Tax Finals Angel PDF

TAXATION LAW I l Atty. Amago l For the exclusive use of EH 407 A.Y.
2015-2016
CORPORATION INCOME TAX service contracts with the government, it is excluded from the term
corporation.
CORPORATION
Are these types of operation really exempted from taxes?
Corporation Code of the Philippines
No, because separately, these entities forming the consortium will still be
A corporation is an artificial being created by operation of law, having the
taxed once the income is distributed - not treated as dividends but as
right of succession and the powers, attributes and properties expressly
ordinary income.
authorized by law or incident to its existence.
CLASSES OF CORPORATE TAXPAYERS

EXCLUSIONS FROM THE TERM CORPORATION
CLASSES OF CORPORATE TAXPAYERS
EXCLUSIONS FROM THE TERM CORPORATION
1. Domestic Corporation – taxed for income within and without the
1 – Joint Venture Philippines
(For the purposes of undertaking construction project) 2. Resident Foreign Corporation – taxed for income within only
Corporation itself ordinarily owns the land but there are some individuals 3. Non-resident Foreign Corporation - taxed for income within only
who own it but they (corporation) undertake to develop the land and
subdivide it and once the land is ready for sale, whatever is the sales Reasons for distinction:
proceeds once it has been developed, they will just share the profits with A. To know when can they be taxed (income within/ within or without
the owner of the land. They enter in this Joint Venture Agreement. At one Philippines)
part, what was contributed by the owner of the land (which is the B. Different tax base and rate will apply (DC is taxed at 30% based on
ownership) while the other party it contributes to the cost of developing net income for those earned within and without, RFC within is taxed
the land. based on 30% net income; NRFC are taxed at 30% gross income
within Philippines)
But ordinarily, when you transfer property to one fund, you will be treated
as a partnership and it is supposedly subject to tax. Domestic Corporations
Domestic corporations are those which are registered and/or organized
The law deems it that no, in this type of conveying property to a particular under Philippine laws. It is presupposed that if the corporation is registered
fund, you don’t treat it as if a partnership. Because the undertaking is a and/or organized here, then the operations must be here.
construction project, the law deems it that it should not be taxed but does
that mean that there no tax in such operations? Foreign Corporations
In general, these refer to those which are organized and/or registered in
No. There is still tax but on the level of the entities who formed the Joint laws other than the Philippines
Venture. The owner will be subject to tax separately and then the one who
developed the property will also be taxed separately on whatever income Resident foreign corporation
was distributed to them. These are those which are doing business in the Philippines. This means
that there should be continuous or regular operations. It should pass the
While it says exclusions from the term corporation, it does not mean there test of regularity. A foreign corporation having a branch here is a means of
is no tax imposed, it’s just taxed on a different level. Different type of having regular or continuous operation but it is not necessarily a branch
taxpayer is being taxed when everyone is excluded from the term because it could be a representative office.
corporation.
Under Foreign Investment Act, there are 2 ways a foreign corporation can
Not corporate income tax applies but it is individual taxation (of course if do business here. It’s either by having a branch or a representative office.
that entity happens to be a corporation then it would be still taxed as a If it has either one of these, it is deemed to be a RFC automatically.
corporation) but not on his operations together with someone who is in
Joint Venture with him on that construction project. They would still be Does that mean that if you are not registered in the Philippines SEC, you
taxed as corporation, but only separately, not jointly. will not be subject to tax?
No, because if that’s the case then all of the foreign corporations will never
2 – Consortium for the operations engaging in petroleum, coal,
register with the Philippine SEC because if they will register then they are
geothermal, and other energy operations pursuant to an
subject to tax and if they won’t register then they won’t be subject to tax.
operating/consortium agreement under the service contract
Again, the laws on which the corporation is registered matters. To be a
with the government
resident foreign corporation, it must be doing business in the Philippines,
This refers to certain entities providing public utilities like electricity and its
otherwise, you will only be considered NRFC.
distribution. When the National Power Corporations sub-transmission
assets - the one being used to distribute the line; the asset used to hold the
Example: There is a foreign corporation which happens to have shares of
electricity and distribute it, there are certain entities which on the
stocks in a domestic corp. It does not necessarily mean that they are doing
consortium to buy these sub-transmission assets. (mao ni ang exact words
business here in the Philippines as their income is dependent on the
ni sir)
operations of the Philippine company.
If you look at the Tax Code, they will not be treated as forming a separate
So there is a domestic corporation set up here and shares of stock were
entity subject to tax because it is providing public utilities. They agreed to
bought by a foreign corporation (shares of stocks owned by a foreign
service the public when in fact it is the government who should do that. It
corporation but the business is registered here – this is allowed under
will not be treated as a separate entity just like the joint venture. They are
Foreign Investment Act). If that corporation distributes income to its
joined together in a certain operation, they own sub-transmission assets
stockholder, is the distribution subject to tax? Supposedly if NRFC, you
then they will allow the passage of electricity under their assets. It’s like
are still supposed to subject them to tax based on their income here in the
contributing asset to a common fund.
Philippines. How?
Will they be subject to tax as one entity?
The Corporation will have to withhold the amount and the rate would be
No, because under the law, when there is a consortium for the purpose of
30% based on its gross income. It means that in isolated cases, the
operating petroleum, coal, geothermal and other energy operation under
1|U N I V E R S I T Y O F S A N C A R L O S S L G
TAXATION LAW I l Atty. Amago l For the exclusive use of EH 407 A.Y. 2015-2016
corporation can still be subject to tax whether it has actual presence here Pension
in the Phil or not. If there is no actual presence, then it is automatically an Corporations can’t earn them.
NRFC if they have an isolated transaction.
ITEMS FOR ALLOWABLE DEDUCTIONS
DOMESTIC CORPORATION
Taxed at 30% based on net income ITEMS FOR ALLOWABLE DEDUCTIONS
Taxable Income = Gross Income – Allowable Deductions
It is just like an individual doing business. Expenses
Comes in the form of rentals of a building or salaries and wages to the
GROSS INCOME FOR CORPORATE OPERATIONS employees
GROSS INCOME FOR CORPORATE OPERATIONS Interest Expenses

When they enter into debt transactions which require them to pay interest
Sales
Less: Sales Returns and Allowances Taxes
Less: Sales Discounts For taxes incurred (they can deduct real property taxes and local business
Net Sales taxes) but should not include Philippines Income Tax, Estate & donor’s tax,
Less: Cost of Sales /Cost of Goods Sold stock transaction tax, special assessment, income tax paid in a foreign
Gross Income country claimed as tax credit and VAT
Losses
PERTINENT ITEMS OF GROSS INCOME Incurred in the course of trade or business; example: a building was razed
PERTINENT ITEMS OF GROSS INCOME by fire and the amount not compensated by insurance is considered the
Not all enumerated items of gross income under Sec. 32 apply to all kinds loss
of taxpayers. (Note: dumping ground computation here refers to 30% tax
rate for corporations and not 5-32%) Bad Debts
If there are certain receivables from entities or individuals which may have
Compensation income already been insolvent, but not necessarily judicially declared as insolvent,
No compensation income in corporations because this is earned under an and after exercising due diligence, you cannot collect, then you can treat
employer-employee relationship them as bad debts.
Gross income derived from the conduct of trade, business or Charitable Contributions
exercise of the profession Deductible in full, if given to the government either local or national or any
This is sales or receipts (for services) less the cost directly used in political subdivision as long as it pertains priority projects in the field of
producing the product. education, science; or if it is given to accredited foreign organizations and
non-government organizations such as the Ramon Magsaysay Foundation,
Gains derived from dealings in property Caritas, Bantay Bata, etc.
Corporations can have properties; such as buildings. When they sell the
building, they will earn income from dealings in property. It will not form It is subject to limitations if they don’t fall in the list; for individuals, it is
part of the gross income for the purposes of taxation but will be subject to 10% based on taxable income but before deductions for charitable
capital gains tax. contributions and for corporations, it is 5%.
Interests Research and development

If the business of the corporation is financing, and they extend loans to These are expenses for the discovery of knowledge and development;
individuals or other entities, they can earn interest income. It will form part costs of exploration, cost of exploring and finding a particular property are
of the 30% dumping ground taxation. Deposits in the bank are passive not considered research and development expenses for purposes of
income subject to a different tax rate. allowable deductions.
Rents For example, you paid someone to build a cellphone and whatever is the
When a corporation is engaged in the business of leasing out properties cost of building that cellphone will be considered part of your research &
then it can earn rent income. This forms part of the 30% dumping ground development.
computation, not passive income.
What if part of your operations is into mining? Part of your research is you
Dividends have to find a possible mining site. The cost of finding the mining site will
Corporation can sell their shares to other corporations and if they declare not form part of your research and development but does that mean you
dividends, these will not form part of the 30%. cannot deduct it? No, you can deduct it but it will form part of your
expenses, even the cost of the land itself will not form part of research and
Annuities development.
When the company’s investment gets periodic payments of income then it
can still earn annuities. Ordinarily, when businesses do investments, they Depreciation
can either receive interest income or dividends and not usually annuities. Pieces of equipment used are subject to depreciation. In relation to the
They are not limited from earning annuities because there can still be earlier example, if you can’t deduct it under R & D then deduct it under
investment opportunities which gives them periodic payments of income. depreciation. In mining sites, equipment used in the mining wasting assets
like mineral ores may be accounted it under depletion.
Prizes and winnings
Corporations may win prizes which require participation on the part of a Pension & trust
corporation. These will be given to the corporation as an entity. There are There is a separate section for pensions granted for employees. Pension
winnings when they are earned as a matter of chance - like a raffle ticket can refer to current service cost and past service cost. The total cost which
bought by a representative. you pay in order to set up this pension trust can be allowed as a deduction.
Important: Basic personal exemption and additional exemption are not Reason for distinction: The Philippines would want to encourage foreign
deductible in corporations because they are juridical persons. reserves.
How a corporation is taxed: Royalties

