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Salient Features of the CREATE Act
(Republic Act No. 11534)
Salient Provisions of the CREATE Act
The Corporate Recovery and Tax Incentives for Enterprises Act (CREATE Act), was passed into law on March 26 this year. It granted tax relief for companies , provided transparent tax provisions, and further increase the competitiveness of the Philippines.
- Effective July 1, 2020, Corporate Income Tax rate is reduced from 30% to 20% for domestic corporations with net taxable income not exceeding P5 Million and with total assets not exceeding P 100 Million.
All other domestic corporations and resident foreign corporations will be subject to 25% Income Tax.
- Effective January 1, 2021, Income Tax rate for non-resident foreign corporation is reduced from 30% to 25%.
- Minimum Corporate Income Tax (MCIT rate is reduced from 2% to 1% effective July 1, 2020 to June 30, 2023.
- Percentage Tax is reduced from 3% to 1% effective July 1, 2020 to June 30, 2023.
- Rate of proprietary educational institutions and hospital is reduced from 10% to 1% effective July 1, 2020 to June 30, 2023.
- Imposition of Improperly Accumulated Earnings Tax (IAET) is repealed.
- Definition of “reorganization”, for purposes of applying tax free exchange provision under Section 40(c) (2), is expanded. Prior BIR ruling or confirmation shall not be required for purposes of availing the tax exemption of the exchange.
- Qualified export enterprises shall be entitled to 4 to 7 years Income Tax Holiday (ITH) to be followed by 10 years 5% Special Corporate Income Tax (SCIT) or Enhanced Deductions.
- Qualified domestic market enterprises shall be entitled to 4 to 7 years Income Tax Holiday (ITH) to be followed by 5 years Enhanced Deductions.
- Registered enterprises are exempt from customs duty on importation of capital equipment, raw materials, spare parts, or accessories directly and exclusively used in the registered project or activity.
- VAT exemption on importation and VAT zero-rating on local purchases shall only apply to goods and services directly and exclusively used in the registered project or activity by a Registered Business Enterprise (RBE).
- For investments prior to effectivity of CREATE – RBEs granted only an Income Tax Holiday shall continue with the availment of the Income Tax Holdiay for the remaining period of the ITH while RBEs granted an Income Tax Holiday PLUS 5% Gross Income Taxation (GIT) or currently enjoying 5% Gross Income Tax shall be allowed to avail of the 5% GIT for 10 years.
CREATE Items Vetoed by President Rodrigo R. Duterte
The following items under RA No. 11534 were vetoed by President Rodrigo R. Duterte:
- Vetoed – Increasing VAT-exempt threshold on sale of residential lot from P 1.5 Million to P2.5 Million and house and lot from P2.5 Million to P4.2 Million
Reason: The tax exemption is highly distorting and prone to abuse.
- Vetoed – 90-day period for the processing of general refunds.
Reason: May cause damage or more delays to the prejudice of taxpayers. Legislature, DOF, and BIR to come up with a mechanism to streamline the processing of tax refunds in a separate bill.
- Vetoed – Definition of “investment capital” to exclude land and working capital.
Reason – May lead to an underestimation of investment promotion performance.
- Vetoed – Redundant incentives for domestic corporation.
Reason – The Special Corporate Income Tax (SCIT) for domestic enterprises, which is lieu of all local and national taxes, is redundant, unnecessary, and weakens the fiscal incentives system.
- Allowing existing registered activities to apply for further extensions of new incentives for the same activity.
- Vetoed – Limitations on the power of the Fiscal Incentives Review Board (FIRB)
Reason: The oversight functions of the FIRB will ensure the proper grant and monitoring of tax incentives. These powers must remain plenary over those of the Investment Promotion Agencies.
- Specific industries mentioned under activity tiers – The CREATE Act must be kept flexible to be able to keep up with the changing times.
- Vetoed – Provision granting the President the power to exempt any Investment Promotion Agency (IPA) from the reform.
Reason: Could become a highly political tool.
- Vetoed – Automatic approval of applications for incentives
Reason: The FIRB or the IPA should be allowed to carefully review the application for tax incentives since these are privileges granted by the State.
New income tax rates on the regular income of corporations, on certain passive incomes and additional allowable deductions of persons engaged in business or practice of profession as provided for in the CREATE.
A. Corporations – shall include one-person corporations, partnerships, no matter how created or organized, joint-stock companies, joint accounts (cuentas en participacion), associations, or insurance companies, but does not include general professional partnerships and joint ventures or consortiums formed for the purpose of undertaking construction projects or engaging in petroleum, coal, geothermal and other energy operations pursuant to an operating consortium agreement under a service contract with the Government.
