TAX

on

CORPORATIONS
 DEFINITION OF CORPORATION
Corporation
- The term shall include 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 and 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 consortium agreement under a
service contract with the Government.
[Section 22(B)]
General Professional Partnerships
- Partnership 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. [Section 22(B)]
Include:
(a) Partnerships (except GPPs)
(b) Joint stock companies
(c) Joint accounts (cuentasen participacion)
(d) Associations
(e) Insurance companies
Exclude:
(a) General Professional Partnerships
(b) Joint venture or consortium formed for
purposes of
a. undertaking construction projects or
b. engaging in petroleum, coal,
geothermal and other energy
operations
pursuant to an operating or consortium
agreement under a service contract with the
government.
Section 3, RR 10-2012: JOINT VENTURES NOT
TAXABLE AS CORPORATIONS. A joint venture or
consortium formed for the purpose of undertaking
construction projects not considered as corporation
under Sec 22 of the NIRC of 1997 as amended, should
be:
(1) for the undertaking of a construction project;
and
(2) should involve joining or pooling of resources
by licensed local contracts; that is, licensed as
general contractor by the Philippine
Contractors Accreditation Board (PCAB) of
the Department of Trade and Industry (DTI);
(3) these local contractors are engaged in
construction business; and
(4) the Joint Venture itself must likewise be duly
licensed as such by the Philippine Contractors
Accreditation Board (PCAB) of the
Department of Trade and Industry (DTI)
Joint ventures involving foreign contractors may also
be treated as a non-taxable corporation only if the
member foreign contractor is covered by a special
license as contractor by the Philippine Contractors
Accreditation Board (PCAB) of the Department of
Trade and Industry (DTI); and the construction
project is certified by the appropriate Tendering
Agency (government office) that the project is a
foreign financed/internationally-funded project and
that international bidding is allowed under the
Bilateral Agreement entered into by and between the
Philippine Government and the foreign /
international financing institution pursuant to the
implementing rules and regulations of Republic Act
No. 4566 otherwise known as Contractor’s License
Law.
Absent any one the aforesaid requirements, the joint
venture or consortium formed for the purpose of
undertaking construction projects shall be
considered as taxable corporations.
In addition, the tax-exempt joint venture or
consortium as herein defined shall not include those
who are mere suppliers of goods, services or capital
to a construction project.
The member to a Joint Venture not taxable as
corporation shall each be responsible in reporting
and paying appropriate income taxes on their
respective share to the joint ventures profit.
 CLASSIFICATION OF CORPORATIONS
Classification of Corporations:
(A) Domestic Corporation – Corporations
created or organized in the Philippines or
under its laws. [Section 22(C)]
(B) Foreign Corporation – Corporations which is
not domestic. [Section 22(D)]
(a) Resident Foreign Corporation – Foreign
corporation engaged in trade or business
within the Philippines. [Section 22(H)]
(b) Non-Resident Foreign Corporation –
Foreign corporation not engaged in trade
or business within the Philippines.
[Section 22(I)]
The Corporation Code of the Philippines
(the “Corporation Code”) requires any
foreign corporation doing business in the
Philippines to obtain a license to do
business from the Philippine Securities
and Exchange Commission (“SEC”).
The term “doing business” is defined
broadly under Section 3(d) of the Foreign
Investments Act of 1991, as amended
(the “FIA”). It includes:
✓ Soliciting orders or service
contracts.
✓ Opening offices (whether called
“liaison” offices or branches);
✓ appointing representatives or
distributors domiciled in the
Philippines or who in any
calendar year stay in the country
for a period or periods totaling
one hundred eighty (180) days
or more.
✓ Participating in the
management, supervision or
control of any domestic
business, firm, entity or
corporation in the Philippines.
✓ Any other act or acts that imply a
continuity of commercial
dealings or arrangements, and
contemplate to that extent the
performance of acts or works, or
the exercise of some of the
functions normally incident to,
and in progressive prosecution
of, commercial gain or of the
purpose and object of the
business organization.
The Philippine Supreme Court has explained
that the test of “doing business” is not the
number or quantity of transactions, but
rather the intention of the entity to continue
its business in the country.
Thus, a foreign corporation is “not doing
business” if it engages in an isolated
transaction, or, a transaction or series of
transactions different from or unrelated to
the common business of the foreign
enterprise in the sense that there is no
intention to engage in the progressive pursuit
of the purpose and object of the business
organization. Finally the Supreme Court
cautioned that since there is no hard-and-
fast rule as to what constitutes “doing
business”, each case is to be judged
according to its peculiar circumstances.
In addition, the Supreme Court listed other
instances where a foreign corporation is
considered “not doing business” in the
Philippines:
 Investing as a shareholder in
domestic corporations and/or the
exercising rights as a shareholder
investor.
 Maintaining a nominee director or
officer to represent its interest in
domestic corporations.
 Appointing a representative or
distributor domiciled in the
Philippines to transact business in
the representative’s or distributor’s
own name and account.
Moreover, the FIA implementing regulations
further list the following activities as “not
doing business”:
 Publication of a general
advertisement through any print or
broadcast media.
