SEC. 30. Exemptions from Tax on Corporations.

- The following organizations shall not be taxed under this Title in respect to income received by them as such: (A) Labor, agricultural or horticultural organization not organized principally for profit; (B) Mutual savings bank not having a capital stock represented by shares, and cooperative bank without capital stock organized and operated for mutual purposes and without profit; (C) A beneficiary society, order or association, operating fort he exclusive benefit of the members such as a fraternal organization operating under the lodge system, or mutual aid association or a nonstock corporation organized by employees providing for the payment of life, sickness, accident, or other benefits exclusively to the members of such society, order, or association, or nonstock corporation or their dependents; (D) Cemetery company owned and operated exclusively for the benefit of its members; (E) Nonstock corporation or association organized and operated exclusively for religious, charitable, scientific, athletic, or cultural purposes, or for the rehabilitation of veterans, no part of its net income or asset shall belong to or inures to the benefit of any member, organizer, officer or any specific person; (F) Business league chamber of commerce, or board of trade, not organized for profit and no part of the net income of which inures to the benefit of any private stock-holder, or individual; (G) Civic league or organization not organized for profit but operated exclusively for the promotion of social welfare; (H) A nonstock and nonprofit educational institution; (I) Government educational institution; (J) Farmers' or other mutual typhoon or fire insurance company, mutual ditch or irrigation company, mutual or cooperative telephone company, or like organization of a purely local character, the income of which consists solely of assessments, dues, and fees collected from members for the sole purpose of meeting its expenses; and (K) Farmers', fruit growers', or like association organized and operated as a sales agent for the purpose of marketing the products of its members and turning back to them the proceeds of sales, less the necessary selling expenses on the basis of the quantity of produce finished by them; Notwithstanding the provisions in the preceding paragraphs, the income of whatever kind and character of the foregoing organizations from any of their properties, real or personal, or from any of their activities conducted for profit regardless of the disposition made of such income, shall be subject to tax imposed under this Code.

Basic Income Taxation of Corporations in Philippines

By: Garry S. Pagaspas, CPA Let me share you an overview on how corporate income taxation applies in the Philippines, in general. Let us start with the understanding of the thing called corporation by its nature as defined in the Corporation Code of the Philippines and for tax purposes as defined by the National Internal Revenue Code of the Philippines. Please refer hereunder for easy reference: Corporation Code of the Philippines

Section 2. Corporation defined. A corporation is an artificial being created by operation of law, having the rights of succession and the powers, attributes and properties expressly authorized by law or incident to its existence.

Section 22(B). The term corporation shall include partnerships, no matter how created or organized, jointstock companies, joint accounts (cuentas en participation), association, or insurance companies, but does not include general professional partnerships and 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. X x x
From the two definitions, the NIRC definition is much broader because corporation includes partnerships, association, and other juridical entities. This follows that for income tax purposes, there are only two (2) main classifications:

National Internal Revenue Code (NIRC), as amended

1702(Q); and

Corporate income taxpayer for juridical entities using BIR Form No. 1702 (annually)/BIR Form No. Individual income taxpayer for non-juridical entities including estates and trusts using BIR Form No.

1701(annually) and BIR Form No. 1701Q(quarterly for those engaged in trade or business or practice of profession. Further, for income tax purposes, a corporation is further classified as follows:

Domestic corporation (DC) means a corporation created or organized in the Philippines or under its

laws. Securities and Exchange Commission (SEC) issues a Certificate of Registration to domestic corporations and its legal personality commence upon the date of approval of its Articles of Incorporation.

Resident foreign corporation (RFC) applies to a foreign corporation engaged in trade or business

within the Philippines. SEC normally issues a License to do Business in the Philippines to authorize their engagement in trade or business in the Philippines. Examples of this are Philippine branch of foreign corporation, regional operating headquarters of multinational companies, regional or area headquarters of multinational companies, representative offices.

Non-resident foreign corporation (NRFC) applies to a foreign corporation not engaged in trade or

business within the Philippines. No need for License to do business as they do not normally have presence in the Philippines but allowed to earn income in a way or another. Taxability of income of corporations would depend on the nature of income and the type of corporation. It would be too confusing to discuss them all DC, RFC and NRFC, so I just limit the discussions to domestic corporations. Income as to nature of income may be classified as follows:

Exempt income where the law, treaty or the regulations expressly provides that the same is exempt

from income. Examples of this would be inter-corporate dividend from a DC to another DC or RFC, income from a time deposit of more than five (5) years. While not subject to income tax, the details of this income are required to be declared in BIR Form No. 1702.

Final Income subject to final withholding taxes of varying rates corresponding tax required upon

their payment of such income. Examples of income subject to final taxes are interest income on Philippine bank deposits, royalties, and others. The amount withheld constitutes the final payment of the tax and no additional amount shall be due but the details of income are required to be declared in BIR Form No. 1702.

