CREATE Law: 10 most asked questions

Alexander B. Cabrera Chairman Emeritus, PwC Philippines 04 Apr 2021

as easy as abc

Not surprisingly, I have already spoken in a few webinars this week on the Comprehensive Recovery and Tax Incentives for Enterprises (CREATE) Act (Republic Act 11534), with the ink of presidential approval on it barely dry. I wish to share to my readers important knowledge on CREATE based on the questions I received thus far from our clients, and the public.

The lower tax rate of 25 percent is retroactive to July 1, 2020. Can we apply the 25 percent tax rate on our income for the last six months? Quarterly declarations are not final because tax is applied on annual income. Hence, the effective tax rate of 27.5 percent should be applied on your taxable income in 2020.

Is the minimum corporate income tax (MCIT) suspended? It’s not suspended, but it is temporarily reduced from two to one percent retroactive to July 1, 2020 up to June 30, 2023. It follows the same manner of computation for the new corporate income tax for 2020. So the effective MCIT rate for calendar year 2020 is 1.5 percent.

Is the 40 percent optional standard deduction (OSD) still available? Yes it is, for big and small businesses and individuals. However, individuals are still only allowed to use 40 percent OSD based on their sales and if they use it, they cannot deduct direct costs, unlike corporations. Note that regulations implementing the OSD law are deemed legislatively reenacted. Thus, you cannot use OSD in your annual ITR if you have not used OSD in your first quarterly tax return.

What is the new value-added tax (VAT) exemption threshold for house and lot or dwellings under CREATE? The CREATE law provided for the increase in the threshold of VAT exemption for dwellings to P4.2 million. However, this was among the provisions vetoed by the President. While the veto communication alluded that the VAT exemption shall remain at P2.5 million as it is the Tax Reform for Acceleration and Inclusion (TRAIN) law, this however is inaccurate as the threshold under the TRAIN law went down to P2 million beginning 2021. Since the President can only veto but not pass laws, fresh legislation is needed to increase the current threshold. (If not to P4.2 million as vetoed, then to P3.5 million?)

How is the sunset period computed for registered enterprises? You can enjoy your income tax holiday (ITH) undisturbed, but you can only avail of the five percent GIT for the next 10 years after the ITH. Or if you are already in the five percent regime, you can enjoy ITH for the next 10 years, technically from the effectivity of CREATE.

Will registered enterprises be allowed to register again for incentives after the sunset period? In the CREATE law, so long as the activity of the registered enterprise is in the strategic investment priorities plan, they can reapply for incentives after the sunset period. This provision however has been vetoed by the President. These companies can only register again if they are engaged in a new activity that is entitled to incentives. This brings it back to the declared policy of government that for incentives, there is no forever.

Do you still need a BIR ruling for tax-free exchange transactions under CREATE? The law expressly states that no prior ruling is required for transactions exempt under the law to be tax-free. We hope that in the implementation of the BIR, a ruling will also not be required when securing Certificate Authorizing Registration (CAR) because it would negate the spirit of the law. The BIR can anyway review the transaction during a regular examination.

Specially in this pandemic, does CREATE now allow purely electronic invoicing? This has not been touched on in CREATE but if the earlier TRAIN law is to be followed, the government has until January 2023 (five years from effectivity of TRAIN) to establish the system that is needed to store and process data. It can happen earlier but today, BIR rules still require hard copies of all invoices, receipts, books of accounts and accounting records because the BIR is not yet prepared to conduct digital audits, among other things.

Will the April 15 deadline be extended because revenue regulations will still have to be issued? The CREATE law is officially effective on April 11 (15 days after its publication on March 27) but it has retroactive provisions, like the lower corporate tax rate with effect from July 1, 2020. These provisions are clear enough to have a self-executory effect (or even without the regulations). Although regulations are not expected to come out in the next 10 days, a BIR issuance on updated forms/tax returns is being expected by taxpayers before April 15. If a deadline extension will happen, it is not because of CREATE but if at all, because of the quarantine.

Will we attract investors because of CREATE? The lower corporate tax rate, although not the lowest in the region, makes the Philippines closely lagging behind our neighbors. This is sufficient as investors who come here to do business do so because of our vibrant domestic market, and the lower tax rate will not be a turn-off. Exporters, however, now have a longer sunset period and they will stay put because 10 years is a lot of time, and a lot can happen in 10 years, commercially or politically.

May our families be covered by the merciful mantle of His protection this blessed Easter and in the challenging days to come.

Alexander B. Cabrera is the chairman and senior partner of Isla Lipana & Co./PwC Philippines. He is the chairman of the Integrity Initiative, Inc. (II, Inc.), a non-profit organization that promotes common ethical and acceptable integrity standards. Email your comments and questions to This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.

This article was originally published in the Philippine STAR.

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Alexander B. Cabrera

Alexander B. Cabrera

Chairman Emeritus, PwC Philippines

Tel: +63 (2) 8845 2728