Corporate Recovery and Tax Benefits for Businesses (CREATE) Act Enacted into Law

What the Law Says

The CREATE Act, formally known as the Corporate Recovery and Tax Incentives for Enterprises Act, brings about significant amendments to Republic Act No. 8424, or the National Internal Revenue Code of 1997. This legislative shift aims to foster economic recovery, particularly in light of the disruptions caused by the COVID-19 pandemic. Let’s delve into the salient provisions of the Act, breaking them down into understandable segments.

Income Tax Changes

1. Reduced Corporate Income Tax: One of the Act’s hallmark features is the reduction of the corporate income tax rate from 30% to 25%, effective July 1, 2020. For corporations with a net income not exceeding PHP 5 million and total assets that do not exceed PHP 100 million (excluding land), a lower tax rate of 20% applies. Additionally, nonresident foreign corporations will also see a 25% tax rate commencing January 1, 2021, making it more attractive for foreign investments.
2. Proprietary Educational Institutions and Hospitals: These entities are given a notable tax break, with the applicable income tax rate slashed to 1% from 10%. This reduction is effective from July 1, 2020, until June 30, 2023, underscoring the government’s commitment to support educational and healthcare institutions during challenging times.
3. Minimum Corporate Income Tax (MCIT): The MCIT sees a decrease from 2% to 1%, beginning July 1, 2020, until June 30, 2023. This adjustment aims to alleviate financial burdens on companies operating in a fluctuating economic climate.
4. Regional Operating Headquarters (ROHQ): From January 1, 2022, ROHQs will be liable for regular corporate income tax, shifting how foreign companies manage their operations in the Philippines.
5. Capital Gains Tax (CGT): The CGT for the sale of shares of stocks not traded on the exchange is set at 15% for both resident and nonresident foreign corporations, facilitating smoother transactions within the stock market.

Value-Added Tax (VAT) Adjustments

6. VAT Exemption on Medicines: Starting January 1, 2021, drugs and medicines for specific illnesses—including cancer, mental health conditions, tuberculosis, and kidney diseases—will be exempt from VAT. This measure aims to make essential healthcare services more accessible to the public.
7. VAT Exemption of Medical Supplies and Vaccines: Equipment and raw materials for producing personal protective equipment (PPE), along with all drugs and vaccines for COVID-19 treatment, will also enjoy VAT exemptions from January 1, 2021, until December 31, 2023, reinforcing the country’s focus on pandemic response.
8. Tax on VAT-Exempt Persons: For VAT-exempt taxpayers with gross annual sales not exceeding PHP 3 million, a reduced rate of 1% (down from 3%) on gross quarterly sales or receipts will apply. This provision is effective from July 1, 2020, until June 23, 2023, providing relief to small businesses.

Tax and Duty Incentives

9. Incentives for Critical Exporters and Domestic Market Enterprises: Export enterprises are granted an income tax holiday (ITH) lasting from four to seven years, depending on location and industry, followed by a reduced corporate income tax of 5%. Additionally, these enterprises will benefit from duty and VAT exemptions on imports, and zero-rated VAT on local purchases. Such incentives are aimed at boosting exports and revitalizing the economy.

Moreover, enhanced deductions available for export enterprises and domestic market enterprises include:

• 10% additional deduction for buildings and 20% for machinery and equipment depreciation.
• 50% additional deduction on labor costs.
• 100% additional deduction for research and development expenses.
• 100% additional deduction for training expenses.
• 50% additional deduction on domestic inputs and power expenses.
• Up to 50% deduction for reinvestment allowances for manufacturing enterprises.
• Enhanced net operating loss carry-over (NOLCO) allowing losses from the first three years of operation to be carried over for deduction within the next five taxable years.

10. Additional Incentives for Registered Enterprises in Recovery Areas: An extra two years of income tax holiday is available for enterprises in regions recovering from armed conflict or major disasters, promoting economic recovery in these vulnerable areas.
11. Relocation Incentives from NCR: Enterprises completely relocating outside the National Capital Region (NCR) are entitled to an additional three years of income tax holiday, incentivizing decentralization and development in other regions.

Tax-Free Exchanges and Reorganizations

12. Tax-Free Exchanges for Reorganizations: The CREATE Act simplifies the process for specific corporate reorganizations to qualify for tax-free exchanges. This includes mergers, acquisitions, recapitalizations, and reincorporations that meet certain criteria without requiring a BIR confirmatory ruling. This provision streamlines corporate restructuring activities, facilitating growth and adaptation.

Improperly Accumulated Earnings Tax (IAET)

• IAET Repeal: The previously imposed IAET at a rate of 10% on improperly accumulated taxable income has been repealed, which might incentivize companies to distribute profits rather than retain them unnecessarily.

Actions to Consider

Taxpayers are encouraged to familiarize themselves with how the CREATE Act’s provisions may impact their operations and growth strategies. Understanding these changes could play a crucial role in navigating the post-pandemic landscape. Regulators are expected to provide further guidelines to facilitate the implementation of the CREATE Act, and organizations like Quisumbing Torres are poised to offer legal assistance as businesses adapt to these new regulations.