ACUBELAW

TO : VALUED CLIENTS

FROM : ACUBELAW

JOSE-ANTONIO ALILING & ASSOCIATES | ACUBE LEGAL

SUPPORT, INC.

RE : FREQUENTLY ASKED QUESTIONS REGARDING REPUBLIC

ACT NO. 11534 OR THE NEW CREATE LAW

DATE : 21 April 2021

1. Who are covered by the new Corporate Recovery and Tax Incentives for
Enterprises (“CREATE”) Law?

 If the taxpayer is a one-person corporation;

 Partnership (no matter how created or organized);
 Joint-stock companies;
 Joint accounts;
 Associations;
 Insurance company.1

DOMESTIC AND FOREIGN CORPORATIONS

2. Since the taxpayer is covered, as a domestic corporation how much tax will
it need to pay?

 For domestic corporations, CREATE Law lowered the tax rate effective
July 1, 2020.

 If the taxpayer’s net taxable income does not exceed FIVE MILLION
PESOS (Php5,000,000.00) and its total assets do not exceed ONE
HUNDRED MILLION PESOS (Php100,000,000.00), the applicable income
tax rate is 20%. 2

 However, if its net taxable income exceeds FIVE MILLION PESOS (Php
5,000,000.00) or its total assets exceeds ONE HUNDRED MILLION PESOS
(Php 100,000,000.00), the applicable income tax rate is 25%.

1
Section 4, CREATE Law.
2
Section 6 (A), CREATE Law.

Jose Antonio Aliling & Associates

7C Shaw Residenza Condominium, 429 Shaw Blvd., Addition Hills, Mandaluyong City 1552, Philippines
Telefax: (632) 8.584.9685 |info@acubelaw.net | www.acubelaw.net
 3. What about non-resident foreign corporations, how much tax will it need to
pay?

 For non-resident foreign corporations engaged in trade or business here in

the Philippines, CREATE Law imposed a final withholding tax based on
the gross amount of income on the following:

 all sources within the Philippines such as interests, dividends, rents,

royalties, salaries, premiums (except reinsurance premiums),
annuities, emoluments, or other fixed or determinable annual,
periodic or casual gains, profits and

 However, starting January 01, 2021 onwards, the tax imposed is 25%.3
4. How about dividends received by the non-resident foreign corporation
from a domestic corporation?

 In general, it is subject to Twenty-five percent (25%) final withholding tax.

 However, a reduced rate of Fifteen percent (15%) shall be applied, subject

to the condition that the country in which the non-resident foreign
corporation is domiciled:

 shall allow a credit against the tax due from the said non-resident
foreign corporation which are equivalent to taxes deemed to have
been paid in the Philippines equal to ten percent (10%) effective
January 1, 2021, which represents the difference between the
regular income tax rate for non-resident foreign corporation under
Section 28(8)(1) of the NIRC of 1997, as amended, and the fifteen
percent (15%) tax on dividends as herein provided; or
 does not impose any income tax on dividends received from a
domestic corporation.4

5. The non-resident foreign corporation earned dividends from a domestic

corporation, are those subject to the regular corporate income tax?

 No. Intercorporate Dividends earned by a non-resident foreign

corporation from a domestic corporation is subject to a final withholding
tax of 15% subject to the condition that the country wherein the non-
resident corporation is domiciled allows a credit against the tax due from
the non-resident foreign corporation taxes deemed to have been paid in
the Philippines equivalent to 15% which represents the difference between
the regular corporate income tax and the 15% tax on dividends. 5

3
Section 1, F, BIR Revenue Regulation No. 2-2021
4
Section 1, F, (6), BIR Revenue Regulation No. 2-2021
5
Section 7, (5(, (b), CREATE Law.

2
 6. The taxpayer is a Resident Foreign Corporation receiving interest income
from deposits and yield or other monetary benefit from deposit substitutes,
trust funds, and similar arrangements and royalties, are those interest
incomes taxable?

 Yes. The interest from any currency bank deposit and yield or any other
monetary benefit from deposit substitutes and from trust funds and
similar arrangements and royalties which are derived from sources within
the Philippines are subject to a final income tax of 20%.
 However, the interest income derived from a depository bank under the
expanded foreign currency deposit system are subject to an increased final
income tax of 15%.6
7. What about the capital gains from sale of share of stock not traded in the
stock exchange earned by resident foreign corporations?

 The CREATE Law made the final tax for Capital Gains from Sale of Shares
of Stock not traded in the Stock Exchange uniform at a final tax of 15%.

