TAXATION FOR ESTATES AND TRUSTS

ESTATES

Estate Defined

Estate refers to the mass of all the property, rights, and obligations of a person which are not extinguished
by his death (Art. 776, Civil Code).

It includes not only the property and transmissible rights and obligations existing at the time of his death,
but also those which have accrued thereto since the opening of the succession (Art 78 h Civil Code).

Decedent Defined

Decedent is the general term applied to the person whose property is transmitted through succession
whether or not he left a will. If he left a will, he is also called the testator (Art. 775, Civil Code).

Heir Defined

An heir is a person called to the succession either by the provision of a will or by operation of law (Art. 782,
Civil Code).

Devisee Defined

A devisee is a person to whom a gift of real property is given by virtue of a will.

Legatee Defined

A legatee is a person to whom a gift of personal property is given by virtue of a will (Art, 782, Civil Code).

Classification of Estates

Estates, for purposes of the income tax, are classified into:

1. Estate under judicial administration (the settlement of which is the object of Judicial testamentary or
intestate proceedings), and

2. Estate not under judicial administration (the settlement of which is not the object of judicial
testamentary or intestate proceedings) (Secs. 209 and 210, Rev, Reg. No. 2).

To Whom Income of Estate Shall be Taxed

The income of an estate may be taxable to the estate or heirs and beneficiaries, as follows:

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 1. Generally the income of the estate shall be taxable to the fiduciary or trustee.

The fiduciary or trustee (executor or administrator) shall file a return for the estate and pay the
income tax due thereon.

2. Where the estate is not under judicial administration and there is no executor or administrator, the
income of the estate shall be taxable to the heirs and beneficiaries.

Each heir and beneficiary shall include in his return his distributives share of the net income of the
estate.

Taxable Income of Estates

The taxable income of the estate shall be computed in the same manner and on the same basis as in the
case of a self-employed individual.

Gross Income of Estates

The items of gross income taxable to individuals (as defined in Section 32 (A) of the Tax Code) are also the
same items of gross income which are taxable to estates.

Excluded from Gross Income of an Estate:

The passage of property to the executor or administrator on the death of the decedent, even though the
property may have appreciated in value since the decedent acquired it

Included In Gross Income of an Estate

1. Income received by the estate of a deceased person during the period of or settlement of the
estate.

The “period of administration or settlement of the estate” is the period required by the executor or
administrator to perform the ordinary duties pertaining to such as the collection of assets and
payment of debts and legacies.

Estates, during the period of administration have but one beneficiary and that beneficiary is the
estate.

2. Where prior to the settlement, of the estate, the executor or administrator sells property of a
decedent’s estate for more than the appraised value placed upon it at the death of the decedent,
the excess is income taxable to the estate.

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Notes:
1. In the event of delivery of property in kind to a legatee or distribute, no income is by the legatee or
distributee.

2. Where the property is sold after the settlement of the estate by the devisee, legatee, or heir at a
price greater than the appraised value placed upon it at the time he inherited the property from the
decedent, the devisee, legatee or heir is taxable individually on any profit derived.

Deduction of Estates

An estate can take up the same items of deduction authorized under Section 34 of the Tax Code and
allowed an individual taxpayer (Sec. 61, NIRC).

Special Deduction of Estates

Estates can also deduct, in addition to the deduction authorized under Section 34, the amount of income of
the estate for the taxable year which is property paid or credited during such year to any legatee, heir, or
beneficiary.

Notes:
(a) The amount so allowed as a deduction shall be included in computing the taxable income of the
legatee, heir, or beneficiary (Sec. 61 (B) NIRC).

However, where no such distribution to the heirs is made during the taxable year that such income is
subjected to income tax payments by the estate, the subsequent distribution thereof is no longer
taxable on the part of the recipient heir.

(b) An allowance paid to an heir out of the corpus (i.e. property) of the estate is not deductible from
gross income (Sec. 211, Rev. Reg. 2).

Rates of Tax

The rates of tax under Section 24(A)(2) of the Tax Code, which are prescribed for individuals earning purely
self-employment or professional income, shall be used in the income tax of estates. As estate shall thus have
the following tax rates:

A. If the estate’s gross sales/receipts plus other non-operating income exceeds the VAT threshold of
P3,000,000 as provided in Section 109(BB) of the Tax Code, it shall be taxed on its net taxable
income using the graduated rates under Section 24(A)(2)(a) of the Tax Code.

B. If such estate’s gross sales/receipts plus other non-operating income does not exceed the VAT
threshold of P3,000,000, the estate’s executor/administrator shall have the option for the estate to
be taxed at:

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 1. Eight percent (8%) of gross sales or gross receipts, plus other non-operating income in excess of
Two Hundred Fifty Thousand Pesos (P250,000);

Note: This 8% tax on gross sales/receipts plus other non-operating income shall be in lieu of (a) the
progressive income tax rates under Section 24(A)(2)(a) of the Tax Code, and (b) the 3% Other
Percentage Tax (“OPT”) under Section 116 of the Tax Code.

OR

2. The graduated (progressive) rates under Section 24(A)(2)(a) of the Tax Code.

Computation of Tax

Accounting Period - Calendar year

Tax Base - (a) Taxable net income or
(b) Gross sales/receipts + non-operating income, if 8% income tax
rate is availed
Rate of Tax - (a) Graduated rates or
(b) 8% Income tax rate (if qualified and elected)

TRUSTS

Trust defined

A trust is a right of property, real or personal, held by one party (trustee) for the benefit of another
(beneficiary).

A trust is an obligation imposed either expressly or by implication of law, whereby the trustee is bound to
deal with property over which he has control, for the benefit of certain persons of whom he may himself be
one and anyone of them may enforce the obligation.

Parties to a Trust

A person who establishes a trust is called the Trustor or Grantor. The one in whom confidence is reposed
as regards the property for the benefit of another person is known as the known as the Trustee (or
Fiduciary), and the person for whose benefit the trust has been created is referred to as the Beneficiary.

Fiduciary Defined

A fiduciary for income tax purposes is any person or corporation that holds in trust an estate of another
person or persons. In order that a fiduciary relationship may exist, it is necessary that a legal trust be created
(Sec. 207, Rev. Reg. No. 2).

