CREATE-d Income Tax Returns

By this time, the frenetic pace for the April 15 deadline for filing of the annual income tax returns (ITRs) has already simmered down. Taxpayers who are using the calendar year accounting period have already filed and paid their annual income tax returns (ITRs) on the said date.

However, there are taxpayers who do not file their annual ITRs on April 15, but on another date, either earlier or later than April 15 every year. These taxpayers utilize a fiscal year as their taxable period, wherein their taxable periods end in any month except for December. Under the Tax Code, they are required to file and pay quarterly ITRs within 60 days following the close of each of the first three quarters of the taxable year and the final adjustment return either on or before the 15th day of the fourth month following the close of their fiscal year.

Aside from the usual frenzy surrounding the filing of ITRs, this year’s filing has been affected by the enactment of the Corporate Recovery and Tax Incentives for Enterprise (CREATE) Law.

As part of its efforts to assist companies undergoing financial crisis during this pandemic, the legislature passed the CREATE Law, which introduced lower corporate income tax rates, lower minimum corporate income tax rate, as well as a lower corporate tax rate for proprietary or non-profit educational institutions and hospitals. The CREATE Law became effective on April 11. Notwithstanding taking effect only last month, the CREATE Law expressly provides that the said tax rates were effective July 1, 2020.

The retroactive application of the new tax rates meant that taxpayers had to use the old corporate income tax rates for the first half of calendar year 2020, specifically the months of January to June 2020, and the new corporate income tax rates for the second half of calendar year 2020, beginning the month of July up to December 2020. As a corollary, taxpayers now have to use the new tax rates beginning January 2021 onwards.

The retroactivity of the new tax rates might be confusing for both taxpayers and tax practitioners. Fortunately, Section 9(B) of Revenue Regulations (RR) 5-2021 provides guidance on how the implementation of the new corporate income tax rates. Said section provided for the computation of both the regular corporate income tax (CIT) rate and the minimum corporate income tax (MCIT) rate in order to arrive at the correct tax due for the taxable year.

For the regular CIT, the steps are as follows: (a) Divide the taxable income for the year by 12 months. b) Multiply the number of months applicable to the old rate by the resulting monthly taxable income, then multiply by 30 percent. (c) Multiply the number of months applicable to the new rate by the resulting monthly taxable income, then multiply by either 25 percent or 20 percent as applicable. (d) Add the computed regular income tax under item (b) and (c).

On the other hand, the MCIT can be computed as follows: (a) Divide the gross income by 12 months. (b) Multiply the number of months applicable to the old MCIT rate by the resulting monthly gross income, then multiply by two percent. (c) Multiply the number of months applicable to the new MCIT rate by the resulting monthly gross income then multiply by one percent. (d) Add the computed MCIT under (b) and (c).

After computing for both the regular CIT and the MCIT, taxpayers must compare the resulting figures for both, and the higher amount shall be the income tax due or payable.

As previously mentioned, the above computation for CIT and MCIT rates is crucial for taxpayers whose taxable period begins prior to the effectivity of the new tax rates, or on July 1, 2020, because taxpayers must combine the old CIT and MCIT rates with the new CIT and MCIT rates in their final adjustment return for year 2020. In some cases, fiscal-year taxpayers have already filed and paid their final adjustment return, in which case, they must now amend their final adjustment return in order to reflect the new changes brought about by the retroactive application of the CREATE Law. The amendment of their final adjustment return could result in overpayment or even underpayment of tax due for the year 2020. Should an overpayment arise, RR 5-2021 instructs that any resulting excess or overpayment may be claimed for refund or tax credit certificate, or carried over to the next taxable year at the taxpayer’s option. On the other hand, should an underpayment arise, the amended final adjustment return must reflect the said underpayment.

If it’s any consolation for a potentially confused taxpayer, RR 5-2021 appears to have been thoughtfully crafted so as to include all possible scenarios which might occur in the implementation of the new tax rates.

Previous changes in the tax rates have resulted in much confusion among taxpayers. An example would be the implementation of Republic Act (RA) 9337 which took effect on July 1, 2005 and introduced new tax rates as well. There was much speculation on how the computation of the tax rates would be. To clarify the situation, the BIR issued RMC 16-2006. However, RMC 16-2006 merely gave a very simple computation of how the income tax rates were to be applied for the subject taxable year.

In contrast, RR 5-2021 included a step by step guide on the computation of the income tax due for the year, as well as possible questions which might arise as a result of the computation. For further guidance, RR 5-2021 even provided a matrix on the different tax rates per month. Thus, it appears that the BIR learned from their previous experience so as to provide a clearer set of guidelines for all taxpayers and avoid any more confusion regarding the change in tax rates brought about by the enactment of the CREATE Law.

Lynn Margarita O. Palis is a supervisor from the tax group of KPMG R.G. Manabat & Co. (KPMG RGM&Co.), the Philippine member firm of KPMG International. KPMG RGM&Co. has been recognized as a Tier 1 tax practice and Tier 1 transfer pricing practice by the International Tax Review.

This article is for general information purposes only and should not be considered as professional advice to a specific issue or entity.

The views and opinions expressed herein are those of the author and do not necessarily represent the views and opinions of KPMG International or KPMG RGM&Co. For comments or inquiries, please email [email protected] or [email protected].