CREATE LAW SUMMARY

The lower tax rate of 25 percent is retroactive to July 1, 2020. Can we apply the 25
percent tax rate on our income for the last six months? Quarterly declarations are
not final because tax is applied on annual income. Hence, the effective tax rate of 27.5
percent should be applied on your taxable income in 2020.

Is the minimum corporate income tax (MCIT) suspended? It’s not suspended, but it
is temporarily reduced from two to one percent retroactive to July 1, 2020 up to June 30,
2023. It follows the same manner of computation for the new corporate income tax for
2020. So the effective MCIT rate for calendar year 2020 is 1.5 percent.

Is the 40 percent optional standard deduction (OSD) still available? Yes it is, for big
and small businesses and individuals. However, individuals are still only allowed to use
40 percent OSD based on their sales and if they use it, they cannot deduct direct costs,
unlike corporations. Note that regulations implementing the OSD law are deemed
legislatively reenacted. Thus, you cannot use OSD in your annual ITR if you have not
used OSD in your first quarterly tax return.

What is the new value-added tax (VAT) exemption threshold for house and lot or
dwellings under CREATE? The CREATE law provided for the increase in the
threshold of VAT exemption for dwellings to P4.2 million. However, this was among the
provisions vetoed by the President. While the veto communication alluded that the VAT
exemption shall remain at P2.5 million as it is the Tax Reform for Acceleration and
Inclusion (TRAIN) law, this however is inaccurate as the threshold under the TRAIN law
went down to P2 million beginning 2021. Since the President can only veto but not pass
laws, fresh legislation is needed to increase the current threshold. (If not to P4.2 million
as vetoed, then to P3.5 million?)

How is the sunset period computed for registered enterprises? You can enjoy your
income tax holiday (ITH) undisturbed, but you can only avail of the five percent GIT for
the next 10 years after the ITH. Or if you are already in the five percent regime, you can
enjoy ITH for the next 10 years, technically from the effectivity of CREATE.

Will registered enterprises be allowed to register again for incentives after the
sunset period? In the CREATE law, so long as the activity of the registered enterprise
is in the strategic investment priorities plan, they can reapply for incentives after the
sunset period. This provision however has been vetoed by the President. These
companies can only register again if they are engaged in a new activity that is entitled to
incentives. This brings it back to the declared policy of government that for incentives,
there is no forever.

Do you still need a BIR ruling for tax-free exchange transactions under
CREATE? The law expressly states that no prior ruling is required for transactions
exempt under the law to be tax-free. We hope that in the implementation of the BIR, a
ruling will also not be required when securing Certificate Authorizing Registration (CAR)
because it would negate the spirit of the law. The BIR can anyway review the
transaction during a regular examination.

Specially in this pandemic, does CREATE now allow purely electronic

invoicing? This has not been touched on in CREATE but if the earlier TRAIN law is to
be followed, the government has until January 2023 (five years from effectivity of
TRAIN) to establish the system that is needed to store and process data. It can happen
earlier but today, BIR rules still require hard copies of all invoices, receipts, books of
accounts and accounting records because the BIR is not yet prepared to conduct digital
audits, among other things.

Will the April 15 deadline be extended because revenue regulations will still have
to be issued? The CREATE law is officially effective on April 11 (15 days after its
publication on March 27) but it has retroactive provisions, like the lower corporate tax
rate with effect from July 1, 2020. These provisions are clear enough to have a self-
executory effect (or even without the regulations). Although regulations are not
expected to come out in the next 10 days, a BIR issuance on updated forms/tax returns
is being expected by taxpayers before April 15. If a deadline extension will happen, it is
not because of CREATE but if at all, because of the quarantine.

Will we attract investors because of CREATE? The lower corporate tax rate,

although not the lowest in the region, makes the Philippines closely lagging behind our
neighbors. This is sufficient as investors who come here to do business do so because
of our vibrant domestic market, and the lower tax rate will not be a turn-off. Exporters,
however, now have a longer sunset period and they will stay put because 10 years is a
lot of time, and a lot can happen in 10 years, commercially or politically.