*This is also applicable for non-resident foreign corporations. 7

8. What if the corporation is a non-resident foreign corporation, what tax rate
is it subject to?

 The CREATE Law lowered the tax rate from 30% to 25% of gross income
from sources within the Philippines effective January 1, 2021. 8
9. What if the taxpayer is a Regional Operating Headquarter (“ROHQ”), is it
subject to the normal corporate tax?

 ROHQs as defined under prevailing laws are subject to 10% income tax.
 However, the CREATE Law provides that effective January 1, 2022,
ROHQs shall be subject to the regular corporate income tax. 9

10. What if the taxpayer is a Hospital or an Educational Institution, does it pay

the same taxes as the corporations?

 If the taxpayer is a proprietary educational institution or hospital which is

non-profit, you are generally only subject to 10% income tax. However,
CREATE Law lowered the tax imposed from 10% to 1% effective from July
1, 2020 to June 30, 2023. 10

6
Section 7, (6), (a), CREATE Law.
7
Section 7, (6), (c), CREATE Law.
8
Section 7, B, (1), CREATE Law.
9
Section 7, 5, (a), CREATE Law.
10
Section 6 (b), CREATE Law.

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 Date Tax Imposed
July 1, 2020 – June 30, 2023 1%
July 1, 2023 onwards 10%

11. What if the gross income of the Hospital or and Educational Institution
from ”unrelated trade, business or other activities exceeds 50% of its total
gross income?

 The tax prescribed for Domestic Corporations the applicable income tax
rate is 20%, provided that net taxable income does not exceed FIVE
MILLION PESOS (Php5,000,000.00) and its total assets do not exceed ONE
HUNDRED MILLION PESOS (Php100,000,000.00).11

12. What if the corporation does not have income for the first (1 st) four (4) years
of its operations, is it still subject to the same tax?

 If the domestic or resident foreign corporation has been operational for

four (4) years, and it is operating at a net loss, the Minimum Corporate
Income Tax (“MCIT”) of 2% of gross income will be imposed. However,
the CREATE Law lowered this to 1% effective from July 1, 2020 to June 30,
2023. 12

Date Tax Imposed

July 1, 2020 – June 30, 2023 1%
July 1, 2023 onwards 2%

 Even if the corporation has net income, if the MCIT is higher than the
regular corporate income tax, the MCIT is still the one to be paid.

Example:
 The corporation has Five Million Pesos (Php 5,000,000.00) gross income
and Four Hundred Thousand Pesos (Php 400,000.00) net taxable
income.

Regular Corporate Income Tax Minimum Corporate Income Tax

Net Taxable Income is Php 400,000.00 Gross Income is Php 5,000,000.00
RCIT is 20% MCIT is 2%
Tax liability is Php 80,000.00 Tax liability is Php 200,000.00

Since the tax liability under MCIT is higher, that is the one to be paid.

For easier reference, below are the summary of the changes brought about the
Corporate Recovery and Tax Incentives for Enterprises or CREATE Act for
DOMESTIC CORPORATIONS AND FOREIGN CORPORATIONS.
11
Section 6 (b), CREATE Law.
12
Section 6, (E) (1), CREATE Law.

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Type of Corporation Regular MCIT
Rate Effectivity Rate Effectivity
Domestic Corporations 25% July 1% July
1,2020 1,2020 to
June
30,2023

2% July 1,
2023

For corporations with 20% 1% July

net taxable income July 1,2020 to
not exceeding Five 1,2020 June
Million 30,2023
Pesos(ͥ₱5,000,000)
AND total assets not 2% July 1,
exceeding One 2023
Hundred
Million(₱100,000,000),
excluding the land on
which the particular
business entity's
office, plant and
equipment
are situated
Proprietary 1%
Educational July Not Applicable
Institutions and 1,2020
Hospitals to June
30,
2023
10%
July
1,2023

Type of Corporation Regular MCIT

Rate Effectivity Rate Effectivity
Resident Foreign 25% 1% July
Corporation July 1,2020 1,2020 to
June
30,2023

2% July 1,
2023

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 Offshore Banking 25% 1% Upon the
Unit (OBUs) Upon the effectivity
(Note: OBUs shall effectivity of the
now be taxed as of the CREATE
resident foreign CREATE until June
corporation upon 30, 2023
effectivity of the
CREATE) 2% July
1,2023
Regional Operating 25% January 1, January 1,
Headquarters 2022 1% 2022 to
(ROHQ) June 30,
2023

2% July 1,2023
Non-Resident Foreign 25% Not applicable
Corporation July 1,2023

13. The corporation has labor training expenses, can these be deducted from
the taxable income?

 Yes. Under the CREATE Law, 50% of the value of labor training expenses
incurred for the skills development or enterprise-based trainees enrolled
in public senior high schools, public higher educational institutions, or
public technical and vocational institutions and duly covered by an
apprenticeship agreement under the Labor Code. However, the deduction
cannot exceed 10% of the direct labor wage and the enterprise or
corporation should secure the proper certification from DepEd, TESDA, or
CHED. 13
14. What if the taxpayer has interest expenses and interest income, how are
these relevant in the computation of its tax liability?

