MODULE 5: INCOME TAX ON CORPORATION Classification and Taxability of Income of a Corporation

LEARNING OBJECTIVES
At the end if this module you are expected you are expected to:
1. Define and classify corporate taxpayers;
2. Identify the classification and taxability of income of a corporation;
3. Discuss the concept of Normal Corporate Income Tax (NCIT) and
Minimum Corporate Income Tax (MCIT);
4. Compute income taxes using the Normal Corporate Income Tax
(NCIT); CORPORATION
TAXABLE NON-TAXABLE
5. Compute income taxes using Minimum Corporate Income Tax (MCIT);
Subject to Subject to 1. Non-profit labor, agricultural or
6. Discuss the treatment of a Special Corporation;
BASIC TAX FINAL TAX horticultural organizations
7. Compute income tax due of Special Corporate Taxpayers 1. Business 1. Gains from 2. Non-stock and non-profit mutual
Income dealings in savings and cooperative banks
Corporate Taxpayers 2. Rent Income property 3. Non-stock organizations
- Is an artificial being created by operation of law, having the right of 3. Gains from 2. Passive operating for the exclusive benefits
succession and the powers, attributes and properties expressly authorized dealings in Income of the members like providing
by law or incident to its existence. property payment of life, sickness, and
4. Passive accident benefits
Classification of Corporation: Income not 4. Non-stock corporations operating
subject to final exclusively for religious, charitable,
1. Domestic
tax scientific, athletic, or cultural
- Organized under the existing laws of the Philippines
purposes or for the rehabilitation of
- Taxable on income earned within and without the Gross Taxable veterans, provided that their assets
Philippines Income or income shall not accrue to the
Less: Allowable benefit of any member
2. Foreign Deductions 5. Non-profit business leagues,
- Organized under the laws of a foreign country Net Taxable chambers of commerce or boards of
- Taxable on income earned within the Philippines only Income trade
- Classification of foreign corporation: 6. Non-profit civic league or
a. Resident foreign corporations organizations organized for the
promotion of social welfare
b. Non-resident foreign corporation
7. Non-stock and non-profit
CLASSIFICATION OF INCOME APPLICABLE TAX
educational institutions
Business Income Basic Corporate Tax
8. Government educational
2% or 30%
institutions
Passive Income Final Tax 9. Non-profit organizations such as
Capital Gain a. Cooperative telephone
companies
 b. Fire insurance companies Net
c. Mutual ditch or irrigation Taxa
30
companies NCIT ble
%
Resident Inco Resident
d. Mutual typhoon Foreign me Foreign
association with purely Within
Corporat Gross Corporat
local operation whose ion Taxa ion
income is derived only MCIT ble 2% Within
Inco
from assessment, dues, me
and fees collected from Non- Gross Non-
members to meet the resident Taxa
30
resident
needs and expenses of the Foreign Within NCIT ble Foreign
%
Corporat Inco Corporat
organization. ion me ion
10. Non-profit organizations of
 Farmers
 Fruit growers
 Any other similar Normal Corporate Income Tax (NCIT)
association for the
- 30% tax imposed on corporations, either domestic or foreign, that
purpose of marketing
are classified as ordinary
the products of their
members
ILLUSTRATION 1
ABC Corporation has the following data for the first year of business operations
Philippines Australia
Gross Sales 8,000,000 7,000,000
CLASSIFICATION of CORPORATE TAXPAYERS Cost of Sales 6,200,000 1,300,000
ORDINARY CORPORATE TAXPAYERS SPECIAL CORPORATE TAXPAYERS Allowable business expenses 1,700,000 1,040,000
Ta Ta Required: Compute the amount of corporate tax liability under each of the following cases:
Tax Tax Tax
Taxabil Tax x Taxabil x 1. Domestic corporation using itemized deduction
Liabilit Liabil Ba
ity Base Rat ity Rat 2. Domestic corporation using OSD
y ity se
e e 3. Resident foreign corporation using itemized deduction
Net 4. Resident foreign corporation using OSD
Taxa 5. Non-resident foreign corporations
30
NCIT ble
%
Inco
Answer:
me
1. Domestic corporation using itemized deduction
Domesti MCIT Domesti
Within Within Special Tax Base
c c
and and and Special Tax PHILIPPINES AUSTRALIA TOTAL
Corporat Whiche Corporat
Without Without Rate Gross Sales P 8,000,000 7,000,000 15,000,000
ion ver is ion
HIGHE Less: Cost of Sales 6,200,000 1,300,000 7,500,000
R Gross Profit 1,800,000 5,700,000 7,500,000
betwee Plus: Other Income 600,000 400,000 1,000,000
n NCIT Total Income 2,400,000 6,100,000 8,500,000
& MCIT Less: Allowable Deductions 1,700,000 1,040,000 2,740,000
Net Taxable Income P 700,000 5,060,000 5,760,000
 Net IncomeTax RateIncome Tax Due NCIT5,500,00030%1,650,000
NCIT 1,728,000
MCIT 150,000 Gross ProfitTax RateIncome Tax Due MCIT7,500,0002%150,000

