RA 11534 or the CREATE Act
With the signing into law of Republic Act No. 11534 or the “Corporate Recovery and Tax Incentives for Enterprises (CREATE) Act” on 26 March 2021, and the subsequent issuance of its Implementing Rules and Regulations in 22 June 2021, jointly issued by the Department and Trade and Industry and Department of Finance, there are great expectations to this new legislation, which is dubbed as the largest fiscal stimulus for companies and covered businesses in recent Philippine history. The CREATE Act became effective on 11 April 2021.
Issued at the time of the pandemic, the CREATE Act is looked upon by many businesses as a life saver. Indeed, one of the stated objectives of the law is to provide support to businesses in their recovery from unforeseen events such as an outbreak of communicable disease or a global pandemic, and strengthen the nation’s capability for similar circumstances in the future.
New Tax Rates under CREATE Act
Prior to the enactment of the CREATE Act, the Philippines had the highest corporate income tax rate amongst its Southeast Asian neighbors, at thirty percent (30%), followed by Myanmar and Indonesia at twenty-five percent (25%) and with Singapore at the bottom at seventeen percent (17%). Believed to be a game changer, CREATE further aims to improve equity and efficiency of the corporate tax system by lowering the rate, widening the tax base and reducing tax distortions and leakages. The CREATE Act addresses this situation by lowering not only corporate income tax but the rates of other tax types, and broadening the tax base.
The following table outlines the new tax rates legislated under the CREATE Act:
|Type of business||Past||CREATE||Effectivity|
|Corporations with a net taxable income not exceeding Five Million Pesos (P5,000,000.00) and with total assets not exceeding One Hundred Million Pesos (P100,000,000.00) excluding land on which the particular business entity’s office, plant, and equipment are situated during the taxable year.||30%||20%||Beginning 01 July 2020|
|Corporations with a net taxable income greater than Five Million Pesos (P5,000,000.00) or with total assets not greater than One Hundred Million Pesos (P100,000,000.00) excluding land on which the particular business entity’s office, plant, and equipment are situated during the taxable year.||30%||25%||Beginning 01 July 2020|
|Foreign corporations organized or existing under the laws of any foreign country, engaged in trade or business in the Philippines||30%||25%||Beginning 01 July 2021|
|Regional operating headquarters as defined under Section 22(EE)||10%||Subject to corporate income tax beginning 01 January 2022||Until 01 January 2022, 10%|
|Proprietary educational institutions and hospitals which are non-profit||10%||1%||Beginning July 1, 2020, and until June 30, 2023|
Better Tax Rates under CREATE Act
The CREATE Act also legislated significantly lowered rates for corporate income tax for specific tax types, made certain taxable activities exempt, and even repealed certain taxes:
|Type of Tax||Past||CREATE||Effectivity|
|Dividends received by Domestic Corporations||15%||Exempt|
|Foreign-sourced Dividends received by domestic corporations||15%||Exempt, provided the funds from such dividends are reinvested in the business operations within the next taxable years from the time of receipt, and shall be limited to funding the working capital requirements, capital expenditures, dividend payments, investment in domestic subsidiaries, and infrastructure projects|
|Minimum corporate income tax||2%||1%||BeginningJuly 1, 2020, until June 30, 2023|
|Capital Gains on the sale of shares of stock not traded in the stock exchange||5% and 10%||15%|
|Improperly accumulated earnings tax (IAET)||10%||Repealed|
|Percentage tax for non-VAT taxpayers||3%||1%||BeginningJuly 1, 2020, until June 30, 2023|
|Value added tax on sale or importation of prescription drugs and medicines for high cholesterol, hypertension, diabetes, cancer, mental illness, tuberculosis, and kidney disease||12%||Exempt||Beginning 01 January 2021 until 31 December 2023|
|Value added tax on the sale or importation of capital equipment, spare parts, raw materials, necessary for the production of personal protective equipment, surgical masks, caps, scrub suits, goggles and face shield, dedicated shoes and shoe covers, for COVID-19 prevention||12%||Exempt||Beginning 01 January 2021 until 31 December 2023|
|Value added tax on sale or importation of drugs, vaccines, medical devices specifically prescribed and directly used for the treatment of COVIV-19||12%||Exempt||Beginning 01 January 2021 until 31 December 2023|
|Value added tax on sale, importation, printing or publication of books, and any newspaper, magazine, journal or any such educational reading material covered by the UNESCO Agreement on the Importation of Educational, Scientific and Cultural materials, including the digital or electronic format||12%||Exempt||Beginning 01 January 2021|
|Value added tax on sale or real properties considered as ordinary capital assets, or those not primarily held for sale to customers or held for lease in the ordinary court of trade or business, for residential lots not exceeding Two Million Five Hundred Thousand Pesos (P2,500,000.00) and for residential dwelling not exceeding Four Million Two Hundred Thousand Pesos (P4,200,000.00), subject to adjustment beginning 01 January 2024 and every three (3) years thereafter||Beginning 01 January 2021|
New Fiscal Incentives under CREATE Act
One of the principal thrusts of the CREATE Act is to develop a more responsive and globally competitive tax incentive regime that his performance-based, targeted, time-bound and transparent. In line with this thrust, the CREATE Act instituted numerous reforms in the previous tax incentive schemes offered to investors. Among these changes are, from the previous four (4) to six (6) years income tax holidays given to export and domestic market enterprises, this is now tiered from four (4) to seven (7) years, subject to industry classification. Qualified industries under the CREATE Act are allowed various options in the form of income tax holidays and five percent (5%) special corporate income tax on gross income earned. Previously, there was no limitation on the availment of the 5% special corporate income tax for export industries. Under the CREATE Act, the 5% special corporate income tax may be availed only for ten (10) years.
The CREATE Act also introduces Enhanced Deductions, which was not available in the previous regime. For export, domestic market and critical domestic market enterprises, the following may be allowed as deductions:
- An additional ten percent (10%) depreciation allowance for buildings and twenty percent (20%) for machineries and equipment;
- One hundred percent (100%) additional deduction on research and development expense
- Fifty percent (50%) additional deduction on the labor expense
- One hundred percent (100%) additional deduction on training expense
- Fifty percent (50%) additional deduction on domestic input expense
- Fifty percent (50%) additional deduction on power expense
- Deduction for reinvestment allowance to a maximum of fifty percent (50%) from its taxable income within a period of five (5) years from the time of reinvestment
- Enhanced Net Operating Loss Carry-Over within the next five (5) consecutive taxable years immediately following the year of such loss.
Additional benefits are granted by the CREATE Act to qualified enterprises, such as duty exemption on importation of equipment, raw materials, spare parts, and Value added tax exemption on importation and VAT-zero rating on local purchases.
Under the CREATE Act, extensions of the income tax holidays for two (2) more years, and for three (3) years for expanding businesses, were options available to qualified enterprises. These options are no longer available under the CREAT Act. However, if the qualified enterprise relocates its business outside of the National Capital Region, or to areas recovering from disaster or conflict, the enterprise is eligible to an additional income tax holiday of three (3) years, and two (2) years, respectively, in addition to the initial period granted to the enterprise under the law. This additional incentive may be availed by export enterprises and domestic market enterprises – a benefit which is not found in any previous law or government policy prior to the CREATE Act.
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