Swift take on changes on income tax brought by CREATE

TOP OF MIND - Jasmine Orfinada - The Philippine Star

The passage of Republic Act (RA) 11534, otherwise known as the Corporate Recovery and Tax Incentives for Enterprises Act (CREATE), has resulted to a myriad of changes in corporate tax rules such as the reduction of regular corporate income tax (RCIT) rate from 30 percent to 25 percent or 20 percent, exemption from income tax of foreign dividends received by a domestic corporation, and the additional deduction on training expenses.

The implementing rules governing these changes are summarized in Revenue Regulations (RR) 5-2021, which implements the new income tax rates on the regular income of corporations on certain passive incomes including additional allowable deductions from gross income of persons engaged in business or practice of profession pursuant to the amendments brought by CREATE. The provisions of the said RR are further clarified by Revenue Memorandum Circular (RMC) 62-2021 dated April 30, 2021. Salient points of the RMC are as follows:

Clarification on the application of the reduced RCIT

Section 27 (A) of the Tax Code, as amended by CREATE provides for the reduction of RCIT rate from 30 percent to 25 percent generally or to 20 percent upon satisfying the requirements that net taxable income of the availing corporation shall not exceed P5 million and its total assets should not exceed P100 million (total asset threshold), excluding the land on which the entity’s office, plant and equipment are situated during the taxable year. The applicability of the 20 percent RCIT rate was further clarified by RMC 62-2021, as follows:

• The computation of total assets to determine compliance with the P100 million total asset threshold should be net of depreciation and allowance for bad debts, if any. The issuance also reiterates the exclusion of the land where the entity’s office, plant, and equipment are situated in determining total assets.

• The exclusion of land in determining compliance with the P100 million total asset threshold shall be based on acquisition cost if reflected on the audited financial statements (AFS) of the availing entity. If the land reflected in the AFS is at fair market value (FMV), such FMV shall be excluded in the computation of the total asset threshold of the availing entity.

• The value of the land excluded is only up to the portion where the availing entity’s office, plant, and equipment are situated for the taxable year. Thus, land being held for sale to customers or those acquired for investment purposes are not excluded in determining compliance with the total asset threshold.

• To determine the value of the land that shall be excluded from the computation of total assets, the percentage of the floor area devoted to the entity’s office shall be multiplied by the total value of the land.

Based on Section 27(B) of the Tax Code, as amended by CREATE, proprietary educational institutions and hospitals which are non-profit shall enjoy a tax rate of one percent from July 1, 2020 up to June 30, 2023, and 10 percent from July 1, 2023 onwards. RMC 62-2021 further clarified this by reiterating that private educational institutions distributing dividends are organizations for profit who may not enjoy the one percent tax rate for non-profit proprietary educational institutions and hospitals. These entities are therefore subject to either a 25 or 20 percent RCIT.

Exemption of foreign sourced dividends

As a general rule, foreign sourced dividends received by domestic corporations are subject to income tax. However, pursuant to Section 27(D)(4) of the Tax Code, as amended by CREATE, the said dividends may now be exempt from income tax subject to the conditions set forth under RR 5-2021, as shown below:

• The foreign sourced dividends actually received or remitted into the Philippines are reinvested in the business operations of the domestic corporation in the Philippines within the next taxable year from the time that such dividends are received and shall be limited to funding the capital requirements, capital expenditures, dividend payments, investment in domestic subsidiaries and infrastructure project; and

• The domestic corporation holds directly at least 20 percent of the outstanding shares of the foreign corporation and has held shareholdings for a minimum of two years at the time of the dividend distribution. If the foreign corporation is in existence for less than two years, then the domestic corporation should be in continuous possession of the 20 percent in value of the foreign corporation for its entire existence, as further provided in RR No. 5-2021.

RR 5-2021 makes mention of compliance requirements to avail of this exemption, which includes a sworn certification prepared and executed by an independent auditor on the utilization or non-utilization of the dividends received by the corporation. RMC 62-2021 clarifies the following:

• The exemption from income tax of the said dividends shall only pertain to the dividends actually utilized by the domestic corporation in the manner set out in the Tax Code, as amended. Any unutilized amount shall be declared as taxable income subject to interest, surcharges and penalties, as applicable.

• The tax treatment of dividends received by a domestic corporation from a resident foreign corporation, as defined in Section 28 (A)(1) of the Tax Code, as amended, will depend on the sources of income of the resident foreign corporation. If more than 50 percent of the total gross income of the resident foreign corporation is derived within the Philippines, the dividends received by a domestic corporation from such resident foreign corporation shall be exempt from income tax even without complying with the requirements for exemption of foreign sourced dividends in RR 5-2021. On the other hand, if income from within the Philippines of the resident foreign corporation is less than 50 percent, the conditions for exemption for foreign sourced dividends per RR 5-2021 should be followed. The implementation of this provision should be clarified by the BIR. The following questions/clarifications come to mind for this provision of the RMC:

As defined under Section 28 (A) (1) of the Tax Code, resident foreign corporations refer to corporations organized, authorized or existing under the laws of the foreign country, engaged in trade or business within the Philippines such as branch offices. Thus, does it mean that it is the home office of such branch which should obtain total gross income from within the Philippines of more than 50 percent to qualify for automatic exemption of such dividends received by a domestic corporation from the foreign corporation/home office?;



Jasmine Orfinada is an associate from the tax group of KPMG R.G. Manabat & Co. (KPMG RGM&Co.), the Philippine member firm of KPMG International. KPMG RGM&Co. has been recognized as a Tier 1 tax practice and Tier 1 transfer pricing practice by the International Tax Review.

This article is for general information purposes only and should not be considered as professional advice to a specific issue or entity.

The views and opinions expressed herein are those of the author and do not necessarily represent the views and opinions of KPMG International or KPMG RGM&Co.

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