Finally, after several revisions and heated debates, the Senate approved Bill No. 1357 or the CREATE Bill on its 3rd and final reading last November 26. This acronym stands for Corporate Recovery and Tax Incentives for Enterprises, aiming to provide cuts for corporate income taxes and provide tax incentives. Some may remember they first dubbed this as the Train Package 2 and then called TRABAHO Bill and CITIRA.
The Philippines is known in the ASEAN region as one that levies the highest corporate taxes. This makes it cost-prohibitive for potential investors to set up shop within the country. This equates to less economic opportunities, direct foreign investors, and employment for the Filipinos.
As such, the CREATE Bill helps by immediate trimming down corporate income taxes (CIT) from 30% down to a flat rate of 25%, retroactive to July 1, 2020. This bill is the first-ever revenue-negative tax reform package in the country. It is by far the largest fiscal stimulus program for enterprises. This new corporate income tax rate applies to both domestic and foreign corporations.
However, for domestic companies with total assets not exceeding P100 million and a total net taxable income not exceeding P5 million annually, the taxes would become even lower at 20%. Additionally, the CREATE Bill gives the President the power to make modifications on the period or manner in which corporations can avail of incentives.
Moreover, as of July 1, 2020, the minimum CIT goes down to 1% from 2%, while the percentage tax goes down to 1% from 3% until June 30, 2023. After the said date, it will revert to the original 2% and 3%, respectively. Under the CREATE Bill, the 10% tax imposition on improperly accumulated corporations’ earnings is repealed. The limitation on the deduction for interest expense goes down to 20% from 33% of the interest income subject to final tax.
Moreover, the bill proposes to reduce the income tax rate on educational institutions and non-profit hospitals from 10% to 1% effective July 1, 2020. After three years, it will not go back to its old rate but will only increase to 3%. Additionally, for VAT exemption of residential lots is set at a higher P2.5 million from P1.5 million. As for detached homes, the threshold increases to P4.2 million from P2.5 million. Anything below those given values is VAT exempt. Similarly, you will exempt books, medicines, and PPEs from the VAT.
Also, the CREATE Bill delegates the authority of approving or disproving the grant of tax incentives to the Investment Promotion Agencies (IPA) for those projects with an investment capital of P 1 billion and below. The bill also proposes the following for export and domestic companies:
a. An income tax holiday (ITH) of 4 to 7 years
b. Special CIT of 5% based on the gross income earned (GIE) for exporters and domestic companies which fall under the category of critical industries
c. Enhanced deductions spanning 10 years
d. Incentive duration, including expansion projects, of 14 to 17 years
e. Extension period of 10 years
f. 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.
The CREATE Bill was classified as urgent by the President. Even the Department of Finance rallied for this bill because lower tax rates, added exemptions, and incentives can help the economy rise, especially after the pandemic. All the CREATE provisions also give small and medium-scale enterprises a chance to bounce back and recover. Furthermore, all these benefits will attract even more investors to establish corporations. With the CREATE Bill’s improved taxation and incentives menu, everyone can expect optimized desired economic gains such as creating jobs, tech transfer, increase in GDP, and more direct foreign investment.