And so, it came to pass. The Corporate Recovery and Tax Incentives for Enterprises (CREATE) Bill, though with vetoed provisions, was finally signed by the President on March 26 as Republic Act No. 11534. After years of waiting for the lowering of the corporate income tax and the rationalization of fiscal incentives, we now have the law just waiting to be published to be effective.
CREATE is peculiar because of its retroactive provisions which will affect the 2020 income tax payable of most corporations. This means that even if the law becomes effective sometime in April, it will still have an impact on 2020 corporate income tax filings. Below are some of the provisions with retroactive effect:
1. Corporate income tax (CIT) rates of domestic corporations and resident foreign corporations
Effective July 1, 2020, corporate income tax of domestic corporations shall either be 20% or 25%. The 20% rate applies to domestic corporations with a net taxable income not exceeding P5 million AND with total assets not exceeding P100 million. In computing the total assets, the value of the land where the office, plant and equipment are situated during the taxable year is to be excluded.
All other domestic corporations are subject to the 25% corporate income tax rate.
Resident foreign corporations are subject to 25% income tax effective July 1, 2020.
2. CIT of proprietary educational institutions and hospitals
Beginning July 1, 2020 until June 30, 2023, proprietary educational institutions and hospitals which are nonprofit are subject to a tax of one percent (1%) on their taxable income.
3. CIT of nonresident foreign corporations
Nonresident corporations are subject to income tax of 25% of their gross income from the Philippines effective July 1, 2020.
4. Minimum corporate income tax (MCIT)
The MCIT for both domestic and resident foreign corporations has been decreased to 1% from July 1, 2020 until June 30, 2023.
5. Percentage Tax
Percentage tax on persons exempt from value-added tax under Section 116 of the Tax Code has also been decreased to 1% from July 1, 2020 to June 30, 2023.
With these changes in rates effective July 1, 2020, taxpayers will have to compute their corporate income tax payable differently this year. Considering that we have had previous changes in tax rates, the Tax Code has already prescribed the rules on how to compute income tax if there has been a change in rates. The Tax Code states that taxable income will be computed without regard to the specific date when specific sales, purchases, and other transactions occur. The income and expenses for the fiscal year is deemed to have been earned and spent equally for each month of the period.
Thus, the corporate income tax will apply 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. For example, if the total taxable income is P120 million for the year, the first P60 million will be multiplied by the old rate of 30% and the remaining P60 million pays 25%, regardless of when the net taxable income was actually earned. Thus, even if all the major transactions happened in the last quarter, the income tax will still be computed following the rules listed above. Since the change in rate happened in the last half of the year, an average rate of 27.5% may be used to determine the tax payable. The actual manner of computation, however, will depend on the instructions of the Bureau of Internal Revenue (BIR).
While everybody is anticipating the change in the tax rates, taxpayers are still waiting for the implementing rules from the BIR to guide them in filing and paying their taxes this year. Questions like what tax returns will be used, how the excess payments like excess percentage tax is to be treated, and whether taxpayers are allowed to amend tax returns after April 15 without paying penalties are commonly asked.
Another question concerns the computation of the interest rate arbitrage. Under the current rules, the taxpayer’s otherwise allowable interest expense is to be reduced by 33% of the interest income subject to final tax. CREATE lowered this to 20% but did not provide for retroactive effect. However, since the lowering of the percentage is tied to the applicable corporate income tax and final tax on interest, taxpayers are asking if they will be allowed to use the lower rate of 20% starting July 1, 2020.
What happens if the law is not yet effective by April 15? Will taxpayers be required to compute and pay taxes under the old rate and file for amendment only after the law becomes effective? Some taxpayers are short on funds due to business reverses that happened in 2020, while some cannot afford to pay more than what is due. Refund or credit of excess taxes are not palatable choices as most companies are in dire need of cash to fund their struggling businesses.
With April 15 drawing near and the imposition of the enhanced community quarantine (ECQ) in the NCR plus, taxpayers are hoping for the extension of filing and payment of the corporate income tax. We laud the BIR in announcing that the RMC allowing the “file and pay anywhere” has been signed. However, with the difficulty in mobility and access to documents which are locked in their respective offices, taxpayers are expecting delays in preparing their income tax returns. Once again, this is a time for the bayanihan spirit to be practiced both by the BIR and the taxpayers. We are all hoping for a smooth and safe filing and payment of annual income tax. Let us continue to help one another in surpassing these challenging times as we all hope that this too, shall pass.
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.
Eleanor Lucas Roque is a principal of the Tax Advisory & Compliance division of P&A Grant Thornton, the Philippine member firm of Grant Thornton International Ltd.