Royalties sourced within the Philippines –subject to final tax of 20%
Domestic Corporations
Royalties from book, literary works and musical composition royalties
Domestic Corporations are taxed 30% of their taxable income.
regardless of where that royalty is from – subject to final tax of 20%
There are certain incomes though that will not form part of the 30%, those
These are passive royalty income which is subject to a final tax.
which are ordinarily classified as passive income.
Royalties claimed under franchise - this becomes an active royalty income
PASSIVE INCOME being received every year, taxed under dumping ground computation of
30%, forming part of the gross income.
PASSIVE INCOME
Prizes & Winnings
Dividends (Intercorporate Dividends)
Dumping ground computation since it is not listed as passive income for
Dividend income can be earned by a corporation through a corporation
purposes of corporations in the tax code.
owning shares of another corporation.
Capital gains from the sale of shares of stock not traded in the
Example: 0303
stock exchange
Corporation X Cash Dividends
Illustration:
A 100 shares 10,000
Corp. Y is a stockholder of Corporation X. If Corporation Y has 2,000 shares
B 100 shares 10,000
with a par value of 1 peso per share, the total value of the shares is P2,000.
C 100 shares 10,000
D 100 shares 10,000
To earn capital gains, you sell the shares not in a local stock exchange but
E 100 shares 10,000
in some other market exchange. If you sell it directly to an individual, Mr.
A, how will it be taxed?
Corp. Y 2,000 shares 200,000
It is provided that the final tax at the rate prescribed should be imposed on
Corporation X decides to give dividends to all stockholders in the amount of
net capital gains. So first, you have to establish that there is net capital
100 per share. Mr. A, B, C, D and E will earn 10,000 while the corporation
gains. The cost of the shares is 2,000. We must determine first the amount
Y will be exempt from tax. The individual shareholders earning dividend
for which the shares were sold. So if 1 peso per share, the total cost is
income will be taxed at 10% if they are resident citizen, non-resident
2,000 and your gross selling price is 20,000, your Net Capital gains is
citizen, or resident alien. 20% will apply if they are NRA-ETB and 25% for
18,000. How will this be taxed?
NRA-NETB.
This will be taxed at 5%. So 20,000 x 5% is 900 which is the capital gains
Reason for the exemption
tax.
Section 27 D (4) Intercorporate Dividends. — Dividends received by a
domestic corporation from another domestic corporation shall not be
Will the 18,000 form part of the gross income?
subject to tax.
No because this is already the final tax.
Dividends are just being deferred because while this 200,000 is distributed
You have a total of 6,000 shares. The previous transaction happened on
by Corp. X to Corp. Y, it will also have its own stockholders. The same
January 1, 2015. If on June, you sold shares in the amount of 2,000 shares
200,000 will be distributed as income to the stockholders of Corp. Y. The
but this time, the amount is for 100,000. The cost would still be 2,000 so
moment it is distributed to its own stockholders or it trickles down to
your gain is 98,000. How will it be taxed?
individuals, it is the time that it will be subject to tax. If Corp Y will give the
dividends to Corp Z, a domestic corporation, there will still be no tax
The first 100,000 accounts for the yearly transaction - it is for the entire
because it has not yet been distributed to an individual.
year. The 18,000 should be accounted for to determine if you have reached
the 100,000 threshold. The amount 18,000 for the first transaction and the
TKN: Dividends are only taxable then when it reaches individuals.
98,000 should be added for a total of 116,000.
Interest income
Since the 18,000 has already been subjected to 5% so how much do we
Section 27 D. Rates of Tax on Certain Passive Incomes. — need to make it 100,000? 100k less 18k is 82,000 and this will be added for
the application of the 5% tax rate. Then 98,000 less 82,000 will be
(1) Interest from Deposits and Yield or any other Monetary Benefit from
subjected to 10%.
Deposit Substitutes and from Trust Funds and Similar Arrangements, and
Royalties. — A final tax at the rate of twenty percent (20%) is hereby
Had this transaction happened the on January 1 of the next year, it will
imposed upon the amount of interest on currency bank deposit and yield or
automatically be subjected to 5% since it’s already another year.
any other monetary benefit from deposit substitutes and from trust funds
and similar arrangements received by domestic corporations, and
If on December 1, 2015, you were able to share 2,000 shares for Php
royalties, derived from sources within the Philippines: Provided, however,
20,000, the net gain is Php 18,000. This will be taxed at 10%. There is no
That interest income derived by a domestic corporation from a depository
need to be confused because you already knew that you exceeded the
bank under the expanded foreign currency deposit system shall be subject
100,000 threshold during your June transaction.
to a final income tax at the rate of seven and one-half percent (7 1/2%) of
such interest income.
Each of these transactions will have separate income tax returns. On the
June tax returns, you will have to make a distinction between the tax
Interest income derived from peso currency bank deposit (saving deposits
applicable for your gains. A return will be made within 30 days after the
of corporations) – subject to final withholding tax of 20%
transaction.
Foreign currency deposit - 7.5% final withholding tax
Income Derived under Expanded Foreign Currency Depositary How much is the tax payable of the corporation?
Unit
(3) Tax on Income Derived under the Expanded Foreign Currency Deposit Total Sales 1,000,000.00
System. — Income derived by a depository bank under the expanded Cost of Goods Sold 400,000.00
foreign currency deposit system from foreign currency transactions with Gross Income 600,000.00
local commercial banks, including branches of foreign banks that may be Less:
authorized by the Bangko Sentral ng Pilipinas (BSP) to transact business Salaries and Wages (100,000.00)
with foreign currency depository system units and other depository banks Utilities (50,000.00)
under the expanded foreign currency deposit system, including interest Taxable Income 450,000.00
income from foreign currency loans granted by such depository banks Tax rate 30%
under said expanded foreign currency deposit system to residents, shall be Tax Due and Payable 135,000.00
subject to a final income tax at the rate of ten percent (10%) of such
income.
Item subject to final tax:
Any income of nonresidents, whether individuals or corporations, from Interest Income (10,000 x 20%) 2,000.00
transactions with depository banks under the expanded system
shall be exempt from income tax. Item exempt from tax:
Dividend income from X Corp -
This income is derived by a depositary bank. Do not confuse this with the
interest income derived by a domestic corporation from a depositary bank You cannot actually add the tax due from the items subject to the dumping
under a foreign currency deposit subject to a tax of 7.5%. ground computation with that of the items subject to final tax. It’s like
adding apples and oranges according to sir.
Under this, it is the bank itself that is earning income. If you are a
depository bank and you earn income under EFCD system for foreign But, there are domestic corporations which are not subject to that type of
currency transactions, your tax will depend on whom you are transacting computation.
with.
DOMESTIC CORPORATIONS
If you are transacting with non-residents, off-shore banking units in the DOMESTIC CORPORATION
Philippines, local commercial banks including branches of foreign banks Taxed at 30% based on net income
authorized by BSP, then you will be exempted from all taxes. Taxable Income = Gross Income – Allowable Deductions
It is just like an individual doing business.
If you are transacting with residents, you are subject to the dumping
ground computation of 30%. You will see that under the exemption, if it Source: Income within and without.
relates to a loan transaction, interest income will be subject to final tax of Tax base: Taxable income
10%. Under the last sentence, it is stated that interest income from foreign Tax rate: 30%
currency loans granted by such depository banks under said expanded
foreign currency deposit system to residents, shall be subject to a final
income tax at the rate of ten percent (10%) of such income. SPECIAL TYPES OF DOMESTIC CORPORATION
Take note that this 10% rate is applicable only to loan transaction and only PROPRIETARY EDUCATION INSTITUTION AND HOSPITALS
for an interest income to residents. PROPRIETARY EDUCATIONAL INSTITUTION AND HOSPITALS
Capital gains realized from sale of real property Section 27(B) Proprietary Educational Institutions and Hospitals. —
They are subject to a final tax of 6% on sale of real property classified as Proprietary educational institutions and hospitals which are nonprofit shall
capital assets. The 6% is based on the highest amount among the gross pay a tax of ten percent (10%) on their taxable income except those
selling price, the assessed value given by the local assessor, and the zonal covered by Subsection (D) hereof: Provided, That if the gross income from
value determined by the BIR. unrelated trade, business or other activity exceeds fifty percent (50%) of
the total gross income derived by such educational institutions or hospitals
Even if you sell the property at a loss, you will still be taxed because there from all sources, the tax prescribed in Subsection (A) hereof shall be
is a presumed gain when you sell real property. The law for individuals also imposed on the entire taxable income.
applies for corporations for treatment of capital gains.
For purposes of this Subsection, the term 'unrelated trade, business or
If a corporation is engaged in selling coffee, the computation for income other activity' means any trade, business or other activity, the conduct of
will use the dumping ground computation. which is not substantially related to the exercise or performance by such
educational institution or hospital of its primary purpose or function. A
Example: 'proprietary educational institution ' is any private school maintained and
administered by private individuals or groups with an issued permit to
Given: operate from the Department of Education, Culture and Sports (DECS), or
the Commission on Higher Education (CHED), or the Technical Education
Total Sales 1,000,000.00 and Skills Development Authority (TESDA), as the case may be, in
Cost of Goods Sold 400,000.00 accordance with existing laws and regulations.
Salaries and Wages 100,000.00
Utilities 50,000.00 They are taxed at a rate of 10% based on taxable income.
Intersest Income from bank deposit 10,000.00
Dividend income from X Corp 10,000.00 Predominance test
If the gross income from unrelated trade, business, or other activities
exceeds 50% of the total gross income from all sources, then it is subject
to the 30% dumping ground computation.
Otherwise, if the gross income from unrelated trade, business, or other RESIDENT FOREIGN CORPORATION
activities does not exceed fifty percent, then it is taxable at 10%.
RESIDENT FOREIGN CORPORATION
The general rule is that it is subject to a 10% tax if it complies with the
predominance test with the unrelated activities as basis. Otherwise, it is Source: Income within
subject to 30% tax. Tax base: Taxable income
Tax rate: 30%
Example:
The University of Cebu earns rent income from unrelated activities at the Section 28 (A) In General. — Except as otherwise provided in this Code, a
amount of 1,000,000. Aside from that, it earns educational income from corporation organized, authorized, or existing under the laws of any
tuition fees, sales of books and library fees amounting to 1,000,000. How foreign country, engaged in trade or business within the Philippines, shall
will this be subject to tax? be subject to an income tax equivalent to thirty-five percent (35%) of the
taxable income derived in the preceding taxable year from all sources
Predominance test = Unrelated Income / Total Income within the Philippines: Provided, That effective January 1, 1998, the rate of
income tax shall be thirty-four percent (34%); effective January 1, 1999,
= 1M/2M = 50% the rate shall be thirty-three percent (33%); and effective January 1, 2000
= taxed at 10% because it passed the predominance test and the entire 2M and thereafter, the rate shall be thirty-two percent (32%).
will be subject to 10%
In the case of corporations adopting the fiscal year accounting period, the
If income from unrelated activities is 2,000,000 instead of taxable income shall be computed without regard to the specific date when
1,000,000, then: sales, purchases and other transactions occur. Their income and expenses
for the fiscal year shall be deemed to have been earned and spent equally
Predominance test = Unrelated Income / Total Income for each month of the period.
= 2M/3M = 66.67% The reduced corporate income tax rates shall be applied on the amount
= taxed at 30% because did not pass the predominance test and the entire computed by multiplying the number of months covered by the new rates
3M will be subject to 30% within the fiscal year by the taxable income of the corporation for the
period, divided by twelve.
Important: Take note that this rule not only applies to proprietary
educational institutions but also to hospitals which are also non-profit. Provided, however, That a resident foreign corporation shall be granted
ChongHua, according to sir, is a non-profit hospital. Read the Lung the option to be taxed at fifteen percent (15%) on gross income under the
Center of the Philippines case. same conditions, as provided in Section 27(A).
GOVERNMENT-OWNERD AND CONTROLLED CORPORATION They are taxed similar to domestic corporations
But only for income earned within the Philippines. The things we
GOVERNMENT-OWNED AND CONTROLLED CORPORATION mentioned under the discussion on domestic corporations will also apply
here. The rule for passive income is also similar as provided for in Section
(C) Government-owned or Controlled Corporations, Agencies or 28 A (7) of the tax code.
Instrumentalities. — The provisions of existing special or general laws
to the contrary notwithstanding, all corporations, agencies, or Interest income from bank deposits and royalties are subject to 20% final
instrumentalities owned or controlled by the Government, except the tax but interest income earned from deposits under the foreign currency
Government Service Insurance System (GSIS), the Social Security System depositary unit is subject to 7.5% tax rate.
(SSS), the Philippine Health Insurance Corporation (PHIC), the Philippine
Charity Sweepstakes Office (PCSO) and the Philippine Amusement and Income derived by a depositary bank from an expanded foreign currency
Gaming Corporation (PAGCOR), shall pay such rate of tax upon their deposit system is exempt from tax if it transacts with non-residents,
taxable income as are imposed by this Section upon corporations or offshore banking units, local commercial banks, etc.
associations engaged in a similar business, industry, or activity.
Income derived by a depository bank under the expanded foreign currency
These corporations shall pay such rate of tax upon their taxable income as deposit system from foreign currency transactions with local commercial
are imposed by this Section upon corporations or associations engaged in banks including branches of foreign banks that may be authorized by the
a similar business, industry, or activity. Bangko Sentral ng Pilipinas (BSP) to transact business with foreign
currency deposit system units and other depository banks under the
It is taxed like any other corporation. PAGCOR is exempt from taxes for expanded foreign currency deposit system, including interest income from
income related to gaming operations as provided for in its charter. If it foreign currency loans granted by such depository banks under said
earns income from other sources then such would be subject to 30% tax expanded foreign currency deposit system to residents, shall be subject to
because this is the tax for other gaming corporations. a final income tax at the rate of ten percent (10%) of such income.
The law also provide for GOCCs exempt from taxes: GSIS, SSS, Capital gains from sale of shares of stock not traded in stock
PHILHealth, and PCSO. PAGCOR was previously part of the exemptions exchange
provided in the tax code but it was recently changed by an act of congress A final tax at the rates prescribed below is hereby imposed upon the net
and the extent of their exemption was clarified by the SC in a recent case. capital gains realized during the taxable year from the sale, barter,
exchange or other disposition of shares of stock in a domestic corporation
except shares sold or disposed of through the stock exchange:
Not over P100,000 5%

