BUSINESS TAX TAXES ON CORPORATE INCOME

A domestic corporation is subject to tax on its worldwide income. On the other hand, a foreign corporation is
subject to tax only on income from Philippine sources

Domestic corporations

The following corporate income tax (CIT) rates apply to domestic corporations:

Income CIT rate (%)

In general, on net income from all sources. 30

Minimum corporate income tax (MCIT) on gross income, beginning in the fourth taxable year
following the year of commencement of business operations. MCIT is imposed where the CIT at 2
30% is less than 2% MCIT on gross income.

Proprietary educational institutions and non-profit hospitals, on net income if gross income
from unrelated trade, business, and other activities does not exceed 50% of the total gross 10
income from all sources.

Non-stock, non-profit educational institutions (all assets and revenues used actually, directly,
Exempt
and exclusively for educational purposes) and other non-profit organisations.

Certain passive income from domestic sources is subject to final tax rather than ordinary income tax

Improperly accumulated earnings tax

An improperly accumulated earnings tax of 10% is imposed on improperly accumulated income. The tax applies
to every corporation formed or used for the purpose of avoiding income tax with respect to its shareholders, or
the shareholders of any other corporation, by permitting earnings and profits to accumulate instead of being
divided or distributed. Exceptions are made for publicly held corporations, banks and non-bank financial
intermediaries, and insurance companies.

Resident foreign corporations

Resident foreign corporations (i.e. foreign corporations engaged in trade or business in the Philippines through a
branch office) are taxed in the same manner as domestic corporations (except on capital gains on the sale of
buildings not used in business, which are taxable as ordinary income), but only on Philippine-source income.

International carriers are subject to an income tax of 2.5% on their gross Philippine billings unless a lower rate is
available under an existing tax treaty. Exemption from this tax is also available under international agreements to
which the Philippines is a signatory or on the basis of reciprocity in cases where the home country of the
international carrier grants income tax exemption to Philippine carriers.

Income of offshore banking units (OBUs) and foreign currency deposit units (FCDUs) of depository banks from
foreign currency transactions with non-residents, other OBUs, or FCDUs and local commercial banks (including
branches of foreign banks) authorised by the Bangko Sentral ng Pilipinas (BSP; central bank) to transact business
with OBUs and FCDUs are exempt from all taxes except net income specified by the Secretary of Finance upon
recommendation of the Monetary Board. Interest income from foreign currency loans granted to residents other
than OBUs or local commercial banks shall be subject to a 10% final income tax.

Regional or area headquarters of multinational corporations that do not earn or derive income from the
Philippines, and that act as supervisory, communications, and coordinating centres for their affiliates,
subsidiaries, or branches in the Asia-Pacific region and other foreign markets are not subject to CIT.
Page 1 of 4

Classified as Confidential. Please do not forward this to unintended users. Otherwise, request necessary permission.
BUSINESS TAX TAXES ON CORPORATE INCOME
Regional operating headquarters (ROHQ) pay a tax of 10% on their taxable income. An ROHQ is a branch
established in the Philippines by a multinational company that is engaged in any of the following services: general
administration and planning, business planning and coordination, sourcing and procurement of raw materials
and components, corporate finance advisory services, marketing control and sales promotion, training and
personnel management, logistic services, research and development services and product development, technical
support and maintenance, data processing and communication, or business development.

Non-resident foreign corporations

In general, non-resident foreign corporations are taxed on gross income received from sources within the
Philippines at 30%, except for reinsurance premiums, which are exempt. Interest on foreign loans is taxed at
20%. Dividends from domestic corporations, however, are subject to a final WHT at the rate of 15% if the country
in which the corporation is domiciled does not impose income tax on such dividends or allows a tax deemed paid
credit of 15%.

Lower rates or exemption on the above income may be available under an applicable tax treaty.

Rentals and charter fees payable to non-resident owners of vessels chartered by Philippine nationals are subject
to a final tax of 4.5%. Rentals, charters, and other fees derived by non-resident lessors of aircraft, machinery, and
other equipment are subject to a final tax of 7.5%.

Source: PwC Philippines

Summary

The term Corporation shall include partnerships, no matter how created or organized, joint stock
companies, joint accounts, associations, or insurance companies, but does not include:
a) General Professional Partnership
b) Joint venture or consortium formed for the purpose of undertaking construction projects; and
c) Joint venture for engaging in petroleum, coal, geothermal and other energy operations pursuant to
an operating or consortium under a service contract with the Government.

