ACPAPP - Accounting for Changes in Income Tax Rates (CREATE).pdf

©2021 Punongbayan & Araullo. All rights reserved.
ACPAPP Cebu Chapter
August 27, 2021
Accounting for the
Changes in Income Tax
Rates under the
CREATE Act

Agenda
2
Relevant Accounting Standards and Interpretations,
Regulations and Issuances
Overview of Changes in Corporate Income Tax Rates
Impact on the Companies’ Financial Statements
 Calendar Year 2020 Financial Statements
 Calendar Year 2021 Financial Statements
 Fiscal Year Financial Statements

Relevant Accounting Standards and
Interpretations, Regulations and Issuances
3

Relevant Accounting Standards and
Interpretations, Regulations and Issuances
4
 Philippine Account Standard (PAS) 12, Income Taxes
 PAS 10, Events After the Reporting Period
 Philippine Interpretations Committee (PIC) Q&A No. 2020-07
 Republic Act No. 11534, Corporate Recovery and Tax Incentives for
Enterprise Act (CREATE Act)
 Revenue Regulations No. 5-2021

Overview of Changes in Corporate
Income Tax Rates
5

Overview of Changes in Corporate Income
Tax Rates
6
From To Effectivity
Regular Corporate Income Tax (RCIT)
• Domestic corporations, in general
• Domestic corporations with net
taxable income not exceeding P5M
and total assets not exceeding
P100M*
30%
30%
25%
20%
July 1, 2020
July 1, 2020
• Resident foreign corporations
(on taxable income)
• Non-resident foreign corporations
(on gross income)
30%
30%
25%
25%
July 1, 2020
January 1, 2021
*exclusive of the value of the land where the property, plant and equipment are situated

Overview of Changes in Corporate Income
Tax Rates
7
From To Effectivity
• Proprietary educational institutions*
and hospitals
10% 1% July 1, 2020 to
June 30, 2023
• Regional operating headquarters
(ROHQ) of multinational companies 25% 1% January 1, 2022
Minimum corporate income tax (MCIT) 2% 1% July 1, 2020 to
June 30, 2023
*Certain provisions of RR 5-2021 pertaining to tax treatment of proprietary education institutions (in so far as the
definition includes the phrase “which are non-profit”) are suspended per RR 14-2021.

8
 Calendar Year 2020 Financial Statements
 Fiscal Year Financial Statements

9
Calendar Year 2020
 The then CREATE Bill is not considered enacted or substantively
enacted as of December 31, 2020.
 Current and deferred taxes for FS reporting purposes will still be
measured using the applicable income tax rates as of
December 31, 2020.
 However, the annual income tax return for CY2020 will have to use the
reduced corporate income tax rate.

10
Calendar Year 2020
Illustration: A domestic corporation on its sixth year has a gross
income of P50,000,000 for the year 2020. Its net taxable income for the
year amounted to P10,000,000.

11
Financial Statements
RCIT = P10,000,000 x 30% = P3,000,000
MCIT = P50,000,000 x 2% = P1,000,000
RCIT > MCIT
Current tax expense = P3,000,000
• Deferred tax assets and deferred tax
liabilities are recognized using the tax
rates as of December 31, 2020.
Income Tax Returns
RCIT = P5,000,000 x 30% = P1,500,000
5,000,000 x 25% = 1,250,000
P2,750,000
MCIT = P25,000,000 x 2% = P500,000
25,000,000 x 1% = 250,000
P750,000
RCIT > MCIT
Income tax due = P2,750,000

12
Calendar Year 2020
Scenario 1: CREATE was enacted before the date of the issuance of the
audited financial statements.
December 31, 2020
Balance sheet date
March 26, 2021 April 22, 2021
CREATE was
enacted
FS issuance date
 Treated as a non-adjusting event
 Disclosure of the nature of changes and impact to the financial statements is required if the
impact is significant.

13
Calendar Year 2020
Scenario 2: CREATE was enacted after the date of the issuance of the
December 31, 2020
Balance sheet date
February 20, 2021 March 26, 2021
FS issuance date
CREATE was
enacted
 There is no subsequent event that requires related FS disclosures.
 However, companies may consider disclosing the general key features of the proposed bill and
expected financial impact.

