Tax Alert No. 91 [Senate Bill (SB) No.

1357
or The Corporate Recovery and Tax
Incentives for Enterprises Act (CREATE)]
27 November, 2020
An Act Reforming the Corporate Income Tax and Incentives System, Amending
for the Purpose Sections 20, 22, 25, 27, 28, 29, 34, 40, 109, 116 and 290 of the
National Internal Revenue Code of 1997, as amended, and Creating Therein New
Title XIII, and for Other Purposes

On 26 November 2020, the Senate has approved SB No. 1357 or the Corporate
Recovery and Tax Incentives for Enterprises Act (herein referred to as “CREATE”). The
CREATE bill seeks to lower corporate income tax rates and to rationalize fiscal
incentives.

The key amendments in the Tax Code under the CREATE bill include, but not limited to,
the following:

1. Corporate income tax (CIT)

a. Adoption of graduated CIT rate effective 1 July 2020:

i. 20% CIT for domestic corporations with total assets of PHP100m and
below, and with net taxable income of PHP5m and below
ii. 25% CIT for other domestic corporations
b. 25% CIT for resident and non-resident foreign corporations effective 1 July
2020
c. Reduction of minimum corporate income tax (MCIT) to 1% from 1 July 2020
to 30 June 2023
d. Reduction of CIT for proprietary, non-profit educational institutions and
hospitals to 1% from 1 July 2020 to 30 June 2023
e. Tax exemption of foreign-sourced dividends of domestic corporations
subject to certain conditions
f. Clarification on the types of reorganizations covered by tax-free exchanges
under Section 40(C)(2) of the Tax Code
g. Repeal of improperly accumulated earnings tax (IAET)
 h. Repeal of 10% special income tax rate on regional operating headquarters
(ROHQ) starting 1 January 2022
2. Fiscal incentives

a. Uniform fiscal incentives for newly registered business enterprises (RBE)

i. Income tax holiday (ITH) for 4 to 7 years
ii. 5% gross income tax (GIT) or enhanced deductions for 10 years
b. Total period of incentive availment has been increased to a maximum of 17
years. The length of the period of incentives takes into account the location
and type of the registered activity
c. Highly-desirable projects with a minimum investment capital of PHP50bn or
those that can generate at least 10,000 employees, can enjoy a superior
incentive package for up to 40 years which includes ITH for a maximum of 8
years
d. Sunset period for existing RBEs:
i. Firms enjoying ITH can continue to enjoy the same within the
remaining ITH period
ii. Firms enjoying 5% GIT can continue to enjoy the same for 10 years
e. Existing RBEs may re-apply for the fiscal incentives under the CREATE bill
after the lapse of the sunset period
f. Approval of fiscal incentives for new projects or activities with investment
capital of PHP1bn and below shall be delegated to their respective
Investment Promotion Agencies (IPA). Fiscal incentives application for
projects or activities with investment capital exceeding PHP1bn shall be
subject to the approval of the Fiscal Incentives Review Board (FIRB)
g. Duty exemption on certain importations, VAT exemption on importations,
and VAT zero-rating on local purchases shall still apply
3. Value-added tax (VAT) and Percentage Tax

a. VAT-exemption on the sale or importation of digital or electronic reading

materials
b. VAT-exemption on the sale or importation of drugs, vaccines and medical
devices specifically prescribed and directly used for the treatment of COVID-
19 registered with and approved by the FDA from 1 January 2021 to 31
December 2023
 c. VAT-exemption on the sale or importation of medicines for cancer, mental
illness, tuberculosis, and kidney diseases to take effect on 1 January 2021
instead of 1 January 2023
d. Adjustment on the threshold of VAT-exemption on sale of real property to
account for inflation, as follows:
i. Residential lots from PHP1.5m to PHP2.5m
ii. House and lot, and other residential dwellings from PHP2.5m to
PHP4.2m
e. Reduction of percentage tax for non-VAT taxpayers from 3% to 1% starting
1 July 2020 to 30 June 2023
Congressman Joey Salceda, chairman of the House Ways and Means Committee, said
that a Bicameral Conference Committee will not be necessary since the House will

