CREATE Act: Corporate Tax Reform 2021

Declaration of policy and purposes

Section 2 declares the State policy to develop the national economy toward global competitiveness by implementing tax policies that attract investments, resulting in productivity enhancement, employment generation, countrywide development, and more inclusive economic growth, while maintaining fiscal prudence and stability.
The State shall improve the equity and efficiency of the corporate tax system by lowering the rate, widening the tax base, and reducing tax distortions and leakages. (Section 2(a))
The State shall develop a performance-based, targeted, time-bound, and transparent tax incentives regime, subject to the Act’s provisions. (Section 2(b))
The State shall support business recovery from unforeseen events such as an outbreak of communicable diseases or a global pandemic, and strengthen capability for similar circumstances in the future. (Section 2(c))
The State shall create a more equitable tax incentive system to allow inclusive growth and job generation in all regions and to ensure access and ease in the grant of incentives for applicants in least developed areas. (Section 2(d))

Amendments to corporate and withholding tax

The Act amends Section 20 of the National Internal Revenue Code of 1997 regarding reporting and disclosure: upon the order of the Secretary of Finance specifically identifying needed information and justification in relation to the grant of incentives under Title XIII, the Commissioner shall furnish the Secretary pertinent information on entities receiving incentives. (Section 3(B))
Disclosure under this reporting rule is covered by Section 270 unless the taxpayer consents in writing to disclosure. (Section 3(B))
The Commissioner must submit to the Oversight Committee (through the chairpersons of the Senate and House Committees on Ways and Means) a report on the exercise of his powers pursuant to Section 204, every six (6) months for each calendar year. (Section 3(C))
The Act amends the definition of “corporation” under Section 22 to include one person corporations, partnerships, joint-stock companies, joint accounts (cuentas en participación), associations, or insurance companies, but it excludes general professional partnerships and a joint venture or consortium for certain construction or specified energy operations. (Section 4)

Domestic and foreign income tax rates changed

Section 27(A) imposes an income tax rate of twenty-five percent (25%) effective July 1, 2020 on taxable income derived by every corporation organized in, or under the laws of, the Philippines (as defined in Section 22(B)). (Section 6(A))
A reduced twenty percent (20%) rate applies to corporations with net taxable income not exceeding Five million pesos and total assets not exceeding One hundred million pesos (P 100,000,000.00), excluding land where the office, plant, and equipment are situated. (Section 6(A))
For fiscal-year accounting periods, taxable income is computed without regard to the specific date of sales, purchases, and other transactions, and income and expenses are deemed earned and spent equally for each month of the period; the corporate income tax rate is applied by prorating the number of months covered by the new rate within the fiscal year. (Section 6(A))
Proprietary educational institutions and hospitals that are nonprofit pay ten percent (10%) on taxable income, except those covered by Section 27(D); beginning July 1, 2020 until June 30, 2023, the tax rate is one percent (1%). (Section 6(B))
If the gross income from “unrelated trade, business or other activity” exceeds fifty percent (50%) of total gross income, the tax rate under Section 27(A) is imposed. (Section 6(B))
The term “unrelated trade, business or other activity” means any trade, business or other activity not substantially related to the institution’s or hospital’s primary purpose or function. (Section 6(B))
Government-owned or -controlled corporations, agencies, or instrumentalities (except GSIS, SSS, HDMF, PHIC, and local water districts) pay the same corporate income tax rate rules as other corporations engaged in similar business, industry, or activity, notwithstanding contrary special or general laws. (Section 6(C))
Intercorporate dividends received by a domestic corporation are not subject to tax under this Title, subject to conditions on reinvestment for foreign-sourced dividends, including reinvestment into specific Philippine uses within the next taxable year and shareholding requirements of at least twenty percent (20%) for a minimum of two (2) years. (Section 6(D)(4))
A minimum corporate income tax equal to two percent (2%) of gross income as of the end of the taxable year is imposed on a corporation starting on the fourth taxable year after commencement of business when the minimum tax is greater than the tax computed under Section 27(A); beginning July 1, 2020 until June 30, 2023, the rate is one percent (1%). (Section 6(E)(1))
Section 28(1)(a) imposes a regular twenty-five percent (25%) income tax (equivalent) on taxable income derived in the preceding taxable year from sources within the Philippines for foreign corporations engaged in trade or business within the Philippines, effective July 1, 2020. (Section 7(1)(a))
For resident foreign corporations, a minimum corporate income tax of two percent (2%) of gross income applies under the same conditions, with the minimum rate reduced to one percent (1%) effective July 1, 2020 until June 30, 2023. (Section 7(2))
A Regional or area headquarters as defined in Section 22(DD) is not subject to income tax. (Section 7(5)(a))
A regional operating headquarters as defined in Section 22(EE) pays ten percent (10%) of taxable income; effective January 1, 2022, it becomes subject to the regular corporate income tax. (Section 7(5)(b))
Interest from deposits and similar arrangements and royalties derived from sources within the Philippines paid to a resident foreign corporation is subject to a final income tax at twenty percent (20%); interest derived under the expanded foreign currency deposit system is taxed at fifteen percent (15%). (Section 7(6)(a))
Capital gains from sale of shares of stock not traded in the stock exchange are taxed at a final tax of fifteen percent (15%) on net capital gains for the taxable year. (Section 7(6)(c))
For nonresident foreign corporations not engaged in trade or business in the Philippines, effective January 1, 2021, the tax equals twenty-five percent (25%) of gross income received from sources within the Philippines, except capital gains subject to the special rule on shares not traded in the stock exchange. (Section 7(B)(1)(a))
A final withholding tax of fifteen percent (15%) applies to cash and/or property dividends received from a domestic corporation by a nonresident foreign corporation under a credit mechanism tied to the conditions of its domicile; effective July 1, 2020, the credit difference is between the regular income tax rate and the fifteen percent (15%) dividend tax. (Section 7(B)(5)(b))
Capital gains from sale of shares of stock not traded in the stock exchange by a nonresident foreign corporation are taxed at fifteen percent (15%) as a final tax. (Section 7(B)(5)(c))

