15 April 2021
President Rodrigo Duterte signed into law Republic Act 11534, otherwise known as the “Corporate Recovery and Tax Incentive for Enterprises Act” (CREATE), last 26 March 2021. Among others, CREATE seeks to improve the equity and efficiency of the corporate tax system by lowering the tax rate, widening the tax base and reducing tax distortions and leakages.
Effective 01 July 2020, the 30 percent Philippine regular corporate income tax (RCIT), the highest in the Southeast Asian Region, has been reduced to:
•20 percent of taxable income for domestic corporations with net taxable income not exceeding P5 million and total assets not exceeding P100 million, excluding the land where the business office, plant and equipment are situated; or
•25 percent of taxable income for all other domestic corporations and resident foreign corporations.
The CREATE has likewise introduced temporary reliefs to help businesses recover from the effects of Covid-19 pandemic. Thus, effective from 01 July 2020 until 30 June 2023:
Preferential income tax for proprietary educational institutions and hospitals is reduced from 10 percent to 1 percent of taxable income; and
Minimum corporate income tax (MCIT) for domestic and resident foreign corporations is reduced from 2 percent to 1 percent of gross income.
Since the CREATE has made the reduction in income tax rates effective 1 July 2020, taxpayers should consider the previous and the amended income tax rates in the computation of the income tax liabilities.
The Tax Code provides that income and expenses for the taxable year shall be deemed to have been earned and spent equally for each month of the period. Based on the draft Revenue Regulations (RR) released on 4 April 2021 for the implementation of income tax provisions of the CREATE, that portion of the annual taxable income before 1 July 2020 will be subject to 30 percent RCIT, and the rest will be subject to the reduced RCIT rate of 20 percent/25 percent.
The same principle shall apply in the determination of preferential income tax for proprietary educational institutions and hospitals, and MCIT for domestic corporations and resident foreign corporations.
For ease of computation, the draft RR has provided for the weighted average RCIT, MCIT and preferential income tax rates taking into account the start and end of the taxable year of a taxpayer.
These transitory rates will simply be multiplied by the annual taxable income (or gross income for MCIT computation) to determine the income tax liability.
The CREATE likewise expanded the definition of taxable corporations to include One-Person Corporations which are corporations with a single stockholder. With this amendment, a sole proprietor may find it more beneficial to incorporate his/her business into a One-Person Corporation.
Under the Tax Code, the applicable income tax rate of a sole proprietor can be as high as 35 percent while the RCIT for a One-Person Corporation is now reduced to 20 percent/25 percent.
Moreover, unlike a sole proprietorship where the liability of the business extends to the personality of the sole proprietor, the single stockholder of a One-Person Corporation enjoys limited liability since the stockholder and the corporation is treated as separate and distinct personalities.
On the foreign-sourced dividends paid to a domestic corporation, which is originally subject to RCIT, the CREATE exempts it from income tax if the following conditions concur:
Domestic corporation holds directly at least 20 percent of outstanding shares of the foreign corporation, and has held the shareholdings for a minimum of two years at the time of the dividend distribution; and
Dividends must be reinvested in business operations of the domestic corporation in the Philippines within the next taxable year from the time the foreign-sourced dividends were received and shall be limited to funding the working capital requirements, capital expenditures, dividend payments, investment in domestic subsidiaries, and infrastructure project.
The CREATE has also repealed the provisions on improperly accumulated earnings tax (IAET), thus, corporations can no longer be penalized for non-declaration of dividends to its stockholders.
The draft RR provides that the repeal of IAET shall apply to the entire taxable year for all fiscal years/taxable years ending after the effectivity of CREATE.
The other salient features of CREATE shall be discussed in the subsequent series of this column.
First published on The Daily Tribune.
For further information, please contact:
Nilo T. Divina, Managing Partner, DivinaLaw
nilo.divina@divinalaw.com
