Lecture 3: INCOME TAXATION – CORPORATION

I. Pro-Forma Computation

For CORPORATIONS, including business partnerships, domestic corporations, resident foreign

corporations, joint ventures, and associations, except non-resident foreign corporations (which is taxable at
gross income):

Gross receipts/sales xx
Less: Cost of service/sales (xx)
Gross income from business or profession xx
Add: Passive Incomes, not subjected to final tax xx
Capital Gains, not subjected to CGT xx
Total Gross Income xx
Less: Deductions for:
Itemized Deductions or OSD (xx)
Net Operating Loss Carry-Over (NOLCO) (xx)
Taxable Income xx
*NCLCO is not applicable since the holding period is also not applicable.

II. Overview

The term ‘corporation’ includes partnerships, no matter how created or organized, joint-stock companies,
joint accounts (cuentas en participacion), associations, or insurance companies, but does not include
general professional partnerships (GPPs) and joint venture or consortium formed for the purpose of
undertaking construction porjects or engaging in petroleum operation, coal, geothermal and other energy
operations pursuant to an operating or consortium agreement under a service contract with the Government.

III. Classes of Corporate Taxpayer

1. Domestic corporations are taxed on worldwide income, at 30% of the taxable income.
2. Resident foreign corporations are taxed on incomes from the Philippines only, at 30% of the taxable income.
3. Non- Resident foreign corporations are taxed on incomes from the Philippines only, at 30% of the gross
income.
Note:
a. GPPs are partnerships formed by persons for the sole purpose of exercising their common profession, no
part of the income of which is derived from engaging in any trade or business.

IV. Components of Gross Income

1. Business and/or Professional Income
2. Passive Income
3. Capital Gains

 The components of gross income for individuals are also the same in the case of corporate taxpayers. (See
discussions on Gross Income for individuals, Lecture 2)

V. Deductions from Gross Income

1. Optional Standard Deduction
2. Itemized Deductions
(See discussions on Deductions and Dealing in Property.)

VI. Corporate Tax

1. Gross Income Tax (GIT)
It is an optional income tax given to corporate earners equivalent to 15% of its gross income instead of the
30% net income tax.
Lecture 3: INCOME TAXATION – CORPORATION

 Only domestic corporations and resident foreign corporations may avail such GIT.
 Requirements:
a. A tax ratio of 20% of Gross National Products
b. A ratio of 40% income tax collection of total tax revenues
c. A VAT tax effort of 4% of GNP
d. A 0.9% ratio of consolidated public sector financial position to GNP
e. Available only to firms whose ratio of cost of sales to gross sales or receipts from all sources is 55%.
f. The election shall be irrevocable for three (3) consecutive year
g. Recommendation from the Secretary of Finance
h. Subject to approval of the Office of the President

2. Normal Corporate Income Tax (NCIT)

Period Corporate Income
Tax Rate
January 1 to October 31, 2005 32%
November 1, 2005 to December 31, 2008 35%
January 1, 2009 and onwards 30%

3. Minimum Corporate Income Tax (MCIT)

The following are liable to MCIT beginning the 4th taxable year in which such corporation commenced its
business operations:
a. Domestic Corporations
b. Resident foreign corporations

 The 2% of gross income is imposed whenever a company:

a. Has no taxable inocome; or
b. Has taxable income but the amount of MCIT is greater than the NCIT (30%)
 Excess MCIT can be carried forwards for 3 succeeding years and credited againts the normal corporate
income tax only when the NCIT is greater than MCIT
 MCIT can be claimed as a credit against the MCIT itself or against any other losses

