CREATE-ing the Corporate Tax Reform (Part Two)

Legal Updates

Author Atty. Mary Elizabeth M. Belmonte, Atty. Rhoel Recheta, Atty. Stephen Vera Cruz

On March 26, 2021, after several years of waiting, the Corporate Recovery and Tax Incentives for Enterprises (CREATE) as Republic Act No. 11534 was enacted and signed into law albeit with line veto items by President Duterte. CREATE was published on March 27, 2021 and became effective on April 11, 2021.
 
CREATE is the second package of the comprehensive tax reform program of the Duterte administration. It aims to improve the corporate tax system, rationalize the fiscal incentives system, and provide support to businesses to aid them in their recovery from the COVID-19 pandemic.
 
President Duterte vetoed some important provisions of CREATE. First, the proposed increased on the VAT-exempt threshold for the sale of residential lot from P1.5 million to P2.5 million and house and lot from P2.5 million to P4.2 million, which, according to him, is highly distortive and prone to abuse. Second, the 90-day period of processing general tax refunds, which may cause damage to the government or more delays to the prejudice of the taxpayers. Thus, he suggested that the legislature, the Department of Finance, and the Bureau of Internal Revenue (BIR) come up with mechanisms to streamline the process of tax refunds. Third, specific industries mentioned under the activity tiers to keep CREATE flexible and to be able keep up with the changing times. Fourth, the limitation on the power of the Fiscal Incentives Review Board (FIRB) since the oversight functions of the FIRB should ensure the proper grant and monitoring of tax incentives. Fifth, the grant of power to the President to exempt any investment promotion agency from the reform, which could be used for political gains. Finally, the automatic approval of applications for incentives, which is contrary to the declared policy to approve or disapprove applications based on merit.
 
The comparison of the provisions of the 1997 Tax Code and its corresponding amended provisions in CREATE and the new provisions on Tax Incentives may be accessed through the links below.
 
While the reduced corporate income tax rates significantly affect the Annual Income Tax Return (AITR) for the year 2020, the BIR did not extend the deadline of the filing of the AITR which is due on April 15, 2021. Instead, the BIR issued Revenue Memorandum Circular (RMC) No. 46-2021 states that the AITR may be amended on or before May 15, 2021 without any imposition of increments. Moreover, taxpayers whose amended AITRs result in overpayment of taxes paid may opt to carry over the overpaid tax against the tax due in the succeeding period or file a claim for refund. Furthermore, in RMC No. 41-2021, the BIR adopted a file and pay anywhere system for taxes falling within the period March 22, 2021 to April 30, 2021. The BIR also encouraged taxpayers to pay taxes through any ePayment channels.
 
Lastly, the BIR has already started issuing regulations, beginning with Revenue Regulations No. 2 to 5-2021 on final tax, VAT, and income tax, to implement the provisions of CREATE but with certain controversial provisions. Hence, let’s await the succeeding regulations of the BIR which hopefully will clarify any controversies and fully implement CREATE.
 
For the meantime, we hope that the amendments brought about by CREATE will encourage more corporations to set up their businesses in the Philippines and create jobs for the public as this is certainly a welcome incentive to help the Philippine economy wade through the challenges brought by the pandemic. We look forward to seeing these gains soon.

CREATE-ing the Corporate Tax Reform (Part One)

Legal Updates

Author Atty. Mary Elizabeth M. Belmonte, Atty. Roel Recheta, Atty. Stephen Vera Cruz

On March 26, 2021, after several years of waiting, the Corporate Recovery and Tax Incentives for Enterprises (CREATE) as Republic Act No. 11534 was enacted and signed into law albeit with line veto items by President Duterte. CREATE was published on March 27, 2021 and became effective on April 11, 2021.

CREATE is the second package of the comprehensive tax reform program of the Duterte administration. It aims to improve the corporate tax system, rationalize the fiscal incentives system, and provide support to businesses to aid them in their recovery from the COVID-19 pandemic.

Below are some of the salient provisions of CREATE:

1. One person corporations are included in the definition of corporation and, as such, will be taxed as corporations.

2. Effective July 1, 2020, the corporate income tax (CIT) rate for domestic corporations is reduced from 30% to 25%. However, domestic corporations with net taxable income not exceeding P5 million and with total assets not exceeding P100 million will be subject to an even lower CIT rate of 20%. In computing the total assets, the value of the land where the office, plant and equipment are situated during the taxable year shall be excluded.

3. Effective July 1, 2020, the CIT rate for resident foreign corporations is reduced from 30% to 25%.

4. Effective January 1, 2021, the CIT rate for non-resident foreign corporations is reduced from 30% to 25%.

5.  Proprietary educational institutions and hospitals which are non-profit are subject to a tax of 1% on their taxable income beginning July 1, 2020 until June 30, 2023.

