In INCOME TAXATION Deductions from compensation: SS'premium contributions ag-ibig premium contributions Philhealth premium contribution Pag-ibig loan payment . Withholding taxes on wages (from January to November) Business income and expenses: Within Gross sales 3,000,000 1600000 Cost of sales f Interest income, net of 20% fnaltexes 240,000 Biidcnd income, net of 10% final axes 90,000 rating expenses Seite 200,000 100,000 tone ee 200,000 Business tea 290,000 Rent expenses 500,000 ‘eveling and communication 100,000 Chantable contibutlons 250.000 Income taxes paid 60/595 Required: Determine the correct amount of the following: ‘Total néntaxable compensation income, “Taxable compensation income subject to normal tax. “Total itemized allowable deductions. Total net taxable income per ITR. ‘Tota’ income tax credits per ITR. Income tax stil due and payable. Final income, taxes within. 400,000 190,000 300,000 400,000 160,000, ‘500,000 Chapter 12 INCOME TAX OF CORPORATIONS. CONCEPT OF CORPORATION In taxation, a corporation includes joint stock companies, joint ‘accounts, associations, insurance companies or partnerships no matter how they were created or organized. For inconie tax purposes, however, a corporation does not include geheral professional partnerships and a joint venture or Consortium formed to dindertake construction projects o engage in petroleum, coal, geothermal and other energy related operation, Pursuant to an pperating or consortium agreement ‘under a service contract with the Government. (see 2 mq Classification of Corporate Taxpayers Gorporate Taxpayers are classified into (aj Domestic Corporation, {and (6) Foreign Corporation, ‘A domestic corporativa 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. (ae 29% 27 MSR aig O41 2000} ‘A domestic corporation is taxable on all income from sources within nd outside the Philippines. ise 23, NRC} Foreign Corporation is a. corporatién organized and existing under the laws of foreign country irrespective ofjthe nationality of its stockholders. (see 221, nc Foreign Corporation is taxable only on income from sources within’ the Philippines. (sex 220), MRC] Foreign Corporation may cither be a Resident Foreign Corporation, or a Nonresident Forcign Corporation. |.642 INCOME TAXATION Resident foreiyn corporation refers to a foreign corporation that is engaged in business or trade in the Philippines. Generally, it establishes a branch or ar. office forthe purpose of doing ‘business or trade. (sec 227, mec] ‘A nonresident foreign corporation does not engage in business or trade in the Philippines (sve '221, mag. Its earnings are derived from fixed determinable income from sources within the Philippines that are enumerated in the Tax Code as follows: 1. Interest, dividends, royalties; 2. Rents, salaries; & 3. Premiums, except reinsurance premiums; 4. Annuities, emoluments or other fixed or determinable annual, Periodic or casual gains, profits and income; and 5: Capital gains, except capital gains from the sale of shares of stock not’ traded in the stock exchimge of a domestic corporation: (see 28a), ec) CORPORATIONS’ TAXABLE BASE AND INCOME TAX RATES: ‘SOURCES OF TAXABLE COME IN GENERAL TAXBASE. TAXABLE INCOME. Norma Tax ata 20% eect aay 32908 oR. ‘GROSS INCOME. ‘Minimum Corporto ncome Tax 2% | * Chapter 12 Income Tax of Corporations. as ‘TAX-EXEMPT CORPORATIONS: Income received by the following corporations shall be exempted from tax: 1, Government educational institutions. 2. Non-stock and nonprofit educational institutions, 3. Noriprofit labor, agricultural or horticultural organizations. 4. Associations of farmers, fruit growers, and the like whose primary function is to market the product of their members. 5. Organizations with a purely local operation whose income is derived only from assessments, dues, and fees collected'from their members: to meet operational expenses such as fire fnsurance company, farmers’ or other mutual typhoon associations, mutual ditch or irrigation company and mutual ‘ur cooperative telephone company. 6. Non-stock Corporation or association organized and operated exclusively for religious, charitable, scientific, athletic, or cultural purposes or for the rehabilitation of veterans; provided that no individual person owns its assets or_no individual person receives benefit on its earnings. 7. Non-stock/nonprofit mutual savings bank or non-stock/ nonprofit cooperative bank. 8, Nonprofit civie league or organization operating exclusively for the promotion of social welfare. 9. Cemetery. company owned and operated exclusively: for the benefit of its members, 10. Nonprofit business league, chamber of commerce, or board of trade, 11, Associations, orders, beneficiary societies operating for the exclusive benefits of their membérs. (6 30, mRc) Notes: RMO No. 20-2013 lays down policies and guidelines in the issuance of Tax Exemption Rulings to qualified non-stock, non-profit corporations and associations (exempt entities) Jn this RMO, the Commissioner of Internal Revenue provided that’ "tex exemption rulines eranted to exemot entitles, prior to 30 June 2012 shall644, INCOME TAXATION ‘be valid until 30 December 2019 and those tssuanoes letued after'30 June 2012 shall eéatinue to be valid for 3 years from date of laguance unleve, ‘sooner revoked or cancelled." Prior to amendmieht, Section 10 reads as follower {SECTION 10, Renewal of Tx EnenptonRalegs—Tex Bein Runs be renewed uz filing of a subsequent Application a4 Exempticn/Revalditon, under same requenents and’ procedures. proved hherein. Otherwise, the exemption aball be deenied revoked psn the expiration of the Tax Exemption Ruling, The new Tix Exemption Ruling shall be vali for ssnother period of three (3) ears, unless sooner revoked or canceled” Under the Amendment, the second sentence of Section 10 has been deleted and revised to read as follows: : “Failure, to renew the Tex Exemption Ruling shall be Coomed revooation, thereof upon the explration of the three (3)-yeas period.” CORPORATIONS NOT MENTIONED BY LAW OR ANY TAK TREATY AS TAX-EXEMPT ARE SUBJECT TO INCOME TAXES. Taxabllity of PAGCOR Philippine Gaming Corporation (PAGCOR) derives its incomes from two sources: operations conducted under its franchise, and operatiorfs of other necessary and related services. The Supreme Court has ruled the following regarding the taxability of the (PAGCOR): 1. PAGCOR’s income’ from its gaming operations can only be subjected to S-peroent franchis tax, and not toa corporate income tax. Presidential Decree 1869 exempts PAGCOR's gaming gperations from any kind of taxed, except the, S-peroent franchise tax it is required to pay. 2 2. PAGCOR's income from other related services can be subjected to a corporate income tax.” Chapter 12 Income Tax of Corporations INCOME TAXES OF CORPORATIONS Corporations may be subjected to the following taxes: 1, Normal Corporate income Tax (NCiT).