Quezon City

Date_______________

REVENUE REGULATIONS NO. _______

SUBJECT : Implementing the New Income Tax Rates on the Regular Income of
Corporations, on Certain Passive Incomes, Including Additional Allowable
Deductions from Gross Income of Persons Engaged in Business or Practice of
Profession Pursuant to Republic Act (RA) No.11534 or the “Corporate
Recovery and Tax Incentives for Enterprises Act” (CREATE), Which Further
Amended the National Internal Revenue Code (NIRC) of 1997.

TO : All Revenue Officers and Others Concerned

SECTION 1. SCOPE. Pursuant to the provisions of Sections 244 and 245 of the
National Internal Revenue Code (NIRC) of 1997, as amended, in relation to Section 21 of
Republic Act (RA) No. 11534 or the “Corporate Recovery and Tax Incentives for Enterprises
Act” (CREATE), these Regulations are hereby promulgated to implement the new income tax
rates on the regular income of corporations, on certain passive incomes and additional
allowable deductions of persons engaged in business or practice of profession as provided for
in the CREATE.

SECTION 2. DEFINITION. – The following words or phrases, when used in these

regulations, shall have the following meaning:
A. Corporations - shall include one-person corporations, partnerships, no matter how
created or organized, joint-stock companies, joint accounts (cuentas en
participacion), associations, or insurance companies, but does not include general
professional partnerships and 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 consortium agreement under a
service contract with the Government.
A one-person corporation is a corporation with a single stockholder; Provided, That
only a natural person, trust, or an estate may form a one person corporation.
B. General professional partnerships - are 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.
C. Proprietary Educational Institutions – refer to any private schools, which are
non-profit for the purpose of these Regulations, maintained and administered by
private individuals or groups, with an issued permit to operate from the Department
of Education (DepEd) or the Commission on Higher Education (CHED) or the
Technical Education and Skills Development Authority (TESDA), as the case may
be, under existing laws and regulations.

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D. Proprietary Hospitals – refer to any private hospitals, which are non-profit for the
purpose of these Regulations, maintained and administered by private individuals
or groups.
E. Non-profit - as used in the definition of Proprietary Educational Institutions and
Proprietary Hospitals, means that no net income or asset accrues to or benefits any
member or specific person, with all the net income or assets devoted to the
institution’s purposes and all its activities conducted not for profit.
F. Government-Owned or Controlled Corporations (GOCCs), Agencies or
Instrumentalities – all corporations, agencies, or instrumentalities owned or
controlled by the Government.
G. Resident Foreign Corporation – a corporation organized, authorized, or existing
under the laws of any foreign country, engaged in trade or business within the
Philippines.
H. Non-resident Foreign Corporation - a corporation organized, authorized, or
existing under the laws of any foreign country, not engaged in trade or business
within the Philippines.
I. Reorganization – shall mean any of the following instances:
a. A corporation, which is a party to a merger or consolidation, exchanges
property solely for stock in a corporation, which is a party to the merger or
consolidation; or

b. The acquisition by one (1) corporation, in exchange solely for all or a part
of its voting stock, or in exchange solely for all or part of the voting stock
of a corporation which is in control of the acquiring corporation, of stock of
another corporation if, immediately after the acquisition, the acquiring
corporation has control of such other corporation, whether or not such
acquiring corporation had control immediately before the acquisition; or

c. The acquisition by one (1) corporation, in exchange solely for all or a part
of its voting stock or in exchange solely for all or part of the voting stock of
a corporation which is in control of the acquiring corporation, of
substantially all of the properties of another corporation. In determining
whether the exchange is solely for stock, the assumption by the acquiring
corporation of a liability of the others shall be disregarded; or

d. A recapitalization which shall mean an arrangement whereby the stock and

bonds of a corporation are readjusted as to amount, income, or priority or
an agreement of all stockholders and creditors to change and increase or
decrease the capitalization or debts of the corporation or both; or

e. A reincorporation, which shall mean the formation of the same corporate

business with the same assets and the same stockholders surviving under a
new charter.

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 J. Control - shall mean ownership of stocks in a corporation after the transfer of
property possessing at least fifty-one percent (51%) of the total voting power of all
classes of stocks entitled to vote: Provided, that the collective and not the individual
ownership of all classes of stocks entitled to vote of the transferor or transferors
shall be used in determining the presence of control.
K. Unrelated Trade, Business or Other Activity of Proprietary Educational
Institutions and Hospitals - means any trade, business, or other activity, the
conduct of which is not substantially related to the exercise or performance by such
educational institution or hospital of its primary purpose or function.
L. Foreign-sourced dividends – are dividends received from non-resident foreign
corporations.
M. Related party/ies – are those which are identified under Section 36 (B) of the Tax
Code, as amended.
SECTION 3. CORPORATE INCOME TAX RATES. The matrix below shows the
new income tax rates applicable to the regular taxable income of corporations:

The higher between the “Regular” or “Minimum

Type of Corporation Corporate Income Tax (MCIT)” rates
Regular MCIT
Rate Effectivity Rate Effectivity
Domestic Corporation:
Domestic corporations, in general 25% July 1, 2020 1% July 1, 2020 to
June 30, 2023

2% July 1, 2023

For corporations with net taxable 20% July 1, 2020 1% July 1, 2020 to
income not exceeding Five Million June 30, 2023
Pesos (P5,000,000) AND total assets
not exceeding One Hundred Million
(P 100,000,000), excluding the land 2% July 1, 2023
on which the particular business
entity’s office, plant and equipment
are situated
Proprietary Educational Institutions 1% July 1, 2020 Not Applicable
and Hospitals to June 30,
2023

10% July 1, 2023

Foreign Corporation [on taxable income(e.g., net or gross income,
as applicable) derived from all sources within the Philippines]:
Resident Foreign Corporation 25% July 1, 2020 1% July 1, 2020 to
June 30, 2023

2% July 1, 2023
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 The higher between the “Regular” or “Minimum
Type of Corporation Corporate Income Tax (MCIT)” rates
Regular MCIT
Rate Effectivity Rate Effectivity
Offshore Banking Unit (OBUs) 25% Upon the 1% Upon the
(Note: OBUs shall now be taxed as effectivity effectivity of
resident foreign corporation upon of the the CREATE
effectivity of the CREATE) CREATE until June 30,
2023

2% July 1, 2023

Regional Operating Headquarters 25% January 1, 1% January 1, 2022

(ROHQ) 2022 to June 30,
2023

2% July 1, 2023

Non-Resident Foreign Corporation 25% January 1, Not applicable

2021

The MCIT is imposed beginning on the fourth taxable year immediately following the year in
which such corporation commenced its business operations, when it is greater than the regular
income tax computed for the taxable year.

