On March 31, 2021, the Bureau of Internal Revenue (BIR) has issued Revenue Memorandum Circular (RMC) 42-2021 in relation to Republic Act 11534, or the Corporate Recovery and Tax Incentives for Enterprise (Create) Act signed by President Rodrigo Duterte on March 26, 2021 with line-item vetoes. The following are the salient provisions of the Create Law, which amends some provisions outlined under the National Internal Revenue Code of 1997:
A. Lower corporate income tax
Effective July 1, 2020, the CIT rate for corporations will be reduced as follows for those entities or transactions subject to CIT:
1. Reduced CIT rate of 20 percent shall be applicable to domestic corporations with net taxable income not exceeding P5, 000,000 and with total assets not exceeding P100 million (excluding land on which the business entity’s office, plant, and equipment are situated)
2. Reduced CIT rate of 25 percent shall be applicable to all other domestic corporations and resident foreign corporations
In addition, starting July 1, 2020 until June 30, 2023, a reduced Minimum Corporate Income Tax rate of one percent of gross income shall be applicable to all domestic corporations and resident foreign corporations.
B. Repeal of improperly accumulated earnings tax (IAET)
By virtue of the Create Act, the IAET has been repealed.
C. Lower income tax on proprietary educational institutions and non-profit hospitals
From the period July 1, 2020 to June 30, 2023, proprietary educational institutions and non-profit hospitals will be subject to one percent tax on taxable income, provided that gross income from unrelated trade or business activity does not exceed 50 percent of the total gross income derived by such entities; otherwise, such institutions shall be subject to the regular corporate income tax of 25 percent or 20 percent, as the case may be.
D. Lower percentage tax
Effective July 1, 2020 until June 30, 2023, a reduced percentage tax rate of one percent from three percent shall be applicable to non-VAT taxpayers. After June 30, 2023, percentage tax shall revert to three percent.
E. Tax exemption on inter-corporate dividends received by domestic corporations
Dividends received by domestic corporations shall be exempt from tax, provided that:
1. The funds from such dividends received or remitted into the Philippines are reinvested in the business operations of the domestic corporation within the next taxable year from the time such dividends were received.
2. These shall be limited to funding the working capital requirements, capital expenditures, dividend payments, investment in domestic subsidiaries, and infrastructure projects.
3. The domestic corporation holds directly at least 20 percent of the outstanding shares of the foreign corporation and has held the shareholdings for a minimum of two years at the time of the dividends’ distribution.
F. Regional or area headquarters and regional operating headquarters of multinational companies
Regional or area headquarters shall be exempt from income tax. However, effective Jan. 1, 2022, regional operating headquarters shall be subject to the regular corporate income tax.
G. Tax on certain incomes received by a resident foreign corporation
A final income tax rate of 15 percent is applicable to:
Interest income derived by a resident foreign corporation from a depositary bank under the expanded foreign currency deposit system [previously subject to a final income rate of seven- and one-half percent
Capital gains from sale of shares of stock not traded in the stock exchange (previously subject to five percent for those not over P100,000 and 10 percent for any amount more than P100,000)
Meanwhile, interest from any currency bank deposit and yield or any other monetary benefit from deposit substitutes and from trust funds and similar arrangements and royalties derived from sources within the Philippines shall be subject to a final income tax rate of 20 percent.
P&A Grant Thornton