Changes Due to CREATE Law

Corporate Income Tax (CIT) Reforms under CREATE Act

One of the significant reforms under the CREATE Act is the lowering of the corporate
income tax rate from 30%, previously the highest in ASEAN region, to 20% for micro,
small, and medium domestic enterprises and 25% for other corporate entities. However,
the CREATE Act removed the exemption previously enjoyed by offshore banking units
and increased the tax rate for regional operating headquarters of multinational
companies.

Below is a comparison of the tax rates under the old Philippine Tax Code and the new
tax rates under the CREATE Act.

Taxpayer / Income Stream Old Tax Code CREATE Act

Domestic Corporation 30% of taxable income 25% of taxable income

Effective July 1, 2020

Domestic Corporations with Net 30% of taxable income 20% of taxable income
Taxable Income not exceeding Effective July 1, 2020
₱5M and total assets not
exceeding ₱100M

Resident Foreign Corporation, e.g., 30% of taxable income 25% of taxable income
branch office or “RFC” (under
RCIT) Effective July 1, 2020

Non-Resident Foreign Corporation 30% of gross income 25% of gross income

or “NRFC” (under RCIT)
Effective January 1, 2021

Minimum Corporate Income Tax for 2% of gross income 1% of gross income

DC and RFC
Effective July 1, 2020 until
June 30, 2023

Proprietary Educational Institutions 10% of taxable income 1% of taxable income

and Non-profit Hospitals
Effective July 1, 2020 until
June 30,2023
Offshore Banking Units
Regional Operating Headquarters
Winnings of Non-Resident Alien
Individual Engaged in Trade or
Business in the Philippines from
Philippine Charity Sweepstakes
Office games
Dividends received by DCs
Dividends received by an NRFC
under the Tax Sparing Rule
Interest income received by an
RFC under the expanded foreign
currency deposit system
Capital gains earned by RFC and
NRFC from sale of shares of stock
not traded in the stock exchange
 Income from foreign 25% of taxable income
currency transactions with
non-residents – exempt
 Interest income from
foreign currency loans
granted to residents –
10% final withholding tax
10% of taxable income 25% of taxable income
Effective January 1, 2022
Exempt  PHP10,000
(approximately
USD200) and below –
exempt
 Excess of PHP10,000
– 20% final
withholding tax
 Received from another  Received from
DC – exempt another DC – exempt
 Received from a foreign  Received from a
corporation – 30% foreign corporation –
exempt, subject to
certain conditions
15% Final Withholding Tax 10% Final Withholding Tax
Effective January 1, 2021
7.5% Final Withholding Tax 15%
 PHP100,000 15%
(approximately
USD2,000) and below –
5%
 Excess of PHP100,000 –
10%
Other adjustments involving Income Tax

 Improperly Accumulated Earnings Tax (“IAET”) repealed – The 10% IAET

imposed on improperly accumulated earnings (i.e., earnings and profits
accumulated instead of being divided or distributed) was repealed.
 The Home Development Mutual Fund is included in the list of government
corporations/instrumentalities exempt from income tax.
 Interest Arbitrage Rule adjusted – The amount of interest expense that may be
claimed as a deduction from the taxable income will be accordingly adjusted in
light of the new corporate tax rates. If the taxpayer is subject to 25% RCIT, the
interest expense shall be reduced by 20% of any interest income earned that
was subjected to final tax. No reduction shall be imposed if the taxpayer is
subject to 20% RCIT for MSMEs.
 New item of allowable deduction – An additional 50% of the expenses incurred
for skills development of enterprise-based trainees (150% deduction in total) may
be claimed as deduction from the taxable income, provided that such deduction
shall not exceed 10% of direct labor wage and subject to compliance with certain
conditions.
 Coverage of tax-free exchanges expanded – Under the tax-free exchange
provision of the Tax Code, as amended by CREATE Act, no gain or loss shall be
recognised on a corporation or on its stock or securities if such corporation is a
party to a reorganisation and exchanges of property in pursuance of a plan of
reorganisation solely for stock or securities in another corporation that is a party
to the reorganisation. Reorganisation pertains to (i) merger or consolidation
involving exchange of property solely for stock; (ii) acquisition involving exchange
of voting stock for stock of the other corporation; (iii) acquisition involving
exchange of voting stock for substantially all of the properties of the other
corporation; (iv) recapitalisation; and (v) reincorporation.
 In connection with this, the sale or exchange of property used for business for
shares of stock will be exempt from Value Added Tax. Furthermore, CREATE Act
clarified that a prior confirmation or ruling from the Bureau of Internal Revenue is
not required for purpose of availing the tax exemption under the tax-free
exchange provision.
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 5% / 10% 15%
the stock exchange
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:

o For export enterprises:

Location/Industry Tiers Tier I Tier II Tier III

4 ITH + 10 5 ITH + 10 5 ITH + 10
National Capital Region (NCR)
ED/SCIT ED/SCIT ED/SCIT
Metropolitan areas or areas 5 ITH + 10 6 ITH + 10 7 ITH + 10
contiguous and adjacent to NCR ED/SCIT ED/SCIT ED/SCIT
6 ITH + 10 7 ITH + 10 7 ITH + 10
All other areas
ED/SCIT ED/SCIT ED/SCIT
 o For domestic market enterprises:

Location/Industry Tiers Tier I Tier II Tier III

4 ITH + 5 5 ITH + 5 6 ITH + 5
National Capital Region (NCR)
ED ED ED
Metropolitan areas or areas contiguous and 5 ITH + 5 6 ITH + 5 7 ITH + 5
adjacent to NCR ED ED ED
6 ITH + 5 7 ITH + 5 7 ITH + 5
All other areas
ED ED 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.

YOUTUBE

https://www.youtube.com/watch?v=cAHQECPu95E
References:

https://carpolaw.com/everything-you-need-to-know-about-create-act-in-the-philippines/

https://www.zicolaw.com/resources/alerts/philippine-tax-reform-package-2-create-act-
signed-into-law-corporate-taxes-adjusted-fiscal-incentives-rationalised/

https://www.pwc.com/ph/en/as-easy-as-abc/column/create-law-10-most-asked-
questions.html

https://www.bworldonline.com/tax-guide-on-create-law/

https://www.grantthornton.com.ph/insights/articles-and-updates1/lets-talk-tax/how-will-
the-create-law-affect-your-2020-itr/

https://taxreform.dof.gov.ph/tax-reform-packages/p2-corporate-recovery-and-tax-
incentives-for-enterprises-act/