On the 26th of March 2021, CREATE Law was signed and implemented. In this article, we’ll find out the commonly asked questions that you should know. The pdf copy of this RA-11534-CREATE-Law will be attached here so you can download and read the full text of CREATE Law 2021.
Let’s start with the definition of this law, and let’s find out the updates on corporate income tax 20201.
CREATE Law 2021 Philippines
As you can see, the above graph shows that the Philippines would no longer be the top country among the ASEAN that has the highest income tax rates.
According to section 1, CREATE is referring to the Corporate Recovery and Tax Incentives for Enterprises Act. The main reason for creating this law is to attract more investments that would increase the employment rates and more inclusive economic growth.
The primary purpose is to improve the equity and efficiency of the corporate tax system by lowering the rate, widening the tax base, and reducing tax distortions and leakages. This CREATE Law 2021 includes corporations, partnerships, joint-stock companies, joint accounts, associations, and insurance companies.
CREATE LAW 2021: Frequently Asked Questions (FAQs)
Here are the common questions regarding corporate income tax updates that you should know. If you have any questions not listed here, please let us know in the comment section below.
Question 1: When to apply the new CIT?
The change in a corporate income tax rate of twenty-five percent (25%) is to apply on the 1st of July, 2020. If you’re filing your 2020 income tax returns, 27.5% is used since there’s a tax rate transition.
If the foreign corporation adopts a fiscal year accounting period, the taxable income will compute the total sales, purchases, and other transactions regardless of the specific dates. The corporate income tax rate is the new tax rate multiply by the number of months from the 1st of July, 2020.
Question 2: Can You Still use the MCIT (Minimum Corporate Income Tax)?
The CREATE Law 2021 does not suspend the use of MCIT for a domestic corporation if you want to use it. When in fact, starting the 1st of July. 2020 until the 30th of June, 2023, the MCIT rate is reduced from two percent (2%) to one percent (1%). Therefore, the MCIT rate for filing the corporate income tax for the calendar year 2020 is 1.5 percent.
The basis of computing the MCIT is based on the gross income, not on the taxable income after operating expenses. An only domestic and resident foreign corporation can avail of the MCIT provided they will meet the requirements:
- They have been in their fourth year of operations, and
- Incurred net loss or zero taxable income that is lesser than minimum income tax.
Take note that the government has the authority to suspend the imposition of the minimum corporate income tax on a corporation that suffers losses based on the following reasons:
- Prolonged labor disputes mean losses from strikes staged by the employee that lasted for more than six months. Also, that would cause a temporary shutdown of business operations.
- Legitimate business reverses include substantial losses due to fire, robbery, theft, or embezzlement.
- Natural disasters.
Incurring any excess over MCIT is to carry forward as a deduction to the ordinary tax for three (3) succeeding taxable years. For accounting purposes, any excess over MCIT is classified as “Deferred Charges,” and any excess is considered an Income tax expense.
Question 3: Can You Use the Optional Standard Deduction (OSD)?
A corporation can reduce taxable income by considering the expenses or deductions in connections to their regular operations. The corporation can use itemized deductions or optional standard deductions.
What’s the difference between these two? Itemized deductions are best to use when you have many legitimate expenses and are well supported by the documents. Here are some of the ways on how to reduce your taxes and how to claim deductions. However, if you want to get rid of stress and collect all the forms or have less legitimate expenses, then it would be best to use the optional standard deduction of forty percent (40%) on gross income (gross sales less cost of sales). Take note that OSD is only for Domestic and Resident foreign Corporations.
For more related articles, you can read these links below:
- Tax updates on Deminimis Benefits
- Tips on how to solve comprehensive estate tax problems
- BIR tax updates
- How to Register as BMBE 2021 registration process
If you’re an individual, you can still use the OSD. However, you cannot deduct the cost of sales, or the tax base is the total gross sales; unlike a corporation, it is the gross income. In addition, you can only use OSD in your ITR if you use OSD in your quarterly tax return. Any individual who wants to avail of the OSD is not required to submit the supporting financial statements. If you’re an individual, how can you minimize your taxes? What tax regime should be best for you? If you want to know the answers, you can read this article regarding the practice of professions.
Question 4: What are the objectives of CREATE Law 2021?
Aside from the above primary purpose of this law, there are other reasons for implementing this law.
- To have a more responsive and globally competitive tax incentives regime that is performance-based.
- Provide support to businesses in their recovery due to the pandemic and other natural disasters.
- Create a more equitable tax incentives system that will allow for inclusive growth and generation of jobs and opportunities in the Philippines.