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Income Tax on Corporations

Concept of Corporation

A corporation includes partnerships, no matter how it was created or organized, joint-stock companies, joint
accounts, associations or insurance companies. Corporations do not include general professional , because it
is a joint venture formed to undertake construction projects or engage in petroleum, coal, geothermal and other
energy operations under an operating agreement of a service contract with the government (Section 22[B],
NIRC).

As a rule, the method of determination of gross income of corporations and individuals are the same. So long
as income is derived from any source, whether by corporate or individual taxpayers, it is considered income
except if expressly excluded by law.

As it is today, exclusions from gross income of corporate and individual taxpayers are still the same except
concerning exemptions, which are applicable only to individuals, the same being capable of application only to
natural persons.

Income Tax on Domestic Corporations and Resident Foreign Corporations

A domestic corporation is one organized and existing under Philippine laws. In general, it includes government-
owned and controlled corporations or instrumentalities engaged in a similar business industry or activity. A
domestic corporation is taxable on all income from sources within and outside the Philippines (Valencia &
Roxas, 2017).

A foreign corporation is organized and exists under the laws of the foreign country irrespective of the nationality
of its stockholders. Foreign corporations are taxable only on income from sources within the Philippines
(Valencia & Roxas, 2017).

- Resident foreign corporation refers to a foreign corporation that is engaged in business or trade in the
Philippines. Generally, it establishes a branch or an office to do business or trade (Valencia & Roxas, 2017).

- Non-resident foreign corporation does not engage in business or trade in the Philippines. Its earnings
are derived from fixed, determinable income from sources within the Philippines that are enumerated in the
Tax Code:
a. Interest, dividends, royalties;
b. Rents, salaries;
c. Premiums, except reinsurance premiums;
d. Annuities, emoluments or other fixed or determinable annual, periodic or casual gains, profits and
income; and
e. Capital gains, except capital gains from the sale of shares of stock not traded in the stock exchange of
a domestic corporation.

Regular Tax

Except as otherwise provided in the Tax Code, an income tax of 35% is imposed upon the taxable income
derived during each taxable year from all sources within and without the Philippines by every corporation, as
defined in Section 22(B) of the Tax Code and taxable under the Title as a corporation, organized in, or existing
under the laws of the Philippines: Provided, that effective January 1, 2009, the rate of income tax shall be 30%
(Bureau of Internal Revenue, Tax Code, 2018).

In the case of corporations adopting the fiscal-year accounting period, the taxable income shall be computed
without regard to the specific 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 (Bureau of Internal Revenue, Tax Code, 2018).

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Provided further, that effective January 1, 2000, the President, upon the recommendation of the Secretary of
Finance, may allow corporations the option to be taxed at 15% of gross income as defined herein, after the
following conditions have been satisfied:
- A tax effort ratio of 20% of Gross National Product (GNP);
- A ratio of 40% of income tax collection to total tax revenues;
- A VAT tax effort of 4% of GNP; and
- A 0.9% ratio of the Consolidated Public Sector Financial Position (CPSFP) to GNP.

The option to be taxed based on gross income shall be available only to firms whose ratio of cost of sales to
gross sales or receipts from all sources does not exceed 55% (Bureau of Internal Revenue, Tax Code, 2018).

The election of the gross income tax option by the corporation shall be irrevocable for three (3) consecutive
taxable years during which the corporation is qualified under the scheme (Bureau of Internal Revenue, Tax
Code, 2018).

Net Income Tax Formula:

Gross Income (excluding passive income and capital gains) xxx
Less: Allowable Deductions xxx
Net Taxable Income xxx
Apply Tax Rates 30%
Net Income Tax Due xxx
Less: Tax Credit, if any xxx
Tax still due, if any xxx

Minimum Corporate Income Tax

Imposition of Tax. A minimum corporate income tax of 2% of the gross income as of the end of the taxable
year is imposed on a taxable corporation, beginning on the fourth taxable year immediately following the year
in which such corporation commenced its business operations, when the minimum income tax is greater than
the tax computed for the taxable year (Bureau of Internal Revenue, Tax Code, 2018).

