INCOME TAXATION Taxation of Corporations Learning Objectives: After studying this chapter, you should be able to: as 2 yaw a 10. 1. 12. 13. Identify the income taxpayers other than individuals, Define corporation. Identify the classification of corporate taxpayers. State the sources of income of corporate taxpayers. Recognize the categories of income and state the tax rates to be used by each type of corporate taxpayer. ist the sources of passive income and state the final tax rates to be used by each type of corporate taxpayer. Show the pro-forma computation of the normal income tax of domestic, resident and non-resident foreign corporations, in general. Identify the special corporations for tax purposes and be able to provide the relevant tax rates. Define the allowable deductions from gross income. Define and compute taxable income and tax due for each type of corporate taxpayer depending on income category. List the corporate taxpayers exempt from income tax. Outline the taxation for cooperatives, franchises and SBMA, CDA, PEZA- registered enterprises. Compute the quarterly corporate income tax. The discussion on taxation of corporations is divided into two chapters—this chapter and the next. This chapter deals with the normal tax liability and passive income of corporations. Minimum corporate income tax (MCIT), improperly accumulated earnings tax (IAET), and gross income tax (GIT), are discussed in the next chapter. The term “normal income tax” shall mean the income tax rates prescribed under Sections 27(A) and 28(A)(1) of the Code at 35% effective Jan. 1, 1997; 34% effective Jan. 1, 1998; 33% effective Jan. 1, 1999; and 32% effective Jan. 1, 2000, and thereafter. Last May 24, 2005, the President signed into law R.A. 9337 or the Expanded Value-Added Tax 135 Scanned with CamScanner= Act 6f 2005. Under this law, beginning Nov. 1, 2005, the corporate income tax rate shai be 45%, This rate shall be reduced to 30% effective Jan. 1, 2009, CLASSIFICATION OF INCOME TAXPAYERS (Other than Individuals) 1. Corporations a. Domestic. Those created or organized under and by virtue of Philippine laws, Domestic corporation, in general Government-owned and -controlled corporations Taxable partnerships Proprietary educational institutions Non-profit hospitals Feeney b. Foreign. Those organized in accordance with laws of their respective countrie: 1. Resident. Those engaged in trade or business within the Philippines. 2, Non-resident. Those not engaged in trade or business within the Philippine: 2. General Professional Partnership. This is discussed in Chapter 6. 3. Estates and Trusts. This is discussed in Chapter 5. Definition of Terms 1. Corporation. It includes partnerships, no matter how created or organized, joint stock companies, joint accounts (cuentas en participacion), associations, or insurance companies, but does not include general professional partners joint venture or consortium formed for the purpose of undertaking construction Projects or engaging in petroleum, coal, geothermal and other energy operations Pursuant to an operating or consortium agreement under a service contract with the Government. The tax exemption of joint ventures formed for the purpose of construction projects was pursuant to Presidential Decree 929 (dated May 4, 1976) to assist local contractors in achieving competitiveness with foreign contractors by pooling their resources in undertaking big construction projects. Section 3 of Revenue Regulations 10-2012 states that a joint venture or consortium formed for the purpose of undertaking construction projects not taxable as corporation under Sec, 22 of the NIRC of 1997 as amended, should be: 136 Scanned with CamScanner(1) for the undertaking of a construction project; and (2) should involve joining or pooling of resources by licensed local contracts; that is, licensed as general contractor by the Philippine Contractors Accreditation Board (PCAB) of the Department of Trade and industry (OTI); (3) these local contractors are engaged in construction business; and (4) the Joint Venture itself must likewise be duly licensed as such by the Philippine Contractors Accreditation Board (PCAB) of the Department of Trade and industry (DT!) Joint ventures involving foreign contractors may also be treated as a non-taxable corporation only if the member foreign contractor is covered by a special license as contractor by the PCAB of the DT!; and the construction project is certified by the appropriate Tendering Agency (government office) that the project is a foreign financed or internationally-funded project and that international bidding is allowed under the Bilateral Agreement entered into by and between the Philippine Government and the foreign or international financing institution pursuant to the IRR of Republic Act 4566, the Contractor's