A one-person corporation is a corporation with a single stockholder; Provided, That only a natural person, trust, or an estate may form a one person corporation.
B. General professional partnerships – are partnerships formed by persons for the sole purpose of exercising their common profession, no part of the income of which is derived from engaging in any trade or business.
C. Proprietary Educational Institutions – refer to any private schools, which are non-profit for the purpose of these Regulations, maintained and administered by private individuals or groups, with an issued permit to operate from the Department of Education (DepEd) or the Commission on Higher Education (CHED) or the Technical Education and Skills Development Authority (TESDA), as the case may be, under existing laws and regulations.
D. Proprietary Hospitals – refer to any private hospitals, which are non-profit for the purpose of these Regulations, maintained and administered by private individuals or groups.
E. Non-profit – as used in the definition of Proprietary Educational Institutions and Proprietary Hospitals, means that no net income or asset accrues to or benefits any member or specific person, with all the net income or assets devoted to the institution’s purposes and all its activities conducted not for profit.
F. Government-Owned or Controlled Corporations (GOCCs), Agencies or Instrumentalities – all corporations, agencies, or instrumentalities owned or controlled by the Government.
G.Resident Foreign Corporation – a corporation organized, authorized, or existing under the laws of any foreign country, engaged in trade or business within the Philippines.
H.Non-resident Foreign Corporation – a corporation organized, authorized, or existing under the laws of any foreign country, not engaged in trade or business
within the Philippines.
I. Reorganization – shall mean any of the following instances:
a. A corporation, which is a party to a merger or consolidation, exchanges property solely for stock in a corporation, which is a party to the merger or consolidation; or
b. The acquisition by one (1) corporation, in exchange solely for all or a part of its voting stock, or in exchange solely for all or a part of its voting stock of a corporation which is in control of the acquiring corporation, of stock of another corporation if, immediately after the acquisition, the acquiring corporation has control of such other corporation, whether or not such acquiring corporation had control immediately before the acquisition; or
c. The acquisition by one (1) corporation, in exchange solely for all or a part of its voting stock or in exchange solely for all or part of the voting stock of a corporation which is in control of the acquiring corporation, of substantially all of the properties of another corporation. In determining whether the exchange is solely for stock, the assumption by the acquiring corporation of a liability of the others shall be disregarded; or
d. A recapitalization which shall mean an arrangement whereby the stock and bonds of a corporation are readjusted as to amount, income, or priority or an agreement of all stockholders and creditors to change and increase or decrease the capitalization or debts of the corporation or both; or e. A reincorporation, which shall mean the formation of the same corporate business with the same assets and the same stockholders surviving under a new charter.
J. Control – shall mean ownership of stocks in a corporation after the transfer of property possessing at least fifty-one percent (51%) of the total voting power of all classes of stocks entitled to vote: Provided, that the collective and not the individual ownership of all classes of stocks entitled to vote of the transferor or transferors shall be used in determining the presence of control.
K. Unrelated Trade, Business or Other Activity of Proprietary Educational Institutions and Hospitals – means any trade, business, or other activity, the conduct of which is not substantially related to the exercise or performance by such educational institution or hospital of its primary purpose or function.
L. Foreign-sourced dividends – are dividends received from non resident foreign corporations.
M. Related party/ies – are those which are identified under Section 36 (B) of the Tax Code, as amended.
Corporate Income Tax Rates
The matrix below shows the new income tax rates applicable to the regular taxable income of corporations:
- The MCIT is imposed beginning on the fourth taxable year immediately following the year in which such corporation commenced its business operations, when it is greater than the regular income tax computed for the taxable year.
- Domestic corporations shall account separately in their Annual Financial Statements (AFS) the cost of the land on which the particular business entity’s office, plant and equipment are situated, and shall not lump the same in one account title nor consolidate its cost with other fixed asset accounts.
- In the case of proprietary educational institutions or hospitals, if the gross income from “unrelated trade, business or other activity” (as defined under Section 2 hereof) exceeds fifty percent (50%) of the total gross income derived by such educational institutions or hospitals from all sources, the tax prescribed for domestic corporations shall be imposed on the entire taxable income.
- GOCCs, agencies and instrumentalities, except the Government Service Insurance System (GSIS), the Social Security System (SSS), the Home Development Mutual Fund (HDMF), the Philippine Health Insurance Corporation (PHIC), and the local water districts, shall pay such rate of tax upon their taxable income as are imposed upon corporations or associations engaged in a similar business, industry, or activity.