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Classification of Trusts

Trusts may be classified into the following categories.

(1) Ordinary trust;
(2) Revocable trust; and
(3) Employee’s trust.

Ordinary trust

In an ordinary trust, the income and corpus of the trust do not revert to the grantor. The trust
income is accumulated and held for distribution to the beneficiaries.

Revocable Trust

A revocable trust is a trust in which the power to revest in the grantor title to any part of the corpus of the
trust is vested in the grantor himself or any person not having any substantial adverse interest in the trust or
in its income.

The income of such part of the trust estate title to which may be revested in the grantor, or held of
distributed for the benefit of the grantor shall be included in computing the taxable income of the
grantor (Sec. 63, NIRC; Sec. 207, Rev. Reg. No. 2)

“Income For the Benefit of the Grantor”

A trust income is considered foe the benefit of the grantor where any part of the income of the trust –

(1) is, or in the discretion of the grantor or of any person not having a substantial adverse interest in the
disposition of such part of the income may be held or accumulated for future distribution to the grantor, or

(2) may, or in the discretion of the grantor or of any person not having a substantial adverse interest in the
disposition of such part of the income, be distributed to the grantor; or

(3) is, or in the discretion of the grantor or of any person not having a substantial adverse interest in the
disposition of such part of the income may be applied to the payment of premiums upon policies of
insurance on the life of the grantor

Such part of the income of the trust for the benefit of the grantor shall be included in computing the taxable
income of the grantor (Sec. 64 (A), NIRC).

Employee’s Trust

Income tax shall not apply to employee’s trust which forms part of the pension, stock bonus, or profit-sharing
plan of an employer for the benefit of some or all of his employees (Sec. 60 (B), NIRC)

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Requisites or Conditions For Exemption of Employee’s Trust

(1) The employee’s trust must form part of a pension, stock bonus, or profit-sharing plan of an employer for
the benefit of some or all of his employees;

(2) Contributions are made to the trust by such employer, or employees, or both;

(3) The contributions are made for the purpose of distributing to such employees the earnings and principal
of the fend accumulated toy the trust in accordance with such plan;

(4) Under the trust instrument, it impossible, at any time prior to the satisfaction of all liabilities with respect
to employees under the trust, for any part of the corpus or income to be (within the taxable year or
thereafter) used for, or diverted to, purposes other than for the exclusive benefit of his employees.

Any amount actually distributed to any employee or distribute shall be taxable to him in the year in which so
distributed to the extent that it exceeds the amount contributed by such employee or distributee (Sec. 60
(B), NlRC).

TAXABILITY OF INCOME OF TRUST

The income of a trust may be taxable to the trustee, or to the beneficiaries, or to the grantor.

(A) Income of Trust Taxed to the Trustee

(1) The income of a trust which is to be accumulated or held for future distribution, whether consisting
of ordinary income or gain from the sale of assets included in the corpus of the trust, must be
returned by and will be taxed to the trustee (Sec. 207 Rev. Reg. No. 2)

(2) The income of a trust, whether created by will or deed, for accumulation of income, whether for an
unascertained person or persons with contingent interests or otherwise, shall be taxed to the trustee.

(3) The income of a trust, where under the terms of a will or deed, the trustee may, in his discretion,
distribute the income or accumulate it, the income is taxed to trustee, irrespective of the exercise of
his discretion.

(B) Income of Trust Taxed to Beneficiaries

The income of a trust for the taxable year which is to be distributed to the beneficiaries must be returned
(i.e. included in the ITR) by and will be taxed to the respective beneficiaries.

Note: Income distributed to beneficiaries of a trust is subject to a CWT of 15% to be withheld by the
trust.

(C) Income of Trust Taxed Directly to the Grantor

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 (1) In case of a revocable trust, income from such part of the trust estate title to which may be revoked
by the grantor or revested in the grantor.

The income should be included in the grantor’s return.

(2) In the case of a trust the income of which, in whole or in part, may be held or distributed for the
benefit of the grantor. That part of the income which may be held or distributed for the benefit of
the grantor should be included in the return of the grantor.

(3) Such part of the income of the trust which may be applied to the payment of premiums upon
policies of insurance on the life of the grantor. Such part of the income shall be included in
computing the taxable income of the grantor (Sec, 64 (A) NIRC).

Determination of the Tax

The tax shall be computed upon the taxable income of the trust and shall be paid by the fiduciary (Sec.60(C)
(l) NIRC).

Taxable Income of Trusts

The taxable income of the trust shall be computed in the same manner and on the same basis as in the case
of an individual (Sec. 61, MIRC).

Gross Income of Trusts

The items of gross income taxable to individuals are also the same items of gross income which are taxable
to trusts.

Deduction of Trusts

A trust can take up the same items of deduction authorized under Section 34 of the Tax Code and allowed
an individual taxpayer (Sec. 61, NIRC).

Special Deduction of Trusts

A trust can also deduct, in addition to the deductions authorized under Section 34, the following:

(1) The amount of the income of the trust for the taxable year which is to be distributed currently to the
beneficiaries; and
(2) The amount of income collected by a guardian of an infant which is to be held or distributed as the
court may direct (Sec. 61 (A), NIRC); or
(3) The amount of the income of the trust for the taxable year which is properly paid or credited to any
beneficiary. (Sec. 61 (B), NIRC).

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Note: The amount so allowed as a deduction shall be included in computing the taxable income of the
beneficiaries, whether distributed to them or not

Rates of Tax

The rates of tax under Section 24(A)(2) of the Tax Code, which are prescribed for individuals earning purely
self-employment or professional income, shall be used in computing the income tax of trusts. A trust shall
thus have the following tax rates:

(A) If the trust’s gross sales/receipts plus other non-operating income exceeds the VAT threshold of
P3,000,000 as provided in Section 109(BB) of the Tax Code, it shall be taxed on its net taxable
income using the graduated rates under Section 24(A)(2)(a) of the Tax Code.

