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TAXATION OF

CORPORATION

Prepared by: Group 1


INTRODUCTION

The discussion on taxation of corporations is divided into


two chapters- this chapter and the next. This chapter deals with
the normal tax liability and passive income of corporations.
Minimum corporate income tax (MCIT), improperly accumulated
earnings tax (IAET), and gross income tax (GIT), are discussed
in the next chapter.

The term “normal income tax” shall mean the income tax
rates prescribed under Sections 27(A) and 28 (A) (1) of the Code
at 35% effective Jan. 1, 1997; 34% effective Jan. 1, 1998; 33%
effective Jan. 1, 1999; and 32% effective Jan. 1, 2000, and
thereafter. Last May 24, 2005, the president signed into law R.A
9337 or the Expanded Value-Added Tax Act of 2005. Under this
law, beginning Nov. 1, 2005, the corporate income tax rate shall
be 35%. This rate shall be reduced to 30% effective Jan 1, 2009.
WHAT IS CORPORATION?

 A corporation is a legal entity that is separate and distinct


from its owners. Corporations enjoy most of the rights and
responsibilities that individuals possess: they can enter
contracts, loan and borrow money, sue and be sued, hire
employees, own assets and pay taxes. Some refer to it as
a "legal person.” The term ‘corporation’ shall include
partnerships, no matter how created or organized, joint stock
companies, joint accounts, association, or insurance
companies, except 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
government.
 CORPORATION

Domestic Corporations
A domestic corporation is a corporation that is organized
in accordance with Philippines laws.

1. Domestic corporation, in general


2. Government-owned and controlled corporations
3. Taxable partnerships
4. Proprietary educational institutions
5. Non-profit hospitals
Foreign Corporations
A foreign corporation is a corporation that is
organized in accordance with laws of their respective
countries.
Types of Foreign Corporations:
 Resident foreign corporation(RFC) – a foreign corporation
which operates and conducts business in the Philippines
through a permanent establishment (i.e. a branch)

 Non-resident foreign corporation (NRFC) – a foreign


corporation which does not operate or conduct business in the
Philippines.
• General Professional Partnership. This is discussed in
Chapter 6.
• Estates and trusts. This discussed in Chapter 5.
SOURCES OF INCOME

Aside from knowing the classification of the taxpayers, the source of


income is the next important thing to determine-whether it is from within the
Philippines or without. The following ruled apply:

1. Domestic corporations are taxable on income from sources within and


without the Philippines

2. Foreign corporations whether resident or non-resident, are taxable only on


income from Philippine sources
- A partnership other than a general professional partnership is considered
a corporation and is taxable as such.

Corporation Within the Without the


Philippines Philippines
1. Domestic √ √
1. Foreign √
CATEGORIES INCOME AND TAX RATES
1. BUSINESS INCOME. Generally, business income earned by a corporation
is taxed at the following rates (Sections 27(A) and 28 (B)(1)):

Year Tax Rate


1997 35%
1998 34%
1999 33%
2000-Oct. 2005 32%
Nov. 2005- 2008 35%

2009 30%
The table below shows the specific tax rates on business income of corporate taxpayers
(domestic and resident foreign):
Description Tax Rate Tax Base

DOMESTIC CORPORATION
1.
a. In General 30% Taxable Income from all sources
b. Minimum Corporate Income tax 2% Gross income
c. Improperly Accumulated Earnings 10% Improperly Accumulated, Taxable Income
2.Proprietary Educational Institution 10% Taxable Income from all sources

3.Nom-stock, Non-Profit Hospital 10% Taxable Income from all sources

4.GOCC,Agencies& Instrumentalities (see 1a-1b)

5.National Government & LGUs (see 1a-1b)

6.Taxable Partnership (see1a-1b)

7.Exempt Corporation
a. on exempt activities 0% Taxable Income
b.om taxable activities (see 1a)
8. General Professional Partnerships Exempt

9. Corporation covered by Special Laws Rate specified under the respective special
laws
Description Tax Rate Tax Base

RESIDENT FOREIGN CORPORATION

1.
a. In General 30% Taxable Income from within the Philippines
b. Minimum Corporate Income tax 2% Gross income
c. Improperly Accumulated Earnings 10% Improperly Accumulated. Taxable Income