A. DOMESTIC CORPORATION
A.1 LMB Corporation, a retailer, has a gross sales of P1,400,000,000.00 with a cost of sales of P560,000,000.00 and allowable deductions of 150,000,000.00 for the calendar year 2021. Its total assets of P180,000,000.00 as of December 31, 2021 per Audited Financial Statements includes the land costing P50,000,000.00 and the building of P25,000,000.00 in which the business entity is situated, with an aggregate amount of P75,000,000.00 as Fixed Assets.
Assuming CY 2021 is the 5th year of operation ofLMB Corporation, computation of income tax (Income Tax – whichever is higher between Regular Rate and MCIT) shall be as follows:
|Less: Cost of Sales||560,000,000.00|
|Less: Allowable Deductions||150,000,000.00|
|Net Taxable Income||690,000,000.00|
MINIMUM CORPORATE INCOME TAX
|MINIMUM CORPORATE INCOME TAX (MCIT) RATE||1%|
- INCOME TAX DUE shall be P 172,500,000.00.
A.2 JPL Corporation, a manufacturer, has a gross sales of P190,000,000 for CY 2021, its 2nd year of operation. Its total assets amounted to P50,000,000, net of the value of the land of P6,000,000 where its manufacturing plant and business operations are situated. Its cost of sales and allowable operating expenses amounted to P100,000,000 and
P50,000,000, respectively. Compute for its income tax due for CY 2021.
|Less: Cost of Sales||560,000,000.00|
|Less: Allowable Deductions||150,000,000.00|
|Net Taxable Income||690,000,000.00|
* Although the total assets, net of the value of the land, is less than P100,000,000.00, its net taxable income is above P5,000,000. Hence, the income tax rate is 25%. Not subject to MCIT since it is in its 2nd year of operation.
A.3 Given the same facts under Illustration A.2, except for the allowable operating expenses, which amounted to P85,000,000. The net taxable income will be P5,000,000.00. With this, the income tax rate shall be 20%,
and the income tax due shall be P1,000,000.00.
*In both illustrations A.2 and A.3, the MCIT shall not be applied since it is only the second year of operation of JPL Corporation.
B. PROPRIETARY EDUCATIONAL INSTITUTIONS
Rosa Private School of Values or RPSV is a non-profit private educational institution with an issued permit to operate from the Commission on Higher Education (CHED). It is maintained and administered by MCGJ Inc., a private domestic corporation registered under the Securities and Exchange Commission.
RPSV uses a fiscal year accounting ending July 31st of each year. On July 31, 2021, it recorded total gross receipts amounting to P18,000,000.00, of which P10,000,000.00 came from education- related activities, while P8,000,000.00 from other unrelated business activities. Also, RPSV recorded cost of service and operating expenses from related activities amounting to P2,000,000.00 and P1,000,000.00, respectively, and from unrelated business activities amounting to P3,000,000.00 and P2,000,000.00, respectively.
|Particulars||Related Activities||Unrelated Activities||Total|
|Gross Receipts/ Sales||10,000,000.00||8,000,000.00||18,000,000.00|
|Less: Cost of Service/Sales||2,000,000.00||3,000,000.00||5,000,000.00|
|Less: Allowable Deductions||1,000,000.00||2,000,000.00||3,050,000.00|
|Net Taxable Income||7,000,000.00||3,000,000.00||10,000,000.00|
* The educational institution is subject to income tax at the rate of 1% since its gross income from unrelated activities did not exceed 50% of the total gross income.
C. PROPRIETARY HOSPITAL
ILR Hospital, a private non-profit hospital, has gross receipts of P15,000,000.00 with a cost of P6,000,000.00 and allowable deductions of P3,250,000.00 from related activities, while for its unrelated activities, it incurred P5,000,000.00 and P2,000,000.00 as cost of sales and allowable deductions, respectively, with a gross income of P18,000,000.00, for Calendar Year 2021.
Computation of tax shall be as follows:
|Particulars||Related Activities||Unrelated Activities||Total|
|Gross Receipts/ Sales||15,000,000.00||18,000,000.00||33,000,000.00|
|Less: Cost of Service/Sales||6,000,000.00||5,000,000.00||11,000,000.00|
|Less: Allowable Deductions||3,250,000.00||2,000,000.00||5,250,000.00|
|Net Taxable Income||5,750,000.00||11,000,000.00||16,750,000.00|
* ILR Hospital is subject to the regular rate of 25% since its gross income from non-related activities is more than 50% of its total gross income.