Capital gains subject to capital gains tax of 6% based on fair market value of the real property sold,

or 5%/10% of the net capital gains on sales of shares of a domestic corporation not thru the local stock exchange. Again, details of income are required to be declared in BIR Form No. 1702.

Ordinary income or those incomes not falling under any of the above classifications that is subject to

the normal corporate income tax of 30% starting January 1, 2009. In this post, we will discuss ORDINARY income tax computations so you will be guided comes the ITR deadlines. Mathematically, computation is quite simple: Gross Sales/Receipts

Less Sales returns and allowances Equals Net sales/receipts Less Cost of Sales Equals Gross Income Add Other taxable income Equals Total Gross Income Less Allowable Deductions Equals Taxable income Multiplied by 30% rate equals Tax Due (compared to minimum corporate income tax (MCIT) 2% of gross income, whichever is higher less Tax Credits. less Tax Due and Payable. The resulting amount will then be the amount that shall be paid to the BIR using BIR Form No 1702Q (Click to download Form) for quarterly filing not later than 60 days from end of the quarter, and BIR Form No. 1702 (Click to download Form) for annual filing not later than the 15th day of the fourth month following the end of taxable year calendar or fiscal year. If PEZA registered, 2% shall be paid to the municipality where business is located. We will concentrate however on non-PEZA corporations and partnerships for simplicity. Net Sales/Receipts refers to the gross sales/receipts less cost of sales for seller of goods, or gross receipts less the sales discounts granted, and sales return actually made buy the buyers. Cost of sales or service refers to the direct costs directly traceable to the finished product or service such as the direct materials used, the cost of workforce in the production, and the factory overhead incurred. This however does not mean that other expenses are not deductible. They are deductible under allowable deductions. Other taxable income refers to other ordinary income earned during the period on top of the main activity of the corporate taxpayer. Example is interest income from affiliates or subsidiaries, income from sale of assets used in business, and other similar items auxiliary to the operations. Capital gains, exempt income and final income are not included herein. Total Gross income is the amount being multiplied by 2% for computing minimum corporate income tax (MCIT), and the base for 40% optional standard deduction. MCIT is required for entities beginning the fourth (4) year of operations, except for certain industries exempted from MCIT like banks, insurance companies, finance companies, and the likes expressly provided in the Tax Code. Total gross income is the amount of taxable income before allowable deductions for other business expenses. Allowable deductions refer to the ordinary, necessary and reasonable business expenses of the taxpayers in the conduct of trade or business. For tax purposes, taxpayer has the choice between the itemized deductions and the optional standard deduction (OSD) introduced by Republic Act No. 9504. Itemized deductions are those expenses traceable to the conduct of operations such as salaries, travel, rental and entertainment expenses, interest, taxes, losses, bad debts, depreciation, depletion, charitable and other contributions, research and development, pension trust, and the likes. In itemized deductions, claimed expenses are required to be substantiated with sufficient documents, if any, like official receipts, invoices, and the likes; must observe the limitations on deductibility on certain

items, like interest expense, representation and entertainment, and the likes; and must have been withheld the proper amount upon its payment or accrual. For failure to do so, the expense will not be allowed as deduction and the corporate taxpayer maybe assessed with additional income taxes, plus penalties, if owing. On the other hand, OSD is an alternative of the taxpayer where 40% is being allowed to be deducted from the gross income without need of substantiation but is irrevocable during the taxable year applied. However, the obligation to withhold on related expenses still remains. As to which is more beneficial between the two, would depend on the circumstances of the corporation because it may be affected by the nature of the industry, the amount of mark-up and other factors. If you would opt for OSD, then, you apply the same on the first quarter of the year and all throughout within the same taxable year. For tax due purposes, the amount arrived at above using the 30% of taxable income is being compared with the MCIT of 2% of gross income and the higher amount is the one deducted with the allowable tax credits, if any. Tax credits on the other hand refers to those allowed to be deducted from the tax due like creditable withholding taxes (CWTs) supported by Certificates (BIR Form No. 2307) issued by clients and customers who withheld certain amounts of income tax upon payments. Income taxes paid abroad also fall under this category subject to certain conditions. For subsequent taxable years, prior years excess tax credits are also deductible, or taxes in the original return filed, if you are filing an amended tax return. The new November 2011 version of Corporate Income Tax Return After computing the above, you are now ready to prepare and file the income tax return (ITR). With the revision of the BIR Form No. 1702 last 2011 (Click to Download), the annual ITR seems to be another challenge. I strongly suggest that you exert extra effort and due diligence in the preparation of these returns. Hire a knowledgeable one or educate yourself with the technicalities to save your funds from being wasted on penalties. Unintended and simple errors and misstatements may prove to be costly, if not, much discomfort on your part. You can amend or revise duly field tax returns as a matter of right within three (3) years from filing not later than due date or from late filing (if filed beyond due date) provided there is yet no ongoing examination of the tax authorities. See to it that computations are in order, that substantiations and documents required as a condition for deductibility of expenses are on file, and that the claimed creditable withholding taxes are properly supported with certificates.
Non-resident foreign corporation, in particular Non resident cinematographic film owner, 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 of gross rentals, lease or charter fees from leases or charters to Filipino citizens or corporations, as approved by the maritime industry authority. Allowable deductions Allowable deductions are items or amounts which the law 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 the tax code. 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 from business the deductions of the taxpayer. For domestic and resident foreign corporations, in general; and other corporations from whose gross income deductions are allowed. Gross income Less allowable deductions xxxx xxxx

