Tax Notes

Corporate Recovery and Tax Incentives for Enterprises Act (Part 2)

On March 31, 2021, the Bureau of Internal Revenue (BIR) issued Revenue Memorandum Circular (RMC) 42-2021 in relation to Republic Act 11534, or the Corporate Recovery and Tax Incentives for Enterprises (CREATE) Act signed by President Rodrigo Duterte on March 26, 2021 with line-item vetoes. The following are the salient provisions of the Create Law, which amends some provisions outlined under the National Internal Revenue Code of 1997:

H. Tax on certain incomes received by a non-resident foreign corporation

In general, tax on income received by a non-resident foreign corporation is at 25 percent. However, a final tax of 15 percent shall be imposed on the following incomes:

Interest income derived by a resident foreign corporation from a depositary bank under the expanded foreign currency deposit system (previously subject to a final income rate of seven- and one-half percent)

Capital gains from sale of shares of stock not traded in the stock exchange (previously subject to five percent for those not over P100,000 and 10 percent for any amount more than P100,000)

I. VAT exemption on certain sales

The following items are exempt from the imposition of Value-Added Tax (VAT):

Sale, importation, printing or publication of books, and any newspaper, magazine, journal, review bulletin and other educational reading materials covered by the Unesco Agreement on Importation of Educational, Scientific and Cultural Materials, including digital or electronic formats thereof

Sale or importation of the following medicines:

Starting Jan. 1, 2020 – Medicines for diabetes, high cholesterol and hypertension

Starting Jan. 1, 2021 – Cancer, mental illness, tuberculosis and kidney diseases

Sale or importation of the following from Jan. 1, 2021 to Dec. 31, 2023:

Capital equipment, spare parts and raw materials necessary for production of personal protective equipment for Covid-19 protection

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

Drugs for the treatment of Covid-19 approved by the FDA for use in clinical trials

J. Fiscal incentives rationalization

Under the fiscal incentives rationalization of the Create Act, business enterprises may register qualified activities with Investment Promotion Agencies (IPA) either as:

Export enterprise – engaged in manufacturing, assembling, or processing activity, including services such as information technology and business process management services which must have at least 70 percent of its total outputs as exports

Domestic market enterprise – any enterprise registered with IPA other than an export enterprise

Under the Create Act, the following fiscal incentives may be availed of under qualified business activities:

For export enterprises

- Four to seven years income tax holiday; and

- Ten years special corporate income tax rate of five percent of gross income or 10 years of regular corporate income tax with enhanced deductions

For domestic market enterprises

- Four to seven years income tax holiday; and

- Ten years of regular corporate income tax with enhanced deductions

The enhanced deductions, which are additional expenses that may be deducted from the income tax return of a business enterprise availing of the fiscal incentives, are as follows:

1. Depreciation allowance for qualified capital expenditure – 10 percent for buildings, 20 percent for machineries and equipment

2. Labor expense – 50 percent additional deduction

3. Research and development expense – 100 percent additional deduction

4. Training expense – 100 percent additional deduction

5. Domestic input expense – 50 percent additional deduction

6. Power expense – 50 percent additional deduction

7. Reinvestment allowance to manufacturing industry – 50 percent additional deduction within a period of five years from such reinvestment

8. Enhanced Net Operating Loss Carry-Over (Enhanced Nolco) – Nolco incurred within the first three years from the start of commercial operations shall be carried over as deduction in the succeeding five years immediately following the year of the loss

Registered business enterprises may also avail of duty exemption on importation of capital equipment, raw materials, spare parts or accessories, and VAT exemption on importation and VAT zero-rating on local purchases.

Source:

P&A Grant Thornton

 

As published in SunStar Cebu, dated 08 April 2021