SyCipLaw Tax Issues And Practical Solutions (TIPS) International Edition ' March 31, 2021

• Published date: 09 April 2021
• Subject Matter: Tax, Income Tax, Sales Taxes: VAT, GST, Tax Authorities
• Law Firm: SyCip Salazar Hernandez & Gatmaitan
• Author: Norberto P. Geraldez Jr., Muhammad Murshid M. Marsangca and Catherine P. Pedrosa

1. What are the salient provisions on income tax under the Corporate Recovery and Tax Incentives for Enterprises Act, or CREATE Act?

On March 26, 2021, President Rodrigo R. Duterte signed the "Corporate Recovery and Tax Incentives for Enterprises Act" (Republic Act No. 11534, the CREATE Act) into law. It will take effect within 15 days from its publication in the Official Gazette or in a newspaper of general circulation.

The CREATE Act further amends certain provisions of the National Internal Revenue Code, as amended (the Tax Code). As stated in Section 2 of the CREATE Act, the declared policy of the amendments is to "increase the Philippines' global competitiveness by implementing tax policies instrumental in attracting investments, which will result in productivity enhancement, employment generation, countrywide development, and a more inclusive economic growth, while at the same time maintaining fiscal prudence and stability." The CREATE amends the following income tax provisions of the Tax Code:

1. Income Tax on Domestic Corporations - effective July 1 2020, 25% in general and 20% for corporations with net taxable income not exceeding PhP5 Million and with total assets not exceeding PhP100 Million, excluding land on which the corporation's office, plant and equipment are situated (currently at 30%).
2. Income Tax on Foreign Corporations Engaged in Trade or Business in the Philippines - effective July 1, 2020 25% (currently at 30%).
3. Minimum Corporate Income Tax on Domestic Corporations and Foreign Corporations Engaged in Trade or Business in the Philippines - effective only from July 1, 2020 to June 30 2023, 1% (currently at 2%).
4. Income Tax on Regional Operating Headquarters - effective January 1, 2022, regular corporate income tax of 25% (currently at 10%).
5. Income Tax on Offshore Banking Units - With the repeal by the CREATE Act of the provision on offshore banking units (OBUs), OBUs will be subject to the regular corporate income tax of 25% on Philippine-sourced income (currently, income derived by OBUs from foreign currency transactions with non-residents, other OBUs, local commercial banks, including branches of foreign banks, is exempt from income tax, while income derived by OBUs from foreign currency loans granted to residents other than OBUs or local commercial banks is subject to income tax at 10%) and income of non-residents from transactions with OBUs will be subject to tax (currently exempt).
6. Interest Income derived by Resident Foreign Corporations from a depositary bank under the Expanded Foreign Currency Deposit System - 15% (currently at 7.5%).
7. Dividends received by Domestic Corporations from Foreign Sources - exempt (subject to certain conditions), otherwise 25% (currently at 30%).
8. Capital Gains from Sale by foreign corporations of Shares not Traded in the Stock Exchange - 15% (currently at 5% for gains up to PhP100,000 and 10% for gains over PhP100,000).
9. Improperly Accumulated Earnings Tax - repealed (currently at 10%).

SyCipLaw TIP 1: Before filing their annual income tax returns, corporate taxpayers should familiarize themselves with the amended income tax rates under the CREATE Act as the income tax rates applicable to corporations have been reduced and some amendments take effect retroactively from July 1, 2020.

2. What fiscal incentives will be granted under the CREATE Act and who can avail themselves of these incentives?

The CREATE Act introduces in the Tax Code a new Title on Tax Incentives, or Title XIII, which rationalizes tax incentives and will cover Investment Promotion Agencies, which are defined under the CREATE Act as government agencies in charge of promoting investments, granting and administering tax and non-tax incentives, and overseeing the operations of economic zones and freeports. This new law amends certain special laws that grant tax incentives administered by existing Investment Promotion Agencies. To qualify for incentives, the activity has to be under the Strategic Investment Priority Plan which will be approved by the President.

Under Title XIII, the following tax incentives may be granted to registered projects or activities: (a) Income Tax Holiday (ITH) period; (b) Special Corporate Income Tax (SCIT) Rate; (c) Enhanced Deductions (ED) from taxable income; (d) duty exemption on importation of capital equipment, raw materials, spare parts, or accessories; and (e) Value-Added Tax (VAT) exemption on importation and VAT zero-rating on local purchases.

Qualified export enterprises may be granted an ITH period of four (4) to seven (7) years, followed by a period of ten (10) years of SCIT, or ED (based on the applicable regular income tax). Qualified domestic market enterprises may be granted an ITH period of four (4) to seven (7) years, followed by a period of five (5) years of ED (based on the applicable regular income tax).

The SCIT is a rate of 5% of gross income earned, and is in lieu of all national and local taxes. On the other hand, the EDs comprise the following: (a) additional deduction of 10% for buildings and 20% for machinery and equipment; (b) additional deduction of 50% of direct labor expense; (c) additional deduction of 100% of research and development; (d) additional deduction of 100% on training expense; (d) additional deduction of 50% on domestic input expense; (e) additional deduction of 50% on power expense; (f) deduction for reinvestment allowance to manufacturing company; and (g) Net Operating Loss Carry Over (NOLCO) - the net operating loss of...