R.S. Bernaldo & Associates

SALIENT FEATURES OF REPUBLIC ACT (RA) NO. 11534 OR THE “CORPORATE RECOVERY AND TAX INCENTIVES FOR ENTERPRISES ACT” (CREATE) RELATED TO NEW INCOME TAX RATES ON THE REGULAR INCOME OF CORPORATIONS, ON CERTAIN PASSIVE INCOMES, INCLUDING ADDITIONAL ALLOWABLE DEDUCTIONS FROM GROSS INCOME OF PERSONS ENGAGED IN BUSINESS OR PRACTICE OF PROFESSION

CORPORATE INCOME TAX RATES UNDER CREATE BILL

Distinction between the corporate income tax rates applicable to the regular taxable income of corporations under NIRC vs corporate income tax rates under RA No.11534

INCOME TAX RATES ON CERTAIN PASSIVE INCOMES UNDER CREATE BILL

Distinction between the income tax rates applicable to certain passive income of individuals and corporations under NIRC vs passive income under RA No.1153:

CHANGES TO THE ALLOWABLE DEDUCTIONS FROM GROSS INCOME FOR BUSINESS PERSONS

1. Training Expenses

Upon the effectivity of the CREATE, an additional deduction from taxable income of one-half (1/2) of the value of labor training expenses incurred for skills development of enterprise-based trainees enrolled in Public Senior High Schools, Public Higher Education Institutions, or Public Education Institution, or Public Technical and Vocational Institutions and duly covered by an apprenticeship agreement under Presidential Decree No. 442, Series of 1974, or the Labor Code of the Philippines, as amended, shall be granted to enterprises. Provided, further, that for the additional deduction for enterprise-based training of students from Public Educational Institutions, the enterprise shall secure proper “certification” from the Department of Education (DepEd), Technical Education and Skills Development Authority (TESDA), or Commission on Higher Education (CHED). Provided, finally, that such deduction shall not exceed Ten Percent (10%) of Direct Labor Wage.

2. Interest

In the case of corporations, since the income tax rates changed effective July 1, 2020, it follows that the deduction from the interest expense of 20% shall be effective also on the said date. For other domestic corporations with net taxable income not exceeding Five Million Pesos (P5,000,000) and total assets not exceeding One Hundred Million (P 100,000,000), excluding the land on which the particular business entity’s office, plant and equipment are situated, the deduction is 0% since there is no difference in the income tax rate on the taxable income (20%) with the tax rate applied on the interest income subjected to final tax (20%). However, in the case of individuals engaged in business or practice of profession, such deduction shall take effect upon the effectivity of CREATE. See transitory provisions below for the detailed manner of computation.

IMPROPERLY ACCUMULATED EARNINGS TAX UNDER CREATE BILL

The improperly accumulated earnings tax shall no longer be imposed on corporations upon the effectivity of the CREATE onwards. This shall apply to the entire taxable year for all fiscal years/taxable years ending after the effectivity of CREATE.

NON-RECOGNITION OF GAIN OR LOSS ON EXCHANGE OF PROPERTY

No gain or loss shall be recognized if:

• such corporation is a party to a reorganization and exchanges property in pursuance of a plan of reorganization solely for stock or securities in another corporation that is a party to the reorganization.
• property is transferred to a corporation by a person, alone or together with others, not exceeding four (4) persons, in exchange for stock or unit of participation in such a corporation of which as a result of such exchange, the transferor or transferors, collectively, gains or maintains control of said corporation: Provided, that stocks issued for services shall not be considered as issued in return for property.

Sale or exchanges of property used for business for shares of stocks covered under this subsection shall not be subject to value-added tax (VAT). In all of the foregoing instances of exchange of property, prior Bureau of Internal Revenue (BIR) confirmation or tax ruling shall not be required for purposes of availing of the tax exemption. The concerned parties can implement the transaction covered by this Section including, but not limited to, the issuance of the Certificate Authorizing Registration (CAR) by the Revenue District Office (RDO) where the property is located, in case of real properties, or to the RDO where the business is registered, in case of shares of stocks, subject to post-transaction audit by the Bureau.

TRANSITORY PROVISIONS

1. A.    Rate to be used in the deduction of a certain percentage of interest income subject to final tax.

Illustration (lifted from the draft):

JKL Corporation secured in 2018 a bank loan for its business expansion, and incurred interest expense of P2,000,000 in CY 2020 on the said bank loan. In the same year, it likewise earned interest income of P300,000 subjected to final tax of 20%. For CY 2020, its gross income amounted to P20,000,000.  Its gross assets, excluding the value of the land where its building and plant are situated, is P100,000,000. Its operating expenses amounted to P10,000,000, inclusive of the interest expense of P2,000,000.

