Special InTAX: May 2021 Issue 1 | Volume 1

 

Bureau of Internal Revenue

 

The Bureau of Internal Revenue (BIR) issued Revenue Memorandum Circular (RMC) No. 62-2021, 17 May 2021, to clarify certain provisions of Revenue Regulations No. 5-2021 relative to corporate income tax under Republic Act No. 11534, otherwise known as Corporate Recovery and Tax Incentives for Enterprises (CREATE) Law. RMC No. 62-2021 clarifies the following:

• In relation to one of the conditions that must be satisfied to qualify for the reduced corporate income tax rate of twenty percent (20%) that the total assets should not be more than Php 100,000,000, exclusive of the land, the term total assets shall be understood to be the net of depreciation and allowance for bad debts, if any. Further, the land where the business entity's office, plant and equipment are situated is excluded in the computation of total assets.

• If the cost of acquisition of the land is reflected in the Financial Statements (FS), that cost shall be excluded in determining the total assets. But if the land is reflected in the FS at its Fair Market Value (FMV), such FMV shall be excluded in the computation of the total assets, for purposes of determining if the corporation is qualified for the reduced corporate income tax rate of twenty percent (20%).

• For purposes of qualification for the reduced corporate income tax, the value of the land which shall be excluded is limited to that particular land where the business entity's office, plant and equipment are situated during the taxable year for which the twenty percent (20%) income tax is imposed. Thus, if the land is being held primarily for sale to customers or land held for investment purposes, the value of these types of land should not be excluded in the determination of the business entity's total assets.

• In order to determine the value of the land that shall be excluded in the computation of total assets, the percentage of the floor area devoted to the entity's office shall be multiplied with the total value of the land. For example, the building has an area of 5,000 square meters, where 1,000 square meters pertain to the entity's office, while the 4,000 square meters are rented out. If the value of the land is Php 10,000,000.00, the value to be excluded in the computation of total assets shall be Php 2,000,000.00. To further illustrate: 1,000/5,000 square meters x Php 10,000,000.00 - Php 2,000,000.00.

• The CREATE law did not prescribe new tax treatment for proprietary educational institutions and private hospitals since it is already provided in the Tax Code of 1997, as amended. The CREATE Act merely reduced the tax rate from 10% to 1%, effective 1 July 2020 to 30 June 2023 for such institutions which are non-profit.

• The provision on RR No. 5-2021 regarding unutilized dividends should be read as "If the Certification shall state non-utilization of the dividends received, the unutilized dividends shall be declared as taxable income, and the corresponding tax due shall be subject to interest, surcharges and penalties".

• The tax treatment of dividends received by a domestic corporation from a Resident Foreign Corporation (RFC) will depend on the sources of income of the RFC. Under Section 42(A)(2)(b) of the Tax Code, as amended, "dividend received from a foreign corporation shall be treated as income derived from sources within the Philippines, unless less than fifty percent (50%) of the gross income of the foreign corporation for the three-year period ending with the close of its taxable year preceding the declaration of such dividends (or for such part of the period as the corporation has been in existence) was derived from sources within the Philippines xxx xxx".

• The phrase "4th year of business operations" in illustration "a" under Section 9.8 on the Transitory Provisions of RR No. 5-2021 should be construed to mean “fourth taxable year immediately following the year in which such corporation commenced its business operation” as indicated under Section 3 of RR No. 5-2021 on MCIT. Thus, if the corporation commenced its business operations in 2017, MCIT may be imposed beginning the year 2021, if it exceeds the regular income tax. The taxable year in which business operations commenced shall be the year in which the corporation is registered with the BIR, as provided under RR No. 9-98.

• The law provides no distinction as to which type of industry can claim the additional allowable deduction of one-half (1/2) of the value of labor training expenses. There are, however, requirements that must be complied with before this deduction can be claimed. These are:

a.     The labor training expenses shall not be more than ten percent (10%) of the Direct Labor Wage;

b.     The labor training expenses are incurred for skills development of enterprise based trainees;

c.     The enterprise-based trainees are enrolled in public senior high school, public higher education institutions, or public technical and vocational institutions for the taxable year in which the labor training expenses are claimed;

The training is covered by an apprenticeship agreement under Presidential Decree (PD) No. 442 or the Labor Code of the Philippines; and

d.     The Company claiming the additional deduction is granted an authority to offer training program for skills development as certified by the Department of Education (DepEd), Technical Education and Skills Development Authority (TESDA) or Commission on Higher Education (CHED), as applicable.

Moreover, since the training is covered by an apprenticeship agreement, it follows that training expenses which pertain to training/s of employees under supervisory, managerial, administrative and support functions should not be included in the computation of the additional allowable deduction of one-half (1/2) of the value of labor training expenses. The resulting amount then shall be subject to a cap of not more than ten percent (10%) of the Direct Labor Wage. The "direct labor" is that portion of salaries and wages which can be identified with and charged directly to a product or to a project or service on a consistent basis. Thus, it does not only apply to a manufacturing industry.

 

Attached is the full text of the issuance.

Revenue Memorandum Circular No. 62-2021