In the case of proprietary educational institutions or hospitals, if the gross income from
“unrelated trade, business or other activity” (as defined under Section 2 hereof) exceeds fifty
percent (50%) of the total gross income derived by such educational institutions or hospitals
from all sources, the tax prescribed for domestic corporations shall be imposed on the entire
taxable income.
GOCCs, agencies and instrumentalities, except the Government Service Insurance System
(GSIS), the Social Security System (SSS), the Home Development Mutual Fund (HDMF), the
Philippine Health Insurance Corporation (PHIC), and the local water districts, shall pay such
rate of tax upon their taxable income as are imposed upon corporations or associations engaged
in a similar business, industry, or activity.
ILLUSTRATIONS
A. DOMESTIC CORPORATION

A.1 Corporation A, a retailer, has a gross sales of P1,400,000,000.00 with a cost of sales of
P560,000,000.00 and allowable deductions of 150,000,000.00 for the calendar year 2021. Its
total assets of P180,000,000.00 as of December 31, 2021 per Audited Financial Statements
includes the land costing P50,000,000.00 and the building of P25,000,000.00 in which the
business entity is situated, with an aggregate amount of P75,000,000.00 as Fixed Assets.
Assuming CY 2021 is the 5th year of operation of Corporation A, computation of income tax
(Income Tax – whichever is higher between Regular Rate and MCIT) shall be as follows:
REGULAR RATE
Gross Sales 1,400,000,000.00
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 Less: Cost of Sales 560,000,000.00
Gross Income 840,000,000.00
Less: Allowable Deductions 150,000,000.00
Net Taxable Income 690,000,000.00
REGULAR RATE 25%
TAX DUE 172,500,000.00

MINIMUM CORPORATE INCOME TAX (MCIT)

Gross Income 840,000,000.00

MINIMUM CORPORATE INCOME TAX (MCIT) RATE 1%
TAX DUE 8,400,000.00

INCOME TAX DUE SHALL BE P 172,500,000.00

A.2 Corporation B, a manufacturer, has a gross sales of P 190,000,000 for CY 2021, its 2nd year
of operation. Its total assets amounted to P 5,000,000, net of the value of the land where its
manufacturing plant and business operations are situated. Its cost of sales and allowable
operating expenses amounted to P 100,000,000 and P 50,000,000, respectively. Compute for
its income tax due for CY 2021.

INCOME TAX DUE SHALL BE THE REGULAR INCOME TAX RATE OF 25%

Gross Sales 190,000,000.00

Less: Cost of Sales 100,000,000.00
Gross Income 90,000,000.00
Less: Allowable Deductions 50,000,000.00
Net Taxable Income 40,000,000.00
REGULAR RATE 25%
TAX DUE 10,000,000.00

Although the total assets, net of the value of the land, is less than P 100,000,000.00, its net
taxable income is above P 5,000,000. Hence, the income tax rate is 25%. Not subject to MCIT
since it is in its 2nd year of operation.

A.3 Given the same facts under Illustration A.2, except for the allowable operating expenses,
which amounted to P 85,000,000. The net taxable income will be P 5,000,000.00. With this,
the income tax rate shall be 20%, and the income tax due shall be P 1,000,000.00.

In both illustrations A.2 and A.3, the MCIT shall not be applied since it is only the second year
of operation of Corporation B.

B. PROPRIETARY EDUCATIONAL INSTITUTIONS

Junior Chamber in Business College or JCB College is a non-profit private educational
institution with an issued permit to operate from the Commission on Higher Education
(CHED). It is maintained and administered by FBNR Inc., a private domestic
corporation registered under the Securities and Exchange Commission.

JCB College uses a fiscal year accounting ending July 31st of each year. On July 31,
2021, JCB College recorded total gross receipts amounting to P18,000,000.00, of which
P10,000,000.00 came from education-related activities, while P8,000,000.00 from
other unrelated business activities. Also, JCB College recorded cost of service and
operating expenses from related activities amounting to P2,000,000.00 and
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 P1,000,000.00, respectively, and from unrelated business activities amounting to
P3,000,000.00 and P2,000,000.00, respectively.

Related Unrelated Total

activities Activities
Gross Receipts/Sales 10,000,000.00 8,000,000.00 18,000,000.00
Less: Cost of Service/Sales 2,000,000.00 3,000,000.00 5,000,000.00
Gross Income 8,000,000.00 5,000,000.00 13,000,000.00
Less: Allowable Deductions 1,000,000.00 2,000,000.00 3,000,000.00
NET TAXABLE INCOME 7,000,000.00 3,000,000.00 10,000,000.00
REGULAR RATE 1%
TAX DUE 1,000,000.00

The educational institution is subject to income tax at the rate of 1% since its gross
income from unrelated activities did not exceed 50% of the total gross income.

C. PROPRIETARY HOSPITAL

XYZ Hospital, a private non-profit hospital, has gross receipts of P15,000,000.00 with
a cost of P6,000,000.00 and allowable deductions of P3,250,000.00 from related
activities, while for its unrelated activities, it incurred P 5,000,000 and P 2,000,000, as
cost of sales and allowable deductions, respectively, with a gross income of P
18,000,000.00, for Calendar Year 2021.

Computation of tax shall be as follows:

Related Unrelated Total
activities Activities
Gross Sales 15,000,000.00 18,000,000.00 33,000,000.00
Less: Cost of Sales 6,000,000.00 5,000,000.00 11,000,000.00
Gross Income 9,000,000.00 13,000,000.00 22,000,000.00
Less: Allowable 3,250,000.00 2,000,000.00 5,250,000.00
Deductions
NET TAXABLE INCOME 5,750,000.00 11,000,000.00 16,750,000.00
REGULAR RATE 25%
TAX DUE 4,187,500.00

XYZ Hospital is subject to the regular rate of 25% since its gross income from non-
related activities is more than 50% of its total gross income.

