CORPORATE INCOME

TAXATION
OCTOBER 2019
SUMMARIZED FROM VARIOUS SOURCES
INCLUDES:
> general corporation partnerships , no matter how created
> joint stock companies
> joint account association or insurance corporation

DOES NOT INCLUDE:

> general professional partnership
> joint venture
A. Domestic Corporation
> 30% regular tax on WORLD TAXABLE INCOME

B. Resident Foreign Corporation

> 30% regular tax on PHILIPPINE TAXABLE INCOME

C. Non-resident Foreign Corporation

> 30% final tax on PHILIPPINE GROSS INCOME
◦ Corporation enjoying preferential treatments or preferential
tax rate lower than the 30% regular income tax
1. EXEMPT DOMESTIC CORPORATION
◦ Exempt non-profit corporations under NIRC
◦ Government agencies and instrument allies
◦ Certain GOCCs
◦ Cooperatives

2. SPECIAL DOMESTIC CORPORATION

◦ Proprietary Educational institution
◦ FCDUs and expanded FCDUs
◦ PEZA or BOI registered enterprises

3. REGULAR DOMESTIC CORPORATION

1. SPECIAL RESIDENT FOREIGN CORPORATION
◦ Offshore Banking units and expanded FCDUs
◦ Regional Area Headquarter and Regional Operating Headquarters of Multinational Corporation
◦ International carrier
◦ BOI or PEZA – registered enterprises

2. REGULAR RESIDENT FOREIGN CORPORATION

1. SPECIAL NON-RESIDENT FOREIGN CORPORATION
◦ Non-resident cinematographic film owner, lessor or distributor
◦ Non-resident lessor of vessels, chartered by Philippine nationals
◦ Non-resident owner or lessor of aircraft, machineries and other equipment

2. REGULAR
SPECIAL AND EXEMPT
DOMESTIC
CORPORATION
> relates only to income from related activities

> examples:
◦ Non-stock, non-profit educational institution
◦ Government educational institution
◦ Mutual savings bank without having a capital stock reported by shares
◦ Non-stock corporation, non-profit religious, charitable, scientific, athletic or cultural purposes
Toma Sengla Tumba, a not for profit fraternal organization, received total membership dues of
P300,000. To finance its community development project, it conducted a fundraising drive by
selling souvenir items to local tourists. The final raising generated P200,000 income.

Solution:
Net Income 200,000 = fundraising, commercial in nature = taxable
Multiply by: 30% = membership dues = exempt
60,000
1. It must be ORGANIZED AND OPERATED EXCLUSIVELY for religious, charitable, scientific,
athletic, or cultural purposes or for the rehabilitation of veterans.

2. It should meet the following test:

◦ Organizational test
– it limits the purposes to religious, charitable, scientific, athletic, cultural or for rehab of veterans
◦ Operational test
– regular activities of the corporation must be exclusively devoted to the accomplishment of the
purpose
3. All NI or assets of the corporation must be devoted to its purposes ( no part shall benefit to
any member or specific person)

4. It must not be a branch of a foreign non-stock, non-profit organization

Illustration:
SLU collected P4M school fees, earned P200,000 from the rent of for its property,
earned P400,000 in the sale of its properties.
SLU utilized P200,000 rental fund for undergrad scholarship and invested P400,000 for
retirement benefit of university Director
 if in the previous example, instead of SLU
- Government school
- Private school

ANSWER:

1. Government school = classification rule shall apply ( Income from related activities non-taxable
unrelated (tx)
– P4M (exempt) and P200,000 + P400,000 (taxable)

2. Private School = Dominance test will apply

> exempt from tax except if income is derived from unrelated activities
> generally taxable, except if exempted

EXEMPTED GOCCs:
- GSIS
- SSS
- PHILHEALTH
- Local water districts
- PCSO
A. transact with MEMBERS ONLY
◦ not subject to any taxes and fees under NIRC
◦ eg. Income tax, VAT, percentage, donor’s tax, excise tax