On any amount in excess of P100,000 10%
Intercorporate Dividends OFFSHORE BANKING UNITS

d) Intercorporate Dividends. — Dividends received by a resident foreign
corporation from a domestic corporation liable to tax under this Code shall OFFSHORE BANKING UNITS
not be subject to tax under this Title.
Section 28 A (4) Offshore Banking Units. — The provisions of any law to
A resident foreign corporation earning dividends from a domestic the contrary notwithstanding, income derived by offshore banking units
corporation is also exempt. If a domestic corporation earns income from authorized by the Bangko Sentral ng Pilipinas (BSP), from foreign currency
RFC, it will be taxed at 30% subject to the dumping ground corporation. transactions with local commercial banks, including branches of foreign
banks that may be authorized by the Bangko Sentral ng Pilipinas (BSP) to
Dividend income earned by RFC from another RFC is still taxed at 30% transact business with offshore banking units, including any interest
because the taxes for these transactions are not found in the tax code. income derived from foreign currency loans granted to residents, shall be
Absent such provisions, we apply the general rule of taxing it at 30%, subject to a final income tax at the rate of ten percent (10%) of such
dumping ground computation. income.
Sale of real property Any income of nonresidents, whether individuals or corporations, from
It is subject to the 30% tax because it is not considered a passive income transactions with said offshore banking units shall be exempt from income
for purposes of foreign corporations because it is not provided in the tax tax.
code. This transaction is not impossible but not ordinary because they can
still own condominiums. You make a distinction on who these offshore banking units are transacting
with. If it is transacting with non-residents then they are exempt unless
SPECIAL TYPES OF RESIDENT FOREIGN CORPORATION otherwise provided by the BSP. Interest income on foreign loans is subject
to final tax of 10% if you are transacting with residents in relation to their
INTERNATIONAL CARRIERS interest income from foreign loans.
Branches of foreign corporations

INTERNATIONAL CARRIERS
Section 28 A (5) Tax on Branch Profits Remittances. — Any profit
Section 28 A (3) An international carrier doing business in the Philippines
remitted by a branch to its head office shall be subject to a tax of fifteen
shall pay a tax of two and one-half percent (2 1/2%) on its 'Gross Philippine
percent (15%) which shall be based on the total profits applied or
Billings' as defined hereunder: earmarked for remittance without any deduction for the tax component
thereof (except those activities which are registered with the Philippine
(a) International Air Carrier. — 'Gross Philippine Billings' refers to the
Economic Zone Authority). The tax shall be collected and paid in the same
amount of gross revenue derived from carriage of persons, excess
manner as provided in Sections 57 and 58 of this Code: Provided, That
baggage, cargo and mail originating from the Philippines in a continuous
interests, dividends, rents, royalties, including remuneration for technical
and uninterrupted flight, irrespective of the place of sale or issue and the services, salaries, wages, premiums, annuities, emoluments or other fixed
place of payment of the ticket or passage document: or determinable annual, periodic or casual gains, profits, income and
capital gains received by a foreign corporation during each taxable year
Provided, That tickets revalidated, exchanged and/or indorsed to another
from all sources within the Philippines shall not be treated as branch profits
international airline form part of the Gross Philippine Billings if the
unless the same are effectively connected with the conduct of its trade or
passenger boards a plane in a port or point in the Philippines: Provided,
business in the Philippines.
further, That for a flight which originates from the Philippines, but
transshipment of passenger takes place at any port outside the Philippines
Branch profit remittance tax
on another airline, only the aliquot portion of the cost of the ticket
This is called the branch profit remittance tax. Foreign corporations may
corresponding to the leg flown from the Philippines to the point of
engage in business here in the country in two ways: branch office or
transshipment shall form part of Gross Philippine Billings.
representative office.
The value of the ticket paid by a passenger travelling from the Philippines
A representative office will not earn income because they are here for
to the US via Hongkong (connecting flight) is 100,000. Coming to the
purposes of liaising with costumers. Otherwise, they are now subject to
Philippines, he paid another 100,000 passing through Korea.
tax.
Will the international carrier which flies these flights be subject
Branches enter into transactions which allow them to earn income subject
to tax in the Philippines?
to tax. Most likely they will return that income they earned here to their
The trip from Philippines to Hongkong in an uninterrupted and continuous
home office. They will remit it to their home office. If that happens, it will
flight will be subject to tax here in the country. The 100,000 will be be subject to tax.
apportioned for the value from the Philippines to Hongkong.
Example:
For the trip from HK to US, the Philippines has no jurisdiction because this A company registered in the British Virgin Islands (USA) has a branch here
is a resident foreign corporation. in the Philippines. The Philippine branch earns an income of 1M but it
decided to remit P500,000 to its home office. How much is the branch
On the second part, there will be no income that is taxable in the profit tax applicable?
Philippines because the point of origin is the US and then the second flight
Only the 500,000 will be taxed. The law provides that any profit applied or
originated from Korea. The law provides that the point of origin must be earmarked for remittance. Earmarked means that there is an intention for
the Philippines. the amount will be remitted. Even without actual remittance, they will still
be subject to tax at a rate of 15%.
(b) International Shipping. — 'Gross Philippine Billings' means gross Is it better to have branches here in the Philippines rather than
revenue whether for passenger, cargo or mail originating from the setting up a subsidiary?
Philippines up to final destination, regardless of the place of sale or
payments of the passage or freight documents. A subsidiary is a corporation set-up here in the Philippines. It is a domestic
corporation where the shares are owned by a foreign corporation and it is
a separate entity. A branch is an extension of the home office abroad and regular corporation. They cannot be automatically considered a ROHQ
it is not a separate entity. because when they made their registration, they were registered as a
RAHQ.
When a corporation is a stockholder of a corporation, the subsidiary will
distribute income to its principal through dividends and not remittance. It is NON-RESIDENT FOREIGN CORPORATION
taxed at 30% or at 15% depending on the applicability of the tax sparing
rule. It is as if it is a domestic corporation distributes income through NON-RESIDENT FOREIGN CORPORATION
dividends to a non-resident foreign corporation.
Source: Income within
Tax sparing rule Tax base: Gross income
The domestic corporation giving out dividends to the NRFC, the latter may Tax rate: 30%
be subject to tax because it is the one earning income. It is taxed either at
15% or 30%. A rate of 15% will be applied if there is reciprocity in the Important: They are taxed at the rate of 30% based on gross income.
sense that the foreign country where the NRFC is domiciled allowed the
same credit or more favorable to Filipino corporations. This concept is Tax on Intercorporate Dividends
similar to personal exemptions granted to NRA NETB under the reciprocity
rule for individuals. Recipient
Sender
DC RFC NRFC
If the country of NRFC allows credit to Filipino corporations then 15% rate DC Exempt Exempt 15% or 30%
is allowed. This is computed by deducting the amount spared which is 15% (tax sparring)
from regular tax rate of 30% and the resulting amount is 15%. RFC 30% 30% 30%
If you have a subsidiary distributing income to principal, the rate is 15% or NRFC 30% No jurisdiction No jurisdiction
30%. When would you advice your client that it is better set-up a branch
here in the Philippines rather than a subsidiary? Rules:
1. Domestic –> domestic = Exempt
First, ask about the country of the NRFC and check if there is reciprocity. If 2. Domestic –> resident foreign = Exempt
it is the US and there is reciprocity, then you can advise that they can 3. Domestic –> non-resident foreign = 15% or 30% depending on when
set-up either a subsidiary or a branch. In actual practice, you will realize the tax sparring rule applies
that it is better to set-up a subsidiary than a branch because the 4. Resident foreign –> domestic corp = 30%
requirements for the latter are difficult to comply with. 5. Resident foreign –> resident foreign = 30% if you can establish that
the income is earned within the Philippines and depending on the rule
Otherwise, if there is no reciprocity, then it would be better to set-up a on situs on dividends, you look at the income of the foreign
branch where the tax is at 15%. corporation for the last 3 years and if you can establish that the
income earned within the Philippines is:
Regional or Area Headquarters and Regional Operating
Headquarters of Multinational Companies. Under the Tax Code
A. If income earned is 50% or less, then it is deemed income outside the
Section 28 A (6) Regional or Area Headquarters and Regional Operating Philippines
Headquarters of Multinational Companies
B. If income earned is more than 50%, then it is deemed income inside
(a) Regional or area headquarters as defined in Section 22(DD) shall not be the Philippines
subject to income tax.
Under the Regulation
(b) Regional operating headquarters as defined in Section 22(EE) shall pay
a tax of ten percent (10%) of their taxable income. A. 50% or less – income outside the Philippines
B. More than 50% to 85% - income partly within and partly without
Area headquarters are not earning income here in the Philippine because it C. More than 85% - income within the Philippines
is only for liaising and cooperation purposes. If it starts to earn income then
it is subject to a 30% and not 10% because it is registered as an area RESIDENT FOREIGN -> NON-RESIDENT FOREIGN:
headquarter. It will not be converted to an operating headquarter.
Determine if it has situs within the Philippines, otherwise the Philippines
Procter & Gamble is a regional operating headquarter of a multinational does not have jurisdiction
company so it is subject to a rate of 10%.
NON-RESIDENT FOREIGN -> DOMESTIC CORP: 30%
March 17, 2016
(RECAP) NON-RESIDENT FOREIGN -> NON-RESIDENT FOREIGN:
Make a distinction between Regional Area Headquarters (RAHQ) and
Regional Operating Headquarters (ROHQ). Philippines has no jurisdiction because they are not supposed to have any
activities within the Philippines.
ROHQ meaning they are earning income from their operations and they
conduct activities that are income generating and so they will be subject to How are non-resident foreign corporation taxed?
tax on such income. They are taxed at 30% based on gross income from all sources within the
RAHQ are not subject to tax because they are not supposed to engage in Philippines. It includes all types of income, unless otherwise specified in
such activities otherwise they will violate the license granted to them in the the tax code.
Philippines.
So the royalties, prizes and winnings will be considered as income subject
Q: What will happen then when the RAHQ will earn income? to the rate of 30%.
A: They will be subject to tax at 30 percent as if they were operating as a
ITEMS TAXED AT DIFFERENT RATES TN: This accounts for 1 year. The first 100,000 should therefore be in
conjunction with the earnings of the entire year and whatever is the
ITEMS TAXED AT DIFFERENT RATES excess, that will be subject to 10%. Always be mindful of the 1 year period.
Those that are subject to final withholding tax: Is there capital gains from the sale of real property for NFRC?
No. There is no capital gain from sale of real property for NRFC. This is
1 – Interest on Foreign Loans (20%) because non-resident foreign corporations are not supposed to engage in
(a) Interest on Foreign Loans. — A final withholding tax at the rate of real property transactions.
twenty percent (20%) is hereby imposed on the amount of interest on
foreign loans contracted on or after August 1, 1986. What happens when they sell condominium units considering that
non-resident foreign corporations are allowed to own condominiums?
They are taxed at final withholding tax of 20%.
It will be treated just like any other income earned by the corporation,
It need not be sourced from a bank, as long as it can be established that it which is at the rate of 30% based on gross income. It must be an income.
is a foreign loan, but under Philippine laws, you cannot actually transact There is no presumed gain to speak of and deductions are allowed.
here foreign exchange without going through the bank otherwise you will
have to go through the black market. So most likely, these foreign loans GI = Gross Sales – Cost of Sale
are coursed through the bank. So in this case, you can deduct the cost of the condominium units.
But it is also possible to extend loan if you have a related company here in SPECIAL TYPES OF NON-RESIDENT FOREIGN CORPS
the Philippines. It’s just that ang pagpadala should still be coursed through
the bank, but it can also be done through remittance offices like Western Important: These special types of NRFC will be taxed differently.
Union, Pera Padala, Pay Pal, etc. Remittance offices are also covered by the
Manual on Foreign Exchange. The manual does not only cover banks, but NON-RESIDENT CINEMATOGGRAPHIC FILM OWNER, ETC.
remittance offices as well.
NONRESIDENT CINEMATOGRAPHIC FILM OWNER, LESSOR OR
It is therefore possible for a non-resident foreign corporation to earn DISTRIBUTOR
interest income from a foreign loan and when they do, they will be subject
A cinematographic film owner, lessor, or distributor shall pay a tax of
to final tax rate of 20%.
twenty-five percent (25%) of its gross income from all sources within the
Philippines.
2 – Intercorporate Dividends
(b) Intercorporate Dividends. — A final withholding tax at the rate of
Taxed at 25% based on gross income
fifteen percent (15%) is hereby imposed on the amount of cash and/or
Example: You want to watch Batman vs Superman. The owner of the film
property dividends received from a domestic corporation, which shall be
will have to lease it to someone here in the Philippines, but they need not
collected and paid as provided in Section 57(A) of this Code, subject to the
be considered as resident foreign corporations. DC is the owner of that film
condition that the country in which the nonresident foreign corporation is
and it is shown in the Philippines, so they allowed cinemas in the
domiciled, shall allow a credit against the tax due from the nonresident
Philippines to show it. They can be considered as non-resident
foreign corporation taxes deemed to have been paid in the Philippines
cinematographic film owner, lessor or distributor and so they can subject
equivalent to twenty percent (20%) for 1997, nineteen percent (19%) for
to the 25% tax based on their gross income.
1998, eighteen percent (18%) for 1999, and seventeen percent (17%)
thereafter, which represents the difference between the regular income
TN: The income is not the sale of the tickets, because the ticket sales
tax of thirty-five percent (35%) in 1997, thirty-four percent (34%) in 1998,
belong to the cinemas. The film owner will only get a portion of the income
thirty-three percent (33%) in 1999, and thirty-two percent (32%)
earned by the cinemas.
thereafter on corporations and the fifteen percent (15%) tax on
dividends as provided in this subparagraph.
NON-RESIDENT OWNER OF LESSOR OF VESSELS
15% if Tax sparring rule applies and 30% if it does not
NONRESIDENT OWNER OR LESSOR OF VESSELS CHARTERED BY
PHILIPPINE NATIONALS
3 – Capital Gains from sale of shares of stock not traded in the
Stock Exchange A nonresident owner or lessor of vessels shall be subject to a tax of four
and one-half percent (4 1/2%) of gross rentals, lease or charter fees from
(c) Capital Gains from Sale of Shares of Stock not Traded in the Stock leases or charters to Filipino citizens or corporations, as approved by the
Exchange . — A final tax at the rates prescribed below is hereby imposed Maritime Industry Authority.
upon the net capital gains realized during the taxable year from the sale,
barter, exchange or other disposition of shares of stock in a domestic This is weird because Maritime does not allow nonresident foreign
corporation, except shares sold, or disposed of through the stock corporations to own vessels in the Philippines.
exchange:
NR LESSOR OWNER OF LESSOR OF AIRCRAFT, ETC.
Not over P100,000 5%
On any amount in excess of P100,000 10% NONRESIDENT OWNER OR LESSOR OF AIRCCRAFT, MACHINERY
AND EQUIPMENT
This refers to their shares of stock in a domestic corporation sold or
conveyed or transferred by the non-resident foreign corporation directly Rentals, charters and other fees derived by a nonresident lessor of aircraft,
for as long as it is not through the local stock exchange. machineries and other equipment shall be subject to a tax of seven and
It shall be taxed in a similar way individuals are taxed: one-half percent (7 1/2%) of gross rentals or fees.
First P100,000 – 5% Entities which allows aircrafts and vessels to be leased here in the
Over P100,000 – 10% Philippines will be subject to 7 ½%.
Items 2 and 3 are not very much applicable in the Philippines because not the 2% MCIT. This is only to discourage fraudulent tax practices so it must
much engage in such business because at most companies here in the be implemented along with NIT.
Philippines buy the property from abroad and not lease them. But
nonetheless, still memorize the rates. Will MCIT be applicable to resident foreign corporations?
Yes, because resident foreign corporations are taxed 30% based on their
TAX ON CORPORATION BASED ON GROSS INCOME net income. However, MCIT is not applicable to non-resident foreign
corporation because they are taxed at 30% based on gross income. It is a
TAX ON COPRPORATION BASED ON GROSS INCOME
futile exercise to apply the 2% rate because the original tax of 30% for
The General Rule is that corporations are taxed based on net income,
NRFC based on gross income will always be higher.
except for:
Thus, MCIT is only applicable to domestic and resident foreign corporation
Sec 27 (A)
subject to normal income tax.
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
Will MCIT be applicable to international carriers?
does not exceed fifty-five percent (55%)/
No. An international carrier doing business in the Philippines shall pay a tax
of two and one-half percent (2 1/2%) on its "Gross Philippine Billings"
The cost-ratio of the taxpayer must not exceed 55% of gross sales for
them to be able to avail of this option. The normal income taxation is 30%
MCIT will not apply because it is taxed based on “Gross Philippine Billings”
based on net income.
at the rate of 2 ½%. (This is already higher than the 2% MCIT)
Under Normal Income:
When is MCIT applicable to a corporation?
1. A minimum corporate income tax of two percent (2%0 of the gross
Gross sales
income as of the end of the taxable year, as defined herein, is hereby
(Cost of sales)
imposed on a corporation taxable under this Title, beginning on the
______________________
fourth taxable year immediately following the year in which such
Gross Income
corporation commenced its business operations, when the
(Allowable deductions)
minimum income tax is greater than the tax computed under
______________________
Subsection (A) of this Section for the taxable year.
Taxable Income
x Tax Rate (30%)
It shall be imposed beginning on the 4th taxable year immediately following
______________________
the year in which such corporation commenced its business operations.
Tax Due and Payable
If the business commenced its business operations in 2015, when do you
Under Normal Income, you compute until the last allowable deduction.
start computing MCIT?
Under gross income, you need not go to the taxable income, you just have
ANSWER: 2019
to compute the gross income and then automatically multiply it by 15%
then you will get the tax due and payable.
Because it says 4th taxable year immediately following the year in which
such corporation commenced its business operation, such is to be
Why is it not available to non-resident foreign corporations?
construed as the 5th year of operation of business, including the year in
Because nonresident foreign corporations are already taxed based on their
which the business commenced its operation. Technically, it is on the 5th
gross income.
year of operation.
Important: For the corporation to comply with the 15% tax rate, it must
Commencement of business operation
comply with the 55% cost-ratio. The cost ratio is computed by dividing
It is the moment you enter into a taxable event. This is moment you have
your cost of sales with the gross sales
your first sale or the moment you register in the BIR, whichever is earlier.
But in reality, BIR cannot regulate unless you are registered with them.
Example:
Gross sales = 1,000,000
In reality also, people register first before entering into a sale, so in this
Cost of Producing Product = P500,000
case, the taxable event is the year of registration because it happened
Cost ratio: 500,000/1,000.000 x 100 =50%
earlier than the sale.
In this case, the company may avail of the option. Sir says that
If you decide to enter into a business in December 2015, defer your
computation of cost ratio will not be asked in the exam.
registration until January the following year so that MCIT will be not be
counted from 2015, but on 2016. MCIT in this case will be applicable in
MINIMUM CORPORATE INCOME TAX 2020 (4 years immediately after commencement of operations in 2016).
MINIMUM CORPORATE INCOME TAX (MCIT)
2. MCIT is paid whenever it is higher than the normal income tax
Is it like gross income taxation that once you have availed of the option of Sales 100,000
gross income taxation, you cannot be subject to the normal income tax?
No, it is a tax that goes with the normal income taxation. The NIT and the Cost of Sales 60,000
MCIT will be compared and tax will be imposed to whichever is higher. Gross Income 40,000
Rationale for implementation of MCIT Allowable Deductions 50,000