Effect on PEZA Registered Activity

Sunset period for existing RBEs:

i. Firms enjoying ITH can continue to enjoy the same within the
remaining ITH period
ii. Firms enjoying 5% GIT can continue to enjoy the same for 10 years
Existing RBEs may re-apply for the fiscal incentives under the CREATE bill after the
lapse of the sunset period

Proposed Corporate Recovery and Tax Incentives for

Enterprises Act (CREATE)
(Senate Bill No. 1357)

This Tax Alert is issued to inform all concerned on the proposed amendments to the National Internal Revenue Code of 1997, as amended,
under Senate Bill No. 1357, otherwise known as “Corporate Recovery and Tax Incentives for Enterprises Act” or CREATE Bill. The CREATE
Bill was approved on third and final reading by the Senate on 26 November 2020.

Below are the highlights and relevant provisions of the CREATE Bill:

A. Corporate Income Tax (CIT)

1. Starting July 01, 2020, CIT rate for corporations will be reduced as follows:

i. Reduced CIT rate of 20% shall be applicable to domestic corporations with net taxable income not exceeding P5,000,000 and with total
assets not exceeding P100 Million (excluding land on which the business entity’s office, plant and equipment are situated)

ii. Reduced CIT rate of 25% shall be applicable to all other domestic and foreign corporations.

2. For the period beginning July 01, 2020 until June 30, 2023, minimum corporate income tax rate shall be 1%, instead of 2%.
 3. Improperly accumulated earnings tax is repealed.

B. Preferential tax rates for certain corporations

1. For the period beginning July 01, 2020 until June 30, 2023, non-profit proprietary educational institutions and hospitals shall be taxed
at 1%, instead of 10%.
2. Preferential tax rates/exemption for offshore banking units is repealed.
3. Starting December 31, 2021, regional operating headquarters (ROHQ) will be subject to regular CIT.

C. Final tax rates in certain passive income

1. Aside, from lotto winnings, winnings from PCSO games amounting to P10,000 or less received by a nonresident alien individual shall
be exempt from income tax.
2. Foreign-sourced dividends received by domestic corporations may be exempt from income tax if the following conditions are met:

o The dividends are reinvested in the business operations of the domestic corporation in the Philippines within the next
taxable year from date of receipt; and
o The dividends shall be used to funding the working capital requirements, capital expenditures, dividend payments,
investment in domestic subsidiaries and infrastructure project; and
o The domestic corporation holds directly at least 20% of the outstanding shares of the foreign corporation for a minimum of
2 years at the time of dividends distribution.

3. Interest income earned by a resident foreign corporation (RFC) under the expanded foreign currency deposit system shall be subject
to final tax of 15% (currently 7.5%).
4. Capital gains from sale of shares of stocks not traded in the stock exchange earned by RFC and nonresident foreign corporation
(NRFC) shall be subject to final tax of 15% (currently 5%/10%).

D. Deductions from gross income

1. An additional deduction equal to 50% of the value of labor training expenses incurred for skills development of enterprise-based
trainees enrolled in public senior high schools, public higher education institutions, or public technical and vocational institutions duly
covered by an apprenticeship agreement and for which a proper certification must be secured from DepEd, TESDA or CHED shall be
allowed, provided that such deduction shall not exceed 10% of direct labor wage.
2. Due to the proposed reduction in CIT rate, interest arbitrage shall be reduced to 20% of interest income subjected to final tax.

E. Tax Free Exchanges

1. Specific types of reorganizations involving corporations will be covered by tax-free property for shares exchanges, including:

i. Merger or consolidation

ii. Acquisition by a corporation of stock of another corporation in exchange for shares, if, immediately after the acquisition, the acquiring
corporation has control of the acquired corporation

iii. Acquisition by a corporation in exchange for shares, of substantially all of the properties of another corporation

iv. Recapitalization

v. Reincorporation

2. BIR confirmation or ruling shall not be required for purposes of availing the tax exemption on tax free exchanges.

3. Clarified the definition of “control” for purposes of tax-free exchange which provides that the collective and not the individual ownership of
all classes of stocks entitled to vote of the transferor or transferors shall be used in determining the presence of control.

