Tax reforms are crucial for fostering economic growth, ensuring fairness, and improving government revenue. By updating tax laws, governments can address changing economic conditions, promote investment, and incentivize businesses.
The Philippines closed 2023 with a robust growth rate of 5.6%, outpacing the thriving economies of China, Vietnam, and Malaysia, according to the Department of Finance. Building on this momentum, the country's economy expanded by 5.8% in the first three quarters of 2024, positioning the Philippines as one of the fastest-growing economies in Asia.
This year, we’ve seen significant Philippine tax reforms that are aimed to maintain the strong economic growth of the country, attract more foreign direct investments, simplify tax systems, and reduce inequality through fair tax collection across different business platforms. Let’s recount the significant tax laws passed this year and what we should look forward to in the coming year.
Ease of Paying Taxes Act
2024 started on a high note as the Republic Act No. 11976, also known as the Ease of Paying Taxes Act (EOPT), was passed into law on January 5, 2024, and took effect on January 22, 2024. The law has introduced a more comprehensive and streamlined process designed to encourage timely tax payments and promote greater taxpayer compliance. Significant changes have also been implemented in the Value Added Tax (VAT) system, most notably the harmonization of the timing for VAT recognition and documentary requirements for both the sale of goods and the sale of services.
Digital Services Law
On October 2, 2024, President Marcos signed into law Republic Act (RA) No. 12023 or the VAT on Digital Services Law which imposes a 12% VAT on digital service providers (DSPs) so as for the government to generate additional revenue.
While the Digital Services Law is relatively not a new law, it strengthens the BIR’s ability to collect VAT on digital services by outlining clear compliance measures for digital service providers. The law states that services provided by non-resident DSPs will be considered as performed in the Philippines if consumed there. It also makes DSPs, whether resident or non-resident, responsible for assessing, collecting, and remitting the VAT on digital services consumed in the Philippines, in accordance with the provisions on VAT withholding.
CREATE MORE Act
The CREATE MORE Act (Corporate Recovery and Tax Incentives for Enterprises to Maximize Opportunities for Reinvigorating the Economy) was also passed November this year, which aims to improve the nation’s fiscal incentives policies as well as certain provisions of the CREATE Act to provide ‘more’ benefits for taxpayers.
The Act expands eligibility for tax incentives to include both local and foreign businesses, making the Philippines a more attractive investment destination. Under the law, VAT exemptions are clarified for goods and services directly related to registered projects, such as security, financial, and marketing services. High-value domestic market enterprises (HVDMEs) with significant investments or export sales will also benefit from the CREATE MORE Act as they can enjoy enhanced VAT benefits. Meanwhile, registered business enterprises (RBE) enjoying tax incentives will pay a simplified local tax of up to 2% of gross income, reducing administrative burdens.
VAT Refund Mechanism for Non-Resident Tourists
Signed into law on December 6, 2024, the Republic Act No. 120791 establishes a VAT refund mechanism for non-resident tourists (NRT) in the Philippines. This law aims to maximize the spending power of NRTs and to promote the Philippines as a premier shopping destination, further boosting economic growth and the country’s tourism industry.
The refunds can be made electronically or in cash provided that the value of goods purchased per transaction is equivalent to at least three thousand pesos (P3,000). Additionally, goods purchased should be bought in accredited stores and taken out of the Philippines within 60 days of purchase.
Towards economic stability
As we approach the new year, we also look forward to reforms that will help boost economic growth and promote long-term success for the Philippines. The following are the pending bills in the Philippine Senate.
The 4th package of the Comprehensive Tax Reform Program is called the Passive Income and Financial Intermediary Taxation Bill— a priority measure of the Marcos Jr. administration. The bill seeks to simplify the tax system, reduce the number of final withholding tax rates, unify tax rates on passive income, harmonize business taxes on financial intermediaries, remove the IPO tax, and rationalize the documentary stamp tax.
The bill seeks to limit the interest expense deductions for metallic mining contractors with a debt-to-equity ratio exceeding 4:1 and aims to ensure fair revenue sharing from mining activities while promoting environmental responsibility and transparency. It also sets a 4% royalty rate for operations within mineral reservations and a margin-based royalty for operations outside and imposes a 0.1% royalty rate on gross output. The bill requires public disclosure of mining-related data, including tax and revenue information.
The proposed changes under the CMEPA Bill aims to align the Philippines’ tax rates with neighboring ASEAN countries to attract more investors and to boost the Philippine capital markets. The provisions under the bill include a reduction of the stock transaction tax from 0.6% to 0.1%, aiming to lower trading costs and encourage more frequent transactions. Additionally, it seeks to reduce the dividends tax for non-resident aliens (NRA) from 25% to 10%, aligning it with the rate for cash and property dividends. It also proposes lowering the tax on Philippine Charity Sweepstakes and lotto winnings from 20% to 10%, as well as reducing the documentary stamp tax on horse race tickets or PCSO lottery tickets from 20% to 10%.
In rapidly changing economies, reforms are essential to keep up with global trends, attract foreign investments, and strengthen the country’s competitiveness on the international stage. With ongoing efforts toward economic reforms, improved fiscal policies, and strategic investments, the future holds promise for growth and sustainability. By addressing key challenges and leveraging opportunities, the coming year offers the potential for a stronger economic foundation, greater job creation, and improved quality of life for Filipinos.
As published in The Manila Times, dated 01 January 2025
