Tax Articles

CREATE Bill’s VAT Amendments and Real Property Exemptions

By: Atty. Lino Ernie M. Guevara

As the end of 2020, a year like no other, draws near, the CREATE Bill also inches closer to becoming a law.

The last week of November saw the Upper House approving Senate Bill (SB) No. 1357 into its third and final reading. SB 1357, now known as the CREATE Bill (Corporate Recovery and Tax Incentives for Enterprises Act), with its pre-pandemic sobriquet CITIRA (Corporate Income Tax and Incentives Rationalization Act), was certified by the President for immediate enactment. Initially, the Lower House announced its intention to adopt the Senate version en toto. But our Congressmen, as of this writing, backpedaled and is now gunning for the Bicameral Conference Committee to reconcile their differing versions of the bills. This may delay its enactment as feared by the Senate.

The CREATE Bill falls under the government’s Tax Reform Package 2, after Package 1 was successfully shepherded into law, the Tax Reform for Acceleration and Inclusion (TRAIN) Law amending our 1997 Tax Code. But unlike previous tax reform bills, CREATE is sort of sui generis, a class by itself. Ironically, CREATE, as succinctly described by the Department of Finance (DOF) itself, is the country’s “first-ever revenue-eroding tax reform package” proposed by it. Instead of raising more revenues for the government, CREATE was recalibrated as a response to the economic havoc of COVID-19 pandemic. Thus, it morphed into what is supposedly the largest fiscal stimulus program for enterprises in the country’s history.

CREATE is creating headlines mainly due to the promised drastic cut in the Philippine corporate income tax (CIT) as well as the rationalization of the fiscal incentives under various special laws, including the withdrawal of the 10% special tax rate for Regional Operating Headquarters (ROHQs) by December 31, 2021 and subjecting it to the regular corporate income tax.

Ditching the graduated and yearly decreases in the tax rate as previously espoused under the CITIRA Bill, CREATE goes for the jugular by having an outright 5% cut from the CIT rate to make it 25% retroactive to July 1, 2020. The rate is further reduced to 20% for domestic corporations with net taxable income not exceeding P5 million and with total assets not exceeding P100 million, excluding the land on which the entity’s office, plant and equipment are situated. But the real deal of the bill was rationalizing the fiscal incentives granted to various qualified companies under different incentive laws. In gist, it seeks to plug leaks in the government’s much needed revenue collection. It likewise reduces the Minimum Corporate Income Tax from the current 2% to only 1% from July 1, 2020 to June 30, 2023. One welcome news for the education and health sectors is the reduction of the CIT beginning July 1, 2020 until June 30, 2023 from 10% to 1% CIT covering proprietary educational institutions and hospitals which are nonprofit. The 10% Improperly Accumulated Earnings Tax, which usually is a staple issue during a tax audit, is repealed. Although some of these cuts are merely time-bound, they are nonetheless beneficial and critical for companies during this time of tumult.

But for this article, I would like to highlight more CREATE’s proposed amendments in our current business taxes, specifically percentage tax and VAT exemptions.

First, there would be a reduction of the percentage tax rate imposed on persons whose sales are exempt from VAT (i.e., not having exceeded the P3 million threshold for sale or lease of goods or sale of service) from 3% to 1% effective July 1, 2020 until June 30, 2023.

Now, the VAT exemptions under the CREATE Bill include the following:

1. Sale, importation, printing or publication of books, newspapers, etc. and now to include journal and educational reading materials under the UNESCO Agreement and their digital or electronic format;

2. Sale or importation of certain prescription drugs and medicines including those for cancer, mental illness, tuberculosis and kidney disease beginning January 1, 2021(instead of January 1, 2023);

3. Sale or importation of the following beginning January 1, 2021 to December 31, 2023:

a. Capital equipment, spare parts and raw materials for the production of personal protective equipment components (e.g., coveralls, gown, surgical cap/mask and N95 mask, gloves, etc.)
b. All drugs, vaccines and medical devices for COVID-19 treatment
c. Food and Drug Administration (FDA)-approved drugs for COVID-19 treatment for use in clinical trials, including raw materials directly necessary for the production of such drugs, subject to certain conditions and that the same will be subject to post-audit by BIR and BOC, as may be applicable

Lastly, and one of the more important amendments at that, pertains to the sale of real property.

For one, SB 1357 increased the threshold amount for the purchase of residential lot to P2.5M and below (from the current rule of P1.5M and below) and house and lot and other residential dwellings valued at P4.2M and below (from the current P2.5M and below). Following the current proviso of Section 109 (P) of the 1997 Tax Code, as amended, the sale of low-cost housing will already be subjected to VAT beginning January 1, 2021 and that only the sale of house and lot and other residential dwellings with selling price of not more than P2M shall be VAT-exempt. With CREATE’s deletion of this sunset proviso under the current law, it in effect restores said VAT exemption for the sale of low-cost housing and residential lot with an increased threshold amount. It likewise retained the VAT exemption for the sale of house and lot and residential dwellings further granting the increased threshold of P4.2M from the previous one of P2.5M.

If passed, the amendments on real property VAT exemptions could be great news for the real estate developers and other stakeholders in the housing sector, in general. The housing advocates are concerned that the withdrawal by the current law of said exemptions starting next year would certainly increase the cost of acquiring a home. And this would be a major setback to the housing sector faced with a colossal housing backlog. According to reports, the Department of Human Settlements and Urban Development (DHSUD) pegs the country’s housing need at a whopping 6.5 million that could balloon to 22 million by Year 2040. And there seems to be no panacea for this housing conundrum anytime soon. On the other hand, some tax reform groups are opposed to such grant of continuing VAT exemptions as they will just purportedly erode government’s tax collections and undermine the VAT efficacy. This stirs a balancing act for the government tasked to increase tax collection but expected to fulfill its mandate to address the basic need for shelter of its populace.

We should all be discerning on what the final CREATE Bill will be. For CREATE will be critical as to how we cope in our continuing fight against this pandemic and would even be more telling as to charting our country’s future economic growth and competitiveness in the region for the years to come.

And in closing for this final article, let me ardently wish you all a safe but still a Merry Christmas and a hope-filled New Year come 2021.