TAXATION: Before and After CREATE
2021
Before and After CREATE
R.C.Pendon
Note: Only changes pertaining to income and business taxes are enumerated here. Changes in the
administrative aspect, and Title XIII – Tax Incentives deserves its own separate material due to its lengthy
provisions. This is based on S.B. No. 1357 (3rd reading).
Income Taxation
•
Definition of
Corporation
Old Law
CREATE
Did not include OPC in the Included One Person Corporations (OPC)
definition of a corporation.
in the definition of corporations.
(Note: under TRAIN, OPC is impliedly
classified as a corporation)
•
Final Withholding Tax
on PCSO Winnings
Law makers made a mistake in not CREATE corrected the mistakes and
amending the portion relating to inconsistency of the TRAIN Law.
the income taxes of NRA-ETB.
Classification
RC
RA
NRC
NRA-ETB
NRA-NETB
•
FWT Rate
20%
20%
20%
Exempt
25%
Classification
RC
RA
NRC
NRA-ETB
NRA-NETB
FWT Rate
20%
20%
20%
20%
25%
CREATE Reduced the RCIT and
introduced a schedular tax rate to cover
MSMEs. Effective July 1, 2020.
Regular Corporate
Income Tax (RCIT) Rate
Classification
DC
RFC
NRFC
FWT Rate
30%
30%
30% FWT
Classification
DC
RFC
NRFC
•
FWT Rate
20% - 25%
25%
25% FWT
Domestic Corporation
If
net
taxable
income does not
exceed P5,000,000
AND total assets
does not exceed
P100,000,000*
In general
20%
25%
*excluding land where the entity’s office,
plant and equipment are situated.
Page 1 of 8
TAXATION: Before and After CREATE
R.C.Pendon
2021
• Proprietary Educational Subject to a special tax rate of 10%. Beginning July 1, 2020 until June 30,
2023, the tax rate herein imposed shall be
Institutions and
one percent (1%).
Non-profit Hospitals
Date
Before July 1, 2020
July 1, 2020 – June 30, 2023
After June 30, 2023
•
Intercorporate
Dividends
Dividends received by a domestic
corporation form another
domestic corporation is exempt.
Source of
Dividend
DC
RFC/NRFC
Rate
10%
1%
10%
Dividends received by a DC is exempt
regardless of the source. But dividends
from RFC/NRFC are subject to conditions
to be exempt.
Rate
Source of
Dividend
DC
RFC/NRFC
Exempt
RCIT
Rate
Exempt
It depends*
*requisites for exemption:
1. Funds from such dividends actually
received or remitted into the
Philippines are reinvested in the
business operations of the domestic
corporation in the Philippines
2. Reinvestment should be made within
the next taxable year from the time the
foreign-sourced
dividends
were
received
3. Reinvestment is limited to funding the
working capital requirements, capital
expenditures, dividend payments,
investment in domestic subsidiaries,
and infrastructure project:
4. The DC holds directly at least twenty
percent (20%) of the outstanding
shares of the foreign corporation; and
5. has held the shareholdings for a
minimum of 2 years at the time of
dividend distribution
If the above requisites are not satisfied, the
foreign sourced dividends shall be taxable.
•
Minimum Corporate
Income Tax (MCIT)
MCIT is 2% of gross income
Beginning July 1, 2020 until June 30,
2023, the MCIT shall be one percent (1%).
Date
Before July 1, 2020
July 1, 2020 – June 30, 2023
After June 30, 2023
Rate
2%
1%
2%
.
Page 2 of 8
TAXATION: Before and After CREATE
R.C.Pendon
2021
ROHQs are subject to a special tax Beginning December 31, 2021, ROHQs are
• Regional Operating
rate of 10%.
subjected to the normal RCIT rate.
Headquarters (ROHQ)
Date
Before Dec 31, 2021
On and after Dec 21, 2021
•
Offshore Banking Units
(OBU)
•
15% optional tax rate
Rate
10%
25% RCIT
.
Granted tax exemption and special Removed exemptions and will be subject to
rate.
RCIT.
The
President,
upon
the CREATE deleted this provision
recommendation of the Secretary
of
Finance,
may
allow
corporations the option to be
taxed at 15% of gross income, after
the following conditions have been
satisfied:
i. A tax effort ratio of 20% of
Gross National Product (GNP);
ii. A ratio of 40% of income tax
collection to total tax revenues;
iii. A VAT tax effort of 4% of GNP;
and
iv. 0.9% ratio of the Consolidated
Public
Sector
Financial
Position (CPSFP) to GNP.