D. REGIONAL OPERATING HEADQUARTERS

ABC Corporation is registered as a Regional Operating Head Quarter (ROHQ) since

2015. For taxable years 2020 to 2023, its operation showed the financial results:

TY 2020 TY 2021 TY 2022 TY 2023

Annual 75,000,000.0 120,000,000.0 130,000,000.00 75,000,000.00
Income 0 0
Cost of 41,250,000.0 66,000,000.00 71,500,000.00 41,250,000.00
Services 0

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 Gross 33,750,000.0 54,000,000.00 58,500,000.00 33,750,000.00
Income 0
Allowable 33,625,000.0 41,200,000.00 42,550,000.00 35,125,000.00
Deductions 0
125,000.00 12,800,000.00 15,950,000.00 (1,375,000.00
Computation of Income Tax Due
Net Taxable 125,000.00 12,800,000.00 15,950,000.00 (1,375,000.00)
Income/Gros
s Income
Multiply by 10% 10% 25% 25%
Income Tax 12,500.00 1,280,000.00 3,987,500.00 0.00
Due
MCIT: N/A N/A
Gross P558,500,000.0 33,750,000.00
Income 0
MCIT Rate 1% 1.5%*
MCIT 585,000.00 506,250.00
Income Tax 3,987,500.00 P 506,250.00
Due

* MCIT rate of 1.5% was used since the rate from January 1 to June 30, 2023 is 1%, and
for July 1 to December 31, 2023, the rate is 2%; thus, the average rate is 1.5%.

SECTION 4. INCOME TAX RATES ON CERTAIN PASSIVE INCOMES. The

matrix below shows the new income tax rates applicable to certain passive incomes of
individuals and corporations.

Type of Individual/
Nature of Income Rate Effectivity
Corporation
Non-Resident Alien Winnings from Philippine 20% Upon the effectivity
Individual Charity Sweepstake Office of the CREATE
(PCSO) games amounting
to more than P10,000.00

Winnings from PCSO Exempt

games amounting to
P10,000.00 and below
Domestic Intercorporate Dividends From another
For foreign source
Corporation (domestic and foreign domestic corp-
dividends, these will
source dividends) Exempt be exempt from
income tax upon the
From effectivity of the
nonresident CREATE, subject to
foreign corp - the conditions
25% or 20%, as imposed under
the case may be Section 5 of these
Regulations
Resident Foreign Interest income from a 15% Upon the effectivity
Corporation depositary bank under the of the CREATE

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 Type of Individual/
Nature of Income Rate Effectivity
Corporation
expanded foreign currency
deposit system
Capital gains from sale of 15% Upon the effectivity
shares of stock not traded of the CREATE
in the stock exchange
Non-resident Gross income received 25% January 1, 2021
Foreign Corporation from all sources within the
Phils., such as interests,
dividends, rents, royalties,
salaries, premiums (except
reinsurance premiums),
annuities, emoluments or
other fixed or determinable
annual, periodic or casual
gains, profits and income,
and capital gains, except
capital gains from sale of
shares of stock not traded
in the stock exchange
Intercorporate dividend 25% January 1, 2021
received from a domestic
corporation, in general

Intercorporate dividend The credit January 1, 2021

received from a domestic against the tax
corporation, if the country due is
in which the non-resident equivalent to
foreign corporation is 10%, which is
domiciled, allows a credit the difference
against the tax due from the between the
non-resident foreign regular income
corporation's taxes deemed tax rate of 25%
to have been paid in the in Section
Philippines. 28(B)(1) of the
Tax Code and
the 15% tax on
intercorporate
dividends
Capital gains from sale of 15% Upon the effectivity
shares of stock not traded of the CREATE
in the stock exchange

SECTION 5. EXEMPTION FROM INCOME TAX OF FOREIGN-SOURCED

DIVIDENDS RECEIVED BY DOMESTIC CORPORATIONS. In general, foreign-
sourced dividends received by domestic corporations are subject to income tax. However, the
same shall be exempt if all of the following conditions concur:

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A. The dividends actually received or remitted into the Philippines are reinvested in
the business operations of the domestic corporation within the next taxable year
from the time the foreign-source dividends were received or remitted;

B. The dividends received shall only be used to fund the working capital requirements,
capital expenditures, dividend payments, investment in domestic subsidiaries, and
infrastructure project; and

C. The domestic corporation holds directly at least twenty percent (20%) in value of
the outstanding shares of the foreign corporation and has held the shareholdings
uninterruptedly for a minimum of two (2) years at the time of the dividends
distribution. In case the foreign corporation has been in existence for less than two
(2) years at the time of dividends distribution, then the domestic corporation must
have continuously held directly at least twenty percent (20%) in value of the foreign
corporation's outstanding shares during the entire existence of the corporation.

Absent any one of the above conditions, the foreign-sourced dividends shall be
considered as taxable income of the domestic corporation in the year of actual receipt
or remittance, subject to surcharges, interest, and penalties, as applicable.

For this purpose, to avail of the exemption, the domestic corporation shall:

1. Submit, thru the responsible corporate officers, to the concerned BIR office within
thirty (30) calendar days from actual receipt of the remitted dividends a Sworn
Statement/Affidavit containing (i) the fact of actual receipt of such dividends, (ii)
the amount and the source (non-resident foreign corporation [NRFC]) of such
dividends, including their shareholdings in that NRFC and the holding period at the
time of the dividends distribution, and (iii) a statement that they shall fully comply
with the conditions of the exemptions above stated;

2. In the year of receipt of dividend, attach to the Audited Financial Statements (AFS)
an Independent Auditor Sworn Certification as to (i) the fact of actual receipt of the
remitted dividends, (ii) the amount and the source (NRFC) of such dividends,
including their shareholdings in that NRFC and the holding period at the time of the
dividends distribution, (iii) the fact that the domestic corporation, thru its Board,
has appropriated or has a plan a plan to reinvest the dividends in its business
operations to fund its working capital requirements, capital expenditures, dividend
payments, investment in domestic subsidiaries, or infrastructure project, and (iv) if
any amount has been disbursed, a statement that said disbursement complies with
the above requirements.

