Problem Exercises On RA 11534 CREATE ACT

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PROBLEM EXERCISES ON RA 11534:
CREATE ACT
BY
DR. VIRGINIA JEANNIE P. LIM, Ed.D.,
LL.M., MSA
Bachelor of Laws
University of Cordilleras
Doctor of Education
Master in Supervision and Administration
Bachelor of Science in Commerce
Bachelor of Science in Mathematics
St. Louis University
Master of Law in Taxation

Manuel L. Quezon University
Book Author
Taxation Law and Commercial Law
Litigation Lawyer
MCLE Lecturer
Professor of Law
St. Louis University, University of Baguio, University of Cordilleras, San Sebastian College of Law,
University of the East, Far Eastern University, MLQU School of Law, PUP College of Law
National Bar Review Lecturer

Academicus Review Center, Inc.; Powerhaus Law Review; University Of Santo Tomas Review
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1|P a g e – U N A U T H O R I Z E D R E P R O D U C T I O N O F T H I S R E V I E W M A T E R I A L I S I L L E G A L
A N D T A N T A M O U N T T O I N T E L L E C T U A L P R O P E R T Y R I G H T S I N F R I N G E M E N T
PREPARED BY: DR. VIRGINIA JEANNIE P. LIM, EdD, LLM., MSA
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PROBLEM EXERCISES ON RA 11534: the CREATE ACT

Prepared by: DR. JEANNIE P. LIM
1. RECAPITALIZATION AND REORGANIZATION DEFINED:
RECAPITALIZATION means (a) an arrangement whereby the stock and bonds of a corporation
are readjusted as to amount, income, or priority or an agreement of all stockholders and
creditors to change and increase or decrease the capitalization or debts of the corporation
or both; or (b) the formation of the same corporate business with the same assets and the
same stockholders surviving under a new charter.
REORGANIZATION means any of the following instances: (a) a corporation, which is a party to
a merger or consolidation, exchanges property solely for stock in a corporation, which is a
party to the merger or consolidation, or (b) the acquisition by one (1) corporation, in
exchange solely for all or a part of its voting stock, or in exchange solely for all or part of the
voting stock of a corporation which is in control of the acquiring corporation, of stock of
another corporation if, immediately after the acquisition, the acquiring corporation has
control of such other corporation, whether or not such acquiring corporation had control
immediately before the acquisition; or (c) the acquisition by one (1) corporation, in
exchange solely for all or a part of its voting stock or in exchange solely for all of the voting
stock of a corporation which is in control of the acquiring corporation, of substantially all
the properties of another corporation, (d) No gain or loss shall also be recognized if
property transferred to a corporation by a person, alone or together with others, not
exceeding four (4) persons, in exchange for stock or unit of participation in such a
corporation of which as a result of such exchange, the transferor(s), collectively gains or
maintains control of said corporation. Provided, that stocks issued for services shall not be
considered as issued in return for property.
In determining whether the exchange is solely for stock, the assumption by the acquiring
corporation of a liability of the others shall be disregarded.
 Prior BIR Ruling or confirmation shall not be required for purposes of availing the tax
exemption of the exchange.
Illustrations: (a) A Corporation and B Corporation agreed to merge. In the agreement “A” is the
absorbed corporations and “B” is the absorbing corporation. “A” gave all its properties to
“B” in exchange for
“B’s” shares of stocks. (Property for shares of stocks) This results to a reorganization of “A”
Corporation.
(b) “A” Corporation gave all or part of its voting stocks in exchange for all or part of “B”
Corporation‘s voting shares. “B” is the acquiring corporation. If after the acquisition “B” will
be in control of “A”, there is between “A” and “B” reorganization. (stocks for stocks)
(c) “C” Corporation is in control of “B” Corporation. “A” agreed to give all or part of its voting
shares to “B” in exchange for B’s shares. In view of this agreement, “C” is now in control of
“A”.
Control – means ownership of stocks in a corporation after the transfer of property