•
Interest Income from
FCDU received by an
RFC
Corporations
that
received CREATE fixed the inconsistency of the tax
interest income from an FCDU is rate:
subject to the following rates:
Classification
DC
RFC
NRFC
•
CGT rate from sale of
unlisted Stock
FWT Rate
15%
7.5%
exempt
Classification
DC
RFC
NRFC
FWT Rate
15%
15%
exempt
.
Corporations that realized capital CREATE fixed the inconsistency of the tax
gains from sale of unlisted stock rate:
are subject to the following rates:
Classification
DC
RFC*
NRFC*
FWT Rate
15%
5%-10%
5%-10%
Classification
DC
RFC*
NRFC*
FWT Rate
15%
15%
15%
*where the first P100,000 of the
net gain is subject to 5%; and the
amount in excess of P100,000 is
subject to 10%.
Page 3 of 8
TAXATION: Before and After CREATE
2021
• Additional deduction on No provision
labor training
R.C.Pendon
An additional deduction from taxable
income of 1/2 of the value of labor training
The
following
expenses
incurred.
requisites should be satisfied to be eligible
to the additional deduction:
1. Training is for skills development of
enterprise-based trainees
2. Enrolled in public senior high schools,
public higher education institutions, or
public technical and vocational
institutions
3. duly covered by an apprenticeship
agreement
4. For enterprise-based training of
students from public educational
institutions, the enterprise shall secure
proper certification from DepEd,
TESDA, or CHEd
5. Deduction shall not exceed 10% of
direct labor wage.
•
Reduction in deduction
interest expense
(arbitrage rule)
•
Improperly Accumulated A 10% IEAT is imposed on Section 29 of the NIRC, that imposes IAET,
corporations with improperly is repealed. Hence, no more IAET.
Earnings Tax (IAET)
accumulated taxable income.
•
Income Tax exemption
on merger or
consolidation
Definition of control
•
The amount of deductible interest The amount of deductible interest expense
expense shall be reduced by 33% shall be reduced by 20% of the interest
of the interest income subjected to income subjected to final tax.
final tax.
To be discussed in a separate handout due to its lengthy provision.
The term “control”, shall mean
ownership of stocks in a
corporation possessing at least
fifty-one percent (51%) of the total
voting power of all classes of
stocks entitled to vote.
The term “control” shall mean ownership
of stocks in a corporation after the transfer
of property possessing at least fifty-one
percent (51%) of the total voting power of
all classes of stocks entitled to vote.
Provided, that the collective and not the
individual ownership of all classes of stocks
entitled to vote of the transferor or
transferors shall be used in determining
the presence of control.
Page 4 of 8
TAXATION: Before and After CREATE
2021
R.C.Pendon
VALUE ADDED TAX
•
VAT Exemption of sale
of residential property
Old Law
CREATE
Sale of the following residential CREATE increased the threshold.
properties is exempt from VAT:
Particulars
Residential
Lot
Residential
house and lot
•
VAT exemption on sale
of
Amount
P1,500,000
Particulars
Residential
Lot
Residential
house and lot
P2,500,000
Amount
P2,500,000
P4,200,000
.
VAT exemption applies to the sale, CREATE expanded the coverage of the
importation,
printing
or VAT exemption, it now covers:
a. Books
publication of:
a. Books
b. Newspaper
b. Newspaper
c. Magazine
c. Magazine review or bulletin *
d. Journal,
e. Review bulletin, or
f. Any such educational reading
material covered by the UNESCO
agreement on the importation of
educational, scientific, and cultural
materials
VAT exemption shall only apply to The above exemption includes the digital
the sale of physical copies. Digital or electronic format.
(e-books) are subjected to VAT.
appears
at
regular
*which
intervals with fixed prices for
subscription and sale and which is
not devoted principally to the
publication
of
paid
advertisements.
•
VAT exemption on
specific prescription
drugs and medicines
PROVIDED, that the materials provided
are not devoted principally to the
publication of paid advertisements.
