CREATE Act: Serving and Saving Businesses in the Philippines

CREATE Act Philippines

When the COVID-19 pandemic hit the Philippines, not only was our healthcare system brought to its knees, but also our economy.

Government-imposed community restrictions have had a huge impact on businesses across the country, and while some have thrived, others have struggled and are still struggling.

For those whose businesses have been negatively struck by the pandemic, the CREATE Act might be your lifeline.

Read on to know more about how it can help entrepreneurs keep their businesses afloat and how it boosts the Philippine economy despite the blows of the pandemic.

What Are The Salient Features Of The CREATE Act?

The CREATE Act (RA 11534), also known as the Corporate Recovery and Tax Incentives for Enterprises, was signed by the President on March 26, 2021, and took effect on April 11, 2021. 

It amends the National Internal Revenue Code of 1997, adding in Title XIII.

Written and spearheaded by Albay’s second district Rep. Joey Salceda, CREATE Act is part of the Philippine government’s response to the effects of COVID-19 pandemic to local and foreign businesses in the country. 

CREATE Act On Corporate Income Tax

Among the provisions of CREATE Act Implementing Rules and Regulations (IRR) is to lessen the corporate income tax (CIT) applied to businesses. 

From 30%, the CIT will now be 25% which means that corporations can allocate their money on production costs and retain or hire more employees instead of paying taxes. 

With the passing of the CREATE Act, fiscal incentives governed by the Fiscal Incentives Review Board (FIRB) are now performance-based, targeted, time-bound, transparent, and are anticipated to establish a globally competitive tax regime for the country.

“CREATE Act is perhaps the largest stimulus program and biggest tax reform measure ever crafted by Congress,” Rep. Salceda said.

Other notable adjustments under the Act include reduced Percentage Tax (from 3% to 1%), exemptions from customs duty on the importation of assets (equipment and raw materials), VAT exemption on local goods utilized solely for the business, among others.

CREATE Act And The VAT Exemptions For COVID-19 Products

Since CREATE Act was written and passed as a pandemic response, it includes VAT exemptions on the sale and importation of the following products related to COVID-19 prevention and eradication: 

• Capital equipment, spare parts, raw materials required for the production of PPEs (for eye, hand, body, and respiratory protection)
• Vaccines and medical devices for COVID-19 treatments
• All FDA-approved drugs necessary for conducting COVID-19 clinical trials

The VAT exemption on the said COVID-19 products is effective from January 1, 2021 to December 31, 2023.

ACT-CIS Rep. Jocelyn Tulfo said that all COVID-19 vaccines and devices can be VAT exempt if the products are certified with a product registration before December 31, 2023 importation and sale.

Aside from COVID-19 products, the following are also VAT exempt under the CREATE Act effective January 1, 2020:

• Books, newspapers, journals, and other educational reading materials (physical or electronic format)
• Drugs for the treatment of cancer, mental illness, tuberculosis, kidney disease, diabetes, high cholesterol, and hypertension

Effects Of The CREATE Act On Businesses In The Philippines

With the CIT down to 25% compared to the previous 30% for large corporations, companies in the Philippines are expected to substantially recover from the financial blow caused by the COVID-19 pandemic.

On the one hand, this change can subsequently decrease the need for corporations to cut back on costs which often include letting go of several employees. 

On the other hand, medium and small corporations will have a 20% CIT provided that each taxable income is no more than 5 million pesos and total assets do not exceed 100 million pesos (excluding land on which the entity’s office is situated). 

With the beneficial returns of the CREATE Act on large and small corporations, the law grants investors tax relief, specifically on investment spending, to counter the impact of COVID-19 on the Philippine economy, as mentioned by Rep. Salceda a year before it passed.

According to Rep. Salceda in this Manila Standard article, the CREATE Act “makes capital income taxes and financial intermediary taxes simpler, fairer, and more efficient.” 

Looking at the bigger picture, the CREATE Act provides financial alleviation for businesses and helps our Filipino workforce retain jobs during the pandemic. 

It pushes the Philippines to align with our neighbors in economic competitiveness, attractiveness, and a closer CIT to the ASEAN average. 

Corporate Income Tax In The Philippines

The Philippines’ previous CIT rates are the highest among ASEAN members. 

Through the CREATE Act, the government will provide performance-based, transparent, and targeted incentives beneficial in enticing local and foreign investors and inspiring business expansion.

With the accelerated reduction of the CIT rate, government revenues  from these taxes will decrease (the forecasted amount is around 600 billion pesos in the next five years).

Vetoed Lines Of The CREATE Act 

Despite the considerate amendment of CREATE Act, President Rodrigo Duterte has vetoed the following items from its implementation:

1. Increasing the VAT-exempt threshold on the sale of real estate. The CREATE Act proposed a higher VAT-exempt threshold on real property sales:
   -Residential lots being sold for no more than 2.5 million pesos
   -House and lots and other residential dwellings being sold for no more than 4.2 million pesos 
   
2. 90 days of processing of tax refunds
   -The CREATE Act proposed that tax credit or refund claims with complete requirements shall be granted by the Commissioner within 90 days from submission date.
   -The President denied this as tax refund applications require a full investigation of other pertinent documents or reports. The 90-day processing may not be enough for audit activities.
   
3. Automatic approval of applications for incentives submitted
   -The CREATE Act proposed that if not acted upon by the FIRB or the IPA, a submitted tax incentive application (provided it is complete) shall be approved. 
   -This was denied by the President as well since tax incentive claims should undergo a meticulous review to ensure that the application is credible and justifiable to receive incentives. 

Until When Will The CREATE Act Be Effective In The Philippines? 

Finance Secretary Carlos Dominguez III stated that the current provisions under CREATE Act are only temporary and will be modified depending on the Philippine economy.

“We understand where businesses are now, and we have proactively made adjustments to help them from the taxation side. Once the country’s economic situation improves, our policy response will change accordingly. These amendments, in other words, are on offer for a limited time only,” Sec. Dominguez explained. 

Final Thoughts: CREATE Act Benefits Small Businesses 

Overall, CREATE Act can benefit corporations but more so for small businesses. 

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