(B) If such trust’s gross sales/receipts plus other non-operating income does not exceed the VAT
threshold of P3,000,000 the trustee shall have the option for the trust to be taxed at:

(1) Eight percent (8%) of gross sales or gross receipts, plus other non-operating income in
excess of Two Hundred Fifty Thousand Pesos (P250,000);

Note: This 8% tax on gross sales/receipts plus other non-operating income shall be in lieu
of (a) the progressive income tax rates under Section 24(A)(2)(a) of the Tax Code, and (b) the
3% Other Percentage Tax (“OPT”) under Section 116 of the Tax Code.

OR

(2) The graduated (progressive) rates under Section 24(A)(2)(a) of the Tax Code.

Computation of Income Tax of Trusts

Accounting Period - Calendar year

Tax Base - (a) Taxable net income or
(b) Gross sales/receipts + non-operating income, if 8% income tax
rate is availed.
Rate of Tax - (a) Graduated rates or
(b) 8% Income tax rate (if qualified and elected)

Consolidation of Income of Two or More Trusts

Where two or more trusts are created by the same trustor or grantor, and in each instance the beneficiary is
the same person, the taxable income of all the trusts shall be consolidated, and the tax computed on such
consolidated income.

Such proportion of said tax shall be assessed and collected from each trustee which the taxable income of
the trust administered by him bears to the consolidated income of the several trusts (Sec. 60 (C) (2), NIRC).

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 INCOME TAX ON PARTNERSHIPS

Purposes of the income tax, partnerships are classified into:

(a) partnership not subject to income tax; and
(b) Partnership subject to income tax.

A. Partnerships Not Subject to Income Tax

The following partnerships are not subject to income tax:

1. General professional partnership (“GPP”) – A partnership formed by persons for the sole
purpose of exercising their common profession, no part of the income of which is derived engaging
in trade or business (Sec. 22 (B), NIRC)

Note: Because of the exemption of GPPs from the income tax, income payments to them by their clients are
exempt from creditable withholding tax (RMC No. 3-2012)

2. A joint venture or consortium formed for the purpose 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.
(Sec 22(B), NIRC)

Filing of Return

Exempt partnerships are required to file an “annual information return.” However, the purpose is to furnish
information (Form No. 1702 EX) as to the share each partner shall report and include in his personal income
tax return.

Tax Liability of Partners in Exempt Partnership

(a) Persons engaging in business as partners in a general professional partnership shall be liable for
income tax only in their separate and individual capacities.

(b) Each partner shall report as gross income his distributive share, actually, or constructively received,
in the net income of the partnership (Sec. 26, NIRC)

The share of a partner in the net profits of the partnership shall be taxable to the partner, whether
distributed or not.

But where the result of the partnership operation is a loss, the loss will be divided among the
partners in the same proportion as the net income, or as provided in the partnership agreement.
Each individual partner may then take up his share in the loss in his income tax return as a deductible
loss.

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 (c) The share of a partner shall be subject to creditable withholding tax of 10% if the current year’s
income payments to the partner total P720 000 or below, or 15% if the same exceeds P720 000.

(d) For purposes of computing the distributive share of the partners, the net income of the partnership
shall be computed in the same manner as a corporation.

The distributable net income of the GPP may be determined W claiming either Itemized Deductions
or OSD:

(1) The Partners comprising the GPP can no longer claim further deductions from their distributive
shares in the net income of the GPP.

(2) The partners of a GPP are also not allowed to avail of the 8% income tax rate option since
their distributive share from the GPP is already net of costs and expenses.

(3) If a partner also derives other income from trade, business, or practice of profession apart and
distinct from his share in the net income of the GPP, the deduction that can be claimed from
this other income would either be the Itemized Deductions or OSD.

Note: Co-venturers in a joint venture or consortium which is not subject to income tax have the same tax
liability as partners in an exempt partnership.

B. Partnerships Subject to Income Tax

All other partnerships, except those mentioned above (item A), no matter how created or organized, are
considered corporations subject to income tax (Sec. 22(B), NIRC).

Filing of Tax Return

Taxable partnerships, like ordinary corporations, are required to file quarterly income tax returns for the first,
second, third quarters, and an annual return based on their accounting periods.

Tax Liability of Partners in a Taxable Partnership

Partner Final Tax Rate Tax Base

Citizen or Resident Alien 10% Dividend or Share in the distributable after
tax net income of the partnership
NRAETB 20% Dividend or Share in the distributable after
tax net income of the partnership
NRANETB 20% Dividend or Share in the distributable after
tax net income of the partnership

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Note: 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, is also
subject to this final tax.

Tax Liability of Corporate Co-Venturers in a Taxable Joint Venture (JV)

Co-Venturer Final Tax Rate Tax Base

DC Exempt Dividend of Share in the distributable
after tax net income of the JV
RFC Exempt Dividend of Share in the distributable
after tax net income of the JV
NRFC 15% Dividend of Share in the distributable
after tax net income of the JV

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 INCOME TAX ON CORPORATIONS

A corporation may be liable for at most seven (7) types of income taxes, namely:

Net Income Tax (on Ordinary Income)

Standard Income Tax
Penalty Income Tax
Special Income Tax
Final Withholding Tax (on Passive Income)
Capital Gains Tax (on “Capital Gains”)
Minimum Corporate Income Tax (“MCIT”)
Improperly Accumulated Earnings Tax (“IAET”)
Gross Income Tax (“GIT”)
Branch Profits Remittance Tax (“BPRT”)

Definition

Under Section 22(B) of the NIRC, the term “corporation” shall include –

a) partnerships, no matter how created or organized;

b) joint stock companies
c) joint accounts (cuentas en participacion);
d) associations; or
e) insurance companies

However, the term does not include:

a) General professional partnerships (GPPs)

AND

b) joint venture or consortium formed for the purpose of (1) undertaking construction projects or (2)
engaging in energy operations pursuant to an operating or consortium agreement under a service contract
with the Government.