possessing at least 51% of the total voting power of all classes of stocks entitled to vote.
2. (a) Is this new law applicable to a “ONE-PERSON Corporation”? (b) Is this new law
applicable to a “ONE-MAN Corporation”?
Answer. (a) Yes. The new corporate tax rate also applies of a One-person Corporation. (b) One-
Man corporation refers to a stockholder (natural person) that has acquired all or substantially
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all of the shares of a corporation. The said individual does not become a corporation on that
score alone and therefore is not covered by the new law.
3. For (a) Domestic corporations, and (b) Resident (foreign) corporations the corporate income
tax shall be 25% beginning July 1, 2020.
 In case these corporations sustain losses in their business operation during the period
of July 1, 2020 to June 30, 2023, they shall pay only one (1%) MCIT. But beginning July
1, 2023 and onwards the regular 2% MCIT shall apply.
 If the income tax due from a DC or a RC is less than 1% or 2% MCIT as the case may be,
the DC or RC shall not pay the regular corporate income tax but instead to pay the MCIT
which is bigger than the regular tax due.
 For newly organized corporations the 1% or 2% MCIT shall be imposable only on the
4th year of its operation if there will be business losses incurred. Thus, if there are losses
sustained during the first three (3) years of its operation it shall be exempt from the
imposition of MCIT. (The 3-year Leeway Principle)
 MCIT has a “3-year carry-forward feature” – which means it can be deducted from a
normal corporate income tax provided it is still within the 3-year range from the said
regular income tax. MCIT cannot be deducted from another MCIT!
 NOTE that the MCIT is applicable only to corporations subject to the regular corporate
income tax. Any corporation that is not covered by the regular 25% corporate income
tax is exempt from MCIT. Such as: PAGCOR, PAL, INTERNATIONAL AIRLINES with
landing rights, Cooperatives among others.
4. For MSMEs (micro small and medium enterprises with net taxable income no exceeding Php
5.0M AND total assets not more than Php 100M, excluding the land on which the entity’s
business is situated), the corporate income tax shall be 20% beginning July 1, 2020.
 The new corporate tax rate of 20% applies only to DOMESTIC CORPORATIONS.
 Should these MSMEs suffered losses in their business operation, the MCIT shall likewise
applies to them.
 For newly organized MSMEs the MCIT shall be imposed only beginning on its 4 th year
of operation if losses are sustained.
Illustration: In 2021 X, a domestic corporation realized a net taxable income of Php

1,800,00.00 and its total assets amounts to Php 20M only excluding the land on which the
particular business is situated. Is X subject to the 25% or the 20% new corporate income
tax?
Answer. X belongs to the group of micro, small and medium enterprises (MSMEs) and is
subject to the 20% corporate income tax. Its taxable income is less than P5.0 M and with
total assets of not more than P100K excluding the land where the business is situated.
(b) If X Corporation is a resident foreign corporation (RFC) is the 20% corporate income
tax applicable if its taxable income is less than P5.0M with total assets of less than P100M?
Answer, No. the 20% applies only to a domestic corporation. An RFC regardless of its
taxable income shall be taxed at 25%.
5. (a) Is the new corporate income tax of 25% or 20% applicable to partnership? (b) to
GOCCs?
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Answer. (a) Yes, because partnership is taxed like a corporation. (b) likewise, it is
applicable to GOCCs because they are considered ordinary taxpayers unless the charter
creating them provides for tax exemption.
6. Proprietary (private) educational institutions and non-profit hospitals shall be subject to