— starting January 1, 2009 = 30% based on net taxable income; 24.9327) 2. Minimum Corporate Income Tax (MCI) ~ 2% of gross income; 3. Optional Gross Income Tax (OGIT) ~ Optional effective January 1, 2000 ifrequirements are met; 4. Capital Gains Tax ~ on sale of real property or on sale of shares of stock and 5. Final Tax on passive income. The Normal Corporate Income Tax For taxation purposes, NCIT réfers to the use of regular domestic income tax rates on (he corporate taxable income which is. 30% starting January 1, 2009. ja. 9337) BIR Form 1702 lays out the general forniat for income tax computation on business income, Sales/ Revenues) Receipts/ Fees from within and without Pee ‘ese: Sales retums, allowances, and discounts (any) Pox Cost of sales me Gross income from operation Pox [Add: Non-operating and other income not subjected to final tax or capital gains tax sale Gross income Px Less: Allowable itemiged business deductions or OSD a Net taxable income Pree ‘Multiply by normal corporate income tax rate \ 80% Pw Normal corporate income tax To illustrate, the corporate income subject to normal tax for a trading or manufacturing Doniestic Corporation is as follows: Gross sales, year 201A 1,050,000 Less: Sales returns, allowances and discounts 50,000 Net sales 1,000,000 Less: Cost ofcales/ Goods manufactured and sold "400,000 Gross profit from operation 600,000 ‘Add: Non-operating, and other income not subjected to 100,000 700,000 Less: Allowable itemized business deductions 400,000 Net taxable income subject to normal corporate income tax B 300,000 Multiply by normal corporate income tax rate 30% Norma¥/corporate income tax B= 30.000ce INCOME TAXATION ‘The corporate income subject to normal tax for a, servicing domestic corporation is illustrated, thus: oe teee oa > eae cee an 1 cane mart tt 2 at 850,000 (ise tema Anton alowed iene ‘Malu by moral rm he Yor a0 Normal corporate incon tax nary soration, the computation of Thane capa ata i ene a aor en ep normal coe oF aun he Phlpines. Any Income derived outa the Sree tot aubjeet 1 tax inthe PALppInes a, Por Nonresident Foreign Corporation, the tax base woul be the gros income ‘tin the Pllppnes. Let it be assumed that the corporation illustrated above is a news Resident foreign corporation and its income-in the Philippines 18 Gerived from dividend. Its income tax would be based wo income, computed as follows: “ P 800,000 Gross revenue from dividends 800,¢ Multiplied by normal corporate tax rate’ Income tax. . 240,000 ‘Not aubject 0 reciprocity male, Minimum Corporate Income Tax (MCIT) Purs IRC, domestic +t to Section 27(f) and Sec. 28 (A2) of the NIRC, and Eater foreign corporations ‘shall be taxed with 2% bem! income (MCIT) and not on their net taxable income 4 Said corporations: , i a normal 1. Incurred a net loss or zero taxable income, oF i ae tax that is lesser than minimum income tax. Beginning on the 4th taxable year immediately following the taxable year in which such corporation co “its ‘business operations. account ‘of prolonged labor dispute, or So afer ses on asm of rong ee aren Chapter 12 income Tax of Corporations. ea? For purposes of minimum income tax, passive’ income that has ‘been subjected to a final tax shall not be included as a part of gross income (rev. Revs. 9.98) Per .BIR Form 1702, the format to compute the minimum corporate income tax would be Gross income from operation. P xox ‘Add: Non-operating and other income nat subjecied to final/eapital gains tax sox ‘Total gross income subject to MCIT Pox Multiply by MCIT tax rate 2% Minimum Corporate Income Tax (MCIT) Poss Carry Forward of Excess of MCIT Any excess of the minimum corporate income tax (MCIT) over the normal tax shall be carried forward and credited against the normal tax immediately for three (3) succeeding taxable years. (Sea 2782, NRC) Tlustration Abuel Corporation has been operating since January 1, 2008. Data pertinent to its operations covering 2014 to 2016 are as follows: —20is 2018 0 Gross salen 'P3,080,000 ¥,100,000,P5;200,000 ‘Sales fetus, discounts /allowances 80,000 ‘100,000 "200,000 (Cont of Sales 4,500,000 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 Abuel Corporation is shown as follows: 1. Computation of Normal Corporate Income Tax (NCIT): 2014 2015 2016 Grose sales 5080.00 74,100,000 75,200,000 Sales returns, dlscount/aflowences "80,000 | "10.009 _200,000 Net sales +51900,000 F¥,000,000 75,000,000 Cost of Sales -is00.000 2.000.000. 2,300,000 ‘Gross income 1,500,000 P2,000,000 . P2,500,000 ‘Operating Expenses 1.450.000 1900000 _2/100,000 [Net taxable income F $0,000 F t00;900 | 400,000 Multiply by Normal Corporate Tax 50% 0% 0% Normal corporate income tox E5000 E009 BE iz0.00 2. Computation of Minimurn Corporate Income Tax (MCIT) peas 2016 2,000,000 P2,300,000 See Fea 2900 E50.000 Gross income - ‘Multiplied by Minimum Cokponii# ltieome Tex Rate Minimum corporate ireome tax648 INCOME TAXATION Chapter 12 Income Tax of Corporations a9 Note; The minimum corporate income tax for 2010 is not applicable Becauiee the company has not yet reached its fourth year GENERAL JOURNAL Dae Page abst [eter | oestotons [peat | rae 3, Determination of income tax due and payable: | gous 2015 _ 2016 Pi5,000 740,000 P120,000 NCIT OR MCIT, whichever is higher Tess: Excess of MCIT over NCIT ® =. 