RA 11534 – CORPORATE RECOVERY & TAX INCENTIVES FOR ENTERPRISES ACT (CREATE)1

This legislation was signed into law by President Duterte on March 26, 2021. This monumental breakthrough
is our government’s biggest stimulus for businesses. It came at the most opportune time giving the much-needed
relief to all for this will serve as a fiscal relief and recovery measure for Filipino businesses still suffering from
the effects of the COVID 19 pandemic.

Our present corporate income tax at 30% is the highest among ASEAN countries. This is one big factor why we
could not readily attract foreign investors to consider our country as among their investment prospects. This
long-awaited tax reform aims to attract more investments and maintain fiscal prudence and stability. It
introduces reforms to the corporate income tax, it plugs leakages through rationalization of the fiscal incentives
granted to our inventors; it shifts administration of such incentives towards a system that is performance-based,
targeted, time bound and transparent.

Our country’s economy contracted by a record 9.5% in 2020, the steepest economic contraction in the country’s
history, making the nation one of the worst affected in the region.

This new law has amended thirteen (13) sections of our Tax Code (Secs. 20, 22, 25, 27, 28, 29, 34,40, 57, 109,
116, 204 and 290.) Sections 291 and 292 are deleted and it added a new TITLE XIII with 21 sections to our Tax
Code, beginning from Sections 291 to Sec. 311).

The new law provides for retroactive application of its provisions to July 1, 2020. This is an example of the
exception to the Doctrine of Non-retroactive Application of Tax Law. (“Retroactive application shall not be
allowed unless the law itself so provides.”)

Salient changes introduced are:

1. Effective July 1, 2020 Micro small and medium enterprises (MSMEs) with net taxable income not
exceeding Php 5.0M and with total assets not exceeding Php 100M excluding land on which the
particular business entity’s office, plant and equipment are situated shall be taxed at 20%. (OLD – 30%
corporate income tax on net taxable income.)

2. All other corporations (domestic and resident foreign) shall be taxed at 25% starting July 1, 2020.
(OLD – 30% corporate income tax on net taxable income.)
a. For corporations adopting the fiscal year of accounting period, the taxable income shall be
computed without regard to the specific date when specific sales, purchases and other
transactions occur.
b. The corporate income tax rate shall be applied on the amount computed by multiplying the
number of months covered by the new rate within the fiscal year by the taxable income of the
corporation for the period, divided by twelve (12).
c. Corporation’s income and expenses for the fiscal year shall be deemed to have been earned and
spent equally for each month of the period.

3. Effective January 1, 2021 Non-resident Foreign Corporations (NRFC) shall be taxes at 25% . (OLD
30% on gross income earned from within the Philippines.)

4. Passive income earned by corporations from their foreign currency deposits shall be subject to final
withholding tax of 15% . (OLD – 7.5% Final Withholding Tax)

5. Final Tax of 20% on interest arbitrage. (OLD – 33% of interest arbitrage.)

6. Net income earned by NRFC from disposition of unlisted shares of stocks shall be subject to 15%
Capital Gains Tax on unlisted shares. (OLD – 5% on the first Php 100K of net gain and 10% in excess
thereof.)

7. Intra-corporate dividends from NRFC earned by a domestic corporation exempt from income tax
provided: (a) reinvestment in the DC, (b) 20% or more ownership, and (c) 2 years or more of holding
period. (OLD – 30% regular corporate income tax.)

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Lecture by Dr. Virginia Jeannie P. Lim
8. Intra-corporate dividends earned by NRFC from domestic corporation at 10% starting July 1, 2020
provided the required tax credit in the domicile country is 15%. (OLD – 15%)

9. NOLCO sustained in 2020 and 2021 may be carried over to the succeeding five (5) years. [OLD three
(3) years]

10. Regional Operating Headquarters (ROHQs) of Multi-National Corporations shall be subject to corporate
income tax at 10% for 2021; however, starting January 1, 2022, they shall be taxed at 25% . (OLD –
they are only subject to 10% corporate income tax.)

11. Offshore Banking Units (OBUs) are now subject to the regular corporate income tax of 25% and other
taxes. [OLD – (a) they are taxed at 10% on gross interest income from residents, (b) exempt from
income tax on interest earned from non-residents, and (c) exempt from other taxes.]