6. Offshore banking units (OBUs) are subject to regular corporate income tax effective April 11, 2021.

7. The minimum corporate income tax rate is reduced from 2% to 1% beginning July 1, 2020 until June 30, 2023.

8. The improperly accumulated earnings tax (IAET) has been repealed effective April 11, 2021.

9. Effective January 1, 2022, regional operating headquarters (ROHQs) shall be subject to regular corporate income tax as well as local taxes.

10. Capital gains tax on the sale of shares of stock not traded in the stock exchange by foreign corporations is now at rate of 15% of net capital gains.

11. Foreign-sourced dividends received by a domestic corporation may be exempt from tax provided that the funds from such dividends actually received or remitted into the Philippines are reinvested in the business operations of the domestic corporation in the Philippines within the next taxable year; the dividends shall only be used to fund the working capital requirements, capital expenditures, dividend payments, investment in domestic subsidiaries, and infrastructure projects; and the domestic corporation holds directly at least twenty percent (20%) of the outstanding shares of the foreign corporation and has held the shareholdings for a minimum of two (2) years at the time of the dividends distribution.

12. The definition of reorganization qualified for tax-free exchange under Section 40(C)(2) of the Tax Code was expanded by CREATE. Prior BIR confirmation or tax ruling shall not be required to avail of the tax exemption.

13. The following are now exempt from value added tax (VAT): (i) sale or importation of prescription drugs and medicines for cancer, mental illness, tuberculosis, and kidney diseases beginning January 1, 2021; (ii) Sale or importation of any such educational reading material covered by the UNESCO Agreement, including the digital or electric format thereof; (iii) capital equipment, personal protective equipment, drugs, vaccines and medical devices specifically prescribed and directly used for the treatment of COVID-19 beginning January 1, 2021 to December 31, 2023.

14. Percentage tax is reduced from 3% to 1 % beginning July 1, 2020 until June 30, 2023.

15. Qualified export enterprises shall be entitled to 4 to 7 years Income Tax Holiday (ITH) followed by 10 years 5% Special Corporation Income Tax (SCIT) or Enhanced Deductions (ED).

16. Qualified domestic enterprises shall be entitled to 4 to 7 years ITH followed by 5 years of ED.

17. Registered business enterprises are exempt from customs duty on importation of capital, raw materials, spare parts, or accessories.

18. Registered business enterprises are entitled to VAT exemption on importation and VAT zero-rating on local purchases.

19. For investments prior to the effectivity of CREATE – (i) If the registered business enterprise is granted ITH only, it may still avail of the ITH for the remaining ITH period; and (ii) If the registered business enterprise is granted ITH and 5% gross income tax (GIT) after ITH or 5% GIT only, it may avail of the 5% GIT for 10 years.

NCR Plus Under Enhanced Community Quarantine (ECQ)mvg

Legal Updates

Date March 28, 2021

Please be advised that the Philippine Inter-Agency Task Force on Emerging Infectious Diseases (IATF) has placed the National Capital Region (NCR), Bulacan, Rizal, Cavite and Laguna under Enhanced Community Quarantine (ECQ) effective March 29 to April 4. In light of this, transportation shall be restricted and only essential services and other identified industries and/or business establishments shall continue to operate or be open for business.  Even before the imposition of the ECQ, certain government agencies have likewise already partially closed or suspended certain transactions.

Notwithstanding the above, all MVGS lawyers and support personnel shall continue to service your requirements under a strict work-from-home (WFH) arrangement from March 29 to March 31.  

Please be also advised that April 1-2 are legal holidays in the Philippines, and we will resume work on April 5.

For your information.

PCC Rules on Merger Review under Bayanihan 2

Legal Updates

Author Atty. Erika B. Paulino, Atty. Melissa Jean G. Hipolito

On October 5, 2020, the Philippine Competition Commission (PCC) issued the Rules for the Implementation of Section 4 (eee) of Republic Act No. 11494, otherwise known as the “Bayanihan to Recover As One Act”, Relating to the Review of Mergers and Acquisitions (PCC Rules).

To recall, on September 11, 2020, the Philippine President signed into law Republic Act No. 11494, otherwise known as the “Bayanihan to Recover as One Act” (Bayanihan 2), which became effective on September 15, 2020. Section 4 (eee) of Bayanihan 2 exempts all mergers and acquisitions with transaction values below Php 50 Billion from compulsory notification to the PCC, if entered into within two years from effectivity of Bayanihan 2 on September 15, 2020.