It is implemented to curtail fraudulent mechanisms done by corporations of
Net Loss -10,000
overstating their allowable deductions in order to have a lesser taxable
income. There was a time when corporations incurred net losses, so the
government implemented the MCIT because corporations will always have Pay MCIT at 2% of Gross
a gross income. This is to discourage corporations from overstating their Income 800
expenses. At the point of the gross income, you will already be subject to
MCIT is applicable in this case because the net income is 0, thus the 2% of Proprietary educational institutions and hospitals
Gross income is higher than 0. MCIT is paid whenever it is higher than the Proprietary educational institutions (like University of Cebu) and hospitals
normal income tax. are taxed at 10% based on net income provided that their unrelated
earnings are less than 50%, applying the predominance test. MCIT is not
Carry forward of excess MCIT applicable here because these institutions are not subject to normal
3. Carry Forward of Excess Minimum Tax. - Any excess of the minimum income tax.
corporate income tax over the normal income tax as computed under
Subsection (A) of this Section shall be carried forward and credited against However, MCIT is applicable if the unrelated activities/earnings of
the normal income tax for the three (3) immediately succeeding taxable proprietary educational institutions are more than 50% of its total income
years. because by then they will be taxed at 30% normal income tax.
MCIT allows carrying forward of excess MCIT. Excess MCIT is equal to We already know that corporations can be subject to normal income tax
MCIT less the Normal income tax. along with MCIT. It can also be taxed to special rates as provide in the tax
code or it can be taxed under the gross income taxation method as
MCIT can be deducted for a period of three consecutive years and it is to be provided in Section 27.
deducted from the normal income tax that you pay.
There are instances where corporations are subject to tax in addition to its
Note: Numbers in brackets are to be deducted and numbers in bold are NIT, GIT, and MCIT. When is that?
the higher amount between MCIT and NIT which is to be paid during the
year. Answer: When company is subject to IAET.
2019 2020 2021 2022 2023 IMPROPERLY ACCUMULATED EARNINGS TAX

