CORPORATE RECOVERY AND TAX INCENTIVES FOR ENTERPRISES ACT (CREATE) – Republic Act 11534
Effectivity Date
Date of Publication
Effectivity
-
Reforms under CREATE:
1. Lower Corporate Income Tax
2. Temporary COVID-19 Measures
3. VAT Provisions
4. Fiscal Incentives Rationalization
5. Tax Incentives Management
March 27, 2021
15 days thereafter;
April 11, 2021
Was created by the Philippine Congress in response to the COVID-19 pandemic as a fiscal relief to domestic and foreign
corporations doing business in the Philippines.
It seeks to amend several provisions in the old Tax Code, with a central focus on lowering corporate income tax rates
and rationalizing fiscal incentives to better attract local and foreign investments in the Philippines.
Before the COVID-19 pandemic, CREATE Act was initially known as TRABAHO bill (or Tax Reform for Attracting Better
and Higher-quality Opportunities). When the bill failed to pass Congress, it was renamed to CITIRA (or Corporate Income
Tax and Incentives Reform Act), which also failed to pass Congress because it was deemed as a non-priority and nonurgent bill during the outbreak of COVID-19. The addition of COVID-19 related provisions propelled the passage of the
bill into law.
LOWER CORPORATE INCOME TAX
- The first tax reform (TRAIN, January 1, 2018) focused on individual income tax reduction.
- The corporate income tax (CIT) rates for domestic corporations and resident foreign corporations (RFCs) under the
CREATE Act will be reduced from the current 30% to 25%, retroactive to July 1, 2020.
Type of Corporation
OLD
Regular
Rate Effectivity
Rate
30%
25%
July 1, 2020
1%
Corporations (MSME) with:
30%
 Taxable income not exceeding P5M; &
 Total sales not exceeding P100M
Excluding the land where the business
entity’s office, plant and equipment are
situated.
Proprietary Educational Institutions and 10%
Hospitals
20%
July 1, 2020
2%
1%
DOMESTIC CORPORATION
Domestic Corporation (in general)
Note: If i’s unrelated gross income from
unrelated activity exceed 50%, then they will
be subject to the regular corporate income
tax the entire taxable income, not just the
income from unrelated activity.
RESIDENT FOREIGN CORPORATION
Resident Foreign Corporation
30
2%
1%
10%
July 1, 2020 to June
30, 2023 (temporarily)
July 1, 2023
25%
July 1, 2020
MCIT
Effectivity
July 1, 2020 to June
30, 2023
(temporarily)
July 1, 2023
July 1, 2020 to June
30, 2023
(temporarily)
July 1, 2023
Not applicable –
MCIT
is
only
applicable
to
corporations subject
to
the
regular
corporate
income
tax.
1%
2%
July 1, 2020 to June
30,
2023
(temporarily)
July 1, 2023
Offshore Banking Units (OBUs)
Note: OBUs shall now be taxed as resident
foreign corporation upon effectivity of the
CREATE
Regional Operating Headquarters (ROHQ)
10%
25%
from
residents
Upon effectivity of the 1%
CREATE
10%
January 1, 2022
25%
2%
1%
2%
NON-RESIDENT FOREIGN CORPORATION
Non-Resident Foreign Corporation
30%
25%
Upon effectivity of
the CREATE until
June 30, 2023
July 1, 2023
January 1, 2022 to
June 30, 2023
July 1, 2023
January 1, 2021 (Take Not applicable. This is a form
Note)
of final withholding tax from
the part of the non-resident
corporation.
MSME Classification
Enterprise
Category
By Asset Size
Micro
Up to P3,000,000
Small
P3,000,001 – P15,000,000
Medium
P15,000,001 – P100,000,000
By Number of Employees
1-9
10-99
100-199
INTEREST ARBITRAGE
Before 2009
Regular Income Tax Rate
Less: Final Income Tax on Interest
Arbitrage
Divide: Regular Income Tax Rate
Arbitrage Interest Rate
Round Off (according to Tax Code)
Average 2020
35%
20%
15%
35%
42.86%
42%
01/01/2009 07/01/2020
Regular
30%
25%
20%
20%
10%
5%
30%
25%
33.33%
20%
33%
26.67%
07/01/2020
MSME
20%
20%
0%
20%
0%
16.67%
CORORATE INCOME TAX – OTHER AMENDMENTS (Passive Income)
Type of Corporation
Domestic Corporation
Nature of Income
Intercorporate dividends
(Domestic and foreign sources)
Rate
Effectivity
From another domestic
corporation – EXEMPT
Note. In the old provision, whatever
dividend received by a domestic
corporation from a foreign source
has to be included in its taxable From NRFC – regular income
income subject to the regular tax 25% or 20% as the case
may be
corporate income tax.