B. Transact with BOTH MEMBERS & NON-MEMBERS

◦ accumulated reserve = not more than P10M, accumulated reserve and undivided net savings
= exempt from taxes
◦ If > P10M subject to tax
◦ Income tax
◦ VAT
◦ Percentage tax
- totality of the amounts legally acquired to be deducted from net surplus

◦ RF = atleast 10% of nsup (?) but not less than 50% in the next 5 years
◦ Education fund = not more than 10%
◦ Comm dev fund = not less than 3%
◦ Optional land and building fund = not to exceed 7%
1. Private educational institution and non-profit hospital

◦ 10% on worldwide income

◦ Subject to PRE-DOMINANCE TEST
– If GI from unrelated act EXCEEDS 50% of total GI = subject to 30% REGULAR INCOME
TAX
OWNER EDUCATIONAL INSTITUTION HOSPITAL
Private  10% of TI  30% of taxable income

Non-profit  exempt  10% of taxable income

Government  exempt  exempt

- unit or a bank
Authorized by BSP to engaged in Foreign currency denominated transaction

DIFFERENCE between FCDUs and EFCDUs and OBU

> FCDUs- limited, short-term foreign currency transaction
> EFCDUs – allowed both ST and LT foreign transaction
> OBU – division of foreign bank and allowed to conduct foreign currency transaction
 from residents
Nature of Income (E) FCDUs or OBUs other residents non-residents

 Income from FOREX transaction

- Interest income from
a. loans & receivables exempt 10% exempt
b. FOREX deposits exempt - exempt
- Other FOREX income exempt RCIT exempt
 Income from Non-FOREX RCIT RCIT RCIT
A. Specific Identification
◦ Expenses directly traceable to an income are allocated to that income

B. Pro-rata allocation
◦ expenses NOT directly traceable to an income are allocated PRO-RATA on the ration of ALL INCOME
(including exempt income)

> Only expenses traceable or reasonably allowable to taxable income (RCIT) are deductible.
PEZA
◦ And TIEZA ( Tourism Infrastructure and Enterprise Zone Authority) = all business enterprise operating
within ECOZONE  5% of Gross Income earned in lieu of all taxes
◦ 5% = National Government and 2% Local Government
◦ 5% excludes real property tax on land
◦ Gross Income = net of discount and returns and COS and includes Interest income, gains from sale and
other income
◦ max of 10 years = because it can be extended
◦ Sale of scrap materials & income from other activity by a PEZA entity = subject to REGULAR TAX

BOI – REGISTERED ENTERPRISE

◦ Income tax holiday for 6 years from commercial operation for pioneer firms
◦ 4 years – non-pioneer firms
SPECIAL FOREIGN
CORPORATIONS
1. Offshore Banks
◦ conduct of bank transactions in foreign currencies involves receipt of funds from external sources

Offshore Banking Unit

◦ - same rules with FCDU and EFCDU of domestic corporation except (only WITHIN IS TAXABLE)

Treatment of common expenses of OBU = deductions

2. Regional area headquarters and regional operating HQ of multinational corporation
1. Regional Head Quarters
a. RAH or RHQ = branch by multinational company which HQ do not earn or derive
income from PH
a. RAH or RHQ = acts as supervisory, communication and coordinating centre for their affiliates
= EXEMPT
b. Regional Operating HQ = branch est in the PH by multinational which are engaged in :
general admin and planning
= 10% of tax income
= they are allowed to derive income on their services to their
affiliates, subsidiaries or branches of their (?)

RHQs and ROHQs

- exempt from all kinds of local taxes, fees or charges by LGU, except real property tax
- aka International common carrier
- entities that transport passengers, mails, and excess cargos or baggage from Philippines to any
destination abroad and vise versa

TWO TYPES
◦ International AIR carrier
◦ International SEA or shipping carrier
Income Tax Rate to International Carrier
- Gross Receipts: 2 ½ % of Gross Philippine Billings
- Exception: Preferential rate or exemption on the basis of reciprocity applicable tax treaty or
reciprocity
If other countries allow lower or exempt from tax, then the Government will give
the lower rate or exemption based on reciprocity
Gross Philippine billings
- Air carrier = outbound & uninterrupted flights
- Total receipts of outgoing flights, regardless of the place where they are actually paid
- Gross Receipts = billing less refunded ticket
- Non- revenue passengers are NOT DEDUCTED from (?) billings
1. Endorsed tickets ( original carrier to another carrier)
◦ Gross receipts of the CARRYING airline