The recently-issued PCC Rules defined “transaction values” as used under Bayanihan 2 (eee), and provided clarity that “transaction values” refer to both the Size of Person and the Size of Transaction. Thus, a merger or acquisition entered into within two years from effectivity of Bayanihan 2 will still be subject to compulsory notification if the transaction meets the following thresholds:

(A) (Size of Person) The aggregate annual gross revenues in, into or from the Philippines, or value of the assets in the Philippines of the ultimate parent entity (UPE) of at least one of the acquiring or acquired entities, including that of all entities that the UPE controls, directly or indirectly, is Php 50 Billion or more;

and

(B) (Size of Transaction) The value of the transaction is Php 50 Billion or more, as may be determined by:

(1) the aggregate value of the assets in the Philippines being acquired in the proposed transaction or the gross revenues generated in the Philippines by assets acquired in the Philippines, in case of proposed M&As of assets in the Philippines;

(2) by the aggregate value of the assets in the Philippines of the acquiring entity, or the gross revenues generated in or into the Philippines by assets acquired outside the Philippines, in case of proposed M&As of assets outside the Philippines;

(3) by the aggregate value of the assets in the Philippines of the acquiring entity, or the gross revenues generated in or into the Philippines by assets acquired in the Philippines and any assets acquired outside the Philippines, in case of proposed M&As of assets inside and outside the Philippines; or

(4) by the aggregate value of the assets in the Philippines that are owned by the corporation (or non-corporate entity) or by entities it controls, other than assets that are shares of any of those corporations, or the gross revenues from sales in, into, or from the Philippines of the corporation (or non-corporate entity) or by entities it controls, other than assets that are shares of any of those corporations, in case of a proposed acquisition of voting shares (or interest) of more than 35% (or more than 50% if the acquirer already owns more than 35% before the proposed acquisition) of a corporation (or non-corporate entity).

An acquiring entity in a notifiable joint venture transaction shall also be subject to the notification requirements if either the aggregate value of the assets that will be combined in the Philippines or contributed into the proposed joint venture is Php 50 Billion or more or the gross revenues generated in the Philippines by assets to be combined in the Philippines or contributed into the proposed joint venture is Php 50 Billion or more.

Parties to transactions valued below the compulsory notification thresholds are not precluded to voluntary notify the PCC. A voluntary notification shall, however, constitute a waiver to the exemption from review provided under Bayanihan 2.

In addition to the exemption from compulsory notification, M&As exceeding the Php 50 Billion threshold and entered into within two years from effectivity of Bayanihan 2 on September 15, 2020 are also exempted from the PCC’s power to review M&As motu proprio for a period of one year from September 15, 2020. The PCC, however, declared that M&As entered into during the effectivity of Bayanihan 2, especially those that are likely to substantially lessen competition, may be reviewed by the PCC motu proprio after 1 year from the effectivity of Bayanihan 2.

The PCC Rules also clarified that transactions entered into prior to the effectivity of Bayanihan 2 and exceeding the thresholds applicable as of the date the definitive agreement to the transaction was executed shall still be subject to compulsory notification. Prior to Bayanihan 2, the compulsory notification thresholds are Php 6 Billion (Size of Person) and Php 2.4 Billion (Size of Transaction), where the threshold for Size of Transaction is also applied to joint venture transactions.

With regard to the PCC’s exercise of motu proprio review, the following M&As are not covered by the exemption under Bayanihan 2: (a) transactions entered into prior to the effectivity of Bayanihan 2 which have not yet been subject of PCC review; or (b) transactions pending review by the PCC prior to the effectivity of Bayanihan 2.

Philippine Tax Reform Packages: What to expect?

Legal Updates
Author Atty. Mary Elizabeth M. Belmonte, Atty. Harlem P. Ma-at

The need to accelerate poverty reduction and to sustainably address social and economic inequality are pervasive issues in the Philippines. To address these issues, the current administration, through the Department of Finance (DOF), initiated the Comprehensive Tax Reform Program (CTRP) which aims to make the tax system of the Philippines simpler, fairer, and more efficient[1]. In this regard, the DOF rolled out four (4) major tax packages as of date.[2]

The first tax package is the Tax Reform for Acceleration and Inclusion (TRAIN) Act which was signed into law by the Philippine President on 19 December 2017 and became effective beginning 1 January 2018. The TRAIN Act aims to enhance the progressivity of the Philippines’ tax system, to provide an equitable relief to a greater number of taxpayers and their families, to improve levels of disposable income of the latter, and to increase economic activity.[3] As such, the TRAIN Act includes several provisions amending the National Internal Revenue Code (NIRC) of 1997 effectively lowering the rate of individual income tax, estate tax, and donor’s tax. To complement the TRAIN Act, Republic Act No. 11213 or Tax Amnesty Act was also enacted to give errant taxpayers a “fresh start” by allowing them to settle long outstanding tax dues.[4] Labeled as Package 1B by the DOF, the Tax Amnesty Act provides a six percent (6%) estate tax amnesty rate on unsettled estate of decedents who died on or before 31 December 2017 or Php5,000.00, whichever is lower.[5] The Tax Amnesty Act also provides an amnesty on tax delinquencies on all national internal revenue taxes such as income tax, withholding taxes, value added tax, donor’s tax, excise tax, and percentage taxes for taxable year 2017 and prior years.