The Sworn Statement/Affidavit in item (1) hereof and the Independent Auditor
Sworn Certification shall be deemed as substantial compliance with the above-
conditions for exemption without the need of securing a written tax exemption
ruling/certificate from the BIR. In addition, a disclosure of the dividends in the said
AFS which shall be attached to the Annual Income Tax Return (AITR) to be filed
in the year of receipt, as well as the amount of dividend deemed exempt from
income tax shall be declared in reconciliation part of the said AITR.

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 3. In the immediately following taxable year, attach to the AITR a Sworn Certification
prepared and executed by an Independent Auditor on the utilization or non-
utilization of the dividends received by the corporation. The Sworn Certification on
the utilization of the dividends received shall confirm the taxpayer's full compliance
with the conditions for its exemption. However, if the Certification will state non-
utilization of the dividends received, the corresponding tax due on the unutilized
dividends shall be declared as taxable income, subject to surcharges, interest, and
penalty, if any.

Finally, no credit or deduction under Section 34(C) of the Tax Code shall be allowed
for any taxes of foreign countries paid or incurred by the domestic corporation in
relation to the exempt foreign-sourced dividends. Further, any taxes of foreign countries
paid or incurred by the domestic corporation in relation to the exempt foreign-sourced
dividends shall be disregarded in computing the limitations provided under Section
34(C)(4) of the Tax Code.

ILLUSTRATIONS:

C.1 FGH Corporation, a domestic corporation, owns twenty percent (20%) of the
outstanding shares of USA Corporation, a non-resident foreign corporation (NRFC),
since August 1, 2015. On June 30, 2021 it received dividends amounting to
P1,000,000.00 from the said NRFC. The said dividend has not been used until January
13, 2023. In this case, the P1,000,000.00 shall be declared as taxable income for
calendar year 2021, subject to surcharge, interest, and penalty, since it was not utilized
within the next taxable year, which is in 2022.

C.2 ABC Corporation, a domestic corporation, owns twenty percent (20%) of the
outstanding shares of UK Corporation, a non-resident foreign corporation (NRFC),
since August 1, 2015. On May 1, 2021, it received dividends amounting to
P1,000,000.00 from the said NRFC. On September 1, 2022, ABC Corporation utilized
P800,000.00 for its dividend payments. On January 1, 2023, it utilized the remaining
P200,000.00 for its working capital requirements. In this case, P800,000.00 shall be
treated as tax-exempt since this was properly utilized within 2022. On the other hand,
P200,000.00 shall be declared as taxable income for the taxable year 2021, subject to
surcharge, interest, and penalty, since the utilization is not within the following taxable
year, which is in 2022.

C.3 GHQ Corporation, a domestic corporation, holds 20% of the stocks of UK

Corporation, a non-resident foreign corporation. GHQ is a wholly-owned subsidiary of
H & M Corporation, a non-resident foreign corporation. GHQ’s holding in UK
Corporation started in 2018, and the holding period is uninterrupted. On January 1,
2022, GHQ Corporation received dividends from UK Corporation amounting to
P2,000,000 and subsequently paid out dividends on December 31, 2022, in the amount
of P 1,500,000. The remaining amount of P500,000 has not been used in any qualified
activity for exempt foreign-sourced dividends. In this situation, GHQ Corporation shall
be subject to income tax on the unused amount in the taxable period 2022, subject to
surcharge, interest, and penalty.

SECTION 6. IMPROPERLY ACCUMULATED EARNINGS TAX.- The

improperly accumulated earnings tax shall no longer be imposed on corporations upon the
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effectivity of the CREATE onwards. This shall apply to the entire taxable year for all fiscal
years/taxable years ending after the effectivity of CREATE.

ILLUSTRATION:

MNC Corporation, a domestic corporation, has unappropriated retained earnings in

excess of its paid-up capital stock amounting to P20,000,000 and P50,000,000 as of the
fiscal years ending June 30, 2020 and June 30, 2021, respectively. [Assuming the
CREATE Law takes effect April 14, 2021] MNC Corporation shall be subject to the
10% improperly accumulated earnings tax as of June 30, 2020. However, MNC
Corporation shall no longer be subject to improperly accumulated earnings tax for the
entire fiscal year ending June 30, 2021, which is after the effectivity of CREATE.

SECTION 7. ALLOWABLE DEDUCTIONS FROM GROSS INCOME FOR

BUSINESS PERSONS. Under Sec. 34 of the Tax Code, as amended, it was provided that
except for taxpayers earning purely compensation income arising from personal services
rendered under an employer-employee relationship, in computing taxable income subject to
income tax under Sections 24(A), 25(A), 26, 27(A), 27(B), 27(C) and 28(A)(1) of the National
Internal Revenue Code of 1997, as amended, where the person subject to income tax opted to
claim itemized deductions, there shall be allowed the following deductions from gross income:

(A) Expenses –

(1) Ordinary and Necessary Trade, Business or Professional Expenses.- In general,

there shall be allowed as deductions from gross income all the ordinary and
necessary expenses paid or incurred during the taxable year in carrying on or which
are directly attributable to, the development, management, operation and/or conduct
of the trade, business or exercise of a profession, including:

a. A reasonable allowance for salaries, wages, and other forms of compensation

for personal services rendered, including the gross-up monetary value of fringe
benefit furnished or granted by the employer to the employee: Provided, that
the income tax imposed on such salaries and fringe benefits has been paid;

b. A reasonable allowance for travel expenses, here and abroad, while away from
home in the pursuit of trade, business or profession;

c. A reasonable allowance for rentals and/or other payments which are required as
a condition for the continued use or possession, for purposes of the trade,
business or profession, of property to which the taxpayer has not taken or is not
taking title or in which he has no equity other than that of a lessee, user or
possessor;

d. A reasonable allowance for entertainment, amusement and recreation expenses

during the taxable year, that are directly connected to the development,
management and operation of the trade, business or profession of the taxpayer,
or that are directly related to or in furtherance of the conduct of his or its trade,
business or exercise of a profession not to exceed such ceilings as prescribed
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 under RR 10-2002. Provided, that any expense incurred for entertainment,
amusement or recreation (EAR) that is contrary to law, morals, public policy or
public order shall in no case be allowed as deduction.

