TAX ON CORPORATION

CORPORATION DEFINED:
- It includes joint stock companies, joint accounts, associations, insurance companies or partnerships no matter how
they were created or organized.
- For income tax purposes, however, a corporation does not include general professional partnerships and joint
venture or consortium formed to undertake construction projects or engage in petroleum, coal, geothermal and
other energy related operation, pursuant to an operating or consortium agreement under a service contract with
the Government.

CLASSIFICATION OF CORPORATE TAXPAYERS:

A. Domestic Corporation – is one organized and existing under Philippine laws. It includes government owned
controlled corporations {except GSIS, SSS, PHIC, and the local water district (LWD)} or instrumentalities engaged
in a similar industry or activity.
B. Foreign Corporation – is a corporation organized and existing under the laws of foreign country irrespective of
the nationality of its stockholders.
1. Resident FC – refers to a foreign corporation that is engaged in business in the Philippines. Generally, it
establishes a branch or an office for the purpose of doing business or trade.
2. Nonresident FC – refers to a foreign corporation that is not engaged in business in the Philippines.

RESIDENT FORIGN NONRESIDENT FOREIGN

CLASSIFICATIONS DOMESTIC CORPORATION CORPORATION CORPORATION
SOURCES OF WITHIN AND WITHOUT WITHIN THE PHILIPINES WITHIN THE PHILIPPINES
TAXABLE INCOME THE PHILIPPINES
In general
Tax base Taxable income (NT of 30%) Taxable income (NT of 30%) Gross income (FWT of 30%)
OR OR
Tax base Gross income (MCIT of 2%) Gross income (MCIT of 2%) Not applicable
Whichever is higher

CLASSIFICATION OF TAXES:
A. Domestic Corporation:
1. Capital gain tax
a. On sale of shares of stocks not listed and traded in the local stock exchange, held as capital assets – On the
capital gain – 15% final tax
b. On sale of real property (land and/or building) held as capital asset – On gross selling price or current fair
market value at the time of sale, whichever is higher – 6% final tax
2. Final tax on passive income derived in the Philippines
a. Interest income under the expanded foreign currency deposit system – final tax of 15%
b. Interest income on any currency bank deposit, yield, or other monetary benefit from deposit substitute, trust
fund and similar arrangement – final tax of 20%
c. Dividend from domestic corporation or resident foreign corporation (intercompany dividends) – exempt
3. Normal Tax (NT) (subject to 30% flat rate) - based on taxable income
4. Minimum Corporate Income Tax (MCIT) – 2% of gross income
o Beginning on the fourth taxable year immediately following the year in which such corporation
commenced its business operations, when the MCIT is greater than the NT.
o Any excess of MCIT over NT can be carried over for the three (3) immediately succeeding taxable years.
o However, the corporation shall be exempt from MCIT if;
a. Suffers losses on account of prolonged labor disputes
b. Force majeure
c. Legitimate business reverses
5. Improperly Accumulated Earnings Tax (IAET) – 10% of the improperly accumulated taxable income
Exceptions to IAET:
a. Publicly-held corporations
b. Banks and other non-bank financial intermediaries
c. Insurance companies

Format to compute improperly accumulated taxable income:

Taxable income------------------------------------------------------Pxxxx
Add: Income exempt from tax----------------------------xxxx
Income excluded from gross income------------xxxx
Income subject to final tax--------------------------xxxx
NOLCO deducted------------------------------------xxxx xxxx
Less: Dividends paid or declared------------------------xxxx
Income tax paid for the taxable year-------------xxxx (xxxx)
Improperly Accumulated Taxable Income P xxx

Special Domestic Corporation

1. Proprietary educational institutions (except whose gross income from unrelated source exceeds 50% of their total
gross income) – Tax rate of 10% based on taxable income
2. Nonprofit hospitals – 10% based on taxable income
3. Government owned and controlled corporations – 30% normal tax based on taxable income
4. Exempt government organizations (GSIS, SSS, PHIC, local water district)

