On 26 March 2021, the president signed into law Republic Act No. 11534 or the CREATE Act, which is the reconciled version of the Bicameral Conference Committee. It settled the disagreeing provisions of House Bill No. 4157 and Senate Bill No. 1357. The CREATE Act was previously known as the Corporate Income Tax and Incentives Reform Act (CITIRA) bill. The law will become effective on 11 April 2021.
What the law says
The CREATE Act amends Republic Act No. 8424 or the National Internal Revenue Code of 1997, as amended, with the following salient provisions:
- Reduced corporate income tax: The CREATE Act lowers the corporate income tax rate from 30% to 25% beginning 1 July 2020. Where the corporation’s net income does not exceed PHP 5 million and its total assets do not exceed PHP 100 million (excluding land where the business is situated), the tax rate shall be 20%. For nonresident foreign corporations, the tax rate shall be 25% beginning 1 January 2021.
- Proprietary educational Institutions and hospitals: The applicable income tax rate for proprietary educational institutions and hospitals shall be 1% (previously 10%) imposed on their taxable income beginning 1 July 2020 until 30 June 2023.
- Minimum corporate income tax (MCIT): The MCIT shall be imposed at the rate of 1% (previously 2%) beginning 1 July 2020 until 30 June 2023.
- Regional operating headquarters (ROHQ): ROHQs shall be subject to the regular corporate income tax beginning 1 January 2022.
- Capital gains tax (CGT): The CGT from the sale of shares of stock not traded in the stock exchange shall be 15% for both resident and nonresident foreign corporations.
Value-added tax (VAT)
- VAT exemption of medicines: The VAT exemption on the sale or importation of drugs and medicines for cancer, mental illness, tuberculosis and kidney diseases shall begin on 1 January 2021.
- VAT exemption of medical supplies and vaccines: The sale or importation of equipment and raw materials for the production of personal protective equipment for COVID-19 prevention, and all drugs, vaccines and medical devices used for the treatment of COVID-19 shall be VAT exempt beginning 1 January 2021 until 31 December 2023.
- Tax on VAT-exempt persons: VAT-exempt taxpayers, whose gross annual sales do not exceed PHP 3 million, shall be subject to 1% tax (previously subject to 3% percentage tax) on their gross quarterly sales or receipts beginning 1 July 2020 until 23 June 2023.
Tax and duty incentives
- Incentives for critical exporters and domestic market enterprises: An income tax holiday (ITH) of four to seven years, depending on location and industry priorities, followed by a special corporate income tax rate of 5% based on gross income earned or enhanced deductions for 10 years shall be granted to export enterprises. Furthermore, such enterprises shall be granted duty exemption and VAT exemption on importations and VAT zero rating on local purchases.
Enhanced deductions for export enterprises and domestic market enterprises include the following:
- additional 10% for buildings and 20% for machineries and equipment depreciation allowance of the assets acquired for the production of goods and services (qualified capital expenditure)
- additional 50% deduction on labor expenses
- additional 100% deduction on research and development expenses
- additional 100% deduction on training expenses
- additional 50% deduction on domestic input expenses
- additional 50% deduction on power expenses
- up to 50% deduction for reinvestment allowance for manufacturing enterprises
- enhanced net operating loss carry-over (NOLCO)
The operating loss of the registered project or activity during the first three years from the start of commercial operations may be carried over as a deduction within the next five consecutive taxable years immediately following the year of such loss.
- Additional incentives for registered enterprises in areas recovering from armed conflict or major disasters: An additional two years of income tax holiday shall be granted to projects or activities of registered enterprises located in areas recovering from armed conflict or major disasters.
- Additional incentives for relocation outside the National Capital Region (NCR): An additional three years of income tax holiday shall be granted to registered projects or activities which shall completely relocate from the NCR in the duration of their incentives.
- Tax-free exchanges for reorganizations: Specific types of reorganizations involving corporations will be covered by tax-free exchanges, including the following:
- 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
- the acquisition by one 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 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
- the acquisition by one 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
- 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
- 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
A BIR confirmatory ruling shall not be required for purposes of availing the tax exemption on tax-free exchanges.
Improperly accumulated earnings tax (IAET)
- IAET: The provision on IAET, imposed at the rate of 10% of the improperly accumulated taxable income imposed for permitting earnings and profits to accumulate instead of being divided or distributed, has been repealed.
Actions to consider
Taxpayers are encouraged to understand and consider how the provisions in the CREATE Act will affect their businesses, and how such measures can help them restart and recover from the effects of the COVID-19 pandemic. Regulations will be issued to implement the changes introduced under the CREATE Act.
- Quisumbing Torres will continue to provide updates on the developments on the implementation of the CREATE Act, and is prepared to provide legal assistance in relation to the implementation of the Act upon passage into law.