TAX ON CORPORATION 09/29/2020

NOTES IN TAX ON CORPORATION

1. Classification of corporate taxpayers

a. Domestic Corporation
b. Resident Foreign Corporation
c. Nonresident Foreign Corporation

Notes:

1) Corporation, as defined by the NIRC, includes partnerships, no matter how created or organized, joint-
stock companies, joint accounts (cuentas en participacion), association, or insurance companies, but does
not include general professional partnerships and a joint venture or consortium 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.

2) Domestic Corporation, as defined by the NIRC, means corporation created or organized in the Philippines
or under its laws.

3) Foreign Corporation, as defined by NIRC, means corporation which is not domestic.

4) Resident Foreign Corporation, as defined by the NIRFC, means foreign corporation engaged in trade or
business within the Philippines.

5) Nonresident foreign corporation, as defined under the NIRC, means foreign corporation not engaged in
trade or business within the Philippines.

2. Income subject to tax and type of tax

a. Taxable Income - Normal Tax (NT)

- Gross Income Tax (GIT
- Minimum Corporate Income Tax (MCIT)

b. Passive Income - Final Tax (FT)

c. Capital Gain - Capital Gain Tax (CGT)

3. Domestic Corporation and Applicable Income Taxes

A. For Taxable Income

TYPE OF TAX TAX BASE TAX RATE

(a) Normal Tax Taxable Income 35%/30%
(b) Gross Income Gross Income 15%
(c) Minimum Corporate Income Tax Gross Income 2%

Notes:

1) Taxable income shall include income from all sources.

RA 9337 provides that an income tax of 35%/30% shall be imposed upon the taxable income derived
during each taxable year from all sources within and without the Philippines by domestic corporations.

2) Taxable income means gross income less allowable deductions.

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3) For GIT purposes, gross income means gross sales less sales returns, discounts and allowances and cost
of goods sold.

Cost of goods sold means all business expenses directly incurred to produce the merchandise to bring
them to their present location and use.

For a trading or merchandising concern, cost of goods sold shall include the invoice cost of the goods
sold, plus import duties, freight in transporting the goods to the place where the goods are actually sold,
including insurance while the goods are in transit.

For a manufacturing concern, cost of goods manufactured and sold shall include all costs of production
of finished goods, such as raw materials used, direct labor and manufacturing overhead, freight cost,
insurance premiums and other costs incurred to bring the raw materials to the factory or warehouse.

In the case of taxpayers engaged in the sale of services, ‘gross income’ means gross receipts less sales
returns, allowances and discounts.

The option to be taxed based on gross income shall be available only firms whose ratio of cost of sales
to gross sales or receipts from all sources does not exceed 55%.

The election of the gross income tax option by the corporation shall be irrevocable for 3 years
consecutive taxable years during which the corporation is qualified under the scheme.

4) A minimum corporate income tax of 2% of the gross income as of the end of the taxable year,
beginning on the fourth year immediately following the year in which such corporation commenced its
business operations, when the minimum income tax is greater than the normal tax.

Any excess of the minimum corporate income tax over the normal tax shall be carried forward and
credited against the normal income tax for the three (3) immediately succeeding taxable year.

For MCIT purposes, ‘gross income’ means gross sales less sales returns, discounts and allowances and
cost of goods sold.

‘Cost of goods sold” includes all business expenses directly incurred to produce the merchandise to
bring them to their present location and use.

For trading or merchandising concern, ‘cost of goods sold’ means invoice cost of goods sold, plus
import duties, freight in transporting the goods to the place where the goods are actually sold including
insurance while the goods are in transit.

5) For a manufacturing concern, ‘cost of goods manufactures and sold’ means all cost of production of
finished goods, such as raw materials used, direct labor cost and manufacturing overhead, freight cost,
insurance premiums and other costs incurred to bring the raw materials to the factory or warehouse.

In the case of taxpayers engaged in the sale of service, ‘gross income’ means gross receipts less sales
returns, allowances, discounts and cost of services. ‘Cost of services’ shall mean all direct costs and
expenses necessarily incurred to provide the services required by the customers and clients including
(A) salaries and employee benefits of personnel, consultants and specialists directly rendering the
service and (B) cost of facilities directly utilized in providing the service such as depreciation or rental
of equipment used and cost of supplies. In case of banks, ‘cost of services’ shall include interest
expense.

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The Secretary of Finance is authorized, under the NIRC to suspend the imposition of the minimum
corporate income tax on any corporation (a) which suffers losses on account of prolonged labor
dispute, or (b) because of force majeure, or (c) because of legitimate business reverses.

