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Accounting Review

TAXATION
601: Income Tax (Corporations, Partnerships, Etc.)
Prof. SONNIE A. RAMOS, CPA, MBA

1. CORPORATION AND OTHER TERMS DEFINED


Included in the term 1) Partnerships, no matter how created or organized
corporation 2) Joint stock companies
3) Joint accounts (cuentas en participacion);
4) Associations, or insurance companies
Not included in the term 1) General professional partnerships; and
corporation 2) 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 agreement under a service contract with
the Government.
General Professional General professional partnerships are partnerships formed by persons for sole
partnerships purpose of exercising their common profession, no part of the income of which is
derived from engaging in any trade of business.
Joint venture Joint venture is a commercial undertaking by two or more persons, differing from
a partnership in that it relates to the disposition of a single lot of goods or the
completion of a single project.
Joint stock companies Joint stock companies are constituted when a group of individuals, acting jointly,
establish and operate a business enterprise under an artificial name, with an
invested capital divided into transferable shares, an elected board of directors, and
other corporate characteristics, but operating without formal governmental authority.
Joint accounts (cuentas en Joint accounts are constituted when one interests himself in the business of
participacion) another by contributing capital thereto, and sharing in the profits or losses in the
proportion agreed upon. They are not subject to any formality and may be privately
contracted orally or in writing.
Associations The term “associations” includes all organizations which have substantially the
salient features of a corporation to be taxable as a “corporation.”

2. CLASSIFICATIONS OF CORPORATIONS
a. Domestic corporations The term “domestic”, when applied to a corporation, means created or organized
in the Philippines or under its laws.
b. Foreign corporations The term “foreign”, when applied to a corporation, means a corporation which is
not domestic.
1) Resident foreign The term “resident foreign corporation” applies to a foreign corporation engaged
Corporation in trade or business within the Philippines.
2) Non-resident The term “non-resident foreign corporation” applies to a foreign corporation but
foreign not engaged in trade or business within the Philippines.
Corporation

3. FORMAT OF COMPUTATION (Annual Income Tax Return)


Sales/Revenues/Receipts/Fees xxx
Less: Cost of sales/services xxx
Gross income from operations xxx
Add: Non-operating and taxable other income xxx
Total gross income xxx
Less: Deductions xxx
Taxable income xxx
Regular corporate income tax xxx
Minimum corporate income tax xxx
Tax due (whichever is higher) xxx
Less: Unexpired excess of prior year’s MCIT over normal tax rate xxx
Balance xxx
Less: Tax credits/payments xxx
Prior year’s excess credits other than MCIT xxx
Tax payments for the first three quarters xxx
Creditable tax withheld for the first three quarters xxx
Creditable tax withheld for the fourth quarter xxx
Foreign tax credits, if applicable xxx
Tax paid in return previously filed, if this is an amended return xxx xxx
Tax payable xxx

4. TAX BASE AND TAX RATE

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Accounting Review
TAXATION
601: Income Tax (Corporations, Partnerships, Etc.)
Prof. SONNIE A. RAMOS, CPA, MBA

Corporation Tax Base Tax Rate


a. Domestic corporation Net income within and 35% - November 1, 2005 to December 31,
without 2008
30% - January 1, 2009
b. Resident corporation Net income within 35% - November 1, 2005 to December 31,
2008
30% - January 1, 2009
c. Non-resident corporation Gross income within 35% - November 1, 2005 to December 31,
2008
30% - January 1, 2009
d. Taxable partnerships, joint Net income within and 35% - November 1, 2005 to December 31,
ventures, etc without 2008
30% - January 1, 2009

5. SPECIAL CORPORATIONS
a. Special domestic corporations
Special domestic Tax Base Tax Rate
corporations
1) Proprietary Net income 10% - Income from unrelated business does not
educational Institution exceeds 50%
and nonprofit hospital 35% - November 1, 2005 to December 31, 2008
30% - January 1, 2009
2) Government-owned or Same as those imposed upon corporation or
controlled association engaged in similar business, or
corporations, agencies activity
or instrumentalities
3) Meaning of “unrelated “Unrelated trade, business or other activity” is not substantially related to the
trade, business or exercise or performance of the school or hospital’s primary purpose or function.
other activity”
4) treatment of capital Capital outlays for expansion of school facilities may either be:
outlays for expansion a) deducted as expenditures; or
of school facilities b) depreciated over the estimated life
5) Tax-exempt The following are tax-exempt government-owned or controlled corporations:
government- owned or a) Government Service Insurance System (GSIS)
controlled b) Social Security system (SSS)
corporations c) Philippine Health Insurance Corporation (PHIC)
d) Local Water Districts (R.A. No. 10026)

