Duration of Reduced Percentage Tax Under the CREATE Law in the Philippines

Introduction

The Corporate Recovery and Tax Incentives for Enterprises (CREATE) Act, officially known as Republic Act No. 11534, was enacted on March 26, 2021, as a comprehensive measure to support economic recovery in the wake of the COVID-19 pandemic. This legislation amends several provisions of the National Internal Revenue Code (NIRC) of 1997, as amended, with the primary goals of lowering corporate income tax rates, rationalizing fiscal incentives, and providing temporary tax relief to businesses. Among its key provisions is the temporary reduction of the percentage tax rate applicable to certain non-value-added tax (VAT) taxpayers. This article explores the intricacies of this reduced percentage tax, focusing on its duration, scope, and implications within the Philippine tax framework. By examining the legal basis, affected entities, and practical considerations, it provides a thorough understanding of how this provision operates and its role in fostering business resilience.

Understanding Percentage Tax in the Philippines

Percentage tax, as outlined in Title V of the NIRC, is a form of business tax imposed on the gross sales or receipts of certain persons or entities that are exempt from VAT or whose transactions are not subject to VAT. Under Section 116 of the NIRC, a 3% percentage tax is generally levied on persons whose annual gross sales or receipts do not exceed the VAT threshold (currently PHP 3 million, as adjusted) and who have not elected to be VAT-registered. This tax applies to a wide array of businesses, including but not limited to:

Domestic carriers and keepers of garages (e.g., transport services like buses, taxis, and jeeps).
International carriers doing business in the Philippines.
Franchises on radio and television broadcasting companies.
Banks and non-bank financial intermediaries.
Life insurance companies.
Agents of foreign insurance companies.
Proprietors, lessees, or operators of cockpits, cabarets, night or day clubs, boxing exhibitions, professional basketball games, jai-alai, and racetracks.
Sales of shares of stock listed and traded through the local stock exchange.

The percentage tax serves as an alternative to VAT for smaller-scale operations or specific industries, ensuring a simplified tax compliance mechanism while generating revenue for the government. It is computed on gross receipts without deductions for costs or expenses, making it a straightforward but potentially burdensome levy during economic downturns. Prior to amendments, the standard rate stood uniformly at 3% for most categories under Section 116, with variations for specific sectors (e.g., 2% for international air and sea carriers under Sections 117 and 118).

Amendments Introduced by the CREATE Law

The CREATE Law introduces sweeping reforms to the Philippine tax system, primarily targeting corporate income taxation and investment incentives. However, it also includes targeted relief measures for other tax types to alleviate the financial strain on businesses amid the pandemic. Section 5 of RA 11534 specifically amends Section 116 of the NIRC by inserting a temporary reduction in the percentage tax rate. This amendment reflects the law's broader objective of stimulating economic activity through tax cuts, complementing reductions in corporate income tax (from 30% to 25% or 20% for qualifying small corporations) and the rationalization of incentives under the Strategic Investment Priority Plan (SIPP).

The rationale behind the percentage tax reduction is rooted in the recognition that non-VAT taxpayers, often comprising micro, small, and medium enterprises (MSMEs) and essential service providers like transportation, were disproportionately affected by lockdowns and reduced consumer activity. By lowering the rate, the government aimed to improve cash flow, encourage compliance, and prevent business closures. This provision aligns with other temporary measures in CREATE, such as the suspension of minimum corporate income tax (MCIT) until June 30, 2023, and adjustments to net operating loss carry-over (NOLCO) rules.

The Reduced Percentage Tax Rate

Under the amended Section 116, the percentage tax rate is temporarily reduced from 3% to 1% on gross sales or receipts. This reduction applies uniformly to all persons subject to percentage tax under this section, provided they meet the criteria for non-VAT status. Key features of the reduced rate include:

Scope of Application: The 1% rate covers the same taxpayers as the original 3% tax, including transport operators, entertainment venues, and financial intermediaries not subject to VAT. It does not extend to other percentage taxes under different sections, such as the 2% tax on international carriers or the 10-15% tax on stock transactions under Section 127.
Computation and Filing: Taxpayers compute the tax on their quarterly gross receipts and file returns using BIR Form No. 2551Q. No deductions are allowed, maintaining the simplicity of the regime. The reduction does not alter withholding requirements or penalties for non-compliance.
Exemptions and Exclusions: Certain transactions remain exempt, such as sales by agricultural cooperatives or exports. Taxpayers who exceed the VAT threshold must transition to VAT registration, rendering them ineligible for the percentage tax.

