12 May 2021

After more than two decades of deliberations on several versions filed in the Congress, the Philippine President finally signed into law Republic Act No. 11534 or the Corporate Recovery and Tax Incentives for Enterprises (“CREATE”) Act on 26 March 2021, albeit vetoing certain provisions. While the CREATE Act took effect on 11 April 2021 after its publication, it bears noting that the Act provides for certain tax adjustments that are effective as early as 1 July 2020.

The CREATE Act is the second package of the tax reform program of the government, the first one being the TRAIN Act (Republic Act No. 10963 or the Tax Reform for Acceleration and Inclusion Act) that took effect on 1 January 2018. The TRAIN Act introduced reforms on taxation of individuals, transfer taxes, indirect taxes, excise tax, documentary stamp tax, and other types of taxes. The CREATE Act, on the other hand, focuses on income taxation of corporate entities and streamlining of fiscal incentives granted under existing investment promotion laws.

With the enactment of the CREATE Act, the government seeks to provide relief to businesses adversely impacted by the COVID-19 pandemic and entice investors by lowering corporate income tax rates while at the same time, plug tax leakages through rationalisation of fiscal incentives. This article summarises the tax adjustments introduced by the CREATE Act, the fiscal incentives, and the provisions vetoed by the President.


Corporate Income Tax Adjustments

One of the significant reforms under the CREATE Act is the lowering of the corporate income tax rate from 30%, previously the highest in ASEAN region, to 20% for micro, small, and medium domestic enterprises and 25% for other corporate entities. However, the CREATE Act removed the exemption previously enjoyed by offshore banking units and increased the tax rate for regional operating headquarters of multinational companies.

Below is a comparison of the tax rates under the old Philippine Tax Code and the new tax rates under the CREATE Act.

Taxpayer / Income StreamTax CodeCREATE Act
Domestic Corporation e.g., local subsidiary or “DC” (under Regular Corporate Income Tax or “RCIT”)30% of taxable income20% or 25%1 of taxable income

Effective 1 July 2020

Resident Foreign Corporation, e.g., branch office or “RFC” (under RCIT)30% of taxable income25% of taxable income

Effective 1 July 2020

Non-Resident Foreign Corporation or “NRFC” (under RCIT)30% of gross income25% of gross income

Effective 1 January 2021

Minimum Corporate Income Tax for DC and RFC2% of gross income1% of gross income

Effective 1 July 2020 until 30 June 2023

Proprietary Educational Institutions and Nonprofit Hospitals10% of taxable income1% of taxable income

Effective 1 July 2020 until 30 June 2023

Offshore Banking Units
  • Income from foreign currency transactions with nonresidents – exempt
  • Interest income from foreign currency loans granted to residents – 10% final withholding tax
25% of taxable income 2


Regional Operating Headquarters10% of taxable income25% of taxable income

Effective 1 January 2022

Winnings of Non-Resident Alien Individual Engaged in Trade or Business in the Philippines from Philippine Charity Sweepstakes Office gamesExempt
  • PHP10,000 (approximately USD200) and below – exempt
  • Excess of PHP10,000 – 20% final withholding tax
Dividends received by DCs
  • Received from another DC – exempt
  • Received from a foreign corporation – 30%
  • Received from another DC – exempt
  • Received from a foreign corporation – exempt, subject to certain conditions3
Dividends received by an NRFC under the Tax Sparing Rule15% Final Withholding Tax10% Final Withholding Tax

Effective 1 January 2021

Interest income received by am RFC under the expanded foreign currency deposit system7.5% Final Withholding Tax15%4
Capital gains earned by RFC and NRFC from sale of shares of stock not traded in the stock exchange
  • PHP100,000 (approximately USD2,000) and below – 5%
  • Excess of PHP100,000 – 10%


Other adjustments involving Income Tax

  • Improperly Accumulated Earnings Tax (“IAET”) repealed – The 10% IAET imposed on improperly accumulated earnings (i.e., earnings and profits accumulated instead of being divided or distributed) was repealed.
  • The Home Development Mutual Fund is included in the list of government corporations/instrumentalities exempt from income tax.
  • Interest Arbitrage Rule adjusted – The amount of interest expense that may be claimed as a deduction from the taxable income will be accordingly adjusted in light of the new corporate tax rates. If the taxpayer is subject to 25% RCIT, the interest expense shall be reduced by 20% of any interest income earned that was subjected to final tax. No reduction shall be imposed if the taxpayer is subject to 20% RCIT.
  • New item of allowable deduction – An additional 50% of the expenses incurred for skills development of enterprise-based trainees (150% deduction in total) may be claimed as deduction from the taxable income, provided that such deduction shall not exceed 10% of direct labor wage and subject to compliance with certain conditions.
  • Coverage of tax-free exchanges expanded – Under the tax-free exchange provision of the Tax Code, as amended by CREATE Act, no gain or loss shall be recognised on a corporation or on its stock or securities if such corporation is a party to a reorganisation and exchanges of property in pursuance of a plan of reorganisation solely for stock or securities in another corporation that is a party to the reorganisation. Reorganisation pertains to (i) merger or consolidation involving exchange of property solely for stock; (ii) acquisition involving exchange of voting stock for stock of the other corporation; (iii) acquisition involving exchange of voting stock for substantially all of the properties of the other corporation; (iv) recapitalisation; and (v) reincorporation.
  • In connection with this, the sale or exchange of property used for business for shares of stock will be exempt from Value Added Tax. Furthermore, CREATE Act clarified that a prior confirmation or ruling from the Bureau of Internal Revenue is not required for purpose of availing the tax exemption under the tax-free exchange provision.

