The CREATE Bill has now been finally signed into law. After numerous revisions and heated debates in the Senate and House of Representatives, The Corporate Recovery and Tax Incentives for Enterprises (CREATE) has been signed by President Duterte on March 26, 2021, as RA No. 11534. This law aims to provide cuts for corporate income taxes and provide tax incentives to stimulate the economy. Some say this is the “greatest economic reform of the post-EDSA years” and the largest fiscal stimulus package for enterprises.
This law lowers the highest corporate income tax in South East Asia. Unfortunately, the Philippines is known for levying the highest corporate income taxes, making it difficult for both local and foreign investors to establish their business. Because of this situation, Filipinos have had to carry the brunt of less economic opportunities, employment and direct foreign investments.
In his statement, the President noted the CREATE law would help Filipinos whose income has been drastically impacted by the coronavirus pandemic. It comes at a very apt time as it provides fiscal relief and recovery measures for Filipino businessmen who still feel the adverse ramifications of stringent lockdowns that halt operations to prevent the spread of infection.
The Create Bill trims down corporate income tax from 30% to 20% for domestic corporations with a net taxable income of no more than a P5million and total assets not exceeding P100million. Moreover, all other domestic corporations exceeding the bracket mentioned above, along with resident foreign corporations, shall be subject to a lower 25% income tax. This is retroactive to July 1, 2020. In the same token, nonresident foreign corporations can enjoy a reduced 25% income tax rate effective January 1, 2021.
However, President Duterte vetoed the President’s provisions to exempt any IPA from reform as it can be considered a political tool. He also cited the limitations on the power of the FIRB to grant and monitor tax incentives. These powers shall remain plenary. Other items vetoed in the bill before it was passed into law include:
- Specific industries mentioned under the activity tiers must be kept flexible to keep up with changes as time goes by.
- Increasing the VAT-exempt threshold on sale of a residential lot from P1.5million to P2.5million and house and lot from P2.5 million to P4.2 million is also vetoed. This particular tax exemption is seen as highly distorting and prone to abuse
- The 90 days for the processing of general tax refunds was not passed as it may cause more delays and damage that puts pressure on the taxpayers.
- The Definition of investment capital to exclude land and working capital is vetoed as it can lead to underestimation of investment promotion performance.
- President Duterte did not pass redundant incentives for domestic corporations as it is unnecessary and only weakens the fiscal incentives system
- Allowing existing registered activities to apply for further extensions of new incentives for the same activity, along with automatic approval of applications for incentives.
Other salient provisions worth noting include that as of July 1, 2020, to June 30, 2023, the MCIT or minimum corporate income tax is reduced from 2% to 1%, while the percentage tax is reduced from 3% to 1%. After the said time frame, everything will revert to the original percentage rates. Under the CREATE law, the 10% tax imposition on IAET (accumulated corporations earnings) is repealed.
In the same token, hospitals and educational institutions’ rate is reduced from 10% to 1% following the same July 1, 2020, to June 30, 2023 calendar. After this, it will not revert to the old rate but will only increase to 3%. Additionally, the allowable deduction for interest expense is reduced from 33% to 20% of any interest income subject to final tax. Furthermore, the Create Law proposes the following for export and domestic companies:
- An income tax holiday (ITH) to qualified companies from 4 to 7 years.
- Special corporate income tax of 5% is based on the gross income earned (GIE) for exporters and domestic companies (those falling under critical industries).
- Enjoy enhanced deductions spanning 10 years and an extension period of 10 years.
- Take advantage of Incentive duration, including expansion projects, of 14 to 17 years.
- Extension period of 10 years
- Transition period — For companies currently in ITH, they can still optimize the ITH until its expiration. Meanwhile, companies under the 5% GIE can take advantage of incentives until 10 years.
Finally, the CREATE law is now in place to protect enterprises. Notably, the Department of Finance promoted and rallied for this bill to be passed urgently. After all, added tax exemptions, incentives, and lower taxes will help the country’s economy rise. It is even more crucial now as the coronavirus continues to wreak havoc in the country despite initial vaccine deployment. The provisions of the law give businesses, especially small and medium-scale ones, a chance to recover. Hopefully, more businesses, especially foreign investors, will establish their headquarters to create jobs, transfer tech, stimulate the economy, and increase GDP.