1% corporate income tax beginning July 1, 2020 to June 30, 2023 instead of the 10% under
the Predominant Test Rule. Beginning July 1, 2023, the tax rate shall be 10% or 25% as the case
may be.
 Private educational institutions are now given additional allowable deductions for
training expenses equivalent to one-half of the actual training expenses incurred
during the year, provided: (a) it shall not exceed 10% of the total direct labor wage of
employees, (b) the labor training is covered by an apprentice agreement and (c) there
is a Certification from DepEd, CHED or TESDA, whichever is applicable)
Illustration: No. I: ABC Academy is an accredited secondary educational institution. In 2020,

it recorded total gross receipts of Php 21.0M. Php 13.0M income from related educational
services and Php 8.0M from unrelated (allied) activities. The following data were also
shown:
Related Activities Unrelated Total

Activities
Gross Receipts / Sales 13,000,000.00 8,000,000.00 21,000,000.00
Less: Cost of Services/Sales 3,000,000.00 2,500,000.00 5,500,000.00
Gross Income 10,000,000.00 5,500,000.00 15,500,000.00
Less: Allowable deductions 3,000,000.00 2,500,000.00 5,500,000.00
NET TAXABLE INCOME 7,000,000.00 3,000,000.00 10,000,000.00
Regular Rate (CREATE ACT) 1%
Tax due 1,000,000.00
ABC Academy is subject to income tax at the rate of 1% since its gross income of
5,500,000.00 from unrelated activities did not exceed 50% (equivalent to 7,750,000.00) of
the total gross income of 15,500,000.00. If the Gross Income from unrelated activities is
more than one-half of the total gross receipts /sales it shall be tax at 25%.
No. 2: XYZ Non-profit hospital has gross receipts of 25,000,000.00 with cost of
service/sale of 12,000,000.00 and allowable deductions of 4,500,000.00 from related
medical activities, while it realized a gross income from unrelated activities of
20,000,000.00; it incurred 5,800,000.00 cost of sales and allowable deductions of
3,000,000.00 on its allied activities for the calendar year 2021, What tax rate is applicable
and how much corporate income tax is due from XYZ Hospital?
Related Activities Unrelated Total

Activities
Gross Receipts / Sales 25,000,000.00 20,000,000.00 45,000,000.00
Less: Cost of Service/Sales 12,000,000.00 5, 800,000.00 17,800,000.00
Gross Income 13,000,000.00 14,200,000.00 27,200,000.00
Less: Allowance deductions 4,500,000.00 3,000,000.00 7,500,000.00
NET TAXABLE INCOME 8,500,000.00 11,200,000.00 19,700,000.00
Regular Rate (CREATE ACT) 25%
Tax Due 4,925,000.00
The gross income of XYZ Corporation from allied or unrelated medical services is
14,200,000.00 which is bigger than 50% of the total gross income realized from both
related and unrelated activities of 13,600,000.00. Hence, the tax rate applicable is the
regular corporate income tax of 25% under the CREATE Act.
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7. Non-Resident Foreign Corporations (NRFC) shall be subject to 25% corporate income tax on
its GROSS income earned within the Philippines beginning January 1, 2021.
 The MCIT is not applicable to a NRFC.
 Expenses incurred by the NRFC within the Philippines are NOT deductible from gross
income.
 The tax payable is withheld by whomsoever pays money to the NFRC and it has the duty
to remit the amount withheld to the BIR.
 NRFC shall be subject to 25% FINAL WITHHOLDING TAX on its passive income received
from all sources within the Philippines beginning January 1, 2021. Such as interest,
dividends, rents, royalties, salaries, premiums (except reinsurance premiums),
annuities, emoluments or other fixed or determinable annual, periodic or casual gains,
profits and income and capital gains (except gains from sale of shares of stock NOT
traded in the stock exchanges.)
Illustration: X is the president of a NRFC. He came to the Philippines on a pleasure trip