2. Transhipment involving SAME CARRIER, the gross receipt from the entire flight is included in the gross
receipts.

3. Transhipment involving another carrier, only the portion pertaining to leg flown from the Philippines,
to an immediate foreign port is included.
- Flight obligating OUTSIDE PH which will have a connecting flight from the PH
If within SAME CARRIER

departed within 48 hours = no included in Gross PH billing

departed beyond 48 hours = gross receipt included in Gross PH billings
= except if due to force (?) even if beyond 48 hours, not considered

 If with DIFFERENT CARRIER

- COST OF OUTGOING FLIGHT IS included AS PART OF Gross Philippine billings regardless of intervening
period between arrival and departure from the PH
- IN COMPUTATION OF Gross Philippine billings, tickets in foreign currencies are translated
WHICHEVER is HIGHER of

◦ Monthly average airline rate in bank settlement plan monthly sales report
◦ Banker association of the Philippines (BAP) rate

TREATMENT OF INCOME OTER THAN FROM INTERNATIONAL TRANSPORT

- Other income of International carriers other than international transport are subject to appropriate
type of income tax
- special corporation, domestic or resident foreign, subject to tax on net income are mandatorily
required to use itemized deduction
- they are NOT allowed to use OSD
- they file using BIR form 1702-MX
- GR: subject to 30% final tax
- Exception: those who pay lower than 30% FTx
1. non-resident cinematographic film owner, lessor or distributor
2. non-resident lessor of vessels chartered by Philippine nationals
3. non-resident owner or lessor of aircraft, machineries and other equipment

 NON-RESIDENT CINEMATOGRAPHIC FILM OWNER, LESSOR OR DISTRIBUTOR

- 25% final tax on their gross income from ALL sources
 NON-RESIDENT LESSOR OF VESSELS CHARTERED BY PHILIPPINE NATIONALS
- 4.5% final tax on gross rentals, lease or charter fees from leases or charters to Filipino
residents or corporations as approved by the maritime industry authority

 NON-RESIDENT OWNER OR LESSOR OF AIRCRAFT, MACHINERIES AND OTHER EQUIPMENT

- 7.5% final tax on rentals, charters and other fees
 LEASE OR CHARTER OF

LESSOR CINEMA FILMS VESSELS AIRCRAFT OTHER EQUIPMENT

DOMESTIC 30% WORLD TAXABLE INC 30% WORLD TAXABLE INC 30% WORLD TAXABLE INC 30% WORLD TAXABLE INC

RESIDENT F 30% WORLD TAXABLE INC 2 ½ % Gross PH billing 2.5% Gross PH billing 30% PH tax income

NON- 25% PH Gross Inc 4 ½ PH Gross Inc 7 ½ PH Gross Inc 7 ½ PH Gross Inc

RESIDENT F
- NRFC, (special or not), do not file Income tax returns.

- Philippine residents who make income payments to them must withhold the final tax and remit
the same to the government, through BIR form 1601-F
CORPORATE TAX SCHEMES ON REGULAR CORPORATIONS
A. Domestic Corporation
◦ Gross Income tax (15% of GI)
◦ Regular corporate tax subject to MCLT (2%of GI)

B. Resident Corporation
- RCIT subject to MCIT
- 2% OF GI
- applicable when
◦ The corporation has zero or negative TI
◦ MCIT is greater than RCIT

SCOPE of MCIT
- applicable to every corporation taxable to the 30% regular corporate income tax including
non-profit, exempt, and special corporation with respect to their taxable income subject to
REGULAR INCOME TAX
1. Real estate investment trusts or REITs under RA 9856
2. Domestic corporation who opted the 15% GI tax.
3. Domestic or resident corporation subject to special tax rates
◦ Prop educational institution and non-profit hospital
◦ FCDUs and OBUs
◦ ROHQ of multinational companies
◦ International carriers
◦ Firms subject to special income tax such as PEZA or BCDA locators (?)

