Everything You Need to Know About CREATE Act in the Philippines
Republic Act (RA) No. 11534, otherwise known as the Corporate Recovery and Tax Incentives for Enterprises (CREATE) Act was created by the Philippine Congress in response to the COVID-19 pandemic as a fiscal relief to domestic and foreign corporations doing business in the Philippines. It seeks to amend several provisions in the old Tax Code, with a central focus on lowering corporate income tax rates and rationalizing fiscal incentives to better attract local and foreign investments in the Philippines.
President Rodrigo Duterte signed CREATE into law on March 26, 2021, with a number of vetoed provisions. It was published in the Business Mirror on March 27 and took effect on April 11, 2021.
Before the COVID-19 pandemic, CREATE Act was initially known as TRABAHO bill (or Tax Reform for Attracting Better and Higher-quality Opportunities). When the bill failed to pass Congress, it was renamed to CITIRA (or Corporate Income Tax and Incentives Reform Act), which also failed to pass Congress because it was deemed as a non-priority and non-urgent bill during the outbreak of COVID-19. The addition of COVID-19 related provisions propelled the passage of the bill into law.
Corporate Income Tax (CIT) Reforms under CREATE Act
The corporate income tax (CIT) rates for domestic corporations and resident foreign corporations (RFCs) under the CREATE Act will be reduced from the current 30% to 25%, retroactive to July 1, 2020. The CIT will be reduced further by 1% annually in the next six years. And shall eventually reach 20% by 2027 onwards.
Summary of CIT rates and their effectivity under CREATE Act
| Taxpayer | Old Rate | New Rate | Effectivity |
|---|---|---|---|
| Domestic Corporations | 30% | 25% | July 1, 2020 |
| Minimum Corporate Income Tax (MCIT) for Domestic Corporations | 2% | 1% | July 1, 2020 - June 30, 2023 |
| Domestic Corporations with Net Taxable Income not exceeding ₱5M and total assets not exceeding ₱100M | 30% | 20% | July 1, 2020 |
| Non-Profit Proprietary Educational Institutions and Hospitals | 10% | 1% | July 1, 2020 - June 30, 2023 |
| Resident Foreign Corporations (RFCs) | 30% | 25% | July 1, 2020 | MCIT Resident Foreign Corporations | 2% | 1% | July 1, 2020 - June 30, 2023 |
| Non-Resident Foreign Corporations (NRFCs) | 30% | 25% | January 1, 2021 | Regional Operating Headquarters (ROHQs) | 10% | 25% | July 1, 2020 |
Changes on rates of certain passive income
| Type of Tax | Old Rate | New Rate |
|---|---|---|
| Capital Gains Tax on capital gains derived by RFCs on sale of shares of stocks not traded in the stock exchange | 5% / 10% | 15% |
| Regional Operating Headquarters (ROHQs) | 7.5% | 15% |
Fiscal Incentive Reforms under CREATE Act
Corporate Income Tax (CIT) Incentives
CIT incentives under CREATE Act shall include:
- Income Tax Holiday (ITH) granted for a period of 4 to 7 years, followed by the Special Corporate Income Tax Rate of 5% on gross income earned (GIE), in lieu of all national and local taxes, or enhanced deductions (ED) for 5 or 10 years (the incentive period varies depending on which area the registered project or activity will be located)
- Duty exemption on importation of capital equipment, raw materials, spare parts, or accessories
- VAT exemption on importation and VAT zero-rating on local purchase (partly vetoed by the President)
- The Strategic Investment Priority Plan (SIPP) shall define the coverage of the tiers and provide the conditions for qualifying activities:
- For export enterprises:
| Location/Industry Tiers | Tier I | Tier II | Tier III |
|---|---|---|---|
| National Capital Region (NCR) | 4 ITH + 10 ED/SCIT | 5 ITH + 10 ED/SCIT | 5 ITH + 10 ED/SCIT |
| Metropolitan areas or areas contiguous and adjacent to NCR | 5 ITH + 10 ED/SCIT | 6 ITH + 10 ED/SCIT | 7 ITH + 10 ED/SCIT |
| All other areas | 6 ITH + 10 ED/SCIT | 7 ITH + 10 ED/SCIT | 7 ITH + 10 ED/SCIT |
- For domestic market enterprises:
| Location/Industry Tiers | Tier I | Tier II | Tier III |
|---|---|---|---|
| National Capital Region (NCR) | 4 ITH + 5 ED | 5 ITH + 5 ED | 6 ITH + 5 ED |
| Metropolitan areas or areas contiguous and adjacent to NCR | 5 ITH + 5 ED | 6 ITH + 5 ED | 7 ITH + 5 ED |
| All other areas | 6 ITH + 5 ED | 7 ITH + 5 ED | 7 ITH + 5 ED |
Transitory Provisions for Existing Registered Activities
- Those granted only with an ITH prior to the effectivity of CREATE Law shall be allowed to continue with its availment for the remaining period
- Those that have been granted the ITH but have not yet availed of the incentive upon the effectivity of the law may use the ITH for the period specified in the terms and conditions of their registration
- Those granted an ITH prior to the effectivity of the law and are entitled to 5% tax on Gross Income Earned (GIE) shall be allowed to continue to avail of the 5% GIE incentive for 10 years
- Those availing of the 5% tax on GIE prior the effectivity of the law shall be allowed to continue availing the said incentive for 10 years
Value-Added Tax (VAT) Exemptions
Value-Added Tax (VAT) exemptions under CREATE Act shall include:
- Sale or distribution, importation, printing, or publication of any educational material covered by the UNESCO agreement including digital and electronic format
- All drugs, vaccines, and medical devices prescribed and used for the treatment of COVID-19
- Capital equipment, its spare parts, and raw materials for the production of personal protective equipment for COVID-19 prevention
- Drugs for the treatment of COVID-19 approved by the FDA for use in clinical trials, including raw materials directly necessary for the production of such drugs
- Sale of prescription drugs and medicines for cancer, mental illness, tuberculosis, diabetes, high cholesterol, hypertension, and kidney disease (beginning January 1, 2021 instead of January 1, 2023)
Vetoed Provisions in CREATE Act
The President vetoed several provisions in the new tax law, including:
- Increasing the VAT-exempt threshold on sales of real property and the adjustment in the threshold amount every 3 years
- 90-day period for processing of general tax refunds, requirements in case of denial by the Commissioner, and remedy of taxpayer in case of denial
- Definition of investment capital
- Domestic market enterprises’ entitlement to special corporate income tax (SCIT) rate
- Specific share of the national government and local government units in the gross income earned using the SCIT rate
- Availment of a new set of incentives and its corresponding period of availment for qualified expansions or entirely new project or activity
- Allowing export enterprises registered prior to CREATE Act to avail of further extension of new incentives for the same activity
- Exercise of power by the Fiscal Incentives Review Board (FIRB) in granting incentives to registered projects or activities with a total investment capital of more than ₱1B
- Specific industries mentioned under activity tiers
- Provision granting the President the power to exempt any investment promotion agency (IPA) from coverage of Title XIII of CREATE Act
- Automatic approval of applications for incentives in case of inaction
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