 Maintaining a stock of goods in the
Philippines solely for the purpose of
having the same processed by
another entity in the Philippines.
 Consignment by a foreign entity of
equipment with a local company to
be sued in the processing of products
for export.
 Collecting information in the
Philippines.
 Performing services auxiliary to an
existing isolated contract of sale
which are not on a continuing basis,
such as installing in the Philippines
machinery it has manufactured or
exported to the Philippines, servicing
the same, training domestic workers
to operate it, and similar incidental
services.
The Court noted that most of these activities
do not bring any direct receipts or profits to
the foreign corporation, consistent with its
earlier ruling that “activities within Philippine
jurisdiction that do not create earnings or
profits to the foreign corporation do not
constitute doing business in the Philippines.
But why the need to draw the line between
“doing business” and not doing business?
Under Philippine corporate law, a foreign
corporation doing business in the Philippine
without securing the proper license from the
Securities and Exchange Commission(SEC)
“shall (not) be permitted to maintain or
intervene in any action, suit or proceeding in
any court or administrative agency of the
Philippines; but such corporation may be
sued or proceeded against before Philippine
courts or administrative tribunals on any
valid cause of action recognized under
Philippine laws.” In other words, a foreign
corporation doing business in the Philippines
without a license cannot sue, although it may
be sued. By implication, a foreign corporation
engaged in an isolated transaction does not
need an SEC-issued license to do business in
order to file legal action to assert or protect
its rights arising from the isolated
transaction.
(C) Special Corporation – Corporations subject to
different income tax rate.
Special DC:
(a) Proprietary educational institutions and
hospitals – Non-profit
✓ Except those whose gross income
from unrelated sources exceeds 50%
of their total gross income
(b) GOCCs
(1) PCSO is included under TRAIN.
(c) Exempt government institutions
Special RFC:
(a) International carrier
(b) Offshore banking units
(c) Branch profit remittances
(d) Regional area headquarters
(e) Regional operating headquarters
Special NRFC:
(a) Cinematographic film owner / lessor /
distributor
(b) Owner/lessor of aircraft, machineries
and other equipment
(c) Owner/lessor of vessels chartered by
Philippine nationals
 CLASSIFICATION OF TAXES
TAX/INCOME
1 Normal Corporate Income Tax
2 Gross/Optional Corporate
Income Tax
3 Minimum Corporate Income
Tax
4 Improperly Accumulated
Earnings Tax
PASSIVE INCOME SUBJECT TO FINAL TAX
5 Royalties
6 Interest from Deposits and
Yield or any other Monetary
Benefit from Deposit
Substitutes, Trust Funds and
Similar Arrangements
7 Income Derived under
Expanded Foreign Currency
Deposit System (EFCDS)
8 Capital Gains from the Sale of
Shares of Stock Not Traded in
the Stock Exchange
9 Capital Gains Realized from the
Sale, Exchange or Disposition of
Lands and/or Buildings
10 Intercorporate Dividends
DOMESTIC CORPORATIONS
TAX BASE TAX
RATE
CORPORATE INCOME TAX
Taxable income from all sources within & without 30%
Gross income (If qualified) 15%
Gross income (If qualified) 2%
Improperly accumulated taxable income (if qualified) 10%
20%
Interest income from currency bank deposit and yield or 20%
any other monetary benefit from deposit substitute and
trust funds and similar arrangements
Interest income from depositary bank under EFCDS 15%
Income from foreign currency transactions with non- EXEMPT
residents, offshore banking units in the Philippines, local
commercial banks, including branches of foreign banks
that may be authorized by the Bangko Sentral ng Pilipinas
(BSP) to transact business with foreign currency deposit
system units and other depository banks under EFCDS
(Except net income from transactions as may be specifed Regular
by the Secretary of Finance, upon recommendation by income of
the Monetary Board) the banks
Interest income from foreign currency loans granted by 10%
such depositary banks under epanded system (Other than
offshore banking units or depository banks under
expanded system)
Income of non-residents from transactions with EXEMPT
depository banks under expanded system
Net capital gains 15%
<5%/10%>
On gross selling price or current FMV at the time of sale, 6%
whichever is higher
Dividends from domestic corporation EXEMPT
Dividends from foreign corporation CIT
(100% part of ordinary income)
 CLASSIFICATION OF TAXES
For Reference:
Gross Income
- Gross sales less sales returns, discounts and
allowances and cost of goods sold. (Section
27)
- In case of taxpayers engaged in the sale of
service, it means gross receipts less sales
returns, allowances and discounts. (Section
27)
Cost of Goods Sold
- Include all expenses directly incurred to
produce the merchandise to bring them to
their present location and use. (Section 27)
- For trading or merchandising concern, it
includes the invoice cost of the goods sold,
plus import duties, freight in transporting the
goods to the place where the goods are
actually sold, including insurance while the
goods are in transit. (Section 27)
Cost of Goods Manufactured and Sold
- Include all costs of production of fnished
goods, such as raw materials used, direct
labor and manufacturing overhead, freight
cost, insurance premiums and other costs
incurred to bring the raw materials to the
factory or warehouse. (Section 27)
Computation of Gross/Taxable Income
Gross Sales XXX
Sales Returns (XXX)
Sales Discount & Allowances (XXX)
Gross Income XXX
Allowable Deductions (XXX)
Taxable Income XXX
NCIT Rate 30% x
NCIT Due XXX
1 – Normal Corporate Income Tax
General Rule: 30% of taxable income from all sources
within and without starting January 1, 2009 (Before:
35%) [Normal Corporate Income Tax (NCIT)]
- If adopting fiscal year accounting:
✓ Taxable income shall be computed
without regard to the specifc date
when specific sales, purchases and
other transactions occur.