4. All non-resident corporation

- imposed beginning on the 4th year of operations
- xxxx year + 4
- eg. Commencement of business = 2010
◦ Imposition of MCIT = 2014 on the 4th year

MCIT GROSS INCOME under NIRC

1. Sale of Goods = Gross Sales less Returns and Allowances and COGS
2. Sale of Service = Gross Receipts less returns and allowances, discounts and COS

Note:
- Gross Income includes all other items of taxable income NOT SUBJECTED to Final Tax and Capital Gains Tax
- If there is gain on sale of machinery, it is included on Gross Income
- imposed beginning on the 4th year of operations
- xxxx year + 4
- eg. Commencement of business = 2010
◦ Imposition of MCIT = 2014 on the 4th year

MCIT GROSS INCOME under NIRC

1. Sale of Goods = Gross Sales less Returns and Allowances and COGS
2. Sale of Service = Gross Receipts less returns and allowances, discounts and COS

Note:
- Gross Income includes all other items of taxable income NOT SUBJECTED to Final Tax and Capital Gains Tax
- If there is gain on sale of machinery, it is included on Gross Income
- MCIT > RCIT = Excess = deductible from RCIT in the immediate 3 succeeding years
- income tax payable may get below MCIT if excess covered RCIT
Illustration:
2013 2014 2015 2016
MCIT 80,000 95,000 20,000 60,000
RCIT 20,000 85,000 40,000 80,000
Income tax due 80,000 (M) 95,000 (M) 40,000 (R.) 80,000 (R.)

Excess 60,000 10,000 40,000 (20,000)

(10,000)
50,000
NOLCO – allowable deduction
Illustration:
2019 2020
Gross Income 300,000 500,000
Business Expense 420,000 250,000
Net Income/(loss) (120,000) 250,000
NOLCO 120,000
NI – subj to TAX 130,000
Multiply by: 30%
RCIT 39,000
MCIT (300,000 x 2%) 6,000 10,000
EXCESS (6,000)
TAX DUE 33,000
- due on or before 60 days from end of each quarter
- formula:

Gross Income xx
Less: Item deduction xx
Net Income, this quarter xx
Net Income, P1, quarter xx
Net Income to date xx
Multiply by 30%
Income tax due xx
Less: credits
◦ CWTx, this QTR xx
◦ CTWx, prev qtrs xx
◦ Estimated tax paid in prior Qtr xx
Quarterly Income Tax Payable xx
- we should get the cumulative balances of RCIT and MCIT

1st Qtr 2nd Qtr 3rd Qtr 4th Qtr TOTAL

RCIT 80,000 50,000 80,000 60,000 270,000
MCIT 50,000 100,000. 40,000 120,000 310,000
Excess MCIT
(prior year) 10,000
Creditable
Withholding 20,000 12,000 10,000 20,000 62,000
Excess of w/-
Holding tax
(prior year) 30,000
 1st 2nd 3rd 4th TOTAL

RCIT 80,000 130,000 210,000 270,000 270,000

MCIT 50,000 150,000 190,000 310,000 310,000
Excess MCIT (prior year) 10,000
Excess CWTx (prior year) 30,000
Creditable WTx
This Qtr 20,000 20,000 10,000 20,000
Prior Qtr 20,000 32,000 42,000
 1st 2nd 3rd 4th TOTAL
Quarterly Income Tax Due 80,000 150,000 210,000 310,000

Less: Tax credits

MCIT (prior yr) (10,000) - (10,000) -

Excess CWTX (prior yr) (30,000) (30,000) (30,000) (30,000)

CWTX (current quarter) (20,000) (12,000) (10,000) (20,000)

CWTX (prior quarter) (20,000) (32,000) (42,000)

Estimated Tax payments (prior qrtr) (20,000) (88,000) (128,000)

Income Tax Payable 20,000 68,000 40,000 90,000

- upon recommendation of commissioner of Internal Revenue, the Secretary of Finance may
suspend the imposition of MCIT upon submission of proof that the corporation sustained
substantial losses on account of:
◦ Prolonged labor dispute
◦ Force majeure
◦ Legitimate business reverses (?)