10,000" ‘neome tax due and payable paso © p40.000 Fi20,000 4 (@)_| Taverne tax expense Deferred charges ‘fer NCIT is computed as follows: Tne me tax payable ‘Ths computation of excess of MCIT. 015 Minimum Corporate Income Tax — MCTT {P2,000,000 x 2%) 40,000) 2015 Minima Comper come Tux NCTT (100,000 90%) 30.000 Excess of MCIT over NCIT- ‘B10,000 6 Year: Normal tax (P4,600,000 — P4,250,000) x 0% ‘ MCIT (4,600,000 234)" be Pe ‘Accounting Treatment of MCIT ‘Any amount of excess MCIT shall be recorded in the corporation's books as an asset as ‘Deferred charges, MCIT.” The excess of (Cif over the normal tax due shall be carried forward and may ‘The excess of MCIT over normal tax on pe ceo neu the Sth year can reduce be credited aghinst the jatter within 3 years immediately et noe ‘succeeding the taxable year(s) in which the MCIT has been paid, aaa eeae os Ue grate 00.000 Income tax payable 100,000 P_$,000 ‘The journal entry would be _ ‘Any amount of the excess MCIT that was not or cannot be credited against normal income taxes due for the three-year reglementary period shall lose its creditability. ce Such amount shall be removed and deducted from “Deferred RERBEIOORNAT a charges, MCIT” account by a debit entry to ‘Retained Earnings! “Te vear Descriptions - ners eee ey and a credit entry to: ‘Deferred charges, MCIT” account (fe) | Trcome tax expense’ 7 See ec ia not allowable as deduction from gross income, it + esr ages 4 ] See being an income tax. jeeitg 999) Mustration Forever Corporation, a domestic corporation, has been in ~-existence for-6 years.It reported the following results of i operations for its Stand 6t*year: = Ve 6 Year ‘Gross income 5,000,000 PA, 600, Itemized expenses 7,800,000 4,250,000 Rorever's income tax and its related journal entries for each ‘would be. Expanded Withholding Tax as Deduction from MCIT A taxpayer who is Uble to Morr : and ot the eae time expanded tidings (EWD) may duct the ENT from MCT ‘here i ull an encase EWI, he tay request for ta eed or refund of tax withheld. jeur Ruting 001-99) Gey a Illustration A realestate lessor collected P 140,000 rent during the taxable yest, net of Sie expanded. withholding tax. Total ae AMC |,130,000. The net i c smintd P1300 income tax payable efundabo) 5ih-Year: ‘Normal tax (P8,000,000 ~ P7,800,000) x 30% MCIT (P8,000,000 x 2%) Excees of MCIT over normal taxChapter 12 income Tax of Corporations 651 650 INCOME TAXATION c. Excess of MCIT over NCIT in the previous years (subject to Cross receipts P1,140,000/95%) = P1,200,000 “ preseriptive period of three years) Multiplied by MCIT rate 2% d. Expanded withholding taxes of the current year; and.) Minimum corporate income tax P 24,000 ¢. Excess withholding taxes in the previous year. Less: Expanded withholding tax 60,000 Income tax refund 136,000) 2. If the annual MCIT is greater than NCIT, only the following taxes are allowed to be credited against MCIT: a. Quarterly MCIT paid on the current taxable quarters; b. Quarterly NCIT paid on the current taxable quarters; fc. Expanded withholding taxes of the current year, and 4. Excess withholding taxes in the previous year. NeIr'Vs MrT ‘Summary Application three yoors of operation: Losses or break-even GIT greatec than NOT [NGIT greater than wCTT “vtan te fn be paid le NCITtaDares Charges MCI (cass af MCIT over NOM win ‘ho pt tre yar an be mo se 9 ot ech agaist NCI Excess MCIT from the previous taxable year/s shall NOT be allowed to be credited therefrom as the same can’only be applied ‘against Normal Income Tax. (tame Regulations No, 124007, published Oct 19, ‘Quarterly Payment of MGIT or NCIT Ilustration Revenue Regulations No, 12-2007 also provides that the quarterly income tax of domestic corporations (including resident foreign corporations) shall be paid on quarterly payment. ‘The following income taxes records were revealed by Hilong-Hilo Corporation: Year 4 business operations: Noir err If the computed quarterly MCIT is higher than the NCIT, the tax 'P500,000 ue tobe paid for such taxable quarter shall be MCIT (2% of gross income of the said taxable quarter). Below are the rules to be observed for MCIT. Corporate income tax computed ‘300,000 Excess withholding taxes in year 4 was P20,000. Year 5 business operations; NOT Mt 1* quarter ~ noncumulative 100,000 P160,000 For quarterly income tax return: 2 quarter ~ noncumulative 180,000“ 100,000 i i 3+ quarter — noncunmulativ 1. The taxes ALLOWED to be eredited against the quarterly MGIT aiquarer Caaulatrd oe Suave “1 Sooo Mee due are: XK x a. Expanded withholding tax; Bai rie a : : b. Quarterly corporate income tax payments under NCIT pi expanded withholding taxes in year 5 is P50,000. in the previous taxable quarter; and cc. Quarterly MCIT paid in the previous taxable quarter, The year 5 income tax still due and payable of Hilong-Hilo Corporation would be: 2. In the payment of said quarterly MCIT due, excess MOIT Wesce cies cea” Worn tienes the previous taxable year/s is NOT ALLOWED to be credited, ee en eter aaa pine 900,000 z 1# quarter ~ MCIT, higher For the annual income tax return: a oe NCR Ee 1. If in the final computation annual income tax due the NGIT i S™ quarter ~ MCIT, higher. Excess of MCIT over NCIT - year 4 credited: (P500,000 - P300,000) ‘Quarterly MCIT paid on the current taxable quarters; “Expanded withholding tax in year 5 '». Quarterly NCIT paid on the current taxable quarters;652 INCOME TAXATION Optional Gross Income Tax (OGIT) Section 27 A of the NIRC provides an optional gross income tax of 15% based on the gross income. The rules for the application of this tax are ag follows: 1,°4.The President, upon the recommendation of the Secretary of Finance, may, effective January 1, 2000, allow corporations the option to be taxed at fifteen|percent (15%) of gross income as defined therein, after the following conditions have been satisfied: a. A tax ratio of twenty percent (20%) of Gross National Product (GNP); b. A ratio of forty percent (40%) of income tax collection to total tax revenues; ¢. AVAT tax effort of four percent (4%) of GNP; and 4. A 09 percent (0.9%) ratio of the Consolidated Public ‘Sector Financial Position. (CPSFP) to GNP.” 2. 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 do not exceed fifty-five percent (55%). 