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 The improperly accumulated earnings tax (IAET) has been repealed effective April 11, 2021.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