This reduced rate represents a significant 66.67% decrease from the original, providing substantial relief. For instance, a transport operator with PHP 1 million in quarterly gross receipts would pay PHP 10,000 under the reduced rate instead of PHP 30,000, freeing up resources for operational needs.

Duration of the Reduction

The core focus of this discussion is the temporal limit of the reduced percentage tax. As stipulated in Section 5 of RA 11534, the 1% rate is effective for a fixed period of three years, commencing on July 1, 2020, and ending on June 30, 2023. This retroactive start date ensures alignment with the onset of pandemic-related economic measures, allowing taxpayers to claim refunds or credits for overpayments in earlier quarters if applicable.

Effective Period Breakdown:
- Start Date: July 1, 2020 – This coincides with the effective date of other CREATE tax reductions, such as the corporate income tax cut, to provide immediate relief.
- End Date: June 30, 2023 – After this date, the rate automatically reverts to 3% without need for further legislation, unless extended by subsequent laws.
- Quarterly Application: The reduction applies to gross receipts earned within this window, with returns due 25 days after each quarter's end.

The three-year duration was designed as a short-term stimulus, balancing fiscal relief with the government's need to restore revenue streams post-recovery. Implementing rules and regulations (IRR) issued by the Bureau of Internal Revenue (BIR), such as Revenue Regulations No. 4-2021, clarify that the reduction is non-extendable unless amended by Congress. Taxpayers must monitor their compliance calendars to avoid underpayment penalties upon reversion.

Implications and Considerations for Taxpayers

The temporary nature of the reduced percentage tax carries several implications for affected entities:

Financial Planning: Businesses should budget for the impending increase to 3% starting July 1, 2023. This may involve adjusting pricing strategies, especially in price-sensitive sectors like public transportation, where passing on costs to consumers could affect demand.
Compliance and Reporting: During the reduced period, taxpayers must accurately segregate receipts by date to apply the correct rate. BIR audits may scrutinize claims, emphasizing the need for robust record-keeping. Revenue Memorandum Circulars (RMCs) from the BIR, such as RMC No. 44-2021, provide guidance on transitional procedures.
Interaction with Other Taxes: The reduction does not affect VAT thresholds or elections. Taxpayers nearing the PHP 3 million threshold should evaluate whether to register for VAT voluntarily, as it allows input tax credits that may offset the higher effective tax burden.
Special Cases: MSMEs benefiting from other CREATE incentives, such as the 20% corporate income tax rate, may still be subject to percentage tax if their operations fall under Section 116. Additionally, transport cooperatives or those under special laws (e.g., RA 9520 for cooperatives) may have overlapping exemptions.
Penalties and Remedies: Non-compliance, such as applying the wrong rate, incurs a 25% surcharge, 12% interest per annum, and potential compromise penalties. Taxpayers can avail of administrative remedies like abatement or installment payments under BIR rules.

Reversion to Original Rate and Future Outlook

Upon the expiration of the reduction on June 30, 2023, the percentage tax rate reverts to 3% effective July 1, 2023. This automatic reversion is embedded in the law to ensure fiscal sustainability, as prolonged reductions could strain government revenues needed for public services. Taxpayers must file returns for the third quarter of 2023 (July-September) using the 3% rate for receipts from July 1 onward, prorating if necessary for mixed periods.

Looking ahead, the Philippine Congress may consider extensions or further reductions in future tax reforms, particularly if economic challenges persist. The CREATE Law's sunset review clause under Section 316 mandates periodic evaluation of incentives, which could influence percentage tax policies. Stakeholders, including business chambers and tax experts, advocate for permanent reductions to enhance competitiveness, but such changes would require legislative action. In the interim, BIR issuances will continue to address queries, ensuring smooth transitions.

Conclusion

The reduced percentage tax under the CREATE Law exemplifies targeted fiscal policy aimed at economic recovery, offering a temporary 1% rate from July 1, 2020, to June 30, 2023, for non-VAT taxpayers under Section 116 of the NIRC. By understanding its scope, duration, and implications, businesses can navigate compliance effectively and leverage the relief for growth. As the Philippine economy evolves, this provision underscores the balance between short-term support and long-term fiscal responsibility, contributing to a resilient tax ecosystem.