Special InTAX: April 2021 Issue 1 | Volume 2

 

Office of the President

 

On 26 March 2021, Republic Act No. 11534 or the “Corporate Recovery and Tax Incentives for Enterprises Act” or “CREATE” was signed into law by the President.

I.          Salient Changes in the National Internal Revenue Code (NIRC)

A.    On Domestic Corporations

• Domestic corporations shall already be subject to a lower Regular Corporate Income Tax (RCIT) rate of twenty-five percent (25%) effective 01 July 2020.

• However, domestic corporations with: (1) net taxable income not exceeding Php5 Million; and (2) total assets not exceeding Php100 Million (excluding land on which the business entity’s office, plant and equipment are situated), shall be subject to an RCIT rate of twenty percent (20%).

• Proprietary educational institutions and hospitals shall be subject to an income tax rate of one percent (1%) of their taxable income effective 01 July 2020 until 30 June 2023.

• Foreign-sourced dividends shall be exempt on the following conditions:

a.     Dividends actually received or remitted into the Philippines are reinvested in the business operations of a domestic corporation in the Philippines within the next taxable year from the time the foreign-sourced dividends were received;

b.     Shall be limited to funding the working capital requirements, capital expenditures, dividend payments and investment in domestic subsidiaries and infrastructure projects; and

c.     The domestic corporation holds directly at least 20% of the outstanding shares of the foreign corporation and has held the shareholdings for a minimum of 2 years at the time the dividend distribution.

•  Minimum Corporate Income Tax (MCIT) on domestic corporations shall be reduced to one percent (1%) effective 01 July 2020 until 30 June 2023.

B.    On Resident Foreign Corporations

• Resident foreign corporations shall already be subject to a lower RCIT rate of twenty-five percent (25%) effective 01 July 2020.

• MCIT on resident foreign corporations shall be reduced to one percent (1%) effective 01 July 2020 until 30 June 2023.

• Section 28(A)(4) on Offshore Banking Units (OBUs) has been deleted.

• Regional Operating Headquarters (ROHQs) shall already be subject to RCIT effective 01 January 2022.

• The final tax on interest income derived by a resident foreign corporation from a depositary bank under the Expanded Foreign Currency Deposit System has been increased to fifteen percent (15%).

• Capital gains from the sale of shares of stock not traded in the stock exchange shall already be subject to a final tax of fifteen percent (15%).

C.    On Non-Resident Foreign Corporations

• Non-resident foreign corporations shall already be subject to a lower tax rate of twenty-five percent (25%) effective 01 January 2021.

• The final withholding tax rate applicable to dividends received by a non-resident foreign corporation shall be fifteen percent (15%) if the deemed tax credit is ten percent (10%) which represents the difference between the twenty-five percent (25%) RCIT and the fifteen percent (15%) tax on dividends.

• Capital gains from the sale of shares of stock not traded in the stock exchange shall already be subject to a final tax of fifteen percent (15%).

D.    On Improperly Accumulated Earnings Tax (IAET)

• Section 29 on IAET has been deleted.

E.    On Deductions from Gross Income

• Section 34(A)(1)(a) provides an additional deduction from taxable income of one-half (½) of the value of labor training expenses incurred from skills development of enterprise-based trainees. The taxpayer’s otherwise allowable deduction for interest expense shall be reduced by twenty percent (20%) of the interest income subject to final tax.

F.     On Tax-Free Exchanges under Section 40(C)(2)

• Definition of reorganization is expanded as follows:

a.     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; or

b.     The acquisition by one (1) 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 the 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; or

c.     The acquisition of one (1) 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; or

d.     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; or

e.     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.

• In all instances of exchange of property, prior Bureau of Internal Revenue (BIR) confirmation or tax ruling shall not be required for purposes of availing the tax exemption.

G.    On Value-Added Tax (VAT) -Exempt Transactions

• The following transactions shall already be exempt from VAT:

a.     Sale, importation, printing or publication of educational reading material covered by the UNESCO agreement on the importation of educational, scientific and cultural materials, including the digital or electronic format thereof

b.     Sale or importation of prescription drugs and medicines for: (1) diabetes, high cholesterol and hypertension beginning 01 January 2020 and (2) cancer, mental illness, tuberculosis and kidney diseases beginning 01 January 2021

c.     Sale or importation of the following from 01 January 2021 to 31 December 2023:

1.     Capital equipment, its spare parts and raw materials necessary for the production of personal protective equipment (PPE) components;

2.     All drugs, vaccines and medical devices specifically prescribed and directly used for the treatment of Covid-19; and

3.     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.