Compute for the interest arbitrage using the applicable rate:

Alternatively, we may multiply the rates reflected in the table below with the amount of gross interest income subjected to final tax to find the amount of interest deductible from the interest expense claimed. Using the same illustration, we will get the same amount of P79,500 (P300,000*26.50).

Transitory rates for interest arbitrage applicable for TY 2020 for corporations under itemized corporations:

1. B.    Computation of Income Tax Due of The Corporations for Taxable Year 2020

Under RA 11534, corporations’ income and expenses for the fiscal year shall be deemed to have been earned and spent equally for each month of the period.

Illustration (lifted from the draft):

MVAA Corporation, a domestic retailer, has gross sales of P1,400,000,000.00 with cost of sales of P560,000,000.00 and allowable deductions of P150,000,000.00 for calendar year 2020, its 4th year of business operations. Its total assets of P180,000,000.00 includes the land and building in which the business is situated, amounting to P50,000,000.00 and P25,000,000.00, respectively.

The corporate income tax due for taxable year 2020 shall be computed as follows:

Alternatively, we may multiply the rates reflected in the table below with the amount of taxable income to obtain the tax payable during the period. Using the same illustration, we will get the same amount of P189,750,000 which is the higher between the tax due - regular of P189,750,000 (P690,000,000*27.50) and tax due – MCIT of P10,350,000 (P690,000,000*1.50).

IMPACT OF CREATE LAW TO THE INCOME TAX RETURNS AND FINANCIAL STATEMENTS TO BE FILED AFTER ITS EFFECTIVITY

PAS 12, Income Taxes, requires current and deferred taxes to be measured with reference to the tax rates and laws, as enacted or substantively enacted by the end of the reporting period. Under the Philippine legislation process, Bills turn into Law upon the President’s approval or when he fails to act upon a proposed law submitted by Congress within 30 days of receipt. A bill may be vetoed by the President, but the House of Representatives may overturn a presidential veto by garnering a 2/3rds vote. Accordingly, since CREATE Bill was not yet approved by the President as of December 31, 2020, current and deferred taxes will still be measured using the existing RCIT rate of 30% in December 31, 2020 financial statements. The retroactive effect of July 2020 is ignored in the financial statements, but is considered in the preparation of the annual ITR for December 31, 2020.

See below sample computation and disclosure for reference:

Sample Computation and Disclosure

Note:

1. Income tax payable under PFRS will be the amount to be presented in the Dec 31, 2020 financial statements.
2. Income tax payable under Tax will be the amount to be presented in the Dec 31, 2020 ITR and is subject for payment.
3. Any difference will be reflected as reconciliation in the Dec 31, 2021 financial statements.

Continuing the sample computation, a disclosure under Events After Reporting Period section of the financial statements shall also be presented for the effect of CREATE. Sample disclosure would be:

On March 26, 2021, the Republic Act (RA) 11543, known as “The Corporate Recovery or Tax Incentives for Enterprises Act” (Create Act), was passed into law. The salient provisions of the Create Act applicable to the Company are as follow:

1. Effective July 1, 2020, the corporate income tax rate is reduced from 30% to 20% for domestic corporations with net taxable income not exceeding P5,000,000 and with total assets not exceeding P100,000,000, excluding land on which the particular business entity’s office, plant, and equipment are situated during the taxable year for which the tax is imposed at 20%. All other domestic corporations and resident foreign corporations will be subject to 25% income tax;
2. Minimum corporate income tax (MCIT) rate reduced from 2% to 1% effective July 1, 2020, to June 30, 2023;
3. Percentage tax reduced from 3% to 1% effective July 1, 2020, to June 30, 2023; and
4. The imposition of improperly accumulated earnings is repealed.

As of [approval date of financial statements], the overall effect of the changes in tax rates if applied to the current and deferred tax balance at the reporting period would be as follows:

      For those taxpayers who have already filed their income tax returns for taxable year 2020 (calendar year 2020; fiscal year ending from July 31, 2020 to fiscal year ending February 28, 2021), they may amend their income returns using the transitory rates, and any resulting excess/overpayment can be claimed for refund or carried over to the next taxable year, at taxpayers’ option.

      For those taxpayers who have already issued their financial statements, no need to reissue the financial statements as the auditor’s report and financial statements is reflective of the circumstances when these were issued.

PDF version: 

qau_memo_2021-14._revenue_regulation_no._5_ra_11534.pdf

qau_memo_2021-14._annexes.pdf