28.3 Corporate Income Taxation under the CREATE Law

Corporate Income Taxation under the CREATE Law

Corporate income taxation in the Philippines underwent historic structural reform with the enactment of Republic Act No. 11534, known as the Corporate Recovery and Tax Incentives for Enterprises (CREATE) Act, effective April 11, 2021 (with retroactive application of key income tax rates to July 1, 2020). For candidates preparing for the Philippine CPA Licensure Examination (CPALE), mastering corporate tax rules requires understanding taxpayer classifications, the bifurcated Regular Corporate Income Tax (RCIT) rate structure, the operational mechanics of the Minimum Corporate Income Tax (MCIT) and its excess carry-forward, rules governing Net Operating Loss Carry-Over (NOLCO), Optional Standard Deduction (OSD), passive income treatments, and the statutory repeal of former penalty taxes.

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1. Statutory Definition and Classification of Corporate Taxpayers

Definition of a Corporation under Tax Law

Under Section 22(B) of the National Internal Revenue Code (NIRC), the term "corporation" is defined broadly for tax purposes. It includes:

• One-person corporations, partnerships (no matter how created or organized), joint-stock companies, joint accounts (cuentas en participacion), associations, or insurance companies.
• Exclusions: The statutory definition explicitly excludes:
  1. General Professional Partnerships (GPPs): Partnerships formed by persons for the sole purpose of exercising their common profession, no part of the income of which is derived from engaging in any trade or business;
  2. Joint Ventures or Consortiums: Formed for the purpose of undertaking construction projects, or engaging in petroleum, coal, geothermal, and other energy operations pursuant to an operating or consortium agreement under a service contract with the Government.

Classification Matrix of Corporate Taxpayers

Corporate taxpayers are classified into three primary categories, determining their tax base and applicable tax regimes:

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2. Regular Corporate Income Tax (RCIT) under CREATE

Prior to CREATE, corporations were subject to a flat RCIT rate of 30%. Republic Act No. 11534 established a differentiated, two-tiered rate structure:

                               CREATE Act Corporate Tax Structure
                                               │
         ┌─────────────────────────────────────┴─────────────────────────────────────┐
         ▼                                                                           ▼
Standard Corporate Rate: 25%                                                MSME Corporate Rate: 20%
• Applied to large domestic corporations                                    • Net taxable income ≤ PHP 5,000,000 AND
• Applied to all Resident Foreign Corporations (RFCs)                       • Total assets ≤ PHP 100,000,000 (excluding land)
• Applied to Non-Resident Foreign Corporations (gross)                      • Strictly restricted to Domestic Corporations (DC)

1. General Regular Corporate Income Tax Rate: 25%

The standard RCIT rate of 25% applies to:

• All domestic corporations that do not qualify for the preferential MSME rate;
• All resident foreign corporations (RFCs), regardless of their asset size or net taxable income level;
• Non-resident foreign corporations (NRFCs), computed on gross income received from Philippine sources as a final withholding tax.

2. Preferential MSME Rate: 20%

A reduced RCIT rate of 20% is granted exclusively to Domestic Corporations that satisfy both of the following statutory thresholds concurrently:

1. Net Taxable Income Threshold: Net taxable income does not exceed PHP 5,000,000; AND
2. Total Assets Threshold: Total assets do not exceed PHP 100,000,000, excluding the value of the land on which the particular business entity's office, plant, and equipment are situated.

CPALE Rule: The 20% preferential rate is strictly unavailable to Resident Foreign Corporations (RFCs), even if an RFC's Philippine branch assets and taxable income fall well below the thresholds. An RFC is always subject to the 25% RCIT or 2% MCIT.

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3. Minimum Corporate Income Tax (MCIT)

Purpose and Applicability

Under Section 27(E) (for DCs) and Section 28(A)(2) (for RFCs) of the NIRC, the Minimum Corporate Income Tax (MCIT) is imposed to prevent corporations from evading tax liability through excessive deductions, transfer pricing, or prolonged declared tax losses. The MCIT is imposed whenever the computed MCIT is greater than the RCIT for the taxable year, or whenever the corporation has zero or negative taxable income.

