Tax Guide on CREATE Law, Part 1
On March 26, 2021, President Duterte signed into law RA 11534, otherwise known as the Corporate Recovery and Tax Incentives for Enterprises (CREATE) Act. It is another landmark legislation of the Duterte administration which took effect on April 11, 2021.
The CREATE Act is the second package of the Comprehensive Tax Reform Program that reduces the corporate income tax rate from 30% to 20%. Notwithstanding its vetoed provisions, the following are its salient features:
- Corporate Income Tax rate is reduced from 30% to 25% for large corporations, and 20% for small and medium corporations with net taxable income not exceeding P5 million, and total assets not exceeding P100 below (excluding land) effective July 1, 2020;
- Minimum Corporate Income Tax (MCIT) rate is reduced from 2% to 1% effective July 1, 2020 to June 30, 2023;
- Percentage Tax is reduced from 3% to 1% effective July 1, 2020 to June 30, 2023;
- The improperly accumulated earnings tax shall no longer be imposed on corporations upon the effectivity of the CREATE onwards;
- Qualified export enterprises shall be entitled to 4-7 years Income Tax Holiday (ITH) to be followed by 10 years 5% Special Corporate Income Tax (SCIT) or enhanced deductions;
- Qualified domestic market enterprises shall be entitled to 4-7 years ITH to be followed by 5 years enhanced deductions;
- Registered enterprises are exempt from customs duty on importation of capital equipment, raw materials, spare parts, or accessories directly and exclusively used in the registered project or activity;
- VAT exemption on importation and VAT zero-rating on local purchases shall only apply to goods and services directly and exclusively used in the registered project or activity by a Registered Business Enterprise (RBE);
- For investments prior to effectivity of CREATE, RBEs granted only an ITH shall continue with the availment of the ITH for the remaining period of the ITH while RBEs granted an ITH + 5% Gross Income Tax (GIT) or currently enjoying 5% GIT shall be allowed to avail of the 5% GIT for 10 years.
The Bureau of Internal Revenue (BIR) issued several revenue regulations to fully implement the CREATE Law. For easy reference, here’s a summary list of revenue issuances dated April 8, 2021:
- RR No. 2-2021 amends certain provisions of RR No. 2-98, as amended, to implement the amendments introduced by RA No. 11534 (CREATE Act) to the NIRC of 1997, as amended, relative to the Final Tax on certain passive income;
- RR No. 3-2021 prescribes the rules and regulations to implement Section 3 of RA 11534 (CREATE Act), amending Section 20 of NIRC of 1997;
- RR No. 4-2021 implements the provisions on Value-Added Tax (VAT) and Percentage Tax under RA No. 11534 (CREATE Act), which further amended the NIRC of 1997, as amended, as implemented by RR No. 16-2005, as amended;
- RR No. 5-2021 implements 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 RA No. 11354 (CREATE Act), which further amended the NIRC of 1997
To serve as a tax guide especially for small and medium enterprises (SMEs), here are some of the most frequently asked questions on the CREATE Law:
- Will small businesses benefit from CREATE law? How about one-person corporations?
Yes. Small corporations including one-person corporations with net taxable income not exceeding P5 million and total assets not exceeding P100 million (excluding land) will be subject to only 20% corporate income tax effective July 1, 2020.
- Is the reduced percentage tax from 3% to 1% applicable even to individual taxpayers?
Yes. It’s applicable to all non-VAT registered taxpayers with annual gross sales of P3 million and below, effective July 1, 2020 to June 30, 2023.
- If you filed annual income tax return before the issuance of revenue regulations on CREATE law, can you amend to apply the reduced corporate income tax rate?
Yes. RMC 46-2021 allows amendment of filed tax returns on or before May 15, 2021 without penalty. Any excess payment due to reduced tax rate may be carried over as credit in the next period or may be filed for refund.
- Is there a reduced income tax rate of 20% applicable to foreign corporations?
No. It’s only for domestic MSME corporations. Foreign corporations subject to regular rate will use 25% similar to other domestic corporations.
- Are non-stock and non-profit proprietary educational institutions still exempt under CREATE law? How about the non-profit and proprietary educational institutions and hospitals?
Yes. Income tax exemption granted to non-stock and non-profit proprietary educational were not repealed. Non-profit and proprietary educational institutions will be subject to reduced special rate of 1% effective July 1, 2020 to June 30, 2023.
To know more about the CREATE law, you can watch BIR’s FREE webinar on its Facebook and YouTube channel. You may also join the Elite Taxpayer Circle and attend the exclusive CREATE webinar for free organized by the Asian Consulting Group (ACG). For inquiries, send email to email@example.com or call +632 76227720.