The Philippine outsourcing industry is asking a pointed question: If a company is already paying a 5% Special Corporate Income Tax “in lieu of all national and local taxes,” can a local government unit still impose local business tax?
The issue has moved from technical debate to industry-wide concern, with the Information Technology and Business Process Association of the Philippines (IBPAP) warning that inconsistent local taxation may undermine the incentives granted under the Corporate Recovery and Tax Incentives for Enterprises to Maximize Opportunities for Reinvigorating the Economy (CREATE MORE) Act “(Republic Act No. 12066)” — potentially affecting investor confidence in one of the country’s largest export sectors.
What the Law Intended
CREATE MORE strengthened the Philippines’ fiscal incentive system for registered business enterprises (RBEs), including many export-oriented BPO firms. Fiscal incentives for export-oriented enterprises include Income Tax Holiday (ITH), and choice between 5% Special Corporate Income Tax (SCIT) or Enhanced Deductions Regime (EDR).
The legal pivot point lies in the SCIT option.
Under SCIT, firms pay 5% of gross income earned, in lieu of all national and local taxes, except certain exclusions.
The phrase “in lieu of” carries legal weight – it signifies that the 5% tax is meant to stand in place of, and not alongside, other applicable taxes on the registered activity.
This structure reflects a policy balance embedded in the incentive regime. While the 5% SCIT simplifies the national tax burden for registered enterprises, the framework simultaneously ensures that host communities still participate in the economic benefits generated within their jurisdictions. Rather than excluding local governments from the fiscal base, the law integrates them directly into the revenue stream, preserving a measure of local fiscal participation while maintaining the overall “in lieu of all taxes” incentive structure.
This is an important structural detail that is often overlooked: the 5% SCIT is not purely a national tax. The law provides a statutory revenue-sharing structure:
3% is remitted to the National Government
2% is remitted directly to the Treasury of the host Local Government Unit (LGU)
This means that LGUs are not excluded from the incentive framework; they are statutorily entitled to a direct 2% share of the 5% gross income tax paid by the enterprise. In effect, the SCIT is a shared tax regime, not a national-only incentive.
Imposing additional local business taxes on the same registered activity raises a fundamental question: If the LGU already receives its 2% share under the SCIT framework, what is the legal basis for layering another local tax on top?
Legal Basis: Hierarchy of Laws and LGU Taxing Power
LGUs possess taxing authority under Section 5, Article X of the 1987 Constitution and the Local Government Code. However, that power is expressly subject to guidelines and limitations as Congress may provide.
While the taxing power of the LGUs is recognized by the Constitution, the same however, is not absolute.
When Congress enacts a law that creates a specific tax substitution mechanism, such as the 5% SCIT in lieu of all national and local taxes, that statute operates as a limitation on local authority. Under long-standing doctrine, local ordinances inconsistent with national statutes may be invalid.
The tension now surfacing appears less about policy design and more about implementation.
Where Confusion May Arise
Accordingly, where CREATE MORE expressly provides that the 5% Special Corporate Income Tax is imposed “in lieu of all national and local taxes” on the registered activity, any local ordinance imposing additional taxes on the same covered activity may raise legal issues of inconsistency with national law. According to IBPAP, LGUs are disregarding the exemptions granted by the CREATE MORE Act, and are also concerned by inconsistencies in tax assessments.
The complication arises in practice, particularly in determining:
whether the tax is imposed on registered or non-registered activities;
whether assessments are imposed on income already covered by SCIT; and
whether the LGU recognizes the scope of the SCIT substitution.
What About RBEs who opt to choose EDR?
RBEs that opt for the Enhanced Deductions Regime (EDR) pay 20% corporate income tax and applicable local taxes.
Unlike SCIT, the EDR does not carry the “in lieu of all national and local taxes” clause. As a rule, enterprises under EDR remain subject to local taxation under the Local Government Code (LGC).
However, CREATE MORE did not leave local taxation entirely unstructured. The law introduced the concept of the Registered Business Enterprise Local Tax (RBELT) – a mechanism designed to rationalize and standardize the local tax treatment of RBEs.