e. Upon the effectivity of the CREATE, an additional deduction from taxable

income of one-half (1/2) of the value of labor training expenses incurred for
skills development of enterprise-based trainees enrolled in Public Senior High
Schools, Public Higher Education Institutions, or Public Education Institution,
or Public Technical and Vocational Institutions and duly covered by an
apprenticeship agreement under Presidential Decree No. 442, Series of 1974, or
the Labor Code of the Philippines, as amended, shall be granted to enterprises.
Provided, further, that for the additional deduction for enterprise-based training
of students from Public Educational Institutions, the enterprise shall secure
proper “certification” from the Department of Education (DepEd), Technical
Education and Skills Development Authority (TESDA), or Commission on
Higher Education (CHED). Provided, finally, that such deduction shall not
exceed Ten Percent (10%) of Direct Labor Wage.

ILLUSTRATION: RMP Corporation, a domestic manufacturing corporation,

had gross sales of P 100,000,000.00 for Fiscal Year ending June 30, 2021 and
incurred cost of sales of P60,000,000.00 and operating expenses of
P17,500,000.00, with the following details:

Cost of Sales
Direct Materials P 30,000,000.00
Direct Labor 20,000,000.00
Manufacturing Overhead 10,000,000.00
Total P 60,000,000.00
Operating Expenses
Salaries and Wages P 7,000,000.00
Taxes 300,000.00
Depreciation 3,500,000.00
Professional Fees 200,000.00
Advertising Expenses 3,000,000.00
Training Expenses 3,000,000.00
Office Supplies 500,000.00
Total P 17,500,000.00

Assuming the corporation has complied with the withholding tax requirement
on all cost and expenses incurred subject to withholding tax, compute for the
corporation’s net taxable income:

Gross Income P 40,000,000.00

Less: Allowable Deductions
Salaries and Wages P 7,000,000.00
Taxes 300,000.00
Depreciation 3,500,000.00
Professional Fees 200,000.00
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 Advertising Expenses 3,000,000.00
Training Expenses 3,000,000.00
Office Supplies 500,000.00
Expenses before additional deduction P 17,500,000.00
on Training Expenses
Additional Allowable Deductions on 1,500,000.00 P 19,000,000.00
Training Expenses (see Note)
Net Taxable Income P 21,000,000.00

Note: The amount of P 1,500,000.00, which is one-half of the value of the actual
training expenses of P 3,000,000.00, can be claimed as additional deduction,
since it did not exceed ten percent (10%) of the Direct Labor Wage. In this
scenario, the corporation’s direct labor wages incurred was P 20,000,000.00.
Thus, the one-half value of the actual training expenses of P 1,500,000.00 did
not exceed the P 2,000,000.00 (10% of P 20,000,000.00) threshold. Provided
further, that all the prescribed requirements in this section has been complied
with (e.g., Apprenticeship Agreement, Certification from DepEd or TESDA or
CHED, whichever is applicable). If the company’s direct labor wage is only
P10,000,000.00, the additional deduction that can be allowed shall be
P1,000,000.00 and not P1,500,000.00.

(2) Expenses allowable to Private Educational Institutions. – xxx

(B) Interest. – Interest paid or incurred within a taxable year on indebtedness in connection
with the taxpayer’s profession, trade or business shall be allowed as deduction from
gross income, provided the same also satisfied the following criteria:

(1) The indebtedness must be that of the taxpayer;

(2) The interest must have been stipulated in writing;

(3) The interest must be legally due;

(4) The interest payment arrangement must not be between related taxpayers as
mandated in Sec. 34(B)(2)(b), in relation to Sec. 36(B) both of the Tax Code of
1997;

(5) The interest must not be incurred to finance petroleum operations; and

(6) The interest was not treated as “capital expenditure”, if such interest was incurred
in acquiring property used in trade, business or exercise of profession.

Provided, further, that the taxpayer’s otherwise allowable deduction for interest
expense shall be reduced by an amount equivalent to twenty percent (20%) of interest
income subjected to final tax. However, if the final withholding tax rate on interest
income of 20% will be adjusted in the future, the interest expense reduction rate shall
be adjusted accordingly.

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In the case of corporations, since the income tax rates changed effective July 1, 2020, it follows
that the deduction from the interest expense of 20% shall be effective also on the said date. For
other domestic corporations with net taxable income not exceeding Five Million Pesos
(P5,000,000) and total assets not exceeding One Hundred Million (P 100,000,000), excluding
the land on which the particular business entity’s office, plant and equipment are situated, the
deduction is 0% since there is no difference in the income tax rate on the taxable income (20%)
with the tax rate applied on the interest income subjected to final tax (20%). However, in the
case of individuals engaged in business or practice of profession, such deduction shall take
effect upon the effectivity of CREATE.

ILLUSTRATION. For fiscal year ending June 30, 2021, assuming that RMP Corporation,
aside from the operating expenses of P17,500,000.00, incurred interest expense of P
400,000.00 which satisfied the prescribed requirement for deductibility, but it also earned
interest income of P 100,000.00, net of final tax of twenty percent (20%), how shall the taxable
income be computed?

Gross Income P 40,000,000.00

Less: Allowable Deductions
Salaries and Wages P 7,000,000.00
Taxes 300,000.00
Depreciation 3,500,000.00
Professional Fees 200,000.00
Advertising Expenses 3,000,000.00
Training Expenses 3,000,000.00
Interest Expense 400,000.00
Office Supplies 500,000.00
Expenses before additional P 17,900,000.00
deduction
Add: Additional Deduction- 1,500,000.00
Training
Less: 20% of Interest Income 25,000.00 P 19,375,000.00
earned
Net Taxable Income P 20,625,000.00

Note: Actual interest expense of P400,000 was reduced by an amount of P25,000,

representing 20% of the interest income subjected to final tax. The net interest income of
P100,000 is divided by 80% to get the gross interest income earned. Thus, the quotient of
P125,000 multiply by 20%, the product is P25,000. Then deduct it from the interest expense
incurred to get the allowable interest expense: P400,000 – P25,000 = P375,000.00.