F. VAT Exempt Transactions

1. Adjustment of threshold for VAT exempt sale of residential real property:

i. Residential lot – P2,500,000 (currently P1,500,000)

ii. House and lot and other residential dwellings – P4,200,000 (currently P2,500,000 and P2,000,000 effective Jan. 1, 2021)

2. Additional VAT exempt transactions:

i. Sale, importation of any books/newspaper, or any educational reading material covered by the UNESCO agreement on the importation of
educational, scientific and cultural materials, including the digital or electronic format thereof (requirement to appear at regular intervals shall
be removed)

ii. Sale or importation of the following goods from January 1, 2021 to December 31, 2023:

 capital equipment, its spare parts and raw materials, necessary to produce personal protective equipment component;
 all drugs, vaccines and medical devices specifically prescribed and directly used for the treatment of COVID-19
 drugs, including raw materials, for the treatment of COVID-19 approved by the FDA for use in clinical trials

3. VAT exemption of sale or importation of prescription drugs and medicines for cancer, mental illness, tuberculosis, and kidney diseases will
start on January 1, 2021 instead of January 1, 2023.

G. Percentage Tax

1. For the period from July 01, 2020 to June 30, 2023, the rate of percentage tax shall be 1% (currently 3%).

H. Fiscal Incentives Rationalization

1. The Fiscal Incentives Review Board (FIRB) or the Investment Promotion Agencies (IPAs) under a delegated authority from the FIRB,
shall grant incentives pursuant to the Tax Code only to the extent of their approved registered project or activity under a Strategic
Investment Priority Plan (SIPP).
2. Qualifications of a registered business enterprise:

i. Should be engaged in an activity included in the SIPP

ii. Should meet the target performance metrics after agreed time period

iii. Should install adequate accounting systems that can identify the investments, revenue, costs and profits for each activity or establish a
separate corporation for each registered project or activity

iv. Should comply with e-receipting and e-sales requirement

v. Should submit annual reports of beneficial ownership of the organization and related parties

3. Income tax incentives that can be availed are as follows:

i. Income tax holiday followed by Special Corporate Income Tax (SCIT) of 5% based on gross income earned, in lieu of all taxes; OR

ii. Regular CIT with enhanced deductions, at the option of the export enterprise or domestic market enterprise engaged in activities classified
as strategic industries

Enhanced Deductions includes additional deductions for depreciation, labor, training, R&D, domestic input expense, power expense,
investment allowance and claiming of NOLCO for next 5 years.

4. Duration of income tax incentives differed for each category which is based on location and industry priorities:

i. ITH followed by SCIT

ii. Regular CIT with enhanced deductions

5. Other fiscal incentives:i.

i. Exemption from customs duties on importation of capital equipment, raw materials, spare parts or accessories directly and exclusively used
in the registered project or activity and which are not produced or manufactured domestically in sufficient quantity at reasonable prices

ii. VAT exemption on importation and VAT zero-rating on local purchases of goods and services directly and exclusively used in the
registered project or activity by a registered enterprise located inside an ecozone or freeport

6. Qualified expansion or entirely new project or activity may qualify to avail of a new set of incentives
7. Existing registered projects or activities prior to effectivity of CREATE Bill may qualify to register under the CREATE Bill provisions
8. Reportorial requirements for registered enterprises

i. Registered enterprises should use the electronic system for filing and payment with the BIR

ii. Registered business enterprises shall file with their respective IPA and with the FIRB a complete annual tax incentives report and an
annual benefits report within 30 calendar days from the statutory deadline for filing of returns and payment of taxes

iii. Non-compliance with reportorial requirements and failure to use the electronic system for filing and payment of taxes to the BIR shall be
imposed with penalties (1st offense – P100,000; 2nd offense – P500,000) then, cancelation of fiscal incentives.

9. Approval of registered projects or activities of P1 billion pesos and below shall be delegated by FIRB to IPA

10. Application for tax incentives shall be deemed approved if not acted upon within 20 days

11. Powers of the President to grant tax incentives

i. The President may modify the mix, period or manner of availment of incentives for a highly desirable project subject to certain conditions
and recommendation of the FIRB. The grant of ITH shall not exceed 8 years and thereafter, 5% SCIT may be granted, provided that the total
period of availment shall not exceed 40 years.