B. For Passive Income

a. Interest on currency bank deposit 20%
b. Royalties 20%
c. Interest income derived by a domestic corporation from a depository bank
under the expanded foreign currency deposit system 7 ½%
d. Dividends received by a domestic corporation from another domestic
corporation. Exempt

Notes:

1) Passive income shall include derived from sources within the Philippines.

2) Income derived by a depository bank under the expanded foreign currency deposit system from foreign
currency transactions with local commercial banks and interest income from foreign currency loans
granted by such depository banks under said expanded foreign currency deposit system to residents are
subject to final income tax at the rate of 10%.

Any income of nonresidents, whether individuals or corporations, from transactions with depository
banks under the expanded system is exempt from income tax.

C. For Capital Gain

a. Capital Gain from Sale of Shares of Stock not Traded in the Stock Exchange

Not over P100,000 5%

On any amount in excess of P100,000 10%

b. Capital Gain from Sale of Real Property

6% of gross selling price or the fair market value, whichever is higher.

Notes:

1) The capital gain tax on sale of shares of stock shall be imposed upon the net capital gains realized
during the taxable year from the sale, barter, exchange or other disposition of shares of stock in a
domestic corporation, except shares sold, or disposed of through the stock exchange.

2) The capital gain tax on real property is imposed on the gain presumed to have been realized on the sale,
exchange or disposition of lands and/or buildings which are not actually used in the business of a
corporation and are treated as capital assets, based on the gross selling price or fair market value,
whichever is higher.

D. Special rules for special corporations

TAXPAYER TAX BASE RATE
a. Proprietary educational institution Taxable Income 10%
b. Hospitals which are nonprofit Taxable Income 10%
c. Government owned or controlled corporations (see notes) (see notes)

Notes:

1) The Constitution expressly exempts non-stock, non-profit educational institutions from taxes.

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All revenues and assets of non-stock, non-profit educational institutions used actually, directly, and
exclusively for educational purposes shall be exempt from taxes and duties. Art. 14, Sec. 4 (3).

2) If the gross income from unrelated trade, business or other activity of a proprietary educational
institution or non-profit hospital exceeds 50% of the total gross income derived by such educational
institutions or hospitals from all sources, the tax prescribed on ordinary corporations shall be imposed
on the entire taxable income.

The term unrelated trade, business or other activity 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.

3) Government owned or controlled corporations are subject to the same tax imposed on ordinary
corporations engaged in similar business or industry.

The following government owned or controlled corporations are exempt from income tax:
a. Government Service Insurance System (GSIS)
b. Social Security System (SSS)
c. Philippine Health Insurance Corporation (PHIC)
d. Philippine Charity Sweepstakes Office (PCSO)

4. Resident foreign corporation and applicable income taxes

A. For Taxable Income

TYPE OF TAX TAX BASE TAX RATE

(a) Normal Tax Taxable Income 35%/30%
(b) Gross Income Gross Income 15%
(c) Minimum Corporate Income Tax Gross Income 2%

Notes:

1) Taxable income shall include income derived from sources within.

RA 9337 provides that a corporation organized, authorized, or existing under the laws of any foreign
country, engaged in trade or business within the Philippines shall be subject to an income equivalent to
35%/30% of the taxable income derived in the preceding taxable year from all sources within the
Philippines.

2) Rules on GIT applicable to domestic corporations are also applicable to resident foreign corporations.

3) Rules on MCIT applicable to domestic corporations are also applicable to resident foreign corporations.

4) Branch profit remittance tax. Any profit remitted by a branch to its head office shall be subject to a tax
of 15% which shall be based on the total profits applied or earmarked for remittance without any
deduction for the tax component thereof.

Interests, dividends, rents, royalties, including remuneration for technical services, salaries, wages
premiums, annuities, emoluments, or other fixed or determinable annual, periodic or casual gains,
profits, income and capital gains received by a foreign corporation during each taxable year from all
sources within the Philippines shall not be treated as branch profits unless the same are effectively
connected with the conduct of its trade or business in the Philippines.

B. For Passive Income

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a. Interest on currency bank deposit 20%

b. Royalties 20%
c. Interest income derived by a domestic corporation from a depository bank
under the expanded foreign currency deposit system 7 ½%
d. Dividends received by a domestic corporation from another domestic
corporation. Exempt

Notes:

1) Passive income shall include income derived from sources within the Philippines.

2) Income derived by a depository bank under the expanded foreign currency deposit system from foreign
currency transactions with local commercial banks and interest income from foreign currency loans
granted by such depository banks under said expanded foreign currency deposit system to residents are
subject to final income tax at the rate of 10%.

Any income of nonresidents, whether individuals or corporations, from transactions with depository
banks under the expanded system is exempt from income tax.

