Corporate Recovery and Tax Incentives for Enterprises Act

CREATE LAW
REO discussion: May 16, 2021

Income Tax Changes

Final Income Taxation
- Correction of final tax on PCSO or lotto winnings (NRAETB not exempt
and now subject to 20% final tax
- Correction of the final tax on the interest income from Forex Deposits for
resident foreign corporations (from 7.5% to 15% tax rate)
- Deemed paid tax credit under tax sparring rule (final tax on dividends from
domestic to resident foreign corporation; deemed tax credit from 15% to
10%)

Capital gains Taxation

- Correction of the two-tiered capital gains tax on foreign corporations
 Old law: 5% on first P100,000 and 10% on excess on sale of
domestic stock directly to buyer/ outside local stock exchange
 Create law: 15% CGT
- Expansion of the definition of tax-free exchanges: Corporate
Reorganization
 Merger & Consolidation
 Acquisition of Control (at least 51% ownership) or Transfer to a
controlled corporation. Initial acquisition of control is not taxable
regardless of any type of asset transferred.
 Acquisition of substantial assets; substantially own the assets of a
subsidiary
 Recapitalization
 Reincorporation

Items of Gross Income

- Exemption criteria on intercorporate dividends from Non-Resident Foreign
Corporation (NRFC) fto Domestic Corporation
 The domestic corporate recipient directly owns at least 20% in
value of the outstanding shares of the NRFC
 The shareholdings in the NRFC must have been held
uninterruptedly for a minimum of 2 years at the time of dividend
distribution or throughout the entire existence of the NRFC if it is
operation for less than 2 years
 The foreign-sourced dividend received or remitted must be
reinvested within the next taxable year in business operations of
the domestic corporation such as working capital requirements,
capital expenditures, dividend payment, investment in domestic
subsidiaries or infrastructure projects (encourages domestic
corporations to expand internationally)
  Caveat: Foreign sourced dividends that are not utilized within the
following taxable year shall be considered taxable income in the
year received subject to surcharges, interest and penalties, as
applicable.

Deductions from gross income

- Change in the arbitrage limit on interest expense of corporations (from
33% to 20% or 0%)
 Large enterprise – 20% of interest income
 Micro Small Medium enterprise (MSME) – 0%/ no limit as to
deduction of interest expense

- Addition of special deduction for training expenses

 Apprenticeship agreement
 Dep-Ed, TESDA, CHED Certification
 Not to exceed 10% of direct labor changes

- Donation of COVID19 Supplies and Equipment

- Expanded NOLCO Carryover
 For the year 2020 and 2021 losses shall be carried over for 5 years
instead of 3 years
 For taxpayers on a fiscal year basis, NOLCO for fiscal year on or
before June 30, 2021 and June 30, 2022 will be carried over for 5
years.

Corporate Income Taxation

Two classifications for Domestic corporation:
1. MSMEs – 20%
2. Large Corporations – 25%; Effective July 1, 2021

MSME Criteria (must meet both of the criteria):

- Asset test: Total assets, excluding land on which their office, plant and
equipment are situated, does on exceed P100,000

- Income test: Taxable income does not exceed P5,000,000

-
Summary of Regular Corporate Tax Rates
Taxpayer Type Domestic Corporation Resident Foreign
Corporation
MSME corporate
taxpayers
- With < P5M 20% 25%
Taxable
income
- With > P5M
 Taxable
income
Large corporate taxpayers
- With < P5M 25% 25%
Taxable
income

- With > P5M 25% 25%

Taxable
income

- Repeal of the 15% gross income tax (GIT) for domestic corporations
- Tax rate for proprietary schools/ non-profit hospitals (1% between July 1,
2020 to June 30, 2023)
- Inclusion of Home Development Mutual Fund (HDMF) among exempt
corporations
- Offshore Banking Units (OBUs) are now regular corporations
- Regional Operating Headquarters (ROHQs) are regular corporations
starting January 1, 2022
- Adjustment of the MCIT (1% effective July 1, 2020 to June 30, 2023)
- Repeal of the Improperly Accumulated Earnings Tax (IAET)

Summary of Tax Rates for Domestic Corporations

Regular CIT MCIT
Domestic Corporations Rate Effectivity Rate Effectivity
Domestic Corporation, in 25% July 1, 2020 1% July 1, 2020 to
general June 30, 2023

2% July 1, 2023

MSME with less than P5M 20% July 1, 2020 1% July 1, 2020 to
Taxable income June 30, 2023

2% July 1, 2023
Proprietary educational 1% July 1, 2020 to June Not applicable
Institutions and Hospitals 30, 2023

10% July 1, 2023 Not Applicable

Summary of Tax Rates for Foreign Corporations

Regular CIT MCIT
Foreign Corporations Rate Effectivity Rate Effectivity
Resident Foreign 25% July 1, 2020 1% July 1, 2020 to
 Corporations June 30, 2023

2% July 1, 2023
Offshore Banking Units 25% Upon effectivity of 1% Upon effectivity of
the CREATE LAW CREATE LAW until
(April 11, 2021) June 20, 2023
2% July 1, 2023
Regional Operating 25% January 1, 2022 1% January 1, 2022 to
Headquarters June 30, 2023
2% July 1, 2023
Non-Resident foreign 25% January 1, 2021 Not applicable
corporations

Transition rules:
- Pro-rate treatment regardless of whether calendar or fiscal year
- Assume income is earned evenly throughout the year

Value Added Tax

- Sale, importation, printing or publication of books, and any newspaper,

magazine, journal, review bulletin on digital electronic format
- VAT Exemption on certain medicines:
 Diabetes, high cholesterol, and hypertension (starting Jan 1, 2020)
 Cancer, mental illness, tuberculosis, and kidney disease (starting
Jan 1, 2021)

- Exemption of the following:

 Real properties not primarily held for sale or lease in the ordinary
course of business
 Sale of property utilized for social housing
 Sale of house and lot and other residential dwellings with selling
price not more than P2,000,000, as adjusted in 2011 using 2020
CPI Values
Percentage Tax:

- Reduction of the 3% General percentage tax to 1% Effective July 1, 2020

to June 30, 2023