Published 19 April 2021, The Daily Tribune
On the third part of the series of A Dose of Law articles for the Corporate Recovery and Tax Incentives for Enterprises (CREATE) Act, the income tax holiday (ITH) has been discussed, along with the classification of registered activities into tiers and how the location of the registered business enterprise (RBE) affects its entitlement on the ITH.
It has been mentioned that once the period of ITH expires, the export enterprise may choose to be subjected to the special corporate income tax rate or to be entitled to claim enhanced deductions. On the other hand, domestic market enterprises will only be entitled to claim enhanced deductions.
The special corporate income tax rate (SCIT) is five percent of gross income. This is in lieu of all national and local taxes. This is like the gross income tax rate enjoyed by PEZA-registered entities prior to the passage of CREATE Act. However, unlike the previous gross income tax rate which may be enjoyed in perpetuity, the SCIT may only be enjoyed by an export enterprise for a period of 10 years.
The SCIT for a period of five years for domestic market enterprises and a period of 10 years for critical domestic market enterprises were the subject of the President’s veto for being “redundant” and “unnecessary.” This is in sharp contrast to laws granting tax incentives prior to CREATE, which likewise extends the benefit of gross income tax to domestic market enterprises.
Also, in contrast with the ITH, the tiered classification of the registered activity of the RBE and the location of the RBE do not affect the length of entitlement to the special corporate income tax rate.
The enhanced deduction under CREATE involves 10 percent additional deductions on depreciation of buildings, 20 percent additional deductions on depreciation of machineries and equipment, 50 percent additional deduction on direct labor expense, 100 percent additional deduction on research and development expense, 100 percent additional deduction on training expense, 50 percent additional deduction on domestic input expense, and 50 percent additional deduction on power expense. Thematically, the common requirement to be entitled to these additional deductions is that the expense must be directly connected with the registered activity of the RBE.
Likewise, part of the enhanced deduction available under CREATE is the deduction for reinvestment allowance to manufacturing industry to a maximum of 50 percent of the amount of undistributed profit or surplus reinvested in an RBE’s projects or activities listed in the Strategic Investments Priorities Plan. An enhanced net operating loss carryover is also available as an enhanced deduction.
It allows RBE to carry over net operating losses of the registered project or activity during the first three years from the start of commercial operations within the next five consecutive taxable years immediately following the year of such loss.
Further, similar to the SCIT, the period of entitlement to enhanced deduction is not perpetual. It is similarly subject to the 10-year limit for export enterprises. For domestic market enterprises, the enjoyment of enhanced deductions is set at a limit of five years.
Finally, as distinguished from the tax incentives prior to the passage of CREATE Act, an export enterprise must now choose between the option of special corporate tax incentive or enhanced deduction, after the expiration of the period for its entitlement to the ITH.
For those who were already enjoying the ITH or the 5 percent gross income tax prior to the effectivity of the CREATE Act, will their incentives be affected? The answer is in the affirmative.
An enterprise enjoying ITH prior to the effectivity of the CREATE Act, these RBE are allowed to continue the ITH availment for the remaining period as originally provided. On the other hand, those enjoying the 5 percent gross income tax prior to the effectivity of the CREATE Act can continue availing the said 5 percent gross income tax incentive for 10 years.
The CREATE Act is another sweeping legislation intended to use taxation as an instrument of economic recovery, from the micro-level of businesses to the macro-level of the nation. It has granted the necessary relief to corporate taxpayers by reducing income tax rate, the vital exemption to certain medicines amid this pandemic, and the centralization and rationalization of the varying special laws granting tax incentives.
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