b. Special resident foreign corporation


Special RFC Tax Base Tax rate
1) International carrier Gross Philippine billings 2 ½%
2) Offshore banking units Income from foreign currency transactions Exempt from all taxes except
with non-residents, OBUs in the Philippines, income from transactions specified
local commercial bank including Philippine by Sec. of Finance (used to be 10%
branches of foreign banks final tax)
Interest income from foreign currency loans
granted to residents other than OBUs or 10% final tax
local commercial banks
Any income of non-resident (individual or
corporation) from OBUs Exempt
3) Tax on branch profit Total profits applied or earmarked for
remittance (except on remittance without deduction for the tax 15%
activities registered component
with PEZA)
4) Regional or area Exempt from tax -
headquarters of
multinationals
5) Regional operating Taxable income 10%
Headquarters of
multinationals

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Accounting Review
TAXATION
601: Income Tax (Corporations, Partnerships, Etc.)
Prof. SONNIE A. RAMOS, CPA, MBA

6) Gross Philippine Gross Philippine Billings (for international air carrier) refers to the amount of
Billings for gross revenue derived from carriage of persons, excess baggage, cargo or mail
International air carrier 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.
7) Gross Philippine Gross Philippine Billings (for international shipping) means gross revenue
Billings for whether for passenger, cargo, or mail originating from the Philippines up to final
international shipping destination, regardless of the place of sale or payment of the passage or freight
documents.
8) Regional or area Regional or area headquarters is a branch established in the Philippines by
headquarters multinational companies and which headquarters do not earn or derive income from
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.
9) Regional operating Regional operating headquarters is a branch established in the Philippines by
Headquarters multinational companies which are engaged in different services (e.g. general
administration and planning, business planning and coordination, marketing control
and sales promotion, etc).
10) Exercises
a) The following data were provided by Air America, international carrier doing business in the Philippines:

Gross receipts, sales of tickets in the Philippines (Manila to Taipei flight) P8,000,000
Gross receipts, sales of tickets in Japan (only P5,000,000 actually flown) (Manila to Tokyo 6,000,000
flight) 3,000,000
Gross receipts, sales of tickets in Japan (Tokyo to Manila flight)
Gross receipts, sales of tickets in the Philippines (Manila to Hongkong flight), passengers 1,000,000
were endorsed to another international airline which airlifted from Manila
Gross receipts, sales of tickets in the Philippines (Manila to Los Angeles flight), passengers
were transshipped in Tokyo to Los Angeles by another airline (flight from Manila to 4,500,000
Tokyo- 5 hours; flight from Tokyo to Los Angeles- 10 hours) 4,000,000
Expenses, sales of tickets, Philippines 1,500,000
Rental Income, Philippines, gross of 5% withholding tax 500,000
Expenses connected to rental income, Philippines 150,000
Payments, first three (3) quarters

How much was the total Philippine income tax due and payable?

b) A resident foreign corporation has the following data on its income, expenses and remittances:

Gross income, Philippines P7,000,000


Gross income, USA 5,000,000
Business expenses, Philippines 2,000,000
Business expenses, USA 1,000,000
Royalties on Philippine Copyrights 500,000
Interest on time deposit, PNB-Manila, Philippines 100,000
Remittances of profit during the year 200,000
Payments, first three (3) quarters 100,000

Question 1 – How much is the Philippine income tax due and payable?
2– How much is the tax on the branch profit remittances, if any?

c. Special nonresident/ foreign corporation


Special NRFC Tax Base Tax Rate
1) Nonresident Gross income from Philippine sources 25%
cinematographic film
owner, lessor, or
distributor
2) Nonresident owner or Gross rentals or fees derived within the Philippines 7½%
lessor of aircraft,
machineries and other
equipment

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Accounting Review
TAXATION
601: Income Tax (Corporations, Partnerships, Etc.)
Prof. SONNIE A. RAMOS, CPA, MBA

3) Nonresident owner or Gross rentals, lease or charter fees from leases or charters 4½%
lessor of vessels to Filipino citizens or corporations, as approved by Maritime
chartered by Philippine Industry Authority
nationals
4) Exercise
A corporation has the following data for the calendar year 2009:
Gross income, Philippines P2,500,000
Gross income, Japan 1,500,000
Expenses, Philippines 1,000,000
Expenses, Japan 500,000

How much is the final withholding Philippine income tax, assuming the corporation is a:
a. Nonresident cinematographic film owner, lessor, or distributor?
b. Nonresident owner or lessor of vessels chartered by Philippine nationals?
c. Nonresident owner or lessor of aircraft, machineries and other equipment?