ILLUSTRATION.
For taxable year 2021, STS Corp. incurred interest expense of P 500,000 on its bank loan. For
the year, its gross assets amounted to P50,000,000, exclusive of the cost of the land of
P7,100,000. It registered a gross income of P 10,000,000 and incurred operating expenses of
P6,000,000, inclusive of the interest expense. It had interest income earned for the same year
amounting to P150,000. Compute for the allowable interest expense.
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In this scenario, the corporation is subject to CIT of 20% since its taxable income did not
exceed P5M and its total assets did not exceed P100M, exclusive of the land. Since the CIT is
20%, and the final tax on interest income is also at 20%, there is no difference on these two
rates. Thus, there is no interest arbitrage. The allowable interest expense, in this case, is
P500,000.

(C) Taxes - xxx

(D) Losses - xxx

(E) Bad Debts - xxx

(F) Depreciation - xxx

(G) Depletion of Oil and Gas Wells and Mines – xxx

(H) Charitable and other Contributions – xxx

(I) Research and Development – xxx

(J) Pension Trusts –xxx

Existing implementing rules and regulations governing the policies in the application
of other allowable deductions, if any, shall remain in effect.

SECTION 8. NON-RECOGNITION OF GAIN OR LOSS ON EXCHANGE OF

PROPERTY. No gain or loss shall be recognized on a corporation or on its stock or securities
if such corporation is a party to a reorganization and exchanges property in pursuance of a plan
of reorganization solely for stock or securities in another corporation that is a party to the
reorganization as defined under Section 2 hereof.

No gain or loss shall also be recognized if property is transferred to a corporation by a

person, alone or together with others, not exceeding four (4) persons, in exchange for stock or
unit of participation in such a corporation of which as a result of such exchange, the transferor
or transferors, collectively, gains or maintains control of said corporation: Provided, that stocks
issued for services shall not be considered as issued in return for property.

Sale or exchanges of property used for business for shares of stocks covered under this
subsection shall not be subject to value-added tax (VAT). In all of the foregoing instances of
exchange of property, prior Bureau of Internal Revenue (BIR) confirmation or tax ruling shall
not be required for purposes of availing of the tax exemption. The concerned parties can
implement the transaction covered by this Section including, but not limited to, the issuance of
the Certificate Authorizing Registration (CAR) by the Revenue District Office (RDO) where
the property is located, in case of real properties, or to the RDO where the business is registered,
in case of shares of stocks, subject to post-transaction audit by the Bureau.

SECTION 9. TRANSITORY PROVISIONS. –

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 A. For the rate to be used in the deduction of a certain percentage of interest
income subject to final tax from the claimed interest expense to come up with the allowable
interest expense, or the interest arbitrage, the following shall be applied for taxable year 2020
by corporations, except non-resident foreign corporations:

Compute for the interest arbitrage using the applicable rate:

(a) Divide the gross interest income subjected to final tax for the year by 12 months:
Interest income subjected to final tax ÷ 12
(b) Multiply the number of months applicable to old arbitrage rate by the resulting
monthly gross interest income subjected to final tax; then, multiply the product by
the old arbitrage rate :
number of months applicable x (a) x 33.33%
(c) Multiply the number of months applicable to the new arbitrage rate by the resulting
monthly gross interest income subjected to final tax; then, multiply the product by
the new arbitrage rate:
Number of months applicable x (a) x (20% or 0%, as the case may be)
(d) Add the computed interest arbitrage under items (b) and (c) above to get the amount
to be deducted from the interest expense claimed to arrive at the allowable interest
expense.

ILLUSTRATION. For calendar year ended December 31, 2020, assuming that ABC
Corporation, aside from the operating expenses of P17,500,000.00, incurred interest
expense of P 400,000.00 which satisfied the prescribed requirement for deductibility,
but it also earned interest income of P 100,000.00, net of final tax of twenty percent
(20%), how shall the taxable income be computed?

Gross Income P 30,000,000.00

Less: Allowable Deductions
Salaries and Wages P 7,000,000.00
Taxes 300,000.00
Depreciation 3,500,000.00
Professional Fees 200,000.00
Advertising Expenses 3,000,000.00
Training Expenses 3,000,000.00
Interest Expense 400,000.00
Office Supplies 500,000.00
Expenses before additional P 17,900,000.00
deduction
Add: Additional Deduction- 1,500,000.00
Training
Less: 33% / 20% of Interest 33,125.00 P 19,366,875.00
Income earned deductible
from Interest Expense
Net Taxable Income P 10,633,125.00

Note: Actual interest expense of P400,000 was reduced by an amount of P33,125,

representing the interest to be deducted from interest expense. The net interest income
of P100,000 is divided by 80% to get the gross interest income earned. Thus, the
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quotient of P125,000 divided by 2 to get the interest income per six months. This is
equal to P62,500, for the first half of the year, multiply by 33%, the product is P20,625.
For the second half of the year, P62,500 multiply by 20% is P12,500. Add the two
products of P20,625 and P12,500 will equal to P33,125. Then deduct it from the interest
expense incurred to get the allowable interest expense: P400,000 – P33,125= P366,875.

ILLUSTRATION. JKL Corporation secured in 2018 a bank loan for its business
expansion, and incurred interest expense of P2,000,000 in CY 2020 on the said bank
loan. In the same year, it likewise earned interest income of P300,000 subjected to final
tax of 20% . For CY 2020, its gross income amounted to P 20,000,000. Its gross assets,
excluding the value of the land where its building and plant are situated, is
P 100,000,000. Its operating expenses amounted to P10,000,000, inclusive of the
interest expense of P2,000,000.