License Law. Absent any one the requirements, the joint venture or consortium formed for the purpose of undertaking construction projects shall be considered as taxable corporations. In addition, the tax-exempt joint venture or consortium as defined shall not include those who are mere suppliers of goods, services or capital to a construction project. The member to a joint venture not taxable as corporation shall each be responsible in reporting and paying appropriate income taxes on their respective share to the joint venture’s profit. WMustration. Source: 81 Ruling 475-2014, Nov. 26, 2014 A joint venture or consortium formed for the purpose of undertaking construction projects pursuant to ‘an operating or consortium agreement is not subject to the regular corporate income tax. The co- venturers are separately subject to the regular corporate income tax under Section 27(A) of the Tax ‘Code on their taxable income during each taxable year respectively derived by them from the JV. The ‘respective net income of the co-venturers derived from the JV is also subject to CWT under Section 57 ‘of the Tax Code. Before the JV distributes the net income of the co-venturers, it shall withhold the tax due on such net income. The co-venturers are required to enroll themselves to the BIR’s Electronic ‘Fling and Payment System (eFPS). The enrollment should be done at the Revenue District Office (ROO) “where they are registered as taxpayers. ‘Mlustration. Source: BIR Ruling 018-99, Feb. 11, 1999 ‘in @ letter from Megaworld Properties and Holdings, inc. dated Nov. 27, 1997, it was stated that ‘Megaworld and LA O' David Agro Development Corporation and Realty Office (LA 0’) executed a Joint ‘Venture Agreement (IVA) on July 6, 1995 to develop a residential condominium project to be referred ‘1025 “The Manhattan Square” in Makati City. It was agreed, among others, that LA O’ shall contribute the land while Megaworld shall be responsible for the financing, planning, designing, execution, ‘construction, monitoring and supervision of al facets of work on the building: and that LA O” shall be ‘entitled to 26% of the net saleable area of the completed condominium building and 28% of the total ‘parking lots. The remaining area shall belong to Megaworld who shall also be the exclusive marketing, agent of al units inthe project. 137 Scanned with CamScannerof Section 22(n) ain Megaworld requested for a ruling to confirm Its 0 ure within the me vent 1, That the joint venture does not create @ twat ba oomiurn Cerca, In relation to Section 27(A) of the Tax Code of ie porn Cone epreseNg The 2. That the allocation of the units and the pop ‘aegaworld ‘of Title by the Registry of Deeds of Mal respective shares in the project are not taxabl oe to tied parties eA of 1 Yay of the 13 55, as af ized wil Be SUbJeCt to the se event yar and to the &xDandeq 3, That upon sale or disposition of the unit regular 35% Income tax under Section withholding tax under Revenue Regulations inion, the BIR said thay he third pnts to third Partles yi The BIR confirmed the first and second opinions of MeBAMOT ion Of INE a71A) of the Tax Code the gain realized by Megaworld and LA 0’ upon the 889 OF Avea7 under SECNOH oe as amended iy, be subject to the regular 35% income tax forthe taxable Yeo" pegulatlon of 1997 ond to the expanded withholding tax under R Re Regulation: wuling 0A-488-98). enue Regulations 2-98, (BIR Ruling OF organized In the 2. Domestic. When applied to a corporation, Philippines or under its laws. eid is not domestic, tion which 3. Foreign. When applied to a corporation, means @ corpora’ i d in trade or tion engage’ 4, Resident Foreign Corporation, Applies to a foreign corPor™ business within the Philippines. ration not engaged in 5. Non-resident Foreign Corporation. Applies to a foreign Corp! trade or business within the Philippines. sion) Case 8425, Nov Muustration. Source: Visayas Geothermal Power Company vs. CIR, CTA (First Oivist jon) Cas exempt from the Service fees payable by a Philippine company to a non-resident foreign corporation are C2S# ot I ® FWT if it can be established that (a) the services are performed by a foreign COMPO Tine, trade or business in the Philippines, and (b) the said income Is derived from sources Mustration. Source: BIR Ruling ITAD 310-13, Nov. 18, 2013 ACo., a non-resident foreign corporation based in China, entered into a Just-In-Tme inventory cee with B Co,, a domestic corporation, in the agreement, A Co. agreed to deliver magnetic heads to B Cos warehouse, for use by B Co. as raw materials in its production of hard disk drives. However, sce the arrangement is “just in time,” A Co. will only recognize a sale upon B Co's actual withdrawal of the ‘magnetic heads from the warehouse. {A Co. deemed to have a permanent establishment (PE) in the Philippines by delivering goods to B Co.'s warehouse? No. Although A Co. agreed to deliver the goods to 8 Co.'s warehouse, the use of the warehouse is considered to be for the benefit of B Co, and is not for the purpose of establishing A Co.'s fixed place of business. If any, the relation between the warehouse and A Co. is merely to attain the ultimate objective of carrying out the Just-in-Time Inventory Agreement. 