Package 2: Corporate Recovery and Tax Incentives for Enterprises (CREATE) Act

The Corporate Recovery and Tax Incentives for Enterprises (CREATE) Act is the largest fiscal stimulus for businesses in our recent history. It is estimated to provide private enterprises more than 1 trillion pesos worth of tax relief over the next 10 years. MSMEs will be the biggest beneficiaries of CREATE through the grant of the largest ever corporate income tax rate reduction in the country, from 30 percent to 20 percent. Large corporations also enjoy an immediate reduction in the corporate income tax rate from 30 to 25 percent.

CREATE also provides other forms of tax relief which are part of a package of economic recovery measures implemented by the government to address the varying needs and concerns of the business sector brought about by the ongoing COVID-19 pandemic.

CREATE also provides for a generous and flexible tax incentive system that is performance-based, time-bound, targeted, and transparent. These principles have been unanimously recognized by stakeholders during hearings and consultations. The tax incentives system under CREATE balances the interests of all stakeholders while remaining faithful to the fundamental principles and mindful of the country’s fiscal challenges.

LEGISLATIVE STATUS

Republic Act No. 11534
Implementing Rules and Regulations

Passed into law on 26 March, effective on 11 April 2021

SALIENT FEATURES

A. Corporate income tax reduction and other pandemic-related tax relief under CREATE

Type of business Pre-CREATE CREATE
Domestic MSME corporations with a taxable income of P5M and below, and with total assets of not more than P100M 30% 20%
Domestic corporations which earn a taxable income above P5M 30% 25%
Foreign corporations subject to the regular rate (for nonresident foreign corporations: effective January 1, 2021) 30% 25%
Percentage tax for non-VAT taxpayers (applicable from July 1, 2020 to June 30, 2023) 3% 1%
Minimum corporate income tax (applicable from July 1, 2020 to June 30, 2023) 2% 1%
Non-profit and proprietary educational institutions and hospitals (applicable from July 1, 2020 to June 30, 2023) 10% 1%
Foreign-sourced dividends received by domestic corporations 15% Exempt, subject to reinvestment of earnings in the Philippines
Improperly accumulated earnings tax (IAET) 10% Repealed
VAT on the sale of importation of capital equipment and raw materials for PPE production 12% Exempt
VAT on the sale of importation of all prescription drugs, medical supplies, devices, and equipment for COVID-19 12% Exempt
VAT on the sale or importation of vaccines for COVID-19 12% Exempt
VAT on e-books 12% Exempt
VAT on the sale and importation of prescription drugs on cancer, mental illness, tuberculosis, and kidney-related diseases 12% Exempt

B. Fiscal incentive modernization

CREATE has instituted an incentive system that is based on industry and location tiers. This allows the fiscal incentive system to reflect our industrial policy. Longer incentives will be given to activities in more sophisticated sectors and less developed areas.

In summary, all businesses applying for tax incentives will continue to deal with investment promotion agencies, or IPAs. Approval of incentives will be done by the IPAs, unless the proposed project or activity exceeds an investment capital threshold of one billion pesos. Above this threshold, applications for incentives will be decided on by the Fiscal Incentives Review Board, an interagency Cabinet-level body to oversee the grant of fiscal incentives.

Fiscal incentives rationalization summary

Particulars Pre-CREATE CREATE
Exporters Domestic market enterprises Exporters Domestic market enterprises
Approval of Incentives IPA IPA IPA or FIRB
FIRB oversight None None All
ITH (non-income national and local taxes are excluded) 4-6 years 4-6 years 4-7 years
Expansion of activities 2 more years, and 3 years for expanding firms 2 more years, and 3 years for expanding firms 3-year ITH
Additional incentives for relocation outside of NCR and in disaster/conflict areas None None Relocation outside of NCR: additional ITH of 3 years
Locating in areas recovering from disaster/conflict: additional ITH of 2 years

Fiscal incentives rationalization summary

Particulars Pre-CREATE CREATE
Exporters Domestic market enterprises Exporters Domestic market enterprises
ITH duration 4-6 years 4-6 years 4-7 years 4-7 years
Option 1: ITH + 5% tax on gross income earned (GIE)
SCIT/GIE duration Forever Forever 14-17 years (ITH: up to 7 years, and GIE: 10 years) Not applicable
Option 2: ITH + enhanced deductions (ED)
Enhanced deductions duration None None 10 years 15 years
ITH + enhanced deductions duration None None 14-17 years (ITH: up to 7 years, and ED: 10 years) 9-12 years (ITH: up to 7 years, and ED: 5 years)

Enhanced deductions under CREATE

Particulars Pre-CREATE CREATE
Power expense 100% 150%
Labor expense 150%* 150%
Training expense 100% 200%
Research and development 100% 200%
Domestic input expense 100% 150%
Reinvestment allowance to the manufacturing industry None Up to 50% of reinvested profit (within 5 years from time of reinvestment)
Depreciation allowance None 10% for buildings, 20% for machinery

*The deduction shall be 200% if the activity is located in less developed areas. However, this incentive does not apply to TIEZA, SBMA, CDC, and APECO.

 

Duration of incentives for exporters under CREATE

Location/industry tiers Tier I Tier II Tier III
National Capital Region (NCR) 4 ITH + 10 ED/SCIT 5 ITH + 10 ED/SCIT 6 ITH + 10 ED/SCIT
Metropolitan areas or areas contiguous to the 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

 

Duration of incentives for domestic market activities under CREATE

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 to the 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

The industry tiers will be included in the Philippines’ Strategic Investment Priority Plan (SIPP). The SIPP contains projects or activities that promote long-term growth and sustainable development.

As the first SIPP is yet to be released, the 2020 Investment Priorities Plan of the Board of Investments (BOI) serves as the transitional SIPP until such time that the initial SIPP is issued.

As proposed by the BOI and approved by the FIRB, activities under the 2020 IPP may be eligible for incentives under the Tier I classification, without prejudice to upgrade to Tiers II or III if qualified under the new SIPP.

 

Transition periods for existing registered business enterprises

Incentives prior to CREATE Transition period
Current in ITH (granted ITH only) Finish ITH as scheduled
Granted ITH, but have not yet availed of the incentive Use the ITH for the period specified in the terms and conditions of the registration
Currently in ITH (granted ITH and then GIE after ITH) Use the ITH first, then avail of the 5% GIE incentive, subject to a 10-year limit for both incentives
Currently in GIE 10 years at 5% GIE

FISCAL INCENTIVES REVIEW BOARD (FIRB)

Pursuant to the CREATE Act, the powers and functions of the Fiscal Incentives Review Board (FIRB) are enhanced under CREATE as part of its oversight mandate. The FIRB structure under CREATE ensures that apart from tax subsidies, tax incentives are also granted and monitored properly by relevant agencies.

The FIRB is the interagency government body given the authority by the Philippine law to grant tax incentives to registered business enterprises. The FIRB has delegated to the country’s investment promotion agencies the grant of tax incentives for registered projects or activities with investment capital of one billion pesos (P1,000,000,000) and below. The FIRB also grants tax subsidies to government-owned and -controlled corporations (GOCCs).

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