3, 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,” For purposes of gross income tax, gross income should be the — ‘nome for purposes of MCIT in cases of 5 for service enterprises, gross incotne means gross receipts lets sales returns, discounts, ‘allowances and cost of services. (Sec27@4 Mlustration Janette Corporation's information regarding its 201A operation i 3,700} 2,000. ‘900. Operating expenses Chapter 12° Income Tax of Corporations 653, ‘The computation of income taxes due and payable by Janette Corporation would be u. 2014 Now Morr or Gross sales 3,700,000 73,700,000 3,700,000 Less: Cost of sales 0, 2,000,000 2,000,000 Gross income Pi,700,000 1,700,000 Pi,700,000 Less: Operating expenses, 900,000 et income 800,000 Multiply by tax ate 30% 2% 15% Income tax E240.000 E—a000 E_255.000 ‘Cost ratio over sales (P2,000,000/3,700,000) 54% Janette Corporation may opt to pay gross income tax of P255,000 or pay normal corporate income tax of P240,000. The corporation is not qualified for MCIT. Note: As of the writing of this book, the grose income tax of 15% based on the corporate grose income hae not been Implemented in the Philippines: Capital Gains Tax ‘The tax on capital gains of a corporation derived within the Philippines is summarized as follows: CORPORATIONS ‘esiient ] Neareldent Foren |, Farcen Domestic ae: ot over 100,000 5% o% 3% Exoees of 100,000 10% 10% 10% 2, Perentage tx on sale of ites of stockade in the dna stork exchange Based con eeling price wore | wore ye ge woe lee CSingerdponon ot - | facet | donee | winialang Guctiees qcneeey |unenal S ees one nee 4. Net Capital gains onsale oF ‘shange oF dspoution of soi Inds nor baking leentet outside the No taxable | Not table654 INCOME TAXATION Hotes’ 1, 41/2 of 1% tax on sale of shares of stoék traded in local stock exchange is @ ‘percentage tax, not an income tox. 2. Gale of reel. property sold outside by resident citizen and domestic corporation fa eubject to formal tax rate based on gain. (Rev. Reg. No. 7 2008, Sen. & fi 8. The eate of feal property by nonresident foreign corporation is subject to a ‘20% final withholding tax based on casual gains. (RA. 9397) ‘4. In general, only Filipino citizens and corporations or partnerships with at least 60% of the shares are owmed by Filipinos are entitled to own or acquire land in the Philippines, 5. - Foreign individuals and foreign corporations are not allowed to acquire real property in the Philippines as provided by anti-cummy law. (PD 715, May 28, 1975) Exception: ‘a, Acquisition of real property by hereditary succession — ‘Obama (US Citizen) inherited a real property In the Philiopines from his relative, Mar Binay. ‘Acquisition of real property under the 1935 Constitution. 4 Purchase ofnot more than 40% of the units in a condominium project in the Philippines: 4. Purchase by former natural bor Flipino cise, subjoct to the Fauirement of Umitatonapreseibed by lave The acusiton shall ot Ceca Toon equare meters or urban land ort hectare fo ural lad trea sale fr fesidental parpost of the tages (Balan Panbaneg 1g 105, or under 000 aquare meters or ursan andor 3 hectare or Fill elt or business of one? purfones of ts teneeree: orem vesinentCpde RA 8179) ustration Dianiohd 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 F100, 2. Sold 20,000 preferred ‘shares of preferred stock traded in ocal stock exchange for P1,800,000.. The cost per stock P100. 3. Sold land located in the Philippines for 6,000,000. The 6f land is P3,000,000 with a fair market value of 6,500,000: 4; Sold land located in Japan for P5,090,000: The cost of land is P4,000,000. { Chapter 4” income Tax of Corporations 655, Required: Compute Diamond Corporat sales of ep anseto assuming te bone PavaE on 1. Domesti¢ corporation (DC) 2. Resident foreign corporation (RFC) eee Solution: Capital gains tax on: c REC _NRK A.” Sales of stock - not traded = = ‘et capil pain of 1200000 ‘62 P100,000 x 5% F Teronenes rice oo0xi0% — Tiogsa — agag 500 Reece as cause Bis.000 25.000 B5,000 {[P1,800,000 x ¥ of 1%) 29,009 29.900» p 9.000 9. Ses oft the hips a 500,000 x 6%) 290,009 _p990,000 (6,000,000-F3,000,000) x 30% = -B900,000 4. Sales ofland in Japan (5,000,000-P4,000,000)x 30% 300.000 nottassble not taxable Passive Income Tax The tax ive i ic Tollowa, 7 Passive income of the corporation is summarized as CORPORATIONS PASSIVE INCOME writs Donesbeae | Nene 1 elfen deptnybaskunder | Siento | "Foren eae eS ore 13% io aeee ‘See. 27 Dit} See. |, See 27 DE, Royalties, Viel or nionctary ae ee ae ‘bates on depen, eB Kemal cups ‘rust funds and sitar arene mm ee Interest on creney tank depose on | Nema copere ncone ar Illustration Golden Corp. Golden Corporation has the folowing passive income forthe year 1. Interest from de = : 4 120,000. Pository bank under’ expanded) FCDS_ at 2. Royalties of P300,000. ' + ai Vield deposit substitutes‘and trust fund at P180,000.Chapter 12 Income Tax of Corporations 657 58 INCOME TAXATION ‘a. Dividend income from San Miguel Corporation amounting to 3,000,000. b. Interest income on US dollar deposit with local bank authorized to operate a FDCU at $20,000. c. Interest income on US dollar loans from resident borrowers at $5,000. is ompute. the passive income taxed of Golden Corporation ‘Seuming that the corporation is 2) Domestic corporation, ) Resident foreign Corporation; end 6) Nonresident foreign corporation. 3olution d. Interest on Philippine peso loans from borrowers at 2agsive income: peyRFc = ___NRFC 3,000,000. Se depository bank under expanded : 2V> Tnteeat fom deport bank under vende 6a, Taxaaemal e Interest on US dollar loans to nonresidlent borrowers at pea, 30,000 2) Royalties [P300,000 x 20%6) 0.000 as {P300,000 x 30%) 220,000 Interest on US dollar deposit in Hongkong at $10,000. 3) Yield deposit substitutes and trust fund & Operating expenses of P2,000,000. Exchange rate: one US 180,000 x 20%) £36,000 5 000,000. 5. {P180,000 = 30%) 4.900 dollar is P50. 