✓ Their income and expenses for the
fiscal year shall be deemed to have
been earned and spent equally for
each month of the period.
Exceptions:
2 – Gross Corporate Income Tax
(A) 15% of gross income (at the option of the
corporation) [Optional Corporate Income Tax
(GCIT)] - After satisfaction of the following
conditions:
a. A tax effort ratio of 20% of GNP;
b. A ratio of 40% of income tax
collection to total tax revenues;
c. A VAT tax effort of 4% of GNP; and
d. A 0.9% ratio of the Consolidated
Public Sector Financial Position
(CPSFP) to GNP.
Conditions:
(1) Satisfaction of the mentioned conditions.
(2) The option to be taxed based on gross
income is available only to firms whose ratio
of cost of sales to gross sales or receipts from
all sources does not exceed 55%;
(3) Election of gross income tax option shall be
irrevocable for 3 consecutive taxable years
during which the corporation is qualifed
under the scheme;
(4) Recommendation from the Secretary of
Finance; and
(5) Approval of the Office of the President.
3 – Minimum Corporate Income Tax
(B) 2% of the gross income (except 1income
exempt from income tax and those 2subject
to final tax) – IF MCIT applies.
a. Beginning on the fourth taxable year
immediately following the year in
which such corporation commenced
its business operations.
 Commencement – Date of
registration with the BIR, regardless
of whether the corporation is using
the calendar year or fiscal year.
b. MCIT shall be imposed when:
i. If taxable income is zero.
ii. If taxable income is negative.
iii. If MCIT is greater than NCIT.
(30% NCIT or 2% MCIT,
whichever is higher)
c. Not applicable:
i. On the first 3 years of business
ii. On corporations not subject to
NCIT
iii. On NRFC
d. Paid on a quarterly and yearly basis.
e. Suspended due to the following:
i. Prolonged labor dispute
ii. Force majeure
iii. Legitimate business reverses
f. It is an estimate of normal income
tax and it cannot be claimed as a
deduction.
Carry-Forward of the Excess of MCIT
(1) The excess of MCIT over the NCIT shall be
carried forward on an annual or quarterly
basis.
(2) The excess shall be credited against NCIT due
for the 3 immediately succeding taxable
years.
(3) Any excess not credited in the next 3 years
shall be forfeited.
(4) Carry forward (annually or quarterly) is
possible only if MCIT is greater than NCIT.
(5) The maximum amount that can be credited is
only up to the amount of the NCIT, there can
be no negative NCIT.
Note: See RR 9-1998
4 - Improperly Accumulated Earnings Tax
General Rule: 10% of improperly accumulated
taxable income [Section 29(A)(B)]
(1) Shall apply to every corporation formed and
availed for the purpose of avoiding the
income tax with respect to its shareholders
or the shareholders of any other corporation.
(2) Done by permitting earnings and profts to
accumulate instead of being divided or
distributed.
Exceptions: Shall not apply to [Section 29(B)]
(1) Publicly-held corporations
(2) Banks and other nonbank financial
intermediaries
(3) Insurance companies
Improperly Accumulated Taxable Income [Section
29(D)]
- Taxable income adjusted by (add):
✓ Income exempt from tax
✓ Income excluded from gross income
✓ Income subject to final tax
✓ Amount of NOLCO deducted
and reduced by the sum of:
(1) Dividends actually or constructively
paid (Section 5, RR 2-2001: Dividends
actually or constructively paid/issued
from the applicable year’s taxable
income)
(2) Income tax paid for the taxable year
(Section 5, RR 2-2001: income tax
paid/payable for the taxable year)
(3) amount reserved for the reasonable
needs of the business as defined in
these Regulations emanating from
the covered year’s taxable income
(Section 5, RR 2-2001)
Evidence of Purpose to Avoid Income Tax [Section
29(C)]
▪ Prima Facie Evidence: The fact that the
corporation is a mere holding company or
investment company
▪ Evidence Determinative of Purpose: The fact
that the earnings or profts of a corporation
are permitted to accumulate beyond the
reasonable needs of the business unless the
corporation, by the clear preponderance of
evidence, shall prove to the contrary.
Holding or Investment Company (Section 7, RR 2-
2001)
 - Corporation having practically no activities
except holding property, and collecting the
income therefrom or investing the same.
Prima Facie instances of accumulation of profits
beyond the reasonable needs of a business and
indicative of purpose to avoid income tax upon
shareholders: (Section 7, RR 2-2001)
a. Investment of substantial earnings and
profits of the corporation in unrelated
business or in stock or securities of unrelated
business;
b. Investment in bonds and other long-term
securities;
c. Accumulation of earnings in excess of 100%
of paid-up capital, not otherwise intended for
the reasonable needs of the business as
defined in these Regulations.