Tax to be paid is the NCIT, since it is higher than the calculated MCIT 1,728,000

Domestic corporations are taxable for income earned both in the Philippines and
abroad and are subject to either normal corporate income tax (NCIT) of 30% of net
income or minimum corporate income tax (MCIT) of 2% of gross profit, whichever is
3.Resident foreign corporation using itemized deduction
higher.
Plus: Other Income 600,000 400,000 1,000,000 PHILIPPINES
Net Income Tax Rate Income Tax Due Gross Sales P 8,000,000
NCIT 5,760,000 30% 1,728,000 Less: Cost of Sales 6,200,000
Gross Profit 1,800,000
Plus: Other Income 600,000
Gross Profit Tax Rate Income Tax Due Total Income 2,400,000
MCIT 7,500,000 2% 150,000 Less: Allowable Deductions 1,700,000
Net Taxable Income P 700,000

NCIT 210,000
2. Domestic corporation using OSD MCIT 36,000

PHILIPPINES AUSTRALIA TOTAL Tax to be paid is the NCIT 210,000

Gross Sales P 8,000,000 7,000,000 15,000,000
Less: Cost of Sales 6,200,000 1,300,000 7,500,000
Gross Profit 1,800,000 5,700,000 7,500,000 Foreign
corporations, whether resident or nonresident, are taxable for income earned in the Philippines
Total Income 2,400,000 6,100,000 8,500,000
Less: Allowable Deductions 720,000 2,280,000 3,000,000 Net IncomeTax RateIncome Tax Due NCIT700,00030%210,000
Net Taxable Income P 1,680,000 3,820,000 5,500,000
Gross ProfitTax RateIncome Tax Due MCIT1,800,0002%36,000
NCIT 1,650,000
MCIT 150,000

Tax to be paid is the NCIT, since it is higher than the calculated MCIT 1,650,000

If a corporation opted to use optional standard deduction (OSD), such corporation

4. Resident foreign corporation using OSD
are no longer allowed to claim the line by line item of expenses it incurred. The
deductions to total income earned will be based on a fixed rate of 40% of gross PHILIPPINES
taxable income (gross profit, as the case maybe). Gross Sales P 8,000,000
Less: Cost of Sales 6,200,000
Philippines Australia Total Gross Profit 1,800,000
Gross Profit 1,800,000 5,700,000.00 7,500,000 Plus: Other Income 600,000
OSD Rate 40% 40% 40% Total Income 2,400,000
Allowable Deductions 720,000 2,280,000 3,000,000 Less: Allowable Deductions 720,000
Net Taxable Income P 1,680,000