The second tax package, the Corporate Recovery and Tax Incentives for Enterprises (CREATE) Act, is currently being deliberated in the Philippine Senate. In comparison to the TRAIN Act which provides tax reliefs for individuals, estates, and donors, the CREATE Act grants tax reliefs to corporate entities. Significant amendatory provisions of the CREATE Act includes the following:[6]

  1. a.  An immediate five percentage (5%) point cut in the corporate income tax rate starting July 2020 and 1 percentage (1%) point reduction for every year from 2023 to 2027;
  2. b.  The prolonging of the “sunset period” by two years;
  3. c.  Extension of up to nine (9) years of the five percent (5%) tax on gross income earned incentive for registered business activities; and
  4. d.  The grant of power to the President to modify the mix, period, or manner of availment of incentives for highly desirable projects or specific industrial activities.

The third tax package which is the Real Property Valuation Reform is currently pending in the Committees on Ways and Means, Local Government, and Finance in the Philippine Senate.[7] The salient features of this tax package includes adoption of international standards in the process of valuation of real property, establishment of a single valuation base for taxation of real property, and the formation of Property Valuation Service to oversee and manage valuation related concerns of local governments.[8]

The fourth tax package is the Passive Income and Financial Intermediary Taxation Act (PIFITA) which is currently being discussed in the Committee hearings of the Philippine Senate.  PIFITA complements the recently-passed TRAIN Act by making passive income and financial intermediary taxes simpler, fairer, more efficient, and more competitive in the ASEAN region.[9] Significant provisions include the following:[10]

  1. a.  A single rate of fifteen (15%), in general, will be imposed on interest income, dividends, and capital gains.
  2. b.  A single gross receipt tax rate of five (5%) will be imposed on banks, quasi banks, and certain non-bank financial intermediaries.
  3. c.  A uniform two percent (2%) tax of the premium of pre-need, pension, life, and HMO insurance.
  4. d.  The IPO tax will be removed as it is seen as a tax on capital, and is detrimental to the capital markets.
  5. e.  Equalize tax treatment of debt and equity by: (a) a gradual reduction of the 0.6% stock transaction tax by 0.1 percentage point every year until it reaches 0 by 2026, and (b) a temporary imposition of a 0.1% transaction tax on listed and traded debt instruments at the Philippine Dealing Exchange, which will also be removed by 2026. Documents which are non-monetary in nature will also be exempted from DST.

Altogether, it is too early to assess if these four major tax packages effectively address the issues of poverty reduction and socio-economic inequality in the Philippines. The effect of these tax packages on a macro-economic level is yet to be seen or assessed in the next few years. Undoubtedly, however, these tax laws will surely open a number of opportunities for our clients, both individuals and corporate. As their lawyers, we must be ready to assist our clients in availing tax reliefs, in exploring tax savings opportunities, and in establishing tax efficient mechanisms under the new Tax Code. Most importantly, these new tax packages will create avenues for us to create more value to our clients as their business partners.

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[1] Department of Finance, Tax Reform available at https://taxreform.dof.gov.ph/about-tax-reform/ last accessed on 14 September 2020.
[2] Id.
[3] Section 2 of Tax Reform for Inclusion and Acceleration (TRAIN) Act, RA 10963, 29 December 2017.
[4] Package 1B, Tax Amnesty available at https://taxreform.dof.gov.ph/tax-reform-packages/package-1b-tax-amnesty/ last accessed on 14 September 2020.
[5] Section 5 of Tax Amnesty Act, RA 11213, 14 February 2019.
[6] Package 2, Corporate Recovery and Tax Incentives for Enterprises Act available at https://taxreform.dof.gov.ph/tax-reform-packages/p2-corporate-recovery-and-tax-incentives-for-enterprises-act/ last accessed on 14 September 2020.
[7] Package 3, Real Property Valuation Reform available at https://taxreform.dof.gov.ph/tax-reform-packages/p3-real-property-valuation last accessed on 14 September 2020.
[8] Id.
[9] Package 4, Passive Income and Financial Intermediary Taxation Act (PIFITA) available at https://taxreform.dof.gov.ph/tax-reform-packages/p4-passive-income-and-financial-taxes last accessed on 14 September 2020.
[10] Id.
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