1) Interest on currency bank deposit : (P50,000 x 20%) P10,000 is.000 The final taxes of Philippine Bank would be {Psolovo © ac) Interest” interest “Dividend. dpllardepoalt ~doaclnans iv ive Income of Domestic and Resident Foreign « Income P3,000,000 '$ 20,000 $ 5,000 po! Final taxes ae £2,000 a 200 4. The income of domestic banks under the Expanded Foreign Currency Deposit System is subject to a final tax of 10%. Income subject to normal corporate income tax: «a. Income derived by a depository bank from foreign currency Interest on Philippine peso loans 3,000,000 tranwactions with local commercial banks including Interest on US dollar loans ($30,000 x P50) 1/500,000 caeeee of foreign banks, other depository banks end Inert on US dlr depo (610,000 750) eae seal es Less: Operating expenses 2,000,000 tb. Intereat income trom foreign currency loans granted to ‘Taxable income 3,000,000 residents. ; : Multiply by tax rate 50m Income tax due 900.000 2, Inter-corporate dividends. ‘a. Received by a domestic corporation from another domestic: corporation = tax-exempt. (Se227/D(4), NRC) E b. Received by a resident foreign corporation from ‘on liable to tax under Philippine Tax Code = tax ‘exempt. (Sec.28/7d, NRC) ‘Other Passive Income of Nonresident Foreign Corporation 1, Interest income on foreign loans contracted on or after August 1, 1986 is subject to 20% Final Withholding Tax. 2, ‘Tax Sparing Rule is an inter-corporate dividend received by a nonresident foreign corporation from a domestic corporation is subject to 15% Final Withholding Tax provided that foreign law allows taxpayer clause; otherwise, it will be subjett to the normal domestic rate of 30% 1m: 9297) Tlustration : A Philippine Bank has seen authorized to operate a Foreign ae Viet he the Raneko Sentral ng Pilininas and658. INCOME TAXATION The tax rate of 15% shall be applicable if the foreign country * does not impose, any income tax on dividends received by the nonresident foreign corporation from a domestic corporation, ‘The 15% tax rate shall be effective starting January 1, 2009. Mlustration World Company, a nonresident foreign corporation, received P100,000 worth of dividends for the taxable year 201A . Compute the taxes on the dividends assuming that the a) foreign law allows taxpayer clause, and b) foreign law docs not allow taxpayer clause. The computation of taxes on dividends received by World ‘Company would be: Assumption A “Assumption B Dividend P100,000; * 100,000 Multiply by tax rate > 15% 30% Final withholding taxes BLis.000 230,000 Note: 8. THE TAX SPARING RULE OF PROCILE AND GAMBLE PHILIPPINES, (SUBSIDIARIES AZ NOT SUBJECT TO BRANCH PROFIT REMITTANCE TAX BUT SUBJECT TO DIVIDEND TAX OF 15% OR 30%) b, Commissioner of Internal ‘Revenue vs, Piocter & Gamble Philippine Manufacturing Corporation and the Court of Tax Appeals (G.R. No. 66896, ‘dated December 2, 1991 now Section 28 (6)(l) and (5)(0) of the Tax Code of 1997 — A subsidiary is not @ branch because subsidiary are registered in the Philippines. Remittances are considered dividends. fitters rand nov area ee are company. ‘A subsidiary is a separate legal ent and has the same legal identity as SPECIAL CORPORATIONS (soc. 27/6), MRC) SPECIAL DOMESTIC CORPORATIONS. ASBCATIONS [APPLICABLE TAK cualonal nen (Cepep fe whose goss ncn \rrtad st eesde 90% 0 ort ‘os nome) Non ona ona id i cova Sonortors Ee ee ies ah Seu Pie Pee) 10% of not taxable income 10% of nt taxable nome ral corporate income tx Chapter 12 income Tax of Corporations 659 Domestic Private Educational Institutions and Hospitals Domestic private educational institutions and hospitals which are nonprofit shall pay a tax of 10% on their net taxable income. However, if their business income from unrelated business activities exceeds 50% of the total gross income from all sources, the regular tax rate for domestic corporation shall be applied. jsec: 2718), NEC} ‘The term “unrelated business activity” means any trade, business or other activity, the conduct of which is not substantially related to the exercise or performance by such eduéstional institution or hospital or its primary purpose or function. ‘A “proprietary educational institution” is any private’ schodl maintained and administered by, private individuals or groups with an issued permit to operate from the DECS, or CHED, or TESDA, Illustration 1 ‘The following data were reported for 200A business activities of Western University (WU), a private educational institution: ‘Tuition fees 3,000,000 Miscellaneous fees 200,000 Rent income, net of 5% withholding tax 475,000 Cash dividend (domestic), tax-exempt 200,000 Interest income, net of 20% final tax 80,000 Operatitig expenses 1,200,000 ‘The income tax payable of WU per ITR is determined as follows: 1. Computation of percentage of unrelated income’ ‘Unrelated “__Related Rent income (P475,000/95%) _P500,000, Cash dividend 200,000 Interest income [PB0,000/80%) 100,000 ‘Tuition fees 3,000,000 3,000,000 Miscellaneous fees if Total gross income ~ all sources 200,000 Percentage of unrelated income over total gross income ‘rom all sourees (P800,000/P4,000,000) 20,660 INCOME TAXATION 2. Computation of income tax payable per ITR: Tuition fees 3,000,000 Rent income 500,000 Miscellaneous fees — 200,000, ‘Total gross intome per ITR 3,700,000 Less: Operating expenses . _1'200,000 Net taxable income 2,500,000. Multiplied by special tax rate Se s0m Income tax duc Py 250,000 Less: Creditable withholding tax on rent (500,000 - 475,000) 25.000 Income tax payable B228,000 Ilustration 2 Suppose that in 200A, the composition of WU income is as follows! ‘Tuition fees 1,200,000 Miscellaneous fees ‘200,000 Rent income, net of 5% withholding tax 950,000, Cash dividend (domestic), tax-exempt 500,000, Interest income, net of 20% final tax 80,000 Operating expenses 1,200,000 ‘The income tax payable of WU per ITR is determined as follows! 