Statutory Rates and Timing

• Statutory Rate: 2% of Gross Income. (Under CREATE, the MCIT was temporarily reduced to 1% from July 1, 2020 through June 30, 2023 as pandemic economic relief. Effective July 1, 2023, the MCIT reverted to its permanent statutory rate of 2%).
• Timing Rule: MCIT is imposed beginning on the fourth (4th) taxable year immediately following the taxable year in which such corporation commenced its business operations.

For tax purposes, the year in which operations commenced is the year the corporation registered with the Bureau of Internal Revenue (BIR). The counting sequence operates as follows:

$$\begin{aligned} \text{Year of BIR Registration (e.g., 2021)} &\rightarrow \text{Year 0 (Commencement Year: RCIT only)} \\ \text{2022} &\rightarrow \text{1st Taxable Year Following} \\ \text{2023} &\rightarrow \text{2nd Taxable Year Following} \\ \text{2024} &\rightarrow \text{3rd Taxable Year Following} \\ \text{2025} &\rightarrow \text{4th Taxable Year Following: First Year MCIT Applies!} \end{aligned}$$

Definition of Gross Income for MCIT Purposes

Gross income for MCIT purposes is defined specifically by tax regulations:

• Sellers of Goods: Gross sales less sales returns, discounts, allowances, and Cost of Goods Sold (COGS).
• Sellers of Services: Gross receipts less sales discounts, allowances, and direct Cost of Services (salaries of service personnel, supplies, depreciation of service equipment, and rental of service facilities).
• Passive and non-operating income subjected to final taxes is excluded from gross income for MCIT purposes.

Excess MCIT Carry-Forward (Creditable against RCIT)

Under Section 27(E)(2), any excess of the MCIT over the RCIT in a given taxable year shall be carried forward and credited against the RCIT due for the next three (3) consecutive taxable years immediately succeeding the year in which the excess MCIT was paid.

Key operational rules governing excess MCIT carry-forward:

1. Excess MCIT can only be credited against RCIT, never against MCIT itself.
2. The credit is allowable only up to the amount of RCIT due for that subsequent year (the net tax payable cannot be reduced below the MCIT due for that subsequent year).
3. Any excess MCIT not utilized within the three-year window expires and is forfeited.

Statutory Relief from MCIT

The Secretary of Finance, upon recommendation of the Commissioner of Internal Revenue (CIR), may suspend the imposition of MCIT on any corporation that suffered losses on account of:

1. Prolonged labor dispute (losses arising from a strike staged by employees lasting more than 6 months);
2. Force majeure (acts of God, natural calamities, or armed conflict);
3. Legitimate business reverses (substantial operational losses resulting from fire, theft, or unforeseen regulatory closures).

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4. Net Operating Loss Carry-Over (NOLCO)

Standard 3-Year Carry-Over

Under Section 34(D)(3) of the NIRC, a net operating loss incurred in a taxable year during which the corporation was not exempt from income tax may be carried over as a deduction from gross income for the next three (3) consecutive taxable years immediately following the year of such loss.

Bayanihan II Special 5-Year Carry-Over Window

Pursuant to Section 4(uuu) of the Bayanihan to Recover as One Act (RA 11494) and Revenue Regulations No. 25-2020, net operating losses incurred by businesses for taxable years 2020 and 2021 are permitted to be carried over as a deduction from gross income for the next five (5) consecutive taxable years immediately following the year of such loss.

Operational Restrictions on NOLCO

• Ownership Retention Rule: NOLCO may be deducted only if there has been no substantial change in ownership, meaning that not less than 75% in nominal value of the outstanding issued shares (or of the paid-in capital, if the corporation has no shares) continues to be held by or on behalf of the same persons. If that test is not met, the carry-over is lost.
• Interaction with MCIT: A corporation paying MCIT in a profitable gross income year cannot benefit from deducting NOLCO against that year's MCIT base. However, the running of the 3-year (or 5-year) statutory expiration period continues uninterrupted.