Classification of Corporations

(1) Domestic Corporations

(a) In general
(b) GOCCs EXC: SSS, GSIS, PHIC, LWDs
(c) Taxable partnerships
(d) Proprietary educational institutions/Non-profit hospitals
(e) FCDUs of domestic banks
(f) Service contractors/subcontractors engaged in petroleum operations
(g) Ecozone enterprises
(h) Exempt corporations

(2) Resident Foreign Corporations

(a) In general
(b) Resident international carriers
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 (c) OBUs
(d) ROHQs/RHQs of MNCs
(e) Service contractors/subcontractors engaged in petroleum operations
(f) Ecozone enterprises

(3) Non-resident Foreign Corporations

(a) In general
(b) Non-resident owners/lessors of vessels chartered by Philippine nationals;
(c) Non-resident owners/lessors of aircraft, machineries, and other equipment;
(d) Non-resident cinematographic film owner, lessor or distributor

(4) Exempt Corporations

Types of Income Subject to Tax

(a) Ordinary Income/Net Income – refer to “Ordinary Income” table

(b) Passive Income – refer to “Passive Income” and Intercorporate Dividend” tables
(c) “Capital Gains”

ORDINARY INCOME

Source of Taxable
Corporate Taxpayer Income Tax Base Tax Rates
1. Domestic Within and Without the Net Income 30%
Philippines
2. RFC Within the Philippines Net Income 30%
only
3. NRFC Within the Philippines Gross Income Final withholding tax of
only enumerated by law 30%

PASSIVE INCOME

Passive Income DOMESTIC and RFC NRFC

Interest on currency bank deposit 20% 30%
Yield or any other monetary
benefit from:
(1) Deposit substitutes 20% 30%
(2) Trust funds, and similar 20% 30%
arrangements
Royalties 20% 30%
Interest from a depositary bank
7.5% (RFC)
under the expanded foreign Exempt
15% (DC)
currency deposit system

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 INTERCORPORATE DIVIDEND

Payor Recipient Tax

1. Domestic corporation Domestic corporation Not taxable
2. Domestic corporation RFC Not taxable
3. Domestic corporation NRFC 15% final WT

Capital Gains Tax on Capital Gains

1. Sale, exchange, or other disposition of domestic shares of stock:

(a) Not traded at the stock exchange:

By Domestic Corporation:
Net capital gain 15%

By Foreign Corporation:
Net gain over P100,000 5%
Amount in excess of P100,000 10%

(b) Shares listed and traded at the stock exchange:

6/10 of 1% based on the gross selling price.

Notes:
(1) Final tax on capital gains on the sale of shares of stock applies to all corporate taxpayers.
(2) The exceptions for individual taxpayers also apply for corporate taxpayers.

2. Sale of Real Property Classified as Capital Asset –

(a) Transaction subject – the sale, exchange, or other disposition of lands and buildings which
are not actually used in the business of the corporation and treated as “capital assets.”

(b) Tax rate and base –

(1) Seller domestic corporation – Final tax of 6% based on the gross selling price
or FMV, whichever is higher. The FMV is the higher between the Commissioner’s
value and the Assessor’s value (Sec. 27 (D)(5), NIRC).

(2) Seller RFC – Gain on sale is returnable, and subject to normal tax rate (30%).

(3) Seller NRFC – Final tax of 30% of the capital gain realized on the sale.

(c) Exemptions from CGT –

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 (1) Sale of raw lands to be sued for “socialized housing” projects, or sold under the
Community Mortgage Program under R.A. No. 7279 (Urban Development and
Housing Act of 1992).
(2) Land transfers under the Comprehensive Agrarian Reform Law of 1988.

DOMESTIC COMPANIES SUBJECT TO SPECIAL TAX RATES

(1) Proprietary educational institutions

Proprietary educational institutions are subject to a special tax rate of 10% of taxable net
income within and without the Philippines

Provided – the gross income from unrelated trade, business, or activity does not exceed 50% of the
total gross income derived from all sources. However, if it exceeds 50%, the normal tax rate will be
applied on the entire taxable income, i.e. 30%.

(2) Hospitals which are non-profit

Hospitals which are non-profit are also subject to a special tax rate of 10% of taxable net income
within and without the Philippines.

Provided – the gross income from unrelated trade, business, or activity does not exceed 50% of the
total gross income derived from all sources. However, if it exceeds 50%, the normal tax rate will be
applied on the entire taxable income, i.e. 30%.

(3) Final tax on income of a Foreign Currency Deposit Unit (“FCDU”) of a local bank
under the Expanded Foreign Currency Deposit System (“FCDS”)

a) Income from foreign currency loans granted to Philippine residents, (other than OBUs or
other depositary banks) – 10% final tax

b) Interest income from foreign currency interbank deposits – 10% final tax

c) Income from foreign currency transactions with non-residents, OBUs, local

commercial banks, and branches of foreign banks authorized to transact
business under the FCDS – Exempt

Note: “Income from foreign currency transactions” shall include interest income from lending
operations, including bank charges, commissions, service fees, and net foreign exchange
transaction gains.

(4) Service Contractors/Subcontractors Engaged in Petroleum Operations

- Liable to an eight percent (8%) final tax on gross income derived from such contract in
petroleum operations

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 Provided however, that any income received from all other sources within and without the
Philippines in the case of domestic contractors/subcontractors, shall be subject to the regular
income tax under the Tax Code.

(5) Ecozone Enterprises

All business enterprises registered with the Philippine Economic Zone Authority (“PEZA”), SBMA, or
CDA and operating within the Special Economic Zones (“ECOZONE”) availing the 5% GIT incentive
taxed 5% of gross income on registered activities. Three percent (3%) shall be paid to the
National Government; Two percent (2%) to the city or municipality where the enterprisers located.

Notes:

(a) The exemption from all other taxes under the Income Tax Holiday (ITH) and 5% GIT regimes
does not include the following:
1) Withholding taxes at source (expanded withholding tax (‘‘EWT”) and Final
Withholding Tax (“FWT”)) on income payments by PEZA-registered entities;
2) Withholding tax on compensation income of employees of PEZA-registered entities;
and
3) Fringe Benefits Tax (“FBT”) on fringe benefits given to managerial or supervisory
employees of PEZA-registered entities.

These taxes are not the taxes of a PEZA-registered entity. Instead, these are taxes of a
PEZA-registered entity’s payees which are withheld and remitted by the PEZA-
registered enterprise.

(b) On the other hand, the BIR has ruled that all income payments received from its customers
related to its registered activities, by a PEZA-registered enterprise, whether availing the ITH
or 5% GIT incentive, are exempt from the withholding tax.

