On March 26, 2021, the President signed the Corporate Recovery and Tax Incentives for Enterprises (CREATE) Act or Republic Act (RA) No. 11534 into law which introduces extensive reforms on corporate income tax and incentive systems for existing and qualifying enterprises. The law was published on March 27, 2021 and is expected to take effect on April 11, 2021.
CREATE aims to improve the equity and efficiency of the corporate tax system by lowering the rates, widening the tax base, and reducing tax distortions and leakages, as well as developing a more responsive and globally competitive tax incentive regime that is performance-based, targeted, time-bound, and transparent. It is a unique piece of legislation since it encourages the flow of investments, which will in turn yield jobs for Filipinos, in all areas in the Philippines (most especially in the less developed areas of the country), while endeavoring to provide support to enterprises to recover and thrive even during any outbreak of diseases like the COVID-19 pandemic which we are currently battling.
Indeed, much clamor is being given to the reduction of corporate income tax from 30% to 25%/20% (as applicable) which is expected to encourage more inbound investments and give aid to entities already doing business in the country. However, other provisions of the new law may be as impactful in affecting investors’ attitude towards continuing business operations in the Philippines over neighboring Asian countries. This is especially true for existing registrants of Investment Promotion Agencies (IPAs), as these entities must now assess the impact of the provisions of the CREATE Act, such as the application of the sunset provisions and any options that may be available to them to enjoy incentives under the said law.
Sunset provisions for existing registered enterprises
True to its mandate to rationalize the grant of tax incentives, Section 16 of CREATE Act introduces Section 311 of the Tax Code which provides for the following sunset provisions applicable to existing IPA-registered entities which have been granted tax incentives prior to the effectivity of the CREATE Act:
- Existing registered enterprises that were granted only an income tax holiday (ITH), whether availed of or not prior to the CREATE Act, shall continue to enjoy the same for the remaining period, as specified in the terms and conditions of their registration; (Section 311-A)
- Existing registered enterprises that were, prior to the effectivity of CREATE Act, granted ITH followed by the 5% tax on gross income earned (5% gross income tax or GIT), shall enjoy the 5% GIT for 10 years; (Section 311-B)
- Existing registered enterprises enjoying 5% GIT prior to the effectivity of CREATE shall continue to enjoy the said incentive for 10 years. (Section 311-C)
It is clear under Section 311-A that entities granted with ITH incentive only prior to the effectivity of the CREATE Act will continue to enjoy the said incentive, as granted under the terms and conditions of their registration. In contrast, entities falling under Section 311-C or those currently enjoying 5% GIE granted prior to the CREATE Act’s effectivity shall continue to enjoy the same, albeit for a limited period of 10 years. We can say that this is consistent with the intention of the government to make incentives rational and time-based.
However, a plain reading of Section 311-B reveals that entities which were granted with ITH and 5% GIT after the lapse of ITH shall continue to enjoy only 5% GIT for 10 years, impliedly forfeiting any remaining ITH period. The law is silent on what will happen on the ITH incentive of these entities. This brings into question whether or not it is the intent of the law to forfeit the remaining years of ITH entitlement and limit the incentive to only 5% GIT for 10 years. Questions in the minds of taxpayers include whether or not the applicability of 5% GIT despite remaining years under ITH is in line with the CREATE’s intention to build a transparent and rational tax incentive scheme. Hopefully, the Department of Finance (DOF) and the Bureau of Internal Revenue (BIR), in the implementing rules and regulations (IRR) which will be released within 90 days from the CREATE Act’s effectivity, will be able to provide sufficient and categorical guidance on what will happen to these entities’ ITH entitlement in view of Section 311-B.
On the possibility of enjoying tax incentives under CREATE Act
Another section of the CREATE Act which should be considered by existing IPA-registrants in assessing the impact of the CREATE Act on their businesses is on whether there is still a possibility, under the CREATE Act to continue enjoying incentives beyond the sunset provisions.
A closer look into the new Section 296 of the Tax Code provides that existing registered projects or activity prior to CREATE Act may qualify to register and avail of the incentives granted under CREATE Act for the prescribed period subject to the criteria and conditions set forth in the Strategic Investment Priority Plan (SIPP). The same section, under paragraph (B), further provides that after the expiration of the applicable transitory period, export enterprises may reapply and avail of the 5% Special Corporate Income Tax (SCIT) for 10 years subject to the conditions and qualifications set forth in the SIPP and the performance review by the Fiscal Incentives Review Board (FIRB).
The language of this Section seems to suggest that, notwithstanding the transitory periods, existing registered enterprises, whether export or domestic market enterprises, may qualify to register, and avail of the incentives granted under CREATE Act. Does this refer to an option to register under the CREATE Act, subject to the necessary conditions and approvals that may be required under the IRR, instead of continuing to enjoy the incentives under the transitory provisions? In the case of export enterprises, it seems that another available option is to continue to enjoy the incentives under the sunset provisions and thereafter avail the 5% Special Corporate Income Tax (SCIT) under the CREATE Act for another 10 years through a re-application, subject to the conditions and qualifications of the SIPP and FIRB’s performance review. Hopefully, the mechanics on how to implement, the parameters to obtain approval and the requirements on how to properly avail and other compliance and reporting requirements once applications are approved be clearly outlined in the IRR.
CREATE has indeed introduced innovative ways to retain and even encourage investments despite the existence of sunset provisions for existing registered enterprises. It also entails a massive undertaking on the part of the government agencies concerned to craft clear rules and guidelines to properly implement and enforce the CREATE Act’s provisions to stay true to its call for a globally competitive tax incentive schemes in the Philippines which are rational, equitable and transparent.
Marc O. Cabida is an Assistant Manager from the Tax group of KPMG R.G. Manabat & Co. (KPMG RGM&Co.), the Philippine member firm of KPMG International. KPMG RGM&Co. has been recognized as a Tier 1 tax practice and Tier 1 transfer pricing practice by the International Tax Review.
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