To compute for its allowable interest expense:

Interest Expense before interest arbitrage………………………… P 2,000,000.00
Less: Interest Arbitrage:
P300,000 /2 = P 150,000 X 33% …… ………………P 49,500.00
P300,000/2 = P150,000 X 20%.................................... 30,000.00 79,500.00
Allowable Interest Expense… ………………………………… P 1,920,500.00

OR:

Allowable Interest Expense Before Deduction P 2,000,000.00

Less: Interest Arbitrage using the
average Interest Arbitrage for CY 2020… 26.5%
Multiply by ……………………… X P 300,000.00……………. 79,500.00
Allowable Interest Expense ………………………………….. P 1,920,500.00

The taxpayer is subject to CIT of 25% in the second semester of 2020 even though the
total assets did not exceed P100M, excluding the land, but the taxable income is more
than P5M. In this case, the interest arbitrage for the 2nd semester is 20% since the
difference in the CIT of 25% and the final tax rate on the interest income of 20% is 5%,
which is equivalent to 20% (5% ÷ 25%) interest arbitrage.

ILLUSTRATION. MNO Corporation incurred interest expense of P 500,000 in CY

2020 on its bank loan. The said loan was secured in 2019 to finance the construction of
its warehouse. In CY 2020, its gross assets amounted to P50,000,000, excluding the
land with a cost of P5,500,000. It recorded a gross income of P 10,000,000 and incurred
operating expenses of P6,000,000, inclusive of the interest expense. It had interest
income earned for the same year amounting to P150,000. Compute for the allowable
interest expense:

To compute for its allowable interest expense:

1. Compute for the interest arbitrage:
P 150,000 x 6/12 X 33% …………………………… …………….P 24,750.00
P 150,000 X 6/12 X 0%…………………………… …………… 0.00
Total………………………………………… …………………… P 24,750.00

2. Deduct the resulting amount from the interest expense:

Interest Expense before deductions……………………………… P 500,000.00
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 Less: Interest Arbitrage………………………… ……………… 24,750.00
Allowable Interest Expense………… …………………………… P 475,250.00

OR

1. Simply multiply the interest income with the prescribed interest arbitrage under the
transitory provision (P 150,000 X 16.50%)………………………….P 24,750.00
2. Deduct the said amount from the interest expense
Interest Expense before deductions……………………………… P 500,000.00
Less: Interest Arbitrage………………………… ……………… 24,750.00
Allowable Interest Expense…………………… ………………… P 475,250.00

The corporation is subject to 30% CIT in the 1st semester. For the 2nd semester the CIT is 20%
since the taxable income did not exceed P5M and the total assets did not exceed P100M,
exclusive of the land.

The interest arbitrage for the 2nd semester is 0% since the CIT is 20% and the final tax imposed
on the interest income is 20%, there is no difference between the two rates, thus there is no
interest arbitrage for the 2nd semester.

Another option in the computation of the interest arbitrage is to use the rates reflected
in the table below, and multiply the same with the amount of gross interest income subjected
to final tax to find the amount of interest deductible from the interest expense claimed, with
the allowable interest expense as the end result.

Transitory rates for interest arbitrage applicable for TY 2020 for corporations under itemized
deductions:

For the computation of Interest Arbitrage

Annual Other domestic
Accounting Corporations corporations with net
Period subject to taxable income ≤5M
Regular Rates & total assets ≤100M,
(Transition TY exclusive of land
2020) 30% / 25% 30% / 20%
FY 7-31-20 31.92 % 30.25 %
FY 8-31-20 30.83 27.50
FY 9-31-20 29.75 24.75
FY 10-31-20 28.67 22.00
FY 11-31-20 27.58 19.25
CY 12-31-20 26.50 16.50
FY 1-31-21 25.42 13.75
FY 2-28-21 24.33 11.00
FY 3-31-21 23.25 8.25
FY 4-30-21 22.17 5.50
FY 5-31-21 21.08 2.75
FY 6-30-21 20.00 0.00

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 B. In the computation of income tax due of the corporations for taxable year 2020,
regardless of the taxpayers’ annual accounting period, the taxable income shall be computed
without regard to the specific date when sales, purchases and other transactions occur. The
income and expenses shall be deemed to have been earned and spent equally for each month
of the period. The corporate income tax due for taxable year 2020 shall be computed as follows:

1. Compute for the tax due using the regular income tax rate:
a. Divide the taxable income for the year by 12 months
b. Multiply the number of months applicable to old rate by the resulting monthly
taxable income;
c. Multiply the number of months applicable to the new rate by the resulting
monthly taxable income;
d. Add the computed regular income tax under item 1.b and 1.c.

2. Compute for the income tax due using the MCIT rate, if applicable:
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
c. Multiply the number of months applicable to the new MCIT rate by the
resulting monthly gross income
d. Add the computed MCIT under 2.b and 2.c

3. Compare the resulting figures under 1.d and 2.d above and the higher amount shall
be the income tax due/payable.

ILLUSTRATIONS

(1) Corporation A, a domestic retailer, has gross sales of P1,400,000,000.00 with cost of
sales of P560,000,000.00 and allowable deductions of 150,000,000.00 for calendar year
2020, its 4th year of business operations. Its total assets of P180,000,000.00 includes
the land and building in which the business is situated, amounting to P50,000,000.00
and P 25,000,000.00, respectively. Computation of Tax (Income Tax – whichever is
higher between Regular Rate and MCIT) shall be as follows:
For Calendar Year
Net Taxable Income (P 840,000,000 – 150,000,000) P 690,000,000.00
Divide by 12 months ÷ 12
Taxable Income per month P 57,500,000.00
Tax Due: January 1 to June 30, 2020- (P57,500,000 X 6)X 30% P 103,500,000.00
July 1, 2020 to December 31, 2020 (P57,500,000 X 6) 25% 86,250,000.00
Total Tax Due- Regular P 189,750,000.00
Gross Income P 840,000,000.00
Divide by ÷ 12
Gross Income per month P 70,000,000.00
Tax Due: January 1 to June 30, 2020 (P70,000,000 X 6) 2% P 8,400,000.00
July 1, 2020 to December 31, 2020 (P 70,000,000 X 6) 1% 4,200,000.00
Total Tax Due- MCIT P 12,600,000.00
Income Tax Payable (Higher between Regular and MCIT) P 189,750,000.00