6. PARTNERSHIP, JOINT VENTURE AND CO-OWNERSHIP


a. Non-taxable partnerships, joint ventures and 1) General professional partnerships
co-ownerships 2) Joint venture undertaking construction projects
pursuant to an operating consortium agreement under
a service contract with the Government;
3) Joint venture engaging in petroleum, coal, geothermal,
and other energy operations pursuant to an operating
consortium agreement under a service contract with
the Government;
4) Co-ownership
b. Taxable partnerships, joint ventures and co- 1) Partnerships engaged in business, no matter how
ownerships created;
2) Other joint ventures

7. IMPORTANT POINTERS IN NON-TAXABLE PARTNERSHIPS


a. General professional partnership defined A general professional partnership is one formed for the
sole purpose of exercising a profession, no part of income
of which is derived from engaging in trade or business.
b. Liability of partners in a general professional Persons engaging in business as partners in a general
partnership professional partnership shall be liable for income tax only
in their separate and individual capacities.
c. General professional partnership required to Every general professional partnership shall file, in
file return duplicate, a return of its income except income exempt
under the Tax Code, setting forth the items of gross
income and deductions and the names, TIN, addresses
and share of each of the partners.
d. Manner of computing the net income of For purposes of computing the distributive share of the
general professional partnership partners, the net income of the general professional
partnership shall be computed in the same manner as a
corporation.
e. Basis of the income that a partner will report Each partner shall report as gross income his distributive
share, actually or constructively received, in the net
income of the partnership.
f. Income payments to partners of a general Income payments to partners of general professional
professional partnership subject to creditable partnership are subject to 15% creditable withholding tax,
withholding tax if the income payment to the partner for the current year
exceeds P720,000; and 10%, if otherwise.
g. Exercise
Jaimee, married, has two dependent minor. She is a partner of a general professional partnership. She also has a
trading business of her own. The following data are made available for the year 2009:

Gross income, trading business P500,000


Expenses, trading business 100,000
Interest income, BPI Makati 20,000
Share from the net income of a general professional partnership 300,000

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Accounting Review
TAXATION
601: Income Tax (Corporations, Partnerships, Etc.)
Prof. SONNIE A. RAMOS, CPA, MBA

Royalty, book published in the USA 150,000


Salaries as part time teacher 100,000

For income tax purposes, how much is Jaimee’s taxable net income?

8. IMPORTANT POINTERS IN TAXABLE PARTNERSHIPS


a. Taxable partnerships Taxable partnerships are required to file a cumulative quarterly declaration and a
required to file final return just like corporations.
cumulative
declaration of annual
return
b. Share of partner in a The share of partners in the net income of a taxable partnership shall be subject to
taxable partnership 10% final tax.
subject to final tax

c. Exercise
A business partnership was organized by partners Tin and Cris, equal partners, has the following data for the
calendar year ended 2009:
Gross business income P1,000,000
Deductible expenses 300,000
Yield from deposit substitute, net of final withholding tax 50,000
Interest income derived from a depository bank under EFCDS, net of withholding tax 100,000
Gain from sale of shares of stock not traded in the local stock exchange, Net of capital gains 80,000
tax 150,000
Withdrawals on the share in the net income of the partners, net of withholding tax 300,000
Rent income, gross of 5% withholding tax 120,000
Payments of quarterly taxes, first 3 quarters

Question 1 – How much is the taxable net income of the business partnership?
2– How much is the tax payable of the business partnership?
3– How much is the distributable net income of the partnership?
4– How much is the final withholding tax on the share of the partners, if any?

9. IMPORTANT POINTERS IN JOINT VENTURES


a. Taxable joint ventures Generally, joint ventures are subject to tax.
b. Exempt joint ventures 1) Joint venture undertaking construction projects;
(pursuant to an 2) Joint venture engaging in petroleum, coal, geothermal, and other
operating or energy operations
consortium agreement
under a service
contract with the
Government)
c. Share in the net The share in a taxable joint venture’s net income is treated as inter-corporate
income after tax in a dividend which is generally exempt from income tax. In case of individual co-
taxable joint venture venturer, it is subject to 10% final tax.
d. Share in the net The share in a non-taxable joint venture’s net income is subject to corporate income
income in an exempt tax or Section 24(A), in case of individual co-venturer.
joint venture
e. Exercise
Rhea company and Issa company formed a joint venture to undertake construction project pursuant to an
operating consortium agreement under a service contract with the Government. They shared equally. For the
calendar year 2009, the following data on their joint and separate operations were presented:

