TAXATION REVIEW: INCOME TAXATION FOR CORPORATE TAXPAYERS

a.

Corporation Defined
The term corporation includes (hence taxable):
b.
c.
d.
e.

Partnership, no matter how created or organized;

Joint stock companies;
Joint accounts (cuentas en participacion); and
Associations, or insurance companies.

However, it does not include:

a. General professional partnership are partnerships formed by persons of exercising their
common profession, no part of the income of which is derived from engaging in any trade or
business.
b. 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
or consortium agreement under a service contract with the Government.
f.

Classification of Corporations
g.
h.

i.

Domestic corporation (DC) created or organized in the Philippines or under its laws.
Foreign corporations a corporation which is not a domestic:
1.
Resident foreign corporations (RFC) a foreign corporation engaged in trade or
business in the Philippines;
2.
Non-resident foreign corporation (NRFC) a foreign corporation not engaged
in trade or business in the Philippines.
Tax Base

Classification
DC
RFC
NRFC

Sources of Taxable
Income
Within and without
Within
Within

Allowable
Deductions
Within and without
Within

Tax Base
Taxable income
Taxable income
Gross income

Tax Rate
30%*
30%*
30%*

* Corporate tax rates subject to change effective:

> 34% starting January 1, 1998
> 33% starting January 1, 1999
> 32% starting January 1, 2000
j.

> 35% starting November 1, 2005

> 30% starting January 1, 2009

Format of Computation
Sales/receipt/revenues/fees
Less: Cost of sales/services
Gross income from operations
Add: Other Non-Operating taxable income
Gross Income or Gross Taxable Income
Less: Optional Standard Deduction
OR
Allowable Itemized Deductions:
Regular Allowable Itemized Deductions
Special Allowable Itemized Deductions
Allowance for NOLCO
Total taxable income
Tax Rate
Normal Income Tax Due
Minimum Corporate Income Tax Due
Income Tax Due Higher of (1) or (2)

Corporate Income Tax

xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx

xxx
(1)
(2)

xxx
xxx
x%
xxx
xxx
xxx

k.

Tax Rates
l.

Sec. 27A: Corporate Income Tax in General (Regular / Normal Corporate Income
Tax)
Tax rate
Tax base

DOMESTIC
30%
Taxable income within
and without

RFC
30%
Taxable income within

NRFC
30%
Gross income within

Note: Corporate tax rates subject to change effective:

> 34% starting January 1, 1998
> 35% starting November 1, 2005
> 33% starting January 1, 1999
> 30% starting January 1, 2009
> 32% starting January 1, 2000
Note that the erstwhile of Section 25 of the old Code, resident foreign corporations are
taxed in the same way and at the same rates as domestic corporation, except that the
taxable income for resident foreign corporations is limited to those derived within the
Philippines, hence, the optional gross income tax and the minimum corporate income tax
shall likewise apply to resident foreign coporations.
m.

Minimum Corporate Income Tax (MCIT)

Tax rate
Tax base

DOMESTIC
2%
Gross income within and
without

RFC
2%
Gross income within

NRFC
Not subject to MCIT
because it is already
subject to final tax

Notes:
1. Gross income shall mean:
Gross sales / revenues
Less: Sales returns and allowances, discounts
Net sales
Less: Cost of sales / services
Gross income from operations
Add: Other income not subject to final income tax
and not exempted from income tax
Gross income

xxx
xxx
xxx
( xxx)
xxx
xxx
xxx

2. MCIT is imposed on the beginning of the fourth taxable year immediately following the
year in which such corporation commenced its operation;
3. The tax due for the taxable year is the higher between the MCIT and the normal / regular
corporate income tax;
4. Notwithstanding note 3, the computation and payment of MCIT, shall likewise apply at
the time of filing the quarterly income tax. Thus, the tax due for the taxable quarter is the
higher between the quarterly normal income tax and the MCIT due as of the end of the
taxable quarter. In the payment of said quarterly MCIT, excess MCIT from the previous
taxable year/s shall not be allowed to be credited. Expanded withholding tax, quarterly
corporate income tax payments under the normal income tax, and the MCIT paid in the
previous taxable quarter/s are allowed to be applied against the quarterly MCIT due (RR
No. 12-2007 dated October 10, 2007);
5. Any excess minimum corporate income tax over the normal corporate income tax shall
be carried forward and credited against the normal income tax for three (3) succeeding
taxable years;
6. The Secretary of Finance is authorized to suspend the imposition of minimum corporate
income tax on any corporation, which suffers from losses on account of the following:
a) Prolonged labor disputes;
b) Force majeure; or
Corporate Income Tax

c) Legitimate business reverses.

n.