Per BIR Form 1702, the format to compute the minimum corporate income tax would be:

Gross income from operation P xxx

Add: Non-operating and other income not subject to final/capital gains tax xxx
Total gross income subject to MCIT P xxx
Multiplied by: MCIT Tax Rate 2%
Minimum Corporate Income Tax (MCIT) P xxx

Carry Forward of Excess Minimum Tax. Any excess of the minimum corporate income tax over the normal
income tax as computed shall be carried forward and credited against the normal income tax for the three (3)
immediately succeeding taxable years (Bureau of Internal Revenue, Tax Code, 2018).

Illustration:

ABC Corporation has been operating since January 1, 200a. Data pertinent to its operations covering 200c to
200e are as follows:

200c 200d 200e

Gross Sales P 3,080,000 P 4,100,000 P 5,200,000
Sales Returns, Discounts/Allowances 80,000 100,000 200,000
Cost of Sales 1,500,000 2,000,000 2,500,000
Operating Expenses 1,450,000 1,900,000 2,100,000

The determination of the appropriate income tax of ABC Corporation is shown as follows:

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a. Computation of Normal Corporate Income Tax (NCIT)

200c 200d 200e

Gross Sales P 3,080,000 P 4,100,000 P 5,200,000
Less: Sales Returns, Discounts/Allowances 80,000 100,000 200,000
Net Sales P 3,000,000 P 4,000,000 P 5,000,000
Less: Cost of Sales 1,500,000 2,000,000 2,500,000
Gross Income P 1,500,000 P 2,000,000 P 2,500,000
Less: Operating Expenses 1,450,000 1,900,000 2,100,000
Net Taxable Income P 50,000 P 100,000 P 400,000
Multiply: NCIT Tax Rate 30% 30% 30%
Normal Corporate Income Tax (NCIT) P 15,000 P 30,000 P 120,000

b. Computation of Minimum Corporate Income Tax (MCIT)

200d 200e
Gross Income P 2,000,000 P 2,500,000
Multiply: MCIT Tax Rate 2% 2%
Minimum Corporate Income Tax (MCIT) P 40,000 P 50,000

c. Determination of income tax due and payable:

200c 200d 200e

Whichever is higher (NCIT vs. MCIT) P 15,000 P 40,000 P 120,000
Less: Excess of MCIT over NCIT 10,000
Income tax due and payable P 15,000 P 40,000 P 110,000

The computation of excess of MCIT over NCIT:

200d MCIT (P2,000,000 x 2%) P 40,000

200d NCIT (P100,000 x 30%) 30,000
Excess of MCIT over NCIT P 10,000

Relief from the Minimum Corporate Income Tax under Certain Conditions. The Secretary of Finance is
authorized to suspend the imposition of the minimum corporate income tax on any corporation, which suffers
losses on account of a prolonged labor dispute, or because of force majeure, or because of legitimate business
reverses (Bureau of Internal Revenue, Tax Code, 2018).

The Secretary of Finance is authorized to promulgate, upon the recommendation of the Commissioner, the
necessary rules and regulation that shall define the terms and conditions under which he may suspend the
imposition of the minimum corporate income tax in a meritorious case (Bureau of Internal Revenue, Tax Code,
2018).

Gross Income Defined. For purposes of applying the minimum corporate income tax, the term 'gross income'
shall mean gross sales less sales returns, discounts and allowances and cost of goods sold. 'Cost of goods
sold' shall include all business expenses directly incurred to produce the merchandise to bring them to their
present location and use (Bureau of Internal Revenue, Tax Code, 2018).