Repeal and deductions rules revised

Section 29 of the National Internal Revenue Code of 1997 (improperly accumulated earnings tax) is repealed. (Section 8)
Section 34 on deductions is amended to add a special additional deduction for labor training expenses incurred for skills development of enterprise-based trainees in specified public educational institutions covered by an apprenticeship agreement under Presidential Decree No. 442 series of 1974 (Labor Code of the Philippines, as amended). (Section 9)
Enterprises receive an additional deduction equal to one-half (1/2) of the value of covered labor training expenses, but the deduction shall not exceed ten percent (10%) of direct labor wage. (Section 9(A)(1)(v))
For enterprise-based training of students from public educational institutions, the enterprise must secure proper certification from DepEd, TESDA, or CHED. (Section 9(A)(1)(v))
The general interest deduction rule allows the amount of interest paid or incurred on indebtedness connected with the taxpayer’s profession, trade or business, but it reduces the otherwise allowable deduction for interest expense by twenty percent (20%) of interest income subjected to final tax. (Section 9(B)(1))
If the interest income tax is adjusted in the future, the interest expense reduction rate adjusts accordingly based on a standard formula defined in rules and regulations promulgated by the Secretary of Finance upon recommendation of the Commissioner of Internal Revenue. (Section 9(B)(1))

Corporate reorganization rules and withholding oversight

Section 40(C)(2) is amended to define when no gain or loss is recognized for certain reorganization exchanges, including merger/consolidation stock exchanges, stock acquisitions with control, acquisitions of substantially all properties, recapitalizations, and reincorporations. (Section 10)
No gain or loss is recognized when property is transferred to a corporation in exchange for stock, where the transferor or transferors (collectively) do not exceed four (4) persons and the transferor or transferors collectively gain or maintain control, with the rule that stocks issued for services are not considered as issued in return for property. (Section 10)
Prior Bureau of Internal Revenue confirmation or tax ruling is not required to avail the tax exemption in the enumerated exchange of property instances. (Section 10)
The definition of “control” in this section means ownership of stocks after transfer of property possessing at least fifty-one percent (51%) of total voting power of all classes of stock entitled to vote, using collective (not individual) ownership of all classes of voting stock by the transferor or transferors. (Section 10)
The Act amends Section 57 to require the Department of Finance to review withholding-related regulations and processes at least once every three (3) years, and direct the Bureau of Internal Revenue to amend rules if existing processes adversely and materially impact taxpayers. (Section 11)

