The Pending Change in Corporate Income Tax from 30% to 25%

In November, 2020, the Senate passed SB 1357, or the CREATE bill (Corporate Recovery and Tax Incentives for Enterprises Act), a new proposed law that calls for sweeping changes in the country’s existing corporate tax laws.
 
The lower house of Congress has initially agreed to adopt the bill as drafted by the Senate, but had since backtracked and called instead for a bicameral conference, which has yet to convene as of the second week of January, 2021.
 
Nonetheless, it’s expected that the bill will be approved by both houses — something the local business community has been eagerly anticipating as it can help the sector in recovering from the effects of the COVID-19 pandemic.

Reducing corporate taxes

One of the most important provisions of the CREATE bill is the lowering of the corporate income tax (CIT) rate from 30% to 25%.
 
This move will place the Philippines on the same footing as many of the top and most mature economies in the Asia-Pacific region, such as Hong Kong, Singapore, Thailand, Vietnam, and Taiwan, which all have CIT rates of between 16.5% and 20;, as well as Indonesia, Japan, Malaysia, China, and South Korea, which have CIT rates of between 22% and 25%.
 
Once passed, the legislation will immediately cut CIT rates to 25%. And it does not end there. The bill also proposes to reduce the CIT rate by 1% each year starting in 2023 until it reaches 20% in 2017.
 
For corporations making P5 million or less a year in net taxable income and have total assets not exceeding P100 million, the CIT rate will immediately be reduced to 20% upon the bill’s passage.

Other important provisions

 
In addition to reducing the CIT rate, the bill includes other important provisions, such as:

1. 1. Additional VAT exempt activities

      The CREATE bill has expanded the list of business activities that are exempt from paying VAT. The new exemptions include:

      • Printing, publication, sale, and importation of journals and educational materials under the UNESCO agreement

      • Sale and importation of drugs for the treatment of cancer, mental illness, tuberculosis, and kidney diseases

      • Sale and importation of equipment, raw materials, and spare parts for the production of PPEs such as coveralls, N95 masks, gloves, and others

      • Sale and importation of all drugs for COVID-19 treatment, including FDA approved drugs for clinical trials of COVID-19 treatments

1. 1. 2020 Net Operating Loss Carryover (NOLCO)

      The CREATE bill also calls for extending NOLCO for the year 2020 to five years compared to the original NOLCO of only three years. This means that businesses can declare any loss in 2020 as an expense to lower its taxable income within the next five years.

1. 1. Status quo for businesses enjoying 5% tax on gross income earned (GIE) incentive

      Certain businesses, such as PEZA-registered and BOI registered enterprises, enjoy the incentive of paying 5% tax on gross income for 2 to 7 years, instead of paying the standard corporate net income tax rate of 30%. After 2 to 7 years, known as the sunset period, these businesses will be taxed the standard CIT rate.

      Under the CREATE bill, these businesses will continue to enjoy the benefit of paying only 5% tax on GIE with the extension of the sunset period to 4 to 9 years.

1. 1. VAT exemptions for the sale of low cost housing

      Under the existing 1997 Tax Code, the sale of low cost real estate properties meeting a certain threshold was VAT exempt until January, 2021. Residential lots valued at no more than P1.5 million and homes valued at no more than P2.5 million qualify for the exemption. After January, 2021, only homes valued at no more than P2 million would have enjoyed this incentive.

      The CREATE bill seeks to nullify the sunset period and continue the VAT-exempt status of low-cost housing units sales. Furthermore, it has upped the threshold for qualified properties to P2.5 million for residential lots and P4.2 million for homes.

1. More flexibility for the president in granting incentives

   The CREATE bill seeks to grant the president of the country greater flexibility in granting incentives to highly desirable projects. These incentives include income tax holidays for eight years or longer, special corporate tax rate of 5% for more than 30 years, and others.

 
Some sectors had objected to provisions in the bill that favor discretion to rules, which they believe creates fraught and uncertainty among foreign investors. In general, however, the CREATE bill is seen to have favorable effects to businesses, and consequently, to the economy in general.
 
If you need more information about Philippine tax codes and how you can maximize your opportunities from the CREATE bill, we at Filepino are the local experts to call. Get in touch with us at +63.917.892.2337 or send us a message here.