Bicameral Conference Committee Report on the Proposed Corporate Recovery and Tax Incentives for Enterprises Act (CREATE)
This Tax Alert is issued to inform all concerned on the proposed amendments to the National Internal Revenue Code of 1997, as amended, under the proposed “Corporate Recovery and Tax Incentives for Enterprises Act” or CREATE Bill, as approved by the Bicameral Conference Committee of the House of Representatives and the Senate.
Below are the highlights and relevant provisions of the CREATE Bill:
A. Corporate Income Tax (CIT)
1. Starting July 01, 2020, CIT rate for corporations will be reduced as follows:
ii. Reduced CIT rate of 20% shall be applicable to domestic corporations with net taxable income not exceeding P5,000,000 and with total assets not exceeding P100 Million (excluding land on which the business entity’s office, plant and equipment are situated)
ii. Reduced CIT rate of 25% shall be applicable to all other domestic and resident foreign corporations.
2. Effective January 1, 2021, nonresident foreign corporations shall be subject to 25% income tax based on gross income.
3. For the period beginning July 01, 2020 until June 30, 2023, minimum corporate income tax rate shall be 1%, instead of 2%.
4. Improperly accumulated earnings tax is repealed.
5. The option to be taxed at 15% of gross income if allowed by the President subject to certain conditions is repealed.
B. Preferential tax rates for certain corporations
1. For the period beginning July 01, 2020 until June 30, 2023, non-profit proprietary educational institutions and hospitals shall be taxed at 1%, instead of 10%.
2. Home Development Mutual Fund (HDMF) shall be exempt from income tax.
3. Preferential tax rates/exemption for offshore banking units is repealed.
4. Starting January 01, 2022, regional operating headquarters (ROHQ) will be subject to regular CIT.
C. Final tax rates in certain passive income
1. Aside from lotto winnings, winnings from PCSO games amounting to P10,000 or less received by a nonresident alien individual shall be exempt from income tax.
2. All dividends received by a domestic corporation shall be exempt from income tax. However, exemption of foreign-sourced dividends shall be subject to the following conditions:
- The domestic corporation holds directly at least 20% of the outstanding shares of the foreign corporation for a minimum of 2 years at the time of dividends distribution;
- The dividends are actually received or remitted into the Philippines;
- The dividends are reinvested in the business operations of the domestic corporation in the Philippines within the next taxable year from date of receipt; and
- The dividends shall be used to funding the working capital requirements, capital expenditures, dividend payments, investment in domestic subsidiaries and infrastructure project.
3. Interest income earned by a resident foreign corporation (RFC) under the expanded foreign currency deposit system shall be subject to final tax of 15% (currently 7.5%).
4. Capital gains from sale of shares of stocks not traded in the stock exchange earned by RFC and nonresident foreign corporation (NRFC) shall be subject to final tax of 15% (currently 5%/10%).
D. Deductions from gross income
1. An additional deduction equal to 50% of the value of labor training expenses incurred for skills development of enterprise-based trainees enrolled in public senior high schools, public higher education institutions, or public technical and vocational institutions duly covered by an apprenticeship agreement and for which a proper certification must be secured from DepEd, TESDA or CHED shall be allowed, provided that such deduction shall not exceed 10% of direct labor wage.
2. Due to the proposed reduction in CIT rate, interest arbitrage shall be reduced to 20% of interest income subjected to final tax, and will be further adjusted in case final tax on interest income will be adjusted in the future.
E. Tax Free Exchanges
1. The following reorganizations involving corporations will be covered by tax-free property for shares exchanges:
a. Merger or consolidation
Acquisition by a corporation of stock of another corporation in exchange for shares, if, immediately after the acquisition, the acquiring corporation has control of the acquired corporation
c. Acquisition by a corporation in exchange for shares, of substantially all of the properties of another corporation
d. Recapitalization
e. Reincorporation
2. BIR confirmation or ruling shall not be required for purposes of availing the tax exemption on tax free exchanges.
3. Clarified the definition of “control” for purposes of tax-free exchange which provides that the collective and not the individual ownership of all classes of stocks entitled to vote of the transferor or transferors shall be used in determining the presence of control.
F. Withholding tax system
1. Required the DOF to review the regulations and processes for creditable withholding taxes once every three years and amend the rules and regulations for the same if found that they adversely impact the taxpayers.
G. VAT Exempt Transactions
1. Adjustment of threshold for VAT exempt sale of residential real property:
- Residential lot – P2,500,000 and below
- House and lot and other residential dwellings – P4,200,000 and below
Effective January 1, 2024 and every three years thereafter, the above thresholds shall be adjusted to its present value using the PSA’s consumer price index.