B. Resident Foreign Corporation

1. Capital gain tax
a. On sale of shares of stocks not listed and traded in the local stock exchange, held as capital assets – On the
capital gain – Not over P100,000 – 5%; On any amount in excess of P100,000 – 10%
2. Final tax on passive income derived in the Philippines
a. Interest income under the expanded foreign currency deposit system – final tax of 7.5%
b. Interest income on any currency bank deposit, yield, or other monetary benefit from deposit substitute, trust
fund and similar arrangement – final tax of 20%
c. Dividend from domestic corporation or resident foreign corporation (intercompany dividends) – exempt
3. Normal Tax (NT) (subject to 30% flat rate) - based on taxable income
4. Minimum Corporate Income Tax (MCIT) – 2% of gross income
o Beginning on the fourth taxable year immediately following the year in which such corporation
commenced its business operations, when the MCIT is greater than the NT.
o Any excess of MCIT over NT can be carried over for the three (3) immediately succeeding taxable years.
o However, the corporation shall be exempt from MCIT if;
d. Suffers losses on account of prolonged labor disputes
e. Force majeure
f. Legitimate business reverses

I. International Air and Shipping Carrier – 2.5% on Gross Philippine Billings

II. Offshore Banking Unit – 10% final tax on interest income derived from foreign currency loans granted to residents
other than offshore banking units or local commercial banks.
III. Tax on Branch Profit Remittances – 15% based on total profits applied or earmarked for remittance
IV. Regional Operating Headquarters of Multinational Companies – 10% based on their taxable income

C. Nonresident Foreign Corporation

1. Capital gain tax
a. On sale of shares of stocks not listed and traded in the local stock exchange, held as capital assets – On the
capital gain – Not over P100,000 – 5%; On any amount in excess of P100,000 – 10%
2. Final tax on passive income
a. Interest on foreign loans – final tax of 20%
b. Dividends received from domestic or resident foreign corporation – 15% final tax
3. Final tax of 30% based on gross income received during the taxable year within the Philippines

I. Nonresident Cinematographic Film Owner, Lessor or Distributor – 25% final tax based on gross income
II. Nonresident Owner or Lessor of Vessels Chartered by Philippine Nationals – 4.5% final tax based on gross rentals,
lease or charter fees
III. Nonresident Owner or Lessor of Aircraft, Machineries and other Equipment – 7.5% based on gross rentals or fees

QUARTERLY PAYMENT OF MCIT or NT:

Revenue Regulations No. 12-2007 provides that the quarterly income tax of domestic corporations (including resident
foreign corporations) shall be paid on quarterly payment.

If the computed quarterly MCIT is higher than the NT, the tax due to be paid for such taxable quarter shall be MCIT (2%
of gross income of the said taxable quarter). Below are the rules to be observed for MCIT.

For quarterly income tax return:

1. The taxes allowed to be credited against the quarterly MCIT due are:
a. Expanded withholding tax;
b. Quarterly corporate income tax payments under NT paid in the previous taxable quarter; and
c. Quarterly MCIT paid in the previous taxable quarter.
2. In the payment of the said quarterly MCIT due, excess MCIT from the previous taxable year/s is not allowed to be
credited.

For the annual income tax return:

1. If in the final computation of annual income tax due, NT is higher than MCIT, the following taxes are allowed to be
credited:
a. Quarterly MCIT paid on the current taxable quarters;
b. Quarterly NT paid on the current taxable quarters;
c. Excess MCIT over NT in the previous years (subject to prescriptive period of 3 years);
d. Expanded withholding taxes of the current year; and
e. Excess withholding taxes in the previous year.
2. If the annual MCIT greater than NT, only the following taxes are allowed to be credited against MCIT:
a. Quarterly MCIT paid on the current taxable quarters;
b. Quarterly NT paid on the current taxable quarters;
c. Expanded withholding taxes of the current year; and
d. Excess withholding taxes in the previous year.

ILLUSTRATION:
1. The following income tax records were revealed by Hilong-Hilo Corporation:

Year 4 business operations: NT MCIT

Corporate income tax computed P300,000 P500,000

Excess withholding taxes in year 4 was P20,000.

Year 5 business operations: NT MCIT

1st quarter – noncumulative P100,000 P160,000
2nd quarter – noncumulative 180,000 100,000
3rd quarter – noncumulative 150,000 190,000
4th quarter – cumulative ending computation 900,000 250,000

The expanded withholding taxes in year 5 is P50,000.