12. For existing registered projects/activities prior to effectivity of the CREATE:

i. If granted ITH only, existing registered enterprise may still avail of ITH for the remaining ITH period

ii. If granted ITH and 5% (Gross Income Tax) GIT after the ITH or if granted 5% GIT only, existing registered enterprise may avail of 5% GIT
for 10 years

Report:

Effect of CREATE to existing PEZA RBEs

1. End to 5% GIT (SCIT),
i. If granted ITH only, existing registered enterprise may still avail of ITH for
the remaining ITH period
ii. If granted ITH and 5% (Gross Income Tax) GIT after the ITH or if granted
5% GIT only, existing registered enterprise may avail of 5% GIT for 10
years
2. RBEs with an option to re-apply for incentives:
i.

ii. Regular CIT with enhanced deductions

- After Incentive Period, 25% CIT will apply, which is higher than 17% CIT equivalent of
5% GIT.

3. Entitlement to VAT Zero Rating

- In TRAIN PEZA had to clarify status quo, given the provision on VAT refund scheme in
lieu of Zero rating
- CREATE provides for VAT exemption for importation & Zero Rating, without
condition
 4. Discretion of the President: The President may modify the mix, period or manner of
availment of incentives for a highly desirable project subject to certain conditions and
recommendation of the FIRB. The grant of ITH shall not exceed 8 years and thereafter,
5% SCIT may be granted, provided that the total period of availment shall not exceed 40
years.

Effect of PEZA De-Registration

On the Lots Sold
Taxes LLI Locator
CGT on Sale 6% (CWT)
DST on Sale 1.5%
DST on Lease 0.2%
VAT * 12%
Transfer Tax 0.5% on Selling Price
RPT – Lot ** 1% of Market Value 1% of Market Value
(for unsold)
On Conduct of Business
Taxes LLI Locator
CIT 25% 25%
VAT on Purchases * 12% 12%
Business Tax 2% of Gross Sales 2% of Gross Sales
RPT – 1.6% of
Building/Machineries Cost/Depreciated
Value

* If the Refund Mechanism in TRAIN takes effect, this may be mitigated

** Covered by 5% GIT under CREATE

Questions:
1. Will there be sufficient demand for PEZA lots after 10 years?
2. Should proclamation to expansions be put on hold?
3. Will there be a need to partially de-Register the ecozone to open such portions to non-
PEZA?

PEZA Locators’ Proposed Amendments

1. Status Quo of incentives such that only amendments affecting domestic entities should
be passed.
2. 17% CIT after the period of ATH/SCIT
3. Call to increase the threshold for FIRB Approval of registered projects or activities to
higher that P1 billion pesos

Potential for non REB Market

 1. Lower CIT may attract investors that whose activities do not qualify as registered
projects/activities:
i. SMES with Net Taxable Income not exceeding 5M and Total Assets
(excluding Land for Office/Plant/Equipment) not exceeding 100M will
enjoy 20% CIT
ii. Otherwise, 25% CIT
2. VAT Exemptions favor certain activities:
- Adjustment of threshold for VAT exempt sale of residential real property:
i. Residential lot – P2,500,000 (currently P1,500,000)
ii. House and lot and other residential dwellings – P4,200,000 (currently
P2,500,000 and P2,000,000 effective Jan. 1, 2021)

- Additional VAT exempt transactions, on sale/importation of:

i. Educational, scientific and cultural reading materials covered by UNESCO

agreement
ii. Upto December 2023, capital equipment, its spare parts and raw
materials, necessary to produce PPEs & drugs/vaccine for COVID-19
iii. Prescription drugs and medicines for cancer, mental illness, tuberculosis,
and kidney diseases

Temporary Incentives to Boost Businesses – Up to June 30, 2023

1. MCIT shall be 1%, instead of 2%.

2. Non-profit proprietary educational institutions and hospitals shall be taxed at 1%,
instead of 10%.
3. minimum corporate income tax rate
4. Percentage tax on Persons Exempt from VAT shall be 1%, instead of 3%