TAX 72

Income Taxation
Taxation of Corporations

What is a Corporation?
Sec. 2 of the Corporation Code of the Philippines. Batas Blg. 68.
Corporation defined. - A corporation is an artificial being created by operation of law,
having the right of succession and the powers, attributes and properties expressly
authorized by law or incident to its existence.

For Taxation purposes: A corporation includes partnerships, no matter how created or

organized, joint-stock companies, joint accounts, associations, or insurance companies, but
does not include general professional partnerships an a joint venture or consortium
formed for the purpose of undertaking construction projects or engaging in petroleum,
coal, geothermal an other energy operations pursuant to an operating or consortium
agreement under a service contract with the Government.

Classification of Corporations
I. Domestic: Those created or organized under and by virtue of Philippine laws.
a. Domestic Corporation, in general
b. Government-owned and controlled corporations
c. Proprietary educational institutions
d. Non-profit hospitals

II. Foreign: Those organized in accordance with laws of their respective countries.
a. Resident. Those engaged in trade or business within the Philippines.
b. Non-resident. Those not engaged in trade or business within the Philippines.

Sources of Income: Which is taxable?

Aside from knowing the classification of the taxpayer, the source of income is the next
important thing to determine – whether it is from within the Philippines or without. The
following rules 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.

Sources of Income
Corporation Within the Phils. Without the Phils.
1. Domestic Taxable Taxable
2. Foreign Taxable

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Categories of Income and Tax Rates

1. Business Income.

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 Accum. Taxable Income
2. Proprietary Educational Institution 10% Taxable Income from all sources
3. Non-stock, Non-profit Hospital 10% Taxable Income from all sources
4. Exempt Corporations 0% Taxable Income
5. General Professional Partnerships Exempt

RESIDENT FOREIGN CORPORATION

1.
a. In general 30% Taxable Income from w/in Phils.
b. Minimum Corporate Income Tax 2% Gross Income
c. Improperly Accumulated Earnings 10% Improperly Accum. Taxable Income
2. International Carriers 2.5% Gross Philippine Billings
3. Regional Operating Headquarters 10% Taxable Income
4. Offshore Banking Units (OBUs) 10% Gross Taxable Income on Foreign
Currency Transaction
30% On Taxable Income Other than
Foreign Currency Transaction
5. Foreign Currency Deposit Units 10% Gross Taxable Income on Foreign
(FCDU) Currency Transaction
30% On Taxable Income Other than
Foreign Currency Transaction

2. Passive Income. Passive Income is subject to a separate and final tax. These are
taxed at fixed rates ranging from 5% to 20%. Passive income is not to be included
in gross income computation.

ON PASSIVE INCOME Domestic Resident

Foreign
Interests. Interest from deposits and yield or any other
monetary benefit from deposit substitutes and from trust
funds and similar arrangements. 20% 20%
Interest income from a depositary bank under the expanded
foreign currency deposit system. 7 ½% 7½%

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Income derived by a depository bank under the expanded
foreign currency deposit system from foreign currency
transactions with local commercial banks, including branches
of foreign banks that may be authorized by the
BangkoSentralngPilipinas (BSP), including interest income
from foreign currency loans. 10% 10%
Royalties 20% 20%
Dividends. Dividends received by a domestic/resident
corporation from a domestic corporation. Exempt Exempt
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 Commissioner 6%

Domestic and Resident Foreign Corporations, In General

Generally, the pro-forma computation of the normal income tax of domestic and resident
foreign corporations as follows:

Gross Income XXX

Less: Allowable Deductions XXX
Net Income XXX
Multiply by TAX RATE 30%
Tax Due XXX

Domestic Corporations, In Particular

Proprietary Educational Institutions and Non-Profit Hospitals. The 10% tax on the
taxable income is subject to limitation. If the gross income from unrelated trade, business
or other activity exceeds fifty percent (50%) of the total gross income derived from all
sources, the normal income tax rate shall be imposed on the entire taxable income.

Illustration 1: SU, a proprietary educational institution, has a gross income for the taxable
year 2013 of P15 million. Of the total gross income, P5 million was derived from unrelated
trade or business. Total deduction amounts to P3 million.

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 Gross Income 15,000,000
Less: Deductions 3,000,000
Net Income 12,000,000
Multiply by TAX RATE 10%
Tax Due 1,200,000

The tax rate applies because the gross income from unrelated trade or business did not
exceed the 50% limit of the total gross income (only 33.33% or P5 million/P15 million.)

Illustration 2: Maintain all the assumptions in the preceding illustration except that the
institution’s gross income derived from unrelated trade or business is P9 million. How
much is the tax due.

Gross Income 15,000,000

Less: Deductions 3,000,000
Net Income 12,000,000
Multiply by TAX RATE 30%
Tax Due 3,600,000

The gross income from unrelated trade or business is more than 50% of the total gross
income. It is actually 60% (P9 million/P15 million). Hence, the tax rate that applies is the
normal tax rate of 30%.

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.

A proprietary educational institution is any private school maintained and administered

by private individuals or groups with an issued permit to operate from the DECS, CHED or
TESDA, as the case may be, in accordance with existing laws and rules and regulations.

Government-Owned or Controlled Corporations, Agencies or Instrumentalities. 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. Local Water Districts (LWD);
5. Philippine Charity Sweepstakes Office (PCSO).

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Resident Foreign Corporations, In Particular

International Shipping. Gross Philippine Billings in the case of 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 payments of the
passage or freight documents. Subject to the gross Philippine billings tax of 2.50%.

Offshore Banking Units. 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.

Branch Profits Remittances. Any profit remitted by a branch to its head office shall be
subject to a tax of fifteen percent (15%) which shall be based on the total profits applied
or earmarked for remittance without deduction for the tax component thereof.

Non-resident Foreign Corporations, In General

The basis of tax for non-resident foreign corporations is gross income from sources
within the Philippines, such as interests, dividends, rents, royalties, salaries, 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 as follows:

Gross Income XXX

Multiply by TAX RATE 30%
Tax Due XXX

Non-resident Foreign Corporations, 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 the 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, charters and other fees.

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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 deductions under the Tax
Code. Or, these corporations may elect a standard deduction in an amount not exceeding
forty percent (40%) of its gross income. 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.

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 corporations from whose gross income deductions are allowed.

Sales/Revenues/Receipts/Fees XXX
Less: Cost of Sales/Services XXX
Gross Income from Operation XXX
Add: Non-operating and Taxable Other Income XXX
Total Gross Income XXX
Less: Deductions
Optional Standard Deduction or
Itemized Deduction XXX
Taxable Income XXX
Multiply by: Tax Rate X%
Tax Due XXX

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

Gross Income XXX

Multiply by TAX RATE X%
Tax Due XXX