Reasonable Needs of the Business [Section 29(E)]
- Includes the reasonably anticipated needs of
the business.
Section 7, RR 2-2001: In order to determine whether
profits are accumulated for the reasonable needs of
the business as to avoid the imposition of the
improperly accumulated earnings tax, the controlling
intention of the taxpayer is that which is manifested
at the time of accumulation, not subsequently
declared intentions which are merely the product of
afterthought. A speculative and indefinite purpose
will not suffice. The mere recognition of a future
problem or the discussion of possible and alternative
solutions is not sufficient. Definiteness of plan/s
coupled with action/s taken towards its
consummation are essential.
Note: See Sections 2-8 of RR 2-2001(Important)
Section 2, RR 2-2001: Improperly Accumulated
Earning Tax – A tax equal to 10% of the improperly
accumulated taxable income of corporations formed
or availed of for the purpose of avoiding the income
tax with respect to its shareholders or the
shareholders of any other corporation, by permitting
the earnings and profits of the corporation to
accumulate instead of dividing them among or
distributing them to the shareholders.
Rationale: If the earnings and profits were
distributed, the shareholders would then be liable to
income tax thereon, whereas if the distribution were
not made to them, they would incur no tax in respect
to the undistributed earnings and profits of the
corporation. Thus, a tax is being imposed in the
nature of a penalty to the corporation for the
improper accumulation of
its earnings, and as a form of deterrent to the
avoidance of tax upon shareholders who are
supposed to pay dividends tax on the earnings
distributed to them by the corporation.
If the failure to pay dividends is due to some other
causes, such as the use of undistributed earnings and
profits for the reasonable needs of the business, such
purpose would not generally make the accumulated
or undistributed earnings subject to the tax.
However, if there is a determination that a
corporation has accumulated income beyond the
reasonable needs of the business, the 10%
improperly accumulated earnings tax shall be
imposed.
Section 3, RR 2-2001: Determination of Reasonable
Needs of the Business. An accumulation of earnings
or profits (including undistributed earnings or profits
of prior years) is unreasonable if it is not necessary for
the purpose of the business, considering all the
circumstances of the case.
To determine the "reasonable needs" of the business
in order to justify an accumulation of earnings:
▪ Immediacy Test (Under American
jurisprudence)
▪ Reasonable needs of the business
- Are hereby construed to mean the
immediate needs of the business, including
reasonably anticipated needs.
In either case, the corporation should be able to
prove an immediate need for the accumulation of the
earnings and profits, or the direct correlation of
anticipated needs to such accumulation of profits.
Otherwise, such accumulation would be deemed to
be not for the reasonable needs of the business, and
the penalty tax would apply.
The following constitute accumulation of earnings
for the reasonable needs of the business:
 a. Allowance for the increase in the
accumulation of earnings up to 100% of the
paid-up capital of the corporation as of
Balance Sheet date, inclusive of
accumulations taken from other years;
b. Earnings reserved for definite corporate
expansion projects or programs requiring
considerable capital expenditure as
approved by the Board of Directors or
equivalent body;
c. Earnings reserved for building, plants or
equipment acquisition as approved by the
Board of Directors or equivalent body;
d. Earnings reserved for compliance with any
loan covenant or pre-existing obligation
established under a legitimate business
agreement;
e. 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;
f. In the case of subsidiaries of foreign
corporations in the Philippines, all
undistributed earnings intended or reserved
for investments within the Philippines as can
be proven by corporate records and/or
relevant documentary evidence.
Section 4, RR 2-2001: Coverage. Imposed on
improperly accumulated taxable income earned
starting January 1, 1998 by domestic corporations as
defined under the Tax Code and which are classified
as closely-held corporations.
Closely-Held Corporations
- Corporations at least fifty percent (50%) in
value of the outstanding capital stock or at
least fifty percent (50%) of the total
combined voting power of all classes of stock
entitled to vote is owned directly or indirectly
by or for not more than twenty (20)
individuals.
- Domestic corporations not falling under the
aforesaid definition are, therefore, publicly-
held corporations.
For purposes of determining whether the corporation
is closely held corporation, insofar as such
determination is based on stock ownership, the
following rules shall be applied:
(1) Stock Not Owned by Individuals. - Stock
owned directly or indirectly by or for a
corporation, partnership, estate or trust shall
be considered as being owned
proportionately by its shareholders, partners
or beneficiaries.
(2) Family and Partnership Ownership. – An
individual shall be considered as owning the
stock owned, directly or indirectly, by or for
his family, or by or for his partner. For
purposes of this paragraph, the ‘family of an
individual’ includes his brothers or sisters
(whether by whole or half-blood), spouse,
ancestors and lineal descendants.
(3) Option to Acquire Stocks. - If any person has
an option to acquire stock, such stock shall be
considered as owned by such person. For
purposes of this paragraph, an option to
acquire such an option and each one of a
series of option shall be considered as an
option to acquire such stock.
