CREATE MORE: Adopting the global minimum tax in the Philippines
In November 2023, the Philippine government signed the inclusive agreement with the Organization for Economic Cooperation and Development (OECD) Inclusive Framework on Base-Erosion and Profit Shifting (BEPS), aligning with over 140 countries committed to addressing global tax avoidance by multinational corporations (MNCs).
Under current international tax law, profits can be taxed either in the “source” country (where the transaction took place) or the country of “residence” (where the firm is based). For most jurisdictions, the primary right to tax active business income is attributed to the “source” country, while the right to tax passive income, such as dividends, royalties and interest are granted to the firm’s country of residence.
BEPS occurs when MNCs exploit these distinctions by shifting profits to low or no tax jurisdictions via the shifting of intellectual property royalties and interest to lessen their tax liabilities. We’ve seen first-hand how the erosion of the tax base impacts critical services, like infrastructure and healthcare. MNCs often exploit these distinctions, but the fact remains—developing countries like the Philippines lose out on vital revenue.
In response, the OECD introduced the Global anti-Base Erosion (GloBE) Rules, divided into Pillar One and Pillar Two. Pillar One aims to reallocate part of MNC profits to countries where economic activity occurs, while Pillar Two aims to implement a 15-percent global minimum tax (GMT) for all MNCs, regardless of where they operate. By signing on to the OECD Two-Pillar solution, the Philippines aligns itself with global taxation policy but enhances its competitiveness by ensuring fair taxes across the board.
The Philippines and the Pillar Two initiative
Domestically, the House of Representatives’ version of the CREATE MORE bill is the closest the country has gotten to adopting Pillar Two, which manifests itself in two key mechanisms. The first method is via the Income Inclusion Rule (IIR), which requires the MNC’s parent company to pay a “top-up tax” in its home country if any subsidiaries are taxed below the 15-percent threshold elsewhere.
Meanwhile, the Qualifying Domestic Minimum Top-up Tax (QDMTT) is an opt-in policy that allows the Philippines to impose its own top-up tax on MNCs so that the effective tax rate never falls below the minimum threshold, thus safeguarding its tax base and retaining tax rights over domestic earnings.
The Philippines does not have an implementation date for the IIR and QDMTT compared to its Southeast Asian neighbors, with Vietnam already implementing both the IIR and QDMTT as of January 2024.
In terms of competitiveness as an investment destination, the GloBE rules only apply to MNCs that earn at least 750 million euros and above, which means that we can still give tax holidays and benefits to companies that fall below that threshold.
Pillar Two and the CREATE MORE bill
In shaping the amendments to CREATE MORE, we made several key proposals, including the establishment of a separate VAT refund center and the implementation of the GMT. While the former has been included in the bill, the GMT has yet to be adopted.
I recently met with the head of the OECD Division of Cross Border and International Taxation, John Peterson, wherein we discussed how the implementation of Pillar Two will affect tax incentives and other initiatives under the CREATE Law and the CREATE MORE bill. The OECD has also assured us that it will extend its technical support to help the Philippines adopt the Pillar Two initiative, like it did with Vietnam. Prior to our meeting in Paris, Peterson had made an appearance in the Thought Leaders and Game Changers podcast on Spotify.
Peterson was also one of the experts who gave a presentation about the benefits and challenges of GMT during the recently concluded International Tax and Investment Conference held in Manila, where he talked on the GMT.
Alongside our push for the adoption of the GMT in the Philippines, we’re also proposing the adoption of risk-based audit, which is designed to lessen the burden for compliant taxpayers and allocate resources to catching big-time tax evaders.
We continue to engage with the OECD and other international organizations and legislative bodies, like the Senate ways and means committee, in advocating for a fair and efficient tax system.
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This article reflects the personal opinion of the author and does not reflect the official stand of the Management Association of the Philippines or MAP. The author is a MPA/ Mason Fellow at Harvard Kennedy School. He is a member of MAP Tax Committee and MAP Ease of Doing Business Committee, co-chair of Paying Taxes on Ease of Doing Business Task Force and chief tax advisor of ACG.