However, under CREATE, there is a
provision that that foreign source
dividend may be exempted
provided certain conditions are
met.
For
foreign
source
dividends, these will be
exempt from income tax
upon the effectivity of the
CREATE,
subject
to
conditions.
Resident
Foreign
Corporation
Note.
TRAIN
–
individual tas domestic
lang ang 15%, naiwan
si RFC and NRFC
Interest income from a depositary 15% (old is 7.5%)
bank under the expanded foreign
currency deposit system.
Capital gains from sale of shares of 15% (old is 5-10%)
stock not traded in the stock
exchange
Regional
Operating
15% (old is 7.5%)
Headquarters (ROHQs)
Non-resident foreign Capital gains from sale of shares of 15%
corporation
stock not traded in the stock
exchange
Upon the effectivity of the
CREATE Act 2020
Upon the effectivity of the
CREATE Act 2020
Upon the effectivity of the
CREATE Act 2020
Upon the effectivity of the
CREATE Act 2020
Conditions for Exemption of Foreign Source Dividends
A. As to its timing of appropriation. The dividends actually received or remitted into the Philippines are reinvested in the
business operations of the domestic corporation within the next taxable year from the time the foreign-source dividends
were received or remitted.
- What was received are to be disposed or reinvested within the next taxable year
- If not, it will not be subject to exemption and will be subject to the regular corporate income tax.
B. Usage of Dividends should be:
a. Working capital
b. Capital expenditures
c. Dividend payments
d. Investment in subsidiaries
e. Infrastructure projects.
C. The domestic corporation receiving the foreign dividends:
a. Holds directly 20% in value of the outstanding shares of the foreign corporation and has held the shareholdings
uninterruptedly for a minimum of 2 years at the time of dividend distribution;
b. In case the foreign corporation has been in existence for less than 2 years, the domestic corporation must have
continuously held directly 20% in value of the outstanding shares of the foreign corporation during the entire
existence of the corporation.
Any one of the conditions not complied: the foreign sourced dividends shall be considered as taxable income of the
domestic corporation in the year of actual receipt or remittance, subject to surcharges, interest and penalties, as
applicable.
VALUE-ADDED TAX (VAT) EXEMPTION
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 instead of 2023
Medical
supplies
and The sale or importation of equipment and raw materials for the production of personal
vaccines
protective equipment for COVID-19 prevention, and all drugs, vaccines and medical
devices used for the treatment of COVID-19 shall be VAT exempt
Exempt beginning 1 January 2021 until 31 December 2023
Educational material
Sale or distribution, importation, printing, or publication of any educational material
covered by the UNESCO agreement including digital and electronic format
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 DUTY AND INCENTIVES
For critical exporters and An income tax holiday (ITH) of four to seven years, depending on location and industry
domestic
market priorities, followed by a special corporate income tax rate of 5% based on gross income
enterprises
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.
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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 10% deduction on training expenses (DepEd, TESDA, ChEd)
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.
For registered enterprises in An additional two years of income tax holiday shall be granted to projects or activities of
areas recovering from registered enterprises located in areas recovering from armed conflict or major disasters.
armed conflict or major
disasters
For relocation outside the An additional three years of income tax holiday shall be granted to registered projects or
National Capital Region activities which shall completely relocate from the NCR in the duration of their incentives.
(NCR)
TAX-FREE EXCHANGES
Reorganizations
Specific types of reorganizations involving corporations will be covered by tax-free
(Expanded)
exchanges, including the following:
1) 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
2) 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
3) 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
4) 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
5) 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.
IMPROPERLY ACCUMULATED EARNINGS TAX (IAET)
Definition:
- 10%
- Imposed on the improperly accumulated taxable income of a corporation formed for the purpose of avoiding the
income tax on its shareholders, by permitting the earnings and profits of the corporation to accumulate, instead of
distributing them to the shareholders as dividends.
