Proposed Corporate Recovery and Tax Incentives for

Enterprises Act (CREATE)

(Senate Bill No. 1357)

This Tax Alert is issued to inform all concerned on the proposed amendments to the National
Internal Revenue Code of 1997, as amended, under Senate Bill No. 1357, otherwise known as
“Corporate Recovery and Tax Incentives for Enterprises Act” or CREATE Bill. The CREATE
Bill was approved on third and final reading by the Senate on 26 November 2020.

Below are the highlights and relevant provisions of the CREATE Bill:

A. Corporate Income Tax (CIT)

1. Starting July 01, 2020, CIT rate for corporations will be reduced as follows:

i. Reduced CIT rate of 20% shall be applicable to domestic corporations with net taxable income
not exceeding P5,000,000 and with total assets not exceeding P100 Million (excluding land on
which the business entity’s office, plant and equipment are situated)

ii. Reduced CIT rate of 25% shall be applicable to all other domestic and foreign corporations.

2. For the period beginning July 01, 2020 until June 30, 2023, minimum corporate income tax rate
shall be 1%, instead of 2%.
3. Improperly accumulated earnings tax is repealed.

B. Preferential tax rates for certain corporations

1. For the period beginning July 01, 2020 until June 30, 2023, non-profit proprietary educational
institutions and hospitals shall be taxed at 1%, instead of 10%.
2. Preferential tax rates/exemption for offshore banking units is repealed.
3. Starting December 31, 2021, regional operating headquarters (ROHQ) will be subject to regular
CIT.

C. Final tax rates in certain passive income

1. Aside, from lotto winnings, winnings from PCSO games amounting to P10,000 or less received by
a nonresident alien individual shall be exempt from income tax.
2. Foreign-sourced dividends received by domestic corporations may be exempt from income tax if
the following conditions are met:

3.

o The dividends are reinvested in the business operations of the domestic corporation in the
Philippines within the next taxable year from date of receipt; and
o The dividends shall be used to funding the working capital requirements, capital expenditures,
dividend payments, investment in domestic subsidiaries and infrastructure project; and
o The domestic corporation holds directly at least 20% of the outstanding shares of the foreign
corporation for a minimum of 2 years at the time of dividends distribution.

3. Interest income earned by a resident foreign corporation (RFC) under the expanded foreign
currency deposit system shall be subject to final tax of 15% (currently 7.5%).
4. Capital gains from sale of shares of stocks not traded in the stock exchange earned by RFC and
nonresident foreign corporation (NRFC) shall be subject to final tax of 15% (currently 5%/10%).

D. Deductions from gross income

1. An additional deduction equal to 50% of the value of labor training expenses incurred for skills
development of enterprise-based trainees enrolled in public senior high schools, public higher
education institutions, or public technical and vocational institutions duly covered by an
apprenticeship agreement and for which a proper certification must be secured from DepEd,
TESDA or CHED shall be allowed, provided that such deduction shall not exceed 10% of direct
labor wage.
2. Due to the proposed reduction in CIT rate, interest arbitrage shall be reduced to 20% of interest
income subjected to final tax.

E. Tax Free Exchanges

1. Specific types of reorganizations involving corporations will be covered by tax-free property

for shares exchanges, including:

i. Merger or consolidation

ii. Acquisition by a corporation of stock of another corporation in exchange for shares, if,
immediately after the acquisition, the acquiring corporation has control of the acquired
corporation

iii. Acquisition by a corporation in exchange for shares, of substantially all of the properties of
another corporation

iv. Recapitalization

v. Reincorporation

2. BIR confirmation or ruling shall not be required for purposes of availing the tax exemption on
tax free exchanges.

3. Clarified the definition of “control” for purposes of tax-free exchange which provides that the
collective and not the individual ownership of all classes of stocks entitled to vote of the
transferor or transferors shall be used in determining the presence of control.

F. VAT Exempt Transactions

 1. Adjustment of threshold for VAT exempt sale of residential real property:

i. Residential lot – P2,500,000 (currently P1,500,000)

ii. House and lot and other residential dwellings – P4,200,000 (currently P2,500,000 and
P2,000,000 effective Jan. 1, 2021)

2. Additional VAT exempt transactions:

i. Sale, importation of any books/newspaper, or any educational reading material covered by the
UNESCO agreement on the importation of educational, scientific and cultural materials,
including the digital or electronic format thereof (requirement to appear at regular intervals shall
be removed)

ii. Sale or importation of the following goods from January 1, 2021 to December 31, 2023:

 capital equipment, its spare parts and raw materials, necessary to produce personal protective
equipment component;
 all drugs, vaccines and medical devices specifically prescribed and directly used for the treatment
of COVID-19
 drugs, including raw materials, for the treatment of COVID-19 approved by the FDA for use in
clinical trials

3. VAT exemption of sale or importation of prescription drugs and medicines for cancer, mental
illness, tuberculosis, and kidney diseases will start on January 1, 2021 instead of January 1, 2023.