12. Proprietary educational institutions and non-profit hospitals will be taxed of 1% from July 1, 2020 to
June 30, 2023. (OLD – 10% or 30% subject to the Predominance Test Rule)

13. Additional 50% deduction for labor training expense of educational institutions subject to: (a) not to
exceed 10% of direct labor wage, (b) covered by apprenticeship agreement, and (c) supported by DepEd,
TESDA and CHED Certification. (OLD – no such deduction)

14. Minimum corporate income tax (MCIT) of 1% effective July 1, 2020 until June 30, 2023. (OLD – 2%)

15. Percentage tax of 1% effective July 1, 2020 to June 30, 2023. (OLD – 3%)

16. Improperly Accumulated Earnings Tax (IAET) of 10% is repealed.

17. Definition of reorganization for purposes of applying the tax-free exchange provision under Sec.
40(C)(2) of the Tax Code is expanded.
a. Types of Reorganization now shall include: (a) Merger or consolidation, (b) Stock acquisition
from a corporation if there is an immediate control to the acquired corporation, (c) Property
acquisition from a corporation in exchange of shares, (d) Recapitalization, and (e)
Reincorporation.
b. Prior BIR Ruling or confirmation shall not be required for purposes of availing the tax exemption
of the exchange.

18. Medicine for diabetes, cholesterol-control, and hypertension shall be exempt from 12% VAT beginning
January 1, 2020 and medicines for cancer, mental-illness, tuberculosis, kidney medicines shall be
exempt from 12% VAT beginning January 1, 2021.

19. Sales or importation of capital equipment, its spare parts and raw materials necessary for the production
of PPEs (Personal Protection Equipment) shall be exempt from 12% VAT and import taxes from
January 1, 2021 to December 31, 2023.

20. Sales and importation of drugs including those for use in clinical trials, vaccines and medical devises
prescribed and used for the treatment of COVID 19 shall be exempt from 12% VAT and import taxes
from January 1, 2021 to December 31, 2023.

21. Better taxpayer experience with creditable withholding taxes.

22. Qualified export enterprises shall be entitled to entitled to 4 – 7 years ITH thereafter to SCIT of 5% on
gross income earned for 10 years or to enhanced deduction for 10 years.

23. Qualified domestic market enterprises shall be entitled to 4 – 7 years ITH and thereafter to 5 years
enhanced deduction.

24. Registered enterprises are exempt from customs duty on importation of capital equipment, raw
materials, spare parts, or accessories directly and exclusively used in the registered project or activity.
 25. VAT exemption on importation and VAT Zero rating on purchases shall only apply to goods and
services directly and exclusively used in the registered project or activity by a registered business
enterprise (RBE).

26. Additional tax incentives of 2 years ITH shall be given to export and domestic market enterprise
recovering from major disasters or areas with armed conflicts.

27. Additional tax incentives to corporation relocating their operations outside the NCR.

28. Available income tax incentives under CREATE:

29. Enhanced deductions for depreciation, labor training, Research & Development expenses, domestic
input expense, power expense, investment allowance.

30. For existing registered projects/activities prior to CREATE – existing registered enterprises may still
avail of ITH for the remaining period if granted ITH only. If granted ITH and 5% GIT after the ITH,
existing registered enterprises may avail of 5% GIT for 10 years.

VETOED ITEMS by President Rodrigo R. Duterte:

1. Increasing threshold of house and lot to Php 4.2M for VAT exemption. (Still at Php 2.5M)

2. 90-day period for processing of general tax refunds under the 0% VAT as impracticable. The Congress,
Department of Finance, and BIR is given time to come up with mechanism to streamline the process of
tax refunds in a separate tax administration bill. (120-day period still applicable)

3. The automatic approval of applications for tax incentives after a certain number of days. The FIRB or
the IPA should be allowed to carefully review the application for tax incentives since these are privilege
granted by the State. The declared policy is to approve or disapprove application based on merits.

4. Specific share of the National government and LGUs in the gross income earned using the special
corporate income tax (SCIT) rate.

5. The additional SCIT for domestic enterprises which is in lieu of all local and national taxes is redundant.
It is unnecessary and it weakens the fiscal incentives system.

6. Allowing registered companies to further apply for new incentives for the same activities they already
enjoy.

7. Allowing export enterprises prior to CREATE to avail of further extension of new incentives for the
same activities.

8. Limiting the power of the FIRB (Foreign Investment Review Board) over projects and activities with an
investment capital of above Php 1.0B. – The oversight functions of the FIRB will ensure the proper
grant and monitoring of tax incentives. These powers must remain plenary over those of the investment
promotion agencies (IPA).

9. Allowing the President to exempt an investment promotion agency from the coverage of the CREATE
Act. This could become a political tool.

10. The exclusion of the value of the land and working capital from the definition of investment capital –
this may lead to an under estimation of investment promotion performance.