 Interest Expenses are deductible from the taxable income. However, if the
taxpayer has income interest, the allowed deduction will be reduced by
20% of the interest income subjected to final tax. The reduction was
reduced by the CREATE Law from 33% to 20%.
 Additionally, if the interest income tax is adjusted in the future, the
reduction rate shall also be adjusted based on the standard formula
provided for by the rules and regulations made by the Secretary of
Finance.14
13
Section 9, 34, (A), (v), CREATE Law.
14
Section 9, (B), (1), CREATE Law.

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 15. The taxpayer corporation has recently decided to reorganize wherein there
will be exchange of properties, what is the tax implication of this decision?

 Generally, the entire amount of the gain or loss realized from the sale
or exchange of property is recognized. However, there are exceptions,
and such exceptions were expanded under the CREATE Law.
 Under the CREATE Law, no gain or loss shall be recognized on a
corporation or on its stock or securities if such corporation is a party to
a reorganization and exchanges properties pursuant to a plan of
reorganization solely for stock or securities in another corporation that
is a party to the reorganization.15

 Under the CREATE Law, reorganization is defined as:

 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 corporation; or
 The acquisition by one 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
 A recapitalization, which shall mean 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
 A reincorporation, which shall mean the formation of the same
corporate business with the same assets and the same
stockholders surviving under a new charter.
 The sale or exchanges of property used for business for shares of
stock mentioned is not subject to VAT.
 The CREATE Law also provided that the confirmation or the
ruling of the Bureau of Internal Revenue is not required to avail
of the exemption. 16

VALUE ADDED TAX

16. What transactions are exempted from VAT based on the new CREATE
Law?

15
Section 10, (2), (e), CREATE Law.
16
Section 10, (2), e, CREATE Law.

7
  The CREATE Law retained most of the transactions exempted under the
NIRC, as amended, but added or revised the following:

- Sale, importation, printing or publication of books, and any

newspaper, magazine, journal, review bulletin, or any such educational
reading material covered by the UNESCO Agreement on the
Importation of Educational, Scientific and Cultural Materials which are
not devoted principally to the publication of paid advertisement;

- The sale of or importation of prescription drugs and medicines for

Diabetes, high cholesterol, and hypertension beginning January 1,
2020, and cancer, mental illness, tuberculosis, and kidney diseases
beginning January 1, 2021. However, the Department of Health (DOH)
shall issue a list of approved drugs and medicines.

 For the period beginning January 1, 2021 to December 31, 2023, the sale
or importation of the following:

 Capital equipment, its spare parts and raw materials, which are
necessary for the production of personal protective equipment
components for COVID-19 prevention;
 All drugs, vaccines and medical devices specifically prescribed
and directly used for COVID-19 treatment. The DOH will issue
every 3 months a list of drugs and medical devices to be covered
by this exception; and
 Drugs for COVID-19 treatment approved by the Food and Drug
Administration (FDA) for use in clinical trials, including raw
materials directly necessary to produce such drugs. However,
the Department of Trade and Industry (DTI) should certify that
the equipment, spare parts or raw materials to be imported are
not available locally or if available, there is not enough supply
or does not meet the qualifications. 17
17. The taxpayer is exempt from VAT, what tax does it pay?

 Under the NIRC, as amended, non-VAT Registered persons and VAT

exempt persons, except cooperatives, are subject to 3% tax on the gross
quarterly sales or receipts. However, CREATE Law lowered the tax
imposed from 3% to 1% effective from July 1, 2020 to June 30, 2023. 18

Date Percentage Tax Imposed

July 1, 2020 – June 30, 2023 1% on gross quarterly
sales
17
Section 12, Section 109 (1), CREATE Law.
18
Section 13, Section 116, CREATE

8
 July 1, 2023 onwards 3% on gross quarterly
sales

18. The taxpayer corporation has improperly accumulated earnings, is this

subject to tax?

