How will the CREATE Law affect Micro, Small and Medium Enterprises?
The RA No. 11534 or the Corporate Recovery and Tax Incentives for Enterprises (CREATE) Act was signed into law by President Rodrigo Duterte to cushion the economic impact of the pandemic to the business sector, primarily the micro, small and medium enterprises.
The new bill is a welcome relief for small business owners and their workers affected by the extraordinary economic disruption, triggered by the pandemic across the globe because it would save them a lot of money.
With a significant cut in corporate income taxes and other tax relief incentives, enterprises are expected to reinvest in their businesses or increase their operations to create more jobs for the Filipinos.
What are the significant provisions of RA 11534?
1. Corporate Income Tax (CIT)
The new CIT rate of domestic corporations is now set at 20% for a domestic corporation with taxable income not exceeding P5 million and with total assets not more than P100 million.
All other domestic corporations, including resident and non-resident foreign corporations, will benefit from the reduced tax rate of 25%.
Moreover, all corporations, including resident foreign corporations with a net loss from operations, will pay the Minimum Corporate Income Tax (MCIT) of 1% (from 2%), starting on the 4th taxable year from the start of business operations.
Proprietary and non-profit educational institutions and hospitals are subject to a 1% CIT rate.
2. Percentage Tax
The updated Percentage Tax for non-VAT taxpayers has been decreased to 1%.
3. Other Tax incentives
Corporate financial transactions are considered necessary and could strategically benefit the country; in terms of creating jobs and promoting countryside development, CREATE offers generous incentives and discounts.
What do these provisions mean to business owners?
Implementation is retroactive.
What is peculiar about this bill is that the implementation is retroactive and will affect the 2020 income tax payable. Since the reduced rates are effective starting, July 1, 2020, business owners will have to determine their CIT payable differently this year.
The Tax Code of the Philippines specifies that when there is a change in tax rates, the income and expenses are deemed to have been earned and spent equally for each month. Thus, the CIT is computed by multiplying the number of months covered by the new tax rate with the corporation’s taxable income, divided by twelve.
To illustrate, if the annual corporate taxable income is 150 million and the new rates are effective July 1, 2020, the first 75 million (150 million multiplied by six months and divided by 12 months) is multiplied by the old rate (30%), while the remaining 75 million is multiplied by the new rate (25%).
More extensive opportunities in this hostile business climate
The passage of CREATE makes more significant opportunities for businesses, primarily the micro, small, and medium enterprises, to survive in this harsh economic climate.
We appreciate the Bureau of Internal Revenue for the timely issuance of RMC No. 46-2021, which gives taxpayers an extension of the amendment of their tax return until May 15, 2021.
This alone is the “light at the end of the tunnel” for many taxpayers as tax payment based on the reduced rates is on the horizon.
Everyone wishes for a smooth and safe income tax filing and payment in these challenging times. Let us continue to keep the Bayanihan spirit alive in each one of us.
How we can help you
On April 8, 2021, the BIR has finally issued five revenue regulations given the new bill. Now, we can file and pay our taxes correctly and promptly, beating the April 15, 2021 deadline.
However, the new BIR rulings had amended some provisions of the National Internal Revenue Code, particularly on the allowable deduction from Gross Income of persons engaged in the practice of a profession, the Value-Added Tax, and Percentage Tax. Taxpayers may find it confusing to interpret the recent revenue regulations.
Thus, without the professional help of a tax expert and with the deadline of filing and payment drawing near, as well as the imposition of stricter control measures to contain the COVID 19, taxpayers may not file and pay their tax due on time.
Our team may help you assess and identify the tax incentives under the CREATE bill you are qualified for.
Just email us at email@example.com or send us a message on Facebook: https://www.facebook.com/djkaaccounting.
Please refer to the Revenue Regulation Nos. 1-2021 to 5-2021 here.