1. Computi mn of percentage of unrelated income: Unrelated Related ‘total Rent income (P950,000/95%) 1,000,000 1,000,000) Cash dividend 500,000 ‘500,000 Interest income (P80,000/80%) 100,000 100,00 1,200,000 Tuition fees 1,200,000 Miscellaneous fees . _ 200,000 __'200,000 ‘otal gross income all sources 71,600,000 Percentage of unrelated income over total gross income {rom all sources (P1,690,000/P3,000,000) 2. Computation of income tax payable per TR: ‘Tuition fees 1,200, Rent income Miscellaneous fees Total nross income per ITR Chapter12 Income Tax of Corporations, 664 Net taxable income 1,200,000 Multiplied by normal tax rate 20% Income tax due P 360,000 ‘Less: Creditable withholding tax on rent {1,000,000 - P950,000) 50,000 Income tex payable 310.000 Note: The minimum corporate income tax may be applied if the private educational institution qualifies to be taxed under normal corporate income tax. If ‘# remains under special tax of 10%, the minimum corporate income tx §8 not applicable ‘SPECIAL RESIDENT FOREIGN CORPORATION The income taxes imposed to special resident foreign corporation are as follows: CLASSIFICATIONS: Itornational earior 2 Hof the Philine goss bigs (Offshore banking unis 410% of gross nome Regional eres headquerters | Tax oxernpt 10% of taxable income 4 2 8. Branch remitances 15% of remittances 4 s. International Carrier ‘The applicable tax would be 2 % % of the Gross Philippine Billings (PGB) (se0283, meq, PGB-means gross revenue realized from carriage or persons, excess baggage, cargo and mail originating from the Philippines under the following conditions: + Inacontinuous and uninterrupted flight, and * In case of transshipment, that portion of the cost of ticket corresponding to the leg flown from the Philippines to the point of transshipment. eet 19) Mhustration DRAGON FLY has the following records of income for the period:662 INCOME TAXATION . Continuous flight from Manila to Beijing = 1,000 tickets at 3,000 per ticket. B. Ticket Sold for flight from Manila to Hongkong: Transfer flight from Hongkong to Beijing = 2,000 tickets at P3,000 per ticket. C.- Direct flight ‘from Manila to Hongkong = 3,000 tickets at 2,000 per ticket. Computation of income tax: Continuous flight from Manila to Beijing {P3,000 x 1,000) P 3,000,000 ‘Transfer flight from Manila to Hongkong (P3,000 x 2,000 x 2/3*) 4,000,000) Direct flight from Manila to Hongkong. {2,000 x 3,000) 6,000,000 Gross revenue 13,000,000 Multiply by tax rate 2% income tax E_325,000 ‘Note: The 2/8 ratio of transfer Mgt from Manila to Hong Kong is computed by. ‘petting the prices of ticket for direct flight over transfer fight, (P2,000/ F3,000),_ Offshore Banking Units (OBU) ‘These resident foreign corporations are subject to a 10% final tax: on interest income derived from foreign currency loans granted to residents, (see 28 (a4, MIR. Exceptions: 1, Income derived by OBU authorized by BSP from foreign currency. transactions with nonresidents, other OBUs, local ‘commercial banks and foreign banks shall be exempt from all taxes, except net income from such transactions as specified by the Secretary of Finance. (e204) 2. Income of nonresident individuals and nonresident corporations from transactions with offshore banking units is ‘exemipted from Philippine income tax. 4 Illustration Aseanbank, Inc., an offshore banking unit and a resident corporation, shows the following income and expenses during ti taxable year: ‘Total amount to be remitted CChaptor12 income Tax of Corporations 653 Interest income on foreign currency transactions from: Nonresident other offshore banking units “$1,000,000. Local commercial banks and foreign banks’ . 1,500,000 Resident corporations and individuals 500,000 ‘Operating expenses "400,000 ‘The interest income subject to final tax of 10% would only be interest income from foreign currency transactions from realdent corporations and individuals, Thus, $50,000 or $500,000 multiplied by 10%. ‘Tax on Branch Profits Remittance ‘They are subject to 15% tax on the amount remitted by branch to its head office excluding: a Income from activities that are registered with Philippine Economic Zone Authority. . Passive income gains and profits received not directly connected with the conduct of its trade or business in the Philippines. (se= 285, meq) Illustration Astex Corporation, Phils., a branch of a foreign corporation located at Texas, USA doing business in the Philippines, reported * the following during the year: Net operating income after tax 7,000,000 ‘Tax-exempt dividend income 2,000,000 Total net income ‘2,000,990 ‘The following year, the branch earmiarked for remittaiice to the head office the P2,000,000 dividend and P5,000,000 of its net operating income after tax. ‘The total amount to be remitted would be i Dividend income i ‘Add: Net operating income after tax, 5,000,000 Branch profit remittance tax. bill nee at 2,000,000 {P5,000,000 x 15%) ote: Only income connected with the conduct of trade or business is subject to ‘branch profit remittance tax.664 INCOME TAXATION Sec. 28 (A) (4) of NIRC provides that the following income within of a foreign corporation shall not be treated as branch profit for tax purposes unless the same are effectively connected with the conduct of the trade or business in the Philippin 1. Interest, dividends, rents, royalties; 2.’ Remuneration for technical servi 3, Salaries, wages, premiums, annuities, emoluments; 4. Other fixed or determinable annual, periodic or casual gain, profits, income and capital gains. ‘ Regional Operating Headquarters i Regional operating headquarters are branches established in the Philippines by multi-national companies, which are engaged in any of the following services, are’subject to 10% tax rate based on their taxable income General administration and planning; oP Business planning and coordination; Sourcing and procurement of raw materials and components; 2 Corporate finance advisory services; Marketing control and sales promotion; ‘Training and personnel management; Logistic services; h, ‘Technical support and maintenance; j. Data processing and communication; and. Kk. Business development. (sos 28.46, 10) Mlustration Ace, inc., Philippines is engaged in research and develop services and product development related to computer aircraft parts, During the year, Ace reported the following ine: and expenses! 