Income Tax on Non-Resident Foreign Corporations

In General. Except as otherwise provided in the Tax Code, a foreign corporation not engaged in trade or
business in the Philippines shall pay a tax equal to 30% of the gross income received during each taxable
year from all sources within the Philippines, such as interests, dividends, rents, royalties, salaries, premiums
(except reinsurance premiums), annuities, emoluments or other fixed or determinable annual, periodic or casual

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gains, profits and income, and capital gains, except capital gains subject to tax under subparagraph 5(c) (Bureau
of Internal Revenue, Tax Code, 2018).

a. Nonresident Cinematographic Film Owner, Lessor, or Distributor - Shall pay a tax of 25% of its gross income
from all sources within the Philippines (Bureau of Internal Revenue, Tax Code, 2018).

b. Nonresident Owner or Lessor of Vessels Chartered by Philippine Nationals - Shall be subject to a tax of
four and one-half percent (4 1/2%) of gross rentals, lease or charter fees from leases or charters to Filipino
citizens or corporations, as approved by the Maritime Industry Authority (Bureau of Internal Revenue, Tax
Code, 2018).

c. Nonresident Owner or Lessor of Aircraft, Machineries, and Other Equipment - Rentals, charters and other
fees derived by a nonresident lessor of aircraft, machinery and other equipment shall be subject to a tax of
seven and one-half percent (7 1/2%) of gross rentals or fees (Bureau of Internal Revenue, Tax Code, 2018).

d. Tax on Certain Incomes Received by a Nonresident Foreign Corporation (Bureau of Internal Revenue, Tax
Code, 2018):
- Interest on Foreign Loans. A final withholding tax at the rate of 20% is imposed on the amount of interest
on foreign loans contracted on or after August 1, 1986;

- Intercorporate Dividends. A final withholding tax at the rate of 10% shall be imposed upon the cash
and/or property dividends actually or constructively received by an individual from a domestic
corporation or from a joint stock company, insurance or mutual fund companies and regional operating
headquarters of multinational companies, or on the share of an individual in the distributable net income
after tax of a partnership (except a general professional partnership) of which he is a partner, or on the
share of an individual in the net income after tax of an association, a joint account, or a joint venture or
consortium taxable as a corporation of which he is a member or co-venturer.

- Capital Gains from Sale of Shares of Stock not traded in the Stock Exchange. A final tax at the rate of
15% is now imposed upon the net capital gains realized during the taxable year from the sale, barter,
exchange or other disposition of shares of stock in a domestic corporation, except shares sold, or
disposed of through the stock exchange.

Allowable Deductions

As reiteration, deductions are items or amounts by which the law allows to be deducted under certain conditions
from gross income to arrive at taxable income. The following are the provisions for deductibility:
• Refers to the amounts which the law allows to be subtracted from gross income to arrive at net income;
• Pertains to the computation of net income; and
• Something spent or pain on earning of gross income.

Itemized Deductions

In the determination of the amount taxable, the following are the items to be deducted from the income of the
corporation:

Ordinary and necessary expenses. It is ordinary when it is commonly incurred in the trade or business of the
taxpayers distinguished from capital expenditures. The payments, however, need not be normal or habitual in
the sense that the taxpayer will have to make them often. The payment may be unique or non-recurring to the
particular taxpayer affected. Further, an expense is necessary when it is appropriate and helpful to the
taxpayer’s business or if it is intended to realize a profit or to minimize a loss.

Business expenses. These include salaries, wages, and other forms of compensation for personal services
rendered, including the grossed-up monetary value of fringe benefit granted, provided the fringe benefits tax
has been paid.

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For the salaries to be deductible, the payments must be reasonable and that they are paid for personal services
rendered. For travel expenses, the deductions include transportation expenses and meals and lodging of an
employee paid for by the employer.

Interest. It is the amount paid or incurred within a taxable year in connection with the taxpayer’s profession,
trade or business. To be deductible, interest must be a debt for which the taxpayer is legally liable or answerable.
It must result from an actual debtor-creditor relation where repayment of the loan is intended, and be based on
a valid obligation to pay a fixed or determinable amount of money. Lastly, the interest must be stipulated in
writing. No deduction is allowed where: (1) interest is paid in advance through discount, and (2) if the
indebtedness is incurred to finance petroleum exploration.

