The Corporate Recovery and Tax Incentives for Enterprises (CREATE) Act is part of the Comprehensive Tax Reform Program that aims to aid small and micro businesses to ease their tax obligations.
These are its salient features:
I. Lower Corporate Income Tax Rate
For domestic corporations, the new income tax rate is 25%, effective July 1, 2020.
For corporations with net taxable income not exceeding Five Million Pesos(P5,000,000) and with total assets not exceeding One Hundred Million Pesos(excluding the value of the land where the business is on), they shall be taxed at the lower rate of 20%, effective July 1, 2020.
For proprietary educational institutions and hospitals, the new income tax rate is 1%, effective July 1, 2020 to June 30, 2023.
II. Lower Minimum Corporate Income Tax Rate
From the higher rate of two percent (2%), the minimum corporate income tax rate of one percent (1%) is now imposed, effective July 1, 2020 until June 30, 2023.
III. Regional Operating Headquarters to be Subject to Regular Corporate Income Tax
Currently, regional operating headquarters pay an income tax of ten percent (10%).According to CREATE, effective January 1, 2022, regional operating headquarters shall be subject to the regular corporate income tax of 25%.
IV. Higher Interest Income Tax for Resident Foreign Corporations
From seven and one-half percent (7.5%), CREATE now provides that interest income derived by a resident foreign corporation from a depository bank under the expanded foreign currency deposit system shall be subject to a final income tax at the rate of fifteen percent (15%) of such interest income, effective on April 11, 2021 or the effectivity of the CREATE law.
V. Final Tax on Capital Gains from Sale of Shares of Stock Fixed
Whereas the tax code provides for tax rates of either five percent (5%) or ten percent (10%) corresponding thresholds of amount of net capital gains from sale of shares of stock nontraded in the stock exchange, CREATE fixes the final tax at the rate of fifteen percent (15%), effective on April 11, 2021 or the effectivity of the CREATE law.
VI. No More Improperly Accumulated Earnings Tax
CREATE removed the imposition of improperly accumulated earnings tax on corporations.
VII. Labor Training in Public Institutions as Deduction from Gross Income
CREATE provides for an additional deduction from taxable income of one-half (1/2) of the value of labor training expenses incurred for skills development of enterprise-based trainees enrolled in public education institutions duly covered by an apprenticeship agreement under the Labor Code. Such deduction shall not exceed ten percent (10%) of direct labor wage.
VIII. No More Requirement of a Prior BIR Ruling for Tax-Free Exchanges
According to CREATE, a prior BIR confirmation or tax ruling shall not be required for purposes of availing the tax exemption in case of tax-free exchange of property in pursuance of a plan of reorganization under the tax code.
IX. Increased VAT Exemption Threshold for Residential Lots and Dwelling
The VAT exempt sale transactions now cover residential lots valued at Two Million Five Hundred Thousand Pesos (P2,500,000.00) and below, and house and lot and other residential dwellings valued at Four million Two Hundred Thousand Pesos(P4,200,000.00) and below.
X. More VAT Exempt Transactions
CREATE included the sale of or importation of the following items shall be exempt from VAT:
a. Educational reading materials covered by the UNESCO Agreement on the Importation of Educational, Scientific and Cultural Materials;
b. Prescription drugs and medicines for cancer, mental illness, tuberculosis, and kidney diseases;
c. Materials needed for the production of PPEs for COVID-19 prevention; and
d. Drugs, vaccines, and devices for the treatment of COVID-19.
XI. Lower Rate of Percentage Tax
CREATE reduced the rate of percentage tax from three percent (3%) to one percent (1%).
XII. Tax and Duty Incentives to Registered Enterprises upon Certain Conditions
a. Income Tax Holiday (ITH) for a period of four to seven years;
b. Special Corporate Income Tax (SCIT) Rate of five percent (5%);
c. Enhanced Deductions (ED);
d. Duty exemption on importation of capital equipment, raw materials, spare parts;
e. Value-Added Tax (VAT) Exemption on importation and VAT zero-rating on local purchases.
With the passing of CREATE into law on March 26, 2021, more investments, employment, productivity, and overall economic growth should be expected. It is also hoped that with the passing of this law, the Philippines will be developed into aglobally competitive economy that welcomes investors from various industries inside and outside of the country.
This article was written by Atty. Jadea Ezra M.Capucion for King and Graido Law Office. She graduated with a Juris Doctor degree from the Ateneo De Manila University School of Law in 2016, and has been a practicing attorney since being admitted to the Philippine Bar in 2017.