Under RBELT, local taxes on the registered activity of qualified registered business enterprises (RBEs) under Income Tax Holiday (ITH) or Enhance Deductions (EDR) regimes may be imposed at a rate not exceeding 2% of gross income, in lieu of certain local business taxes, subject to the approval and enactment of a local ordinance by the concerned Local Government Unit (LGU). This tax is not automatic but must be authorized through the passage of an ordinance, in accordance with the provisions of the law and its implementing regulations.
It is important to note that the 2% tax rate is a cap, and its imposition may vary based on the local policies and decisions of the LGU, as long as they adhere to the legal framework set out in the CREATE Act (Republic Act No. 11534). The implementation of the RBELT is aimed at ensuring that while registered business enterprises enjoy incentives like the ITH or EDR, the host LGUs still benefit from the economic activities occurring within their jurisdiction, through a mechanism that integrates local fiscal participation.
Conclusion
At its core, the debate is not about whether LGUs have taxing power, but about how that power operates within the framework established by Congress. CREATE MORE was designed to provide predictability and competitiveness in the Philippines’ fiscal incentive system. For enterprises under the 5% SCIT regime, the law clearly intended a tax substitution mechanism – one that already includes a built-in revenue share for host LGUs through the 2% allocation.
When additional local business taxes are imposed on activities already covered by SCIT, the result is not merely a technical inconsistency; it risks undermining the very certainty that the incentive regime was meant to provide. For investors and export-oriented industries such as the BPO sector, predictability in tax treatment is a critical factor in location decisions.
The issue therefore appears less about local autonomy and more about consistent implementation of national policy. Clearer regulatory guidance, stronger coordination between national agencies and LGUs, and uniform interpretation of CREATE MORE’s provisions may help address the current uncertainty. Ensuring that the intended balance between national incentives and local fiscal participation is respected will be essential to maintaining investor confidence while preserving the legitimate revenue interests of local governments.
References:
CREATE MORE Act (R.A. No. 12066)
Implementing Rules and Regulations (IRR) of CREATE MORE
The Hidden Challenge to CREATE MORE: LGU Tax Policies and the BPO Sector
The Philippine outsourcing industry is asking a pointed question: If a company is already paying a 5% Special Corporate Income Tax “in lieu of all national and local taxes,” can a local government unit still impose local business tax?
The issue has moved from technical debate to industry-wide concern, with the Information Technology and Business Process Association of the Philippines (IBPAP) warning that inconsistent local taxation may undermine the incentives granted under the Corporate Recovery and Tax Incentives for Enterprises to Maximize Opportunities for Reinvigorating the Economy (CREATE MORE) Act “(Republic Act No. 12066)” — potentially affecting investor confidence in one of the country’s largest export sectors.
What the Law Intended
CREATE MORE strengthened the Philippines’ fiscal incentive system for registered business enterprises (RBEs), including many export-oriented BPO firms. Fiscal incentives for export-oriented enterprises include Income Tax Holiday (ITH), and choice between 5% Special Corporate Income Tax (SCIT) or Enhanced Deductions Regime (EDR).
The legal pivot point lies in the SCIT option.
Under SCIT, firms pay 5% of gross income earned, in lieu of all national and local taxes, except certain exclusions.
The phrase “in lieu of” carries legal weight – it signifies that the 5% tax is meant to stand in place of, and not alongside, other applicable taxes on the registered activity.
This structure reflects a policy balance embedded in the incentive regime. While the 5% SCIT simplifies the national tax burden for registered enterprises, the framework simultaneously ensures that host communities still participate in the economic benefits generated within their jurisdictions. Rather than excluding local governments from the fiscal base, the law integrates them directly into the revenue stream, preserving a measure of local fiscal participation while maintaining the overall “in lieu of all taxes” incentive structure.