3 Sales Cost of sales : (Operating expenses Chapter 12 Income Tax of Corporations es } Interest ineome, net of final tax 200,000 Dividend income, tax-exempt 800,000 The income tax of Ace Inc., Philippines would be Sales 10,000,000 Less: Cost of sales 4,000,000 Goes Income P 6,000,000 ss: Operating expenses, 2,500,000, Net taxable income P 3,500,000 Multiplied by applicable tax rate 0% Income tax due " B3s0,000 ote: Tax-exempt and income subjected to final taxes are not to be included an ‘part ofthe taxabl ‘SPECIAL NONRESIDENT FOREIGN CORPORATIONS ‘The. ‘applicable tax rates for special nonresident’ foreign corporations are as follows. "= SPECIAL NONRESIDENT FOREIGN CORPORATIONS ‘CLASSIFICATIONS. | APPLICABLE TAX Income Within Cinematographic fin owner, Lessor Detrbutor 25% of gross income: (Boe. 288.0) Lessor of machinery, ‘qupment, area and ctners | 7 4% of ross income (See. 286 2) Lessor of voscols chartered by Piippine Nationals 4 #240 gros income Illustration %, @ special nonresident foreign corporation reveals its income and expenses within the Philippines as follows: \ Gross receipts 5,000,000 Operating expenses 2,000,00066. : INCOME TAXATION Compute the income taxes due if X is a: (1) Cinematographic film distributor, Lessor of icra or a: (G) Lessor of vesoes chartered by Philippine Nationale ie nome tases due would be (0) Cinemato- (2) Lessor of (3) Lessor of ‘raphic lm Gross receipts 5,000,000 Multiplied By ‘applicable tax rate Income taxes due INSURANCE COMPANIES In the case of insurance cor panies, whether domestic or foreign doing business in the Phiiippines, the net additions, if any; required by law to be madi within the year to reserve funds and the sums other than divid nds paid within the yeer on policy and anauity contracts may tie deducted from their gross income: Provided, however, that the released reserve be treated as income in the year of release. (s= 37, 18; Sax 129, Ret Rege No.2) Illustration Malayan Insurance Corporation shows the following accounts at theend ofthe taxable year, _ i Gross premium collected 200.088 Operating expenses 500.000 Reserve funds release 800,060 Net additions to reserve funds during the year ¢ ‘The net income of Malayan Corporation would be i 8,200,000. Gross premium collected 200, Add: Reserve funds release 800,000 * Gross income 9,000,000 Less: Operating expenses P3,500,000 Net additions to reserve funds 500,000 pigeon Net taxable income aoe \\Multiplied by normal tax z Income tax due ‘B1,500,000 Chapter 12 Income Tax of Corporations eer FRANCHISING COMPANIES When royalties are’ received in active pursuit of business, it is Gubject to 30% regular corporate income tax. If royaltiee are derived from passive income, these are generally subject to 20% fimall tax. (Bt Ruling te. 04 101) dated Onder 17, 2006) Mlustration ¥ Corporation, a franchisor of chain stores, granted franchise to a franchisee, M Corporation. The franchise fee is P10,000,000, The Pre-operating and training costs incurred was P2,000,000, Using OSD, how much is the income tax due for this tran action? ‘The income tax due would be Royalty fee 1 10,000,000 less: Pre-operating and training cost 2,000,000 Gross income P’8,000,000 Tess: OSD (P8,000,000 x 40%) = 3,200,000 Net taxable income 4,500,000, Multiplied by normal tax rate 30% Income tax due P1,440,000 Corporate Income Tax Returns H Section 52 (A) of the NIRC provides that every corporation subject fo the tax herein imposed, except foreign corporations not Gneaged in trade or business in the Philippines, shall render, in fuplicate, truc and accurate quarterly income tax return (BIR "Form 17020) and final or adjustment retum (BIR Form 1702) nl The xeturn shall be filed by the. president, vice president or other Principal gfncers and shall be sworn to by such officer and by the treasurer or asSistant treasurer. Rules in fling and payment of corporate income tax: 1. Be sorpras guar resum shal be fled win sy (0) dane ling theese fea he Be ee en (0) ays a Sine of okeeet 2. The iinet ue on the conatéquszly stars and the Sel “Adjusted income tax returns computed: in- accordance with Section’ FB gpd 76 shall be paid at the time the declaration or return is led.668. INCOME TAXATION fore the nneenth ‘the final adjustment return shall be fled on or b a (15%) day of April, or on or before the fifteenth (15) day of the fourth month folowing the cloge of the fiscal year, as the case may be, jx 77 ome ITR of Corporate Dissolution or Reorganization an, for dissolution, or Within 30 days after the adoption of a pl 0 Feorganization, a corporation should render a corect TTR to the BIR Commissioner. Prior to the issuance of the Certificate of’ Dissolution or Reorganization by the SEC, the dissolving or reorganizing corporation shall Secure a certificate of tax clearance from the BIR ‘which shall be submitted to the SEC. (se= 52(¢, mac) ‘Taxable Year of Corporation A corporation may employ either a calendar year or a fiscal year as a asis for fling its annual income tax return, A corporation shall not change the accounting period employed without prio, approval from the Commissioner in accordance with the prohibitions of Section 47 of the Tax Code. (sees. ‘The quarterly corporate income tax is computed as follows: Sales for the quarter Pax Less: Cost of sales = Grose income = Less: Deductible exzcuses = ‘Taxable income f. che quarter 30 ‘Add: taxable income from previous quarter = ‘Total taxable income to date Multiply by corporate fax rate we Income tax due a8 Less: Income tax paid in previous quarterly return Prox Income tax withheld by various payor = ‘Tax payable this quarter Eas quarterly income ‘tax has been. illustrated The corporate Chapter 10 of this book. ‘Annual Income Tax Return ee The corporate annual income tax retum contains” accumulated report of sales, cost of sales and Chapter 12 Income Tax of Corporations 660 cleductions from the first quarter to the fourth quarter during the Taxable year This annual income tax return is the adjusted income tax return and is to be filed on or before April 15 of the succeeditig year. Sales for the year Prox Less: Cost of sales Gross income Prox. Less: Deductible expenses xa Taxable income for the year Prax Multiplied by normal tax rate or 30% MCIT 2% of gross income 2% Total annual income tax (applicable tax, the higher of normal tax or MCIT) Px Less: Income tax paid in the first 3 quarters Prox Income tax withheld by various payor x 8 Tax payable this year Bas Note: if the total quarterly tax pald during the taxable year is more than the tax ue of the final retum, the corporation may claim tat eredit carry-ovey oy he sefuyade! widh the excess amount Improperly Accumulated Earnings Tax (on Family or Closely-held Corporation In general, accumulation of earnings would be improper if such accumulation were not within the reasonable needs of the " business. 