NCIT 504,000
 MCIT 36,000 -
However, the Secretary of Finance is authorized to
Tax to be paid is the NCIT 504,000
suspend the imposition of MCIT on any corporation
which suffers losses because of:
Philippines 1,800,000  Prolonged labor dispute
Gross Profit OSD Rate 40%
 Force majeure
Allowable Deductions720,000 4. Applicable only to ordinary domestic and resident foreign
Net IncomeTax RateIncome Tax Due NCIT1,680,00030%504,000
corporations
5. NOT applicable to the following domestic corporations since
Gross ProfitTax RateIncome Tax Due MCIT1,800,0002%36,000 these groups are not subject to MCIT:
a. Proprietary educational institutions
b. Non-profit hospital
c. Banking institutions under the expanded foreign
currency deposit system
5.Non-resident foreign corporations d. Corporations under a special income tax regime such as
PEZA law and the Bases Conversion Development Act
Less: Allowable Deductions 720,000
Gross Taxable Income P 1,680,000 6. Tax liability is being calculated at 2% based on gross income
7. Starting on the fourth year of operation, the corporate income tax
Tax to be calculated is only the NCIT liability shall be based on
504,000
o NCIT of 30%
Non-resident foreign corporations are not subject to 2% minimum corporate income tax. Hence, such corporate taxpayeror will only be liable to the Philippine
whichever is HIGHER
government for the 30% norma
o MCIT of 2%
Net IncomeTax Rate 8. Excess of MCIT over NCIT is creditable
- Any excess of the MCIT over NCIT shall be carried
Income Tax Due
504,000 forward and credited (deducted) against the NCIT for
NCIT1,680,00030%
the three succeeding taxable years, provided that, the
NCIT should be higher than MCIT in the year to
which the excess MCIT is forwarded.
Minimum Corporate Income Tax
- 2% tax on gross income imposed on corporations, either domestic or
foreign, that are classified as ordinary
- Guidelines in MCIT: QUARTERLY AND ANNUAL CORPORATE TAX DUE
1. Applicable beginning on the fourth year of business 1. The computation and the payment of MCIT shall also be applied at the time of filing
the quarterly corporate income tax
operation 2. If in the computations of the tax due for the taxable quarter, MCIT is higher than
2. Applicable even if a corporation has zero taxable income the quarterly NCIT, the amount of tax to be paid at the time of filing the quarterly
corporate income tax return shall be MCIT
3. Applicable even if a corporation incurs a loss
3.In the payment of said quarterly MCIT, the following guidelines shall apply Net Loss Tax RateIncome Tax Due
Allowed to be credited? -30%-
NCIT
excess MCIT from the previous taxable years No
excess MCIT from the previous quarters Yes
expanded withholding tax Yes Gross IncomeTax RateIncome Tax Due MCIT17,000,0002%340,000
Quarterly NCIT payment Yes
On 2016, the corporation suffered from a net loss, hence, the company is not subject to the NC

2017
Net Taxable
ILLUSTRATION 2 Income/ (Net Loss)1,200,000
The records of a domestic corporation which commenced operation in 2010 are as
follows: Net IncomeTax RateIncome Tax Due NCIT1,200,00030%360,000
2015 2016 2017
Gross Income P15,000,000 P17,000,000 P19,000,000
Allowable Deductions (14,500,000) (17,200,000) (17,800,000)
Required: Determine the income tax payable for 2015, 2016 and 2017
Answer:

2015 2016 2017

Gross Income Tax Rate Income Tax Due
Gross Income P 15,000,000 P 17,000,000 P 19,000,000
Less: Allowable Deductions 14,500,000 17,200,000 17,800,000 MCIT 19,000,000 2% 380,000
Net Taxable Income P 500,000 P (200,000) P 1,200,000
On 2017, the corporation is liable for P380,000, since the MCIT is higher than the
NCIT 150,000 - 360,000 NCIT.
MCIT 300,000 340,000 380,000

Income Tax Payable P 300,000 P 340,000 P 380,000

ILLUSTRATION 3
XYZ Corporation’s normal corporate income tax, minimum corporate income tax, income
2015 taxes withheld from 1st to 4th quarter including excess MCIT and excess
Net Taxable withholding taxes from prior years are as follows:
Income/ (Net Loss) 500,000 Quarter NCIT MCIT Taxes Excess Excess
withheld MCIT prior Withholdin
Net Income Tax Rate Income Tax Due during year g tax prior
NCIT 500,000 30% 150,000 the year year
1st P250,000 P210,000 P90,000 P110,000 P20,000
2nd 290,000 550,000 110,000
Gross Income Tax Rate Income Tax Due 550,000 250,000 130,000
3rd
MCIT 15,000,000 2% 300,000 450,000 250,000 120,000
4th
Required: Determine the following:
on 2015, the corporation is liable for P300,000, since the MCIT is higher than the 1. Income tax payable for the first quarter
NCIT. 2. Income tax payable for the second quarter
3. Income tax payable for the third quarter
2016 4. Annual income tax payable
Net Taxable
Income/ (Net Loss) (200,000.00)
Answer:
1. Income tax payable for the first quarter
 Excess MCIT-Prior Year Tax -
Q1 Paid-Previous Quarter (30,000) (30,000)
MCIT 210,000
NCIT 250,000 Income Tax Still Payable P 510,000