2.International Carriers 2.50% Gross Philippine Billings

3.Regional Operating Headquarters 10% Taxable Income

4.Corporation covered by special Laws Rate specified under the respective special
laws
5.Offshore Banking Units (OBUs) 10% Gross Taxable Income on Foreign Currency
Transaction
30% On Taxable Income Other than Foreign
Currency Transaction
6.Foreign Currency Deposit Units (FCDU) 10% Gross Taxable Income on Foreign Currency
Transaction
30% On Taxable Income Other than Foreign
Currency Transaction
Passive income. Passive income is subject to a separate final tax. These are taxed at
fixed rates ranging from 5% to 20%. Passive income is not included in gross income
computation.
ON PASSIVE INCOME DOMEST RESIDENT FOREIGN
IC
 Interests 20% 20%
Interest from deposits and yield or any other
monetary benefit from deposit substitutes and from
trust funds and similar arrangements.

 Interest income from a depository bank under 7.50% 7.5%


the expanded foreign currency deposit system

 Income derived by a depository bank under the 10% 10%


expanded foreign currency deposit system from
foreign currency transactions with local
commercial banks, including branches of foreign
banks that may be authorized by the Bangko
Sentral ng Pilipinas (BSP), including interest
income from foreign currency loans.
 Royalties 20%t 20%

 Dividends Exempt Exempt


Dividends received by a domestic/resident foreign
corporation from a domestic corporation
 Capital Gains
On the net capital gain from sale,
exchange or other disposition of shares of
stock in a domestic corporation not
traded in the stock exchange
Not over P100,000 5% 5%
Amount in excess of P100,000 10% 10%
On the capital gain presumed to have
been realized on the sale, exchange or
disposition of lands and/or buildings not
actually used in the business and treated
as capital assets, the higher value
between
Gross selling price, and
Fair market value as determined by the 6%
Commissioner
DOMESTIC AND RESIDENT FOREIGN
CORPORATIONS, IN GENERAL

Generally, the pro-forma computation of the normal income tax of


domestic and resident foreign corporation follows:

Gross Income xxx


Less; Allowable Deductions xxx
Net Income xxx
Multiply by; Tax rate 30%
Tax Due xxx

For domestic and residents’ corporations adopting the fiscal-


year accounting period, the taxable income shall be computed without
regard to the specific date when specific sales, purchases and other
transactions occur. Their income and expenses for the fiscal year shall
be deemed to have been earned and spent equally for each month of
the period.
The corporate income tax rate of 35% became effective beginning Nov.
1, 2005 (RA9337). This law presented a scenario where the months of January to
October 2005 are under the rate of 32%. Regardless of the taxable year (calendar
of fiscal) followed, the formula for determining the total tax due for the year shall
be a follow (RMC 16-06, Feb 21, 2006)

Taxable income x no. of months covered by 32% x 32% = P xx


12
Taxable income x no. of months covered by 35% x 35% = xx
12
Total tax Due Per ITR P xx
DOMESTIC CORPORATIONS, IN
PARTICULAR