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5. Gross Income Deductions: Itemized vs. Optional Standard Deduction (OSD)

Under Section 34 of the NIRC, domestic and resident foreign corporations may elect to deduct either itemized deductions or the Optional Standard Deduction (OSD).

Comparison: Corporate OSD vs. Individual OSD

A frequent trap in the CPALE is the stark difference in the statutory deduction base for OSD between individuals and corporations:

$\text{Corporate Taxable Net Income (under OSD)} = \text{Gross Income} - (40\% \times \text{Gross Income}) = 60\% \times \text{Gross Income}$

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6. Passive and Capital Income of Corporations

Corporations are subject to final withholding taxes on specific categories of passive income derived from Philippine sources:

CMEPA (RA 12214), effective July 1, 2025, made the final tax on corporate interest from any currency bank deposit uniformly 20%, raised the rate on foreign currency deposit interest of domestic and resident foreign corporations from 15% to 20%, extended the 15% capital gains tax to unlisted shares of foreign corporations, and cut the stock transaction tax to 0.1%.

The Inter-Corporate Dividend Exemption

Dividends received by a Domestic Corporation or Resident Foreign Corporation from a Domestic Corporation are 100% tax-exempt. This statutory exemption eliminates cascade taxation across affiliated corporate layers.

Foreign-Sourced Dividends Received by Domestic Corporations under CREATE

Under Section 27(D)(4) as amended by CREATE, dividends received by a domestic corporation from a foreign subsidiary are exempt from Philippine corporate tax if:

1. The funds are reinvested in business operations, capital expenditures, or working capital of the domestic corporation in the Philippines within the next taxable year;
2. The domestic corporation directly holds at least 20% in value of the foreign corporation's outstanding shares; and
3. The shares have been held uninterruptedly for at least two (2) years prior to the dividend declaration.

The Tax Sparing Credit for NRFCs

Dividends received by an NRFC from a domestic corporation are taxed at a preferential rate of 15% (instead of 25%) if the foreign corporation's country of domicile:

• Allows a credit against the tax due from the foreign corporation taxes deemed to have been paid in the Philippines equivalent to at least 10% (the difference between the standard 25% RCIT and the 15% reduced tax); or
• Does not impose any tax on foreign-sourced dividends.

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7. Special Corporate Taxpayers & Repealed Taxes

Proprietary Educational Institutions and Non-Profit Hospitals

Under Section 27(B) of the NIRC as clarified by RA 11635 and CREATE:

• Special Tax Rate: Subject to a preferential tax rate of 10% on Net Taxable Income (temporarily 1% from July 1, 2020 through June 30, 2023).
• The Predominance Test: If the gross income from "unrelated trade, business, or other activity" exceeds 50% of the total gross income derived from all sources, the preferential 10% rate is lost, and the regular rate of 25% is imposed upon the entire taxable income.

Statutory Repeal of Improperly Accumulated Earnings Tax (IAET)

Under prior tax law, Section 29 imposed a 10% penalty tax on improperly accumulated earnings of closely held corporations. Republic Act No. 11534 (CREATE Act) explicitly repealed Section 29 of the NIRC. Effective April 11, 2021, the Improperly Accumulated Earnings Tax has been eliminated from the Philippine tax system.

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8. Comprehensive Worked Calculation Example: RCIT vs. MCIT & Excess Carryover Schedule

Scenario

Summit Commercial Corporation, a domestic merchandising enterprise registered with the BIR in January 2020, presents the following financial data for taxable years 2024, 2025, and 2026. The corporation's total assets exceed PHP 100,000,000 in all years, subjecting it to the standard 25% RCIT rate. The MCIT rate is 2%. Year 2024 represents the corporation's 4th taxable year following the year of commencement (2020), making it subject to MCIT for the first time.

• Year 2024: Gross Sales = PHP 30,000,000; Cost of Sales = PHP 18,000,000; Allowable Operating Expenses = PHP 11,500,000.
• Year 2025: Gross Sales = PHP 40,000,000; Cost of Sales = PHP 22,000,000; Allowable Operating Expenses = PHP 17,200,000.
• Year 2026: Gross Sales = PHP 50,000,000; Cost of Sales = PHP 25,000,000; Allowable Operating Expenses = PHP 19,000,000.

