Corporate Recovery and Tax Incentives: The More You Know

Republic Act No. 11534, also known as the Corporate Recovery and Tax Incentives for Enterprises (CREATE) Act was created by Congress as a response to the COVID-19 pandemic to relieve domestic and foreign corporations doing business in the Philippines. This act amended several provisions of the old Tax Code, focusing on lowering corporate income tax rates and rationalizing fiscal incentives so it can attract foreign and local investments in the Philippines.

Former President Rodrigo Duterte signed the Create Law Philippines on March 26, 2021, along with several vetoed provisions.

CREATE Act was initially called the Tax Reform for Attracting Better and Higher Quality Opportunities or the TRABAHO Bill but failed to pass Congress. Later on, it was renamed to Corporate Income Tax and Incentives Reform Act or CITIRA but still failed to pass Congress as the bill was deemed non-priority and non-urgent during the COVID-19 outbreak.

Continue reading Brittany’s article to know more about the CREATE Law.

What are the Corporate Income Tax (CIT) Reforms under CREATE Law?

Effective January 1, 2021, the corporate income tax rates for domestic and resident foreign corporations are now 25% from the previous 30%, retroactive to July 1, 2020. These CIT rates will be reduced by 1% annually for the next six years and will reach 20% by 2027.

The Minimum Corporate Income Tax (MCIT) rate is also reduced to 1% from the previous 2% gross income from July 1, 202 to June 30, 2023. Take note that MCIT is imposed if a corporation has a negative taxable income or if the MCIT is higher than 30% of Regular Corporate Income Tax (RCIT).

Repeal of Improperly Accumulated Earnings Tax

Under the CREATE Act, improperly accumulated earnings (IAE) are now repealed. IAEs are profits of a corporation permitted to accumulate instead of being distributed by a corporation to its shareholders to avoid income tax with respect to the shareholders of another corporation.

What are the Fiscal Incentives under the CREATE Act?

Under the CREATE Act, the CIT incentives for corporations include the following:

• Income Tax Holiday (ITH) for four (4) to seven (7) years, with a Special Corporate Income Tax rate of 5% on gross income earned in lieu of national and local taxes, or enhanced deductions for five (5) to 10 years
• Duty exemption on importation of raw materials, spare parts, capital equipment, or accessories
• VAT exemption on importation and VAT zero-rating on local purchase
• Qualified domestic market enterprises are also entitled to four (4) to seven (7) years of ITH

What are the Transitory Provisions for Existing Registered Projects or Activities?

• The law provides that those granted an ITH before CREATE Act became effective shall be allowed to continue availing it for the remaining period.
• Unused ITH can be utilized for the specified registration period after the law’s effectivity
• Those granted ITH before the law and entitled to 5% tax on gross income earned (GIE) can still avail it for 10 years
• Availing of the 5% tax on GIE before the law can still continue for 10 years

What are the Value-Added Tax (VAT) Exemptions?

The VAT exemptions under the CREATE Act are as follows:

• Sale or distribution, importation, printing, or publication of any material covered by the UNESCO agreement including digital and electronic formats for educational purposes
• COVID-19 drugs, vaccines, and medical devices
• COVID-19 personal protective equipment production materials, such as capital equipment, spare parts, and other raw materials
• Drugs for the treatment of COVID-19 approved by the FDA for use in clinical trials, including raw materials directly necessary for the production of such drugs
• Sale of prescription drugs and medicines for cancer, mental illness, tuberculosis, diabetes, high cholesterol, hypertension, and kidney disease (beginning January 1, 2021)

What is the Sunset Provision?

The Philippine government has included a two-year extension to the ‘sunset’ provision for firms currently registered with the Philippine Investment Promotion Agencies and paying the five percent gross income earned (GIE) tax incentive. This provision has been extended by two years under the CREATE Act.

The sunset period in the CREATE Act has four levels:

• Companies benefiting from the GIE tax incentive for 10 years can benefit from a sunset period of four years.
• Companies benefiting from the GIE tax incentive for five to 10 years can benefit from a sunset period of five years.
• Companies benefiting from the GIE tax incentive for less than five years can benefit from a sunset period of seven years.
• Industries or activities that export their products or services and employ at least 10,000 people can benefit from a sunset period of nine years.

However, companies can only be granted the extension of the sunset period if they have been granted the six-year income tax holiday (ITH) that has already ended. It is also important to note that it will not be possible to apply for an extended ITH or an ITH renewal.

What are the Vetoed Provisions in the CREATE Act?

The President of the Philippines vetoed the following provisions in this tax law:

• Increase of VAT-exempt threshold and adjustment every 3 years for selling real property
• The 90-day processing period for general tax refunds, requirements in case of denial, and taxpayer remedy
• Definition of investment capital
• Domestic market enterprises entitled to special corporate income tax rate (SCIT)
• Specific share of the national and local government in gross income earned using the SCIT rate
• New incentives and corresponding period for qualified expansions or new projects or activities
• Extension of new incentives for the same activity for export enterprises registered before CREATE Act
• Fiscal Incentives Review Board‘s (FIRB’s) power to grant incentives for projects or activities with investment capital over ₱1 Billion
• Specific industries under activity tiers
• Provision granting President power to exempt Investment Promotion Agency (IPA) from CREATE Act’s Title XIII
• Automatic approval of incentive applications in case of inaction

What are the Effects of CREATE Act?

The CREATE Act has been labeled as the initial tax reform package that could reduce revenue and the most significant economic stimulus initiative in the Philippines’ past. Here are some of the effects this new tax law has on the way you do business in the Philippines:

Supporting Business Recovery in the Philippines

The Philippines has been significantly affected by the COVID-19 pandemic, resulting in prolonged lockdowns that have impacted the financial capabilities of businesses and citizens. As part of the Corporate Recovery and Tax Incentives for Enterprises (CREATE) Act, the government has introduced measures to provide fiscal relief to businesses, such as lowering the Corporate Income Tax (CIT) rate from 30% to 25% and offering performance-based incentives. The act is expected to help businesses revitalize their operations and increase cost competitiveness.

Attracting Foreign Investors to the Philippine Market

Through CREATE, the Philippine government aims to attract foreign enterprises seeking to penetrate the Asian market by offering fiscal and non-fiscal incentives. The act provides income tax holidays, special corporate income tax rates, and enhanced deductions to eligible corporations, including exporters and critical domestic corporations. It also offers value-added tax exemptions for imports of COVID-19 vaccines and other essential items used to fight against COVID-19. The enactment of CREATE places the Philippine market in an attractive position for investors next to its ASEAN neighbors and improves the country’s fiscal incentives system.

Increasing Job Opportunities for Filipinos

The adverse effects of the COVID-19 pandemic have resulted in many Filipinos losing their jobs, with approximately 3.44 million out of work as of March 2021. The CREATE Act aims to provide more job opportunities for locals by attracting foreign entrepreneurs to do business in the Philippines through performance-based tax incentives and low CIT rates. The act is expected to provide a significant boost to the National Employment Recovery Strategy (NERS) Task Force, the Department of Labor and Employment (DOLE), and the Technical Education and Skills Development Authority (TESDA).

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