Optional Corporate Tax / Gross Income Tax (GIT)

Tax rate
Tax base

RESIDENT
FOREIGN
15%

DOMESTIC
15%
Gross income within and
without

Gross income within

NONRESIDENT
FOREIGN
Not subject to GIT
because it is already
subject to final tax

Notes:
1. The president, upon the recommendation of the Secretary of Finance may, effective January
1, 2000, allow corporation to be subjected to optional corporate tax;
2. The following conditions shall have to be satisfied in the allowance of optional corporate
tax;
a)
b)
c)
d)

A tax effort ratio of 20% of Gross National Product (GNP);

A ratio of 40% of income tax collection of total tax revenue;
A VAT tax effort of 4% of GNP; and
A 0.9% ratio of the Consolidated Public Sector Financial Position to GNP.

3. The option to be taxed on gross income shall be available only to firms whose ratio of cost
of sales to gross sales or receipts from all sources does not exceed 55%;
4. The election of the gross income option shall be irrevocable for 3 consecutive taxable years
during which the corporation is qualified under the scheme.
5. Gross income shall mean gross sales less sales returns, discounts and allowances and cost
of goods (manufactured and) sold for those engaged in trading and manufacturing. For
those engaged in the sale of services, gross income shall mean gross revenue less sales
returns, allowances and discounts.
o.

Final Tax on Passive Income Derived from Philippine Sources

Royalties
Interest in any currency bank
deposit
Yield or any monetary benefit
from deposit substitute
Yield or any monetary benefit
from trust fund and other similar
arrangements
Interest income derived from
depository bank under expanded
foreign currency deposit system
Intercorporate dividends received
from domestic corporation
Interest on foreign loans
contracted on or after Aug. 1, 1986

DOMESTIC
20%

RFC
20%

NRFC
30%

20%

20%

30%

20%

20%

30%

20%

20%

30%

7%

7%

Exempt

Exempt
Under FCDS
regime

Exempt
Under FCDS
regime

15%
20%

Note: 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 the tax due from the nonresident foreign corporation
taxes deemed to have been paid in the Philippines equivalent to 20% for 1997, 19% for
1998, 18% for 1999, 17% for 2000, 20% November 1, 2005 and 15% effective January 1,
2009 (current corporate tax rate less 15% final tax).
p.

Capital Gains from Sale of Shares of Stock Not Traded in the Local Stock Exchange

Tax base
Corporate Income Tax

DOMESTIC
Net capital gain
3

RFC
Net capital gain

NRFC
Net capital gain

Tax rate:
> First P100,000
> Amount in excess of P100,000
q.

DOMESTIC
6%
Gross selling price or
fair market value
whichever is higher

5%
10%

RFC
30% (Sec. 27A)
Net capital gain
(normal income tax)

NRFC
30% (Sec. 27A)
Net capital gain
(final income tax)

Tax on Income Derived Under Foreign Currency Deposit System by a Depositary

Bank

R.A. No. 9294

From foreign currency transactions
granted by depository banks under
expanded FCDS to residents other
than OBUs in the Philippines and
other depository banks
From foreign currency transactions
with nonresidents, OBUs in the
Philippines, local commercial
bank including branches of foreign
banks
s.

5%
10%

Capital Gains Realized from Sale, Exchange or Disposition of Land and/or Building
Tax rate
Tax base

r.

5%
10%

DOMESTIC

RFC

NRFC

10%

10%

N/A

Exempt from
Final Tax
(Subject to
Normal tax - RA
9294)

Exempt from
Final Tax
(Subject to
Normal tax - RA
9294)

N/A

Improperly Accumulated Earnings Tax (IAET)

a. In addition to other taxes imposed, there is imposed for each year on the improperly
accumulated taxable income of each corporation an improperly accumulated earnings tax
equal to 10% of the improperly accumulated taxable income.
b. The improperly accumulated earnings tax shall not apply to:
1. Publicly held corporations;
2. Banks and other non-bank financial intermediaries; and
3. Insurance companies.
c. The fact that any corporation is a mere holding company or investment company shall be
prima facie evidence of a purpose to avoid the tax upon its shareholders or members.
d. The fact that the earnings or profits of a corporation are permitted to accumulate beyond the
reasonable needs of a business shall be determinative of the purpose to avoid the tax upon
shareholders or members, unless the corporation, by clear preponderance of evidence, shall
prove the contrary. The following constitute accumulation for the reasonable need of the
business:
1.
Allowance for the increase in the accumulation of earnings up to 100% of the paid-up
capital of the corporation as of the balance sheet date, inclusive of accumulation taken
from other years
2.
Earnings reserved for definite corporate expansion projects or programs requiring
considerable capital expenditures
3.
Earnings reserved for building, plants, or equipment acquisition
4.
Earnings for compliance with any loan covenant or pre-existing obligation established
under a legitimate business agreement
5.
Earnings required by law or applicable regulations to be retained by the corporation
or in respect of which there is legal prohibition against its distribution
6.
In case of subsidiaries of foreign corporations in the Philippines, all undistributed
earnings intended or reserved investments within the Philippines as can be proved by
corporate records and/or relevant documentary evidence

