The Effects of CREATE Act Towards Your Business in the Philippines
As an entrepreneur, it is vital to stay up-to-date with the latest tax laws to ensure that your company is compliant with its corresponding rules and regulations. Doing so also enables you to align your business towards notable changes provided by recent tax laws.
Recently, the Philippine Government has signed the Corporate Recovery and Tax Incentives for Enterprises (CREATE) Act into law to assist local and foreign enterprises in the Philippines by modifying corporate tax rates and improving fiscal incentives.
To help you stay updated, this article will discuss the salient features of CREATE and how its features could affect your business in the Philippines.
The Salient Features of the CREATE Act
On March 26, 2021, President Rodrigo Duterte signed the CREATE Act into law, significantly lowering corporate income tax (CIT) rates to provide fiscal relief to foreign and local corporations. CREATE Act is part of Package 2 of the Corporate Tax Reform Program (CTRP) under the Duterte administration.
The act aims to amend several provisions under the Tax Code, focusing on lowering CIT rates and rationalizing fiscal incentives to entice more foreign and local investors to contribute and do business in the Philippines.
Under the CREATE Act, the most notable amendments are as follows:
- The CIT rate is reduced to 25%, from the previous 30%, for large corporations. For small and medium-sized enterprises with net taxable income not exceeding ₱5 million, and total assets not exceeding ₱100 million (excluding land), the CIT rate is reduced to 20%.
- The minimum CIT (MCIT) rate is reduced from 2% to 1%.
- The percentage Tax is reduced from 3% to 1%
Such amendments took effect on July 1, 2020, with varying CIT reductions depending on the type of taxpayer your business falls under.
The Effects of CREATE Act Towards Doing Business in the Philippines
CREATE Act is said to be the first-ever revenue-eroding tax reform package and the largest economic stimulus program in Philippine history. To give you an insight into the effects of CREATE, we listed several points that could affect the way you do business in the Philippines.
Support for Business Recovery From COVID-19
The government has been seeking solutions to help businesses recover from the effects of the COVID-19 pandemic in the Philippines. The rising surge of COVID cases has resulted in prolonged lockdowns in the country, drastically affecting the financial capabilities of businesses and citizens.
As part of CTRP, CREATE Act was initially drafted to provide fiscal relief to businesses by lowering the CIT rate from 30% to 25%, with a yearly deduction of 1% until 2027. CREATE also introduced performance-based incentives that can benefit businesses in the long run.
The Philippines formerly had the highest CIT rate in the ASEAN region, making it difficult for local and foreign enterprises to expand their business. The high rates also affected the country’s competitiveness within the Asia-Pacific region.
The government predicts that Philippine businesses can gain an estimated ₱42 billion in tax savings and over ₱625 billion within the next five years with CREATE. Businesses can then reinvest these savings to revitalize their business and boost cost competitiveness within their industry.
Attract More Foreign Investors into the Philippine Market
Through CREATE, the Philippine government hopes to increase its investment appeal to foreign enterprises seeking to penetrate the Asian market. It also enables foreign enterprises to enjoy numerous benefits through fiscal and non-fiscal incentives provided in the country.
The National Economic and Development Authority (NEDA) claims how the enactment of CREATE places the Philippine market in an attractive position for investors next to its ASEAN neighbors. It also improves the country’s fiscal incentives system to attract more foreign direct investments (FDIs) in the Philippines.
Under CREATE, qualified corporations may enjoy four to eight years of income tax holiday (ITH). A Special Corporate Income Tax (SCIT) of 5% and enhanced deductions are also offered to exporters and critical domestic corporations as identified by NEDA.
The act also provides value-added tax (VAT) exemptions for imports of COVID-19 vaccines, personal protective equipment, and other essential items used to fight against COVID-19. Such products are exempted from VAT until December 2023.
Increases Job Opportunities for Filipinos
Due to recent surges of COVID-19 cases in the Philippines, many businesses have been forced to close or shut down. This resulted in many Filipinos losing their jobs.
According to the Philippine Statistics Authority (PSA), as of March 2021, approximately 3.44 million Filipinos are out of work due to the adverse effects of COVID-19.
Through CREATE, the government hopes to provide more job opportunities for locals by enticing foreign entrepreneurs to do business in the Philippines. By introducing performance-based tax incentives and low CIT rates, corporations can do business with more confidence due to relaxed financial requirements in maintaining their business.
The Department of Trade and Industry (DTI) Secretary Ramon Lopez assures that CREATE will attract more foreign investors, providing more employment opportunities for locals in the country.
He added that the CREATE bill will also provide a significant boost to the National Employment Recovery Strategy (NERS) Task Force, the Department of Labor and Employment (DOLE), and the Technical Education and Skills Development Authority (TESDA).
Confidently Do Business in the Philippines in 2021
As an entrepreneur, it is important to be up-to-date with recent tax reforms that could affect your company and the way you do business. Doing so allows you to prepare for your next move and find ways to maximize such reforms to your company’s benefit.
Keeping up with tax laws and regulations can be exhaustive. If you find such regulations confusing, you can always reach out to business consulting firms to guide you through tax rules and reforms that may affect your business.
