Republic Act No. 11534 or CREATE LAW is now in effect. Here are some key points for corporations and other taxpayers
CREATE Law lowers corporate income tax from 30% to 20% for micro, small, and medium enterprises (MSMEs) and to 25% for other corporate taxpayers. It also rationalizes incentives given to investors.
Here’s what’s noteworthy under the CREATE LAW
1. Lower Corporate Income Tax
Effective July 1, 2020, the corporate income tax shall be 25% of the taxable income of domestic corporations.
However, for corporations with net taxable income not exceeding five million pesos (P5,000,000.00) and whose total assets does not exceed one hundred million pesos (P100,000,000.00) excluding the land on which the office, plant, and equipment are situated, the rate shall be 20% of the taxable income.
The 25% rate applies to a foreign corporation engaged in trade or business in the Philippines.
2. Lower tax rate for proprietary educational institutions and non-profit hospitals
Proprietary educational institutions and hospitals, which are nonprofit, shall have a reduced tax rate of 1% on their taxable income from July 1, 2020 until June 30, 2023. A 10% tax rate shall apply after said period.
3. Disposition of Intercorporate Dividends
Dividends received by a domestic corporation shall no longer be subject to income tax. It is no longer required that such dividend must come from another domestic corporation to be exempt from income tax.
An additional requirement was also imposed foreign-sourced dividends on To be exempt from tax. The funds from such dividends actually received or remitted to the Philippines must now be reinvested in the business operations of the domestic corporation within the next taxable year from the time such dividends were received. This reinvestment must be limited to funding the working capital requirements, capital expenditures, dividend payments, investment in domestic subsidiaries and infrastructure project.
It also imposed the condition that the domestic corporation holds directly at least 20% of outstanding shares of the foreign corporation and has held the shareholdings for a minimum of 2 years at the time of dividend distribution.
4. Reduced minimum corporate income tax (MCIT)
The MCIT has been reduced to 1% of the gross income effective July 1, 2020 until June 30, 2023. The tax rate of 2% shall begin to operate after said period.
5. Tax on Regional Operating headquarters
Tax of regional operating headquarters shall be subject to regular corporate income tax starting January 1, 2022.
6. Interest income by a resident foreign corporation
Interest income derived by a resident foreign corporation from a depositary bank under the expanded foreign currency deposit system are subject to a final tax of 15%.
7. Capital gains tax on sale of shares not traded in stock exchange
Capital gains tax on sale of shares of stocks in a domestic corporation not traded in stock exchange shall be at 15% of the net capital gains. The phrase “provisions of Section 39(B) notwithstanding” was removed.
8. Tax on nonresident foreign corporations
Effective January 1, 2021, nonresident corporations shall pay a tax rate of 25% of the gross income from all sources within the Philippines.
9. Imposition of Improperly Accumulated Earnings Tax has been repealed.
10. Deduction for training-based expenses
An additional deduction category was added in ordinary and necessary trade, business or professional expenses, which may lower the taxable income for taxpayers. It is now possible to claim expense deduction from taxable income of one-half (1/2) of the value of labor training expenses for skills development of enterprise-based trainee enrolled in public senior high schools, public higher education institutions, or public technical and vocational institutions and covered by apprenticeship agreement under the Labor Code.
11. Deductible interest expense
A taxpayer’s allowable deduction for interest expense was lowered from 33% to 20% of the interest income subjected to tax. This will make the interest income tax higher.
12. Tax-free exchanges
No gain or loss shall be recognized on a corporation or on its stock or securities if such corporation is a party to a reorganization and exchanges property in pursuance of a plan of reorganization solely for stock or securities in another corporation that is a party to the reorganization.
CREATE Law has expanded what constitutes reorganization.
The law also expressly declared that such tax exemptions do not require a BIR confirmation or tax ruling.
13. Additional VAT-exempt transactions on drugs and medicines
Sale or importation of drugs and medicines approved by the DOH for diabetes, high cholesterol, hypertension, cancer, mental illness, tuberculosis, and kidney diseases are VAT-exempt starting January 1, 2021.
14. VAT-Exemption for COVID-19 medicines and vaccines
From January 1, 2021 until December 31, 2023, sale or importation of all drugs, vaccines and medical devices prescribed and used for treatment of COVID-19 are VAT-exempt.
The exemption also includes capital equipment, spare parts, and raw materials for production of personal protective equipment for COVID-19 prevention.
15. Percentage tax for VAT-exempt persons
Any VAT-exempt person whose gross annual sales or receipts do not exceed three million pesos (P3,000,000.00) shall pay a percentage tax of 3% of his gross quarterly sales or receipts.
This rate shall be at 1% from July 1, 2020 until June 30, 2023.