Corporate Income Tax

e. The following are prima facie instances of accumulation of profits beyond the reasonable
needs of a business and indicative of purpose to avoid income tax upon shareholders:
1.
Investment of substantial earnings and profits of the corporation in unrelated
business or in stock or securities of unrelated business
2.
Investment in bonds and other long-term securities
3.
Accumulation of earnings in excess of 100% of paid-up capital, not otherwise
intended for the reasonable needs of business as defined
f. Pro forma computation of improperly accumulated taxable income is as follows:
Taxable income
Add: Income excluded from gross income
Income subject to final tax
Net operating loss carry over (NOLCO)
Less: Amounts reserved for the reasonable needs of the buss.
Dividends, actually or constructively paid
Income tax for the year (including final tax)
Improperly accumulated taxable income

xxx
xxx
xxx
xxx
xxx
xxx
xxx

xxx
xxx
xxx

g. Once the profits have been subjected to IAET, the same shall no longer be subjected to IAET
in later years even if not declared as dividends. However, profits which have already been
subjected to IAET when finally declared as dividends shall be subject to tax on dividends.
h. Dividend must be declared and paid or issued not later than one (1) year following the close
of the taxable year. If no dividends were declared, paid and issued, improperly accumulated
earnings tax shall be paid within 15 days after one year following the close of the taxable
year.
t.

Special Corporations
u.

Special domestic corporations

Special Domestic Corporations

Proprietary educational institution
and nonprofit hospital

Tax Base
Net income

Government-owned or controlled
corporations (GOCCs), agencies or
instrumentalities

Net income

Tax Rate
10%
30% (If income from unrelated
business exceeds 50%)
Same as those imposed upon
corporation or association
engaged in similar business, or
activity

Notes:
1. Unrelated trade, business or other activity is not substantially related to the exercise or
performance of the school or hospitals primary purpose of function.
2. For the purpose of computing the allowable deduction of a proprietary educational
institution, capital outlays for expansion of school facilities may either be:
a) Deducted as expenditures (outright expense); or
b) Depreciated over the estimated useful life (capitalized).
3. The following are tax-exempt GOCCs:
a) Government Service Insurance System (GSIS);
b) Social Security System (SSS);
c) Philippine Health Insurance Corporation (PHIC); and
d) Philippine Charity Sweepstakes Office (PCSO).
v.

Special resident foreign corporations

Special RFC
International carriers
Offshore banking units (OBU)
(R.A. No. 9294)
Corporate Income Tax

Tax Base
Gross Philippine Billings
Interest income from foreign currency
loans granted to residents other than
OBUs or local commercial banks
5

Tax Rate
2 %
10%

Tax on branch profit remittance

(except on activities registered with
PEZA)
Regional or area headquarters of
multinationals
Regional operating headquarters of
multinationals

Income from foreign currency

transactions with nonresidents, OBUs
in the Philippines, local commercial
banks including Philippine branches
of foreign banks
Total profits applied or earmarked for
remittance without deduction for the
tax component

Exempt from
Final Tax
(Subject to
Normal tax RA 9294)
15%

Exempt from tax

Taxable income

10%

Notes:
1. Gross Philippine Billings (for international air carrier) refers to the amount of gross
revenue derived from carriage of persons, excess baggage, cargo or 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; Provided, that:
a) tickets revalidated, exchanged and/or indorsed to another international airlines form
part of the Gross Philippine Billings if the passenger boards a plane in a port or point in
the Philippines;
b) for flight which originates from the Philippines, but transshipment of passengers takes
place at any port outside the Philippines on another airline, only the aliquot portion of
the cost of the ticket corresponding to the leg flown from the Philippines to the point of
transshipment shall form part of Gross Philippine Billings.
2. Gross Philippine Billings (for international shipping) means gross revenue whether for
passenger, cargo, or mail originating from the Philippines up to final destination, regardless
of the place of sale or payment of the passage of freight documents.
3. Any income of nonresidents, whether individuals or corporations, from transactions with
offshore banking units shall be exempt from income tax.
4. The branch of a foreign Company in the Philippines is subject to a profit remittance tax on
its remittance of profits to the mother Company abroad, even if the profits from which the
remittance was made was a prior years profit. The tax on branch profit remittances shall
be withheld by the bank which the application for remittance was filed.
5. Regional or area headquarters is a branch established in the Philippines which does not
derive income from Philippines and which acts as supervisory, communications and other
foreign countries.
6. Regional operating headquarter is a branch established in the Philippines, which is engaged
in different services (e.g. general administration and planning, business planning, and
coordination, marketing control and sales production, etc.)
w.

