Corporate Recovery and Tax Incentives for Enterprises
The above-mentioned tax rates will take effect on 1 July 2020
Published in Daily Tribune on May 21, 2021
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On 26 March 2021, the President signed Republic Act 11534 otherwise known as the Corporate Recovery and Tax Incentives for Enterprises (CREATE) Act.
It aims to respond to the needs of businesses negatively affected by the Covid-19 pandemic (achieved through lowering tax rates and opening up cash flows for businesses to rebuild during this pandemic), while improving the attracting highly desirable investments that will serve the public interest (achieved through making Philippine Taxes competitive with its neighbors). These are some of its important features.
First, starting on 1 July 2020, domestic corporations shall be subject to a 20 percent or 25 percent corporate income tax (CIT) as opposed to 30 percent (one of the highest in Southeast Asia). The 20 percent tax rate is applied if the net taxable income of the corporation does not exceed P5 million and its total assets do not exceed P100 million. For foreign corporations, whether resident or non-resident, the CIT will be fixed at 25 percent.
Second, minimum corporate income tax or MCIT for both domestic and resident foreign corporations is now lowered to 1 percent as opposed to 2 percent prior to the CREATE Act.
Third, non-profit proprietary educational institutions and hospitals will be taxed at 1 percent of their taxable income as opposed to 10 percent.
Fourth, sunset periods for Investment Promotion Agency-registered companies are likewise extended as follows: 1) Four years for businesses that have spent more than 10 years under the gross income earned (GIE) program; 2) Five years for businesses that have spent 5-10 years under the GIE program; and 3) Nine years for businesses that export 100 percent of their products/business and employ at least 10,000 people.
Fifth, clearer sets of incentives are likewise offered i.e., 4-7 years of Income Tax Holiday and followed by 10 years of Special Corporate Income Tax/Enhanced Deductions (ED) for exporters, or 5 years ED for domestic market enterprises with better incentives given to businesses opting to establish outside Metro Manila.
Fifth, percentage taxes on VAT-exempt persons has been decreased to 1 percent.
The above-mentioned tax rates will take effect on 1 July 2020. The Tax Code states how the retroactivity of these provisions will apply. Section 27 of the Tax Code states that taxable income will be computed without regard to the specific date when specific sales, purchases, and other transactions occur. The income and expenses for the fiscal year is deemed to have been earned and spent equally for each month of the period. In other words, the applicable tax rates will be computed accordingly under the old rates for periods not covered by CREATE i.e., before 1 July 2020.
The BIR, however, has yet to issue the relevant implementing rules and regulation to effect and guide taxpayers towards these changes. Taxpayers wait with bated breath as 15 April 2021 is fast approaching. While the BIR now allows taxpayers to file returns and pay taxes outside the jurisdiction of the Revenue District Office from 22 March 2021 to 30 April 2021, we will see in the coming days if this is enough. In any case, we expect that the BIR will come up with the procedures sufficient to operationalize these changes.