Other adjustments involving Value Added Tax (“VAT”) and Other Percentage Tax (“OPT”)

  • New VAT Exempt Transactions – in addition to the existing list of VAT exempt transactions, the following transactions shall likewise be VAT exempt:
    1. sale, importation, printing, or publication of journals (in addition to books, newspapers, magazines, review bulletins) or any such educational reading material covered by the UNESCO Agreement on the Importation of Educational, Scientific and Cultural Materials, including their digital or electronic format;
    2. sale or importation of prescription drugs and medicines for cancer, mental illness, tuberculosis, and kidney diseases effective 1 January 2021; and
    3. sale or importation of capital equipment, spare parts and raw materials for the production of personal protective equipment and COVID-19 drugs, vaccines, and medical devices beginning 1 January 2021 to 31 December 2023.
  • OPT reduced from 3% to 1%  – Effective 1 July 2020 until 30 June 2023, OPT imposed on non-VAT registered entities and VAT registered entities whose aggregate non-VAT exempt transactions do not exceed PHP3 Million (approximately USD60,000) shall be subject to a lowered OPT rate of 1%.


The CREATE Act introduced a new separate title on fiscal incentives. The CREATE Act mandates the Fiscal Incentives Review Board (“FIRB”) to exercise, among others, policy making and oversight functions on the administration of tax incentives. As such, the FIRB has the power to approve or disapprove the grant of tax incentives. However, for projects/activities with total investment capital of PHP1 Billion (approximately USD20 Million) and below, the authority to grant incentives shall be delegated by the FIRB to the concerned Investment Promotion Agency (“IPA”).6

Below is a summary of the types of fiscal incentives that may be availed of and the general requirements to be eligible for the same.

Who may qualify for incentives and how to qualify for incentives?
  • Any individual, partnership, corporation, Philippine branch of a foreign corporation, or other entity organised and existing under Philippine laws and registered with an IPA excluding service enterprises such as those engaged in customs brokerage, trucking or forwarding services, janitorial services, security services, insurance, banking, and other financial services, consumers’ cooperatives, credit unions, consultancy services, retail enterprises, restaurants, or such other services as may be determined by the FIRB.
  • Be engaged in a project or activity included in the Strategic Investment Priority Plan (“SIPP”)7;
  • Meet the target performance metrics after the agreed time period;
  • Install a separate accounting system or establish a separate corporation for each registered project or activity if the IPA should so require;
  • Comply with the e-receipting and e-sales requirement of the Tax Code; and
  • Submit annual reports of beneficial ownership of the organisation and related parties.
What are the available incentives?
  • For an export enterprise – Income Tax Holiday (“ITH”) of four to seven years, depending on predetermined location and industry tiers. The ITH will be followed by either a Special Corporate Income Tax (“SCIT”) of 5% of gross income in lieu of all national and local taxes OR enhanced deductions, both for 10 years, at the option of the enterprise. In no case shall the SCIT and the enhanced deductions be granted simultaneously.
  • For a domestic market enterprise – ITH of four to seven years, depending on predetermined location and industry tiers. The ITH will be followed by enhanced deductions for five years.


Projects or activities located in areas recovering from armed conflict or a major disaster shall be entitled to two additional ITH years. Projects or activities registered prior to the effectivity of the CREATE Act, which during the duration of their incentives, completely relocate from the National Capital Region shall be entitled to three additional ITH years.


In addition to the foregoing incentives, registered projects/activities may avail of (i) duty exemption on importation of capital equipment, raw materials, spare parts, or accessories, and (ii) VAT exemption on importation and VAT zero-rating on local purchases.


Subject to certain conditions, the President of the Philippines may modify the mix, period, or manner of availment of incentives or craft appropriate financial support package for a highly desirable project or industrial activity.