(4) Constructive Ownership as Actual
Ownership. - Stock constructively owned by
reason of the application of paragraph (1) or
(3) hereof shall, for purposes of applying
paragraph (1) or (2), be treated as actually
owned by such person; but stock
constructively owned by the individual by
reason of the application of paragraph (2)
hereof shall not be treated as owned by him
for purposes of again applying such
paragraph in order to make another the
constructive owner of such stock.
Shall not apply:
a. Banks and other non-bank financial
intermediaries
b. Insurance companies
c. Publicly-held corporations
d. Taxable partnerships
e. General professional partnerships
f. Non- taxable joint ventures
g. Enterprises duly registered with the
Philippine Economic Zone Authority (PEZA)
under R.A. 7916, and enterprises registered
pursuant to the Bases Conversion and
Development Act of 1992 under R.A. 7227, as
 well as other enterprises duly registered 8 - Capital Gains from the Sale of Shares of
under special economic zones declared by Stock Not Traded in the Stock Exchange
law which enjoy payment of special tax rate
on their registered operations or activities in Under NIRC:
lieu of other taxes, national or local. First P100,000 5%
In excess of P100,000 10%
Branch of a foreign corporation is not covered by
these Regulations, the same being a resident foreign 9 – Capital Gains Realized from the Sale,
corporation.
Exchange or Disposition of Lands/Bldgs
Section 6, RR 2-2001: Period for Payment of
Capital gains tax is applied on the gross selling price
Dividend/Payment of IAET. - The dividends must be
or the current FMV at time of the sale, whichever is
declared and paid or issued not later than one year
higher. Any gain or loss on sale is immaterial because
following the close of the taxable year, otherwise, the
there is a conclusive presumption by law that the
IAET, if any, should be paid within fifteen (15) days
sale resulted in gain.
thereafter.
 CLASSIFICATION OF TAXES

SPECIAL DOMESTIC CORPORATIONS

TAX/INCOME TAX BASE TAX
RATE
1 Proprietary Educational Taxable income 10%
Intitutions and Hospitals (Except those whose gross income unrelated trade, 30%
business or other activity exceeds 50% of their total gross
income)
Non-stock Non-profit (Organized and operated exclusively for charitable EXEMPT
Educational Institutions and purposes and no part of its net income or asset shall
Hospitals belong to or inure to the benefit of any member,
organizer, officer or any specific person)
2 Government Owned and Taxable income 30%
Controlled Corporations (Except GSIS, SSS, Philhealth and Local Water District) EXEMPT
3 Exempt Government - EXEMPT
Institutions
 CLASSIFICATION OF TAXES
1 – Proprietary Educational Intitutions and
Hospitals
Proprietary Educational Institutions and Hospitals
➢ 10% of the taxable income (Except passive
income)
➢ Except those whose gross income from
unrelated trade, business or other activity
exceeds 50% of their total gross income. –
30% of Taxable Income
Unrelated trade, business or other activity
- 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.
Proprietary educational institution
- Any private school maintained and
administered by private individuals or
groups with an issued permit to operate
from the Department of Education,
Culture and Sports (DECS), or the
Commission on Higher Education
(CHED), or the Technical Education and
Skills Development Authority (TESDA), as
the case may be, in accordance with
existing laws and regulations.
Note:
A non-stock non-profit educational institution is
exempt from tax on its revenues and assets
actually, directly and exclusively used for
educational purposes. (Section 30)
A non-stock non-profit hospital that is operated
for charitable and social welfare purposes is
exempt from income tax under Section 30(E) and
(G) of the NIRC. However, as provided in St.
Luke’s Medical Center, Inc. vs CIR, the non-stock
non-profit hospital must satisfy the following
requisites to be entitled to exemption from
income tax:
(1) It is a non-stock corporation;
(2) It is operated exclusively for charitable
purposes; and
(3) 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.
Constitution, Section 4: (3) All revenues and
assets of non-stock, non-profit educational
institutions used actually, directly, and
exclusively for educational purposes shall be
exempt from taxes and duties. Upon the
dissolution or cessation of the corporate
existence of such institutions, their assets shall be
disposed of in the manner provided by law.
Proprietary educational institutions, including
those cooperatively owned, may likewise be
entitled to such exemptions, subject to the
limitations provided by law, including restrictions
on dividends and provisions for reinvestment.
DOF Order No. 149-95, Section 2(2.1): Non-stock,
non-profit educational institutions are exempt
from taxes on all their revenues and assets used
actually, directly, and exclusively for educational
purposes. They shall, however, be subject to
internal revenue taxes on income from trade,
business or other activity the conduct of which is
not related to the exercise or performance by
such educational institution of its educational
purpose or function.
DOF Order No. 149-95, Section 2(2.1.1): To
ensure that the exempt interest income from
Philippine currency deposits and yield from
deposit substitute instruments are used actually,
directly, and exclusively for educational
purposes, the said educational institutions shall,
on annual basis submit to the Revenue District
Officer, together with the annual information
return and duly audited financial statement, the
following:
(a) Certification from their depository banks as to
the amount of interest income earned
from passive investments not subject to the 20%
final withholding tax imposed by Section 24(e) of
the Tax Code, as amended;
(b) Certification of actual utilization of the said
income; and
(c) Board Resolution by the school administration
on proposed projects. (i.e.
construction and/or improvement of school
building and facilities; acquisition of equipments,
books and the like) to be funded out of money
deposited in banks or placed in money markets.