Gross Income 40,000 100,000 200,000 50,000 10,000
Allowable Deductions (50,000) (90,000) (180,000) (20,000) - IMPROPERLY ACCUMULATED EARNINGS TAX
Net Income (10,000) 10,000 20,000 30,000 10,000
This is a penalty to corporation if it fails to declare dividends to
shareholders. It is not automatic for a corporation to be subject to IAET if
it doesn’t declare dividends.
MCIT (2% of GI) 800 2,000 4,000 1,000 200
NIT (30% of NI) - 3,000 6,000 9,000 3,000 IAET is imposed when a corporation doesn’t declare dividends and
excess MCIT from 2019 (800) earnings accumulated are beyond reasonable needs of the company. We
tax due & payable 2,200 6,000 9,000 3,000 used the immediacy test, and look at the purpose for the non-declaration.
Assuming that excess MCIT in 2019 is 30,000: Standard for knowing whether it is beyond reasonable means
There will be no IAET imposition if the company is holding earnings within
2020 2021 2022 2023 reasonable means of business. Compare the par-value (the paid up capital
MCIT
of the company) with the earnings also known as retained earnings.
3,000 4,000 1,000 2,000
NIT 3,000 6,000 9,000 3,000
Immediacy test
excess MCIT is 30,000 (3,000) (6,000) (9,000)
It says that you look at immediate need of the business. Non-declaration is
tax due and payable - - - 3,000 justified granting that you have expansion projects, loan obligations and
contingencies.
After 2020, the remaining balance of the MCIT is 27,000 (30,000 – 3,000).
After 2021, excess MCIT is only 21,000 and after 2022, there is a remaining Is it automatic that a company withholding dividends will be
balance of 12,000. said to have improperly accumulated earnings?
No, there must be a comparison to be made first of the earnings and paid
However, you cannot use the remaining 12,000 because the rule provides up capital which are found in a company’s financial statements.
that excess MCIT may only be deducted for a period of 3 consecutive
years. Na-lapas na sa 3 years ang 2023. Bow! The balance sheet, located in the financial statement, tells us the financial
position of the company, indicating its assets, liabilities and the capital
MINIMUM CORPORATE INCOME TAX contributed by the owners.
Non-resident foreign corporations In the portion for stockholders’ equity, you will see there I paid-up capital
MCIT is not applicable to non-resident foreign corporations because the and retained earnings. To be technical about it, your paid-up capital will
NRFC’s are taxed at 30% based on gross income. If we apply the 2% MCIT have several components: common shares, preference shares depending
to these corporations, the tax will be lesser compared to the original 30% on the type of shares issued by the corporation.
tax rate. This will be a futile exercise because you will always have the
higher 30% as the tax rate. The retained earnings accounts for the total income that the company had
for the past years of operation. All incomes from past to present will be
MCIT is only applicable in relation to the Normal Income tax and it is only accumulated, that is why it is termed retained earnings, meaning it is held
paid if it is higher compared to the NIT. by the company and not distributed.
International carriers In applying IAET, earnings found in the Retained Earnings account will be
MCIT is not also applicable to the international carriers because the latter is compared with the paid-up capital. Ordinarily, it is equivalent to the par
already subject to 2.5% tax based on gross Philippine billings and this rate values of the shares of stock. A par value is an assigned value of the shares
is higher than the 2% MCIT. which are determined by the incorporators, as stated in the articles of
incorporation of the corporation. These articles are like the birth certificate
of the corporation.
10 | U N I V E R S I T Y O F S A N C A R L O S S L G
If shareholders invested 1M and the corporation never declared dividends And reduced by the sum of:
from Year 1 to Year 10 so it has retained earnings of 10M, is there
improperly accumulated tax? (1) Dividends actually or constructively paid; and
(2) Income tax paid for the taxable year.
Yes, you are said to be holding beyond the reasonable means of the
business by simply comparing RE to the paid up capital because RE is more Provided, however, that for corporations using the calendar year basis, the
than 100% already. You are now considered improperly accumulating accumulated earnings tax shall not apply on improperly accumulated
earnings. income as of December 31, 1997. In the case of corporations adopting the
fiscal year accounting period, the improperly accumulated income not
Exceptions: subject to this tax, shall be reckoned, as of the end of the month
(IAET is inapplicable even is RE is greater than paid-up capital) comprising the twelve (12)-month period of fiscal year 1997-1998
1. Expansion projects – company is justified because it is very costly to This is a penalty tax so the government wants to tax you for all of your
expand your business income. You add back NOLCO because it is supposed to be only a reprieve
given by the government before because you incurred losses. However,
2. Loans obligations or debt covenants which compel you not to declare this NOLCO was actually deducted when you computed for your taxable
dividends until the loan has been repaid – most likely, the creditors income.
will of the corporation will not allow distribution to stockholders
without first satisfying repaying their loans Taxable income: Items of Gross income less allowable deductions
Exempt income: Inter-corporate dividends
3. Contingencies – includes those for contingencies such as typhoons,
other natural calamities, or pending litigations; this needs to be Excluded: Life insurance proceeds, (LAGCIRM)
justified for its appropriation (Retained Earnings in the financial Final tax: Passive income, interest income from bank deposits, royalties,
statement becomes RE-Appropriated, meaning di na pwede prizes and winnings, etc.
mahilabtan kay magamit ra for a specific purpose).
Income tax actually paid: Tax imposed for taxable and passive income;
if you paid MCIT, you will use this in the computation
Trust fund doctrine
This is the reason for the comparison of the paid-up and retained earnings.
Important: This is sir’s favorite tax because it will show sir if we
understand corporate taxation because a lot of things must be considered.
Creditors can go up to the paid-up capital. The corporations are only
It is, according to sir, a very comprehensive tax.
required to maintain the paid up capital for the protection of the creditors
and capital/ investment cannot be withdrawn. This is the trust fund
Formula:
doctrine which provides that you cannot diminish your paid-up capital.
Taxable Income
In sum, when RE is in excess of paid-up capital, this is only prima facie
evidence for application of IAET. Corporations may not be subject to this
Add:
tax if they can prove the three conditions previously mentioned.
Income exempt from taxes
Income excluded from taxes
HOLDING COMPANIES
Income subject to final tax
NOLCO
HOLDING COMPANIES
In a holding company, the tax code provides that the mere holding is a
Less:
prima facie evidence of improperly accumulated earnings.
Dividends actually or constructively paid
Income tax actually paid
Implication:
You will have the burden of proving that you are holding earnings for
Total: IAE X 10% = IAET
reasonable business. The fact of holding alone is a prima facie evidence.
There is no need to compare paid-up capital with retained earnings.
Paid-up capital:
This is the par value of the share stated in the articles of incorporation. For
A holding company’s purpose is to hold investments. You are supposed to
IAET, you only account for the par value. The excess of the paid up capital
issue dividends to stockholders. If you do not do that, you are said to be
is called the share premium which are all found in the financial statement.
accumulating beyond the reasonable means of the business.
In the exam, sir will tell us the amount of paid-up capital and there is no
need for us to compute.
The presumption is only prima facie and not conclusive. You can always
justify the reason for non-distribution.
Is it possible that the payment is lesser than the par value?
Yes, but they would be considered watered stocks and it is illegal. Under
Rate
the Corporation Code, if shares are issued for the first time, these should
10% of improperly accumulated earnings
not be issued at below par value. But it is possible to sell it at lower or
higher amount subsequent to the first issuance.
Computation
Sec 29 (D) Improperly Accumulated Taxable Income. — For purposes of
this Section, the term 'improperly accumulated taxable income' means
taxable income adjusted by:
(1) Income exempt from tax