Domestic Corporatio ns, in Particula r


 Rea l Esta te Invest ment Trust (REIT ), p er Rep ub lic Act 9856 and Rev enue
Regu lation s 13 -2 011 , is a sto ck co rpo ration estab lish ed in acco rd an ce with th e
Corpo ration Co de of th e Ph ilippin es an d th e ru les an d reg u lation s p ro mu lg ated
by the Sec, p rin cip ally fo r th e pu rpo se o f o wn ing inco me -g en erating real
estate assets . For tax p u rpo s es , a REIT is co n s id ered a taxp ayer eng ag ed in th e
real estate bu sin ess . Hen ce, r eal p rop erties own ed b y a REIT are con sid ered
ordinary assets.
 Inco me -g enera ting rea l esta te means real p rop erty wh ich is held fo r th e
pu rpo se of g en erating a regu lar strea m of in co me su ch as ren tals, to ll f ees and
the like, as may be further defined and identified by the SEC.
 Inv esto r securities means sh ared of stocks issu ed b y a REIT o r d eriv ativ es
thereof .
 Ov ersea s Filipino inv esto r refers to an in d ividu al citizen of the Ph ilipp ines
who is wo rk in g ab ro ad , in cludin g on e wh o has retain ed o r reacqu ired h is
Philippin e citizensh ip under R.A. 9225.
 Principa l sto ckho lder who i s d irectly o r indirectly, th e ben ef icial own er of
more than 10% of any class of investo r securities of the REIT comb in ed .
• Public company means a company listed with the exchange which has, upon and after
listing, at-least 1,000 public shareholders each owning at least 50 shares of any class and
who, in the aggregate, own at least 40% of the outstanding capital stock of the REIT at the
initial year provided, that the minimum ownership shall be increased to 67% within 3 years
from its listing.
• Distributable income net income earned for the taxable year, as adjusted for unrealized
gains and losses/expenses and impairment losses and other items in accordance with
internationally accepted accounting standards. Distributable income excludes proceeds from
the sale of the REIT’s assets that are re-invested in the REIT within 1 year from the date of
the sale.
• Taxable net income means gross income less all allowable deductions (itemized or optional
standard deductions) and the dividends distributed by a REIT out of its distributable income
as of the end of the taxable year as: (a) dividends to owners of the common shares; and (b)
dividends to owners of the preferred shares pursuant to their rights and limitations specified
in the articles of incorporation of REIT.
• Proprietary Non-Profit Educational Institutions and Hospitals. The 10% tax on the
taxable income is subject to limitation. If the gross income from unrelated trade, business or
other activity exceeds (50%) of the total gross income derived from all sources, the tax
prescribed under Section 27(a) shall be imposed on the entire taxable income
• 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.
Government-owned or -Controlled Corporations, Agencies or Instrumentalities (GOOCs). Subject to the
provisions of existing special laws or general laws, all corporations, agencies or instrumentalities owned or
controlled by the government shall pay such rate of tax upon their taxable income as are imposed by the code
upon corporations or associations engaged in a similar business, industry or activity.
The following are exempt:
1. Government Service Insurance System (GSIS)
2. Social Security System (SSS)
3. Philippine Health and Insurance Corporation (PHIC)
4. Philippine Charity Sweepstakes Office (PCSO)
5. Local Water Districts (LWD)
*PCSO is no longer exempt from income tax under TRAIN LAW

Republic act 10026 granted income tax exemption to local water districts. The law mandates that the amount
saved due to the exemption shall be used by the local water districts for capital equipment expenditure that will
result to an expanded water services coverage and improved water equality in the provinces, cities and
municipalities.

Power Sector and Assets and Liabilities Management Corporation(PSALM). RMC 11-2012 clarifies the
income tax consequences of transactions of the PSALM, they are as follow:
1. No income and WT are due from the sale of the National Power Corporation (NPC) generations assets and
other real properties to winning bidders.
2. The rental income of PSALM from the NPC generation assets and other real properties prior to its sale to
winning bidders is subject to income tax.
3. Any income to be derived by PSALM by the operation of the generation facilities is subject to income tax
and withholding tax.
4. Other income or receipt from the miscellaneous activities such as forfeiture or performance bonds, interest
income from persons other than the winning bidders and from other activities not related to PSALM’s
mandate are subject to all applicable taxes under the tax code.
• Mutual Life Insurance Companies. These companies are now
subject to the regular corporate tax rates.
• Homeowners’ Association. Association or condominium dues,
membership fees and other assessment or charges, which are held in
trust by the condominium corporation to be used solely for
administrative expenses, are excluded from the condominium
corporation’s gross income, hence, not subject to income and
withholding tax.
• Recreational Clubs. RMC 35-2012 clarifies the taxability of clubs
organized and operated exclusively for pleasure, recreation, and other
non-profit purposes. Income from whatever source, including but not
limited to membership fees, assessment dues, rental income and
service fees, of clubs organized and operated exclusively for pleasure
and recreation and other non-profit purposes, are subject to income
tax.
RESIDENT FOREIGN CORPORATIONS, IN
PARTICULAR
 International Carrier. Per Republic Act 10378 an international
carrier doing business in the Philippines shall pay a tax of two-
and one-half percent (2.50%) on its Gross Philippine Billings
(GDB) as follows
1. International Air Carrier – Gross Philippine Billing refers to
the amount of gross revenue derived from passage 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 passage documents.
2. International Shipping – Gross Philippines 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.
 Offshore Banking Units (OBUs) – income derived by offshore banking units authorized
by the BSP, from foreign currency transactions with local commercial banks, including
branches of foreign banks that may be authorized by the BSP to transact business with
offshore banking units including any interest income derived from foreign currency loans
granted to residents, shall be subject to a final income tax at ten percent (10%) of such
income.
 Regional Operating Headquarters (ROHQs) shall mean a branch established in the
Philippines by multinational companies which are engaged in any of the following
services: general administration and planning; business planning and coordination;
sourcing and procurement of raw materials, and components; corporate finance and
advisory services; marketing control and sales promotion; training and personnel
management; logistic services ; research and development services and product
development; technical support and maintenance; data processing and communication;
and business development. Regional operating headquarters shall pay a tax ten percent
(10%) of their taxable income.
 Regional or Area Headquarters (RHQs) shall mean a branch established in the
Philippines by multinational companies which headquarters do not earn or derive income
from the Philippines and which act as supervisory, communications and coordinating
center for their affiliates, subsidiaries, or branches in the Asia Pacific Region and other
foreign markets. Regional or area headquarters as such shall not be subject to income tax.
NON- RESIDENT FOREIGN CORPORATION,
IN GENERAL