Joint operation: Gross income P150,000,000


Expenses 50,000,000

Separate operations (not part of joint venture) Rhea Issa


Company Company
Gross income P20,000,000 30,000,000
Expenses 5,000,000 10,000,000

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Accounting Review
TAXATION
601: Income Tax (Corporations, Partnerships, Etc.)
Prof. SONNIE A. RAMOS, CPA, MBA

REQ:
a. Compute the following: b. Assuming the above joint venture was
engaged in the sale of real estate, compute the
1) the net income of the joint venture following:
2) the income tax due from the joint venture 1) the taxable net income of the joint venture
3) the taxable net income of Rhea Company 2) the tax due from the joint venture
4) the taxable net income of Issa Company 3) the taxable net income of Rhea Company
4) the taxable net income of Issa Company

10. IMPORTANT POINTERS IN CO-OWNERSHIP


a. Co-ownership is not Co-ownership is generally not taxable because the activities of the co-owners are
taxable usually limited to the preservation of the property owned in common and collection
of the income therefrom.
b. Income to be reported Co-owners shall report in their respective income tax returns their shares of the
by co-owners income of the co-ownership.
c. When may the co- When the income of the co-ownership is invested by the co-owners in business or
owners be subject to other income producing properties, the co-owners will be subject to a tax as a
tax corporation because the co-owners have constituted themselves into a partnership.
d. Co-owners not to be Co-owners who own inherited properties which produce income should not
automatically automatically be considered as partners of an unregistered partnership or
considered as corporation subject to income tax.
partners
e. Sharing of gross The sharing of gross return does not of itself establish a partnership, whether or not
return does not of the persons sharing them have a joint or common right or interest in any property
itself establish a from which the returns are derived. There must be an unmistakable intention to
partnership form a partnership or joint venture.

11. CORPORATE RETURNS


a. Filing of quarterly and Every corporation subject to tax shall render, in duplicate a true and accurate
final or adjustment quarterly return and final or adjustment return
return
b. Non-resident foreign Corporations not engaged in trade or business in the Philippines (NRFC) shall not
corporations be required to file income tax return
c. Who shall file the 1) President;
corporate return? 2) Vice President; or
3) Other principal officers.
Note: The return shall be sworn to by above officer and by the Treasurer or
Assistant Treasurer.
d. What are the contents 4) 4 pages of paper which contains:
of the return? a. Corporate profile and information
b. Gross sales, receipts or income from services rendered, or conduct or
trade or business, except income subject to final tax as provided under this
Code (TRAIN Act)
c. Allowable deductions under this Code
d. Taxable income as defined in Section 31 of this Code
e. Income Tax due and payable
e. Corporate declarations Declaration of quarterly corporate income tax.
1) On a cumulative basis;
2) 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.
f. Final adjustment 1) Covers the total taxable income for the preceding calendar or fiscal year
return 2) Filed on or before 15th day of April after the close of the calendar year
3) Filed on or before 15th day of the 4th month following the close of the fiscal year
g. Sum of quarterly If the sum of the quarterly tax payments made during the taxable year is not equal
payments not equal to to the total tax due on the entire taxable income of that year, the corporation shall
the total tax due for either:
the year a) pay the balance of tax still due, or
b) carry over the excess credit, or to be credited or refunded with the excess
amount paid.

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Accounting Review
TAXATION
601: Income Tax (Corporations, Partnerships, Etc.)
Prof. SONNIE A. RAMOS, CPA, MBA

h. Corporation is entitled 1) In case the corporation is entitled to a tax refund or credit of the excess
to tax refund or credit estimated quarterly income taxes paid, the excess amount shown on its final
adjustment return may be carried over and credited against the estimated
quarterly income tax liabilities for the taxable quarters of the succeeding taxable
years.
2) Once the option to carry-over has been made, such option shall be considered
irrevocable for that taxable period.
i. Filing of the return The quarterly income tax declaration and the final adjustment shall be filed with:
1) Authorized agent banks, or
2) Revenue District Officer, or
3) Collection Agent, or Duly Authorized Treasurer of the city or municipality having
jurisdiction over the location of the 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.
j. Payment of the income The income tax due shall be paid at the time the declaration or return is filed.
tax

12. SEC 30 EXEMPTION FROM TAX ON CORPORATION – The following organizations shall not be taxed in
respect to
income received by them as such:
(A) Labor, agricultural or horticultural organizations not organized principally for profits;
(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 benefit 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
of which inures to the benefit of any private stockholder or individual;
(G) Civic league or organization not organized for profit but operated exclusively for the promotion of social welfare;
(H) A non-stock 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 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;
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.
Note: 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 corporation tax.

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