Taxation: Comparison between TRAIN vs. CREATE PDF

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TAXATION: Before and After CREATE R.C.Pendon 2021 Before and After CREATE Note: Only changes pertaining to income and business taxes are enumerated here. Changes in the administrative aspect, and Title XIII – Tax Incentives deserves its own separate material due to its lengthy provisions. This is ba...

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TAXATION: Before and After CREATE 2021 Before and After CREATE

R.C.Pendon

Note: Only changes pertaining to income and business taxes are enumerated here. Changes in the administrative aspect, and Title XIII – Tax Incentives deserves its own separate material due to its lengthy provisions. This is based on S.B. No. 1357 (3rd reading).

Income Taxation •

Definition of Corporation

Old Law CREATE Did not include OPC in the Included One Person Corporations (OPC) definition of a corporation. in the definition of corporations. (Note: under TRAIN, OPC is impliedly classified as a corporation)

•

Final Withholding Tax on PCSO Winnings

Law makers made a mistake in not CREATE corrected the mistakes and amending the portion relating to inconsistency of the TRAIN Law. the income taxes of NRA-ETB. Classification RC RA NRC NRA-ETB NRA-NETB

•

FWT Rate 20% 20% 20% Exempt 25%

Classification RC RA NRC NRA-ETB NRA-NETB

FWT Rate 20% 20% 20% 20% 25%

CREATE Reduced the RCIT and introduced a schedular tax rate to cover MSMEs. Effective July 1, 2020.

Regular Corporate Income Tax (RCIT) Rate Classification DC RFC NRFC

FWT Rate 30% 30% 30% FWT

Classification DC RFC NRFC •

FWT Rate 20% - 25% 25% 25% FWT

Domestic Corporation If net taxable income does not exceed P5,000,000 AND total assets does not exceed P100,000,000* In general

20%

25%

*excluding land where the entity’s office, plant and equipment are situated.

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TAXATION: Before and After CREATE R.C.Pendon 2021 • Proprietary Educational Subject to a special tax rate of 10%. Beginning July 1, 2020 until June 30, 2023, the tax rate herein imposed shall be Institutions and one percent (1%). Non-profit Hospitals Date Before July 1, 2020 July 1, 2020 – June 30, 2023 After June 30, 2023 •

Intercorporate Dividends

Dividends received by a domestic corporation form another domestic corporation is exempt. Source of Dividend DC RFC/NRFC

Rate 10% 1% 10%

Dividends received by a DC is exempt regardless of the source. But dividends from RFC/NRFC are subject to conditions to be exempt.

Rate

Source of Dividend DC RFC/NRFC

Exempt RCIT

Rate Exempt It depends*

*requisites for exemption: 1. Funds from such dividends actually received or remitted into the Philippines are reinvested in the business operations of the domestic corporation in the Philippines 2. Reinvestment should be made within the next taxable year from the time the foreign-sourced dividends were received 3. Reinvestment is limited to funding the working capital requirements, capital expenditures, dividend payments, investment in domestic subsidiaries, and infrastructure project: 4. The DC holds directly at least twenty percent (20%) of the outstanding shares of the foreign corporation; and 5. has held the shareholdings for a minimum of 2 years at the time of dividend distribution If the above requisites are not satisfied, the foreign sourced dividends shall be taxable. •

Minimum Corporate Income Tax (MCIT)

MCIT is 2% of gross income

Beginning July 1, 2020 until June 30, 2023, the MCIT shall be one percent (1%).

.

Date Before July 1, 2020 July 1, 2020 – June 30, 2023 After June 30, 2023

Rate 2% 1% 2% Page 2 of 8

TAXATION: Before and After CREATE R.C.Pendon 2021 ROHQs are subject to a special tax Beginning December 31, 2021, ROHQs are • Regional Operating rate of 10%. subjected to the normal RCIT rate. Headquarters (ROHQ) Date Before Dec 31, 2021 On and after Dec 21, 2021

•

Offshore Banking Units (OBU)

•

15% optional tax rate

Rate 10% 25% RCIT

. Granted tax exemption and special Removed exemptions and will be subject to rate. RCIT. The President, upon the CREATE deleted this provision recommendation of the Secretary of Finance, may allow corporations the option to be taxed at 15% of gross income, after the following conditions have been satisfied: i. A tax effort ratio of 20% of Gross National Product (GNP); ii. A ratio of 40% of income tax collection to total tax revenues; iii. A VAT tax effort of 4% of GNP; and iv. 0.9% ratio of the Consolidated Public Sector Financial Position (CPSFP) to GNP.