 The CREATE Law repealed the imposition of Improperly Accumulated

Earnings Tax, therefore, improperly accumulated earnings are no
longer taxed19.

TAX INCENTIVES
(New title added to the National Internal Revenue Code by the CREATE LAW)
19. As an export enterprise, is the taxpayer subject to the same regular
corporate income tax?

 If the taxpayer is an export enterprise, the CREATE Law allows the

taxpayer to avail of the Special Corporate Income Tax (SCIT) rate of 5% of
gross income earned effective July 1, 2020. This is now what the taxpayer
will pay instead of other national and local taxes. 20

 Additionally, the CREATE Law provided an income tax holiday of 4 to 7

years, depending on location and industry priorities, followed by the
special corporate income tax rate or enhanced deductions for 10 years
thereafter.
20. As an export enterprise, what are the other deductions that the taxpayer can
claim?

 The CREATE Law added new deductions to those already provided for by
the NIRC, as amended, that export enterprises may be allowed to deduct,
these are as follows:21

Deductions Corresponding Percentage

Depreciation Allowance (Qualified 10% for buildings; and
Capital Expenditure) Additional 20% for machineries and
equipment
Labor Expenses 50%
Research and Development 100%
Training Expenses 100%
Domestic Input Expenses 50%
Power Expenses 50%

19
Section 6, BIR Revenue Regulation No. 5-2021
20
Section 16, Section 294 (B), CREATE LAW
21
Section 16, Section 294 (C), CREATE LAW

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  Enhanced Net Operating Loss Carry-Over
 The net operating loss of the registered project or activity during
the first 3 years from operation which has not been previously
used as deduction from gross income may be carried over as
deduction from gross income within the next 5 consecutive
taxable years immediately following the year of the loss.22

For those in the Manufacturing Industry – Reinvestment allowance

 When a manufacturing registered business enterprise reinvests
its undistributed profit or surplus in any of the projects or
activities listed in the Strategic Investment Priority Plan, up to
50% of the reinvested amount shall be allowed within 5 years
from reinvestment.

 However, there are conditions provided by the CREATE Law to avail of

these enhanced deductions, as follows:

 The deductions are not simultaneously availed of with the

Special Corporate Income Tax of 5%.
 The Depreciation Allowance are for those assets that are directly
related to the registered enterprise’s production of goods and
services, other than administrative and other support services.
 For the deductions on the labor expenses, these shall not include
salaries, wages, benefits and other personnel costs incurred for
managerial, administrative, indirect labor and support services.
 For the additional deductions on research and development, it
shall only apply to those directly related to the registered project
or activity of the entity and is limited to local expenditure
incurred for salaries of Filipino employees and consumables and
payments to local research and development organizations
 For the additional deduction on training expenses, it shall only
apply to trainings, as approved by the Investment Promotion
Agency based on the Strategic Investment Priority Plan, given to
the Filipino employees engaged directly in the registered
business enterprise’s production of goods and services.
 For the additional deduction on domestic input expense, it shall
only apply to domestic input that are directly related to and
actually used in the registered export project or activity of the
registered business enterprise.
 For the additional deduction on power expenses, it shall only
apply to power that is utilized for the registered project or
activity.

22
Section 16, Section 294 (8), CREATE Law.

10
  For the deduction for reinvestment allowance in the
manufacturing industry, it shall be determined in the Strategic
Investment Priority Plan.23
21. What if the taxpayer has an existing project or activity, what is the effect of
the CREATE Law on its projects or activities?

 Under the CREATE Law, existing registered projects or activities may still
qualify to register and avail of the incentives granted by such law
depending on the criteria provided for by the Strategic Investment Priority
Plan.
22. What about with regard to duties, are there also incentives or exemptions?

 Yes. Under the CREATE Law, importation of capital equipment, raw

materials, spare parts, or accessories directly and exclusively used in the
registered project or activity by the registered business enterprises are
exempted. However, the following conditions must be complied with:

 The capital equipment, raw materials, spare parts, or accessories are

directly and reasonably needed and will be used exclusively in and as
part of the direct cost of the registered project or activity;
 That they are not produced or manufactured domestically in sufficient
quantity or of comparable quality;
 Prior approval of the Investment Promotion Agency may be secured.
 The proportionate taxes and duties are paid in proportion to the
utilization for non-registered projects or activities of the registered
business enterprise and if used for these non-registered projects or
activities within the first 5 years from importation, approval of the
concerned Investment Promotion Agency shall be needed and pay the
taxes and customs duties that were not previously paid. 24

