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| Improperly accumulated earnings tax (IAET) | 10% | Repealed |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).
Publications
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BBB SOS for CREATE (DPWH, DOTr, DBM, NEDA ,BCDA) consolidated as of 2 June 2020
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Date Posted: August 25, 2020
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