•

•

Interest Income from FCDU received by an RFC

CGT rate from sale of unlisted Stock

Corporations that received CREATE fixed the inconsistency of the tax interest income from an FCDU is rate: subject to the following rates: Classification DC RFC NRFC

FWT Rate 15% 7.5% exempt

Classification DC RFC NRFC

FWT Rate 15% 15% exempt

Classification DC RFC* NRFC*

FWT Rate 15% 5%-10% 5%-10%

Classification DC RFC* NRFC*

FWT Rate 15% 15% 15%

. Corporations that realized capital CREATE fixed the inconsistency of the tax gains from sale of unlisted stock rate: are subject to the following rates:

*where the first P100,000 of the net gain is subject to 5%; and the amount in excess of P100,000 is subject to 10%.

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TAXATION: Before and After CREATE 2021 • Additional deduction on No provision labor training

R.C.Pendon An additional deduction from taxable income of 1/2 of the value of labor training The following expenses incurred. requisites should be satisfied to be eligible to the additional deduction: 1. Training is for skills development of enterprise-based trainees 2. Enrolled in public senior high schools, public higher education institutions, or public technical and vocational institutions 3. duly covered by an apprenticeship agreement 4. For enterprise-based training of students from public educational institutions, the enterprise shall secure proper certification from DepEd, TESDA, or CHEd 5. Deduction shall not exceed 10% of direct labor wage.

The amount of deductible interest The amount of deductible interest expense expense shall be reduced by 33% shall be reduced by 20% of the interest of the interest income subjected to income subjected to final tax. final tax.

•

Reduction in deduction interest expense (arbitrage rule)

•

Improperly Accumulated A 10% IEAT is imposed on Section 29 of the NIRC, that imposes IAET, corporations with improperly is repealed. Hence, no more IAET. Earnings Tax (IAET) accumulated taxable income.

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Income Tax exemption on merger or consolidation Definition of control

•

To be discussed in a separate handout due to its lengthy provision. The term “control”, shall mean ownership of stocks in a corporation possessing at least fifty-one percent (51%) of the total voting power of all classes of stocks entitled to vote.

The term “control” shall mean ownership of stocks in a corporation after the transfer of property possessing at least fifty-one percent (51%) of the total voting power of all classes of stocks entitled to vote. Provided, that the collective and not the individual ownership of all classes of stocks entitled to vote of the transferor or transferors shall be used in determining the presence of control.

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TAXATION: Before and After CREATE 2021

R.C.Pendon

VALUE ADDED TAX •

VAT Exemption of sale of residential property

Old Law CREATE Sale of the following residential CREATE increased the threshold. properties is exempt from VAT: Particulars Residential Lot Residential house and lot

•

VAT exemption on sale of

Amount P1,500,000

Particulars Residential Lot Residential house and lot

P2,500,000

Amount P2,500,000 P4,200,000

. VAT exemption applies to the sale, CREATE expanded the coverage of the importation, printing or VAT exemption, it now covers: publication of: a. Books a. Books b. Newspaper b. Newspaper c. Magazine c. Magazine review or bulletin * d. Journal, e. Review bulletin, or f. Any such educational reading material covered by the UNESCO agreement on the importation of educational, scientific, and cultural materials VAT exemption shall only apply to The above exemption includes the digital the sale of physical copies. Digital or electronic format. (e-books) are subjected to VAT. *which appears at regular intervals with fixed prices for subscription and sale and which is not devoted principally to the publication of paid advertisements.