Within the first 5 years from importation, approval of the Investment Promotion
Agency must be secured prior the sale, transfer, or disposition of the capital
equipment, raw materials, spare parts, or accessories, and shall only be allowed
under the following circumstances:25

 If made to another enterprise availing of the same duty exemption;

 If made to another enterprise not availing of the same duty exemption,
upon payment of any taxes and duties due on the net book value of the
capital equipment, raw materials, spare parts, or accessories to be sold;

23
Section 16, section 295, (B), (1), CREATE Law.
24
Section 295, (C), (1), CREATE Law.
25
Section 295, (C), (2), CREATE Law.

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  Exportation of capital equipment, raw materials, spare parts, or
accessories, source documents or those required for pollution
abatement and control;
 Proven technical outdatedness of the capital equipment, raw materials,
spare parts, or accessories; or
 If donated to the TESDA, State Universities and Colleges, or DepEd
and CHED-accredited schools. Provided that the donation is exempt
from import duties and taxes, and donor’s tax.

COVID-19 vaccines tax incentives

23. Is the procurement, deployment, and administration of COVID-19 vaccines
subject to taxes?

 No, beginning January 01, 2021, the procurement, importation, donation,

storage, transport, deployment, and administration of COVID-19 vaccines
through the Vaccination Program by the government or any of its political
subdivisions and by private entities shall be exempt from custom duties,
VAT, excise tax, donor’s tax, and other fees.

 Provided, that the vaccines shall not be intended for resale or other
commercial use and shall be distributed without consideration from
persons to be vaccinated.26

24. What are requirements for the qualified entities to avail the exemption
from VAT, excise tax, and donor’s tax from the procurement, importation,
donation, storage, transport, deployment, and administration of COVID-19
vaccines?

 Certified true copy of COVID-19 vaccine procurement

agreement/multiparty agreement, as may be applicable. The multi-party
agreement on the procurement by the Local Government Unit (“LGU”)
and private entities shall include the DOH and the relevant supplier of the
COVID-19 vaccine.

 Certified true copy of the COVID-19 vaccine’s Certificate of Product

Registration or Emergency Use Authorization issued by the FDA

 “Sworn declaration” from the taxpayer-buyer/importer/done that the

COVID-19 vaccines shall not be intended for resale or other commercial
use and shall be distributed without consideration from persons to be
vaccinated, in accordance with the COVID-19 Vaccination Program of the
National Government. For private entities, a statement shall be included
that any such vaccines shall be for the sole and exclusive use of such
entities and their related parties, if any, as discussed under Section 4 of
Revenue Regulations No. 19-2020; and
26
Section 1 & 2, BIR Revenue Regulations No. 1 – 2021.

12
  In addition to the foregoing requirements, the following shall be presented
for COVID-19 vaccines donated to the abovementioned entities:

i. For the National Government and LGUs - a certified true copy

of the duly accepted Deed of Donations; and

ii. For private entities and international humanitarian

organizations - a certified true copy of the duly accepted Deed
of Donation and/or BIR Form No. 2322 (Certificate of
Donation). 27

25. What were the provisions vetoed by President Duterte?

 The following provisions were vetoed by the President:

 The increase of the threshold for VAT exemption for residential lots
from One Million Five Hundred Thousand Pesos (Php 1,500,000.00) to
Two Million Five Hundred Thousand Pesos (Php 2,500,000.00) and for
house and lots and other residential dwellings from Two Million Five
Hundred Thousand Pesos (Php 2,500,000.00) to Four Million Two
Hundred Thousand Pesos (Php 4,200,000.00);
 The automatic action on tax refunds within 90 days.;
 The grant of Special Corporate Income Tax to Domestic Market
Enterprises and the creation of the categories of Domestic Market
Enterprises;
 The grant of 3% share to the government from the gross income of
export enterprises.
 The extension of availing tax incentives;
 The definition of Investment Capital and suggested to just adopt the
current measures being used;
 The provision listing the specific activities that are included in Tier I
and Tier III;
 The mandatory exercise of the functions of the Fiscal Incentives Review
Board when investment capital exceeds One Billion Pesos (Php
1,000,000,000.00);
 The power of the President to exempt an Investment Promotion
Agency; and
 The automatic approval of applications for incentives.
We trust that you find the foregoing informative for purely advisory purposes.
Should you have further concerns, please do not hesitate to let us know.

27
Section 4, BIR Revenue Regulations No. 1 – 2021.

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