On tax breaks and CRE­ATE-ing tax cuts

Business World - - The Economy - MA. JESSICA A. GUE­VARRA MA. JESSICA A. GUE­VARRA is a senior as­so­ciate of the Tax Ad­vi­sory & Com­pli­ance di­vi­sion of P&A Grant Thorn­ton, the Philip­pine mem­ber firm of Grant Thorn­ton In­ter­na­tional Ltd. pa­grant­thorn­ton@ph.gt.com

With the emer­gence of coro­n­avirus dis­ease 2019 (COVID-19), many busi­nesses have col­lapsed, un­em­ploy­ment rates have in­creased, while many Mi­cro, Small, and Medium En­ter­prises (MSMEs) are on the verge of bank­ruptcy. In cog­nizance of the ad­verse im­pact of the COVID-19 on the Philip­pine econ­omy, govern­ment mech­a­nisms are cur­rently be­ing put in place to con­tain the dam­age.

Re­pub­lic Act No.

11494, also known as the Bayani­han to Re­cover As One Act or the Bayani­han II, has been passed to bol­ster the so­cioe­co­nomic well-be­ing of all Filipinos. Re­cently, the Depart­ment of Fi­nance is­sued three Im­ple­ment­ing Rules and Reg­u­la­tions, as de­scribed be­low (RR No. 23-2020, RR No. 24-2020, and RR No. 25-2020) for Bayani­han II. On the other hand, af­ter the pas­sage of the law, our leg­is­la­tors are now ea­ger to pass an­other eco­nomic mea­sure, the Cor­po­rate Re­cov­ery and Tax In­cen­tives for En­ter­prises (CRE­ATE) bill.


Prior to the re­peal of Sec­tion 127(B) of the Tax Code, as amended, a per­cent­age tax is im­posed on ev­ery sale or other dis­po­si­tion through ini­tial pub­lic of­fer­ing (IPO) of shares of stock in closely-held cor­po­ra­tions, based on the spec­i­fied rates therein. Al­though the re­flected tax bases were low­ered, some PSE in­sid­ers at the time be­lieved that the tax dis­cour­ages many com­pa­nies from go­ing pub­lic. Con­se­quently, the growth and de­vel­op­ment of the cap­i­tal mar­kets are ad­versely af­fected.

Now with the amend­ment in­tro­duced by the Bayani­han Act II, specif­i­cally the re­peal of Sec­tion 127(B), which re­moved the per­cent­age tax, it may be ex­pected that more closely-held cor­po­ra­tions will find it at­trac­tive to go pub­lic, en­cour­ag­ing in­vestors to par­tic­i­pate in pub­lic of­fer­ings. One other pos­si­ble out­come is to en­able SMEs and those from low­in­come sec­tors to ac­tively par­tic­i­pate in the de­vel­op­ment of the cap­i­tal mar­ket.


Part of the re­sponse and re­cov­ery in­ter­ven­tions is the ex­emp­tion from the DST on loans ex­tended or cred­its re­struc­tured. The BSP has like­wise is­sued Me­moran­dum No. 074, which im­ple­ments Sec­tion 4(uu) of Bayani­han II. Rule IV pro­vides for the scope of the manda­tory one-time 60-day grace pe­riod and is be­ing made ap­pli­ca­ble to mul­ti­ple loans of in­di­vid­u­als and en­ti­ties, with prin­ci­pal and/or in­ter­est, in­clud­ing amor­ti­za­tions, fall­ing due on or be­fore Dec. 31, 2020. For mul­ti­ple loans, the grace pe­riod ap­plies to each loan, with­out in­cur­ring in­ter­est on in­ter­ests, penalties, fees or other charges,and for which may be set­tled on a stag­gered ba­sis with­out in­ter­est on in­ter­ests, penalties and other charges un­til Dec. 31, 2020.

As a tax break for cov­ered in­sti­tu­tions, as defined in RR 24- 2020, as well as to the bor­row­ers, no ad­di­tional DST shall be im­posed on the loan term ex­ten­sions and credit restruc­tur­ing, mi­cro-lend­ing in­clud­ing those ob­tained from pawn­shops.


Busi­nesses that suf­fered op­er­at­ing losses in­curred in tax­able years 2020 and 2021, will be al­lowed to carry over the losses as de­duc­tions from gross in­come over the next five con­sec­u­tive tax­able years im­me­di­ately fol­low­ing the year of such loss, as op­posed to the three years granted by the Tax Code, as amended. Here, the losses for the tax­able years 2020 and 2021 may be car­ried over as a de­duc­tion even af­ter the ex­pi­ra­tion of Bayani­han II, pro­vided that the same are claimed within the next five con­sec­u­tive tax­able years im­me­di­ately fol­low­ing the year of such loss.


Not long be­fore the pas­sage of Bayani­han II, the CRE­ATE bill (pre­vi­ously CITIRA), is await­ing de­lib­er­a­tions at the Se­nate. As ad­vised by the eco­nomic team, there is a need to re­cal­i­brate the bill to make it more rel­e­vant and re­spon­sive to the needs of the busi­nesses neg­a­tively af­fected by the pan­demic, and to im­prove the coun­try’s abil­ity to at­tract in­vest­ment.

For en­ter­prises that have not en­joyed any type of in­come tax in­cen­tive, an ac­cel­er­ated cor­po­rate in­come tax re­duc­tion to 25% will surely boost the ef­forts of busi­nesses, es­pe­cially the MSMEs, in pro­tect­ing jobs and re­cov­er­ing from the chal­lenges they have en­coun­tered due to COVID-19. Ac­cord­ing to some ex­perts, once this bill is passed, the Philip­pines will be the only govern­ment to con­fer tax breaks on MSMEs.

Aside from the out­right de­duc­tion of the CIT rate, CRE­ATE, if passed, will pro­mote job cre­ation via per­for­mance­based in­cen­tives. Based on the lat­est work­ing draft of the CRE­ATE, the Min­i­mum Cor­po­rate In­come Tax ( MCIT) rate will be low­ered from 2% to 1%.

For reg­is­tered busi­ness ac­tiv­i­ties en­joy­ing the 5% tax on gross in­come earned in­cen­tive, the sun­set pe­riod is pro­longed to four to nine years, as op­posed to the pre­vi­ous ver­sion’s two to seven years.

With the Bayani­han II now in place, we can also hope for the pas­sage of the CRE­ATE bill any time soon. Nev­er­the­less, let us hope that these tax breaks cur­rently in place and those be­ing pro­posed and pur­sued help tax­pay­ers on the road to a faster re­cov­ery af­ter COVID-19.

Let’s Talk Tax is a weekly news­pa­per col­umn of P&A Grant Thorn­ton that aims to keep the pub­lic in­formed of var­i­ous de­vel­op­ments in tax­a­tion. This ar­ti­cle is not in­tended to be a sub­sti­tute for com­pe­tent pro­fes­sional ad­vice.

Note: In the Sept. 29 edi­tion of Let’s Talk Tax, Tax Breaks in Bayani­han II, un­der the por­tion Tax Ex­emp­tion of Re­tire­ment Ben­e­fits, the pe­riod June 5 to Dec. 31 per­tains to this year, 2020.

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