and visited the islands of Panay and Bohol. He was mesmerized by the beauty of our
beaches. X was trying to convince the board of his company to invest in our country.
While the plan was still being discussed X bought a condominium unit along Roxas
Boulevard overlooking the Manila Bay on behalf of the corporation. Unfortunately, the
Board of X’s company did not approve the proposal to invest in our country.
Consequently, X sold the condominium unit. Is X liable to pay the 6% Capital Gains Tax
and 1.5 % DST considering that the property sold was a capital asset? Answer. The tax
payable is NOT the 6% CGT but the 25% Final withholding tax. All properties in the
hands of a NRFC are considered ordinary assets.
General Rule on Intercorporate dividends – If the NRFC bought shares of stocks of a

domestic corporation and the latter declares dividends, (referred to as intercorporate
dividends) it shall be subject to 25% Final withholding tax. However, (a) if the country
to which the NRFC is domiciled allows a tax credit equivalent to the difference between
the regular income tax of 30% and the intercorporate dividend tax of 15% or (b) the
home country of the NRFC does not impose tax on dividends, the Final withholding tax
on dividend of 15% shall be imposed beginning January 1, 2021 and not the 25%.
 A NRFC that earns income or capital gains from sale of shares of stocks NOT listed or
traded in the exchanges shall is subject to 15% Final Withholding Tax on its net gains
from effectivity of the CREATE.
8. Inter-dividend of a domestic corporation – (1) If a domestic corporation receives dividends

from another domestic corporation, it shall be exempt from final withholding tax on dividends.
(2) If the dividend is from foreign sources, it shall be exempt from income tax upon the
effectivity of this law subject to the following conditions: (a) it shall be reinvested in the
business operation of the domestic corporation-recipient on the same year received, (b)
Holding period of at least 2 years at the time of dividends distribution, and (c) the domestic
corporation holds directly at least 20% in value of the outstanding shares of the foreign
corporation.
Illustration: ABC Corporation, a domestic corporation owns 25% of the outstanding shares of
XYZ Corporation, a non-resident foreign corporation (NFRC), since 2018. On April 15, 2021,
“ABC” received from “XYZ” Php 2.0M cash dividend. The board of “ABC” resolved and utilized
Php 1.5M of its dividend payment as an additional working capital. Is the foreign sourced
dividend exempt from corporate income tax?
Answer. Only the Php 1.5M of the dividend is tax-exempt the remaining Php 500,000 shall be
declared as taxable income for the year 2021 because it failed to meet the requirements of full
utilization of the dividend.
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9. The Regional Operating Headquarters (ROHQ) of multi-national corporations shall be