Special nonresident foreign corporations

Special NRFC
Nonresident cinematographic film
owner, lessor, or distributor
Nonresident owner or lessor of
aircraft, machineries, and other
equipment
Nonresident owner or lessor of
vessels chartered by Philippine
nationals
II.

Tax Base
Gross income from Philippine sources
Gross rentals or fees derived within
the Philippines
Gross rentals, lease or charter fees
from leases or charters to Filipino
citizens or corporations, as approved
by Maritime Industry Authority

Tax Rate
25%
7 %
4 %

Sec. 30: Tax Exempt Corporations the following organizations shall not be taxed in
respect to income received by them:
a. Labor, agricultural or horticultural organizations not organized principally for profits;

Corporate Income Tax

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 for the exclusive benefit of the
members such as fraternal organization operating under the lodge system, or a mutual aid
association or a non-stock corporation organized by employees providing for the payment of
life, sickness, or other benefits exclusively to the members of such society, order, or
association, or non-stock corporations or their dependents;
d. Cemetery company owned and operated exclusively for the benefits of its members;
e. Non-stock corporation or association organized and operated exclusively for religious,
charitable, scientific, athletic, or cultural purposes, or rehabilitation of veterans, no part of its
net income or asset shall belong or inure 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 or asset shall belong or inure to the benefit of any private stockholder
or individual;
g. Civil league or organization not organized for profit but operated exclusively for promotion
of social welfare;
h. Non-stock, non-profit educational institution and government educational institution;
i. Farmers or other mutual typhoon or fire insurance company, mutual ditch or irrigation
company, mutual or cooperative telephone company, or like organizations 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;
j. 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 or produce finished by
them.
k. Local water districts the amount of income tax saved by virtue of its exemption from
income taxation shall be used for capital equipment expenditure in order to expand its water
services coverage and improve water quality in order to provide safe and clean water in the
provinces, cities, and municipalities, provided, that:
1. The water district shall adopt internal control reforms that would bring about their
economic and financial viability; and
2. That the water district shall not increase by more than 20% a year its appropriation for
personal services, as well as for travel, transportation or representation expenses and
purchase of motor vehicles
(effective 2010 as provided by RA No. 20026 and RMC No. 28-2010)
a.

Corporate Returns
Every corporation subject to tax shall render, in duplicate:

b.
1.
2.
c.

A true and accurate quarterly return; and

Final and adjusted return.

Corporations not engaged in trade or business in the Philippines (NFRC) shall not be
required to file income tax return (subject to final income tax).

d.

Who shall file the corporate return?

1.

President;

2. Vice-president; or

3. Other principal officers.

Note: The return shall be sworn to by such officer and by Treasurer or Assistant Treasurer.
e.

Corporate declarations and returns:

1.

Declaration of quarterly corporate income tax:

a) On cumulative basis;
b) Not later than 60 days from the close of each of the first three quarters of the taxable
year, whether, calendar or fiscal year.
Note: The tax so computed shall be decreased by the amount of tax previously paid or
assessed during the preceding quarters.

2.

Final adjusted return;

a) Covers the total taxable income for the preceding calendar or fiscal year;

Corporate Income Tax

b) Filed on or before:
1) In case corporation uses calendar year (year ended December 31) 15 th day of
April; or
2) In case corporation uses fiscal year 15 th day of the 4th month following the close
of the fiscal year.
3.

If the sum of the quarterly tax payments made during the taxable year is not
equal to the total tax due on the entire taxable income of that year, the corporation shall
either:
a) Pay the balance of tax still due;
b) Carry over the excess credit; or
c) Be credited or refunded with the excess amount paid.

4.

In case the corporation is entitled to a tax refund or credit of the excess

estimated quarterly income taxes paid;
a)
b)

5.
f.

Once the option to carry-over has been made, such option shall be considered
irrevocable for that taxable period.

Place of filing The quarterly income tax declaration and the final adjustment shall be
filed with:
1.
2.
3.
4.