What are the enhanced deductions?The following may be allowed as deductions:

  • Depreciation allowance of the assets acquired for the entity’s production of goods and services – additional 10% for buildings, additional 20% for machineries and equipment;
  • 50% additional deduction on labor expenses
  • 100% additional deduction on research and development expense
  • 100% additional deduction on training expense
  • 50% additional deduction on domestic input expense
  • 50% additional deduction on power expense
  • 50% additional deduction on undistributed profit/surplus reinvested into a manufacturing industry’s project/activity, for a period of 5 years from the time of reinvestment; and
  • Enhanced Net Operating Loss Carry-Over (“NOLCO”) – the net operating loss incurred during the first three years of commercial operation may be carried over as a deduction from the gross income within the next five consecutive taxable years immediately following the year of such loss.
What are the reportorial requirements for registered enterprises?For monitoring and transparency, registered enterprises will be required to submit the following:

  • tax returns, whether taxable or exempt
  • tax incentives report of income-based tax incentives
  • annual benefits report
What will happen to the incentives enjoyed under existing laws prior to CREATE Act?Registered business enterprises with incentives granted prior to the effectivity of the CREATE Act shall be entitled to continue enjoying ITH (if currently availing ITH) for the remaining ITH period. On the other hand, enterprises currently availing of the 5% gross income tax shall be allowed to continue availing the incentive for 10 years.



The Philippine President vetoed the following provisions in the bicameral version of the CREATE Bill:

Proposed increase in the VAT-exempt threshold on sale of real properties

  • 90-day period for the processing of general tax refunds
  • Definition of “investment capital” for purposes of availing fiscal incentives
  • Redundant incentives for domestic enterprises
  • Allowing existing registered enterprises to apply for incentives for the same activity
  • Provision limiting the power of the FIRB to grant tax incentives to projects/activities with total investment capital of more than PHP1 Billion (approximately USD20 Million). Thus, the FIRB’s policy-making and oversight functions shall extend to all registered business enterprises and IPAs.
  • Specific industries mentioned under activity tiers
  • Provision granting the Philippine President power to exempt any IPA from the reform
  • Automatic approval of application for incentives if not acted within 20 days from the submission of the application.

Implications for business in the Philippines

It is imperative for taxpayers to be aware of the changes introduced by the CREATE Act to ensure proper and timely tax compliance. In addition, business enterprises may consider the foregoing reforms during tax planning to maximise potential tax efficiencies. The expanded tax-free exchange provision under Section 40(C)(2) of the Tax Code is also an important consideration in a corporate restructuring.


If you have any questions or require any additional information, please contact Felix Sy or Aubbrey Lim of Insights Philippines Legal Advisors (a member of ZICO Law). 

This alert is for general information only and is not a substitute for legal advice.


[1] The 25% rate is applicable to corporations with net taxable income exceeding PHP5 Million (approximately USD100,000) and total assets exceeding PHP100 Million (approximately USD 2 Million). The computation of total assets shall not include the land on which the entity’s office, plant, and equipment are situated. Otherwise, the applicable tax rate is 20%.

[2] Provision under the Tax Code granting exemption and tax privileges to OBUs was removed.

[3] Conditions for exemption of foreign-sourced dividends:

  • The funds from such dividends are reinvested in the business operations of the domestic corporation in the Philippines within the next taxable year from the time the foreign-sourced dividends were received and shall be limited to funding the working capital requirements, capital expenditures, dividend payments, investment in domestic subsidiaries, and infrastructure project;
  • The domestic corporation holds directly at least 20% of the outstanding shares of the foreign corporation and has held the shareholdings for a minimum of two years at the time of the dividends distribution.

[4] The CREATE Act amendment rectifies what was missed by the tax reform package 1 (i.e., the TRAIN Law), which took effect in 2018. Under the TRAIN Law, individuals and domestic corporations are subject to a flat tax rate of 15% already.

[5] The CREATE Act amendment rectifies what was missed by the tax reform package 1 (i.e., the TRAIN Law), which took effect in 2018. Under the TRAIN Law, individuals and domestic corporations are subject to a flat tax rate of 15% already.

[6] Investment Promotion Agencies refer to government entities in charge of promoting investments, granting and administering tax and non-tax incentives, and overseeing operations of the different economic zones such as the BOI, PEZA, BCDA, SBMA, CEZA, APECO, TIEZA and all other similar existing authorities or that may be created by law unless otherwise specifically exempted from the coverage of the Tax Code, as amended by CREATE Act.

[7] The Strategic Investment Priority Plan (“SIPP”) contains the priority projects or activities, the scope and coverage of location and industry tiers, and the terms and conditions on the grant of enhanced deductions. The SIPP will be formulated by the Board of Investments in coordination with other government agencies and will be approved by the President of the Philippines. The SIPP will be valid for three years, subject to review and amendment every three years thereafter.


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