The RDO shall conduct an audit of the annual
information return filed to determined
compliance with the conditions set forth in the
Certificate of exemption and the tax
liabilities, if any.
Summary:
30%:
▪ Private, non-profit hospitals and
educational institutions whose gross
income from unrelated trade, business
or other activity exceeds 50% of total
gross income from all sources.
▪ Hospitals and educational insititutions
claiming to be proprietary non-profit but
do not meet the definition thereof.
10%:
▪ Private, non-profit hospitals and
educational institutions whose gross
income from unrelated trade, business
or other activity does not exceed 50% of
total gross income from all sources.
EXEMPT:
▪ Organized and operated exclusively for
charitable purposes and 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.
2 – GOCCs
GOCCs
➢ 30% of the taxable income (Same as DC)
➢ Under TRAIN, PCSO is already included
➢ Except:
▪ GSIS
▪ SSS
▪ Philippine Health Insurance
Corporation
▪ Local Water District.
Note:
Under Sec. 32 (B)(7) of the NIRC, even if the
GOCC is not one of those enumerated under
Sec. 27 (C), it may still be exempt if it is
performing governmental function. Thus,
income derived from any public utility or
from the exercise of any essential
government function accruing to the
Government of the Philippines or to any
political subdivision shall be exempt from
income tax.
PAGCOR is no longer exempt from corporate income
tax as it has been effectively omitted from the list of
GOCCs that are exempt from the payment of the
income tax. PAGCOR’s income from gaming
operations is subject only to 5% franchise tax under
PD No. 1869, while its income from other related
services is subject to corporate income tax pursuant
to PD No. 1869 in relation to RA No. 9337. SC clarified
that RA No. 9337 did not repeal the tax privilege
granted to PAGCOR under PD No. 1869, with respect
to its income from gaming operations. What RA No.
9337 withdrew was PAGCOR's exemption from
corporate income tax on its income derived from
other related services, previously granted under
Section 27(C) of RA 8424. (PAGCOR v. BIR, G.R. No.
215427, December 10, 2014)
 CLASSIFICATION OF TAXES
RESIDENT FOREIGN CORPORATIONS
TAX/INCOME
1 Normal Corporate Income Tax
2 Gross/Optional Corporate
Income Tax
3 Minimum Corporate Income
Tax
4 Improperly Accumulated
Earnings Tax
PASSIVE INCOME SUBJECT TO FINAL TAX
5 Royalties
6 Interest from Deposits and
Yield or any other Monetary
Benefit from Deposit
Substitutes, Trust Funds and
Similar Arrangements
7 Income Derived under
Expanded Foreign Currency
Deposit System (EFCDS)
8 Capital Gains from the Sale of
Shares of Stock Not Traded in
the Stock Exchange
9 Intercorporate Dividends
Note: See discussions on domestic corporation
TAX BASE TAX
RATE
CORPORATE INCOME TAX
Taxable income from all sources within 30%
Gross income (If qualified) 15%
Gross income (If qualified) 2%
Not applicable N/A
20%
Interest income from currency bank deposit and yield or 20%
any other monetary benefit from deposit substitute and
trust funds and similar arrangements
Interest income from depositary bank under EFCDS 7 ½%
Income from foreign currency transactions with non- EXEMPT
residents, offshore banking units in the Philippines, local
commercial banks, including branches of foreign banks
that may be authorized by the Bangko Sentral ng Pilipinas
(BSP) to transact business with foreign currency deposit
system units and other depository banks under EFCDS
(Except net income from transactions as may be specifed Regular
by the Secretary of Finance, upon recommendation by income of
the Monetary Board) the banks
Interest income from foreign currency loans granted by 10%
such depositary banks to residents under expanded
system (Other than depository banks under expanded
system)
Income of non-residents from transactions with EXEMPT
depository banks under expanded system
Net capital gains
Not over P100,000 5%
On any amount in excess of P100,000 10%
Dividends from domestic corporation EXEMPT
Dividends from foreign corporation Sec. 42
 CLASSIFICATION OF TAXES
SPECIAL RESIDENT FOREIGN CORPORATIONS
TAX/INCOME
1 International Carrier Doing
Business in the Philippines
Offline Carrier
Air Carrier – No flight
operations but derive income
from other activities in the
Philippines
2 Offshore Banking Units
(similar to FCDUs)
3 Branch Profit Remittances
4 Regional Area Headquarters
5 Regional Operating
Headquarters
TAX BASE TAX
RATE
Gross Philippine Billings (GPB) 2 ½%
(Unless subject to preferential tax rate or exemption
from the tax)
Taxable income 30%
Taxable income 30%
Income from foreign currency transactions with non- EXEMPT
residents, other offshore banking units, local commercial
banks, including branches of foreign banks that may be
authorized by the Bangko Sentral ng Pilipinas (BSP) to
transact business with OBUs and other depository banks
under EFCDS (Except net income from transactions as Regular
may be specifed by the Secretary of Finance, upon income of
recommendation by the Monetary Board) the banks
Interest income from foreign currency loans granted to 10%
residents (Other than OBUs, local commercial banks,
including local branches of foreign banks that may be
authorized by BSP)
Income of non-residents from transactions with OBUs EXEMPT
Total profits applied or earmarked for remittnace without 15%
any deduction for the tax component (Except those
activities registered with PEZA)
- EXEMPT
Taxable income 10%
 CLASSIFICATION OF TAXES
1 - International Carrier Doing Business in the
Philippines
International Carrier Doing Business in the Philippines
➢ 2 ½% on gross Philippine billings
➢ Foreign airline corporation doing business in
the Philippines which has a landing rights in
any Philippine port to perform air
transportation services or flight operations
anywhere in the world.
