Summary
RR No. 5-2021 implements the new Income Tax rates on regular corporate income and certain passive incomes, and the additional allowable deductions for those in business or practice of profession, under RA No. 11534 (CREATE Act).
Key points
- Regular corporate rates. Domestic corporations pay the higher of the regular rate or MCIT. The regular rate is 25% from July 1, 2020, or 20% for those with net taxable income not exceeding ₱5,000,000 and total assets not exceeding ₱100,000,000 excluding land. MCIT is 1% from July 1, 2020 to June 30, 2023 and 2% from July 1, 2023, and proprietary educational institutions and hospitals pay 1% to June 30, 2023 and 10% from July 1, 2023. Resident foreign corporations and offshore banking units pay 25% regular and the same MCIT rates, regional operating headquarters 25% from January 1, 2022, and non-resident foreign corporations 25% from January 1, 2021.
- MCIT and related rules. MCIT starts on the fourth taxable year after business operations began, when it is greater than the regular tax. Domestic corporations account separately for land cost in their Annual Financial Statements. If an educational institution’s or hospital’s gross income from unrelated trade, business or other activity exceeds fifty percent (50%) of its total gross income, the domestic corporation rate applies to all its taxable income. GOCCs pay the rate of similar businesses, except GSIS, SSS, HDMF, PHIC and local water districts.
- Passive income and dividends. PCSO winnings above ₱10,000.00 of non-resident aliens are taxed at 20%, and ₱10,000.00 and below are exempt. Resident foreign corporations pay 15% on foreign currency deposit interest and on unlisted share gains. Non-resident foreign corporations pay 25% on Philippine-source gross income and on domestic dividends, reduced to 15% if their home country allows the required credit or imposes no tax on such dividends, and 15% on unlisted share gains.
- Foreign-sourced dividends. Foreign-sourced dividends of domestic corporations are exempt only if they are reinvested in business operations by the next taxable year and used only for working capital, capital expenditures, dividend payments, investment in domestic subsidiaries and infrastructure. The corporation must also directly hold at least twenty percent (20%) in value of the foreign corporation’s shares for at least two (2) years, with a sworn statement within thirty (30) calendar days from receipt and independent auditor certifications. No Section 34(C) credit or deduction is allowed for foreign taxes on these dividends.
- Other changes. The improperly accumulated earnings tax is no longer imposed upon effectivity of the CREATE. Itemized deductions of Expenses and Interest follow policies set in the Regulations. No gain or loss is recognized in qualifying reorganizations or in transfers of property for control of a corporation by up to four (4) persons, without VAT or prior BIR ruling, subject to post-transaction audit.
- Transition for TY 2020. Interest arbitrage and corporate income tax for TY 2020 use the transitory rates matrix by fiscal year end, and income and expenses are deemed earned and spent equally for each month. Taxpayers who already filed TY 2020 returns may amend them with the transitory rates and claim excess as refund, Tax Credit Certificate or carry-over.
Who is affected
- Domestic corporations
- Resident and non-resident foreign corporations
- Proprietary educational institutions and hospitals
- Non-resident alien individuals
- Taxpayers who filed TY 2020 returns and wish to amend
Deadlines and effectivity
- Regular corporate rates effective July 1, 2020
- MCIT 1% from July 1, 2020 to June 30, 2023, then 2% from July 1, 2023
- Non-resident foreign corporation 25% from January 1, 2021
- Foreign dividend sworn statement within thirty (30) calendar days from receipt
Summary by Tax Resources PH. It is not a substitute for the full text of the issuance or professional advice.
Copies of BIR issuances are hosted here for reference. For the official version, check bir.gov.ph. Summaries by Tax Resources PH are not a substitute for the full text or professional advice.