Demystifying LBT exemption

In today’s globalized economy, attracting and maximizing business opportunities are top priorities for countries like the Philippines that seek to strengthen and hasten economic growth and development through foreign investments. To entice foreign investment, tax incentives have been put in place for entities that decide to register (Registered Business Enterprises or RBE) with investment promotions agencies (IPA), such as the Philippine Economic Zone Authority (PEZA) and the Board of Investments (BOI), among others.

One of the tax incentives that RBEs enjoy is exemption from Local Business Tax (LBT). As a general rule, LBT is imposed on the gross receipts of entities doing business in a local government unit (LGU) pursuant to the taxing power of LGUs under the Local Government Code (LGC) of 1991. However, Section 133 of the LGC carves out an exception stipulating that the exercise of the taxing powers of provinces, cities, municipalities, and barangays shall not extend to the levy of taxes on business enterprises certified by the BOI as pioneer or non-pioneer for a period of six and four years, respectively from the date of registration.

Furthermore, Article 78 of Executive Order (EO) 226, otherwise known as the “Omnibus Investment Code of 1987” provides an exemption from local taxes and licenses for all zone-registered enterprises to the extent of their operation or production inside the zone. This exemption was also incorporated into Republic Act (RA) 7916 or the “The Special Economic Zone Act of 1995” particularly under Section 23 which provides that “business establishments operating within the economic zones shall be entitled to the fiscal incentives as provided for under Presidential Decree 66, the law creating the Export Processing Zone Authority, or those provided under Book VI of Executive Order 226.”

It should be noted that the Corporate Recovery and Tax Incentives for Enterprises (CREATE) Act is silent on whether LBT exemption is still available to RBEs registered prior to or after CREATE. Unlike other incentives (such as income tax holiday (ITH), VAT zero rating on local purchases, VAT and duty-free importation), nowhere in the said law can one find provisions expressly addressing the availability of the LBT exemption. In the absence of such provisions under CREATE, which was promulgated to standardize incentives across RBEs and considering that the tax exemptions are strictly construed against the taxpayer (which means that a taxpayer claiming an exemption must cite a specific provision of the statute authorizing the exemption and prove entitlement to it under the law), one can infer that the law may have discontinued the LBT exemption for RBEs.

However, to provide clarity regarding the rules for the continuous enjoyment of the LBT exemptions during the transitory periods provided under the CREATE Act, the Department of Finance (DOF) issued Department Order (DO) 033-2023. This DO was published and disseminated by the Fiscal Incentives Review Board (FIRB) on Aug. 31, 2023 through FIRB advisory 014-2023. In this advisory, it has been clarified that:

Transitioning RBEs availing of income tax holiday (ITH) only and classified as either pioneer or non-pioneer shall be exempt from LBT for the remaining period of the ITH.

Transitioning RBEs currently availing of ITH that are also entitled to the five percent tax on gross income earned (GIE) after the ITH shall be exempt from LBT during the remaining period of the ITH. Thereafter, the RBE shall be exempt from LBT while availing the five percent GIT, subject to the 10-year limitation for both incentives.

Transitioning RBEs availing of five percent tax on GIE only shall be exempt from LBT for 10 years from the effectivity of the CREATE Act.

With this clarificatory issuance, RBEs registered prior to CREATE are now better guided on their continuous enjoyment of the LBT exemption incentive. However, it will be more helpful if additional guidance is provided on how the LBT exemption incentive applies to entities registered under CREATE. Particularly, it is best to understand if LBT exemption will be available only to RBEs that are under five percent Special Corporate Income Tax (SCIT) which is imposed in lieu of national and local taxes (such as LBT). It is also helpful if this incentive is codified or an equivalent ordinance be issued to ensure uniform application of these rules by all LGUs.

Wilmer T. Tardio is a manager from the tax group of KPMG in the Philippines (R.G. Manabat & Co.), a Philippine partnership and a member firm of the KPMG global organization of independent member firms affiliated with KPMG International Limited, a private English company limited by guarantee. The firm has been recognized as a Tier 1 in transfer pricing practice and in general corporate tax practice by the International Tax Review. For more information, you may reach out to manager Wilmer T. Tardio or partner Maria Myla S. Maralit through [email protected], social media or visit www.home.kpmg/ph.

This article is for general information purposes only and should not be considered as professional advice to a specific issue or entity. The views and opinions expressed herein are those of the author and do not necessarily represent KPMG International or KPMG in the Philippines.