(removed the “regular intervals with fixed
prices for subscription and sale” rule)
Prescription
drugs
for
the CREATE changed the effectivity date of the
following illnesses are VAT VAT exemption:
exempt:
• Beginning Jan 1, 2020 (no change)
• Beginning Jan 1, 2020
1. Diabetes
1. Diabetes
2. High Cholesterol
2. High Cholesterol
3. Hypertension
3. Hypertension
•
Beginning Jan 1, 2023
1. Cancer
2. Mental Illness
3. Tuberculosis
4. Kidney Diseases
•
Beginning Jan 1, 2021 (earlier)
1. Cancer
2. Mental Illness
3. Tuberculosis
4. Kidney Diseases
Page 5 of 8
TAXATION: Before and After CREATE
2021
No provision
• Expanded VAT
exemption for COVID-19
R.C.Pendon
Sale or importation of the following
beginning January 1, 2021 to December 31,
2023 are exempt from VAT:
1. Capital equipment, its spare parts
and raw materials, necessary for
the
production
of
personal
protective equipment components
such as coveralls, gown, surgical
cap, surgical mask, N-95 mask,
scrub suits, goggles and face shield,
double or surgical gloves, dedicated
shoes, and shoe covers, for COVID19 prevention;
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 COVID19 approved by the food and drug
administration (FDA) for use in
clinical trials, including raw
materials directly necessary for the
production of such drugs.
On the Bi-cam version, VAT and duty-free
exemptions is granted for COVID-19
vaccines until 2025.
OTHER PERCENTAGE TAX
•
Sec. 116
Old Law
CREATE
Any person whose sales or receipts CREATE temporarily reduced the tax rate
does not exceed P3,000,000 for the to 1% beginning July 1, 2020 until June 30,
taxable year and who is not a VAT- 2023.
registered person shall pay a tax
Date
Rate
equivalent to three percent (3%) of his
gross quarterly sales or receipts.
Before July 1, 2020
3%
July 1, 2020 – June 30, 2023
1%
After June 30, 2023
3%
Page 6 of 8
TAXATION: Before and After CREATE
2021
R.C.Pendon
Transitional Rules
•
Corporate Income Tax - the corporate income tax shall be applied on the amount computed by
multiplying the number of months covered by the new rate within the year by the taxable income of the
corporation for the period divided by 12.
Illustration 1 (calendar year):
ABC Corp. has a net taxable income of P 30,000,000 during the calendar year 2020. How much is the
income tax due for the year?
Solution:
Months covered by 30% (Jan to June) = 6 months
Months covered by 25% (July to Dec) = 6 months
30,000,000 𝑥𝑥
Net Taxable Income
Tax Rate
Income tax Due
6 𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚ℎ𝑠𝑠
= 15,000,000
12 𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚ℎ𝑠𝑠
Jan to June
15,000,000
30%
4,500,000
July to Dec
15,000,000
25%
3,750,000
Income Tax Due for 2020 = 4,500,000 + 3,750,000 = 8,250,000
Illustration 2 (fiscal year):
ABC Corp. has a net taxable income of P 30,000,000 during the fiscal year ending March 31, 2021. How
much is the income tax due for the fiscal year?
Solution:
Months covered by 30% (April 1, 2020 to June 30, 2020) = 3 months
Months covered by 25% (July 1, 2020 to March 31, 2021) = 9 months
30,000,000 𝑥𝑥
30,000,000 𝑥𝑥
Net Taxable Income
Tax Rate
Income tax Due
3 𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚ℎ𝑠𝑠
= 7,500,000
12 𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚ℎ𝑠𝑠
9 𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚ℎ𝑠𝑠
= 22,500,000
12 𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚ℎ𝑠𝑠
April to June
7,500,000
30%
2,250,000
July to March
22,500,000
25%
5,625,000
Income Tax Due for the fiscal year = 2,250,000 + 5,625,000 = 7,875,000
Page 7 of 8
TAXATION: Before and After CREATE
2021
•
R.C.Pendon
Interest Expense (Arbitrage rule) - the amount of interest expense paid or incurred shall be reduced
by specified rate depending on the year when the interest income was earned. (RR. No. 13-00)
Illustration:
ABC Corp. has interest expense of P40,000. During the year 2020, interest income is realized based on
the following months
•
•
•
•
Month
January 2020
June 2020
August 2020
December 2020
Interest Income
P 60,000
15,000
20,000
17,500
How much is the deductible interest expense?
Solution:
Month
January 2020
June 2020
August 2020
December 2020
Total
Interest Income
P 60,000
15,000
20,000
17,500
Rate
33%
33%
20%
20%
Arbitrage
19,800
4,950
4,000
3,500
32,250
Deductible Interest Expense = 40,000 – 32,250 = 7,750
Page 8 of 8