(2) Income excluded from gross income
(3) Income subject to final tax; and
(4) The amount of net operating loss carry-over deducted
PROBLEM 1 PROBLEM 2
On the second year of its business operations, a beauty parlor earned the
Gross Sales 1,000,000.00 following income for 2016:
Cost of sales 500,000.00
Expenses 100,000.00 Note: MCIT is not yet applicable here because it is still on the second year
Bad Debts 100,000.00 of business operations. Income tax actually paid will be based on the
normal income tax.
Depreciation 50,000.00
NOLCO 50,000.00
Frankie's Example
Dividends from Domestic Corp 100,000.00
Given:
Interest Income from savings deposit (gross) 100,000.00 Gross receipts 1,000,000.00
Capital gains from sale of shares of stock 200,000.00 Cost of Services 600,000.00
Dividends actually paid 100,000.00 Bad Debts 50,000.00
Life Insurance Proceeds 500,000.00 NOLCO 20,000.00
Dividends from Domestic Corp 50,000.00
If the company is said to be having earnings more than its paid-up capital Royalties ( applicable rate: 20%) 50,000.00
even if there was declaration of dividends, how much is the IAET, if any? Life Insurance 20,000.00
Capital gains from sale of real property, gsp = 100 cost
Computation: =80 zonal =60 assessed = 50 20,000.00
Dividends Declared 200,000.00
Gross Sales 1,000,000.00
Less: COS (500,000.00) Computation
Gross Income 500,000.00
Expenses (100,000.00) Gross Receipts 1,000,000.00
Cost of Services (600,000.00)
Bad Debts (100,000.00)
Gross Income 400,000.00
Depreciation (50,000.00)
Expenses (100,000.00)
NOLCO (50,000.00) Bad Debts (50,000.00)
Taxable Income: 200,000.00 NOLCO (20,000.00)
Add: Taxable Income 230,000.00
Income exempt from taxes (div received) 100,000.00
Income excluded from taxes (life insurance) 500,000.00 Add:
Income subject to final tax (interest income) 100,000.00 Income Exempt from tax (div received) 50,000.00
Income subject to final tax (CG from sale of shares) 200,000.00 Income Excluded from tax (life insurance) 20,000.00
Income subject to Final Tax (50k royalty + 20k sale of
NOLCO 50,000.00
real property*) 70,000.00
Total 1,150,000.00 NOLCO 20,000.00
Less
Total 390,000.00
Dividends actually paid (100,000.00)
Tax Paid (NIT of 200 * 30% = 60K, higher than MCIT) (60,000.00) Less:
Tax on Interest Income (20* of 100k) (20,000.00) Dividends paid (200,000.00)
CG for sales of shares (5% for 100k, 10% for excess 100k) (15,000.00) Income tax actually paid (NIT of 230 x 30%, MCIT not
Total 955,000.00 applicable) (69,000.00)
Capital gains (6% of 100k which is the higher amount
IAET rate 10%
among GSP, AV and ZV) (6,000.00)
Improperly Accumulated Earnings Tax 95,500.00 Royalties (10,000.00)
Total IAE 105,000.00
Note: Numbers in brackets mean that they are to be subtracted. =)
IAET rate 0.10
The answer to this problem as illustrated in the board was 96,500 but the
IAET 10,500.00
Excel says it is 95,500. Dividend actually paid and received are two
different things. Please take note as well.
Important: In the case of a sale of real property what you add for
Should we not include interest income and capital gains in the income subject to final tax is really the whole amount of
gross income? GAIN/INCOME in the transaction and not the tax base for the capital gains.
We mentioned that an income subject to final tax is not included in the So the amount of 20,000 was added to the taxable income as part of the
dumping ground computation so that is the reason why we do not include income subject to final tax.
it there. It’s just that dividends there happens to be exempt.
However, when you compute the capital gains tax that you paid for
The reason why interest income is added to taxable income is because it is purposes of deduction in the account of passive income subject to
part of the data given by sir. Adding of taxable income with income subject final tax the amount is based on the higher amount among gross selling
to final tax is only for purposes of computing IAET. price, zonal value and assessed value. Since the GSP of 100,000 is the
highest, we use that as tax base and multiply by 6% so 6,000 is deducted
in – Passive Income Subject to Final Tax.
Sir says that in the exam, he will use Capital Gains from Sale of Real
Property and he will disclose the GSP,AV,FV so you can compute for the tax
not only the gains.
PROBLEM 3 Important: If they are not subject to Normal Income Tax (NIT), IAET
Sari-sari Department Store Company is operating for 5 years already. It does not apply.
earned the following income, in thousands:
CORPORATIONS EXEMPT FROM IEAT
Leslie's Example
EXCEPTIONS TO IAET
Given
Gross Sales 2,000,000.00 SEC. 29. Tax on Corporations Subject to Improperly Accumulated Earnings
Tax. - (2) Exceptions. - The improperly accumulated earnings tax as
Cost of Sales 500,000.00
provided for under this Section shall not apply to:
Expenses 200,000.00
Bad debts 100,000.00 (a) Publicly-held corporations;
Depreciation 100,000.00 (b) Banks and other nonbank financial intermediaries; and
NOLCO 100,000.00 (c) Insurance companies.
Dividends Received 150,000.00
IAET is not applicable to the following:
Dividends Paid 100,000.00
1. Partnerships, whether general professional or trading partnership
This is because of the constructive Receipt Doctrine where partners
Computation received income constructively. There is no retained earnings and
paid up capital in a partnership, there is only partners interest hence
Gross Sales 2,000,000.00 this cannot be compared to RE.
Cost of Sales 500,000.00
2. Bank and non-bank financial institutions
Gross Income 1,500,000.00 3. Insurance companies
Expenses (200,000.00) 4. PEZA registered companies because they are subject to 5% tax on
Bad debts (100,000.00) gross income
Depreciation (100,000.00) 5. Resident foreign corporation registered as branches because it has no
NOLCO (100,000.00) capital of its own in the Philippines.
Taxable Income 1,000,000.00 6. Publicly held corporations
7. International Carriers because they are taxed at 2.5% based on Gross
Philippine Billings
Add
8. Non-stock non-profit educational institutions if income from unrelated
Income exempt (Dividends received) 150,000.00 activities is 50% or less of the total gross income using the
NOLCO 100,000.00 predominance test
Total 1,250,000.00
Tax on partnership
Less A and B trading partnership has the following income:
Dividends actually paid (100,000.00)
Incom tax actually paid (NIT =300, MCIT = 30) (300,000.00) Gross Sales 1,000,000
Cost of Sales 500,000
Improperly Accumulated Earnings 850,000.00 Gross Income 500,000
IAET rate 0.10 Expenses 200,000
IAET 85,000.00 Taxable Income 300,000
Tax rate 30%
Note: Since the corporation has been operating for 5 years, MCIT can be Taxable Due and Payable 90,000
imposed already. Normal Income tax is 300,000 (1,000,000 x 30%) while Net Income after tax 210,000
MCIT is only 30,000 (1,500,000 x 2%) so income tax actually paid is the
NIT. Constructive receipt doctrine
The 210,000 income will be distributed to partners A and B. Partnerships
According to sir, he is emphasizing this because this is a review of the follow constructive receipt doctrine. It is as if they already received the
entire corporate income tax. income of the partnership even if it is not actually declared. It is as if A and
B already earned 105,000 each.
However, it does not mean that if you don’t see the items of depreciation,
bad debts, etc in the exam then you would not deduct anything. Those are Partners A and B will be taxed on the year that the partnership earned
just examples of allowable deductions. Don’t expect it to be the same in the income at a rate of 10% final tax. It is as if it is a dividend received from a
exam. Don’t memorize but understand the process. corporation.
CORPORATIONS SUBJECT TO IAET The 10% is applicable to resident citizen, resident alien, or non-resident
citizen, 20% if NRA-ETB and 25% for NRA-NETB.
CORPORATE TAXPAYERS THAT ARE SUBJECT TO IAET
Those that are subjected to Net Income Tax. Can a partnership be subject to IAET?
1. Domestic Corporation No, because there is constructive receipt of dividend. It is as if the amount
2. Resident Foreign Corporations has already been distributed for tax purposes and so there is no
3. Proprietary Educational Institutions accumulation of earnings here. In fact, you already paid taxes for the
4. Non-stock, non-profit educational institutions – if income from income. There is no IAET for general professional partnership or trading
unrelated activities is more than 50% of the Total Gross Income partnership because both follow constructive receipt doctrine.
because it will be subject to the 30% NIT rate
Secondly, there is no retained earnings and paid-up capital for partnership
Note: IAET is just like MCIT it is also applied to Corporations which are because you don’t base it on shares of stocks. There is partner’s equity and
subject to NIT. If 30% NIT is used or 2% MCIT, IAET can apply. shareholder’s equity. Partnership will only have partner’s interest.
General professional partnership (E) Non-stock corporation or association organized and operated
Will your answer change if this is a general professional partnership? If A exclusively for religious, charitable, scientific, athletic, or cultural
and B formed a law firm with the following: 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
Gross Receipts 1,000,000 member, organizer, officer or any specific person
Cost of Services 500,000
Gross Income 500,000 (F) Business league, chamber of commerce, or board of trade, not
Expenses 200,000 organized for profit and no part of the net income of which inures to
Taxable Income 300,000 the benefit of any private stockholder or individual.
A general professional is not subject to tax so there is no tax due and (G) Civic league or organization not organized for profit but operated
payable for this type of partnership. When it is distributed to partners A and exclusively for the promotion of social welfare.
B, it will still follow constructive receipt doctrine. It will be distributed by
dividing 300,000 equally. Each partner receives 150,000 and this amount (H) A non-stock and nonprofit educational institution.
will be treated as an ordinary income of an individual – this is the partner’s (I) Government educational institution.
distributive share in a general professional partnership. This will then be
subject to the dumping ground computation of 5-32%. (J) Farmers' or other mutual typhoon or fire insurance company, mutual
ditch or irrigation company, mutual or cooperative telephone
Take note of the difference between the two types of partnerships and how company, or like organization of a purely local character, the income
they are taxed. of which consists solely of assessments, dues, and fees collected
from members for the sole purpose of meeting its expenses; and
Summary of Taxes for Corporations
1. Net Income Taxation – 30% (K) Farmers', fruit growers', or like association organized and operated
2. MCIT – 2% of gross income and it goes with NIT, applicable as a sales agent for the purpose of marketing the products of its
beginning on the fifth year of operation or on the fourth year members and turning back to them the proceeds of sales, less the
immediately following the year the taxpayer commences business necessary selling expenses on the basis of the quantity of produce
3. Gross Income taxation – 15% based on gross income provided that finished by them.
cost ratio does not exceed 55%
4. IAET – 10% rate based on improperly accumulated earnings (L) Notwithstanding the provisions in the preceding paragraphs, the
income of whatever kind and character of the foregoing
CORPORATIONS EXEMPT FROM TAX organizations from any of their properties, real or personal, or from
any of their activities conducted for profit regardless of the
EXEMPTIONS FROM TAX ON CORPORATIONS disposition made of such income, shall be subject to tax imposed
under this Code.
Generally, corporations under this title shall not be taxed because they are
not intended for profit. If ever they earn income it is simply used to realize
Common denominator among all of them
their purpose or perpetrate whatever is their occupation.
Is that they’re not intended for profit, usually for the benefit of their
members only or to help government extend services to the people as in
Even if the Tax Code provides that these are exempted from taxes, there
the case of educational institutions.
are instances when these corporations can be subjected to tax:
Even if non-stock, non-profit educational institutions are not included or
1. Earned income of whatever kind and character by using their
expressly mentioned in the tax code, they are still exempt because they are
property, real or personal. (ex. use cemetery as a venue for a concert)
exempt under the 1987 Constitution.
2. Income from activities are conducted for profit.
It is provided in Article XIV, Section 4 of the Constitution that:
Example: Fraternal Organizations registered under the BIR for them
to be subject to tax, they should be earning income. They sell
All revenues and assets of non-stock, non-profit educational institutions
reviewer, the proceeds for that will be taxed.
used actually, directly, and exclusively for educational purposes
shall be exempt from taxes and duties. Upon the dissolution or
SECTION 30. Exemptions from Tax on Corporations. — The
cessation of the corporate existence of such institutions, their assets shall
following organizations shall not be taxed under this Title in respect to
be disposed of in the manner provided by law.
income received by them as such:
Non-stock, non-profit educational institutions are not subject to tax or
(A) Labor, agricultural or horticultural organization not organized
costumes duties for all revenues including real property tax for as long as
principally for profit;
the income are actually, directly or exclusively used for educational
purposes. So, even if they are not listed in the tax code, they will still be
(B) Mutual savings bank not having a capital stock represented by
exempted because of the provision in the constitution.
shares, and cooperative bank without capital stock organized and
operated for mutual purposes and without profit;
“Income of whatever kind and character of the foregoing organizations
from any of their properties, real or personal, or from any of their activities
(C) A beneficiary society, order or association, operating for the
conducted for profit regardless of the disposition made of such income,
exclusive benefit of the members such as a fraternal organization
shall be subject to tax imposed under this Code”
operating under the lodge system, or a mutual aid association or a
nonstock corporation organized by employees providing for the
There is a cemetery corporation and a concert organizer asks that the
payment of life, sickness, accident, or other benefits exclusively to
cemetery be the venue for a concert, paying 1M for the use of the property.
the members of such society, order, or association, or nonstock
The cemetery will use the proceeds for maintenance.
corporation or their dependents
(D) Cemetery company owned and operated exclusively for the benefit
of its members.
Will this be taxable as income of the cemetery corporation? return shall be made for the period between the close of the former
Yes, as provided in the last paragraph of Sec 30 of the Tax Code. It is fiscal year and the date designated as the close of the new fiscal
provided that income of whatever kind and character of the foregoing year.
organizations from any of their properties, real or personal, even if not
for profit, may still be subject to tax. This is income from the use of (B) Income Computed on Basis of Short Period . — Where a separate
property, regardless of disposition of income, is subject to tax. final or adjustment return is made under Subsection (A) on account
of a change in the accounting period, and in all other cases where a
If the cemetery corporation itself is organizing the concert and then it sells separate final or adjustment return is required or permitted by rules
tickets for the concert, this will be subject to tax even if it will be for the and regulations prescribed by the Secretary of Finance, upon
building of the chapel in the cemetery. Regardless of the disposition of the recommendation of the Commissioner, to be made for a fractional
income, it is still subject to tax. part of a year, then the income shall be computed on the basis of the
period for which separate final or adjustment return is made.
While they are exempted from taxes, if they earn income from use of
property or from any activity for profit, regardless of the disposition of the Short Period Return
income, it will be subject to tax. The taxpayer must file a short period return (less than twelve months) in
order to change their taxable year type (fiscal to calendar, or calendar to
fiscal).
ACCOUNTING PERIODS AND METHODS OF ACCOUNTING
ACCOUNTING PERIODS AND METHODS OF ACCOUNTING If you want to change your accounting period from calendar year to fiscal
General taxable period of taxpayers is 12 months (year) that is why it is year, say from January to December calendar year to June to May fiscal
called a taxable year. year, the short period return covers January 1 to May 31.
Calendar Year According to sir, it is from your last/old ending (Jan 1) to your new ending
If you follow January to December, it will be Calendar Year (May 31) of the same year, following the rule that you have to exclude the
first day include the last day. Supposedly you end in December but now
Fiscal Year you will be ending in June.
If you do not follow January to December but still has a 12 month period,
example: you begin on May 1 and end on April 30 of the following year. If you want to change your accounting period from fiscal year to calendar
year, say from June 1 to May 31 fiscal year to January 1 to December 31
SECTION 43. General Rule. — The taxable income shall be computed calendar year, the short period return covers June 1 to December 31.
upon the basis of the taxpayer's annual accounting period (fiscal year or
calendar year, as the case may be) in accordance with the method of TYPES OF ACCOUNTING METHOD
accounting regularly employed in keeping the books of such taxpayer; but
if no such method of accounting has been so employed, or if the method TYPES OF ACCOUNTING METHOD
employed does not clearly reflect the income, the computation shall be
made in accordance with such method as in the opinion of the Cash Basis
Commissioner clearly reflects the income. If the taxpayer's annual Here, you account for income whenever you receive income/cash. When
accounting period is other than a fiscal year, as defined in Section 22(Q), or you dispense cash, you recognize an expense.
if the taxpayer has no annual accounting period, or does not keep books, or
if the taxpayer is an individual, the taxable income shall be computed on Accrual Basis
the basis of the calendar year. You account for income the moment there is a right to earn that income
and you claim deductions when there is an obligation to pay, regardless of
Individuals can only choose calendar year and there are no exceptions whether there is cash received or dispensed. This follows the tule on
here. Corporations can choose either fiscal or calendar year. constructive receipt.
We use calendar or fiscal year because income tax is based on your yearly Long-term contracts may follow a particular accounting method which is
profits. You need to know your 12-month period to know if it falls in the the percentage of completion method.
yearly profit of the taxpayer.
LONG-TERM CONTRACTS
Deductions incurred during the taxable year or the 12 month period may
be deducted for the income during the year. If it is an individual taxpayer, LONG-TERM CONTRACTS
it must be from those made during the January 1 to December 31 period. Building, installation or construction contracts covering a period of more
Corporations may choose any 12-month period. than one year.
SEC. 48. Accounting for Long-term Contracts. - Income from
Change from calendar year to fiscal year and vice versa long-term contracts shall be reported for tax purposes in the manner as
Section 47. Final or Adjustment Returns for a Period of Less than provided in this Section. As used herein, the term 'long-term contracts'
Twelve (12) Months. — means building, installation or construction contracts covering a period in
excess of one (1) year. Persons whose gross income is derived in whole or
(A) Returns for Short Period Resulting from Change of Accounting in part from such contracts shall report such income upon the basis of
Period. — If a taxpayer, other than an individual, with the approval percentage of completion. The return should be accompanied by a return
of the Commissioner, changes the basis of computing net income certificate of architects or engineers showing the percentage of completion
from fiscal year to calendar year, a separate final or adjustment during the taxable year of the entire work performed under contract. There
return shall be made for the period between the close of the last should be deducted from such gross income all expenditures made during
fiscal year for which return was made and the following December the taxable year on account of the contract, account being taken of the
31. If the change is from calendar year to fiscal year, a separate final material and supplies on hand at the beginning and end of the taxable
or adjustment return shall be made for the period between the close period for use in connection with the work under the contract but not yet so
of the last calendar year for which return was made and the date applied. If upon completion of a contract, it is found that the taxable [net]
designated as the close of the fiscal year. If the change is from one income arising thereunder has not been clearly reflected for any year or
fiscal year to another fiscal year, a separate final or adjustment years, the Commissioner may permit or require an amended return.
So what is a long term contract? What if it’s construction of a 3rd Step: (Determine Income Per year)
road and not a building? We already determined the total income. That is 20Million for the whole
If the contract itself has a period of more than one year, that’s considered contract. Lastly, we need to know what is the income received by the
a long-term contract. If it involves service of constructing, then it is called Contractor per year. In most cases, the income would just be proportional
a construction contract. to the work done per year. That means, for example, 30% of work done in
the 1st year, means 30% of the total income is given or earned by the
Accounting for Long-term Contracts contractor for that year. In other words, for the 1st year, 30% of 20M is 6M.
Percentage of Completion Basis/Method The contractor earned 6M income for that year. If you add everything
diba? This is still 20M? This is just broken down according to work done per
Percentage of Completion Method year.
Just like installment, you get to avail of recognition of taxes on staggered
basis. Instead of amount, it will be based on the completion of project Income per year = (Percentage of work Done for that particular year) x
Illustrate: (Transcriptioner Daits will use the simplified version, since Income
what was used by sir was confusing. With the same results. Reduced to 4
steps for easier understanding) Payment Received by Contractor:
1st year: 30%work done so income earned is 30% of 20M = 6M
1st step: (Determine Income) 2nd year: 30% work done so income earned is 30% of 20M = 6M
First we must determine the Contract Price and the cost of construction to 3RD year: 20% work done so income earned is 20% of 20M = 4M
determine the income. These are stated in the long term contract, and 4th year: 20% work done so income is earned 20% of 20M = 4M
these figures represent the whole contract price and the whole cost of
construction, not just per year. Then let’s subtract Total Contract Price and 4th Step: (Determine Tax on Income per Year)
Cost of Construction, to get the income. Then let’s assume that this is the What’s left to do is to tax the income per year. Multiply the income per year
only income that the contractor gets. The income is 20 Million for the whole by 30% (Corporate Income Tax Rate). For example the income of 1st year
undertaking is 6M, 30% of 6M is 1.8M. This is the tax per year. Assuming there are no
other expenses to be deducted from taxable income. The income tax per
Total Contract Price (TCP) – Cost of Construction (CoC) = Income year will total 6M, which is actually 30% of your total income of 20M. We
just broke it down according to percentage of work, so that the tax can be
Total Contract Price: 50 Million paid by installments using Percentage of Completion Method
Cost of Construction: 30 Million
TCP – CoC = Income = 20 Million Tax for year = Corporate income tax rate X income per year
1. Publicly-held corporations
2. Bank and other non-bank financial institutions 1st Year: 30% of 6m = 1.8M (Corporate Tax to be paid for 1st year)
3. Insurance companies 2nd Year: 30% of 6m = 1.8M (Corporate Tax to be paid for 2nd year)
4. PEZA registered companies 3rd Year: 30% of 4M = 1.2M (Corporate Tax to be paid for 3rd year)
5. Foreign corporations – only resident foreign corporations registered 4th Year: 30% of 4M = 1.2M (Corporate Tax to be paid for 4th year)
as a branch ana and spectra notes (according to sir: resident foreign
corporations are subject to IAET, so this must refer to non-resident Understand this principle, because basically, you are just paying the tax in
foreign corporation) proportion to the income that you have received for that year. There is no
6. Taxable business partnership difference in the total tax that you actually have to pay for the whole
7. General professional partnership - not subject to IAET transaction. You just broke it down. You did not yet receive the full
payment for the year so why pay tax for the whole thing in that same year?
2nd Step: (Determine Percentage of Completion) The provision gives you this option. If you understand this, that it can be
The next step would be to determine the percentage of completion. (Sir did applicable to Transactions on Installment basis of sales of Dealers and
not mention this directly, but he also deemed the duration of the contract even to casual sales of real and personal property with just some minor
as one of the important factors to note). differences and qualifications peculiar to each provision. Just change the
income per year to installments paid.
What we need to determine is the percent of completion for that year only.
In other words, how much work was done for that year. So, for the first (Retention amount in contracts of construction discussion omitted since
year how much work was done? Let’s just say 30 percent. How about the deemed not relevant)
second year? What was the work done? Let’s just say another 30 %. The
Percentages of completion are given in this problem. Atty Amago: Anyways as lawyers, you will only be asked what to use on
long term Contracts. And your answer should be Percentage of Completion
This is the percent of work done per year in relation to the building Basis. I’m just telling you how it is done.
(100%). This data means that for example, in the 1st year, 30% of the
building was constructed. Subsequently, another 30% of the building was Given:
done on the 2nd year. Hence by the 2nd year, a total of 60% of the building
has already been constructed. Apply by analogy to the rest of the years in Total Contract 50,000,000 100%
the example. Therefore, after four years, the total would then be 100% Cost 30,000,000 60%
percentage of work, meaning, the building would be done in 4 Gross Profit 20,000,000 40% <- gross profit rate
years.
Percentage of Completion: (as provided by sir) cummulat iv