The basic of tax for non-resident foreign corporations in gross


income from sources within the Philippines, such as interests,
dividends, rents, royalties, salaries premiums (except reinsurance
premiums), annuities, emoluments or other fixed or determinable
annual, periodic or casual gains, profits and income, and capital
gains.
Generally, the pro-forma computation of the income tax of non-
resident foreign corporations follows:
Gross Income XXX
Multiply by: Tax rate 30%
Tax Due XXX
NON- RESIDENT FOREIGN CORPORATION,
IN PARTICULAR

 Non-Resident Cinematographic Film Owner, Lessor or


Distributor is taxed at 25% of gross income.
 Non-Resident Owner or Lessor of Vessels Chartered by
Philippine Nationals is taxed at four and one-half percent
(4.50%) of gross rentals, lease or charter fees from leases or
charters to Filipino citizens or corporations, as approved by
Maritime Industry Authority.
 Non-Resident Owner or Lessor of Aircraft, Machinery and
Other Equipment is taxed at seven and one-half percent (7.50%)
of gross rentals, charter and other fees.
Passive Income of Non-Resident Foreign Corporation

1. Interest on foreign loans contracted on or Aug. 1, 1986 are taxed 20%

2. Dividends received from a domestic corporation is subject to a final withholding


tax at 15% on the condition that the country in which the non-resident foreign
corporation is domiciled, shall allow a credit against tax due to non-resident foreign
corporation taxes deemed to have been paid in the Philippines equivalent to: 20% for
1997, 19% for 1998, 17% for 2000 to Oct. 2005, 20% for Nov. 2005 to 2008 and 15%
for 2009.

3. Capital gain from the sale of shares of stocks not traded in the stock exchange. A
final tax at the rates prescribed below imposed upon the net capital gains realized
during taxable year from the sale, barter, exchange or other disposition of share of
stock in a domestic corporation, except shares sold, or disposed of through the stock
exchange;

Not over P100,000 5%


On any amount in excess of P100,000 10%
4. Income derived by a bank from its FCDUs/EFCDUs or OBUs with respect to
foreign currency transactions with non-residents, OBUs in the Philippines, and local
commercial banks, including branches of foreign banks authorized to transact
business with FCDUs/ EFCDUs, are exempt from income taxes.

5. Royalty payment made by a PEZA- registered enterprise to a non-resident


Japanese corporation are subject to the preferential tax rate on the gross amount of
the royalties under the RP-Japan TA\ax treaty- Under Article 10 of the RP-Japan Tax
Treaty, royalty income derived in the Philippines by a corporation which is a resident
of Japan shall be taxed at either one of the following preferential rates;

a. 10% if the payor-company is an entity registered with the Board of


Investment (BOI);
b. 15% if the payments are with respect to the use of right to use
cinematographic films and films or tapes for radio or television broadcasting;
and
c. 25% in all other cases.
ALLOWABLE DEDUCTIONS
Allowable deductions are items or amounts which the allows to be
deducted from gross income in order to arrive at the taxable income. A
domestic or resident foreign corporation may deduct from its business
income, itemized deduction under Tax due. Or these corporations may elect a
standard deduction in an amount not exceeding forty percent (40%) of its
gross income (R.A 9504). Non-resident foreign corporations are not allowed
deductions from gross income.
TAXABLE INCOME AND TAX DUE
In case of corporations, taxable income is the pertinent items of
gross income less the deductions authorized for such types of income.
Taxable income is the amount or tax base upon which tax rate is applied
to arrive at the tax due. Depending on the taxpayer involved and for
purposes of computing the income tax liability of a corporation, taxable
income may refer to either one of the following:

1. Net Income. The income arrived at after subtracting from the gross
income the deductions of the taxpayer. For domestic and resident
foreign corporations, in general, and other corporation from whose
gross income deductions are allowed.

2. Gross Income. The entire or gross income from business without any
deduction for either optional standard deduction or itemized
deduction.