H.    On Persons Exempt from VAT

• Percentage tax rate under Section 116 of the Tax Code shall be reduced to one percent (1%) effective 01 July 2020 until 30 June 2023

II.         Tax Incentives by Enterprises Registered with the Investment Promotion Agencies

A.    On Available Tax Incentives to Registered Projects or Activities

• Income Tax Holiday (ITH)

• Special Corporate Income Tax (SCIT) of five percent (5%) effective 01 July 2020 based on gross income earned by an Export Enterprise, in lieu of all taxes, both national and local

• Enhanced Deductions (ED) is granted in lieu of the ITH and SCIT:

1.     Depreciation allowance of the assets acquired for the production of goods and services – Additional 10% for buildings and additional 20% for machineries and equipment

2.     50% additional deduction on the labor expenses incurred in the taxable year

3.     100% additional deduction on the R&D expense incurred in the taxable year

4.     100% additional deduction on the training expense incurred in the taxable year

5.     50% additional deduction on the domestic input expense incurred in the taxable year

6.     50% additional deduction on the power expense incurred in the taxable year

7.     Deduction for Reinvestment Allowance for the Manufacturing Industry – When a manufacturing registered business enterprise reinvests its undistributed profit or surplus in any of the projects or activities in the SIPP, the amount reinvested to a maximum of 50% shall be allowed as a deduction from taxable income within a period of 5 years from the time of such reinvestment.

8.     The net operating loss during the first 3 years from start of commercial operation may be carried over as deduction from gross income within the next 5 consecutive years immediately following the year of such loss.

• Duty Exemption shall apply only to the importation of capital equipment, raw materials, spare parts or accessories directly and exclusively used in the registered project or activity.

• VAT Exemption on Importation and 0% VAT on Local Purchases shall apply only to goods and services directly and exclusively used in the registered project or activity.

B.    Conditions and Period of Availment

For Export Enterprise – 4 to 7 years of ITH plus 10 years of SCIT or ED

LOCATION/ INDUSTRY TIERS	TIER I	TIER II	TIER III
National Capital Region (NCR)	4 years of ITH + 10 years of SCIT or ED	5 years of ITH + 10 years of SCIT or ED	6 years of ITH + 10 years of SCIT or ED
Metropolitan Areas or Areas Contiguous and Adjacent to NCR	5 years of ITH + 10 years of SCIT or ED	6 years of ITH + 10 years of SCIT or ED	7 years of ITH + 10 years of SCIT or ED
All Other Areas	6 years of ITH + 10 years of SCIT or ED	7 years of ITH + 10 years of SCIT or ED	7 years of ITH + 10 years of SCIT or ED

   

For Domestic Market Enterprise – 4 to 7 years of ITH plus 5 years of ED

 

LOCATION/ INDUSTRY TIERS	TIER I	TIER II	TIER III
National Capital Region (NCR)	4 years of ITH + 5 years of ED	5 years of ITH + 5 years of ED	6 years of ITH + 5 years of ED
Metropolitan Areas or Areas Contiguous and Adjacent to NCR	5 years of ITH + 5 years of ED	6 years of ITH + 5 years of ED	7 years of ITH + 5 years of ED
All Other Areas	6 years of ITH + 5 years of ED	7 years of ITH + 5 years of ED	7 years of ITH + 5 years of ED

 

C.    On Qualifications of a Registered Business Enterprise for Tax Incentive

• The enterprise must be engaged in a project or activity included in the Strategic Investment Priority Plan.

• The enterprise must meet the target performance metrics after the agreed time period.

• An adequate accounting system that shall identify the investments, revenues, costs and profits or losses of each registered project or activity must be installed. The enterprise must establish a separate corporation for each registered project/activity if the IPA requires.

• The enterprise must comply with the e-receipting and e-sales requirement under the NIRC.

• The enterprise must submit annual reports of beneficial ownership and related matters.

D.    On Investments Prior to the Effectivity of the CREATE

•  Enterprises granted only ITH shall be allowed to continue with the availment of the ITH for the remaining period of the ITH.

• Enterprises granted ITH that are also entitled to the 5% tax on gross income earned after the ITH shall be allowed to avail of the 5% tax on gross income earned for 10 years.

• Enterprises availing of the 5% tax on gross income earned shall be allowed to continue availing the said incentive for 10 years

 

Attached is a full text of RA No. 11534 and the provisions vetoed by the President for your reference.

 

Republic Act No. 11534 Create

Republic Act No. 11534 Create Veto Notes

 

(RGM&Co. Note:  The RA was published in Business Mirror on 27 March 2021, which will take effect 15 days after or on 11 April 2021.)