(c) Income derived by an entity registered with the PEZA from its registered activities shall
be subject to such treatment as may be specified in its terms of registration, i.e. (a) the ITH
where such income shall be exempt from the regular income tax; or (b) the 5% preferential
GIT, if the same has been approved.

However, the following shall be subject to the regular internal revenue taxes (i.e., regular
corporate income taxes; final taxes on bank deposits, capital gains taxes, etc.):

1) Income realized by registered entities from activities which are not registered;
2) Income of entities/individuals which are not registered (i.e. income payments to
entities in the Customs Territory, to shareholders, and to non-registered creditors,
etc.)
3) Income of Service Enterprises or providers (e.g. those providing customs brokerage,
transportation, parcel, janitorial, restaurant, banking, insurance services, etc.) which
are required by locator enterprises but which need not be physically based inside
the ECOZONE.

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 (6) Tourism Enterprises registered with the Tourism Infrastructure and Enterprise Zone
Authority (“TIEZA”)

As an alternative to the Income Tax Holiday (“ITH”) a new Registered Tourism Enterprise within a
Tourism Enterprise Zone may, in lieu of all national and local taxes, except real estate
taxes and fees as may be imposed by the TIEZA, pay a tax of five percent (5%) on its gross income
earned from its registered activities.

The 5% gross income tax shall be remitted as follows:

(a) One-third to be proportionally allocated among affected cities or municipalities based on
the area of the RTE
(b) One-third to the National Government; and
(c) One-third to the TIEZA.

(7) Microfinance NGO

A duly registered and accredited Microfinance NGO shall pay a two percent (2%) tax based on
its gross receipts from microfinance operations in lieu of all national taxes. However, the non-
microfinance activities of Microfinance NGOs shall be subject to all applicable regular taxes.

RESIDENT FOREIGN CORPORATIONS SUBJECT TO SPECIAL TAX RATES

(1) International carriers doing business in the Philippines shall pay a tax of two and one-
half percent (2½ %) of Gross Philippine Billings (“GPB”)

GPB - Gross revenue derived from carriage of persons, excess baggage, cargo and mail 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;

Rules:
a) 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;

b) Provided, that for a flight or voyage which originates from the Philippines, but transshipment of
passenger takes place at any port outside the Philippines on another carrier, only the
aliquot portion of the cost of the ticket corresponding to the leg flown from the
Philippines to the point of transshipment shall form part of the Gross Philippine Billings.

c) Where a passenger, his excess baggage, cargo, and/or mail originally commencing his flight or
voyage from a foreign port alights or is discharged in any Philippine port, and thereafter boards
or is loaded on another airplane/vessel owned by the same international carrier, the flight or
voyage from the Philippines to any foreign port shall be considered “originating from the
Philippines” if the time intervening between arrival to and departure from the Philippines
exceeds forty-eight (48) hours.

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 (1) If the failure to depart within 48 hours is due to reasons beyond the control of the passenger
such as when the next available flight or voyage leaves beyond 48 hours, or such failure is due to
force majeure, the flight or voyage from the Philippines shall not be considered “originating
from the Philippines”;

(2) If the second aircraft/vessel belongs to a different international carrier, the flight/voyage from
the Philippines shall be considered originating from the Philippines regardless of the length of
the intervening period between arrival to and departure from the Philippines.

Preferential Rates

Under R.A, No, 10378, an international carrier or shipper is subject to the Gross Philippine Billings Tax of
2 ½%, unless it is subject to a preferential rats or exemption on the agreement to which the Philippines is
a signatory or on the basis of reciprocity.

Note: However, such carriers may earn compensation or commission income from the sale of passage
documents to cover off-line1 flights/voyages of its principal office, or on-line2 flights/voyages of other
carriers. Such income shall not be subject to the 2 ½% GPB tax, but shall be subject to the regular rate
of income tax under Section 28(A)(1) of the Tax Code.

(2) Offshore Banking Units

An “offshore banking unit (“OBU”) shall mean a branch, subsidiary or affiliate of a foreign banking
corporation which is duly authorized by the BSP to transact offshore banking business in the Philippines.

a) Income from foreign currency loans granted to Philippine residents, (other than OBUs or other
depository banks) – 10% final tax

b) Interest income from foreign currency interbank deposits – 10% final tax

c) Income from foreign currency transactions with non-residents, OBUs, local commercial banks, and
branches of foreign banks authorized to transact business under the FCDS – Exempt

(3) Regional or Area Headquarters, and Regional Operating Headquarters of Multinationals

(a) Regional or area headquarters (“RHQ”) of multinationals shall not be subject to income tax.

(b) Regional operating headquarters (“ROHQ”) shall pay a tax of ten percent (10%) of their
taxable income (in the ITR).

Note: Any income derived from Philippine sources by a ROHQ when remitted to the parent
company shall be subject to the tax on branch profit remittances.

1
Off-line carriers refer to international carriers having no transportation operations to and from the Philippines.
2
On-line carriers refer to international carriers having or maintaining transportation operations to and from the
Philippines.
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(4) Service Contractors/Subcontractors Engaged in Petroleum Operations

- Liable to an eight percent (8%) final tax on gross income derived from such contract in
petroleum operations

Note: Any income received from all other sources within the Philippines in the case of foreign
subcontractors shall be subject to the regular income tax under the Tax Code.

(5) Ecozone Enterprises and TIEZA-registered enterprises

- Such enterprises availing the preferential GIT shall be taxed at 5% GIT shall be taxed at 5% of gross
income from registered activities in lieu of all taxes, national or local

NON-RESIDENT FOREIGN CORPORATIONS SUBJECT TO SPECIAL TAX RATES

In general, a non-resident foreign corporation is subject to a final withholding tax of 30% based on
enumerated gross income from all sources within the Philippines, except –

Rate and Base

(1) Non-resident cinematographic film owner, 25% of its gross income from all sources within the
lessor, or distributor Philippines

(2) Non-resident owner or lessor of vessels 4 ½ % of gross rentals or charter fees from leases or
chartered by Philippine nationals charters to Filipinos or corporations, as approved by
the Maritime Industry Authority

(3) Non-resident owner or lessor of aircraft, 7 ½% of gross rentals or fees

machineries, and other equipment

(4) Interest on foreign loans contracted on or 20% of the amount of interest

after August 1, 1986

(5) Income from transactions with depository Exempt

banks under the expanded Foreign Currency
Deposit System

Note: Royalty is subject to the rate of 30% as it is not one of the items of income subject to a special rate.