14

15
Calendar Year 2021
PAS 12 provides that components of tax expense (income) may
include “any adjustments recognized in the period for current tax
of prior periods” and “the amount of deferred tax expense (income)
relating to changes in tax rates or the imposition of new taxes”,
among others.

16
Current and Deferred Tax
Current and
Deferred Tax
Statement of
Comprehensive Income
Statement of
Financial Position

17

18

19
Statements of Financial Position…

20
In the Statements of Comprehensive Income…

21
Calendar Year 2021
income of P50,000,000 for the year 2020. Its net taxable income for the
year amounted to P10,000,000.
Using the same case in 2020…

22
Income Tax Returns
Difference = P250,000
 Adjustment to the 2021 current tax expense
2020 2020

23
Calendar Year 2021
Deferred tax assets and liabilities as of December 31, 2021 will be
remeasured using the new tax rates. The impact of remeasurement
is recognized in profit or loss (i.e., deferred tax income or expense),
unless it can be recognized in other comprehensive income or another
equity account.

24
Deferred Tax Assets and Liabilities – CY 2020
Particulars Temporary
Difference
Applicable
Tax Rate
Deferred Tax
Asset
(Liability)
1) Allowance for impairment of receivables P 40,000,000 30% P 12,000,000
2) Post-employment benefit obligation:
- Current service cost and interest
- Net actuarial gains
8,000,000
( 1,000,000)
30%
30%
2,400,000
( 300,000)
3) Fair value gains on investment properties ( 2,000,000) 30% ( 600,000)
4) Unrealized forex gains ( 500,000) 30% ( 150,000)
5) Changes in FV of investment at FVOCI 3,000,000 30% 900,000
6) Net operating loss carryover (NOLCO) 10,000,000 30% 3,000,000
7) Excess MCIT:
MCIT of P1,000,000 (P50,000,000 x 2%) vs
RCIT of P600,000 (P2,000,000 x 30%) 400,000 400,000
Net Deferred Tax Assets P 17,650,000

25
Deferred Tax Assets and Liabilities – CY 2021
Particulars Temporary
Difference
Applicable
Tax Rate
Deferred Tax
Asset
(Liability)
1) Allowance for impairment of receivables P 40,000,000 25% P 10,000,000
8,000,000
( 1,000,000)
25%
25%
2,000,000
( 250,000)
3) Fair value gains on investment properties ( 2,000,000) 25% ( 500,000)
4) Unrealized forex gains ( 500,000) 25% ( 125,000)
5) Changes in FV of investment at FVOCI 3,000,000 25% 750,000
6) Net operating loss carryover (NOLCO) 10,000,000 25% 2,500,000
7) Excess MCIT:
MCIT of P750,000 (P50,000,000 x 1.5%) vs
RCIT of P550,000 (P2,000,000 x 27.5%) 200,000 200,000
Net Deferred Tax Assets P 14,575,000

26
Remeasurement of DTA/DTL – CY 2021
Particulars
Net DTA
(CY2020)
Net DTA
(CREATE)
Difference –
adjusted to 2021 deferred tax
expense (income)
P&L OCI
1) Allowance for impairment of receivables P 12,000,000 P 10,000,000 P 2,000,000 P -
2,400,000
( 300,000)
2,000,000
( 250,000)
400,000
-
-
( 50,000)
3) Fair value gains on investment properties ( 600,000) ( 500,000) ( 100,000) -
4) Unrealized forex gains ( 150,000) ( 125,000) ( 25,000) -
5) Changes in FV of investment at FVOCI 900,000 750,000 - 150,000
6) Net operating loss carryover (NOLCO) 3,000,000 2,500,000 500,000 -
7) Excess MCIT 400,000 200,000 200,000 -
Net Deferred Tax Assets P 17,650,000 P 14,575,000 P 2,975,000 P 100,000