subject to the 25% corporate income tax beginning January 1, 2022. If said corporation shall
sustain losses in its business operation in our country on July 1, 2023 onwards it shall also be
subject to the 2% MCIT.
 The 3-year Leeway Principle on newly organized corporations shall likewise be applicable
to ROHQ.
10. Offshore Banking Unit (OBUs) – From the effectivity of this law OBUs shall be taxed as a
resident foreign corporation at 25%, in case it shall sustain losses, the MCIT shall likewise be
applied.
11. A non-resident alien individual (NRA) winning prizes here from sweepstake tickets or lotto
of more than Php 10,000 shall be subject to 20% Final Withholding tax beginning from
effectivity of this law.
12. Interest Arbitrage – ABC Corporation, a domestic corporation borrowed Php 20.0M from the
bank with a payable interest of 10% per annum. Only Php 12.0M of this loan proceed was
utilized in its business operation. The remaining Php 8.0M was placed in a bank deposit with
an interest income of Php 240,000 net of final tax of 20%. How much interest expense may
“ABC claim as an allowable deduction?
Answer. The net interest income of 240,000 is divided by 80% to get the gross interest income
earned. Thus, the gross interest earned is Php 300,000. Then Php 300,000 is multiplied by 20%
(the new interest arbitrage rate under CREATE) = Php 60,000. This product is deducted from
the interest expense incurred to get the allowable deduction of interest expense. Since the
Interest expense from loan is Php 2.0M (Php 20.0M X 10%) ABC cannot deduct the full Php
2.0M as interest expense. It must deduct the Php 60,000 interest earned. Thus, Php 2,000,000
– 60,000 = Php 1,940,000 is the allowable deduction that can be claimed by ABC.
No. 2: DEF Corporation has incurred an interest expense of Php 500,000 from its bank loans. It
has a net taxable income of Php 4,500,000.00, Php 70,000,000 total assets exclusive of the land
valued at Php 5,000,000 where the business is situated and operating. Within the same year tt
has earned interest income of Php 180,000. How much interest expense is deductible from its
gross income?
Answer. The tax rate of DEF Corporation is 20% since its taxable income did not exceed Php
5.0M and its total assets did not exceed Php 100M. The final tax on interest income imposable
id 20%, there is no difference on these two rates. Thus, there is no interest arbitrage. DEF
Corporation may claim the allowable interest expense of Php 180,000 in full.
13. Additional allowable deduction of one-half (1/2) of the value of labor training expenses which
shall not exceed 10% of Direct Labor Wages incurred for skills development of enterprise-
based trainees in accredited educational institutions and vocational institutions and duly
covered by an apprenticeship agreement, Certification from DepEd, CHED or TESDA,
whichever is applicable.
Illustration:
ABC, a domestic manufacturing corporation. For the year 2021 it had a total direct labor
(salaries) expense of Php 5,000,000. Granting that ABC has complied with the withholding tax
requirement on all cost and expenses incurred subject to withholding tax, and incurred
training expenses for its qualified employees of Php 300,000. It is allowed to deduct Php
150,000 (1/2 of the training expenses which is less that 10% of the total direct labor cost (Php
500,000.) paid to all employees.
If ABC’s total direct Labor cost is Php 2,400,00 and the training expenses incurred is Php
500,000. ABC cannot deduct ½ of the training cost (Php 250,000) because this is more than
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10% of the total salary to employees (240,000.00). ABC may only deduct no more than Php
240,000.
14. Persons exempt from VAT: (a) cooperatives, (b) Self-employed individuals and professionals
availing of the 8% tax on gross sales/receipts and other non-operating income of the TRAIN
Law – shall be subject to 1% percentage tax effective July 1, 2020 – June 30, 2023. By July 1,
2023 onwards the regular 3% shall apply.
15. Local manufacture or importation of raw materials, drugs, and medical equipment for use in
the treatment of COVID shall be exempt from VAT and import taxes, fees, and charges.
 Importation by VAT registered entity and holder of License to Operate from the FDA of
raw materials for COVID treatment that are not locally available or are insufficient in
quantity are VAT exempt. However, if the raw materials are locally available, the
importation is vatable.
 Importation of capital equipment for use in production of PPEs is VAT exempt.
 The sale or transfer of raw materials for PPEs to an affiliated company which is also a
holder of License to Operate issued by the FDA is exempt from VAT.
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Academicus Review Center Inc.

Empowering your dream . Empowering your future

Master of Law in Taxation

National Bar Review Lecturer

PROBLEM EXERCISES ON RA 11534: the CREATE ACT

1. RECAPITALIZATION AND REORGANIZATION DEFINED:

Control – means ownership of stocks in a corporation after the transfer of property

Illustration: In 2021 X, a domestic corporation realized a net taxable income of Php

6. Proprietary (private) educational institutions and non-profit hospitals shall be subject to

Illustration: No. I: ABC Academy is an accredited secondary educational institution. In 2020,

Related Activities Unrelated Total

Related Activities Unrelated Total

 The MCIT is not applicable to a NRFC.

Illustration: X is the president of a NRFC. He came to the Philippines on a pleasure trip

General Rule on Intercorporate dividends – If the NRFC bought shares of stocks of a

8. Inter-dividend of a domestic corporation – (1) If a domestic corporation receives dividends

9. The Regional Operating Headquarters (ROHQ) of multi-national corporations shall be

 Importation of capital equipment for use in production of PPEs is VAT exempt.

JPL/4-13-2021, ALL RIGHTS RESERVED.

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