Introduction

The Corporate Recovery and Tax Incentives for Enterprises (CREATE) Act, officially known as Republic Act No. 11534, was enacted on March 26, 2021, to provide economic relief amid the COVID-19 pandemic and to reform the Philippine fiscal incentive system. Among its key provisions are temporary reductions in certain percentage-based taxes, aimed at easing the financial burden on businesses and specific institutions during the recovery period. These reductions primarily affect the Minimum Corporate Income Tax (MCIT) and the preferential income tax rate for proprietary educational institutions and non-profit hospitals. Unlike the permanent reduction in the regular corporate income tax (CIT) rate from 30% to 25% (or 20% for qualifying small corporations), these percentage tax reductions are time-bound, reflecting the law's intent to offer short-term stimulus while maintaining long-term fiscal sustainability.

This article examines the duration, scope, applicability, and implications of these reduced percentage taxes under CREATE, drawing from the amendments to the National Internal Revenue Code (NIRC) of 1997, as amended. It covers the legal basis, eligibility criteria, computational aspects, transitional rules, and potential extensions or related developments within the Philippine tax framework.

Legal Basis and Overview of Reduced Percentage Taxes

The CREATE Act amends several sections of the NIRC to introduce temporary reductions in percentage taxes. These are not to be confused with the standard 3% percentage tax under Section 116 of the NIRC, which applies to non-VAT registered persons with annual gross sales or receipts not exceeding PHP 3 million—this rate remains unchanged by CREATE. Instead, the reduced percentages refer to specific income-based taxes calculated as a percentage of gross income or taxable income, designed as minimum or preferential rates.

1. Reduced Minimum Corporate Income Tax (MCIT)

The MCIT, introduced under Section 27(E) and Section 28(A)(2) of the NIRC, serves as a safeguard against tax avoidance by ensuring corporations pay a minimum tax even if their regular CIT is lower due to losses or excessive deductions. Normally imposed at 2% of gross income after the fourth year of business operations, the MCIT under CREATE was temporarily reduced to 1%.

Duration: The reduced rate of 1% applies effective July 1, 2020, until June 30, 2023. After this period, the rate reverts to 2% starting July 1, 2023.
Scope and Applicability: This reduction benefits domestic corporations and resident foreign corporations subject to MCIT. It does not apply to non-resident foreign corporations, proprietary educational institutions, non-profit hospitals, or enterprises enjoying fiscal incentives like income tax holidays (ITH) or the 5% gross income tax (GIT) under the CREATE regime. The MCIT is computed quarterly and annually, with any excess over the regular CIT creditable against future regular CIT liabilities for up to three years.
Rationale: The temporary halving of the MCIT rate was intended to provide cash flow relief to businesses struggling with reduced revenues during the pandemic, allowing them to retain more funds for operations and recovery.
Computational Example: For a corporation with gross income of PHP 10 million in a taxable year within the reduced period, the MCIT would be PHP 100,000 (1% of PHP 10 million). If the regular CIT (at 25%) on net taxable income is PHP 80,000, the corporation pays the MCIT of PHP 100,000, with the excess PHP 20,000 carried forward.
Exemptions and Suspensions: Corporations in their first three years of operation are exempt from MCIT. Additionally, the Bureau of Internal Revenue (BIR) may suspend MCIT imposition in cases of legitimate business losses, as provided under Revenue Regulations (RR) No. 5-2021 implementing CREATE.

2. Reduced Preferential Tax Rate for Proprietary Educational Institutions and Non-Profit Hospitals

Under Section 27(B) of the NIRC, proprietary (private, for-profit) educational institutions and non-profit hospitals are subject to a preferential tax rate on their taxable income, recognizing their social contributions. Prior to CREATE, this rate was 10%. The law introduced a temporary reduction to 1% to support these sectors amid pandemic-induced disruptions, such as school closures and increased healthcare demands.