Gross Philippine Billings (International Air Carrier)
[Section 28(A)]
- Refers to the amount of gross revenue
derived from carriage of persons, excess
baggage, cargo, and mail originating from the
Philippines in a continuous and
uninterrupted fight, irrespective of the place
of sale or issue and the place of payment of
the ticket or passage document.
✓ Tickets revalidated, exchanged
and/or indorsed to another
international airline form part of the
Gross Philippine Billings if the
passenger boards a plane in a port or
point in the Philippines.
✓ Flight which originates from the
Philippines, but transshipment of
passenger 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 fown from the Philippines
to the point of transshipment shall
form part of Gross Philippine Billings.
Gross Philippine Billings (International Shipping)
[Section 28(B)]
- Gross revenue whether for passenger, cargo
or mail originating from the Philippines up to
fnal destination, regardless of the place of
sale or payments of the passage or freight
documents.
Preferential Tax Rate / Exemption [Section 28(B)]:
International carriers doing business in the
Philippines may avail of a preferential rate or
exemption from the tax herein imposed on their
gross revenue derived from the carriage of
persons and their excess baggage on the basis of
an applicable tax treaty or international
agreement to which the Philippines is a signatory
or on the basis of reciprocity such that an
international carrier, whose home country grants
income tax exemption to Philippine carriers, shall
likewise be exempt from the tax imposed under
this provision.
✓ Domestic law granting exemption shall
cover income taxes.
Off-Line International Carrier
➢ 30% income tax
➢ Not considered engaged in business as an
international air carrier in the Philippines.
➢ No landing rights
➢ Not subject to gross Philippine billings tax.
➢ Not subject to 3% common carrier’s tax.
➢ Any foreign carrier not certified by the [Civil
Aeronautics] Board, but who maintains office
or who has designated or appointed agents
or employees in the Philippines, who sells or
offers for sale any air transportation in behalf
of said foreign air carrier and/or others, or
negotiate for, or holds itself out by
solicitation, advertisement, or otherwise
sells, provides, furnishes, contracts or
arranges for such transportation.
South African Airways vs CIR:
To reiterate, if an international air carrier
maintains flight to and from the Philippines, it
shall be taxed at a rate of 2 ½% of its GPB, while
international air carriers that do not have flights
to and from the Philippines but nonetheless earn
income from other activities in the country will be
taxed at a rate of 30% of such income.
2 - Offshore Banking Units
RR 10-1998, Section 2.22:
(A) Foreign Currency Deposit System — shall refer to
the conduct of banking transactions whereby any
person whether natural or juridical may deposit
foreign currencies forming part of the Philippine
international reserves, in accordance with the
provisions of Republic Act No. 6426 entitled "An Act
Instituting a Foreign Currency Deposit System in the
Philippines, and For Other Purposes."
(B) Foreign Currency Deposit Unit (FCDU) — shall
refer to that unit of a local bank or of a local branch
of a foreign bank authorized by the Bangko Sentral Ng
Pilipinas (BSP) to engage in foreign currency-
denominated transactions, pursuant to the
provisions of R.A. 6426, as amended. ("Local bank"
shall refer to a thrift bank or a commercial bank
organized under the laws
of the Republic of the Philippines. "Local branch of a
foreign bank" shall refer to a branch of a foreign bank
doing business in the Philippines, pursuant to the
provisions of R.A. No. 337 , as amended).
(C) Offshore Banking System — shall refer to the
conduct of banking transactions in foreign currencies
involving the receipt of funds principally from
external and internal sources and the utilization of
such fund pursuant to Presidential Decree No. 1034
as implemented by CB (now BSP) Circular No. 1389,
as amended.
(D) Offshore Banking Unit (OBU) — shall mean a
branch, subsidiary or affiliate of a foreign banking
corporation which is duly authorized by the Bangko
Sentral Ng Pilipinas (BSP) to transact offshore banking
business in the Philippines in accordance with the
provisions of Presidential Decree No. 1034 as
implemented by CB (now BSP) Circular No. 1389, as
amended.
(E) Deposits — shall mean funds in foreign currencies
which are accepted and held by an Offshore Banking
Unit or Foreign Currency Deposit Unit in the regular
course of business, with the obligation to return an
equivalent amount to the owner thereof, with or
without interest.