3 The term “reasonable needs of the business” are hereby construed to mean the» immediate needs of the. business, . including Teasonably anticipated needs. fm either’ case, the corporation should be able to: prove an Immediate need for the accumulation of the earnings and profits, at the direct correlation . of anticipated needs to such accumulation of profits, Otherwise, such accumulation would be Heenied to be not for the reasonable needs of the business, and “he penalty tax would apply. (sc.294, aR, nei. Rey Ns 2-200) The improperly accumulated earnings tax shall not apply to the Bllowing corporations: * Publicly-held corporations; » Banks and other nonbank financial intermediaries, and670 INCOME TAXATION Earnings for the Reasonable Needs of the Business Revenue Regulations No. 2-2001 provides the following which constitute accumulation of earnings for the reasonable needs of business: 1, Allowance for the increase in the accumulation of earnings up to 100% of the paid-up capital of the corporation as of balance sheet date, inclusive of accumulations taken from other years; 2, Eamings reserved for definite corporate expansion projects or programs requiring considerable capital expenditure as approved by the Board of Directors or equivalent body; 3. Earnings reserved for building, plants, or equipment acquisition as approved by the Board of Directors or equivalent body; 4, Earnings reserved for compliance with any loan covenant or pre-existing obligation established under a legitimate business, ‘agreement; 5. Earnings required by law or applicable regulations to be retained by the corporation or in respect of which there is legal’ prohibition against its distribution; and } 6. In the case of subsidiaries of foreign corporations in’ the: Philippines, all undistributed earnings intended or, reserved investménts within the Philippines as can be proven by corporate records and/or relevant documentary evidence ‘Accumulated Profits Beyond Reasonable Needs ia t ‘The following are prima facie instances of accumulation of profits beyond the reasonable needs of a business and are indicative purpose to avoid income tax upon shareholders: : 1. Investment of substantial earnings and profits of the corporation in unrelated business or in stock or seourities of unrelated business; 2, Investment in bonds and other long-term securities; and 3. Accumulation of carnings in excess of 100% of paid-v capital, not otherwise intended for the reasonable needs of ‘business as defined. a Amaro C i orporation, a following during the taxable yee ‘Chapter 12 Income Tax of Corporations OPlective of Improperly Accumulated Earnings Tax (IAET) The objective of imposi income. is to force corporations to distribute dividends to stockholders ie Sireauter® im order that related tax on dividends will be A corporation that does not government of income tases “tubule dividends deprives the govern from the stockholders’ dividend If there is a determinati ‘orporation has accumulated ion that a o ity (setort nae, SCcUMulated earnings tax (IAPT) shall be’ imposed. Tex Base of Improperly Accumulated Earnings Tax (IAET) 8). Income exempt from tax; ‘ ) Income excluded from gross income; ©) Income subject to final tax; and d) NOLCO deducted. The sum ofthe above amounts shall he reduced by the si of 8) meome tax paid or payable forthe taxable yer, 2) dividends actially oF co splcable year’s taxabie income; and” Pat/ssved from the ©) Amount reserved for defined, emanating fom the seals Reeds of the business as ffom the coveted year’s taxable income, " Wlustration held corporation, reported the672 INCOME TAXATION Accumulated retained earnings ' P3,000,000 Paid-up share capital 2,000,000 Income tax due and payable ‘900,000 20% final tax on interest income 60,000 Divided income 200,000 Gain on life insurance 1,000,000 Dividend declared and paid 300,000 Reserved for planit expansion 200,000 Investment in bonds 2,000,000 The IAET of Amaro Corporation would be ‘Taxable income (P900,000/30%) 3,000,000 Add: Gain on life insurance 1,000,000 Interest income (P60,000/20%} 300,000 é Dividend income 200,000 _1,500,000 Total A 4,500,000 Less: Income tax due and payable P_ 900,000 Dividend declared and paid 300,000 Reserved for plant expansion 200,000 Final tax on interest income 60,000 _1,460,000 Improperly accumulated earnings 3,040,000 Multiptied by IAET rate 0% Improperly accumulated earnings tax Accounting of IAET The accounting for IAET entails the application of the following formula to convert the GAAP Income to Taxable Income (in B_304,000 thousands): : ___| Weducti | Tax Rate, Amount and Accounts GAAP Tacome ~P100- [ Nondeductible expense ai 2 [Net loss carry over: ay fincome tax expense “Temporarily nt deductible expense 5 | 30% = P00 | S0% = F30.00, income tax expense 1.50 Deferred tax Base of income tax payabl | Temporacily not taxable incom ‘30% = (1,20) Deferred tax lab “at oe et Tax payable | Chapter 12 Income Tax of Corporations | ors ‘The related journal entry would be Income tax expense 30.00 Deferred tax 1.50. ‘Deferred tax liability 1.20 Income tax payable 30.90 If BIR declared the above income as improperly accumulated, then the: computation of IAET following the statutory provision ‘would be: ‘Taxable income 101.00 ‘Add: Net-operatitg loss carry over (NOLCO) P 1.00 Nontaxable ircome 2.00 ‘Temporarily not taxable income 400 __7.00 708.00 Less: Income tax payable 4.00 Basis of ABT Pios.00 Multiplied by 1ABT rate ~ 10% IAET Baps0 Period of Payment of Dividend ‘The dividends must be declared and paid or issued not later than ‘one year following the close of the taxable year; otherwise, the IAET, if any, should be paid within 15 days thereafter. Effect of 10% IAET 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,