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EXEMPT CORPORATIONS

The following organizations shall not be subject to income tax in respect to income received by them as
such:

(A) Labor, agricultural, or horticultural organizations not organized principally for profit;

(B) Mutual savings bank not having a capital stock represented by shares; and cooperative banks
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 a 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, accident or
other benefits exclusively to the members of such society, order, or association, or non-stock
corporation 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 for the rehabilitation of veterans 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;

(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 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 and non-profit educational institution;

(I) Government educational institutions;

(J) Farmers’ or other mutual typhoon or fire insurance company, mutual ditch or irrigation company,
mutual or cooperative telephone company, or like organization 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 (Sec. 30, NIRC).

(L) Child-caring or child-placing institutions licensed and accredited by the Department of Social
Welfare and Development (“DSWD”) to implement the Foster Care Program under R.A. No. 10165,
otherwise known as the “Foster Care Act of 2012.”

(M) Duly registered cooperative on income from transactions with members and non-members as long
as the income is related to its main business or purpose. Provided, those with accumulated reserves

20
 and undivided net savings exceeding P10 Million shall be exempt only on income from transactions
with members.

(N) Homeowners’ Associations (“HOAs”). Generally, fees, dues or contributions made to HOAs are
taxable. However, the same are exempt when the LGU having jurisdiction over the HOA certifies the
lack of resources for the HOA render its services.

(O) Non-stock Savings and Loan Associations (“S&Ls”). S&Ls accumulate savings of its members to be
used for long-term loans to members. These are exempt final taxes on interest income from
deposits.

(P) Building and loan associations whose accounts are guaranteed by the Home Guaranty Corporation.

(Q) Other organizations exempt from income tax in accordance with special laws (exs. Philippine Red
Cross; PDIC; Sports Facilities under the control of the Philippine Snorts Commission; Veterans’
Federation of the Philippines; National Commission for Culture and the Arts)

Income of Exempt Organizations Subject to Tax

The following income, of whatever kind and character, of the foregoing organizations shall be subject to
income tax:
1. From any of their properties, real or personal; or
2. From any of their activities conducted for profit.

The said income shall be taxable regardless of the disposition made of such income (Sec. 30, NIRC).

For-Profit Corporations Enjoying Exemption from Tax

1) BOI-registered enterprise 3 enjoying ITH.

(1) New registered pioneer firms – 6 years from commercial operations.

(2) New registered non-pioneer firms – 4 years from commercial operations.
(3) Expanding firms – 3 years from commercial operations of the expansion.

3
To qualify for BOI registration, the corporation, partnership, or association must be engaged or is proposing to engage:
1) in an area of activity listed in the Investment Priorities Plan (“IPP”);
2) if area of activity is not listed in the IPP, it is a domestic enterprise at least 60% owned by Filipinos with at least 50%
of its production for export;
3) a domestic enterprise less than 60% is owned by Filipinos but exporting at least 70% of its production or exporting
part of its production under such terms and conditions and/or limited incentives as the Board may determine;
4) producing or manufacturing a product which is used as input to an export product;
5) export trading of export products bought by it from one or more export producers;
6) rendering service to domestic and foreign tourists if listed in the IPP;
7) in rendering technical, professional or other services as may be determined by the Board which are paid for in foreign
currency; or
8) in exporting television and motion pictures and musical recordings made or produced in the Philippines, either directly
or through an export trader. (Rule I, Sec. 1(i), IRR of E.O. No. 226)
21
 In exceptional cases, existing firms undertaking new activities distinct from existing operations
may qualify as new projects subject to the setting up of separate books of account, in such cases,
only sales of such registered products shall be entitled to the ITH exemption.

Additional Period of Availment

Registered firms, the ITH incentive may be extended for an extra year for each of the following
cases, but in no case to exceed the total period of eight (8) years for pioneer registered
enterprises.

(1) If the ratio of the total imported and domestic capital equipment to the number of workers for
the project does not exceed $25,000 to one worker; or
(2) If the average cost of indigenous raw materials used of the registered product is at least fifty
percent (50%) of the total cost ox raw materials for the preceding years prior to the extension
unless the BOI prescribes a higher percentage; or
(3) If the annual or average net foreign exchange savings or earnings (“NFEE”) amount to at least
US$500,000.00 during the first three (3) years of operations to be determined by the Board at
the end of such three-year period

2) PEZA-registered and TIEZA-registered enterprises availing of the ITH.

3) Enterprises registered as Barangay Micro Business Enterprise (“BMBE”)

A Barangay Micro Business Enterprise or BMBE refers to any domestic business entity or enterprise
engaged in the production, processing, or manufacturing of products or commodities, including
agro-processing, trading, and services, which activities are barangay-based and micro-business in
nature, and whose total assets including those arising from loans but exclusive of the land on which
the particular business entity’s office plant and equipment are situated, shall not be more than Three
Million Pesos (P3,000,000.00).

Registration

The Office of the Treasurer of each city or municipality shall register the BMBEs and issue a
Certificate of Authority (CA) to enable the BMBE to avail of the benefits under R.A. No 9178.
Provided that only one Certificate of Authority shall be issued for each BMBE and only by the Office
of the Treasurer of the city or municipality that has jurisdiction over the principal Place of business of
the BMBE.

The LGUs shall issue the CA promptly and free of charge. However to defray the administrative costs
of registering and monitoring the BMBEs, the LGU may charge a fee not exceeding One Thousand
Pesos (P1,000.00)

Tax Exemption

Income tax exemption from income arising from the operations of the enterprise.

A duly registered BMBE shall be exempt from income tax on income arising purely from its
operations as such BMBE, Provided, the income tax exemption shall not apply to (a) income

22
 subject to final taxes, (b) capital gains subject to the capital gains tax, and (c) compensation income
(d) income from practice of a profession received directly from clients; and (e) other income not
effectively connected with the operations of the BMBE.

