Amicus Curiae

To mitigate the dire financial and economic effects brought about by the COVID-19 pandemic, Congress enacted Republic Act No. 11534 otherwise known as the Corporate Recovery and Tax Incentives for Enterprises Act or CREATE.

CREATE, which was signed by the President on March 26 this year, improves the corporate tax system by lowering the rate, widening the tax base, and reducing tax distortions and leakages. Below are some of its notable provisions.

CREATE lowered the regular corporate income tax (RCIT) for domestic and foreign corporations engaged in trade or business within the Philippines (resident foreign corporations) from 30% to 25% of taxable income effective July 1, 2020.

However, domestic corporations with net taxable income not exceeding P5 million and with total assets not exceeding P100 million, excluding land on which the particular business entity’s office, plant, and equipment are situated, shall be taxed at 20%.

The RCIT for foreign corporations not engaged in trade or business in the Philippines (non-resident foreign corporation) is also lowered from 30% to 25% of gross income effective Jan. 1, 2021.

Proprietary educational institutions and hospitals, except those whose gross income from unrelated trade, business or other activity exceeds 50% of the total gross income derived from all sources, shall pay a tax of 10% on their taxable income.

CREATE reduced the 2% minimum corporate income tax imposed on domestic and resident foreign corporations to 1% of gross income effective July 1, 2020 until June 30, 2023.

CREATE repealed the imposition of improperly accumulated earnings tax under Section 29 of the National Internal Revenue Code (NIRC).

Regional operating headquarters (ROHQs) of resident foreign corporations shall pay a tax of 10% of their taxable income provided that effective Jan. 1, 2022, the ROHQs shall be subject to the RCIT of 25% of their taxable income.

Under CREATE, dividends received by a domestic corporation shall not be subject to tax. Foreign-sourced dividends are exempt from income tax provided that: a.) the funds from such dividends actually received or remitted into the Philippines are reinvested in the business operations of the domestic corporation in the Philippines within the next taxable year from the time the foreign-sourced dividends were received and shall be limited to funding the working capital requirements, capital expenditures, dividend payments, investment in domestic subsidiaries, and infrastructure project; b.) the domestic corporation must hold directly at least 20% of the outstanding shares of the foreign corporation; and c.) the domestic corporation must have held the shareholdings for a minimum of two years at the time of the dividends distribution.

CREATE provides for tax incentives which may be granted to registered projects or activities. The Fiscal Incentives Review Board, or the Investment Promotion Agencies, under a delegated authority from the Fiscal Incentives Review Board, shall grant the appropriate tax incentives only to the extent of their approved registered project or activity under the Strategic Investment Priority Plan.

CREATE provides for the following tax incentives: a.) Income Tax Holiday (ITH); b.) Special Corporate Income Tax (SCIT); c.) Enhanced Deductions (ED); d.) Duty exemption on importation of capital equipment, raw materials, spare parts, or accessories; and, e.) Value-Added Tax (VAT) exemption on importation and VAT zero-rating on local purchases.

The ITH shall be followed by the SCIT or ED. ED cannot be granted simultaneously with the SCIT.

At the option of the export enterprise, the domestic market enterprises with a minimum investment capital of P500 million and domestic market enterprise under the Strategic Investment Priority Plan engaged in activities that are classified as critical, the SCIT rate of 5% based on gross income in lieu of all national and local taxes or ED shall be granted.

Domestic market enterprises under the Strategic Investment Priority Plan engaged in activities that are classified as critical shall refer to those enterprises belonging to industries identified by the National Economic Development Authority to be crucial to national development.

The duty exemption is applicable only to importation of capital equipment, raw materials, spare parts, or accessories directly and exclusively used in the registered project or activity by registered business enterprises.

The VAT exemption on importation and VAT zero-rating on local purchases shall only apply to goods and services directly and exclusively used in the registered project or activity by a registered business enterprise.

The grant and availment of the foregoing incentives are subject to the conditions and periods laid down under and Sections 295 and 296 of the NIRC as amended by CREATE.

This article is for informational and educational purposes only. It is not offered as and does not constitute legal advice or legal opinion.


Zyra G. Montefolca is an Associate of the Davao Branch of the Angara Abello Concepcion Regala & Cruz Law Offices (ACCRALAW).