REPORTING FOR CORPORATIONS SUBJECT TO REGULAR TAX

- Regular Corporation = 1702 – RI
- if they also derive income subject to special tax rates, = use 1702-MX
- 10% penalty, on the improper accumulation of corporate earnings beyond the need of business
- different for corporations intending to defeat the 10% dividend tax by mere non-declaration of
dividends
> The imposition of 10% IAET is not automatic.
> Due only upon formal assessment.

SCOPE of IAET
- it covers the improperly accumulated earnings of domestic corporations ONLY
1. Mandatory Appropriations – appropriations required by law such appropriation to cover the
cost of treasury stock acquisitions

2. Contractual Appropriations – appropriations required by contract

◦ eg. Appropriations for sinking fund

3. Reasonable Appropriations – appropriations for reasonable needs of the business

 it is a question of fact which requires consideration of all circumstances of the case

PRIMA FACIE INSTANCES of IMPROPER ACCUMULATION OF EARNINGS:

 Investment of substantial profit in unrelated business or stocks or securities of unrelated
business.
 Investment in bonds and other long-term securities.
 Accumulation of earning in excess of 100% of paid-up capital.
1. Investment companies
◦ Entities primarily engage in the business of investing, reinvesting, and trading in securities.

2. Holding companies

3. Closely held corporations

- if ownership of top 20 shareholders = below 50% is a public corporation
- corporation owned by publicly-listed corporation is a public corporation

To rebut(?) the prima facie presumption of improper accumulation, the corporation must be able to
demonstrate definiteness of plans in support of the accumulation supported by actions taken
demonstrating their execution.
 - Upon determination of an important accumulation, the tax is computed as follows:

Taxable Income Pxx

Less: Corporate Income Tax xx
Add: Net Operating xx
Earnings from regular income (net of tax) xx
Passive Income (net of tax) xx
Capital Gains, (net of CG tax) xx
Exempt or excluded in income xx
Total Earnings Pxx
Less: Dividends declared Pxx xx
Reasonable appropriation xx xx
Improperly Accumulated Earnings Pxx
Multiply by: IAET rate 10%
Improperly Accumulated Earning Tax Pxx
Given:
Gross Income P2,000,000
Business Exp 1,400,000
NOLCO – prior 500,000
Dividend Income-Domestic 30,000
Gross Interest Income- bank 50,000
Gain on sale of domestic stocks – sold directly to buyer 200,000
Gain on sale of land – capital asset (SP= P2M; FMV=P2.5) 500,000
Dividends declared 100,000
Appropriation for TS 50,000
Appropriation for plant expansion 150,000
Taxable Income 100,000
Less: Corporate Tax
MCIT (higher) (2Mx2%) 40,000
Add: NOLCO 500,000
Earning from Regular Income, net 560,000
Dividend Income (exempt) 30,000
Interest Income- bank (net) (5000x80%) 40,000
Net Gain, stocks (5%,10%) 185,000
Net Gain, land (500,000 – 150,000) 350,000
Total Earnings 1,165,000
Less: Dividends Declared (100,000)
R Appropriation
TG (50,000)
Plant Expansion (150,000)
IA Earnings 865,000
Multiply by: 10%
Improperly Accumulated Earnings 86,500
- any profit remitted by a branch to its head office abroad
- 15% bank profit remittance tax is = final tax
- the income should arise from the business activity in which the corporation is engaged

SCOPE of the BRANCH PROFIT REMITTANCE TAX

- it covers the remittance of all resident foreign corporation including ROHQs of multinational
company, FCDUs, or OBUs of foreign banks, and international carriers, except PEZA-registered
entities
- remittance from prior year earnings is still taxable
◦ Even without actual remittance of profits abroad, indirect remittance such as the ff are still subject to
profit remittance tax.