The LGUs are encouraged either to reduce the amount of local taxes fees and charges imposed or
to exempt the BMBEs from local taxes, fees and charges (Sec, 7, R.A. No. 9178).

PENALTY TAXES IMPOSED ON CORPORATIONS

I. MINIMUM CORPORATE INCOME TAX (“MCIT”)

1. Who are subject?

(a) Domestic corporations, and

(b) Resident foreign corporations.

2. Rate and Base – Two percent (2%) of gross income. The taxpayer shall pay whichever is higher
between the MCIT and the regular corporate income tax (“RCIT”).

3. Effectivity – The fourth (4th) taxable year immediately following the year in which such corporation
commenced its business.

4. Carry forward of excess minimum tax – Any excess of the MCIT over the regular corporate income tax
(“RCIT”) in a particular year shall be carried forward and credited against the regular income tax for
the three (3) immediately succeeding taxable year.

5. Gross income (sale of goods) – 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.

6. Gross income (sale of services) – In the case of taxpayers engaged in the sale of services, “gross
income” means gross receipts less sales returns, allowances, discounts, and cost of services. “Cost of
services” shall mean all direct costs and expenses necessarily incurred to provide the services
required by the customers and clients, including –

(a) Salaries and employee benefits of personnel, consultants, and specialists directly rendering the
service, and
(b) Costs of facilities directly utilized in providing the service such as depreciation or rental of
equipment used and cost of supplies.

23
 Provided, that in the case of banks, “cost of services” shall include interest expense. (Sec. 27 (E)(4),
NIRC).

Note: According to the regulations, the term “gross income” will also include all items of gross
income enumerated under Section 32, whether or not derived from the taxpayer’s core business,
except:

(a) Income exempt from income tax; and

(b) Income subject to final withholding tax (Rev. Reg. No. 12-2007)

7. Domestic Corporations Not Subject to MCIT

The minimum corporate income tax (“MCIT”) shall apply only to domestic corporations subject to the
regular corporate income tax (30%). Accordingly, the following shall not be subject to MCIT –

(a) Domestic corporations operating as proprietary non-profit educational institutions subject to tax
at ten percent (10%) on their taxable income;

(b) Domestic corporations engaged in hospital operations which are non-profit subject to tax at ten
percent (10%) on their taxable income;

(c) Domestic corporations engaged in business as depository banks under the expanded foreign
currency deposit system, otherwise known as Foreign Currency Deposit Units (“FCDUs”) on their
–

(1) Income from foreign currency transactions with non-residents, offshore banking units in the
Philippines, local commercial banks, including branches of foreign banks, and other
depository banks, and

(2) Interest income from foreign currency loans granted to residents of the Philippines under the
expanded foreign currency deposit system, subject to final tax at ten percent (10%) of such
income.

(d) Firms that are taxed under special income tax regimes such as those PEZA- and TIEZA-registered
firms availing of the 5% GIT incentive.

(e) REITs – Real Estate Investment Trusts. The only corporation which is subject to the 30% RCIT but
not subject to the MCIT.

8. Resident Foreign Corporations Not Subject to MCIT

The minimum corporate income tax shall apply only to resident foreign corporations which
are subject to the regular income tax (30%). Accordingly, the MCIT shall not apply to the
following:

24
 (a) Resident foreign corporations engaged in business as “international carrier” subject to tax at
2.5% of their “Gross Philippine Billings”;

(b) Resident foreign corporations engaged in business as Offshore Banking Units (“OBUs”) on
their:

(1) Income from foreign currency transactions with non-residents, other offshore banking
units, local commercial banks, including branches of foreign banks, and

(2) Interest income from foreign currency loans granted to residents of the Philippines, subject
to final tax at ten percent (10%) of such income.

(c) Resident foreign corporations engaged in business as regional operating headquarters subject
to tax at ten percent (10%) of their taxable;

(d) Firms that are taxed under special income tax regimes such as those PEZA- and TIEZA-
registered firms availing of the 5% GIT incentive.

9. Relief From the Minimum Corporate Income Tax

The Secretary of Finance, upon the recommendation of the Commissioner, may suspend imposition
of the MCIT upon submission of .proof that the corporation sustained substantial losses on account
of –

(a) A prolonged labor dispute;

(b) Because of “force majeure”;
(c) Because of legitimate business reverses.

Rules in Computation of MCIT

1) Excess MCIT, if any, for the year is computed annually, that is, in the 4th quarterly (annual) return.

2) The quarterly tax shall be the higher of the RCIT or the MCIT.

3) IF the quarterly tax due is the MCIT, the excess MCIT from previous taxable year(s) shall not
be allowed to be credited. However, (1) creditable withholding taxes, (2) quarterly income tax
payments paid in the previous quarter(s), and (3) excess tax credits of the prior year, are allowed as
credits against the quarterly MCIT due.

4) IF the quarterly tax due is the RCIT, the (1) excess MCIT from previous taxable year(s), (2)
creditable taxes withheld, (3) quarterly income tax payments paid in previous quarter(s), and (4)
excess tax credits of the prior year, are allowed as credits against the quarterly RCIT due.

25
Illustration: 2% of the gross income as of the end of the taxable year is hereby imposed upon any domestic
corporation beginning on the 4th taxable year immediately following the year in which such corporation
commenced its business operations. The MCIT shall be imposed whenever such corporation has zero or
negative taxable income or whenever the amount of MCIT is greater than the normal income tax computed
due from such corporation.

Any excess of the MCIT over the normal income tax as computed shall be carried forward on an annual basis
and credited against the normal income tax for the three (3) immediately succeeding taxable years.

2008 2009 2010

Regular Corporate Income Tax (30%) P 50,000 P 60,000 P100,000
MCIT (2% of Gross Income) 75,000 100,000 60,000

Amount of tax payable P 75,000 P100,000 P100,000

Excess of MCIT over Normal Income Tax 2008 (25,000)
25,000 40,000 2009 (40,000)
P35,000

II. IMPROPERLY ACCUMULATED EARNINGS TAX

Concept of the Tax

In order to compel corporations to distribute or pay dividends to stockholders, the retention or accumulation
of earnings or profits beyond the reasonable needs of the business is made subject of tax.