Income Tax Payable P 250,000 On the second quarter, the corporation is liable to pay the MCIT. On this case,
excess MCIT that has been carriesuch d over from the previous quarter cannot be
NCIT 250,000 or deducted against MCIT itself. offset Remember that any excess of the MCIT
Withholding tax-Prior Year (20,000) carried forward and credited (Deshall be ducted) against the NCIT only. Hence,
Withholding tax-Current Year (90,000) should be higher than MCIT in tthe NCIY he year or quarter to which the
Excess MCIT-Prior Year (110,000) forwarded. excess MCIT is
Tax Paid-Previous Quarter -

Income Tax Still Payable P 30,000 3. Income tax payable for

the third quarter

the total tax liability of a corporation is either the NCIT or MCIT, whichever is higher. Q1 Q2 Q3 TOTAL
However, there are already payments made to the government that can be MCIT 210,000 550,000 250,000 1,010,000
deducted
to the total amount of tax liability to arrive at the amount still payable to the NCIT 250,000 290,000 550,000 1,090,000
government. These amounts are called “tax credits”.
Income Tax Payable P 1,090,000
These tax credits are the:
 Withholding tax – a government requirement for the payer of an item of NCIT 1,090,000
income to withhold or deduct tax from the payment and pay that tax to the Withholding tax-Prior Year (20,000)
government. Withholding tax-Current Year 90,000 110,000 130,000 (330,000)
 Excess MCIT – this amount is the difference between the NCIT and MCIT. Excess MCIT-Prior Year (110,000)
This excess arises when during the taxable year, a corporation has Tax Paid-Previous Quarter 30,000 510,000 (540,000)
become
liable for MCIT instead of NCIT. In this case, such excess is only deductible
to total income tax liability if the corporation is liable for NCIT. If the Income Tax Still Payable P 90,000
corporation is liable to pay an MCIT, then such excess could not be
deducted.
 Tax payments made on the previous quarters 4. Annual income tax payable

Q1 Q2 Q3 Q4 TOTAL
2. Income tax payable for the second quarter MCIT 210,000 550,000 250,000 250,000 1,260,000
Income NCIT
Tax 250,000 290,000 550,000 450,000 1,540,000
Q1 Q2 TOTAL Payable
MCIT 210,000 550,000 760,000
P 1,540,000
NCIT 250,000 290,000 540,000

Income Tax Payable P 760,000 MCIT 1,540,000

Withholding tax-
(20,000)
MCIT 760,000 Prior Year
Withholding tax-Prior Year (20,000) Withholding tax-
90,000 110,000 130,000 120,000 (450,000)
Withholding tax-Current Year 90,000 110,000 (200,000) Current Year
 Excess MCIT-Prior Year Corporat ion Inco me Corporat ion
Tax Paid-Previous (110,000)
Quarter
30,000510,000 90,000 (630,000)