- Its imposition aimed to deter or penalize corporations for the improper accumulation of earnings to avoid the payment
of dividends tax that would have been due had the earnings been distributed as dividends to the shareholders.
Exemptions:
1) Justifiable retention of profits. Such as the use of undistributed profits for the reasonable needs of the business, such
purpose would not generally make the retention improper and subject to the penalty tax.
a. Reasonable needs of the business - accumulation of earnings up to 100% of the paid-up capital of a corporation
(BIR)
b. Justified purpose:
 definite corporate expansion,
 compliance with any loan covenants,
 earnings reserve subject to the legal prohibition against its distribution
2) Publicly-held corporations. Refer to those, where the top 20 ultimate individual shareholders hold less than 50% of the
value of the outstanding capital stock or the voting power of the corporation pursuant to Revenue Regulations (RR) No.
2-2001.
a. Not automatically exempt. Individual ownership of a corporation shall be considered in determining whether a
corporation is publicly-held for IAET purposes.
b. Tracing stock ownership - BIR regulations allowed tracing the ownership up to the level of the individual owners.
Hence, the stock owned directly or indirectly by or for a corporation, partnership, estate, or trust shall be
considered as being proportionately owned by its shareholders, partners, or beneficiaries. An individual shall
also be considered as owning the stock owned, directly or indirectly, by or for his family, or by his partner in a
partnership.
c. Thus, in one ruling, the BIR did not consider a corporate taxpayer as publicly-held even though more than 50%
of its shareholdings are indirectly owned by a publicly-listed company. The ownership of the taxpayer was
traced past the corporate shareholders and up to the level of the individual shareholders. The BIR observed
that although publicly listed, the ultimate parent of the taxpayer was effectively controlled by only a few
individuals (i.e., less than 10), and thus cannot be considered publicly held for purposes of exemption from
IAET.
d. Domestic corporations and subsidiaries of foreign companies, which are held by publicly-listed corporations,
face these challenges or questions around their excess accumulated earnings during BIR tax audits or
investigations. Oftentimes, they end up being assessed deficiency 10% IAET for allegedly having excess
undistributed earnings and/or for failure to provide adequate supporting documents to prove that they are
publicly-held companies, as the case may be.
IAET REPEAL UNDER CREATE:
- Corporations as they will no longer have to deal with this issue when they are audited by the BIR in the future.
- Moreover, domestic corporations, in general, will not have to think about declaring dividends every so often, which in
some cases would be remitted out to an offshore parent company, thereby taking money out of the Philippines.
- With the funds still in the country, these could be re-invested and used by these domestic companies to grow their
business in the Philippines and benefit the economy, which is sorely needed especially after the pandemic.
- BIR provides that the repeal of IAET applies to the entire taxable year for all fiscal years/taxable years ending after the
effectivity of CREATE.
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NOTE. The repeal under the Act did not specifically provide any retroactivity clause. The general rule on effectivity
date applies, which is officially April 11, or 15 days after CREATE’s publication on 27 March 2021. Technically
speaking, any excess retained earnings in 2020 and prior years may still be at risk of being questioned or assessed
for IAET if the accumulation of earnings is found to be beyond the reasonable needs of the business.
VETOED PROVISIONS IN CREATE ACT: The President vetoed several provisions in the new tax law, including:
1) Increasing the VAT-exempt threshold on sales of real property and the adjustment in the threshold amount every 3
years
2) 90-day period for processing of general tax refunds, requirements in case of denial by the Commissioner, and remedy
of taxpayer in case of denial
3) Definition of investment capital
4) Domestic market enterprises’ entitlement to special corporate income tax (SCIT) rate
5) Specific share of the national government and local government units in the gross income earned using the SCIT rate
6) Availment of a new set of incentives and its corresponding period of availment for qualified expansions or entirely new
project or activity
7) Allowing export enterprises registered prior to CREATE Act to avail of further extension of new incentives for the same
activity
8) Exercise of power by the Fiscal Incentives Review Board (FIRB) in granting incentives to registered projects or activities
with a total investment capital of more than ₱1B
9) Specific industries mentioned under activity tiers
10) Provision granting the President the power to exempt any investment promotion agency (IPA) from coverage of Title
XIII of CREATE Act
11) Automatic approval of applications for incentives in case of inaction