C. For capital gain

Capital gains from Sale of Shares of Stock not Traded in the Stock Exchange

Not over P100,000 5%

On any amount in excess of P100,000 10%

Notes:

1) The capital gain tax on sale of shares of stock shall be imposed upon the net capital gains realized
during the taxable year from the sale, barter, exchange or other disposition of shares of stock in a
domestic corporation, except shares sold or disposed of through the stock exchange.

2) There is no capital gain tax on sale of property.

D. Special for special corporations

TAXPAYER TAX BASE RATE

a. International carrier doing business in the Philippines Gross Philippine Billings 2½
b. Regional or area headquarters of Multinational
Companies Exempt Exempt
c. Regional operating headquarters of Multinational
Companies Taxable Income 10%

Notes:

1) For International Air Carrier, the term “Gross Philippine Billings” refers to the amount of gross
revenue derived from carriage of persons, excess baggage, cargo and mail originating from the
Philippines in a continuous and uninterrupted flight, irrespective of the place of sale or issue and the
place of payment of the ticket or passage document.

2) For International Shipping, the term “Gross Philippine Billings” means gross revenue whether for
passenger, cargo or mail originating from the Philippines up to final destination, regardless of the place
of sale or payments of the passage or freight documents.

5. Nonresident foreign corporation and applicable income taxes

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A. For Taxable Income

TAXABLE INCOME TAX BASE TAX RATE

Interests, dividends, rents, royalties, salaries, premium
(except reinsurance premiums), annuities, emoluments
or other fixed or determinable annual, periodic or casual
gains, profits and income, and capital gains, except
capital gains subject to CGT. Gross Income 35%/30%

Notes:

1) Taxable income shall include income derived from sources within.

RA 9337 provides that a foreign corporation not engaged in trade or business in the Philippines shall
pay a tax equal to 35%/30% of the gross income received during each taxable year from all sources
within the Philippines.

2) Rules on GIT applicable to domestic corporations are not applicable to nonresident foreign
corporations.

Rules of MCIT applicable to domestic corporations are not applicable to nonresident foreign
corporations.

B. For Passive Income

a. Interest on Foreign Loans 20%
b. Dividends received from a domestic corporation 15%

Note: Passive income shall include income derived from all sources within the Philippines.

C. For capital gain

Capital gain from Sale of Shares of Stock not Traded in the Stock Exchange

Not over P100,000 5%

On any amount in excess of P100,000 10%

Notes:

1) The capital gain tax on sale of share of stock shall be imposed upon the net capital gains realized
during the taxable year from the sale, barter, exchange or other disposition of shares of stock in a
domestic corporation, except shares sold, or disposed of through the stock exchange.

2) There is no capital gain tax on sale of real property.

D. Special rules for special corporations

TAXPAYER TAX BASE RATE
a. Nonresident Cinematographic Film Owner;
Lessor or Distributor Gross Income 25%
b. Nonresident Owner or Lessor of Vessels
Chartered by Philippine Nationals Gross rental, lease or charter fees 4½%
c. Nonresident Owner or Lessor of Aircraft,
Machineries and Other Equipment Gross rental or fees 7½%

6. Improperly Accumulated Taxable Income (IAE Tax)

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Improperly accumulated taxable income 10%

Notes:

1) Improperly accumulated taxable income is computed using the following formula:

Taxable Income xx
Add:
Income exempt from tax xx
Income excluded from gross income xx
Income subject to final tax xx
Amount of net operating loss carry-over deducted xx

Less:
Dividends actually or constructively paid xx
Income tax paid for the taxable year xx
Amount reserved for the reasonable needs of the
business emanating from the covered year’s
taxable income (Revenue Regulation) xx
Improperly accumulated taxable income xx

2) Improperly accumulated earnings tax shall be imposed on every corporation formed or availed for the
purpose of avoiding the income tax with respect to its shareholder or the shareholders at any other
corporation, by permitting earnings and profits to accumulate instead of being divided or distributed.

3) The fact that the earnings or profits of a corporation are permitted to accumulate beyond the reasonable
needs of the business shall be determinative of the purpose to avoid the tax upon its shareholders or
members unless the corporation proves on the contrary.

4) The term ‘reasonable needs of the business’ means reasonably anticipated needs of the business.

5) The fact that any corporation is mere holding company or investment company shall be prima facie
evidence of a purpose to avoid the tax upon its shareholders or members.

6) The Improperly Accumulated Earnings Tax does not apply to the following corporations:
a. Banks and other non-bank financial intermediaries;
b. Insurance companies;
c. Publicly-held corporations;
d. Taxable partnerships;
e. General professional partnerships;
f. Non-taxable joint ventures;
g. Enterprises duly registered with the Philippine Economic Zone Authority (PEZA) under RA 7916, and
enterprises registered pursuant to the Bases Conversion and Development Act of 1992 under RA 7227.

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