G. Percentage Tax

1. For the period from July 01, 2020 to June 30, 2023, the rate of percentage tax shall be 1%
(currently 3%).

H. Fiscal Incentives Rationalization

1. The Fiscal Incentives Review Board (FIRB) or the Investment Promotion Agencies (IPAs) under a
delegated authority from the FIRB, shall grant incentives pursuant to the Tax Code only to the
extent of their approved registered project or activity under a Strategic Investment Priority Plan
(SIPP).
2. Qualifications of a registered business enterprise:

i. Should be engaged in an activity included in the SIPP

ii. Should meet the target performance metrics after agreed time period

iii. Should install adequate accounting systems that can identify the investments, revenue, costs
and profits for each activity or establish a separate corporation for each registered project or
activity

iv. Should comply with e-receipting and e-sales requirement

 v. Should submit annual reports of beneficial ownership of the organization and related parties

3. Income tax incentives that can be availed are as follows:

i. Income tax holiday followed by Special Corporate Income Tax (SCIT) of 5% based on gross
income earned, in lieu of all taxes; OR

ii. Regular CIT with enhanced deductions, at the option of the export enterprise or domestic
market enterprise engaged in activities classified as strategic industries

Enhanced Deductions includes additional deductions for depreciation, labor, training, R&D,
domestic input expense, power expense, investment allowance and claiming of NOLCO for next
5 years.

4. Duration of income tax incentives differed for each category which is based on location and
industry priorities:

i. ITH followed by SCIT

ii. Regular CIT with enhanced deductions

5. Other fiscal incentives:i.

i. Exemption from customs duties on importation of capital equipment, raw materials, spare parts
or accessories directly and exclusively used in the registered project or activity and which are not
produced or manufactured domestically in sufficient quantity at reasonable prices

ii. VAT exemption on importation and VAT zero-rating on local purchases of goods and services
directly and exclusively used in the registered project or activity by a registered enterprise
located inside an ecozone or freeport
6. Qualified expansion or entirely new project or activity may qualify to avail of a new set of
incentives
7. Existing registered projects or activities prior to effectivity of CREATE Bill may qualify to register
under the CREATE Bill provisions
8. Reportorial requirements for registered enterprises

i. Registered enterprises should use the electronic system for filing and payment with the BIR

ii. Registered business enterprises shall file with their respective IPA and with the FIRB a
complete annual tax incentives report and an annual benefits report within 30 calendar days from
the statutory deadline for filing of returns and payment of taxes

iii. Non-compliance with reportorial requirements and failure to use the electronic system for
filing and payment of taxes to the BIR shall be imposed with penalties (1st offense – P100,000;
2nd offense – P500,000) then, cancelation of fiscal incentives.

9. Approval of registered projects or activities of P1 billion pesos and below shall be delegated
by FIRB to IPA

10. Application for tax incentives shall be deemed approved if not acted upon within 20 days

11. Powers of the President to grant tax incentives

i. The President may modify the mix, period or manner of availment of incentives for a highly
desirable project subject to certain conditions and recommendation of the FIRB. The grant of
ITH shall not exceed 8 years and thereafter, 5% SCIT may be granted, provided that the total
period of availment shall not exceed 40 years.

12. For existing registered projects/activities prior to effectivity of the CREATE:

i. If granted ITH only, existing registered enterprise may still avail of ITH for the remaining ITH
period

ii. If granted ITH and 5% (Gross Income Tax) GIT after the ITH or if granted 5% GIT only,
existing registered enterprise may avail of 5% GIT for 10 years

https://www.grantthornton.com.ph/newsroom/technical-alerts/tax-alert/2020/proposed-corporate-
recovery-and-tax-incentives-for-enterprises-act-create/
 Package 2: Corporate Recovery and Tax Incentives for Enterprises
(CREATE) Act
The economic team of the Duterte administration has proposed to the Senate several amendments to the
Corporate Income Tax and Incentives Reform Act (CITIRA), the second package of the Duterte
administration’s Comprehensive Tax Reform Program (CTRP), which was passed on 3rd and final reading by
the Lower House in September, 2019 and has now been renamed CREATE.

We are proposing to recalibrate the bill to make it more relevant and responsive to the needs of businesses
negatively affected by the COVID-19 pandemic, and to improve the ability of the Philippines to attract highly
desirable investments that will serve the public interest.