Authorized agent banks; or

Revenue District Office; or
Collection Agent; or
Duly authorized Treasurer of the city or municipality having jurisdiction over
the location of the:
a)
b)

g.

The excess amount shown on its final adjusted return;

May be carried over and credited against the estimated quarterly income
tax liabilities for the taxable quarters of the succeeding taxable years.

Principal office of the corporation filing the return; or

Place where the main books of accounts and other data from which the
return is prepared are kept.

Time of payment of the income tax. The income tax due shall be paid at the time the
declaration or return is filed.

Exercises:
1. A corporation has the following data for the current year (2009):
Gross income
Deductions

Philippines
P2,000,000
500,000

USA
P3,000,000
1,500,000

Japan
P4,000,000
2,500,000

Compute the tax payable assuming the corporation is:

a. A corporation created in the Philippines;
b. A corporation created in the United States with a Philippine branch;
c. A corporation created in Japan with no Philippine branch.
2. A proprietary educational institution has the following data for the current year (2009):
Gross income, school operation
15,000,000
Gross income, unrelated activity
20,000,000
Monetary expenses, school operation
5,000,000
Monetary expenses, unrelated activity
8,000,000
Capital expenditure, library (constructed on
January 1, 2009, with useful life of 20 years)
10,000,000
The school will depreciate the capital outlay for library expansion over its useful life. Compute the
tax payable.

Corporate Income Tax

3. Using the data in number 2 except that gross income from school operation is P20,000,000 and that
the school would use the direct write-off method on accounting for capital outlays. Compute the tax
payable.
4. A corporation has the following data for the year 2009:
Gross income, Philippines
Gross income, Japan
Expenses, Philippines
Expenses, Japan

P2,500,000
1,500,000
1,000,000
500,000

Compute the tax payable assuming the corporation is:

a. Nonresident lessor of cinematographic films;
b. Nonresident lessor of vessels chartered Philippine Nationals;
c. Nonresident lessor of equipment;
d. Offshore banking units, gross income in the Philippines represent income from foreign currency
transaction with local commercial banks
5. A domestic corporation, on its 5th year of operations, has the following data for the fiscal year
ending September 30, 2009 (data are non-cummulative):
Gross income
Expenses
Creditable
withholding tax

1st Qtr
P 4,000,000
3,700,000
20,000

2nd Qtr
P 7,500,000
7,150,000
30,000

3rd Qtr
P 5,000,000
4,500,000

4th Qtr
P 4,500,000
3,100,000

40,000

45,000

At the beginning of the fiscal year, the taxpayers books show an outstanding balance of deferred
charges MCIT and prior years excess credit amounting to P30,000 and P10,000, respectively.
a. Compute the quarterly and annual income tax payable.
b. Give the deadline for filing and payment of quarterly declaration and the final adjusted return.
6. LAB Corporation, a domestic corporation organized in 2000, has the following data on its yearly
operations:
Calendar Year
Gross income
Operating expenses

2007
P 7,500,000
7,400,000

2008
5,000,000
1,000,000

2009
3,500,000
500,000

a. Compute the income tax payable for 2007, 2008 and 2009.
b. Prepare necessary journal entries for 2007, 2008 and 2009.
c. Is it advisable for the company to avail of the optional (gross) income tax regime, assuming its
ratio of cost of sales to gross sales does not exceed 55%? Support your answer with
computation.
7. PAPS Bank, has been authorized been authorized to operate as a savings bank by the Bangko Sentral
ng Pilipinas. It has the following revenue and expenses in the Philippines for year 2009 (assume P50
: $1):
Interest on Philippine peso loans from borrowers
P
3,000,000
Interest on Philippine peso deposit from local banks
P
750,000
Interest on US dollar loans to nonresident borrowers
$
30,000
Interest on US dollar deposit with local bank under FCDS
$
20,000
Interest on US dollar deposit in Hong Kong
$
10,000
Dividend income from domestic corporation
P
100,000
Operating expenses
P2,000,000
Compute the normal corporate income tax and the final tax on passive income assuming the bank is
a. Domestic bank
b. Offshore banking unit
8. A domestic corporation is registered with the BIR in 2000 has the following data for the 2009.
Sales
P
5,000,000
Corporate Income Tax

Cost of sales
Business expenses
Dividend from domestic corporation
Capital gain on sale of land (selling price, P4,000,000)
Interest on Philippine currency bank deposit
Dividends declared and paid
Tax paid for the first three quarters

1,500,000
800,000
50,000
500,000
40,000
500,000
150,000

The BIR upon investigation found out that there was improper accumulation of earnings. Compute
the tax on improperly accumulated earnings.

Corporate Income Tax

10