4s A Co. subject to Philippine income tax on its business profits? No. Under Article 7 in relation to Article 5 of the RP-China Tax Treaty, the business profits of A Co. shall be taxable in the Philippines only if it maintains a 138 Scanned with CamScannera PE situated in the Philippines, and only so much as are attributable to the PE, Since A Co. is not deemed 10 have a PE in the Philippines, its exempt from tax on business profits from the sale of goods to B Co. Mlustration. Source: Cargill, Inc. vs. Intra Strata Assurance Corporation, Supreme Court (Second Division) G.R. 168266, Mar. 15, 2010 Under Section 123 of the Corporation Code, a foreign corporation must obtain a license and 2 certificate from the appropriate government agency before it can transact business in the Philippines. Where a foreign corporation dows business in the Philippines without the proper license, Section 133 of the Code provides that it cannot maintaln any action or proceeding before Philippine courts The Corporation Code does not define the phrase “doing business.” On the other hand, R.A, 7042 or the Foreign Investments Act of 1991, states that “doing business” shall include “soliciting orders, service contracts, opening offices, whether called ‘liaison’ offices or branches, appointing representatives or distributors domiciled in the Philippines or who In any calendar year, stay in the country for a period or periods totaling 180 days or more; participating in the management, supervision or control of any domestic business, firm, entity or corporation in the Philippines; and any other act or acts that imply a continuity of commercial dealings or arrangements, and contemplate to that extent the performance of acts or works, or the exercise of some of the functions normally incident to, and in progressive prosecution of, commercial gain or of the purpose and object of the business organization, However, the phrase ‘doing business’ shall not be deemed to include mere investment as a shareholder by 2 foreign entity in domestic corporations duly registered to do business, and/or the exercise of rights as such lnvestor; nor having a nominee director or officer to represent its interests in such corporation; nor appointing a representative or distributor domiciled in the Philippines which transacts business in its own ‘name and for its own account.” Activities within Philippine jurisdiction that do not create earnings or profits to the foreign corporation do- not constitute doing business in the Philippines. To be doing or “transacting business in the Philippines” under the Corporation Code, the foreign corporation must actually transact business in the Philippines, that is, perform specific business transactions within the Philippine territory on a continuing basis in its own fname and for its own account. Actual transaction of business within the Philippine territory is an essential requisite for the Philippines to acquire jurisdiction over a foreign corporation and to require the foreign corporation to secure a Philippine business license. Ilustration. Source: BIR Ruling ITAD 393-12, Dec. 11, 2012 ‘A Co., a resident of Japan, rendered consultancy services for a fee to B Co., a PEZA-rey corporation. A Co. sent its personnel to the Philippines to provide the services for an aggregate period of 17 days for the entire duration of the agreement. |s the income derived by A Co. subject to Philippine income tax? No. Under the RP-Japan Tax Treaty, 2 Japanese enterprise shall be subject to tax in the Philippines on business profits to the extent attributable to 2 permanent establishment (PE) situated in the Philippines. Under the RP-Japan Tax Treaty, a Japanese ‘enterprise may be deemed to have a PE in the Philippines if it furnishes in the Philippines consultancy services or supervisory services in connection with a contract for a building construction or installation project, through employees or other personnel - other than an agent of independent status ~ provided that such activities continue (for the same project or 2 or more connected projects) for a period or periods ‘aggregating more than 6 months within any taxable year. , Since the services performed by A Co. in the Philippines totaled an aggregate period of only 17 days, A Co. is ‘not deemed to have a PE in the Philippines. Hence, the income derived by A Co. from the consultancy services shall not be subject to Philippine income tax, 