The amendments make the proposed bill the first-ever revenue-eroding tax reform package proposed by the
Department of Finance (DOF) and the largest fiscal stimulus program for enterprises in the country’s history.
The revised bill also increases the ability of the President to approve tax and non-tax incentive packages to
attract investments that will benefit the Filipino people.

The CITIRA bill, now the Corporate Recovery and Tax Incentives for Enterprises (CREATE) Act, was
certified as urgent by President Duterte on March 9, 2020 and mentioned as a SONA priority this year as well
as in previous years.

LEGISLATIVE STATUS
o House of Representatives: Approved on third and final reading (13 September 2019).
o Senate: Committee report filed (17 February 2020). Certified by the President for its immediate enactment on 9
March 2020. Currently under the period of interpellations.

Below is a summary of the economic team’s proposed amendments to Senate Committee Report No. 50, the
current Ways and Means committee report on CITIRA:

o An immediate 5 percentage point cut in the corporate income tax (CIT) rate starting July 2020. The
corporate income tax rate will be reduced further by 1 percentage point every year from 2023 to 2027. In the
second half of this year alone, this will result in a reduction of government revenues estimated at around PHP
37 billion that all firms, especially the country’s micro, small, and medium enterprises (MSMEs), can use to
fund their operations and retain employees. For the succeeding 5 years, the total estimate is about PHP 476.8
billion in foregone government revenues that these firms can invest in the revitalization of their businesses and
to create even more jobs for Filipino workers. This unprecedented investment reflects our resolve to vigorously
fight the impact of COVID-19 and get businesses back on their feet as quickly as possible.
o Maintaining for up to 9 years the status quo for registered business activities enjoying the 5 percent tax
on gross income earned (GIE) incentive. The sunset period is prolonged by two years, from 2 to 7 years in
the previous version, to 4 to 9 years under this proposal. This is a generous compromise for businesses that
have been enjoying forever incentives, some for more than 40 years, which no other country offers.
o More flexibility for the President to grant a combination of fiscal and non-fiscal incentives, which will be
critical as the country competes internationally for high-value investments.

Even with these amendments, we maintain that the reform must continue to adhere to the basic principles of a
system that is performance-based, targeted, time-bound, and transparent. These principles have been
unanimously recognized by stakeholders during hearings and consultations. We believe that these amendments
balance the interests of all stakeholders, while remaining faithful to the fundamental principles and mindful of
the country’s fiscal challenges.
 Provision CITIRA CREATE (Revised CITIRA)

Tax benefit for business enterprises

1 ppt per year:

Outright drop to 25% until 2022; foll
29% – 2020;
by a 1 ppt reduction yearly until 2027
28% – 2021;
25% – July 1, 2020
27% – 2022;
25% – 2021
26% – 2023;
25% – 2022
Accelerated CIT rate reduction 25% – 2024;
24% – 2023
24% – 2025;
23% – 2024
23% – 2026;
22% – 2025
22% – 2027;
21% – 2026
21% – 2028;
20% – 2027 onwards
20% – 2029 onwards

An outright 5 percentage point reduction in the tax rate will benefit all business enterprises in the country that have not enjoyed

type of income tax incentive. The reduction will boost the efforts of enterprises, especially MSMEs, to protect jobs and recover

the challenges they have encountered due to COVID-19.

The accelerated reduction in CIT also boosts the country’s bid to attract multinational firms seeking to diversify their production

chains.

The larger reduction also brings the country closer to the ASEAN CIT rate average of around 22% and will boost cost

competitiveness in doing business. A lower CIT rate, combined with the country’s strong demographic and financial fundament

will strengthen the country’s case for more and better investments.

Flexibility in the grant of incentives

 Recommend to the President the gran

appropriate non-fiscal support, based

Power of the FIRB (Board) None
the SIPP, for highly desirable project

very specific industrial activities.

Modify the mix, period, or manner of

availment of incentives for highly des

Modify the period or manner of
projects or specific industrial activitie
Power of the President availment of incentives; availment of up to
create high-value jobs and attract
40 years
significant foreign capital or investme

incentives availment of up to 40 year

May contain recommendations for ty

non-fiscal support needed to create hi

Strategic Investments Priority Plan (SIPP) None
value jobs and attract significant fore

capital or investment.

To allow the Philippines to take advantage of opportunities to attract especially large or particularly attractive investments, the F

composed of the Secretaries of Finance, Trade and Industry, and NEDA, will have the authority to recommend to the President

appropriate non-fiscal support, in addition to tax incentives. Such support may include facilitation of registration and certificatio

requirements from government agencies; logistics support; customs facilitation; product testing and certification; training suppo

and shared/common services facilities for targeted investors.