e%of
%of
complet ion
50 M x %of complet ion
GPR
50 M x %of complet ion tax
Tax Due
1st year: 30% complet ion per year
per year per year x GPR rate
2nd year: 30% 1st year 30% 15,000,000 40% 6,000,000 30% 1,800,000
3rd year: 20% 2nd year 60% 30% 15,000,000 40% 6,000,000 30% 1,800,000
4th year: 20% 3rd year 80% 20% 10,000,000 40% 4,000,000 30% 1,200,000
4th year 100% 20% 10,000,000 40% 4,000,000 30% 1,200,000
Total 20,000,000 6,000,000
Duration of Contract: 4 Years
*To get the tax due per year: You will need to multiply the percentage of 2. Allows payment in installment basis, and the initial payments do not
completion per year to the total contract price and then multiply it to the exceed twenty-five percent (25%) of the selling price
gross profit rate and finally to the tax rate.
Initial Payments are those payments received within the Year of Sale
In short: Tax due = Percentage of Completion x Total Contract Price x
Gross Profit Rate x Tax rate When we talk about payments in installments here, class, we refer to
yearly basis. So we take into account, all installments paid within the year.
TRANSACTIONS ON INSTALLMENT BASIS
SALE OF PERSONAL PROPERTY
SALES OF DEALERS IN PERSONAL PROPERTY
Problem: For example, the contract of sale for Personal Property provides
that the “Selling Price is 1M with a Down Payment of 10%. Where 10%
SALES OF DEALERS IN PERSONAL PROPERTY installments are to be paid every year for the next 9 years starting on the
SEC. 49. Installment Basis. - year of sale”. Cost is 500k.
(A) Sales of Dealers in Personal Property. - Under rules and
Illustration (For determining applicability of provision):
regulations prescribed by the Secretary of Finance, upon recommendation Selling Price = 1M
of the Commissioner, a person who regularly sells or otherwise disposes of Down Payment = 10% of selling Price = 100k
personal property on the installment plan may return as income therefrom Installments = 10% of selling Price = 100k
in any taxable year that proportion of the installment payments actually
received in that year, which the gross profit realized or to be realized when There is a stipulation for a Down Payment of 100k (10% of 1M). However,
payment is completed, bears to the total contract price. there is also a stipulation that the 1st installment of 100k should be paid
within the year of sale. Therefore, the Initial Payments include the Down
Type of Transaction Covered Under This Provision Payment and the First Installment as these are the payments made within
1. The contract must have a stipulation for payment in installments and; the year. Always take into account the installments paid within the year.
2. The seller must regularly sell personal property on installment basis
In this case, the total Initial Basis (Synonymous with Initial Payments) is
Formula 200k which is 20% of the total selling price. Hence, this provision can still
Based on the installment in relation to the contract price apply because it has not exceeded 25%. If it were otherwise, we go to
deferred sale, which means just one payment of tax. You pay tax for the
Illustration: whole thing despite not having received income yet from the installments.
Taxable income for the year =
Now let’s proceed to the main problem. We are the seller here since we are
Gross Profit (Installment Received) the ones who get income out of this.
--------------------------------------------------
Total Contract Price Illustration (How to determine the Tax under this Provision) 4
steps: (Accounting method used is different, but same results for easier
To find the tax, multiply taxable income with the tax applicable understanding. This is similar to the formula used in long term contracts.
Mathematically, there are other faster ways to solve but that still depends
Tax = Taxable Income (Tax Rate Applicable) on what is given in the problem. So these steps are used to emphasize that
you pay tax only to the amount of income you received for that particular
Basically the same principle as mentioned above. year, and for uniformity)
Tax rate applicable 1st step (Determine Total Income/Gross profit):
So if it is corporation, use 30%, if it is individual, use 5%-32%. If it is sale We already know that in the particular problem above, the installment
of shares of stock, then use 5% for the first 100K, then 10% for the excess. basis can be applied. So, first we must determine our income. Deduct the
cost of 500K(given in the problem) from the Selling price of 1M. This is the
TREATMENT OF SALES OF REALTY AND CASUAL SALES total income, assuming you did not have any other expenses that can be
deducted besides the cost. In this problem, total income is 500k.
SALES OF REALTY AND CASUAL SALES OF PERSONALITY
(B) Sales of Realty and Casual Sales of Personality. - In the case Selling Price = 1M
Down Payment = 10% of selling Price = 100k
(1) of a casual sale or other casual disposition of personal property (other
Installments = 10% of selling Price = 100k
than property of a kind which would properly be included in the inventory
Cost = 500K
of the taxpayer if on hand at the close of the taxable year), for a price
exceeding One thousand pesos (P1,000), or (2) of a sale or other
Selling Price – Cost = Total Income
disposition of real property, if in either case the initial payments do not
1M – 500k = 500K
exceed twenty-five percent (25%) of the selling price, the income may,
under the rules and regulations prescribed by the Secretary of Finance,
2nd step (Determine Percentage of Installments Paid per year)
upon recommendation of the Commissioner, be returned on the basis and
in the manner above prescribed in this Section. As used in this Section, the
(similar to percentage of work done in long term contracts):
Now we determine the percentage of installments paid within each year.
term 'initial payments' means the payments received in cash or property
Why do we do this? Because again, we only pay tax in proportion to the
other than evidences of indebtedness of the purchaser during the taxable
income that we receive for that year. The amount in peso of the installment
period in which the sale or other disposition is made.
received does not really matter in this problem since the percentages are
already given in the contract.
Transaction Covered Under This Provision:
1. A casual sale (meaning you don’t regularly sell real property) or other However, if the percentages of Down Payments and Installments are not
casual disposition of personal or real property for a price exceeding given in the problem and what instead is given is the amount of payment in
P1,000 that; peso (highly unlikely), just convert that to percentage. Amount of
payments in the year in peso received divided by Total Selling price. That’s installments under rules and regulations to be promulgated by the
the percentage. Secretary of Finance, upon recommendation of the Commissioner.
For the first year, we already know that we take into account the Down Sale of real property (as illustrated by sir)
payment and the 1st installment. So that means we actually received 20% Slightly different since capital gains tax will now apply.
of the total selling price for that year. For the rest of the years, there is
payment of 10%. So basically, we receive 100k for the succeeding years Problem: Real Property is sold for 1Million as Selling Price. There is a
after the year of sale. This is the case since there is nothing in the stipulation that it shall be paid in 20% installment per year, for 5 years.
problem that states that there are other payments made within the 2 nd
year, 3rd year, etc. Other given values are:
Cost = 500k
1st year: 10% +10% = 20% Zonal Value = 500k
2nd year: 10% Assessed Value = 700k
3rd year: 10%
4th year: 10% Steps:
And so on and so forth until the 9th year 1. First, we determine if the provisions are applicable. 20% is the initial
payment. Which means that installment basis for paying tax is
3rd Step (Determine Taxable Income per year) applicable because it less than or equal to 25%. If the given in the
So now, we determine the income you have received each year, in relation problem is amount in Peso of the initial payment, compute for the
to the total income. For example, if we get 10% of the total selling price percentage by following the prior example in sale of personal
through installment, it also follows that we earn 10% of the income. property.
Because for 1M income, we get 500k profit. In other words, we ask the
question again, how much of the total income have you received in that 2. Second, and most importantly in this case, we do not anymore
particular year? We multiply the percentage of the installment we received subtract the Cost from the Selling Price because Taxable Income in
by the total income, which is 500k in this case. This is like multiplying the this case is not based on Income/Gross Profit. What is applicable
percentage of the amount of work done, to the total income in long term here is Capital Gains Tax, which is 6% of the Zonal Value,
contracts. Assessed Value, or Gross Selling Price, whichever is higher.
Hence, for the 1st year, we received 100k as income, from the 200k initial 3. So 3rd, we determine the total CG tax to be paid which is 6% of Gross
payments paid. On the 2nd year, we have 50k income, for the 100k selling price, because in this case, it is the highest.
installment received. If you add all these, this is still 500k total income. Just
broken down. 6% of 1M = 60k
1st year: 20% of 500k = 100k 4. Then multiply the installment paid in percentage to the Total CGT.
2nd year: 10% of 500k = 50k The result would be the CGT payable for the year. In this case, All
3rd year: 10% of 500k = 50k installments are 20%, so you just multiply 20% to Total CGT, in this
4th year: 10% of 500k = 50k case 60,000, and you will arrive at the CGT payable for the year. It’s
5th year: 10% of 500k = 50k just like dividing the Total CGT by 5 equal installments. In this case,
6th year: 10% of 500k = 50k 12k is the tax payable for each year since all are equal 20%
7th year: 10% of 500k = 50k installments.
8th year: 10% of 500k = 50k
9th year: 10% of 500k = 50k 20% (60k) = 12k Tax payable for each of the 5 years
4th Step (Determine the tax on income per year): 5. What if the installments are not uniform or equal per year? First get
Multiply the applicable tax rate on the income per year the percentage of the payments in relation to the Gross selling Price,
then multiply it to the Total CGT. You will then arrive at the CGT
In this case, this is corporation so multiply 30% to each taxable income per payable for that year. For example, given these additional stipulations
year and you will get the tax to be paid per year. For example in the first in the contract, solve for the CGT per year. (not the examples given by
year, multiply 100k by 30%. Therefore you pay 30k as tax for the 1st year. sir, sir changed the problem in the discussion to a 3 year contract. In
Apply by analogy to the other years. this example, we stay with 5 year contract still)
Actually, if you add all the taxes per year, you actually end up with 120k, 1st installment: 100k
which is 30% of the Total Income/Gross Profit of 500k. Just broken down. 2nd installment: 200k
3rd installment: 250k
Tax on income per year = Taxable Income Per Year x (Tax Rate applicable) 4th installment: 250k
5th installment: 200k
1st year: 100k (30%) = 30k tax to be paid on the first year
2nd – 9th year: 50k (30%) = 15k tax to be paid on the 2nd year So, use this formula
Tax per year = Installment received (Total Capital Gains Tax)

