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The passage of Republic Act (RA) No. 11534, otherwise known as the Corporate Recovery and Tax Incentives for Enterprises Act (CREATE), has resulted to a myriad of changes in corporate tax rules such as the reduction of regular corporate income tax (RCIT) rate from 30% to 25% or 20%, exemption from income tax of foreign dividends received by a domestic corporation, and the additional deduction on training expenses. The implementing rules governing these changes are summarized in Revenue Regulations (RR) No. 5-2021, which implements the new income tax rates on the regular income of corporations on certain passive incomes including additional allowable deductions from gross income of persons engaged in business or practice of profession pursuant to the amendments brought by CREATE. The provisions of the said RR are further clarified by Revenue Memorandum Circular (RMC) No. 62-2021 dated 30 April 2021. Salient points of the RMC are as follows:


Clarification on the application of the reduced RCIT

Section 27 (A) of the Tax Code, as amended by CREATE provides for the reduction of RCIT rate from 30% to 25% generally or to 20% upon satisfying the requirements that net taxable income of the availing corporation shall not exceed PHP5 Million and its total assets should not exceed PHP100 Million (total asset threshold), excluding the land on which the entity’s office, plant and equipment are situated during the taxable year. The applicability of the 20% RCIT rate was further clarified by RMC No. 62-2021, as follows:

  • The computation of total assets to determine compliance with the PHP100 Million total asset threshold should be net of depreciation and allowance for bad debts, if any. The issuance also reiterates the exclusion of the land where the entity’s office, plant and equipment are situated in determining total assets.
  • The exclusion of land in determining compliance with the PHP100 Million total asset threshold shall be based on acquisition cost if reflected on the audited financial statements (AFS) of the availing entity. If the land reflected in the AFS is at fair market value (FMV), such FMV shall be excluded in the computation of the total asset threshold of the availing entity.
  • The value of the land excluded is only up to the portion where the availing entity’s office, plant and equipment are situated for the taxable year. Thus, land being held for sale to customers or those acquired for investment purposes are not excluded in determining compliance with the total asset threshold.
  • To determine the value of the land that shall be excluded from the computation of total assets, the percentage of the floor area devoted to the entity’s office shall be multiplied by the total value of the land.

Based on Section 27(B) of the Tax Code, as amended by CREATE, proprietary educational institutions and hospitals which are non-profit shall enjoy a tax rate of 1% from 1 July 2020 up to 30 June 2023 and 10% from 1 July 2023 onwards. RMC No. 62-2021 further clarified this by reiterating that private educational institutions distributing dividends are organizations for profit who may not enjoy the 1% tax rate for non-profit proprietary educational institutions and hospitals. These entities are therefore subject to 25%/20% RCIT.


Exemption of Foreign Sourced Dividends 

As a general rule, foreign sourced dividends received by domestic corporations are subject to income tax. However, pursuant to Section 27(D)(4) of the Tax Code, as amended by CREATE, the said dividends may now be exempt from income tax subject to the conditions set forth under RR No. 5-2021, as shown below:

  • The foreign sourced 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 from the time that such dividends are received and shall be limited to funding the capital requirements, capital expenditures, dividend payments, investment in domestic subsidiaries and infrastructure project; and
  • The domestic corporation holds directly at least 20% of the outstanding shares of the foreign corporation and has held shareholdings for a minimum of 2 years at the time of the dividend distribution. If the foreign corporation is in existence for less than 2 years, then the domestic corporation should be in continuous possession of the 20% in value of the foreign corporation for its entire existence, as further provided in RR No. 5-2021.

RR No. 5-2021 makes mention of compliance requirements to avail of this exemption which includes a sworn certification prepared and executed by an Independent Auditor on the utilization or non-utilization of the dividends received by the corporation. RMC No. 62-2021 clarifies the following:

  • The exemption from income tax of the said dividends shall only pertain to the dividends actually utilized by the domestic corporation in the manner set out in the Tax Code, as amended. Any unutilized amount shall be declared as taxable income subject to interest, surcharges and penalties, as applicable.
  • The tax treatment of dividends received by a domestic corporation from a resident foreign corporation, as defined in Section 28 (A)(1) of the Tax Code, as amended, will depend on the sources of income of the resident foreign corporation. If more than 50% of the total gross income of the resident foreign corporation is derived within the Philippines, the dividends received by a domestic corporation from such resident foreign corporation shall be exempt from income tax even without complying with the requirements for exemption of foreign sourced dividends in RR No. 5-2021. On the other hand, if income from within the Philippines of the resident foreign corporation is less than 50%, the conditions for exemption for foreign sourced dividends per RR No. 5-2021 should be followed. The implementation of this provision should be clarified by the BIR. The following questions/clarifications come to mind for this provision of the RMC:


—    As defined under Section 28 (A) (1) of the Tax Code, resident foreign corporations refer to corporations organized, authorized, or existing under the laws of the foreign country, engaged in trade or business within the Philippines such as Branch Offices. Thus, does it mean that it is the Home Office of such Branch which should obtain total gross income from within the Philippines of more than 50% to qualify for automatic exemption of such dividends received by a domestic corporation from the foreign corporation/home office?

—   Taxpayers should also be clarified of the rules for tax exemption availment and determination of the source of income in case dividends are received from resident foreign corporations which may be considered nonresident foreign corporations for certain transactions undertaken independently of its branch office in the Philippines.


Additional Deduction from Taxable Income

Section 34(A)(1)(v) of the Tax Code, as amended by CREATE, provides that an additional deduction from taxable income of ½ of the value of labor training expenses incurred for skills development of enterprise-based trainees can be availed of by qualifying enterprises. RMC No. 62-2021 clarifies that this additional deduction applies to no specific industry alone subject to compliance requirements under the RMC.

Thanks to these issuances which are religiously issued despite the COVID-19 situation, taxpayers are now hopefully more informed of how to implement the changes brought about by CREATE especially on these amendments to the income tax provisions of the Tax Code. Hopefully, the BIR can address these items for clarification soon so that taxpayers can avail of these benefits under CREATE. 

Jasmine Orfinada is an Associate from the Tax group of KPMG R.G. Manabat & Co. (KPMG RGM&Co.), the Philippine member firm of KPMG International. KPMG RGM&Co. has been recognized as a Tier 1 tax practice and Tier 1 transfer pricing practice by the International Tax Review.

This article is for general information purposes only and should not be considered as professional advice to a specific issue or entity.

The views and opinions expressed herein are those of the author and do not necessarily represent the views and opinions of KPMG International or KPMG RGM&Co. For comments or inquiries, please email ph-inquiry@kpmg.com or rgmanabat@kpmg.com.