THE CORPORATE RECOVERY AND TAX INCENTIVES FOR ENTERPRISES (CREATE) ACT, OR REPUBLIC ACT NO. 11534

 

The Corporate Recovery and Tax Incentives for Enterprises (CREATE) Act, or Republic Act No. 11534, is a landmark legislation in the Philippines that significantly reformed the country's corporate income tax and fiscal incentive system. Signed into law on March 26, 2021, and effective April 11, 2021, CREATE is part of the broader Comprehensive Tax Reform Program (CTRP) aimed at making the Philippine economy more competitive and attractive to investments.

 

Key Objectives of CREATE Law:

·         Lower Corporate Income Tax (CIT) Rates: The primary objective was to reduce the CIT rates to bring them closer to the regional average in Southeast Asia. This was intended to provide relief to businesses, especially in the wake of the COVID-19 pandemic, and to make the Philippines a more appealing investment destination.

·         Rationalize Fiscal Incentives: Before CREATE, the Philippines had a complex and often perpetual system of tax incentives granted by various Investment Promotion Agencies (IPAs). CREATE sought to streamline and rationalize these incentives, making them performance-based, targeted, time-bound, and transparent. The goal was to ensure that incentives lead to tangible economic benefits like job creation, productivity enhancement, and countrywide development.

·         Support Business Recovery: The law was designed to provide fiscal relief and support to businesses grappling with economic challenges, particularly those brought about by unforeseen events like pandemics.

 

Salient Features of CREATE Law:

Reduced Corporate Income Tax (CIT) Rates:

·         General Reduction: The regular CIT rate for domestic corporations and resident foreign corporations was reduced from 30% to 25%, effective July 1, 2020.

·         Smaller Businesses: For domestic corporations with net taxable income not exceeding PHP 5 million and total assets not exceeding PHP 100 million (excluding land), the CIT rate was further reduced to 20%.

·         Non-Resident Foreign Corporations: The income tax rate for non-resident foreign corporations was reduced from 30% to 25% effective January 1, 2021.

·         Minimum Corporate Income Tax (MCIT): The MCIT rate was temporarily reduced from 2% to 1% of gross income from July 1, 2020, to June 30, 2023.

·         Proprietary Educational Institutions and Non-Profit Hospitals: The tax rate for these entities was reduced from 10% to 1% from July 1, 2020, to June 30, 2023.

·         Repeal of Improperly Accumulated Earnings Tax (IAET): The 10% tax on improperly accumulated earnings was repealed.

Rationalized Fiscal Incentives:

·         Incentive Menu: CREATE established a new menu of incentives, primarily consisting of:

·         Income Tax Holiday (ITH): Granted for a period of 4 to 7 years, depending on the location and industry.

·         Special Corporate Income Tax (SCIT): A 5% tax on gross income earned (GIE) in lieu of all national and local taxes, typically for export enterprises, for a period of 10 years.

·         Enhanced Deductions (ED): This regime allows for additional deductions from taxable income for various expenses, such as:

·         Additional depreciation allowance for buildings, machinery, and equipment.

·         Additional deductions for labor expenses, research and development (R&D), training, domestic input expenses, and power expenses.

·         Deduction for reinvestment allowance for manufacturing and tourism industries.

 

Enhanced Net Operating Loss Carry-Over (NOLCO).

·         Strategic Investment Priority Plan (SIPP): The SIPP, developed by the Board of Investments (BOI) and approved by the President, outlines the industries and activities eligible for incentives, categorizing them into tiers based on their strategic importance and economic impact.

·         Fiscal Incentives Review Board (FIRB): CREATE strengthened the FIRB, granting it more oversight and policy-making functions over the grant and administration of tax incentives. This aims to ensure accountability and effective monitoring of incentives.

·         Sunset Provision: For existing registered business enterprises (RBEs) that availed of incentives before CREATE, a sunset provision was included. Those with only ITH could continue for the remaining period, while those with ITH + 5% GIE or already enjoying 5% GIE could continue for 10 years.

 

VAT and Duty Exemptions:

·         Duty Exemption: Registered enterprises are generally exempt from customs duty on the importation of capital equipment, raw materials, spare parts, or accessories directly and exclusively used in the registered project or activity.

·         VAT Exemption and Zero-Rating: VAT exemption on importation and VAT zero-rating on local purchases apply to goods and services directly and exclusively used by RBEs in their registered projects or activities.

 

Recent Amendments (CREATE MORE Act - RA 12066):

In November 2024, the CREATE MORE Act (RA 12066) was signed into law, further refining the CREATE Act. Key amendments include:

·         Expanded VAT Zero-Rating Coverage: The "directly and exclusively used" requirement for VAT zero-rating was relaxed to "directly attributable," broadening the scope to include essential services like janitorial, security, financial, and administrative functions.

·         Lower CIT Rate for Enhanced Deductions: RBEs under the Enhanced Deductions (ED) regime can now enjoy a 20% CIT rate on income from registered activities, down from the general 25% under CREATE.

·         Local Business Tax (LBT) Clarification: CREATE MORE provides for the optional imposition of an RBE local tax (RBELT) at a rate not exceeding 2% of gross income, which can be in lieu of all local taxes, fees, and charges during the ITH or ED period.

·         Flexibility in Incentive Availment: RBEs can now avail of SCIT or ED outright, without necessarily going through ITH first.

·         Extended Incentive Periods: The SCIT and ED incentives, initially capped at a maximum of 10 years, can now be extended for up to 17 or 27 years, with labor-intensive projects potentially getting an additional 5 or 10 years.

·         Liberalized Importation: Duty exemption for imports now covers goods "directly attributable" to the registered activity and goods used for administrative purposes, and allows imports prior to the issuance of the Certificate of Registration (CoR) with a performance bond.

·         Enhanced NOLCO: The Net Operating Loss Carry-Over (NOLCO) can now be carried over as a deduction within five years immediately following the last year of the Income Tax Holiday (ITH) period of the project, instead of the year of loss.

 

Overall Impact:

The CREATE Law, and its subsequent enhancement through CREATE MORE, signifies the Philippines' commitment to fostering a more competitive and investor-friendly environment. By reducing corporate taxes and rationalizing incentives, the government aims to attract higher quality investments, stimulate economic growth, generate employment, and promote a more equitable and efficient tax system.