Solution:
The year 5 income tax still due and payable of Hilong-Hilo Corporation would be:

Year 5 income tax, end – NT, higher P900,000

Less: Previous income taxes paid:
1st quarter – MCIT, higher P160,000
2nd quarter – NT, higher 180,000
3rd quarter – MCIT, higher 190,000
Excess of MCIT over NT – year 4 200,000
Expanded withholding tax – year 5 50,000
Excess withholding tax – year 4 20,000 800,000
Income tax still due and payable – year 5 P100,000

2. ABC Corporation has been operating since January 2, 2012. Data pertinent to its operations covering 2014 to 2016 are
as follows:
2014 2015 2016
Gross sales P3,080,000 P4,100,000 P5,200,000
Sales returns, discounts/allowances 80,000 100,000 200,000
Cost of sales 1,500,000 2,000,000 2,500,000
Operating expenses 1,450,000 1,900,000 2,100,000

The determination of the appropriate income tax of ABC Corporation is shown as follows:
2014 2015 2016
Gross sales P3,080,000 P4,100,000 P5,200,000
Sales returns, discounts/allowances 80,000 100,000 200,000
Net sales P3,000,000 P4,000,000 P5,000,000
Cost of sales 1,500,000 2,000,000 2,500,000
Gross income P1,500,000 P2,000,000 P2,500,000
Operating expenses 1,450,000 1,900,000 2,100,000
Net taxable income P50,000 P100,000 P400,000
Multiply by: NT of 30% 15,000 30,000 120,000
 MCIT of 2% on gross income - 40,000 50,000
Higher 15,000 40,000 120,000
Less: Excess MCIT carry over (10,000)
Income tax due and payable 15,000 40,000 110,000

3. ABC Corporation has the following capital asset transactions for the year 2018:
a. Sold 10,000 ordinary shares of stock not traded in the local stock exchange for P1,200,000. The cost per share is
P100.
b. Sold land located in the Philippines for P6,000,000. The cost of the land is P3,000,000 with a fair market value of
P6,500,000.
c. Sold land located in Japan for P5,000,000. The cost of the land is P4,000,000.

Required: Compute ABC’s taxes payable on sale of capital assets assuming the taxpayer is:
a. Domestic corporation
b. Resident foreign corporation
c. Nonresident foreign corporation

Solution:
DC RFC NRFC
Sales of shares of stocks (15%) 30,000
First 100k = 5,000
Excess 100k x 10% = 10,000 15,000 15,000
Sale of land – Phil. (6%) 390,000 390,000
Capital gain (3M x 30%) 900,000
Sale of land - Japan 300,000 Not taxable Not taxable

Note: Only Filipino citizens and corporations or partnerships with at least 60% of the shares owned by Filipinos are
entitled to own or acquire land in the Philippines. The sale of real property by nonresident foreign corporation is subject
to a 30% final withholding tax based on casual gains.

4. ABC Corporation, a closely-held corporation, reported the following during the taxable year:
Accumulated retained earnings P3,000,000
Paid up share capital 2,000,000
Income tax due and payable 900,000
20% final tax on interest income 60,000
Dividend income 200,000
Gain on life insurance 1,000,000
Dividend declared and paid 300,000
Reserved for plant expansion 200,000
Investment in bonds 2,000,000

The IAET of ABC Corporation would be:

Taxable income (P900,000/30%) P3,000,000

Add: Gain on life insurance P1,000,000
Interest income 300,000
Dividend income 200,000 1,500,000
Total P4,500,000
Less: Income tax due and payable P900,000
Dividend declared and paid 300,000
Reserved for plant expansion 200,000
Final tax on interest income 60,000 1,460,000
Improperly accumulated earnings P3,040,000
Multiplied by IAET rate 10%
Improperly accumulated earnings tax P304,000

PROBLEM 1
For more than 5 years, T has been engaged in trading business within the Philippines with the following results of
business operations in 2017 and 2018:
2018 2019
Sales P2,000,000 P5,000,000
Cost of sales 1,200,000 1,800,000
Operating expenses 800,000 800,000
Income taxes paid before last quarter 100,000 150,000

The 2017 operating expenses were allowed as deductions by the BIR. In 2018, however, the operating expenses were not
substantiated with official receipts opting T to deduct OSD.
1. How much is the 2019 income tax still due and payable if T is a resident Filipino citizen? ___________________
2. How much is the 2019 income tax still due and payable if T is a domestic corporation? _____________________

PROBLEM 2
Masikap Corporation, a domestic corporation, has the following information regarding its income and expenses for the
taxable year 2018:
1st 2nd 3rd 4th
Sales 1,000,000 1,500,000 2,200,000 2,800,000
Cost of sales 600,000 900,000 1,320,000 1,680,000
Itemized deductions 320,000 480,000 704,000 896,000

Assume that the amounts are cumulative from first quarter to the fourth quarter, the income tax credit and income tax
still due and payable in the fourth quarter would be?