VAT exemptions and VAT receipts tax rules

The Act amends Section 109 (Exempt Transactions) by expanding VAT exemptions for:
- Residential property thresholds and socialized housing definition under Republic Act No. 7279, with residential lot valued at Two million five hundred thousand pesos (P2,500,000.00) and below; house and lot and other residential dwellings valued at Four million two hundred thousand pesos (P4,200,000.00) and below. (Section 12(P))
- Adjustment rule: beginning January 1, 2024 and every three (3) years thereafter, amounts adjust to present values using the Consumer Price Index published by the Philippine Statistics Authority (PSA). (Section 12(P))
- Sales/importation/printing/publication of books and specified educational reading materials covered by the UNESCO Agreement on the Importation of Education, Scientific, and Cultural Materials, including digital/electronic formats, provided materials are not devoted principally to paid advertisements. (Section 12(R))
- Sale or importation of prescription drugs and medicines for diseases listed, with effective starting dates: diabetes, high cholesterol, hypertension beginning January 1, 2020; and cancer, mental illness, tuberculosis, and kidney diseases beginning January 1, 2021. (Section 12(AA)(i)-(ii))
For the prescription drugs and medicines exemption, the DOH must issue a list of approved drugs and medicines within sixty (60) days from the effectivity of the Act. (Section 12(AA))
The Act grants VAT exemptions for COVID-19 related items for a covered period:
- Capital equipment, spare parts, and raw materials necessary for production of personal protective equipment components listed, and
- Drugs, vaccines, and medical devices specifically prescribed and directly used for COVID-19 treatment,
- Drugs approved by the FDA for use in clinical trials and raw materials directly necessary for production,
  covering beginning January 1, 2021 to December 31, 2023. (Section 12(BB))
The DTI must certify that specified equipment/spare parts/raw materials are not locally available or insufficient, or not in accordance with required quality/specifications. (Section 12(BB))
For the COVID-19 prescription drugs and medical devices list, the DOH must issue the list within sixty (60) days from the effectivity of the Act and then every three (3) months thereafter. (Section 12(BB))
COVID-19 related exemptions are subject to post audit by the Bureau of Internal Revenue or Bureau of Customs as applicable. (Section 12(BB))
The Act exempts the sale or lease of goods/properties or performance of services other than prior paragraphs when the gross annual sales/receipts do not exceed Three million pesos (P3,000,000.00). (Section 12(CC))
The Act amends Section 116 so that any person exempt from VAT under Section 109(CC) who is not VAT-registered shall pay a tax equivalent to three percent (3%) of gross quarterly sales or receipts.
Cooperatives are exempt from this three percent (3%) gross receipts tax. (Section 13)
The rate is reduced to one percent (1%) effective July 1, 2020 until June 30, 2023. (Section 13)

Tax refund procedure and appeal rights

Section 204 authorizes the Commissioner to credit or refund taxes erroneously or illegally received or penalties imposed without authority, and to handle internal revenue stamps by refunding value when returned in good condition, redeeming/changing unused unfit stamps, and refunding value upon proof of destruction. (Section 14)
No credit or refund of taxes or penalties is allowed unless the taxpayer files a written claim with the Commissioner within two (2) years after payment of the tax or penalty. (Section 14(C))
An application showing overpayment is considered a written claim for credit/refund. (Section 14(C))
In proper cases, the Commissioner must grant a refund within ninety (90) days from complete submission of supporting documents. (Section 14(C))
If the Commissioner denies a refund, the Commissioner must state in writing the legal and factual basis for denial. (Section 14(C))
For full or partial denial, the taxpayer may appeal to the Court of Tax Appeals within thirty (30) days from receipt of the denial decision. (Section 14(C))

Congressional oversight committee

Section 290 establishes a Congressional Oversight Committee.
The Committee includes the Chairperson of the Committee on Ways and Means of the Senate and House of Representatives, plus four (4) additional members from each House, designated by the Speaker of the House of Representatives and the Senate President, respectively. (Section 15)
The Committee’s functions include reviewing the performance of the Fiscal Incentives Review Board. (Section 15)