The IAET is imposed upon corporations which are formed or availed of for the purpose of avoiding the
income tax by permitting earnings and profits to accumulate instead of being divided or distributed (Sec. 29
(B) (1), NIRC).

The IAET is an additional tax to the regular corporate income tax imposed on corporations under Title II of
the Tax Code (Sec. 29 (A), NIRC).

Corporations Subject to IAET

The tax is imposed on improperly accumulated taxable income earned starting January 1, 1998 by
domestic corporations (as defined under the Tax Code) which are classified as closely-held
corporations (Sec. 4, Rev. Regs. No. 2-2001)

Note: A branch of a foreign corporation is not liable for the IAET the same being a resident foreign
corporation.

26
Closely-held Corporations Defined.

These are corporations where 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 (Sec. 4 Rev. Reg. No. 2-2001).

Corporations Not Subject to IAET

The IAET shall not apply to the following corporations:

(a) Banks and other non-bank financial intermediaries
(b) Insurance companies5
(c) Publicly-held corporations;
(d) Taxable partnerships;
(e) General professional partnerships;
(f) Non-taxable joint ventures; and
(g) Enterprises duly registered with the TIEZA under RA, 9593, the 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 under special economic zones declared by law
which enjoy payment of special tax rates on their registered operations or activities in lieu of
other taxes, national or local (Sec. 4, Rev. Reg. 2-2001).

Circumstances Indicative of Purpose to Avoid the Tax

(1) Dealings between the corporation and its shareholders, such as withdrawals by the shareholders as
personal loans;
(2) Expenditure of funds by the corporation for the personal benefit of the shareholders;
(3) The investment by the corporation of undistributed earnings in assets having no reasonable connection
with the business (Sec. 19, Rev. Reg. No, 2);
(4) Advances in substantial sums made yearly to corporate officers who are at the same time the
stockholders (Basilan Estates vs. Commissioner, GRL-22492, September 5,1967);
(5) Investment of substantial earnings and profits of the corporation in an unrelated business or in the
stock or securities of an unrelated business;
(6) Investment in bonds and other long-term securities;
(7) Accumulation of earnings in excess of 100% of paid-up capital, not otherwise intended for the
reasonable needs of the business.

Proper Accumulation of Profits

The following constitute accumulation of earnings for the reasonable needs of the business:
If retained for working capital needed by 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 the 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;

27
 (e) Earnings required by law or applicable regulations to be retained by the corporation or in respect of
which there is a 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 (Sec. 3, Rev. Reg. No. 2-2001).

Tax Base or Basis of the Tax

The rate of the IAET is 10%. It is based upon the improperly accumulated taxable income for each taxable
year.

Formula:

Current Year’s Taxable Income

Plus: 1) Income exempt from tax;
2) Income excluded from gross income;
3) Income subject to final tax;
4) Amount of NOLCO deducted.
Less: 1) Dividends actually or constructively paid from applicable year’s taxable income;
2) Income taxes paid or payable for the taxable year (both income tax in the ITR and final taxes); and
3) Amounts reserved for the reasonable needs of the business from the applicable year’s taxable
income
Equals: IAET
Notes:
1) Once the profit has been subjected to IAET, the same shall no longer be subjected to IAET in later
years even if not declared as dividend.
2) Notwithstanding the imposition of IAET, profits which have been subjected to IAET, when finally
declared as dividends, shall nevertheless be subject to tax on dividends imposed under the Tax
Code except in those instances where the recipient is not subject thereto.

Period For Payment of Dividend/Payment of IAET

The dividends must be declared and paid or issued not later than one (1) year following the close of the
taxable year. Otherwise, the IAET, if any, should be paid within fifteen (15) days thereafter (Sec. 6, Rev. Reg.
2-2001).

SPECIAL INCOME TAXES

The Tax Code presently has two types of special income taxes, namely the branch profits remittance tax, and
the gross income tax.

I. BRANCH PROFITS REMITTANCE TAX (“BPRT”)

(a) Transaction subject – Any profit remitted by a branch of a foreign corporation to its head office
(Sec. 28 (A) (5), NIRC).

28
 This includes any income derived from Philippine sources by the Regional Operating Headquarters
of a multinational corporation when remitted to the parent company (R.A. No. 8756)

(b) Rate and Base – Fifteen percent (15%) of the total profits applied or earmarked for remittance (gross
of the BPRT), except those activities which are registered with the –

(1) Philippine Economic Zone Authority (“PIEZA”);

(2) Subic Bay Metropolitan Authority (“SBMA”);
(3) Clark Development Authority (“CDA”); and
(4) Tourism Infrastructure and Enterprise Zone Authority (“TIEZA”)

(c) Income not treated as branch profits – Income which are not connected with the trade or business in
the Philippines shall not be treated as “branch profits.”

Ex. Dividends from marketable securities.

(d) Tax treaties. The 15% rate may be reduced by international treaties to which the Philippines is a
signatory.

II. GROSS INCOME TAX (“GIT”)

Under Section 27(A) of the Tax Code, the President, upon recommendation of the Secretary of Finance, may
allow corporations the option to be taxed at fifteen percent (15%) of gross income as defined
in the Tax Code instead of the 30% net income tax.

(a) Corporations given the option – the option is available to domestic and resident foreign
corporations (Secs. 27 (A) and 28 (A) (1) NIRC).

(b) Requisite conditions – the option is available after the following conditions have been satisfied:

1) A tax ratio effort of twenty percent (20%) of Gross National Product (“GNP”);
2) A ratio of forty percent (40%) of income tax collection to total tax revenues;
3) A VAT tax effort of four percent (4%) of GNP; and
4) A 0.9 percent (0.9%) ratio of the Consolidated Public Sector Financial Position (“CPSFP”) to
GNP.

(c) Additional requisite – the option shall be available only to firms whose ratio of cost of sales to gross
sales or receipts from all sources does not exceed fifty-five percent (55%)

(d) Period of irrevocability – 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.

(e) Rate and base – Fifteen percent (15%) of gross income where gross income shall be
equivalent to gross sales less sales returns, discounts, and allowances, and cost of goods sold.

29