Duration: The reduced rate of 1% is effective from July 1, 2020, until June 30, 2023. Thereafter, the rate reverts to 10% starting July 1, 2023.
Scope and Applicability: This applies to proprietary educational institutions (e.g., private schools, colleges, and universities) and non-profit hospitals that comply with the "predominance test"—at least 50% of students must be on scholarships for schools, or a similar social service orientation for hospitals. Income from unrelated business activities (e.g., commercial rentals) is taxed at the regular CIT rate of 25%. Foreign-owned institutions may qualify if they meet domestic requirements.
Rationale: The reduction aimed to alleviate financial pressures on education and healthcare providers, ensuring continuity of services during the crisis. It aligns with the Philippine Constitution's emphasis on accessible education and health under Article XIV.
Computational Example: A proprietary school with taxable income of PHP 5 million during the reduced period would pay PHP 50,000 (1% rate). Post-June 2023, the same income would incur PHP 500,000 at 10%.
Conditions and Compliance: Institutions must maintain non-profit status for hospitals or proprietary but socially oriented operations for schools. Violations, such as profit distribution exceeding reasonable levels, could trigger reversion to regular CIT. BIR RR No. 5-2021 provides guidelines on compliance, including the need for certification from relevant agencies like the Department of Education (DepEd) or Commission on Higher Education (CHED).

Transitional and Sunset Provisions Related to Percentage Taxes

CREATE includes transitional rules for enterprises previously enjoying fiscal incentives under prior laws, such as the Omnibus Investments Code (Executive Order No. 226) or Special Economic Zone Act (RA 7916). While these primarily involve income tax holidays or 5% GIT, they intersect with percentage taxes during the sunset period:

Sunset Period for Existing Incentives: Registered business enterprises (RBEs) enjoying ITH or 5% GIT before CREATE can continue these for a sunset period: up to 7 years if incentives were enjoyed for less than 10 years, or 5 years if more than 10 years. During this time, they are exempt from MCIT. Post-sunset, they may transition to new incentives like enhanced deductions (ED) or special corporate income tax (SCIT) at 5% on gross income for export-oriented enterprises.
Impact on Reduced Percentages: The temporary 1% MCIT does not apply to RBEs during sunset, as they are incentive-exempt. However, upon transition, if they opt for regular taxation, the reverted 2% MCIT applies after June 30, 2023.
Grandfathering for Regional Operating Headquarters (ROHQs): Existing ROHQs, previously taxed at 10% on taxable income under Section 22(EE), can continue this preferential rate until December 31, 2021, after which they shift to regular CIT at 25%. No extension of the reduced rate applies here, as CREATE phases out new ROHQ registrations.

Implications and Compliance Considerations

The time-limited nature of these reductions underscores CREATE's balance between immediate relief and fiscal responsibility. Businesses benefited from lower effective tax rates during 2020-2023, potentially improving liquidity by up to 50% on MCIT liabilities. However, the reversion to higher rates post-June 2023 necessitates strategic planning, such as accelerating deductions or carrying forward credits.

BIR Implementation: RR No. 5-2021 and subsequent issuances detail filing requirements, including amended returns for retroactive application from July 2020. Penalties for non-compliance, under Section 255 of the NIRC, include fines and interest.
Judicial and Administrative Interpretations: The Supreme Court has upheld similar temporary tax measures in cases like Chamber of Real Estate and Builders' Associations, Inc. v. Romulo (G.R. No. 160756, 2010), emphasizing congressional authority over tax policy. BIR rulings may clarify edge cases, such as hybrid institutions.
Economic Impact: These reductions supported recovery in key sectors, with estimates from the Department of Finance indicating billions in foregone revenue offset by stimulated growth. For schools and hospitals, the 1% rate facilitated investments in online learning and medical equipment.

Potential Extensions and Related Developments

Although the CREATE Act specifies fixed durations ending June 30, 2023, subsequent legislation or executive actions could extend them. For instance, in response to ongoing economic challenges, proposals for amendments have been discussed in Congress, but as of the law's original framework, no automatic extensions exist. Taxpayers should monitor updates from the BIR or Department of Finance for any changes via revenue regulations or new laws.

In conclusion, the reduced percentage taxes under CREATE represent a targeted, temporary intervention in the Philippine tax system, promoting resilience while paving the way for a more competitive incentive structure. Understanding their durations and nuances is essential for compliance and optimization in a post-pandemic economy.