SALES OF REAL PROPERTY CONSIDERED AS CAPITA ASSET
---------------------------------------------------------
SALES OF REAL PROPERTY CONSIDERED AS CAPITAL ASSET Gross Selling Price
(C) Sales of Real Property Considered as Capital Asset by

Individuals. - An individual who sells or disposes of real property,
considered as capital asset, and is otherwise qualified to report the gain
therefrom under Subsection (B) may pay the capital gains tax in
For example, on the 1st year: When: April 15 of the succeeding year for income of this year
Tax on 1st year = 100k (60,000) CORPORATIONS

-------------------
1M Where:
Where the principle place if business of the corporation is registered
CG Tax on 1st year = 6,000
Atty Amago: In practice guys you always file in the bank if there are
payments to be made. If there are none, then you file in the BIR office
Apply likewise to each year, just change the value of the installment itself.
received. Hence the answers would be:
When: 15th day of the 4th month following the close of the taxable period
1 year: 6,000
st
2nd year: 12,000 Example: If the close of the Taxable year of a corporation is October, then
3rd year: 15,000 the time to file the return is February 15.
4th year: 15,000
5th year: 12,000 Atty. Amago: For the case of Corporations, they can choose whatever
taxable year they want. So you base it on the close of their taxable period.
The total of this is still 60,000 which is equivalent to the Total Capital Gains You will realize though that in section 74, there are also quarterly filing for
Tax. Only broken down individuals as well
Note: Sir did not give an example in cases where what is higher is the Fair Do Husband and Wife file separate Income Returns?
Market Value of the Property General Rule: Yes
Exception: If impractical, they can still file separately
INCOME TAX RETURNS
Atty Amago: If purely compensation earner of course you do not need to
Who are required to file Tax Returns? file, we already discussed that. The rest you can just read for yourself.
1. All Individual Tax Payers, except NRA NETB
2. Domestic Corporations and Resident Foreign corporations Are General Professional Partnerships required to File?
They are required to submit income tax returns of their partners
When are the Individuals required to submit tax returns
exempted? Atty Amago: GPP are exempt from tax but why are they required to submit
ITR? This is just for monitoring purposes
1. Pure Compensation income earners, where their gross income does
not exceed their Basic and Additional Personal exemptions When to Pay
2. Those derive income purely from interest income only Generally: Pay as you file
3. Minimum wage earners, granting that that is their only income But we can file in installments pursuant to Section 56(2)
Atty Amago: If you are a compensation earner and gross income is Atty Amago: You can pay in installments if you exceed P2000 pesos worth
150,000 and you have 4 dependents, you will not anymore be required to of tax for the year. I availed of this last time. The rest you can read on your
file a tax return. Total exemption in this case is 150,000. Basic of 50,000 own
and Additional of 100,000. (Income did not exceed)
TAX FREE EXCHANGE
If you are earning business income with compensation income, you have to
file a return. TAX FREE EXCHANGE
Pure compensation earners who have two employers are still required to Are there NOCLCO for Corporations?
file because the government will need to keep track of your basic and No NOCLCO for corporations
additional personal exemptions. It is possible that they have availed these
exemptions in both employers. Are corporations’ capital gains for sale of real property other
than real and sales of stocks subject to the holding period?
Note: So no substituted filing, then. (sir related this to substituted filing, It’s not subject to the holding period (50/100%). Applies only to individuals
but the discussion was under those exempt from filing forms) (Section 39(B))
What Corporations are required to file income tax returns? Atty Amago: As a general rule Capital Gains are taxable and Losses are
General Rule: Domestic Corporations and Resident Foreign Corporations allowed as deductions. But there are losses not allowed as deductions and
there are gains not subject to tax
WHERE AND WHEN TO FILE
Under Section 40 C (2) provides for Capital Gains not subject to
INDIVIDUALS tax
Two instances where there is Tax Free Exchange
Where: 1st Instance - Merger or Consolidation
The BIR office 2nd Instance - Exchange of Property for Control
 In the place of your principal place of business or;
 In the place of your residence
 In the place where the work is done, if you are an employee
Atty Amago: Class in realty, it is where you register.
TAX FREE EXCHANGE IN MERGER AND CONSOLIDATION TAX FREE EXCHANGE IN EXCHANGE OF PROPERTY FOR
CONTROL
Merger: One corporation is subsumed by the other
Example: X and Y merge, the resulting company is either X or Y Situation:
For example: 10 people, named A1 to A10, transferred real property worth
Consolidation: The resulting company is a brand new company 1 million pesos to X corporation in exchange for 51% of the shares of X
Example: If X and Y consolidates the resulting Corporation would be Z corporation. So then, the 10 people will gain control over the corporation
because under the Tax code, Control is ownership of 51% of the equity
Atty Amago: In a merger or consolidation there is always a Merger or interest of the company.
Consolidation Plan
Illustration:
X and Y merged and Y is the surviving Corporation. X happens to own a
parcel of land worth 1M pesos which it will transfer to Y because of the
merger. Y owns shares of stock which are not newly issued, which it will
give to the shareholders of X.
Note in the picture: Just put 51% instead of more than 50%. But clarify
what is controlling interest. 51%? Or more than 51%?
Are the transfers in this situation tax free?
Determine first:
1. If five or less of the ten people who transferred the property accounts
for 51% of the shares of the company.
Then the transfers are tax free
Example:
 A1 has 10 shares
So normally, the transfer of real property is subject to 6% Capital gains tax
and the transfer of shares would be subject to 5%/10% capital gains tax Total of 51 shares which is 51% of 100 total shares of Corporation X.
depending on value of shares but these transactions are not subject to If just one person accounts for 51%, then it is tax exempt
capital gains tax under these situation.
What if what were transferred by the stockholders of Y are not shares but 2. If we need to account for more than five people in order to reach 51%
securities? What if Debt securities (eg. Bonds, Treasury Bills) and equity shares.
securities (eg. Options, Warrants)? Then the transfers are still subject to capital gains tax
It will still not be subject to tax. Example:

 A1 has 5 shares
 A6 has 5 shares
 A7 has 5 shares
 A5 has 5 shares
Total of 30 shares, which is 30% of 100 shares in Corporation X.

Total shares not enough

Tax Finals Angel PDF

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Tax Finals Angel PDF

Uploaded by

Copyright:

Available Formats

TAXATION LAW I l Atty. Amago l For the exclusive use of EH 407 A.Y.

CLASSES OF CORPORATE TAXPAYERS

GROSS INCOME FOR CORPORATE OPERATIONS Interest Expenses

Interests Research and development

How a corporation is taxed: Royalties

Not over P100,000 5%

Intercorporate Dividends OFFSHORE BANKING UNITS

Branches of foreign corporations

Rationale for implementation of MCIT Allowable Deductions 50,000

2019 2020 2021 2022 2023 IMPROPERLY ACCUMULATED EARNINGS TAX

(1) Income exempt from tax

Percentage of Completion: (as provided by sir) cummulat iv

Tax per year = Installment received (Total Capital Gains Tax)

(C) Sales of Real Property Considered as Capital Asset by

Tax on 1st year = 100k (60,000) CORPORATIONS

Atty Amago: Class in realty, it is where you register.

Are the transfers in this situation tax free?

Then the transfers are tax free

It will still not be subject to tax. Example:

Total of 30 shares, which is 30% of 100 shares in Corporation X.

You might also like