27
Remeasurement of DTA/DTL – CY 2021
Deferred Tax
Expense/Income
Tax effects of 2021 temporary
differences
Remeasurements - CY2020
Profit or loss
Current Tax Expense/Income
2021 RCIT/MCIT
Final tax on interest from banks
Application of excess
MCIT/other adjustments
Remeasurements - CY2020
Other comprehensive
income

28
Calendar Year 2021
a) An explanation of changes in applicable tax rate(s) compared
to the previous accounting period is required to be disclosed.
b) Any movement in deferred taxes arising from the change in
tax rates that will form part of the deferred tax expense or income
will be included as well in the effective tax rate reconciliation.
Other disclosure requirements:

29

30
Fiscal Year
Scenario 1: CREATE was enacted before the balance sheet date and date of
the issuance of the audited financial statements.
March 26, 2021
CREATE was
enacted
March 31, 2021 May 15, 2021
Balance sheet date FS issuance date
 Current and deferred taxes for FS reporting will be measured using the new tax rates.
 Disclosure of an explanation of changes in the applicable tax rates vs previous year.
 Any movement in deferred taxes arising from change in tax rates will form part of the deferred
tax expense (P&L or OCI) and in the effective tax rate reconciliation.

31
Fiscal Year
income of P50,000,000 for the fiscal year ended March 31, 2021. Its
net taxable income for the year amounted to P10,000,000.

32
RCIT = P10,000,000 x 3/12 x 30% = P 750,000
10,000,000 x 9/12 x 25% = 1,875,000
P2,625,000
MCIT = P50,000,000 x 3/12 x 2% = P250,000
50,000,000 x 9/12 x 1% = 375,000
P625,000
RCIT > MCIT
Income Tax Returns
RCIT = P10,000,000 x 3/12 x 30% = P 750,000
10,000,000 x 9/12 x 25% = 1,875,000
P2,625,000
MCIT = P50,000,000 x 3/12 x 2% = P250,000
50,000,000 x 9/12 x 1% = 375,000
P625,000
RCIT > MCIT
Deferred tax assets and deferred tax liabilities are remeasured using the revised tax rates.

33
Fiscal Year
Scenario 2: CREATE was enacted before the date of the issuance of the
February 28, 2021
Balance sheet date
March 26, 2021 April 30, 2021
CREATE was
enacted
FS issuance date
 Treated as a non-adjusting event
 Disclosure of the nature of changes and impact to the financial statements is required if the
impact is significant.
Same
with
CY2020

34
Fiscal Year
Scenario 3: CREATE was enacted after the date of the issuance of the
October 31, 2020
Balance sheet date
February 20, 2021 March 26, 2021
FS issuance date
CREATE was
enacted
 There is no subsequent event that requires related FS disclosures.
 However, companies may consider disclosing the general key features of the proposed bill and
expected financial impact.
Same
with
CY2020

35
Note: Companies that have already filed their income tax returns for taxable
year 2020 (CY2020 and FY ended July 31, 2020 to February 28, 2021) may
amend their income tax returns using the transitory rates, and any resulting
excess/overpayment can be claimed for refund or tax credit certificate, or
carried over to the next taxable year, at the companies’ option.

36
Transitory Rates
Annual Accounting Period
(Transition TY 2020)
RCIT
Other domestic
corporations with net
taxable income <5M
& total assets <100M,
exclusive of land
MCIT
Proprietary
Non-profit
Educ/Hosp
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 %
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 %

Raymond Joey D. Mamacus
Senior Manager, Audit & Assurance
raymond.mamacus@ph.gt.com
37
THANK YOU!

grantthornton.com.ph
This presentation is not a comprehensive analysis of the subject matters covered and may include proposed guidance that is subject to change
before it is issued in final form. All relevant facts and circumstances, including the pertinent authoritative literature, need to be considered to arrive
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the presenters and the presentation is not intended to provide accounting or other advice or guidance with respect to the matters covered. For
additional information on matters covered in this presentation, contact your P&A Grant Thornton adviser.
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ACPAPP - Accounting for Changes in Income Tax Rates (CREATE).pdf

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