D. REGIONAL OPERATING HEADQUARTERS
EBQ Corporation is registered as a Regional Operating Head Quarter (ROHQ) since 2015. For taxable years 2020 to 2023, its operation showed the financial results:
|Particulars||Taxable Year 2020||Taxable Year 2021||Taxable Year 2022||Taxable Year 2023|
|Cost of Services||41,250,000.00||66,000,000.00||71,500,000.00||41,250,000.00|
|Net Taxable Income/Gross Income||125,000.00||12,800,000.00||15,950,000.00||( 1,375,000.00)|
|MCIT Rate||1%||1.5% *|
|Income Tax Due (since 2022 higher amount)||3,987,500.00||506,250.00|
- The regular rate of 25% shall be effective on January 1, 2022 for ROHQ. It will also be subject to MCIT beginning on the said date, since EBQ Corp. started its operations way back in 2015.
- MCIT rate of 1.5% was used since the rate from January 1 to June 30, 2023 is 1%,
and for July 1 to December 31, 2023, the rate is 2%; thus, the average rate is 1.5%,
the income tax rate to be used by EBQ Corporation in computing the income tax
due/payable for TY 2023.
Income Tax Rates on Certain Passive Incomes
|Type of Individual/Corporation||Nature of Income||Rate||Effectivity|
|Non-Resident Alien Individual||Winnings from Philippine|
Charity Sweepstake Office
(PCSO) games amounting to
more than P10,000.00
Winnings from PCSO games
amounting to P10,000.00 and
|Upon the effectivity of the|
|Domestic Corporation||Intercorporate Dividends|
(domestic and foreign source
|From another domestic|
corporation – Exempt
From nonresident foreign
corporation – 25% or
20%, as the case may be
(depending on the CIT of
the domestic corp.)
|For foreign source|
dividends, these will be
exempt from income tax
upon the effectivity of the
|Interest income from a depositary bank under the|
expanded foreign currency deposit system
Capital gains from sale of shares of stock not traded in
the stock exchange
effectivity of the
|Gross income received from all sources within the Phils.,|
such as interests, dividends, rents, royalties, salaries,
premiums (except reinsurance premiums), annuities,
emoluments or other fixed or determinable annual,
periodic or casual gains, profits and income, and capital
gains, except capital gains from sale of shares of stock
not traded in the stock exchange
Intercorporate dividend received from a domestic corporation, in general
However, if the country in which the non-
resident foreign corporation is domiciled,
allows a tax credit equivalent to the
difference between the regular income tax
rate of 25% under Section 28(B)(1) of the
Tax Code (25%) and the fifteen percent
(15%) tax on intercorporate dividends or
does not impose tax on dividends, the rate
to be imposed shall be 15%
Capital gains from sale of shares of stock
not traded in the stock exchange
|January 1, 2021|
January 1, 2021
January 1, 2021
Upon the effectivity
of the CREATE
Exemption from Income Tax of Foreign-Sourced Dividends Received by Domestic Corporations
In general, foreign-sourced dividends received by domestic corporations are subject to income tax.
However, these foreign-sourced dividends may be exempt if t all of the following conditions
- The dividends actually received or remitted into the Philippines are reinvested in the business operations of the domestic corporation within the next taxable year from the time the foreign-source dividends were received or remitted;
- The dividends received shall only be used to fund the working capital requirements, capital expenditures, dividend payments, investment in domestic subsidiaries, and infrastructure project; and
- The domestic corporation holds directly at least twenty percent (20%) in value of the outstanding shares of the foreign corporation and has held the shareholdings uninterruptedly for a minimum of two (2) years at the time of the dividends distribution.
In case the foreign corporation has been in existence for less than two (2) years at the time of dividends distribution, then the domestic corporation must have continuously held directly at least twenty percent (20%) in value of the foreign corporation’s outstanding shares during the entire existence of the corporation.
Without any one of the above conditions, the foreign-sourced dividends shall be declared as taxable income by the domestic corporation in the year of actual receipt or remittance, subject to surcharges, interest, and penalties, as
To avail of the exemption, the domestic corporation shall:
- Submit, thru the responsible corporate officers, to the concerned BIR office within thirty (30) calendar days from actual receipt of the remitted dividends a Sworn Statement/Affidavit containing :
- the fact of actual receipt of such dividends,
- the amount and the source (non-resident foreign corporation [NRFC]) of such dividends, including their shareholdings in that NRFC and the holding period at the time of the dividends distribution, and
- a statement that they shall fully comply with the conditions of the exemptions above stated.
2. In the year of receipt of dividend, attach to the Audited Financial Statements (AFS) an Independent Auditor Sworn Certification as to
- the fact of actual receipt of the remitted dividends,
- the amount and the source (NRFC) of such dividends, including their shareholdings in that NRFC and the holding period at the time of the dividends distribution,
- the fact that the domestic corporation, thru its Board, has decided a plan to reinvest the dividends in its business operations to fund its working capital requirements, capital expenditures, dividend payments, investment in domestic subsidiaries, or infrastructure project, and
- if any amount has been disbursed, a statement that said disbursement complies with the above requirements.
