enhance tax benefits for startups and SMEs, the CREATE MORE Law (Republic Act No. 12066) was signed in 2024, further amending CREATE Law. The enhanced law aims to boost the country’s investment climate and job creation by providing refined tax incentives.

For CREATE MORE Law incentives, refer below:

1. Lower Corporate Income Tax (CIT) Rates
   • It reduced the former CIT from 25% to 20% for registered enterprises under the Enhanced Deduction Regime
   • Properly aligns with global minimum tax standards while maintaining competitiveness
2. Enhanced Deduction Regime (EDR)
   • Now, businesses can opt for enhanced deductions instead of income tax holidays. The new deductions include:
     • Depreciation allowance (10% for buildings, 20% for machinery)
     • 100% additional deduction on power expenses from 50%
     • Labor, domestic, R&D, training expense deduction
     • 50% deduction on marketing costs, such as trade fairs
     • Expansion of reinvestment allowances to tourism and manufacturing sectors
     • Enhanced Net Operation Loss Carry Over (NOLCO), which is the total of your excess allowable deduction based on your business gross income per taxable year, which is also considered as a deferred tax asset (DTA)
3. VAT Exemptions
   • Subject to restrictions if your business is a DSP, VAT exemptions and zero-rating on local purchases and importations related to their activities
4. Simplified Local Tax
   • Local government units can levy a 2% gross income tax on top of other local taxes for registered businesses that enjoy incentives
5. Extended Incentive Periods
   • Maximum tax incentive periods extended to:
     • Up to 17 years – projects approved by Investment Promotion Agencies (IPAs)
     • Up to 27 years – projects approved by the Fiscal Incentives Review Board (FIRB)
     • Enterprises with over 10,000 employees may also get extensions up to 5-10 years

The Importance of CREATE MORE Law Incentives

Incentives that are being provided under the CREATE MORE Law pave the way for enterprises and businesses to have a more relaxed criterion. Many improvements have been introduced, such as lowering tax rates and providing VAT exemptions, with the hope that this would provide a positive change in the tax economy. Like PEZA incentives, it is vital for business owners to know the law provisions and the relevant changes to reach the objective of these legislations.

Start Maximizing These Incentives

Not sure how to start maximizing your benefits? Keep reading to enjoy the incentives from PEZA and the CREATE MORE Law. Here are the steps:

1. Register with PEZA or Relevant IPAs
   • For startups, you should consider locating your operations in PEZA zones or registering with IPAs to be qualified
   • Since incentives apply to registered activities, early registration is crucial
2. Income Tax Holiday and Enhanced Deduction Option
   • EDR offers ongoing deductions that might be more effective in your cost structure. On the other hand, ITH provides upfront relief
   • You may choose between the Income Tax Holiday or the Enhanced Deduction Regime and align it with your financial plan
3. Long-Term Incentive Usage
   • Plan ahead to leverage extended incentive periods for capital expenditure and growth
   • Understand the given provisions to avoid mishaps when the incentives lapse
4. Claim Eligible Expenses and Document Entirely
   • Keep a record of everything: From power consumption, R&D, relevant trainings, and marketing expenses to precisely claim enhanced deductions
   • Finally, engage with tax consultants to ensure that your business is compliant and to maximize benefits

Where to Apply for these Incentives?

Now, we come to one of the crucial parts, which is the application. Head to the following to start applying for these incentives:

In applying for PEZA incentives:

1. Register as a PEZA-registered enterprise (PE) through the PEZA’s Electronic Application for Registration System (eARS) here: http://ears.peza.gov.ph/#/input
2. Ensure that you have the proper company documents, including business plans, and proof of export orientation
3. After submission, the application will undergo evaluation, including compliance with zone regulations
4. For more inquiries, you may visit: https://www.peza.gov.ph/

In applying for the CREATE MORE Law incentives:

1. Register with an Investment Promotion Agency (IPA)
2. The incentives of this law apply to businesses registered with an IPA recognized by the Department of Finance (DOF). IPAs include:
   • Board of Investments (BOI)
   • PEZA (for economic zones)
   • Clark Development Corporation (CDC)
   • Subic Bay Metropolitan Authority (SBMA)
   • Among others, depending on industry and location
3. Submit an application to the relevant IPA along with the requirements:
   • Business registration
   • Project feasibility studies
   • Financial statements and tax records
4. After submission, the IPA will evaluate the application, recommend approval, and submit it to the Fiscal Incentives Review Board (FIRB), if necessary.
5. For registration details, visit the official BOI Online Services System (BOSS) under the BOI website: https://boi.gov.ph/boss/
6. For PEZA, follow the above steps
7. For other IPAs, you may check their respective websites or offices

To summarize, if you opt to register with PEZA incentives, you may apply through PEZA for registration as a PE. On the other hand, to avail CREATE MORE Law incentives, register with the appropriate IPA, such as BOI, PEZA, CSC, among others, and follow through with their application process. Take note, however, that you may only avail of one incentive program, as double registration to avail of other incentives is prohibited.

Overall Perks with PEZA and CREATE MORE Law

On a final note, understanding tax incentives in the Philippines is no longer optional. PEZA and CREATE MORE Law benefits are common tax deductions for small business owners and entrepreneurs alike, and is essential for economic growth.

Businesses that proactively adapt to these frameworks gain competitive advantages, increasing their profitability while contributing to the country’s economic progression.

If your answer to our initial question—whether you’re maximizing the right tax incentives—is ‘no,’ and you’re a small business owner or entrepreneur, it may be time to consult with tax professionals who can align your incentive strategy with your business goals.

Unlock Tax Savings with Manila Bookkeepers!

You deserve to save more! As a Manila-based F&A firm, Manila Bookkeepers is ready and equipped to help you save more with these tax incentives. Understandably, taxes are quite overwhelming, so we’re here to get you started on this “tax-ing” journey. With precision and care, our tax experts can guide you in terms of PEZA and CREATE MORE tax incentives and other related tax compliance, help you understand the technicalities, and take care of the groundwork for you.

If you would like to know more about how we can provide you with comprehensive assistance in terms of local tax compliance, don’t hesitate to contact us at [email protected].