Upon the recommendation of the FIRB, the President can approve a set of incentives with longer periods of availment, if necess

to attract highly-desirable investments that will bring more employment, higher level of skills training, and greater value-added

economy.

The flexibility accorded to the President is neither novel nor unique. Among our ASEAN neighbors, the Malaysian, Indonesian,

and Vietnamese authorities have been exercising a similar level of discretion in granting incentives to boost their attractiveness
achieve their economic objectives.

● Our proposal is to work within the boundaries of a performance-based, targeted, time-bound, and transparent system, but not b

confined to a “one-size-fits-all” type of incentive regime that we have at present. As economic trends evolve faster than regulati

can keep up with, we believe that this ability to tailor-fit incentives will help us attract highly desirable investments.

Longer sunset period for firms currently enjoying incentives

Under 5% GIE: Under 5% GIE:

Sunset No. of years under GIE Sunset No. of years under GIE

2 More than 10 4 More than 10

Additional 2-year sunset provision for

3 5 to 10 5 5 to 10
firms currently registered with the various

Investment Promotion Agencies (IPAs)

5 Below 5 7 Below 5

100% exporter; with at least 100% exporter; with at leas

7 10,000 employment; footloose 9 10,000 employment; footlo

projects or activities projects or activities

By extending the sunset period for IPA-registered firms, we directly address their requests for ample time to adjust to the new

incentive scheme.

Even with the extended sunset period, we believe that many, if not most, firms will find the modernized incentives system more

attractive and better suited to their needs. We have thus maintained the option to shift to the new tax incentives regime, instead o

availing of the sunset period.

WHY THE REFORM IS NEEDED
PROBLEM 1:

The Philippines currently imposes the highest CIT rate in the ASEAN region, which is a burden to micro,
small, and medium enterprises (MSMEs) that are dealing with the effects of COVID-19. Even before the
pandemic, the 30 percent CIT rate hindered local businesses from expanding, growing, and competing with
their regional counterparts.
SOLUTION 1:

CREATE seeks to vigorously fight the impact of COVID-19 and help get businesses back on their feet as
quickly as possible. In the second half of this year alone, the accelerated reduction in the CIT rate will result
in a reduction of government revenues estimated at around PHP 40 billion that all firms, especially the
country’s micro, small, and medium enterprises (MSMEs), can use to fund their operations and retain
employees. For the succeeding 5 years, the total estimate is about PHP 600 billion in foregone government
revenues that these firms can invest in the revitalization of their businesses and to create even more jobs for
Filipino workers. This unprecedented investment reflects our resolve to vigorously fight the impact of COVID-
19 and get businesses back on their feet as quickly as possible.

The larger reduction will also bring the country’s CIT rate closer to the ASEAN average of almost 22
percent[1] and will boost cost competitiveness in doing business. A lower CIT rate, combined with the country’s
strong demographic and financial fundamentals, will strengthen the country’s case for more and better
investments.

[1] Source: KPMG, Ernst & Young (EY)

PROBLEM 2:

For decades, the Philippines has been too generous in granting tax incentives to a few investors, in
perpetuity, and without a regular and in-depth review of the costs and benefits of doing so. We give away
some of the most, if not the most, generous incentives in the region via a special rate of 5 percent on gross
income earned (GIE) that is in lieu of all taxes, both local and national, and with no time limit.
While these companies are subjected to discounted tax rates equivalent to 6 to 13 percent of CIT, most other
companies—including around 90,000 small and medium enterprises (SMEs)—pay the regular rate of 30
percent.

In 2017 alone, the Filipino people granted PHP 441 billion (or 2.8 percent of GDP) in tax incentives to only
3,150 companies, including those on the elite list of Top 1,000 corporations. This is just a fifth below the
annual budget of the Department of Education (DepEd) and roughly four times larger than that of the
Department of Health (DOH) in the same year.
PHP 441 billion of foregone revenues in 2017 could have
funded…

In principle, granting incentives is justifiable if the recipients generate a net benefit to society,
such as the creation of good jobs, investing in less developed areas, and if incentives are given
for a generous but reasonable amount of time — not forever.

SOLUTION 2:

Modernizing the fiscal incentive system will allow the government to offer superior
incentives that are performance-based, strategically targeted, time-bound, and fully
transparent. It will encourage businesses to invest in industries and sectors aligned with the
Philippine development agenda; create higher-value jobs; incentivize upskilling and employee
training, and promote investments in less-developed areas, and areas recovering from
calamities or armed conflict.

CREATE seeks to promote a fair and accountable tax incentives system to make sure that every
peso granted as a tax incentive yields a net positive benefit to society.

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