CREATE Title XIII: coverage, scope, definitions

The new Title XIII (Tax Incentives) governs tax incentives under the Act’s system. (Section 16)
Section 291 provides that Title XIII covers all existing Investment Promotion Agencies defined in the Code or related laws unless specifically exempted from coverage by the Code. (Section 16)
Investment Promotion Agencies retain functions and powers under their special laws except to the extent modified by the Code; the Department of Finance, Bureau of Internal Revenue, and Bureau of Customs retain their mandates under the Act and related laws. (Section 16, Sec. 291)
Section 292 limits the grant of incentives to registered business enterprises only, and only to the extent of their approved registered project/activity under the Strategic Investment Priority Plan. (Section 16, Sec. 292)
Section 293 defines key terms including:
- Capital equipment, direct local employment, domestic input, domestic market enterprise, export enterprise, freeport zones, investment capital, Investment Promotion Agencies, metropolitan areas, other government agencies administering tax incentives, other registered entities, qualified capital expenditure, and registered business enterprise. (Section 16, Sec. 293(A)-(M))
- Research and development, sophisticated, sophistication, source document, special economic zone or ecozone, and training. (Section 16, Sec. 293(N)-(S))
The definition of registered business enterprise excludes specified service enterprises such as customs brokerage, trucking/forwarding, janitorial, security, insurance, banking, other financial services, consumers’ cooperatives, credit unions, consultancy, retail, restaurants, and similar services as determined by the Fiscal Incentives Review Board, with income delivered within economic zones subject to taxes under the National Internal Revenue Code. (Section 16, Sec. 293(M))
Export enterprise requires manufacturing/assembling/processing and IT/BPO services (as covered) registered with an Investment Promotion Agency and resulting in direct exportation and/or sale to another registered export enterprise that forms part of final export product/service, reaching at least seventy percent (70%) of total production/output. (Section 16, Sec. 293(E))
Freeport zones are treated as separate customs territories operated/managed to ensure free flow of goods, with imported goods unloaded for immediate transshipment or storage/manipulation without import duties, while movement from free-trade area to non-free trade area subjects goods to applicable internal revenue taxes and duties; the zone must have permanent customs control at its perimeter. (Section 16, Sec. 293(F))
Ecozones are separate customs territories within fixed metes and bounds by presidential proclamations and cover industrial estates, EPZs, ICT parks/centers, and free trade zones, with requirements of permanent customs control; areas where mining extraction is undertaken are excluded; vertical ecozones require minimum contiguous land area as determined by the Fiscal Incentives Review Board. (Section 16, Sec. 293(R))