Source: Taxation Law and Accounting by Reyes

Items of Income DC RC NRC

Regular tax on taxable income (others)
Within and Outside the Philippines 30%
Within the Philippines 30%
Gross Income within the Philippines 30%

But, beginning with the 4th year of operations,

Regular tax on taxable income (others)

Within and Outside the Philippines 30%
Within the Philippines 30%
OR
Minimum Corporate Income Tax on minimum corporate gross income whichever is
higher
Within and Outside the Philippines 2%
Within the Philippines 2%

Page 2 of 4

Classified as Confidential. Please do not forward this to unintended users. Otherwise, request necessary permission.
BUSINESS TAX TAXES ON CORPORATE INCOME

REGULAR CORPORATE INCOME TAX AND MINIMUM CORPORATE INCOME TAX FOR DOMESTIC AND RESIDENT
CORPORATION

DOMESTIC RESIDENT
Gross income within the Philippines Gross income within the Philippines (a)
Gross income outside the Philippines
Total gross income (a)
Less: Less:
Expenses and losses within the Philippines Expenses and losses within the Philippines
Expenses and losses outside the Philippines
OR OR
Optional Standard Deduction [20% of (a)] Optional Standard Deduction (20% of “a”)
Taxable net income (b) Taxable net income within the Philippines (b)
RCIT at 30% of (b) RCIT at 30% of (b)

Beginning with 4th year of operations Beginning with 4th year of operations

Gross income within the Philippines Gross income within the Philippines (a)
Gross income outside the Philippines
Total gross income (a)
Less: Less:
Expenses and losses within the Philippines Expenses and losses within the Philippines
Expenses and losses outside the Philippines
OR OR
Optional Standard Deduction [20% of (a)] Optional Standard Deduction (20% of “a”)
Taxable net income (b) Taxable net income within the Philippines (b)
RCIT at 30% of (b) RCIT at 30% of (b)
MCIT at 2% of (a) MCIT at 2% of (a)
Income tax due (whichever is higher Income tax due (whichever is higher between
between RCIT or MCIT) RCIT or MCIT)

Reminders:
 Gross income of manufacturing and trading corporations is equal to net sales minus cost of sales
 Gross income of service concerns is equal to gross receipts less direct costs of the services.
 If MCIT is higher than RCIT, excess MCIT shall be carried forward for the next three years. However, MCIT
can be used only if RCIT is greater than MCIT. After the 3rd year of specific MCIT, unutilized excess MCIT
shall be closed to Retained Earnings account.
 Each year has its own 3 years to which MCIT can be carried over.
 Income Tax Expense is the RCIT. Any excess MCIT over RCIT at the end of the year is debited to “Deferred
Charge – MCIT” account.
 Entry will be:
Income Tax Expense (RCIT) XX
Deferred Charges – MCIT (Excess MCIT) XX
Income Tax Payable XX

Page 3 of 4

Classified as Confidential. Please do not forward this to unintended users. Otherwise, request necessary permission.
BUSINESS TAX TAXES ON CORPORATE INCOME
Case 1

The following information came from a 3-year old corporation:

Gross income, Philippines Php 500,000

Gross income, foreign 200,000
Expenses, Philippines 200,000
Expenses, foreign 120,000

Required:
1. Determine the taxable income if the corporation is (a) domestic corporation and (b) resident corporation
2. Calculate the tax due if the corporation is (a) domestic corporation and (b) resident corporation

Case 2

ABC Corporation is incorporated in the Philippines in 2010. The following results is for the calendar year 2015:

Net sales Php 1,000,000

Capital gain on sale of shares of a domestic corporation 100,000
Capital gain on sale of land outside the Philippines 500,000
Dividend received from a domestic corporation 25,000
Interest on bank deposit 20,000
Cost of sales 300,000
Quarterly income tax paid 100,000
Operating expenses 250,000

Compute for the following:

1. Taxable income for the end of the year
2. Income tax still due for the end of the year

Case 3

See the information below from a domestic corporation:

5th Year 6th Year 7th Year 8th Year 9th Year
RCIT 100,000 120,000 140,000 110,000 160,000
MCIT 310,000 80,000 130,000 100,000 120,000

Required: Determine the income tax due in each of the years.

Case 4

BCD Corporation have the following data as domestic corporation:

4th Year 5th Year 6th Year 7th Year 8th Year
RCIT 320,000 80,000 100,000 220,000 500,000
MCIT 650,000 20,000 300,000 200,000 200,000

How much is the income tax due for each year?

Page 4 of 4

Classified as Confidential. Please do not forward this to unintended users. Otherwise, request necessary permission.