Taxes. As a general rule, all taxes, national or local, paid or incurred within the taxable year in connection with
the taxpayer’s trade, business or profession, are deductible from gross income. These taxes are not considered
as deductible tax: (1) income tax imposed by the government, (2) income taxes imposed by the authority of any
foreign country but deduction is allowed only in the case of a taxpayer who is entitled to tax credit for taxes of
foreign countries but does not avail of the same, (3) tax credit – taxpayer’s right to deduct from the income tax
due the amount of tax he has paid to a foreign country, (4) estate and donor’s taxes, and (5) special
assessments or levies assessed against local benefits of a kind tending to increase the value of the property
assessed.

Losses. For losses to be deductible from gross income, the losses should be those of the taxpayer. Such losses
must have been sustained or incurred during the taxable year and should not be compensated by insurance
and that such losses must be evidenced by a closed and completed transaction.

Bad debts. These are valid and subsisting debts due to the taxpayer that is ascertained to be worthless and
charged off within the taxable year. These debts must be connected with the trade, business or profession of
the taxpayer. The specific requirements must be met so that bad debts may be deductible. The taxpayer must
show: (1) the nature of the debt, (2) the name of the debtor and his relationship to the taxpayer, if any, (3) when
the debt was created, (4) when the debt became due, (5) the effort made by the taxpayer to collect the debt,
and (6) how the debt was determined to be worthless.

Depreciation. This is the reduction in service value of the property used in business or trade arising from
exhaustion, wear and tear, and obsolescence. This is also applied to amortization of the value of intangible
assets, the use of which in the trade or business is limited in duration. For depreciation to be deductible, it must
be shown that: (1) the allowance for depreciation must be reasonable, (2) it must be for property used in trade,
business or profession, (3) it must be charged off during the taxable year, and (4) a statement on the allowance
must be attached to the return.

Depletion of oil wells, gas wells, and mines. Depletion is the exhaustion of natural resources like mines and oil
and gas wells as a result of production or severance from such mines and wells. Depletion based on costs of
natural resources at a gradually diminishing rate is deductible. Annual depletion deductions are allowed only to
mining entities, which own an economic interest in mineral deposits. An economic interest is possessed in every
case in which the taxpayer has acquired by investment any interest in mineral, in place and secures, by any
form of legal relationship, such as, but not limited to operating agreement and service contract agreement,
income derived from the extraction of the mineral, to which it must look for a return of its capital. A person who
has no capital investment in the mineral deposit does not possess an economic interest merely because through
a contractual relation he possesses mere economic or pecuniary advantages derived from production.

Charitable and other contributions. These are contributions to an organization, which is officially created for
charitable, religious, educational, scientific, artistic, literary, or other good works. For such to be deductible from
gross income, the following must be obeserved: (1) contribution must actually be paid or made to the Philippine
government or any of its political subdivision or any domestic corporations or associations, (2) no part of the net
income of the beneficiary must benefit any private stockholder or individual, (3) it must be made within the
taxable year, (4) it must not exceed 5% in case of a corporation of the taxpayer’s income (except where the
donation is deductible in full) to be determined without the benefit of the contribution, and (5) must be evidenced
by adequate records or receipts.

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Research and development. These are expenditures paid or incurred by the taxpayer during the taxable year
in connection with his trade, business or profession. These are considered as ordinary and necessary expenses,
which are not chargeable to capital account. The expenditures so treated shall be allowed as deduction during
the taxable year when it is paid.

Pension trusts contributions of employees. A pension trust is a fund established as an account for employee
retirement systems. For pension trusts to be deductible, the following must be observed: (1) the employer must
have established a pension or retirement plan to provide for the payment of reasonable pensions to his
employees, (2) the pension plan is reasonable and actuarially sound, (3) it must be funded by the employer, (4)
the amount contributed must no longer be subject to the control or disposition of the employer, (5) the payment
has not yet been allowed as deduction, and (6) the deduction is apportioned in equal parts over a period of 10
consecutive years beginning with the year in which the transfer or payment is made.

