It has been over three years since the COVID-19 pandemic started. There are changes that have happened since then such as work from home or hybrid work setup, the rise of online transactions, digitalization of manual processes, increase in online payments, and etc.
For tax purposes, one of the significant changes brought about by Republic Act 11534 Corporate Recovery and Tax Incentives for Enterprises Act also known as CREATE law approved last March 2021 and had retroactive effect starting July 1, 2020.
Significant Tax Rate Reduction under CREATE Law
The significant changes brought by CREATE Law that has helped regular taxpayers, especially the micro and small, are with the following:
- Decrease in Corporate Income Tax Rate from 30% to 20-25%
- Decrease in Percentage Tax Rate from 3% to 1%
- Decrease in Minimum Corporate Income Tax, also known as MCIT, from 2% to 1%
The decrease in corporate income tax is permanent unless amended later by a new law in the future. But for the decrease in percentage tax and minimum corporate income tax, the lowering of rate is just temporary for a period of 3 years which started on July 1, 2020, and ended last June 30, 2023.
Although the decrease in rate of percentage tax and minimum corporate income tax is temporary, it still gave a significant relief financially to micro and small business or self-employed especially during the period of significant business decline brought by COVID from 2020 up to the present.
Sample Tax Savings Brought by CREATE Law to Non-VAT Taxpayer subject to Percentage Tax
As an example, if you are a Non-VAT Registered and is subject to Percentage Tax.
Percentage tax computation is total sales multiplied by percentage tax rate. It is a direct expense of the company.
Percentage Tax computation: Total Sales x tax rate
Because of CREATE law there is a temporary reduction on the rate of percentage tax from 3% to 1% from July 1, 2020, to June 30, 2023
To illustrate the benefit of this reduced rate, let us say you had the following sales from January to December 2022 of P1,000,000
Without CREATE transitional rate of percentage tax, the tax due will be P1,000,000 x 3% = P30,000
With CREATE transitional rate of percentage tax, the tax due will be P1,000,000 x 1% = P10,000
Tax Savings to Non-VAT registered subject to percentage tax brought about by the CREATE transitional rate is P20,000
Sample Tax Savings Brought by CREATE Law to Corporate Taxpayer subject to Minimum Corporate Income Tax
Another example, if you are a corporation registered for more than 4 years prior to 2020, example from 2016 and older, are subject to Minimum Corporate Income Tax (MCIT).
And if in 2020 onwards, due to COVID pandemic effect on business, you might have significant losses brought about the decline in economic movement. As such, your reported bottom line in the income statement is net loss.
However, due to MCIT, even if you are net loss, there is a need to pay a minimum corporate income tax based on your gross income.
Gross Income computation: Total Sales – Cost of Sales
MCIT computation: Gross income x tax rate
Because of CREATE law there is a temporary reduction on the rate of Minimum Corporate Income tax from 2% to 1% from July 1, 2020, to June 30, 2023
To illustrate the benefit of this reduced rate, let us say you had the following Gross Income from January to December 2022 of P1,000,000
Without CREATE transitional rate of Minimum Corporate Income Tax, the tax due will be P1,000,000 x 2% = P20,000
With CREATE transitional rate of Minimum Corporate Income Tax, the tax due will be P1,000,000 x 1% = P10,000
Tax Savings to Non-VAT registered subject to Minimum Corporate Income Tax brought about by the CREATE transitional rate is P10,000
Effect of Expiration of Transitional Rate
As we are now back to normal, and business is back to normal, it is also timely that the transitional lower rate of percentage tax and Minimum Corporate Income Tax has expired and returned to the normal rate starting July 1, 2023, as follows:
- Percentage Tax – 3%
- Minimum Corporate Income Tax – 2%
As a guide, for the year 2023 your computation of percentage tax and Minimum Corporate Income Tax will be as follows:
Percentage Tax
- January 1 to June 30, 2023 – Total Sales x 1%
- July 1 to December 31, 2023 – Total Sales x 3%
Minimum Corporate Income Tax
- January 1 to June 30, 2023 – Gross Income x 1%
- July 1 to December 31, 2023 – Gross Income x 2%
Keep in mind these changes in tax rate starting July 1, 2023, when you file your third quarter and fourth quarter percentage tax return while third quarter and annual income tax return.
If you want to automate the process, you may use MPM Accounting Software. The software automates computation and preparation of Percentage Tax return and Income Tax return.
I hope this article has been helpful for you. Please leave a comment if you have questions or suggestions. And please share to anyone who may find this article useful.
