CREATE the changes to VAT and real estate exemptions from the bill
As the end of 2020 approaches, a year like no other, the CREATE bill is also set to become law.
The last week of November saw the Upper House approve Senate Bill 1357 during its third and final reading. The SB 1357, now known as the CREATE Bill (Corporate Recovery and Tax Incentives Act for Enterprises), with its pre-pandemic moniker Citira (Corporate Income Tax and Incentives Rationalization Act), has been certified by the President for immediate enactment. . As a first step, the Lower House announced its intention to adopt the Senate version in full. But our members of Congress, as of this writing, have backed down and are now asking the Bicameral Conference Committee to reconcile their different versions of the bills. This could delay its enactment, as the Senate feared.
The CREATE bill falls under the government’s tax reform package 2, after package 1 was successfully passed into law, the tax reform for acceleration and the inclusion law amending our 1997 tax code. But unlike previous tax reform bills, CREATE is a kind of sui generis, a class apart. Ironically, CREATE, as the finance ministry succinctly describes it, is the country’s “first ever revenue-eroding tax reform package”. Instead of generating more revenue for the government, CREATE has been recalibrated in response to the economic ravages of the Covid-19 pandemic. So it turned into what is supposed to be the biggest fiscal stimulus package for businesses in the country’s history.
CREATE grabbed the headlines mainly due to the promised drastic reduction in the Philippine Corporate Tax (CIT) as well as the streamlining of tax incentives under various special laws, including the removal of the special tax rate 10% for regional operating headquarters by December. December 31, 2021 and subjecting it to ordinary corporation tax.
Abandoning the progressive and annual reductions in the tax rate as they were previously adopted under the Citira bill, CREATE opts for the jugular by purely and simply reducing the CIT rate by 5% to make it retroactive 25% on July 1, 2020. The rate is further reduced. 20 per cent for national companies with a net taxable income not exceeding 5 million pesos and whose total assets do not exceed 100 million pesos, excluding the land on which the offices, facilities and the entity’s equipment. But the real problem with the bill was to rationalize the tax incentives given to various qualified companies under different incentive laws. Basically, it seeks to plug the leaks in the collection of much needed government revenue. It also reduces the minimum corporate income tax from 2% currently to just 1% from July 1, 2020 to June 30, 2023. Good news for the education and health sectors is the reduction of the CIT. from July 1, 2020 until June. 30 2023 from 10% to 1% CIT covering educational institutions and private non-profit hospitals. The 10 percent tax on unduly accrued gains, which is usually a basic problem in a tax audit, is repealed. While some of these reductions are simply limited in time, they are nonetheless beneficial and essential for businesses during this tumultuous time.
But for this article, I would like to further highlight the changes CREATE is proposing in our current business taxes, especially the percentage tax and value added tax (VAT) exemptions.
First, there would be a reduction in the percentage tax rate imposed on persons whose sales are exempt from VAT (i.e. not having exceeded the threshold of 3 million pesos for sale or rental of goods or the sale of services) from 3% to 1% as of July. From 1 2020 to 30 June 2023.
Now, VAT exemptions under the CREATE Bill include the following:
1. Sale, import, printing or publication of books, newspapers, etc. and henceforth include journals and educational reading material under the Unesco Agreement and their digital or electronic format;
2. Sale or import of certain prescription drugs and drugs, including those for cancer, mental illness, tuberculosis and kidney disease from January 1, 2021 (instead of January 1, 2023);
3. Sale or import of the following items from January 1, 2021 to December 31, 2023:
a. Equipment goods, spare parts and raw materials for the production of personal protective equipment components (e.g. coveralls, gowns, surgical caps / masks and N95 masks, gloves, etc.).
b. All drugs, vaccines and medical devices for Covid-19 treatment.
vs. Drugs approved by the Food and Drug Administration (FDA) for the treatment of Covid-19 for use in clinical trials, including raw materials directly necessary for the production of these drugs, subject to certain conditions and that they will be subject to a subsequent audit by the BIR and BOC, as appropriate.
Finally, and one of the most important amendments, concerns the sale of real estate.
On the one hand, SB 1357 increased the threshold amount for the purchase of residential land to P2.5 million and below (compared to the current rule of P1.5 million and below) and a house and of a lot and other residential housing valued at P4.2million and below (from P2.5million currently and below). Following the current provision of Article 109 (P) of the General Tax Code of 1997, as amended, the sale of social housing will already be subject to VAT as of January 1, 2021 and that only the sale of house and of land and other residential dwellings whose sale price does not exceed 2 million pesos are exempt from VAT. With the removal by CREATE of this sunset provision under the current law, it effectively reinstates said VAT exemption for the sale of social housing and residential land with an increased threshold amount. It also maintained the VAT exemption for the sale of houses, land and residential accommodation, further granting the increased threshold of 4.2 million pula compared to the previous one of 2.5 million pula.
If passed, the amendments on VAT exemptions on real estate could be great news for real estate developers and others in the housing industry in general. Housing advocates fear that the removal by current law of such exemptions from next year will certainly increase the cost of home ownership. And that would be a major setback for the housing sector in the face of a colossal housing backlog. According to reports, the Ministry of Human Settlements and Urban Development estimates the country’s housing needs at 6.5 million, which could reach 22 million by 2040. And there does not seem to be a panacea for this conundrum of housing soon. On the other hand, some tax reform groups oppose such granting of continued VAT exemptions because they will allegedly only erode government tax revenues and undermine the effectiveness of VAT. This creates a balancing act for the government charged with increasing tax collection, but which should fulfill its mandate of meeting the basic shelter needs of its population.
We should all discern what the final CREATE bill would be. Because CREATE will be essential as to how we cope in our continued fight against this pandemic and would be even more revealing as to mapping our country’s future economic growth and competitiveness in the region for years to come.
And to end this last article, let me fervently wish you all a safe and happy Christmas and a hopeful New Year in 2021.
The author is a special advisor to Du-Baladad and Associates Law Offices (BDB Law), a member firm of WTS Global.
The article is for general information only and is not intended, nor should it be construed as a substitute for tax, legal or financial advice on any specific matter. The applicability of this article to any real or particular tax or legal question must therefore be supported by a study or professional advice. If you have any comments or questions regarding the article, you can email the author at [email protected] or call 8403-201 local 160.