The Sworn Statement/Affidavit in item (1) hereof and the Independent Auditor Sworn Certification shall be deemed as substantial compliance with the above- conditions for exemption without the need of securing a written tax exemption ruling/certificate from the BIR.
In addition, a disclosure of the dividends in the said AFS which shall be attached to the Annual Income Tax Return (AITR) to be filed in the year of receipt, as well as the amount of dividend deemed exempt from income tax shall be declared in reconciliation part of the said AITR.
- In the immediately following taxable year, attach to the AITR a Sworn Certification prepared and executed by an Independent Auditor on the utilization or non-utilization of the dividends received by the corporation. The
Sworn Certification on the utilization of the dividends received shall confirm the
taxpayer’s full compliance with the conditions for its exemption. However, if the
Certification will state non-utilization of the dividends received, the
corresponding tax due on the unutilized dividends shall be declared as taxable
income, subject to surcharges, interest, and penalty, if any.
Further, no credit or deduction under Section 34(C) of the Tax Code shall be
allowed for any taxes of foreign countries paid or incurred by the domestic
corporation in relation to the exempt foreign-sourced dividends. Finally, any taxes
of foreign countries paid or incurred by the domestic corporation in relation to the
exempt foreign-sourced dividends shall be disregarded in computing the limitations
provided under Section 34(C)(4) of the Tax Code.
a. RLI Corporation, a domestic corporation, owns twenty percent (20%) of the outstanding shares of USA Corporation, a non-resident foreign corporation (NRFC), since August 1, 2015. On June 30, 2021 it received dividends amounting to P1,000,000.00 from the said NRFC. The said dividend has not been used until January 13, 2023.
In this case, the P1,000,000.00 shall be declared as taxable income for calendar year 2021, subject to surcharge, interest, and penalty, since it was not utilized within the next taxable year, which is in 2022.
b. RSDV Corporation, a domestic corporation, owns twenty percent (20%) of the outstanding shares of UK Corporation, a non-resident foreign corporation (NRFC), since August 1, 2015. On May 1, 2021, it received dividends amounting to P1,000,000.00 from the said NRFC. On September 1, 2022, RSDV Corporation utilized P800,000.00 for its dividend payments. On January 1, 2023, it utilized the remaining P200,000.00 for its working capital requirements.
In this case, P800,000.00 shall be treated as tax-exempt since this was properly utilized within 2022. On the other hand, P200,000.00 shall be declared as taxable income for the taxable year 2021, subject to surcharge, interest, and penalty, since the utilization is not within the following taxable year, which is in 2022.
c. BKTD Corporation, a domestic corporation, holds 20% of the stocks of EU Corporation, a non-resident foreign corporation. BKTD is a wholly-owned subsidiary of GKCM Corporation, a non-resident foreign corporation. BKTD’s holding in EU Corporation started in 2018, and the holding period is uninterrupted. On July 1, 2021, BKTD Corporation received dividends from EU Corporation amounting to P2,000,000 and subsequently paid out dividends on December 31, 2022, in the amount of P 1,500,000. The remaining amount of P500,000 has not been used in any qualified activity
for exempt foreign-sourced dividends.
In this situation, BKTD Corporation shall be subject to income tax on the unused amount in the taxable period
2021, subject to surcharge, interest, and penalty.
IMPROPERLY ACCUMULATED EARNINGS TAX
The improperly accumulated earnings tax shall no longer be imposed on corporations upon the effectivity of the CREATE onwards. This shall apply to the entire taxable year for all fiscal years/taxable years ending after the effectivity of CREATE.
JDS Corporation, a domestic corporation, has unappropriated retained earnings in excess of its paid-up capital stock amounting to P20,000,000 and P50,000,000 as of the fiscal years ending June 30, 2020 and June 30, 2021, respectively. JDS Corporation shall be subject to the 10% improperly accumulated earnings tax as of June 30, 2020. However, JDS Corporation shall no longer be subject to improperly accumulated earnings tax for the entire fiscal year ending June 30, 2021, which is after the effectivity of CREATE.
ALLOWABLE DEDUCTIONS FROM GROSS INCOME FOR BUSINESS PERSONS
Hi, I’m Marie! I am a Certified Public Accountant by profession with an MBA Degree. A Tax Maven. I have worked with the country’s premier tax collecting agency for years. If you have any tax-related Qs, shoot away and I will answer you in a jiff!)