3 - Branch Profit Remittances
Section 28 A(4):
Taxable Transaction:
Any profit remitted by a branch [of multinational
corporation] to its head office.
Tax Rate & Base:
Subject to 15% final tax based on the total profits
applied or earmarked for remittance without any
deduction for the tax component thereof (except
those activities which are registered with the
Philippine Economic Zone Authority).
The tax shall be collected and paid in the same
manner as provided in Sections 57 and 58 of this
Code, provided:
The following, received by a foreign corporation
during each taxable year from all sources within the
Philippines, shall not be treated as branch profits
unless the same are effectively connected with the
conduct of its trade or business in the Philippines:
✓ Interests
✓ Dividends
✓ Rents
✓ Royalties, including remuneration for
technical services, salaries, wages,
premiums, annuities, emoluments or other
fixed or determinable annual, periodic or
casual gains
✓ Profits
✓ Income
✓ Capital gains
For purposes of branch profit remittance, income
items which are not effectively connected with the
conduct of its trade or business in the Philippines are
not considered branch profits.
RMC 55-1980: To be ‘effectively connected’, it is not
necessary that the income be derived from the actual
operation of the branch’s trade or business. It is
sufficient that the income arises from the business
activity in which the branch is engaged.
For example, if a resident foreign corporation is
engaged in the buying and selling of machineries in
the Philippines and invests in some shares of stock on
which dividends are subsequently received, the
dividends thus earned are not considered effectively
connected with its trade or business in this country.
On the other hand, if a resident foreign corporation
with a branch office in the Philippines engaged in the
canning business allows its trade name or brand to be
used and royalties are received by its parent company,
such royalties which constitute passive income, are
effectively connected with its trade or business and
should be subject to tax, if remitted abroad.
The 15% final tax should exclude profits on activities
registered with PEZA.
4 - Regional Area Headquarters
Section 22(DD): Regional Area Headquarters is a
branch established in the Philippines by multinational
companies and which headquarters do not earn or
derive income from the Philippines and which act as
supervisory, communications and coordinating
center for their afliates, subsidiaries, or branches in
the Asia-Pacifc Region and other foreign markets.
5 - Regional Operating Headquarters
Section 22(EE): Regional Operating Headquarters is a
branch established in the Philippines which is
engaged in any of the following qualifying services:
✓ General administration and planning
✓ Business planning and coordination
✓ Sourcing/procurement of raw materials and
components
✓ Corporate finance advisory services
✓ Marketing control and sales promotion
✓ Training and personnel management
✓ Logistics services
✓ Research and development services and
product development
✓ Technical support and maintenance
✓ Data processing and communication
✓ Business development
 CLASSIFICATION OF TAXES

NON-RESIDENT FOREIGN CORPORATIONS

TAX/INCOME TAX BASE TAX
RATE
CORPORATE INCOME TAX
1 Normal Corporate Income Tax Gross income from all sources within 30%
2 Gross/Optional Corporate Not applicable N/A
Income Tax
3 Minimum Corporate Income Not applicable N/A
Tax
4 Improperly Accumulated Not applicable N/A
Earnings Tax
PASSIVE INCOME SUBJECT TO FINAL TAX
5 Interest on Foreign Loans Interest on foreign loans contracted 20%
6 Capital Gains from the Sale of Net capital gains
Shares of Stock Not Traded in Not over P100,000 5%
the Stock Exchange On any amount in excess of P100,000 10%
7 Intercorporate Dividends Dividends from domestic corporation1
(Cash/Property) If tax credit is allowed 15%
If tax credit is not allowed 30%
Dividends from foreign corporation Sec. 42

1:Does the domicile country of such NRFC allows tax against the tax due from the NRFC deemed to have been paid
in the Philippines equivalent to 15%?
 CLASSIFICATION OF TAXES

SPECIAL NON-RESIDENT FOREIGN CORPORATIONS

TAX/INCOME TAX BASE TAX
RATE
1 Non-Resident Cinematographic Gross income from all sources within 25%
Film Owner, Lessor or
Distributor
2 Non-Resident Owner or Lessor Gross rentals, lease or charter fees 4 ½%
of Vessels Chartered by (As approved by Maritime Industry Authority)
Philippine Nationas
3 Non-Resident Owner or Lessor Gross rentals or fees 7 ½%
of Aircraft, Machineries and
Other Equipment
 FRINGE BENEFITS

Fringe Benefits ✓ Interest on loans at less than market rate to

➢ Any good, service or other benefit furnished or
granted by an employer, in cash or in kind, in
addition to basic salaries, to an individual
employee, except a rank and file employee, such
as, but not limited to:
✓ Housing
✓ Expense account
✓ Vehicle of any kind
✓ Household personnel such as maid, driver
and others.
the extent of the difference between the
market rate and the actual rate granted
✓ Membership fees, dues and other expenses
athletic clubs or other similar organizations
✓ Expenses for foreign travel
✓ Holiday and vacation expenses
✓ Educational assistance to the employee or
his dependents
✓ Life or health insurance and other non-life
insurance premiums or similar amounts in
excess of what the law allows.

PRINT: 159-170 (UST)