Local business tax exemption for registered enterprises: Who has the final say?

For a moment, imagine being in a position wherein you have multiple siblings and each of them are instructing you to do different things for one situation that requires a single solution. Quite confusing and stressful, right? Well, that might be the same experience for some taxpayers, specifically the registered business enterprises (RBEs) with the Board of Investments (BOI), when it comes to local business tax (LBT) exemption -- upon the passing into law of Republic Act (RA) 11534, otherwise known as the Corporate Recovery and Tax Incentives for Enterprises Act or CREATE Act.

Prior to CREATE Act, one of the tax incentives that BOI-RBEs enjoyed was the exemption from LBT as pioneer or non-pioneer enterprises that stems from Executive Order 226, series of 1987 (Omnibus Investments Code of 1987 or EO 226, s. 1987) and RA 7160 (Local Government Code or LGC). Articles 17 and 18 of the Omnibus Investments Code of 1987 define pioneer and non-pioneer enterprises, while Section 133(g) of LGC sets out one of the limitations on the taxing powers of local government units (LGUs) in exercising taxing powers of provinces, cities, municipalities and barangays which 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.

The CREATE Act, an act reforming the corporate income tax and incentive system in the Philippines, was signed into law in 2021. Uncertainties arose from the express repealing of Article 39 of the Omnibus Investments Code of 1987 which provides the available incentives to the RBEs.

Although the Department of Finance (DOF) issued Department Order 033-2023 to provide clarity to the RBEs registered prior to CREATE regarding the rules for the continuous enjoyment of the LBT exemptions during the transitory period, there are no issuances released to guide the RBEs registered under CREATE.

Three years later, some are still trying to navigate the murky waters when it comes to the LBT exemption, to the point that an opinion from the Department of Justice (DOJ) was sought by another department of the government. DOJ’s Opinion 09, series of 2024, dated Feb. 13, 2024, was published on their website in response to a letter from the Department of Trade and Industry (DTI) dated July 5, 2023, seeking confirmation if there is no irreconcilable inconsistency among the provisions of the LGC, the Omnibus Investments Code of 1987 and CREATE with regard to LBT Exemption of RBEs registered with the BOI. The DTI secretary requested an opinion on three issues, of which the DOJ secretary provided guidance on the first two and declined from giving opinion on the last one. For the purpose of this topic, only the first issue will be discussed.

The first issue is whether the CREATE Act repealed the legal basis of LBT exemption of BOI RBEs, resulting in the revocation BOI’s authority to certify enterprises as pioneer and non-pioneer, and which can avail of LBT exemption under Section 133(g) of LGC.

The DOJ replied that even though the Investment Priorities Plan (IPP) under EO 226, s. 1987, has been repealed entirely by CREATE Act due to the establishment of the Strategic Investment Priority Plan (SIPP), there was no express repeal of BOI’s authority to certify and register enterprises as pioneer or non-pioneer under the Omnibus Investments Code of 1987, in relation to Section 133 (g) of the LGC. This guidance was based on verba legis or the plain meaning rule such that if a statute is clear, plain and free from ambiguity, it must be accorded its literal meaning without using any other rule of interpretation.

The DOJ further pointed out that insofar as the availment of LBT exemption for RBEs classified as pioneer and non-pioneer, the fundamental rationale behind the current principle of local fiscal autonomy lies on the principle of empowering LGUs and ensuring their sustainability and self-reliance through the direct conferment of comprehensive and extensive tax powers. The DOJ holds that it is the LGU that grants local business tax exemption, and BOI only classifies a registered business enterprise as pioneer or non-pioneer.

With this opinion, although merely advisory in nature, RBEs registered under CREATE are provided with a more focused direction on the authority that would prevail when it comes to the LBT exemption. However, it is still preferable if additional guidelines would be provided and codified in a manner that leaves no room for different interpretations.

Kc Atinon is a Tax Assistant Manager from the Tax Group under 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 Tax Assistant Manager Kc M. Atinon or Leandro Ben Robediso through ph-kpmgmla@kpmg.com, 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.