The significance of Create More’s tax amendments
By: Atty. Euney Marie Mata-Perez on November 14,2024
On November 8, 2024, the much awaited CREATE More Act or Republic Act (RA) No. 12066 was signed into law and published in the Official Gazette on the same date. This Act is touted to boost our country’s global competitiveness.
CREATE More introduced amendments to provisions in our National Internal Revenue Code (“Tax Code”) on income tax, value-added tax (VAT), particularly on VAT zero-rating on purchases, incentives enjoyed by Registered Business Enterprises (RBEs), powers of the Fiscal Incentives Board (FIRB) and the Investment Promotion Agencies (IPAs), refunds of excise taxes on petroleum products sold to international carriers, and electronic invoicing, among others.
For purposes of this article, we shall discuss the amendments introduced relating to income tax and VAT, and why such amendments are significant.
Income Tax amendments:
CREATE More introduced the following amendments to the income tax section of the Tax Code:
- Applies of the lower 20% regular corporate income tax (RCIT) rate to RBEs operating under the Enhanced Deductions Regime (EDR). Prior to the amendment, the 20% tax generally applies only to corporations with net taxable income not exceeding five million pesos and with total assets not exceeding 100 million pesos. Now, the lower 20% rate is also extended to RBEs which enjoy enhanced business deductions.
- Broadens the scope of income exempted from treaty obligations, specifying that income earned under any treaty and agreements entered into by the President, with the concurrence of the Senate, will also be binding and exempt under the law.
- Adds that input tax paid on local purchases attributable to VAT-exempt sales shall be deductible from the gross income of the taxpayer. This settles the issue of whether or not such input VAT can be used as an allowable business deduction for tax purposes.
- Sets a cap on withholding tax rates at not more than 15% for payments to individuals and corporations residing in the Philippines. With the lowering of the income tax rate from 30% to 25% or 20%, it just proper to lower the cap of the creditable or expanded withholding tax, which is an advance collection of the RCIT.
Expansion of VAT Zero-Rating on Purchases
Among the most significant amendments introduced by CREATE More are in Sections 106 and 108 of the Tax Code on VAT on sale of goods or properties and services, and Sections 295 on incentives granted to RBEs.
As amended, Sections 106 and 108 now provide that goods or services sold to export-oriented enterprises qualify for VAT zero-rating if: (a) the enterprises exports at least 70% of their annual production from the previous year, and (b) the sales are “directly attributable” to the export activity, as certified by the Export Marketing Bureau.
In addition, Section 295(D) of the Tax Code on incentives was also amended to provide that VAT exemption on importation and VAT zero-rating on local purchases now apply to goods and services “directly attributable” to the registered project or activity, including incidental expenses, of a registered export enterprise or high-value domestic market enterprise (HV DME), regardless of the location of these enterprises.
In this connection, a definition of “directly attributable” was added to refer to goods and services that are incidental to and reasonably necessary for the export activity of the export-oriented enterprise. It should be noted that “incidental expenses” are allowed, and these include janitorial, security, financial, consultancy, marketing, and promotion services. It also covers services for administrative operations – human resources, legal, and accounting services.
Prior to CREATE More, the rule (as introduced by the CREATE Act or RA No. 11534) was that the VAT exemption on importation and VAT zero-rating on local purchases apply to goods and services “directly and exclusively used” in the registered project or activity of an RBE. The term “directly and exclusively used” was defined to refer to raw materials, supplies, equipment, goods, packaging materials, services (including infrastructure, utilities, maintenance), and other expenditures essential to the operation of the registered project and which are not used for administrative purposes. (Revenue Memorandum Circular No. 24-2022). This criteria and definition posed many issues to exporters and RBEs.
Significantly, the incentive of VAT zero-rating on purchases was also extended to HV DMEs or domestic enterprises which have investment capital exceeding 15 billion pesos, engaged in import-substituting sectors, or with significant export sales.
Location of Sales and Local Sales
Section 295(D) was further amended to clarify that the sale of goods or services by a VAT-registered seller to a registered export enterprise is VAT zero-rated, regardless of location of said enterprise.
On the other hand, it was also clarified that local sales of goods and services by RBEs, on the other hand, regardless of their income tax incentives regime and location, are still generally subject to 12% VAT, unless otherwise exempt or zero-rated under specific provisions of the Tax code.
A definition of “local sales” was added to mean sales to domestic market enterprises or non-RBEs, regardless of whether the sale is made within freeports or economic zones. This clarifies the issue and nature of sales made within freeports or economic zones.
Significantly, CREATE More increased the additional allowable deduction of RBEs for power expenses from 50% to 100%. It also amended and clarified the other incentives, including the VAT on transfers of previously-VAT exempt equipment and materials, which we will discuss in a subsequent article.
Without a doubt, the amendments introduced by CREATE More added benefits to be enjoyed by export and registered enterprises, and thus, boost our country’s competitiveness.
Euney Marie J. Mata-Perez is a CPA-Lawyer and the Managing Partner of Mata-Perez, Tamayo & Francisco (MTF Counsel). She is a corporate, M&A and tax lawyer and has been ranked as one of the top 100 lawyers of the Philippines by Asia Business Law Journal and Chair of the Tax Committee of the Management Association of the Philippines. She acknowledges the contribution of Ms. Elaisha Nelle C. Espinosa to this article. This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. If you have any question or comment regarding this article, you may email the author at info@mtfcounsel.com or visit MTF website at www.mtfcounsel.com