The following are exempt from MCIT (these are special corporations):

a. Domestic corporations operating as proprietary (private) educational institutions subject to tax at 10% on
their taxable income;
b. Domestic corporations engaged in hospital operations which are nonprofit subject to tax at 10% on their
taxable income;
c. Domestic corporations engaged in business as depository banks under the expanded foreign currency
deposit system on their income from foreign currency transactions which has been subjected to final tax at
10%;
d. Resident foreign corporations engaged in business as “international carrier” subject to tax at 2 ½% of their
Gross Philippine Billings;
e. Resident foreign corporations engaged in busines as Offshore Banking Units (OBUs) on their income from
foreign currency transactions which has been subjected to a final income tax at 10% of such income;
f. Resident foreign corporations engaged in business as regional area headquarters subject to tax at 10% of
their taxable income; and
g. Firms that are taxed under a special income tax system

 The computation and payment of MCIT, shall likewise apply at the time of filing the quarterly corporate
income tax.
 In the computation of the tax due for the taxable quarter, if the quarterly MCIT is higher than the quarterly
normal income tax, the tax due to be paid for such taxable quarter at the time of filing the quarterly corporate
income tax return shall be the MCIT.
Lecture 3: INCOME TAXATION – CORPORATION

VII. Improperly Accumulated Earnings Tax

It is a tax imposed on improper accumulation of earnings. “Improperly accumulated earnings (IAE)” are the
profits of a corporation that are permitted to accumulate instead of being distributed by a corporation to its
shareholders for the purpose of avoiding the income tax with respect to its shareholders or the shareholders of
another corporation.

 The rate of 10% of the Improperly Accumulated Taxable Income, computed as follows:
Taxable Income for the Year xx
Add:
Income exempt from tax xx
Income excluded from gross income xx
Income subject to final tax, net xx
NOLCO xx
Less:
Income tax paid for the taxable year (xx)
Dividends actually or constructively paid/issued
from the applicable year’s taxable income (xx)
Amount reserved for the reasonable needs (xx)
Tax Base for IAET xx

Note: Earnings for the reasonable needs are enumerated as follows [Revenue Regulation No. 2-2001]:
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 or projects as approved by the board;
3. Earnings reserved for building, plants or equipment acquisition as approved by the board;
4. Earnings reserved 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;
6. In case of subsidiaries of foreign corporations in the Philippines, all undistributed earnings intended
or reserved investments within the Philippines as can be proven by corporate records.

 Applicability:
a. Shall apply to every corporation formed or availed for the purpose of avoiding the income tax with respect
to its shareholders or shareholders of any other corporation, by permitting earnings and profits to
accumulate instead of being divided or distributed. These are:
i. Domestic corporations
ii. Closely-held corporations

 Exceptions:
a. Publicly-held corporations
b. Banks and other non-banks financial intermediaries
c. Insurance companies
d. Taxable (business) partnerships (deemed to have actually or constructively received the taxable income
under Sec. 73D)
e. General professional partnerships
f. Non-taxable joint ventures
g. Enterprises duly registered with the Philippine Economic Zone Authority under R.A. 7916 and enterprises
registered pursuant to the Bases, Conversion and Development Act of 1992 under R.A. 7227
Lecture 3: INCOME TAXATION – CORPORATION

VIII. Income Tax Return Filing and Payment of Income Tax

Income Tax Return (BIR Form)
Annual Income Tax Return – Corporate
(BIR Form 1702)
Annual Income Tax Return – Self-Employed
Individual (BIR Form 1701)
Quarterly Income Tax Return (BIR Form 1702Q)
Deadline for Filing and Payment
On or before the 15th day of the 4th month of the
following the close of the taxable year
On or before the 15th day of the 4th month of the
following the close of the taxable year
Within 60 days after the end of each first 3 quarters
of the taxable year

IX. BIR Issuances and Court Decisions Related to Income Tax

1. Valuation of Contributions or Gifts Actually Paid or Made in Computing Taxable Income

 Revenue Memorandum Circular (RMC) No. 86-2014 dated December 5, 2014
- This circular is issued to clarify the valuation of contributions or gifts actually paid or made in computing
taxable income as part of the substantiation requirement under Revenue Regulations No. 13-98:
Information Required in Certificate of  Actual receipt by the accredited NSNP/ NGO
Donation (BIR Form No. 2322) of the donation or contribution
 Date of the receipt of donation, and
 Amount of donation
a. Amount of donation or contribution –if
cash
b. Acquisition cost – if real or personal
property
Allowable income tax deduction (on the part Net book value of the property donated as
of the donor) reflected in the financial statements of the donor.