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(2) If the taxable period of ABC Corporation is ending on April 30, 2021, the computation
of the income tax due shall be:

Net Taxable Income P 690,000,000.00

Divide by 12 months ÷ 12
Taxable Income per month P 57,500,000.00
Tax Due: May 1 to June 30, 2020- (P57,500,000 X 2)X 30% P 34,500,000.00
July 1, 2020 to April 30, 2021 (P57,500,000 X 10)25% 143,750,000.00
Total Tax Due-Regular P 178,250,000.00

Gross Income P 840,000,000.00

Divide by ÷ 12
Gross Income per month P 70,000,000.00
Tax Due: May 1 to June 30, 2020 (P70,000,000 X 2) 2% P 2,800,000.00
July 1, 2020 to April 30, 2021(P 70,000,000 X 10) 1% 7,000,000.00
Tax Due-MCIT P 9,800,000.00
Tax payable shall be P 178,250,000.00

(3) CDE Corporation, a Micro Small Medium Corporation, had gross sales of P10,000,000,
cost of sales of P 6,000,000 and operating expenses of P 2,000,000 for fiscal year ending
October 31, 2020, its 3rd year of operation. Its total assets amounted to P 5,000,000.00.
It does not own the land and building where its business operations are conducted.
Computation of the income tax for 2020 shall be:

Net Taxable Income P 2,000,000.00

Divide by ÷ 12
Taxable Income per month P 166,666.67
Tax Due:
November 1, 2019 to June 30, 2020- (P166,666.67 X 8)X 30% P 400,000.00
July 1, to October 31, 2020 (P166,666.67 X 4) 20%* 133,333.34
Total Tax Due-Regular P 533,333.34

*20% was used as the rate since the net taxable income did not exceed P 5,000,000.00
and the total assets of the corporation is less that P 100,000,000.00. MCIT computation
is not applicable since it is only the 3rd year of operation of the corporation.

(4) HUB Company, for calendar year 2020, its 2nd year of business operations, had net
taxable income of P 12,000,000.00. Its total assets, net of the value of the land where
its business is situated, is P 80,000,000.00. Income tax shall be computed as follows:

Net Taxable Income P 12,000,000.00

Divide by ÷ 12
Taxable Income per month P 1,000,000.00
Tax Due:
January 1 to June 30, 2020- (P1,000,000 X 6)X 30% P 1,800,000.00
July 1 to December 31, 2020 (P1,000,000 X 6) 25%* 1,500,000.00
Total Tax Due-Regular P 3,300,000.00

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 *25% was used since its net taxable income exceeds P 5,000,000.00. Not subject to
MCIT at this time.

FOREIGN CORPORATION

5) DEF Corporation, a resident foreign corporation, has gross sales of P500,000,000.00,

cost of sales of P 300,000,000.00 and allowable deductions of P 75,000,000.00 for
Fiscal Year ending April 30, 2021, its fourth year of business operations. Its total assets
is P800,000,000.00 which included the land of P50,000,000.00 and other fixed assets
of P200,000,000.00.

Gross Sales 500,000,000.00

Less: Cost of Sales 300,000,000.00
Gross Income 200,000,000.00
Less: Allowable Deductions 75,000,000.00
NET TAXABLE INCOME 125,000,000.00
Divide by ÷ 12
Net Taxable Income per month 10,416,666.67
TAX DUE- REGULAR
May 1 to June 30, 2020 (P10,416,666.67 X 2) 30% P 6,250,000.00
July 1, 2020 to April 30, 2021 (P10,416,666.67 X10) 25% 26,041,666.67
INCOME TAX DUE P 32,291,666.67

MCIT:
Gross Income 200,000,000.00
Divide by ÷ 12
Gross Income per month 16,666,666.67
TAX DUE-MCIT
May 1 to June 30, 2020 (16,666,666.67 X 2) 2% P 666,666.67
July 1, 2020 to April 30, 2021 (16,666,666.67 X 10) 1% 1,666,666.67
TOTAL P 2,333,333.34

The income tax payable shall be P 32,291,666.67 (the higher amount between the regular
rate and MCIT).

For ease of computing the income tax due during the transition period, the following
rates reflected in the matrix below may be used:

TRANSITORY RATES
Annual Other domestic
Accounting Regular corporations with Proprietary
Period Corporate net taxable income
MCIT Non-profit
Income Tax ≤5M & total assets
(Transition TY ≤100M, exclusive of Edu/Hosp
Rates
2020) land
30% / 25% 30% / 20% 2% / 1% 10% / 1%
FY 7-31-20 29.58 % 29.16 % 1.91 % 9.25 %
FY 8-31-20 29.16 28.33 1.82 8.50
FY 9-31-20 28.75 27.50 1.73 7.75
FY 10-31-20 28.33 26.66 1.64 7.00
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 FY 11-31-20 27.91 25.83 1.55 6.25
CY 12-31-20 27.50 25.00 1.50 5.50
FY 1-31-21 27.08 24.16 1.41 4.75
FY 2-28-21 26.66 23.33 1.32 4.00
FY 3-31-21 26.25 22.50 1.23 3.25
FY 4-30-21 25.83 21.66 1.14 2.50
FY 5-31-21 25.41 20.83 1.05 1.75
FY 6-30-21 25.00 20.00 1.00 1.00

For taxpayers who have already filed their income tax returns for taxable year 2020
(calendar year 2020; fiscal year ending from July 31, 2020 to fiscal year ending February 28,
2021) may amend their income returns using the transitory rates per above matrix, and any
resulting excess/overpayment can be claimed for refund or carried over to the next taxable year,
at taxpayers’ option.

SECTION 10. REPEALING CLAUSE. Any provisions of existing revenue

regulations or revenue issuances which are inconsistent with these Regulations are hereby
repealed, modified or amended accordingly.

SECTION 11. EFFECTIVITY. These regulations shall take effect immediately upon
publication in the Official Gazette or in any two newspapers of general circulation, whichever
comes earlier.

CARLOS G. DOMINGUEZ
Secretary of Finance

Recommending Approval:

CAESAR R. DULAY
Commissioner of Internal Revenue

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