Optional Standard Deductions

In the case of a corporation subject to tax under Sections 27(A) and 28(A)(l) of the Tax Code, it may elect a
standard deduction in an amount not exceeding 40% of its gross income as defined in Section 32 of the Tax
Code. Unless the taxpayer signifies in his return his intention to elect the optional standard deduction, he shall
be considered as having availed himself of the deductions allowed in the preceding subsections. Such election
when made in return shall be irrevocable for the taxable year for which the return is made: Provided, that an
individual who is entitled to and claimed for the optional standard deduction shall not be required to submit with
his tax return such financial statements otherwise required under the Tax Code. Provided, further, that a general
professional partnership and the partners comprising such partnership may avail of the optional standard
deduction only once, either by the general professional partnership or the partners comprising the partnership.
Provided, finally, that except when the Commissioner otherwise permits, the said individual shall keep such
records pertaining to his gross sales or gross receipts, or the said corporation shall keep such records pertaining
to his gross income as defined in Section 32 of the Tax Code during the taxable year, as may be required by
the rules and regulations promulgated by the Secretary of Finance, upon recommendation of the Commissioner
(Congress of the Philippines, 2017).

Taxation of Passive Income

a. Interest from Deposits and Yield or any other Monetary Benefit from Deposit Substitutes and Trust Funds
and Similar Arrangements, and Royalties

A final tax at the rate of 20% is imposed upon the amount of interest on currency bank deposit and yield or
any other monetary benefit from deposit substitutes and trust funds and similar arrangements received by
domestic corporations, and royalties, derived from sources within the Philippines. Provided, however, that
interest income derived by a domestic corporation from a depository bank under the expanded foreign
currency deposit system shall be subject to a final income tax at the rate of 15% of such interest income.

b. Capital Gains from the Sale of Shares of Stock Not Traded in the Stock Exchange

A final tax at the rate of 15% is at this moment imposed upon the net capital gains realized during the taxable
year from the sale, barter, exchange or other disposition of shares of stock in a domestic corporation, except
shares sold, or disposed of through the stock exchange.

c. Tax on Income Derived under the Expanded Foreign Currency Deposit System

Income derived by a depository bank under the expanded foreign currency deposit system from foreign
currency transactions with nonresidents, 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 shall be exempt from all taxes, except net income
from such transactions as may be specified by the Secretary of Finance, upon recommendation by the
Monetary Board to be subject to the regular income tax payable by banks: Provided, however, that interest
income from foreign currency loans granted by such depository banks under said expanded system to

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residents other than offshore banking units in the Philippines or other depository banks under the expanded
system, shall be subject to a final tax at the rate of 10%.

Any income of nonresidents, whether individuals or corporations, from transactions with depository banks
under the expanded system, shall be exempt from income tax.

d. Intercorporate Dividends

Dividends received by a domestic corporation from another domestic corporation shall not be subject to tax.

e. Capital Gains Realized from the Sale, Exchange or Disposition of Lands and/or Buildings

A final tax of 6% is hereby imposed on the gain presumed to have been realized on the sale, exchange or
disposition of lands and/or buildings which are not actually used in the business of a corporation and are
treated as capital assets, based on the gross selling price of fair market value as determined in accordance
with Section 6(E) of the Tax Code, whichever is higher, of such lands and/or buildings.

Illustration: GG Corporation has the following passive income for the year 201A:
1. Interest from a depository bank under the expanded foreign currency deposit system (FCDS) at P120,000;
2. Royalties of P300,000;
3. Yield deposit substitutes and trust fund at P180,000; and
4. Interest on currency bank deposit at P50,000.

Required: Compute for the passive income taxes of GG Corporation assuming that the corporation is: (1) a
Domestic Corporation (DC), (2) a Resident Foreign Corporation (RFC), and a Non-resident Foreign Corporation
(NRFC).