This is an important structural detail that is often overlooked: the 5% SCIT is not purely a national tax. The law provides a statutory revenue-sharing structure:
This means that LGUs are not excluded from the incentive framework; they are statutorily entitled to a direct 2% share of the 5% gross income tax paid by the enterprise. In effect, the SCIT is a shared tax regime, not a national-only incentive.
Imposing additional local business taxes on the same registered activity raises a fundamental question: If the LGU already receives its 2% share under the SCIT framework, what is the legal basis for layering another local tax on top?
Legal Basis: Hierarchy of Laws and LGU Taxing Power
LGUs possess taxing authority under Section 5, Article X of the 1987 Constitution and the Local Government Code. However, that power is expressly subject to guidelines and limitations as Congress may provide.
While the taxing power of the LGUs is recognized by the Constitution, the same however, is not absolute.
When Congress enacts a law that creates a specific tax substitution mechanism, such as the 5% SCIT in lieu of all national and local taxes, that statute operates as a limitation on local authority. Under long-standing doctrine, local ordinances inconsistent with national statutes may be invalid.
The tension now surfacing appears less about policy design and more about implementation.
Where Confusion May Arise
Accordingly, where CREATE MORE expressly provides that the 5% Special Corporate Income Tax is imposed “in lieu of all national and local taxes” on the registered activity, any local ordinance imposing additional taxes on the same covered activity may raise legal issues of inconsistency with national law. According to IBPAP, LGUs are disregarding the exemptions granted by the CREATE MORE Act, and are also concerned by inconsistencies in tax assessments.
The complication arises in practice, particularly in determining:
What About RBEs who opt to choose EDR?
RBEs that opt for the Enhanced Deductions Regime (EDR) pay 20% corporate income tax and applicable local taxes.
Unlike SCIT, the EDR does not carry the “in lieu of all national and local taxes” clause. As a rule, enterprises under EDR remain subject to local taxation under the Local Government Code (LGC).
However, CREATE MORE did not leave local taxation entirely unstructured. The law introduced the concept of the Registered Business Enterprise Local Tax (RBELT) – a mechanism designed to rationalize and standardize the local tax treatment of RBEs.
Under RBELT, local taxes on the registered activity of qualified registered business enterprises (RBEs) under Income Tax Holiday (ITH) or Enhance Deductions (EDR) regimes may be imposed at a rate not exceeding 2% of gross income, in lieu of certain local business taxes, subject to the approval and enactment of a local ordinance by the concerned Local Government Unit (LGU). This tax is not automatic but must be authorized through the passage of an ordinance, in accordance with the provisions of the law and its implementing regulations.
It is important to note that the 2% tax rate is a cap, and its imposition may vary based on the local policies and decisions of the LGU, as long as they adhere to the legal framework set out in the CREATE Act (Republic Act No. 11534). The implementation of the RBELT is aimed at ensuring that while registered business enterprises enjoy incentives like the ITH or EDR, the host LGUs still benefit from the economic activities occurring within their jurisdiction, through a mechanism that integrates local fiscal participation.
Conclusion
At its core, the debate is not about whether LGUs have taxing power, but about how that power operates within the framework established by Congress. CREATE MORE was designed to provide predictability and competitiveness in the Philippines’ fiscal incentive system. For enterprises under the 5% SCIT regime, the law clearly intended a tax substitution mechanism – one that already includes a built-in revenue share for host LGUs through the 2% allocation.
When additional local business taxes are imposed on activities already covered by SCIT, the result is not merely a technical inconsistency; it risks undermining the very certainty that the incentive regime was meant to provide. For investors and export-oriented industries such as the BPO sector, predictability in tax treatment is a critical factor in location decisions.
The issue therefore appears less about local autonomy and more about consistent implementation of national policy. Clearer regulatory guidance, stronger coordination between national agencies and LGUs, and uniform interpretation of CREATE MORE’s provisions may help address the current uncertainty. Ensuring that the intended balance between national incentives and local fiscal participation is respected will be essential to maintaining investor confidence while preserving the legitimate revenue interests of local governments.
References:
Article written by: Rhea Pelayo, CPA