•

VAT exemption on specific prescription drugs and medicines

PROVIDED, that the materials provided are not devoted principally to the publication of paid advertisements. (removed the “regular intervals with fixed prices for subscription and sale” rule)

Prescription drugs for the CREATE changed the effectivity date of the following illnesses are VAT VAT exemption: exempt: • Beginning Jan 1, 2020 (no change) • Beginning Jan 1, 2020 1. Diabetes 1. Diabetes 2. High Cholesterol 2. High Cholesterol 3. Hypertension 3. Hypertension •

Beginning Jan 1, 2023 1. Cancer 2. Mental Illness 3. Tuberculosis 4. Kidney Diseases

•

Beginning Jan 1, 2021 (earlier) 1. Cancer 2. Mental Illness 3. Tuberculosis 4. Kidney Diseases

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TAXATION: Before and After CREATE 2021 No provision • Expanded VAT exemption for COVID-19

R.C.Pendon Sale or importation of the following beginning January 1, 2021 to December 31, 2023 are exempt from VAT: 1. Capital equipment, its spare parts and raw materials, necessary for the production of personal protective equipment components such as coveralls, gown, surgical cap, surgical mask, N-95 mask, scrub suits, goggles and face shield, double or surgical gloves, dedicated shoes, and shoe covers, for COVID19 prevention; 2. All drugs, vaccines and medical devices specifically prescribed and directly, used for the treatment of COVID-19; and 3. Drugs for the treatment of COVID19 approved by the food and drug administration (FDA) for use in clinical trials, including raw materials directly necessary for the production of such drugs. On the Bi-cam version, VAT and duty-free exemptions is granted for COVID-19 vaccines until 2025.

OTHER PERCENTAGE TAX •

Sec. 116

Old Law CREATE Any person whose sales or receipts CREATE temporarily reduced the tax rate does not exceed P3,000,000 for the to 1% beginning July 1, 2020 until June 30, taxable year and who is not a VAT- 2023. registered person shall pay a tax Date Rate equivalent to three percent (3%) of his gross quarterly sales or receipts. Before July 1, 2020 3% July 1, 2020 – June 30, 2023 1% After June 30, 2023 3%

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TAXATION: Before and After CREATE 2021

R.C.Pendon

Transitional Rules •

Corporate Income Tax - the corporate income tax shall be applied on the amount computed by multiplying the number of months covered by the new rate within the year by the taxable income of the corporation for the period divided by 12. Illustration 1 (calendar year): ABC Corp. has a net taxable income of P 30,000,000 during the calendar year 2020. How much is the income tax due for the year? Solution: Months covered by 30% (Jan to June) = 6 months Months covered by 25% (July to Dec) = 6 months 30,000,000 𝑥𝑥 Net Taxable Income Tax Rate Income tax Due

6 𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚ℎ𝑠𝑠 = 15,000,000 12 𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚ℎ𝑠𝑠

Jan to June 15,000,000 30% 4,500,000

July to Dec 15,000,000 25% 3,750,000

Income Tax Due for 2020 = 4,500,000 + 3,750,000 = 8,250,000 Illustration 2 (fiscal year): ABC Corp. has a net taxable income of P 30,000,000 during the fiscal year ending March 31, 2021. How much is the income tax due for the fiscal year? Solution: Months covered by 30% (April 1, 2020 to June 30, 2020) = 3 months Months covered by 25% (July 1, 2020 to March 31, 2021) = 9 months 30,000,000 𝑥𝑥 30,000,000 𝑥𝑥 Net Taxable Income Tax Rate Income tax Due

3 𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚ℎ𝑠𝑠 = 7,500,000 12 𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚ℎ𝑠𝑠

9 𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚ℎ𝑠𝑠 = 22,500,000 12 𝑚𝑚𝑚𝑚𝑚𝑚𝑚𝑚ℎ𝑠𝑠

April to June 7,500,000 30% 2,250,000

July to March 22,500,000 25% 5,625,000

Income Tax Due for the fiscal year = 2,250,000 + 5,625,000 = 7,875,000 Page 7 of 8

TAXATION: Before and After CREATE 2021 •

R.C.Pendon

Interest Expense (Arbitrage rule) - the amount of interest expense paid or incurred shall be reduced by specified rate depending on the year when the interest income was earned. (RR. No. 13-00) Illustration: ABC Corp. has interest expense of P40,000. During the year 2020, interest income is realized based on the following months • • • •

Month January 2020 June 2020 August 2020 December 2020

Interest Income P 60,000 15,000 20,000 17,500

How much is the deductible interest expense? Solution: Month January 2020 June 2020 August 2020 December 2020 Total

Interest Income P 60,000 15,000 20,000 17,500

Rate 33% 33% 20% 20%

Arbitrage 19,800 4,950 4,000 3,500 32,250

Deductible Interest Expense = 40,000 – 32,250 = 7,750

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