CREATE Bill: An early Christmas gift?

CREATE Bill: An early Christmas gift?

Legal & Compliance

Yusoph Maute

Yusoph Maute

189 week ago — 6 min read


With Christmas just a few weeks away, most of us are preparing decorations and buying presents despite the quarantine. This year’s holiday season will be very different from the past celebrations. Most businesses, particularly the micro, small and medium enterprises, which used to get their fair share of consumer spending, were forced to temporarily close and retrench employees due to the pandemic.

Despite this, the government is still trying to improve the situation. One example of this effort was the passage of Republic Act No. 11494 or the Bayanihan to Recover as One Act (Bayanihan II), which provides tax breaks for corporate issuers, lenders and borrowers and businesses with operating losses.

Also read: Relief for resilient taxpayers

On November 26, 2020, the Senate also approved on third and final reading Senate Bill No. 1357 or the proposed Corporate Recovery and Tax Incentives for Enterprises Act (CREATE). According to the Department of Finance, the bill is the first-ever revenue-negative tax reform package and the largest fiscal stimulus program for enterprises.

The CREATE Bill provides for the following major reform measures:

1. Corporate Income Tax (CIT)

The bill proposes a flat rate of 25%, from the current 30%, retroactive to July 1, 2020. This new rate is applicable to both domestic and foreign corporations. However, domestic corporations with total assets not exceeding P100 million and total net taxable income not exceeding P5 million, may end up paying as little as 20% CIT.

2. Minimum Corporate Income Tax (MCIT)

Effective also July 1, 2020, the MCIT drops to 1% from 2%. However, the rate will revert to 2% after June 30, 2023.

3. Imposition of improperly accumulated earnings tax

Under the bill, the imposition of the 10% tax on the improperly accumulated earnings of corporations is repealed.

4. Deductible interest expense

The allowable deduction for interest expense is to be reduced by 20% (from 33%) of the interest income subjected to final tax.

5. Percentage tax

As with the MCIT, the rate will also be reduced to 1% from 3% effective July 1, 2020. However, the rate will also revert to 3% after three years.

6. Proprietary education institutions and non-profit hospitals

The bill proposes to reduce the income tax rate on proprietary educational institutions and non-profit hospitals to 1% (from 10%) effective July 1, 2020. After three years, the rate will increase to 3%.

7. VAT Exemption

a. Housing — The threshold for the VAT exemption of residential lots is set at P2.5 million (from P1.5 million). Any below that value will be exempt from VAT. For detached houses and other residential dwellings, the threshold is set at P4.2 million (from P2.5 million) and below.

b. E-Books — The sale, import, printing or publication of books, and any newspaper, magazine, journal, review bulletin on digital or electronic format is also be exempt from VAT.


c. Medicine — The sale or import of medicine for cancer, mental illness, tuberculosis, and kidney diseases will be exempted from VAT beginning 2021 instead of 2023.

d. Personal Protective Equipment (PPE) — The sale and importation of the following shall be VAT exempt:

i. Capital equipment, its spare parts and raw materials, necessary for the production of PPEs

ii. All drugs, vaccines, and medical devices specifically prescribed and directly used for the treatment of COVID-19

iii. Drugs for the treatment of COVID-19 approved by the Food and Drug Administration for use in clinical trials

8. Approval of incentives

Under the CREATE Bill, the role of Fiscal Incentives Review Board (FIRB) is to approve or disapprove the grant of tax incentives to the extent of the registered project or activity upon the recommendation of the Investment Promotion Agencies (IPA). However, the bill proposes to delegate the authority to the IPA for those projects or activities with investment capital of P1 billion and below.

In addition, the bill also proposes the following provisions for both export and domestic enterprises:

a. Income tax holiday (ITH) of 4 to 7 years

b. Special corporate income tax of 5% based on the gross income earned (GIE) for exporters and domestic enterprises classified as critical industries

c. Enhanced deductions duration of 10 years

d. Incentive duration, including expansion projects, of 14 to 17 years

e. Extension period of 10 years

f. Transition period — For enterprises currently in ITH, the enterprise can still avail of the ITH until its expiration. On the other hand, enterprises under the 5% GIE, can still avail of the said incentive until 10 years.

The reduction of the tax rates, additional exemptions and expansion of incentives will certainly help businesses recover and will also improve the country’s capability to attract investment after the pandemic. Considering that the bill was certified as urgent by the President, most investors and business owners are eagerly waiting for the passage of the bill. Such may be considered an early Christmas gift. Nonetheless, I hope that our legislators ensure that the benefits of the tax incentives will be given directly to the economy, workers, and businesses. 

Article by: Anthony Joseph A. Cometa of P&A Grant Thornton

As published in BusinessWorld, dated 01 December 2020

Image source: Freepik

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Yusoph Aquino Maute

Yusoph is a senior manager in the Audit & Assurance Division of P&A Grant Grant Thornton. He is concurrently designated as senior manager of the Firm’s Technical...