Step-by-Step Multi-Year Computation

Taxable Year 2024

1. Gross Income: $\text{PHP }30{,}000{,}000 - \text{PHP }18{,}000{,}000 = \text{PHP }12{,}000{,}000$.
2. Net Taxable Income: $\text{PHP }12{,}000{,}000 - \text{PHP }11{,}500{,}000 = \text{PHP }500{,}000$.
3. Regular Corporate Income Tax (25%): $\text{PHP }500{,}000 \times 25\% = \text{PHP }125{,}000$.
4. Minimum Corporate Income Tax (2%): $\text{PHP }12{,}000{,}000 \times 2\% = \text{PHP }240{,}000$.
5. Tax Due: Higher of RCIT (PHP 125,000) and MCIT (PHP 240,000) = PHP 240,000 (MCIT).
6. Excess MCIT Created: $\text{PHP }240{,}000 - \text{PHP }125{,}000 = \text{PHP }115{,}000$ (Creditable through taxable year 2027).

Taxable Year 2025

1. Gross Income: $\text{PHP }40{,}000{,}000 - \text{PHP }22{,}000{,}000 = \text{PHP }18{,}000{,}000$.
2. Net Taxable Income: $\text{PHP }18{,}000{,}000 - \text{PHP }17{,}200{,}000 = \text{PHP }800{,}000$.
3. Regular Corporate Income Tax (25%): $\text{PHP }800{,}000 \times 25\% = \text{PHP }200{,}000$.
4. Minimum Corporate Income Tax (2%): $\text{PHP }18{,}000{,}000 \times 2\% = \text{PHP }360{,}000$.
5. Tax Due: Higher of RCIT (PHP 200,000) and MCIT (PHP 360,000) = PHP 360,000 (MCIT).
6. Excess MCIT Created: $\text{PHP }360{,}000 - \text{PHP }200{,}000 = \text{PHP }160{,}000$ (Creditable through taxable year 2028).
7. Utilization of 2024 Excess MCIT: None, because the corporation is under MCIT in 2025.

Taxable Year 2026

1. Gross Income: $\text{PHP }50{,}000{,}000 - \text{PHP }25{,}000{,}000 = \text{PHP }25{,}000{,}000$.
2. Net Taxable Income: $\text{PHP }25{,}000{,}000 - \text{PHP }19{,}000{,}000 = \text{PHP }6{,}000{,}000$.
3. Regular Corporate Income Tax (25%): $\text{PHP }6{,}000{,}000 \times 25\% = \text{PHP }1{,}500{,}000$.
4. Minimum Corporate Income Tax (2%): $\text{PHP }25{,}000{,}000 \times 2\% = \text{PHP }500{,}000$.
5. Primary Tax Baseline: Since RCIT (PHP 1,500,000) exceeds MCIT (PHP 500,000), RCIT applies.
6. Application of Prior Excess MCIT Credits:
   • Available 2024 Excess MCIT: PHP 115,000 (Year 2 of 3-year life).
   • Available 2025 Excess MCIT: PHP 160,000 (Year 1 of 3-year life).
   • Total Available Excess MCIT: $\text{PHP }115{,}000 + \text{PHP }160{,}000 = \text{PHP }275{,}000$.
   • Maximum Credit Allowable: RCIT can be reduced down to MCIT floor (PHP 1,500,000 - PHP 500,000 = PHP 1,000,000 max credit room).
   • Since PHP 275,000 $\le$ PHP 1,000,000, the full PHP 275,000 is creditable.
7. Net Tax Payable for 2026:

$\text{Net Tax Payable} = \text{RCIT Due } (\text{PHP }1{,}500{,}000) - \text{Excess MCIT Credited } (\text{PHP }275{,}000) = \text{PHP }1{,}225{,}000$

Excess MCIT Carry-Forward Tracking Ledger