It has been almost a year since Republic Act No. 11534, otherwise known as the Corporate Recovery and Tax Incentives for Enterprises (CREATE) Act was signed into law. It took effect on April 11 last year. Its central focus is to lower corporate income tax rates for domestic and foreign corporations to mitigate the effects of the COVID-19 pandemic on our economy. However, this is not the case for Regional Operating Headquarters (ROHQs), which in the past enjoyed a preferential income tax rate of 10%. With the passage of the CREATE Law, effective Jan. 1, 2022, ROHQs shall now be taxed at 25% Regular Corporate Income Tax (RCIT) or 1% (until June 30, 2023)/ 2% Minimum Corporate Income Tax (MCIT), whichever is higher.
ROHQs AS DEFINED
Section 22 (EE) of the National Internal Revenue Code (NIRC) of 1997 defined ROHQs as branches established in the Philippines by multinational companies which are engaged in the provision of the following services to its affiliates, subsidiaries, and branches in the Philippines: general administration and planning; business planning and coordination; sourcing and procurement of raw materials and components; corporate finance advisory services; marketing control and sales promotion; training and personnel management; logistics services; research and development services and product development; technical support and maintenance; data processing and communication; and business development. The company shall not directly and indirectly solicit or market goods and services, whether on behalf of the parent company, branches, affiliates, subsidiaries, or any other company. In the same manner, it cannot directly or indirectly engage in the sale and distribution of goods and services of its mother company, branches, affiliates, subsidiaries, or any other company. In the eyes of our existing tax laws, ROHQs are treated as resident corporations that are taxable only on their income derived from sources within the Philippines.
PREFERENTIAL INCOME TAX RATE OF 10% PRE-CREATE
Before the passage of the CREATE Law, ROHQs were subjected to 10% preferential income tax rate on their taxable income derived from all sources within the Philippines. Hence, income earned outside the Philippines was treated as exempt for income tax purposes. Meanwhile, ROHQs subject to the preferential income tax rate under Section 28 (A)(5) of the Tax Code are not liable for the MCIT of 2%, nor are they entitled to elect the Optional Standard Deductions as their method of deduction in their income tax return.
REGULAR CORPORATE INCOME TAX OF 25% UNDER CREATE
Effective Jan. 1, 2022, pursuant to the CREATE Law and Revenue Regulations No. 05-2021, ROHQs are subject to 25% RCIT. As a result, just like other resident foreign corporations, in general, pursuant to Section 28(A)(2) of the Tax Code, ROHQs are subject to 1% (until June 30, 2023) and 2% MCIT. MCIT is computed based on the cumulative gross income multiplied by the applicable MCIT rate. It is applicable only on the fourth taxable year immediately following the taxable year in which the company commenced its business operations.
In the Revenue Regulations, the BIR issued guidelines on how to compute income tax due using the revised rates. If the company follows a calendar year, for the taxable year ending Dec. 31, 2022, the company must pay income tax equivalent to the RCIT or MCIT, whichever is higher. However, in computing the income payable for 2023, the MCIT rate from Jan. 1 to June 30, 2023 is 1%, and for July to Dec. 31, 2023, 2%. Thus, the MCIT rate to be used would average 1.5%. Any excess of the MCIT over the normal income tax is to be carried forward and credited against the normal income tax for the three immediately succeeding taxable years.
As a result of the change in the corporate income tax rate for ROHQs, under Section 34 (L) of the Tax Code, in lieu of the allowed itemized deductions under the same section, ROHQs may now elect a standard deduction in an amount not exceeding 40% of its gross income. “Gross income” means gross sales or receipts less sales returns, allowances, discounts, and cost of goods sold or cost of services. The corporation needs to signify in its first quarter income tax return its intention to elect the optional standard deduction. Otherwise, it will be considered as having availed itself of the allowed itemized deductions. Such election, when made in the return, is irrevocable for the taxable year for which the return is made. Provided, that except when the Commissioner of the Internal Revenue otherwise permits, the corporation must keep records pertaining to its gross income as defined in Section 32 of the Tax Code during the taxable year, as may be required by the rules and regulations promulgated by the Secretary of Finance, upon recommendation of the Commissioner.
The preferential tax rate is one of the most beneficial incentives for ROHQs. The removal of this incentive might have consequences such as reduced operations, loss of jobs, decreased spending, and lower competitive advantage. On the other hand, such a preferential tax is disadvantageous to local investors. Hence, removal of such incentives will level the playing field for foreign and local companies. But at the end of the day, what we hope to see is that such tax reforms help our economy thrive especially during trying times.
Let’s Talk Tax is a weekly newspaper column of P&A Grant Thornton that aims to keep the public informed of various developments in taxation. This article is not intended to be a substitute for competent professional advice.
Trisha Amor M. Gatdula is a senior in charge from the Tax Advisory & Compliance division of P&A Grant Thornton, the Philippine member firm of Grant Thornton International Ltd.