Solution:
DC/RFC RFC NFRC

Taxation of Capital Gains

The tax on capital gains of a corporation derived within the Philippines is summarized as follows:

Resident Non-resident
Domestic
Foreign Foreign
Capital gains on sale of shares
of stock not traded in the local First P100,000 (5%) First P100,000 (5%)
15%
stock exchange; Final Excess of P100,000 (10%) Excess of P100,000 (10%)
withholding tax
Percentage tax on sale of
shares of stock traded in the
6/10 of 1% 6/10 of 1% 6/10 of 1%
local stock exchange; Based
on selling price
Capital gains on sale, 6% of selling
exchange or disposition of price or FMV, 6% of selling price or FMV,
30% Final Withholding Tax
lands and/or buildings located whichever is whichever is higher
in the Philippines higher
Net capital gains on sales or
30% Not taxable Not taxable
exchange or disposition of

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Resident Non-resident
Domestic
Foreign Foreign
lands and/or buildings located
outside the Philippines

SEC. 127. Tax on Sale, Barter or Exchange of Shares of Stock Listed and Traded through the Local Stock
Exchange or through initial Public Offering. (A) Tax on Sale, Barter or Exchange of Shares of Stock Listed and
Traded through the Local Stock Exchange.
- There shall be levied, assessed, and collected on every sale, barter, exchange or other disposition of shares
of stock listed and traded through the local stock exchange other than the sale by a dealer in securities, a
tax at the rate of six-tenths of one percent (6/10 of 1%) of the gross selling price or gross value in money of
the shares of stock: sold, bartered, exchanged or otherwise disposed which shall be paid by the seller or
transferor (Congress of the Philippines, 2017).

Illustration: XYZ Corporation has the following capital asset transactions for the year 201A:
1. Sold 10,000 common shares of stock not traded in the local stock exchange for P1,200,000. The cost per
stock is P100.
2. Sold 20,000 preferred shares of the preferred stock traded in the local stock exchange for P1,800,000. The
cost per stock is P100.
3. Sold land located in the Philippines for P6,000,000. The cost of the land is P3,000,000 with a fair market
value of P6,500,000.
4. Sold land located in Japan for P5,000,000. The cost of the land is P4,000,000.

Required: Compute XYZ Corporation’s taxes payable on sales of capital assets assuming the taxpayer is (1) a
Domestic Corporation (DC), (2) a Resident Foreign Corporation (RFC), and a Non-resident Foreign Corporation
(NRFC).

Solution:
DC RFC NFRC

References
Bureau of Internal Revenue. (2018). 2018 revenue regulations. Retrieved from Bureau of Internal Revenue:
https://www.bir.gov.ph/index.php/revenue-issuances/revenue-regulations/2018-revenue-
regulations.html
Bureau of Internal Revenue. (2018). Computation of gross income. Retrieved from Bureau of Internal Revenue:
https://www.bir.gov.ph/index.php/tax-code.html#title2
Bureau of Internal Revenue. (2018, January 25). Revenue regulations no. 8-2018. Quezon City, NCR,
Philippines.
Bureau of Internal Revenue. (2018). Tax code. Retrieved from Bureau of Internal Revenue:
https://www.bir.gov.ph/index.php/tax-code.html
Bureau of Internal Revenue. (2018). Tax information. Retrieved from Bureau of Internal Revenue:
https://www.bir.gov.ph/index.php/tax-information.html
Congress of the Philippines. (2017, July 24). Republic act no. 10963. Metro Manila, Philippines.
De Leon, H. S. & De Leon, H. M. (2016). The law on income taxation. Quezon City: REX Printing Company,
Inc.
De Vera, J. L. (2018). Quicknotes in taxation. Manila: GIC Enterprises & Co.,Inc.
Valencia, E. G. & Roxas, G. F. (2017). Income taxation: Principles and laws with accounting applications. Baguio
City: Valencia Educational Supply.

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