Net Income Multiply by tax rate Tax due

xxxx xxxx xxxx

2. Gross income: The entire or gross income from business without any deduction For domestic and resident foreign corporations, subject to the MCIT; non resident foreign corporations not subject to the normal income tax rate (sec. 28b1) Gross income Multiply by tax rate Tax due xxxx xxxx xxxx

Note that in computing for the taxable income, fraction of a peso is disregarded. For the tax due, a fraction amounting to fifty centavos or more is rounded off to a peso while a fraction amounting to less than fifty centavos is disregarded. Corporations exempt from income tax. 1. Labor, agricultural or horticultural organization not organized principally for profit; 2. Mutual savings bank not having a capital stock represented by shares and cooperative bank without capital stock organized and operated for mutual purposes and without profit. 3. A beneficiary society, order or association, operating for the exclusive benefit of the members such as fraternal organization operating under the lodge system, or a mutual aid association or a nonstick corporation organized by employees providing for the payment of life, sickness, accident or other benefits exclusively to the members of such society, order, or associations, nonstick corporation or their dependents. 4. Cemetery company owned and operated exclusively for the benefit of its members; 5. Nonstock corporations or associations organized and operated exclusively for religious, charitable, scientific, athletic or cultural purposes, or for the rehabilitation of veterans, no part of its net income or asset shall belong to or inure to the benefit of any member, organizer, officer or any specific person. 6. Business, league, chamber of commerce, or board of trade, not organized for profit and no part of the net income of which inures to the benefit of any private stockholder or individual. 7. Civic league or organization not organized for profit but operated exclusively for the promotion of social welfare; 8. A nonstick and nonprofit educational institutions 9. Government educational institution; 10. Farmers; or other mutual typhoon or fire insurance company, mutual ditch or irrigation company or like organizations of a purely local character, the income of which consists solely of assessments, dues, and fees collected from member for the sole purpose of meeting its expenses, and 11. Farmers fruit growers or like associations organized and operated as a sales agent for the purpose of marketing the products of its members and turning back to them the proceeds of sales, less the necessary selling expenses on the basis of the quantity of produce finished by them Declaration of quarterly corporate income tax. Every corporation shall file in duplicate a quarterly summary declaration of its gross income and deductions on a cumulative basis for the preceding quarter or quarters upon which the income tax shall be levied, collected and paid. The income tax computed decreased by the amount of tax previously paid or assessed during the preceding quarters shall be paid and the return filed not later than 60 days from the close of each of the first three quarters of the taxable year, whether calendar or fiscal. A return showing the cumulative income and deductions shall still be filed even if the operations for the quarter and the preceding quarters yielded no tax due. Every taxable corporation is likewise required to file a final adjustment return covering the total taxable income of the corporation for the preceding calendar or fiscal year which is required to be filed and paid on or before April 15 on or before the 15th day of the 4th month following the close of the fiscal year, as the case may be. If the sum of the quarterly tax payments made during the said taxable year is not equal to the total tax due on the entire taxable income of that year, the corporation shall either 1. Pay the balance of the tax still due or 2. Carry over the excess credit 3. Be credited or refunded with the excess amount paid.

C. Special Types of Non-resident Foreign Corporations 1. Non-resident cinematographic film owners, lessors or distributors 25% of gross income from all sources within the Philippines 2. Nonresident Owner or Lessor of Vessels Chartered by Philippine Nationals 4.5% of gross rentals, lease or charter fees from leases or charters to Filipino citizens or corporations, as approved by the Maritime Authority 3. Nonresident Owner or Lessor of Aircraft, Machineries and Other Equipment 7.5% of gross rentals or fees Non-resident Foreign Corporations Non-resident cinematographic film owners, lessors or distributors Gross Income from the Philippines 25% Nonresident Owner or Lessor of Vessels Chartered by Philippine Nationals Gross Rentals, Lease and Charter Fees from the Philippines 4.5%

Nonresident Owner or Lessor of Aircraft, Machineries and Other Equipment Gross Rentals, Charges and Fees from the Philippines 7.5%