CREATE, which came into effect on April 11, 2021 with a few retroactive provisions on income tax effective July 1, 2020, was enacted with the end view of (i) improving the efficiency of the corporate tax system by lowering corporate tax rates; (ii) developing a globally-competitive tax incentives system which is performance-based, targeted, time-bound, transparent, and promotes more-inclusive growth across the region; and (iii) providing support to businesses affected by the pandemic and strengthening the preparedness of business enterprises. Key amendments include (i) 13 sections realigning corporate income tax rates, deductions, VAT exempt transactions, and percentage tax reporting, (ii) 20 codified provisions generally laying down fiscal incentives rationalization of the country, (iii) 1 repealed provision in the 10% IAET, and (iv) 9 vetoed clauses and sections, viz:
- lowering the regular corporate income tax (RCIT) rate from 30% to 20% for MSMEs (25% in all other cases), the minimum corporate income tax (MCIT) from 2% to 1% until June 30, 2023, and the interest arbitrage (deductible interest expense) from 33% to 20%,
- repealing the improperly accumulated earnings tax (IAET), which shall apply to the entire taxable year of entities under fiscal/ taxable year reporting after CREATE’s validity,
- redefining “control” and clarifying a no-prior BIR confirmation (tax ruling) for purposes of availing tax-free exchange, and
- rationalizing the tax incentive system that is generally designed based on strategic investment priority plan (SIPP) and exercisable up to 17 years, extendible to 40 years on extreme occasions (for highly desirable projects) only,
- introducing the Fiscal Incentives Review Board (FIRB) which is tasked to exercise policy-making and oversight functions on all registered business enterprises (RBEs) and investment promotion agencies (IPAs),
- restructuring the incentive scheme for export enterprises with 4-7 years income tax holiday (ITH), then with options to either avail of the 5% Special Corporate Income Tax (SCIT) on gross income earned or enhanced deductions (EDs) for 10 years, while domestic market enterprises may be afforded only EDs for 10 years after consuming the 4-7 years ITH,
- instituting an enhanced Net Operating Loss Carry-over to 5 years as part of the ED option,
- establishing sunset/ transitory provisions on enterprises with registered business activities prior to CREATE so that (i) ITH shall continue for the remaining period, (ii) enterprises under ITH and 5% Gross Income Tax (GIT) category shall continue the ITH for the remaining period and the 5% GIT for 10 years, and (iii) enterprises that are enjoying 5% GIT shall continue with it for 10 years.
Supplemental features include (1) relevant illustrations on income tax related amendments under RR 4-2021 and 5-2021, (2) POGO taxation which is now subject to 25% regular tax on taxable income from non-gaming revenues and 5% franchise tax on gross gaming revenues, (3) clarificatory amendment on non-profit hospitals and proprietary educational institution under RA 11635 and whether they are entitled to special income tax rate of 1% (previously 10%) on their taxable income beginning July 1, 2020 until June 30, 2023 under CREATE law, (4) implementing provision for transfer pricing or review of controlled transactions among associated enterprises under §50 of the NIRC, and allocate or distribute their income and deductions whenever necessary, and (5) inclusion in the gross income of social media influencers’ earnings derived from sources within and without the Philippines and the mandatory registrations to all persons doing business and earning income digitally or similar means in pursuant to §§23 & 236 of the NIRC, respectively.