2. Additional VAT exempt transactions:
a. Sale, importation, printing or publication of books, any newspaper, magazine, journal, or any educational reading material covered by the UNESCO agreement on the importation of educational, scientific and cultural materials, including the digital or electronic format thereof (requirement to appear at regular intervals is removed)
b. Sale or importation of the following goods from January 1, 2021 to December 31, 2023:
- capital equipment, its spare parts and raw materials, necessary to produce personal protective equipment component;
- all drugs, vaccines and medical devices specifically prescribed and directly used for the treatment of COVID-19;
- drugs, including raw materials, for the treatment of COVID-19 approved by the FDA for use in clinical trials
3. VAT exemption of sale or importation of prescription drugs and medicines for cancer, mental illness, tuberculosis, and kidney diseases will start on January 1, 2021 instead of January 1, 2023.
H. Refund of taxes
1. The 90-day period to grant refund shall apply also to applications for refund of taxes erroneously or illegally paid or penalties imposed without authority under Section 204 (C) of the Tax Code. In case of full or partial denial, the taxpayer may appeal the decision to the CTA within 30 days from receipt of denial. (currently applicable to VAT refund only).
I. Percentage Tax
For the period from July 01, 2020 to June 30, 2023, the rate of percentage tax shall be 1% (currently 3%).
J. Fiscal Incentives Rationalization
1. The Fiscal Incentives Review Board (FIRB) or the Investment Promotion Agencies (IPAs) under a delegated authority from the FIRB, shall grant incentives pursuant to the Tax Code only to the extent of their approved registered project or activity under a Strategic Investment Priority Plan (SIPP).
2. Qualifications of a registered business enterprise:
a. Should be engaged in an activity included in the SIPP (e.g. projects with substantial amount of investments, net exports, job generation especially in less developed areas, use of modern, advance or new technology, environment protection systems/sustainability strategies, food security, agriculture, fisheries, activities that can promote regional and global operations in the country)
b. Should meet the target performance metrics after agreed time period
c. Should install adequate accounting systems that can identify the investments, revenue, costs and profits for each activity or establish a separate corporation for each registered project or activity
d. Should comply with e-receipting and e-sales requirement
e. Should submit annual reports of beneficial ownership of the organization and related parties
3. Income tax incentives shall be income tax holiday (ITH) followed by EITHER Special Corporate Income Tax (SCIT) of 5% based on gross income earned, in lieu of all taxes, OR regular CIT with enhanced deductions.
Enhanced Deductions include additional depreciation of 10% for buildings and 20% for machineries and equipment, additional deductions of 50% labor, 100% training, 100% R&D, 50% domestic input expense, 50% power expense, reinvestment allowance and claiming of NOLCO for next 5 years.
4. Duration of income tax incentives shall be based on location and industry priorities:
a. Export enterprise and domestic enterprises engaged in “critical” activities – ITH of four (4) to seven (7) years depending on location and industry priorities, followed by SCIT or regular CIT with enhanced deductions for ten (10) years.
“Critical” activities are industries identified by the National Economic and Development Authority to be crucial to national development.
b. Domestic enterprises not engaged in “critical” activities – ITH of four (4) to seven (7) years depending on location and industry priorities, followed by SCIT or regular CIT with enhanced deductions for five (5) years.
To avail of SCIT, the domestic enterprise, whether or not engaged in critical activity, must have minimum investment capital of P500M.
5. Other fiscal incentives:
a. Exemption from customs duties on importation of capital equipment, raw materials, spare parts or accessories directly and exclusively used in the registered project or activity and which are not produced or manufactured domestically in sufficient quantity at reasonable prices, among other conditions.
b. VAT exemption on importation and VAT zero-rating on local purchases of goods and services directly and exclusively used in the registered project or activity by a registered enterprise located inside an ecozone or freeport
6. Qualified expansion or entirely new project or activity may qualify to avail of a new set of incentives subject to the criteria and conditions in SIPP.
7. Approval of registered projects or activities of P1 billion pesos and below shall be delegated by FIRB to IPA
8. Application for tax incentives shall be deemed approved if not acted upon within 20 days
9. Powers of the President to grant tax incentives
10. The President may modify the mix, period or manner of availment of incentives for a highly desirable project subject to certain conditions and recommendation of the FIRB. The grant of ITH shall not exceed 8 years and thereafter, 5% SCIT may be granted, provided that the total period of availment shall not exceed 40 years.
11. Reportorial requirements for registered enterprises
a. Registered enterprises should use the electronic system for filing and payment with the BIR.
b. Registered business enterprises shall file with their respective IPA and with the FIRB a complete annual tax incentives report and an annual benefits report within 30 calendar days from the statutory deadline for filing of returns and payment of taxes.
c. Non-compliance with reportorial requirements and failure to use the electronic system for filing and payment of taxes to the BIR shall be imposed with penalties (1st offense – P100,000; 2nd offense – P500,000) then, cancelation of fiscal incentives.
12. For existing registered projects/activities prior to effectivity of the CREATE:
a. If granted ITH only, existing registered enterprise may still avail of ITH for the remaining ITH period
b. If granted ITH and 5% (Gross Income Tax) GIT after the ITH or if granted 5% GIT only, existing registered enterprise may avail of 5% GIT for 10 years
c. After expiration of the transitory period above, existing export enterprises shall have the option to reapply and avail of the incentives provided under CREATE and may still be extended for a certain period not exceeding 10 (years) at any one time.