It has been almost a year since Republic Act No. 11534, otherwise known as the Business Recovery and Tax Incentive Act (CREATE), was signed into law. It took thffect on April 11th. Its main objective is to reduce tax rates for domestic and foreign corporations in order to mitigate the effeffects of the COVID-19 pandemic on our economy. However, this is not the case for regional headquarters (ROHQ), which previously enjoyed a preferential tax rate of 10%. With the passing of the CREATE Act, effEffective January 1, 2022, ROHQs will now be taxed at 25% ordinary corporate income tax (RCIT) or 1% (until June 30, 2023)/2% minimum corporate income tax (MCIT), whichever is greater.
ROHQ AS DEFINED
Section 22 (EE) of the National Internal Revenue Code (NIRC) of 1997Ifned ROHQs as branches established in the Philippines by multinational corporations which provide the following services to its affisubsidiaries, subsidiaries and branches in the Philippines: general administration and planning; business planning and coordination; procurement and procurement of raw materials and components; corporate Iffinancial advisory services; marketing control and sales promotion; personnel training and management; logistics services; research and development and product development services; technical assistance and maintenance; data processing and communication; and business development. The company must not directly and indirectly solicit or market goods and services, whether on behalf of the parent company, branches, afIfaffiliates, subsidiaries or any other company. Similarly, it may not deal directly or indirectly with the sale and distribution of the goods and services of its parent company, branches, affiaffiliates, subsidiaries or any other company. Under our existing tax laws, ROHQs are treated as resident corporations that are taxable only on their income from sources within the Philippines.
PREFERENTIAL TAX RATE 10% OFF PRE-CREATION
Prior to the passage of the CREATE Act, ROHQs were subject to a preferential tax rate of 10% on their taxable income from all sources in the Philippines. Therefore, income earned outside the Philippines was treated as exempt for income tax purposes. Meanwhile, ROHQs subject to the preferential income tax rate under Section 28(A)(5) of the Internal Revenue Code are not liable for the 2% MCIT, nor do they have plus the right to choose optional standard deductions as a method of deduction on their income tax return.
REGULAR CORPORATE INCOME TAX BY 25% UNDER CREATE
As of January 1, 2022, in accordance with the CREATE law and tax regulation n° 05-2021, ROHQs are subject to an RCIT of 25%. Accordingly, just like other resident foreign corporations, in general, pursuant to Section 28(A)(2) of the Tax Code, ROHQs are subject to 1% (until June 30, 2023) and 2% MCIT . The MCIT is calculated on the basis of the cumulative gross income multiplied by the applicable rate of the MCIT. It only applies to the fourth tax year immediately following the tax year in which the company began its commercial activities.
In the Revenue Regulations, the BIR issued guidelines on how to calculate the income tax due using the revised rates. If the corporation follows a calendar year, for the tax year ending December 31, 2022, the corporation must pay income tax equal to the RCIT or MCIT, whichever is greater. However, in calculating income payable for 2023, the MCIT rate from January 1 to June 30, 2023 is 1% and from July 31 to December 31, 2023 is 2%. Thus, the MCIT rate to use would be on average 1.5%. Any excess of MCIT over normal income tax must be carried forward and deducted from normal income tax for the following three tax years.
Following the change in the corporate income tax rate for ROHQs, under Section 34(L) of the tax code, instead of itemized deductions allowed under the same section, ROHQs can now choose a standard deduction of an amount not exceeding 40% of their gross income. “Gross Revenue” means sales or gross receipts less sales returns, allowances, rebates, and cost of goods sold or cost of services. The corporation must indicate on its first quarter tax return its intention to elect the optional standard deduction. Failing this, he will be deemed to have made use of the itemized deductions authorized. This election, when made in the declaration, is irrevocable for the taxation year for which the declaration is made. Provided that, unless otherwise authorized by the Commissioner of Taxes, the company shall maintain records relating to its gross income as defined in section 32 of the tax code during the tax year, as required by the rules and regulations promulgated by the Secretary of Finance, on the recommendation of the Commissioner.
The preferential tax rate is one of the most beneficialIffinancial incentives for ROHQs. Removing this incentive could have consequences such as reduced operations, lost jobs, reduced expenses and reduced competitive advantage. On the other hand, such a preferential tax is disadvantageous for local investors. Therefore, removing these incentives will level the playing field for foreign and local companies. But at the end of the day, what we hope to see is that such tax reforms help our economy to prosper, especially during difficult times.
Let’s Talk Tax is a weekly column from P&A Grant Thornton that aims to keep the public informed of various tax developments. This article is not intended to be a substitute for competent professional advice.
Trisha Amor M. Gatdula is Senior Head of Tax Advisory & Compliance at P&A Grant Thornton, the Philippine member firm of Grant Thornton International Ltd.