Published 12 April 2021, The Daily Tribune

Following our discussion on the effects of Republic Act 11534, otherwise known as the Corporate Recovery and Tax Incentive for Enterprises Act (CREATE), on the changes in taxation of corporations, we now delve on the amendments to the Minimum Corporate Income Tax (MCIT), percentage tax, value added tax (VAT), and Section 40(C)(2) transfer and reorganization.

Due to COVID-19 pandemic, majority of business are encountering financial difficulties. Despite the diminished transactions, businesses that managed to survive are still incurring the same expenses as to salaries and overhead costs. The surplus of expenses over one’s revenue results in losses.

Normally, when a corporation incurs net losses for the year, it is still mandated to pay income tax in the form of the MCIT, which is based on the gross income of the corporation.

Gross income refers to difference between gross sales/receipts and the cost of good sold/service. With this in mind, CREATE decreased the MCIT from two percent to one percent.

Another concession to businesses is the decreased percentage tax of taxpayers exempt from VAT, which was originally at three percent and now at one percent of gross sales/receipts.

Per Revenue Regulations (RR) No. 5-2021 and RR No. 4-2021, both the lower MCIT and percentage tax shall be retroactively applied and may only be availed for a limited time; i.e., 1 July 2020 until 30 June 2023. For the MCIT computation for taxable year 2020, the gross income shall be considered as earned equally within the year.

The monthly gross income will then be multiplied to the number of months before and after 1 July 2020. The months prior to 1 July 2020 shall be subject to the two percent MCIT and the succeeding months shall be subject to the one percent MCIT. While for the percentage tax, the resulting two percent excess payment from 1 July 2020 shall be carried forward to the succeeding taxable quarters.

Moreover, CREATE likewise gives a helping hand to ordinary citizens by exempting the VAT on the sale or importation of (a) digital and electronic format of books, newspapers, magazines, journals, review bulletins, or any other educational reading material covered by the UNESCO; (b) medicine and prescriptive drugs for cancer, mental illness, tuberculosis, and kidney diseases; (c) capital equipment, spare parts, and raw materials necessary for the production of personal protective equipment components; (d) drugs, vaccines, medical devices prescribed and directly used for the treatment of COVID-19; and (e) drugs and their raw materials, which are used for COVID-19 clinical trials.

Aside from the many concessions and incentives given to taxpayers, CREATE expanded the coverage of Section 40(C)(2) of the Tax Code to not only cover mergers and consolidations and to include other forms of reorganization; e.g., recapitalization and reincorporation.

Recapitalization was defined as an arrangement whereby the stock and bonds of a corporation are readjusted as to amount, income, or priority or an arrangement of all stockholders and creditors to change and increase or decrease the capitalization or debts of the corporations or both.

On the other hand, reincorporation pertains to the formation of the same corporate business with the same assets and the same stockholders surviving under a new charter.

CREATE further amended Section 40(C)(2) of the Tax Code by no longer requiring taxpayers to secure a BIR confirmatory ruling.

The parties can immediately proceed with the reorganization and apply for the issuance of the Certificate Authorizing Registration with the Revenue District Office where the real property is located for real property or where the business is registered for shares of stock. Per RR No. 5-2021, the transaction shall be subject to post-transaction audit by the BIR.

The foregoing amendments will indeed provide much-needed relief to businesses already reeling from the devastation caused by the present pandemic.

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