With the emergence of coronavirus disease 2019 (COVID-19), many businesses have collapsed, unemployment rates have increased, while many Micro, Small, and Medium Enterprises (MSMEs) are on the verge of bankruptcy. In cognizance of the adverse impact of the COVID-19 on the Philippine economy, government mechanisms are currently being put in place to contain the damage.
Republic Act No. 11494, also known as the Bayanihan to Recover As One Act or the Bayanihan II, has been passed to bolster the socioeconomic well-being of all Filipinos. Recently, the Department of Finance issued three Implementing Rules and Regulations, as described below (RR No. 23-2020, RR No. 24-2020, and RR No. 25-2020) for Bayanihan II. On the other hand, after the passage of the law, our legislators are now eager to pass another economic measure, the Corporate Recovery and Tax Incentives for Enterprises (CREATE) bill.
RR NO. 23-2020: A TAX BREAK FOR CORPORATE ISSUERS
Prior to the repeal of Section 127(B) of the Tax Code, as amended, a percentage tax is imposed on every sale or other disposition through initial public offering (IPO) of shares of stock in closely-held corporations, based on the specified rates therein. Although the reflected tax bases were lowered, some PSE insiders at the time believed that the tax discourages many companies from going public. Consequently, the growth and development of the capital markets are adversely affected.
Now with the amendment introduced by the Bayanihan Act II, specifically the repeal of Section 127(B), which removed the percentage tax, it may be expected that more closely-held corporations will find it attractive to go public, encouraging investors to participate in public offerings. One other possible outcome is to enable SMEs and those from low-income sectors to actively participate in the development of the capital market.
RR NO. 24-2020: A TAX BREAK FOR LENDERS AND BORROWERS
Part of the response and recovery interventions is the exemption from the DST on loans extended or credits restructured. The BSP has likewise issued Memorandum No. 074, which implements Section 4(uu) of Bayanihan II. Rule IV provides for the scope of the mandatory one-time 60-day grace period and is being made applicable to multiple loans of individuals and entities, with principal and/or interest, including amortizations, falling due on or before Dec. 31, 2020. For multiple loans, the grace period applies to each loan, without incurring interest on interests, penalties, fees or other charges,and for which may be settled on a staggered basis without interest on interests, penalties and other charges until Dec. 31, 2020.
As a tax break for covered institutions, as defined in RR 24-2020, as well as to the borrowers, no additional DST shall be imposed on the loan term extensions and credit restructuring, micro-lending including those obtained from pawnshops.
RR NO. 25-2020: A TAX BREAK FOR BUSINESSES WITH OPERATING LOSSES
Businesses that suffered operating losses incurred in taxable years 2020 and 2021, will be allowed to carry over the losses as deductions from gross income over the next five consecutive taxable years immediately following the year of such loss, as opposed to the three years granted by the Tax Code, as amended. Here, the losses for the taxable years 2020 and 2021 may be carried over as a deduction even after the expiration of Bayanihan II, provided that the same are claimed within the next five consecutive taxable years immediately following the year of such loss.
Not long before the passage of Bayanihan II, the CREATE bill (previously CITIRA), is awaiting deliberations at the Senate. As advised by the economic team, there is a need to recalibrate the bill to make it more relevant and responsive to the needs of the businesses negatively affected by the pandemic, and to improve the country’s ability to attract investment.
For enterprises that have not enjoyed any type of income tax incentive, an accelerated corporate income tax reduction to 25% will surely boost the efforts of businesses, especially the MSMEs, in protecting jobs and recovering from the challenges they have encountered due to COVID-19. According to some experts, once this bill is passed, the Philippines will be the only government to confer tax breaks on MSMEs.
Aside from the outright deduction of the CIT rate, CREATE, if passed, will promote job creation via performance-based incentives. Based on the latest working draft of the CREATE, the Minimum Corporate Income Tax (MCIT) rate will be lowered from 2% to 1%.
For registered business activities enjoying the 5% tax on gross income earned incentive, the sunset period is prolonged to four to nine years, as opposed to the previous version’s two to seven years.
With the Bayanihan II now in place, we can also hope for the passage of the CREATE bill any time soon. Nevertheless, let us hope that these tax breaks currently in place and those being proposed and pursued help taxpayers on the road to a faster recovery after COVID-19.
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.
Note: In the Sept. 29 edition of Let’s Talk Tax, Tax Breaks in Bayanihan II, under the portion Tax Exemption of Retirement Benefits, the period June 5 to Dec. 31 pertains to this year, 2020.
Ma. Jessica A. Guevarra is a senior associate of the Tax Advisory & Compliance division of P&A Grant Thornton, the Philippine member firm of Grant Thornton International Ltd.