CREATE incentives: types, conditions, and periods

Section 294 authorizes tax incentives for registered projects or activities, subject to conditions and period of availment, in the forms of:
- Income Tax Holiday (ITH);
- Special Corporate Income Tax (SCIT) Rate (including an in-lieu-of-all national and local taxes regime for qualifying export enterprise, qualifying domestic market enterprises with minimum investment capital of P500,000,000.00, and qualifying “critical” domestic market enterprises, at a rate equivalent to five percent (5%) effective July 1, 2020 based on gross income earned); and
- Enhanced Deductions (ED); and
- Duty exemption on specified imports; and
- VAT exemption on importation and VAT zero-rating on local purchases. (Section 16, Sec. 294(A)-(E))
The SCIT scheme requires the “in lieu of all national and local taxes” structure and sets the national government share at three percent (3%) of gross income earned effective July 1, 2020, with local government unit and Investment Promotion Agency shares observed under special laws without diminution; the local government unit share jurisdiction applies outside ecozones and freeports at two percent (2%) remitted directly to the local government unit. (Section 16, Sec. 294(B))
The Enhanced Deductions include additional depreciation of qualified capital expenditure with additional ten percent (10%) for buildings and additional twenty percent (20%) for machineries and equipment; labor expense additional deduction of fifty percent (50%); R&D additional deduction of one hundred percent (100%); training expense additional deduction of one hundred percent (100%); domestic input additional deduction of fifty percent (50%); power expense additional deduction of fifty percent (50%); reinvestment allowance deduction for manufacturing of a maximum of fifty percent (50%) within a five (5) years reinvestment window; and enhanced NOLCO carry-over deduction of net operating loss from the first three (3) years after start of commercial operations, carried over within the next five (5) consecutive taxable years. (Section 16, Sec. 294(C)(1)-(8))
Duty exemption under Section 294(D) covers importation of capital equipment, raw materials, spare parts, or accessories; VAT incentives under Section 294(E) cover VAT exemption on importation and VAT zero-rating on local purchases. (Section 16, Sec. 294(D)-(E))
The incentives’ governance rules provide that income tax holiday shall be followed by SCIT rate or enhanced deductions. (Section 16, Sec. 295(A))
At the option of qualifying enterprises, SCIT rate or enhanced deductions may be granted, but enhanced deductions cannot be granted simultaneously with SCIT. (Section 16, Sec. 295(B))
Enhanced deduction eligibility limits apply to the covered items:
- Depreciation allowance applies only to assets directly related to production, excluding administrative/support services. (Section 16, Sec. 295(B)(1))
- Labor expense additional deduction excludes managerial, administrative, indirect, labor, and support services personnel costs (as stated in the Act). (Section 16, Sec. 295(B)(2) and Sec. 295(B)(4))
- R&D deduction is limited to local expenditure for salaries of Filipino employees and consumables and payments of local R&D organizations, and applies only if directly related to the registered project/activity. (Section 16, Sec. 295(B)(3))
- Domestic input deduction applies only to domestic input directly related to and actually used in the registered export project/activity. (Section 16, Sec. 295(B)(5))
- Power deduction applies only to power utilized for the registered project/activity. (Section 16, Sec. 295(B)(6))
- Reinvestment allowance deduction is determined in the Strategic Investment Priority Plan. (Section 16, Sec. 295(B)(7))
Duty exemption is strictly tied to exclusive, direct use in the registered project/activity and requires prior approval from the Investment Promotion Agency before importation. (Section 16, Sec. 295(C)(1)-(2))
Duty-exempt imports may be used partially for non-registered projects only through an allowed framework, subject to payment of proportionate taxes/duties and prior approval; if duty-exempt items are used for non-registered projects within the first five (5) years from importation, the enterprise must seek prior approval and pay taxes/duties not paid at importation. (Section 16, Sec. 295(C)(1))
Within the first five (5) years from importation, prior Investment Promotion Agency approval must be secured before sale, transfer, or disposition, with permitted circumstances including transfers to other enterprises availing duty exemption; transfers to others not availing exemption upon payment of taxes/duties based on net book value; exportation; proven technical obsolescence; or donation to TESDA, state universities and colleges, or DepEd and CHED-accredited schools, with donation exempt from import duties and taxes, including donor’s tax. (Section 16, Sec. 295(C) subsections (a)-(e))
Unauthorized sale/transfer/disposition without prior approval makes both the registered business enterprise and the vendee/transferee/assignee solidarily liable to pay twice the amount of duty exemption that should have been paid at importation. (Section 16, Sec. 295(C))
After five (5) years from importation, sale/transfer/disposition requires prior notice to the Investment Promotion Agency; even with notice after five (5) years, duties based on net book value remain due if registration terms/conditions were violated. (Section 16, Sec. 295(C))
VAT exemption on importation and VAT zero-rating on local purchases applies only to goods and services directly and exclusively used in the registered project/activity. (Section 16, Sec. 295(D))
Income derived from non-registered project/activity remains subject to appropriate taxes under the National Internal Revenue Code. (Section 16, Sec. 295(D), last paragraph)
COVID-19 vaccine importation is exempt from import duties, taxes, and other fees, subject to approvals/licenses from the Department of Health or the Food and Drug Administration. (Section 16, Sec. 295(E))
Persons directly importing petroleum products for resale in the Philippine customs territory and/or free zones under Republic Act No. 10863 are excluded from the foregoing tax and duty incentives and remain subject to applicable taxes. (Section 16, Sec. 295(F))
Petroleum products importation (including by registered business enterprises) is subject to applicable duties and taxes under Republic Act No. 10863 and the Code, upon importation into Philippine customs territory and/or free zones; refund claims may be filed for direct or indirect export of petroleum products and/or tax-exempt sales within the period provided under Republic Act No. 10863, and exporters of fuel may apply for refund subject to fuel marking program rules. (Section 16, Sec. 295(F))
Crude