The Tax Reform Package 2: CREATE-ing opportunities for business

Allenierey Allan V. Exclamador

The Department of Finance (DoF) originally designed its tax reform package 2 to be revenue-neutral, gradually lowering the corporate income tax (CIT) rate while modernizing incentives and making them “performance-based, targeted, time-bound, and transparent” for companies.

However, the COVID-19 pandemic brought about unforeseen hardships and challenges to businesses. The DoF has refocused package 2 (now known as the Corporate Recovery and Tax Incentives for Enterprises Act or CREATE) to make it more “responsive to the needs of businesses negatively affected by the COVID-19 pandemic, and to improve the ability of the Philippines to attract highly desirable investments that will serve the public interest.”


According to the DoF, the changes make the proposed bill the first-ever revenue-eroding tax reform package and the largest fiscal stimulus program for enterprises in the country’s history. In this light, the Senate approved in November Senate Bill (SB) No. 1357, known as CREATE, after which the bill was forwarded to the House of Representatives in December. The provisions in the bill will still be reconciled with the House of Representatives’ version, through a bicameral conference (bicam) and may still be subject to change.

The bill aims 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, as well as developing a more responsive and globally competitive tax incentive regime that is performance-based, targeted, time-bound, and transparent. It also aims to provide support to businesses in their recovery from unforeseen events such as an outbreak of communicable diseases or a global pandemic and strengthen the nation’s capability for similar circumstances in the future. In addition, it seeks to create a more equitable tax incentive system that will allow for inclusive growth and generation of jobs and opportunities across the entire country and ensure access and ease in the granting of these incentives, especially for applicants in the least developed areas.

CREATE seeks to lower the CIT rate from 30% to 25% effective July 1, 2020. But domestic corporations with net taxable income not exceeding P5,000,000 and with total assets not exceeding P100,000,000, excluding land on which the particular business entity’s office, plant, and equipment are situated, shall be taxed at 20%.

While this reduction in the CIT rate will significantly cut into government revenue, the DoF said all firms, especially micro, small and medium enterprises (MSMEs), can use the tax savings to fund their operations and retain employees. The DoF also adds that foregone revenue from the reduction of the CIR rate constitute an unprecedented investment that shows the government’s resolve to vigorously fight the effects of COVID-19 on the economy and get businesses back on their feet as quickly as possible.

Currently, when the minimum corporate income tax (MCIT) of 2% on gross income is greater than the regular income tax of 30% on net taxable income, such MCIT of 2% is imposed on the corporation. Under CREATE, effective July 1, 2020 until June 30, 2023, the MCIT rate shall be one percent (1%).


Another notable change covers foreign-sourced dividends received by a domestic corporation. Dividends received by a domestic corporation from another domestic corporation are not subject to income tax. However, foreign-sourced dividends received by a domestic corporation from investments abroad are subject to income tax.

Under CREATE, these foreign-sourced dividends received by a domestic corporation shall not be subject to income tax provided that 1) the funds from such dividends actually received or remitted into the Philippines are reinvested in the business operations of the domestic corporation within the next taxable year from the time the foreign-sourced dividends were received; 2) the dividends shall be limited to funding working capital requirements, capital expenditures, dividend payments, investment in domestic subsidiaries, and infrastructure projects; and 3) the domestic corporation holds directly at least 20% of the outstanding shares of the foreign corporation and has held the shares for a minimum of two years at the time of the dividend distribution.

This will encourage domestic corporations with substantial investments abroad to repatriate profits to the Philippines and use the funds to reinvest locally, helping to drive economic growth.


Proprietary educational institutions and hospitals which are non-profit shall be imposed a tax rate of 1% on their taxable income from July 1, 2020 until June 30, 2023, instead of 10%. “Proprietary” is defined as a private hospital or any private school maintained and administered by private individuals or groups with an issued permit to operate from the Department of Education (DepEd), the Commission on Higher Education (CHED), or the Technical Education and Skills Development Authority (TESDA), as the case may be, in accordance with existing laws and regulations.

It is widely known that educational institutions and hospitals are among the entities badly affected by the pandemic. This reduction in tax rate for a limited time aims to help these hospitals and educational institutions cope with the crisis and retain employees.


Other salient changes proposed in the CREATE bill include the removal of exemption of offshore banking units (OBUs) and the repeal of the imposition of improperly accumulated earnings tax (IAET). In addition, the Regional Operating Headquarters (ROHQs) of multinational companies shall pay a tax of 10% of their taxable income, except that effective Dec. 31, 2021, ROHQs will be subject to the prevailing regular corporate income tax.

The sale or importation of prescription drugs and medicines for cancer, mental illness, tuberculosis, and kidney diseases shall be exempt from value-added tax (VAT) beginning on Jan. 1, 2021 instead of Jan. 1, 2023.

The sale or importation of equipment, raw materials and other items necessary for COVID-19 prevention, such as PPE, medication and FDA-approved vaccines, will also be exempt from VAT beginning Jan. 1, 2021 to Dec. 31, 2023.


Under CREATE, tax incentives may generally be available to certain enterprises provided their activities qualify under the Strategic Investment Priorities Plan (SIPP) to be issued every three years. The incentives can include, among others, income tax holiday (ITH) and special corporate income tax (SCIT) in lieu of all taxes-both local and national.

The duration of the ITH can range from four to 17 years depending on the location and industry of the registered project or activity, and other relevant factors as may be defined in the SIPP.

In CREATE, the period for availing of the ITH will be followed by the Special Corporate Income Tax (SCIT) rate, equivalent to 5% effective July 1, 2020, based on the gross income earned, in lieu of all taxes, both national and local. The period for availing of SCIT after the ITH incentive is 10 years across all categories.

Furthermore, registered enterprises are exempt from customs duty on imports of capital equipment, raw materials, spare parts, or accessories directly and exclusively used in the registered project or activity.

Registered enterprises are also exempt from VAT on imports and are entitled to VAT zero-rating on domestic purchases of goods and services directly and exclusively used in their registered project or activity located inside an ecozone or freeport.

Investments registered before the effectivity of CREATE will be governed by the following rules: 1) registered enterprises whose projects or activities were granted only an ITH prior to the effectivity of the CREATE will be allowed to continue availing of the ITH for the remaining period of the ITH as specified in the terms and conditions of their registration; 2) those that have been granted the ITH but have not yet availed of the incentive upon the effectivity of CREATE may use the ITH for the period specified in the terms and conditions of their registration; and 3) registered enterprises whose projects or activities were granted an ITH prior to the effectivity of CREATE and are entitled to the 5% tax on gross income earned incentive after the ITH will be allowed to avail of the 5% gross income earned incentive for 10 years.

Registered enterprises currently availing of the 5% tax on gross income earned granted prior to the effectivity of the CREATE will be allowed to continue availing of the 5% tax incentive for 10 years.

Given the devastating impact of the pandemic, passing the CREATE bill into law now appears even more urgent. It is hoped that its implementation and execution will play a key role towards economic recovery and eventual national economic resurgence.

This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinions expressed above are those of the author and do not necessarily represent the views of SGV & Co.

Allenierey Allan V. Exclamador is a Tax Partner of SGV & Co.

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