1. Remittance of profits to a resident affiliate or to a Philippine Regional Operating HQs of the home
office.

2. Transfer of net profits to increase the branch assigned capital account

 REMITTING ENTITY TO ITS HEAD OFFICE TAX RATE

- branch of resident foreign corporation - 15% of branch remittance

- subsidiary of a foreign corporation through - 30% final tax, 15% if tax

Divided declaration sparing rule applies

- branch of domestic corporation - not subject to tax

PARTNERSHIPS
◦ contract between two or more persons bind themselves to contribute money, property, or industry to a
common fund to engage in profitable activities with the intention or dividing the profit among
themselves

TWO TYPES:

a. General Professional Partnership

b. General Co-Partnership
◦ formed for the sole purpose of exercising their common profession

◦ General Professional Partnership

> exempt from Income Tax as an entity
> however, it is required to file a tax return for its income for the purpose of furnishing information as to the
share in the gains or profits
1. Partners in GPP, liable for income tax in their separate and individual capacities.
2. Each partner shall report his dist share, actually or constructively received in the net income
of the partnership of GI.

creditable w/holding tax = 10%  if income payment CY does not exceed P720,000
= 15%  if income payment exceeds P720,000
3. GR: partner is deemed to have elected itemized deduction unless:
- he declares his share in gross income was not previously reduced by his share of the itemized
deductions
4. For purposes of computing the dist share of the partners, the NI of the partnership shall be computed
in the same manner as that of a corporation.
NOTE: If the GPP engaged in commercial activity, everything will be subjected to RCIT and MCIT (starting
4th year of operation)
CAPITAL ASSES TRANSACTION
o if partnership = GGP
not subject to FWTX = used holding period
o if partnership = Commercial Partnership
subject to COTX; 5%, 10% = if stockholder is the partner in the partnership
 IF GPP
only the NI from professional operation shall be included in the taxable distributive share of each
partner.

 IF COMMERCIAL PARTNERSHIP
The NI for distribution that will be subject to Final Tax (10%) should include ALL INCOME
subjected to NORMAL TAX and FINAL TAXES
 IF GPP
taxed as the same manner as individual citizen and resident aliens (if with reciprocity)
Share in NI of part XX
less: PE XX
net taxable Income XX
Tax is bared on tax table
 IF COMMERCIAL PARTNERSHIP
Share in NI of partnership XX
Multiply by: Final Tax Rate on “Dividends” 20% non residents
Tax on Share ( Final Tax) XX
There is co-ownership when more than one person acquired the right to own a piece of property
or properties

o Ownership maybe due to succession or donation

o tax exempt (activities of co-owners are usually intended to preserve the property)

o the co-ownership is exempted but the income derived by CO-OWNERS, shall be reported in his
income tax return (whether actually or constructively received)
o co-ownership is formed voluntarily (upon agreement of parties)

o co-owner reinvented his share in the co-ownership to produce another income generation
activity

o inherited property remained UNDIVIDED FOR MORE THAN ten years and no attempt was never
made to divide the same among the co-heirs.
o a business activity that is organized o established only for a temporary or short period of time

o it is dissolved once its business objective is accomplished

o unincorporated JV they are taxed like a corporation

o the share of the JV partners will no longer be taxable to them because they partake of Dividens
if paid to a domestic corporation TAX EXEMPT INTERCORPORATE DIVIDENDS.

o a JV for construction project of the Government is not subjected to income tax

 TAXABLE ESTATES
o an estate is an income tax payer is under Judicial or Administrative Settlement
o A taxable estate treated an individual and is allowed ₱20,000 personal exemption.(DELETED IN TRAIN LAW)
o If and estate is under extra judicial settlement, the estate is NOT a tax payer; the income of the estate is taxable
to the heirs.

TAXABLE TRUSTS
o An irrevocable trust, is a separate and distinct taxable entity
o It is treated as an individual tax payer; and is allowed ₱20,000 personal exemption. (DELETED IN TRAIN LAW)
o A revocable trust is not a taxpayer and is treated as a pass through entity w/c income is taxable to the grantor-
trustor.