Income Tax Still

Payable P330,000
Special Corporation

SPECIAL DOMESTIC CORPORATION

CLASSIFICATION APPLICABLE TAX
1. Proprietary educational
10% of net taxable income
institutions
CLASSIFICATION of CORPORATE TAXPAYERS 2. Non-profit hospitals 10% of net taxable income
ORDINARY CORPORATE TAXPAYERS SPECIAL CORPORATE TAXPAYERS 3. Government Service
Ta Ta Insurance System (GSIS)
Tax Tax Tax
Taxabil Tax x Taxabil x
ity
Liabilit
Base Rat ity
Liabil Ba
Rat
4. Social Security System (SSS)
y ity se 5. Philippine Health Insurance
e e Tax Exempt
Net Corporation (PHIC)
Taxa
30 6. Philippine Charity
NCIT ble
Inco
% Sweepstakes Office (PCSO)
me SPECIAL RESIDENT FOREIGN CORPORATION
Domesti MCIT Domesti CLASSIFICATION APPLICABLE TAX
Within Within
c c
Corporat and Whiche Corporat
and 1. International carrier 25% of the Philippine Gross
Without Without Billings
ion ver is ion
HIGHE  Philippine Gross Billings
R
betwee
- Gross revenue from:
n NCIT Special Tax Base  Carriage
& MCIT and Special Tax  Persons
Net Rate
 Excess
Taxa
NCIT ble
30 baggage
%
Resident Inco Resident  Cargo
Foreign
Within
me Foreign  Mail
Corporat Gross Corporat
originating from the
ion Taxa ion Within
MCIT ble 2% Philippines under the
Inco following conditions:
me o In a continuous
Non- Gross Non-
30 flight and
resident Within NCIT Taxa resident
Foreign ble
%
Foreign uninterrupted flight
o In case of
transshipment:
 portion of the Case 2 The Air Europe, an international carrier doing business in the
Philippines, provided the following data during the current
cost of the ticket
taxable year:
corresponding to Gross receipts for flight Manila to Paris P12,500,000
the leg flown (tickets sold in the Philippines)
from the Gross receipts for flight Manila to
Switzerland 6,500,000
Philippines to
(tickets sold in Switzerland)
the point of Gross receipts for flight Paris to Manila 4,500,000
transshipment (tickets sold in Paris)
Gross receipts for flight Rome to Manila 3,500,000
(tickets sold in the Philippines)
2. Offshore banking units 10% of Gross Income
Gross receipts for flight Manila to England 5,500,000
3. Branch remittances 15% of Remittances (tickets sold in the Philippines)
4. Regional area headquarters Tax Exempt The passengers were transshipped in
5. Regional operating Germany to England by another
10% Taxable Income airline.
headquarters
Flight from Manila to Germany is nine
SPECIAL NON-RESIDENT FOREIGN CORPORATION hours and flight from Germany to
CLASSIFICATION APPLICABLE TAX England is three hours
1. Owner, Lessor, or Distributor Operating expenses in Philippines 2,500,000
25% of the Gross Income Answer (CASE 2)
of Cinematographic film
Gross receipts for
2. Lessor of machinery, flight Manila to Paris P 12,500,000
7.5% of the Gross Income
equipment, aircraft and others Gross receipts for
flight Manila to 6,500,000
3. Lessor of vessels chartered
4.5% of the Gross Income Switzerland
by Philippines Nationals Gross receipts for
flight Manila to 4,125,000
England
ILLUSTRATION
Total 23,125,000
Case 1 The following data were reported for 20xx
Tax Rate 3%
business activities of Students University,
a private educational institution: Income Tax
Payable P 578,125
Tuition fees 525,000
School business related expenses 325,000
For an international carrier, only those
Answer (CASE 1)
gross revenue from carriage, persons,
Tuition Fees P 525,000
excess baggage, cargo and mail
School business (325,000) originating from the Philippines are
related expenses
subject to tax. Thus, only receipts for flight
Net Taxable Income 200,000
from Manila will be included in the
Tax rate 10%
computation of tax.
Income Tax
P 20,000
Payable And, on the case of transshipment from
Manila to Germany for flight of Manila to
A proprietary educational institution is England, only the portion of the cost of the
classified as a special corporation, hence ticket corresponding to the leg flown from
a special tax rate should be used. the Philippines to the point of
transshipment will be considered on tax
A 10% tax on net taxable income is being computation. Hence, calculated as follows:
imposed to this group of taxpayer.
 Gross receipts for flight Manila to
England
P5,500,000*(9hrs/12hrs) = P4,125,000

• End of Module 7 •

Links to Supplemental Readings

1. http://www.chanrobles.com/legal6nircmain.htm#.WW14qR
UrLIU
2. http://www.bir.gov.ph/index.php/tax-code.html#title1
3. http://www.bir.gov.ph/index.php/tax-code.html#title2

Links to Other Video Lectures

1. https://www.youtube.com/watch?v=MHlR_SiyVME
2. https://www.youtube.com/watch?v=LwesvsAwctY
3. https://www.youtube.com/watch?v=nEkSZtKuRjQ

References
National Internal Revenue Code of 1997 . (n.d.). Retrieved from
http://www.bir.gov.ph/index.php/tax-code.html.
Aduana, N. L. (2012). Simplified and procedural handbook on income
taxation (2nd Edition ed.). Quezon City: C & E Publishing Inc.
Garcia, E. R., & Tabag, E. D. (2014). Income Taxation (3rd Edition ed.).
Quezon City: Good Dreams Publishing
Valencia, E. G. (2016). Income Taxation (7th Edition ed.). Baguio City:
Valencia Educational Supply.