Reduction of Corporate Income Taxes
Republic Act No. 11534, otherwise known as the “Corporate Recovery and Tax Incentives for Enterprises” (CREATE) Act is the second package of the Comprehensive Tax Reform Program that reduces corporate Income tax rates. The CREATE Act also provides other tax relief measures that will help businesses, particularly those organized as corporations (including One Person Corporations) recover from the effects of the pandemic as well as measures that will rationalize the grant of fiscal incentives to targeted investors.
The CREATE law reduces the Regular Corporate Income Tax (RCIT) rates effective July 1, 2020 as follows:
|Domestic corporations with net taxable income not exceeding PhP 5 Million and with total assets not exceeding PhP 100 Million
|From 30% to 20%
|All other domestic corporations and resident foreign corporations
|From 30% to 25%
Effective January 1, 2021, the income tax rate for non-resident foreign corporations is reduced from 30% to 25%
Minimum Corporate Income Tax (MCIT) rate is also reduced from 2% to 1% of gross income (revenue less cost of sales) effective July 1, 2020 to June 30, 2023. Note that the MCIT is imposed if a corporation has negative taxable income, or the MCIT is higher than 30% Regular Corporate Income Tax (RCIT). The MCIT applies to the corporation on its fourth year of operation after the year of its BIR registration. The excess of the MCIT over RCIT could be carried over to three (3) succeeding taxable years until the corporation becomes liable to pay RCIT.
Repeal of Improperly Accumulated Earnings Tax
Improperly accumulated earnings (IAE) are the profits of a corporation that are permitted to accumulate instead of being distributed by a corporation to its shareholders for the purpose of avoiding the income tax with respect to its shareholders or the shareholders of another corporation. Previously, a tax of 10% is imposed on IAE. This has been repealed in the CREATE Act.
Rationalization of Fiscal Incentives
The CREATE Act provides measures that rationalize the grant of fiscal incentives to targeted investors given that for decades, the Philippines has been too generous in granting tax incentives to a few investors, in perpetuity, and without a regular and in-depth review of the costs and benefits of doing so.
Some of the key incentives in the CREATE Act include:
- Qualified export enterprises shall be entitled to 4 to 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 to 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)
Sunset Provision for Existing Registered Business Enterprises
One of the items vetoed by the President is the removal of the extension of availment of tax incentives by existing RBEs because the “extension of incentives for existing projects is unfair to ordinary taxpayers / unincentivized enterprises and further, only new activities and projects deserve fresh incentives.”
So, for investments prior to effectivity of CREATE, they may continue to avail of the incentives granted to them, as follows:
|RBEs granted only an ITH
|Continue with the availment of the ITH for the remaining period of the ITH
|RBEs granted an ITH + 5% Gross Income Tax (GIT) or currently enjoying 5% GIT
|Allowed to avail of the 5% GIT for 10 years
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