2. Requirements for Deductibility of Certain Income Tax Payments

 Revenue Regulation No. 12- 2013 dated July 12, 2013
- Requirements for deductibility: Any income payment which is otherwise deductible under the Code
shall be allowed as a deduction from the payor’s gross income only if it is shown that the income tax
required to be withheld has been paid to the Bureau in accordance with Sections 57 and 58 of the
Code.
- No deduction will also be allowed notwithstanding payments of withholding tax at the time of audit
investigation or reinvestigation/reconsideration in cases where no withholding of tax was made in
accordance with Sections 57 and 58 of the Code.

3. Validity of Principal and Supplementary Receipts/Invoices

 Revenue Regulations No. 18- 2012 dated October 22, 2012
- All taxapyers are mandated by the BIR to make new sets of ORs and Sales invoices wuth special
security marking features printed by BIR – Accredited printers only.
- All ORs and Sales invoices shall be valid only until full usage of the approved serial numbers or five
years from its issuance whichever comes first.
- This should be effective starting January 18, 2013

4. Taxability of Associations Dues, Membership Fees Received by Condominium Corporations

 Revenue Memorandum Circular (RMC) No. 65-2012 dated October 31, 2012
- Amounts paid in as dues or fees by members or tenants of a condominium corporation form part of the
gross income of such corporation subject to income tax. This is because the condominium corporation
furnishes its members and tenants with benefits, advantages, and privileges in return for such
payments.
- For tax purposes, the following constitute income tax payment or compensation which are subject to
income tax:
a. Association dues
Lecture 3: INCOME TAXATION – CORPORATION

b. Membership fees
c. Other assessments/charges
- The previous interpretation that the assessment dues are funds which are merely held in trust by a
condominium corporation lacks legal basis and is hereby abandoned.

Note: The same rule applies to homeowner’s association per RMC No. 9-2013 dated January 9,
2013

5. Rules on Deductibility of Depreciation Expenses on Vehicles

 Revenue Regulation No. 12 – 2012 dated October 12, 2012
- Limitations on deductions:
a. Only one (1) vehicle for land transportation is allowed for the use of an official or employee, the
value of which should not exceed P2.4 million
b. No depreciation shall be allowed for yachts, helicopters, airplanes and/or aircrafts, and land
vehicles which exceed the said threshold.
c. All related maintenance expenses on account of a non-depreciable vehicle for taxation
purposes are also disallowed in its entirety.
d. Loss to be incurred from sale of non-depreciable vehicle shall not be allowed as deduction from
gross income [Revenue Memorandum Circular (RMC) No. 2 -2013 dated December 8, 2012]

- Exception:
a. Unless the taxpayer’s mainline of business is transport operations or lease of transportation
equipment and the vehicles purchased are used in the said operations.
- This regulation shall take effect immediately. (Published in October 17, 2012)

6. Clarifying the Taxability of Clubs Organized and Operated Exclusively for Pleasure, Recreation and
Other Non-Profit Purposes
 Revenue Memorandum Circular (RMC) No. 35 – 2012 dated August 3, 2012
- Clubs which are organized and operated exclusively for pleasure, recreation and other non-profit
purposes are subject to income tax under the Tax Code, as amended.
- Background:
The provision in the NIRC of 1977 which granted income tax exemption to such recreational
clubs were omitted in the current of tax exempt corporations under NIRC of 1997, as amended.

HENCE, the income of recreational clubs from whatever source, including but not limited to
membership fees, assessment dues, rental income, and service fees are subject to income
tax.