139 Scanned with CamScanneriMlustration. Source: BIR Ruling ITAD-O21-11, Jan, 24, 2014 ible only in Thailand un nterprise stall Bee shment (PE). Ifthe Thy, gh a parmeners af such enterprise which are the Pr Under the RP-Thailand Tax Treaty, the profits of a Tha such enterprise carries on a business in the Philippines throw enterprise carries on business through a PE in the Philippines able tothe PE may be taxed in the Philippines seonees forte same oF cong Atco 5 ofthe RP-Thaland Tox Treaty prondes tht the fvrshi6 7°07, x93 dovs shal be constlned» 1roject in a Contracting State fora period or periods auereeatlna TOT or ay that services 2° TE SIA in PE, The 183-day period should be counted based on the total MUMMIE Ty al of a service “i the Philippines, Including. all periods resulting from the automa renewal shall be deemed the “same or a connected project: attribu Mustration, Source: BIM Ruling DA-1TAD-157-04, Dec. 29, 2004 5, shall be deemed resident, that ae residents Of tHe re se branch of a Us a Tal pert hemmed bythe ‘AP-US Tax Treaty with ‘ Under the RP-US Tax Treaty, branches of compan of the U.S, This treaty defines @ U.S, resident as a U.S. Con corporation is considered a U.S. resident. As such, sald branch aspect to income from Philippine sources, that ara residents of Canad chal be ho is liabl ding any person wl hig Canad ear ay the Ron ot mania fable to tax in Canada shall be yat 15 é sme in the Philippines: Similarly, the RP-Canada Tax Treaty states that branches of compat deemed fesidents of Canada, This treaty defines a resident of to tax in Canada by reason of his domicile, residence, place of similar nature. Thus, a Korean branch of a Canadian company overned by the RP-Canada Tax Treaty with respect to Its (branch) Inco" SOURCES OF INCOME income is the next Aside from knowing the classification of the taxpayer, the source aa of without. The important thing to determine—whether it is from within the Philipp following rules apply: in and without the 1. Domestic corporations are taxable on income from sources within an‘ Philippines. 2. Foreign corporations whether resident or non-resident, are taxable only on income from Philippine sources. A partnership other than a general professional partnership is considered a corporation and is taxable as such. Source of Income Corporation Within tthe Phil. __ Without the Phil. 1, Domestic ial’: v 2. Foreign v 140 Scanned with CamScannerCATEGORIES OF INCOME AND TAX RATES 1. Business income. Generally, business income earned by a corporation is taxed at the following rates (Sections 27(A), 28(A)(1) and 28(B)(1)): Year Tax Rate 1997 35% 1998 34% 1999 33% 2000 - Oct. 2005 32% Nov. 2005 - 2008 35% 2009 30% The table below shows the specific tax rates on business income of corporate taxpayers (domestic and resident foreign): T texnnte Tax Base ae a. InGeneral 30% | Taxable income from All Sources », Minimum Corporate Income Tax 2% | Gross Income | .Improperly Accumulated Earnings 10% __| improperly Accum. Taxable Income _| 2. Proprietary Educational institution 10% | Taxable income from All Sources 3. Non Stock, Non-Profit Hospital 10% | Taxable Income from All Sources 4. GOCC, Agencies & instrumentalities (see 1a-1b) | 5. National Government & LGUs (see 1a-1b) | 6. Taxable Partnership (see 1a-1b) 7, Exempt Corporation a, On Exempt Activities 0% | Taxable Income b. On Taxable Activities {see 12) & General Professional Partnerships Exempt 9. Corporation covered by Special Laws Rate specified under the respective ; special laws RESIDENT FOREIGN CORPORATION r ‘a. In General 30% | Taxable income from within the Phils , Minimum Corporate Income Tax 2% | Grossincome «. Improperly Accumulated Earnings 10% __| improperly Accum. Taxable Income 72. International Carriers 2.50% | Gross Philippine Bilings 3. Regional Operating Headquarters 103% | Taxable Income | 4. Corporation covered by Special Laws Rate specified under the respective special laws | 5. Offshore Banking Units (OBUs) 10% | Gross Taxable income on Forelen | E Currency Transaction 30% | On Taxable income Other than Foreign Currency Transaction 6. Foreign Currency Deposit Units (FCDU) | 10% | Gross Taxable income on Foreign Currency Transaction 30% | OnTaxable Income Other than Foreign Currency Transaction 141 Scanned with CamScannerty final tax. These are d 0 a, separate 3 to be included in ject t om ive income is \ 2 Passive income. Passive income |: 0%. Passi taxed at fixed rates ranging from 5% to 2 gross income computation. Co Oe get (i al ence Resident (ON PASSIVE INCOME Domenic | roreies__ Interests Interest from deposits and yield or any other monetary benefit from deposit substitutes and from trust. funds and similar 20% arrangements 18 Interest income from a depository bank under the expanded foreign currency deposit systen:. 750% 7.50% Income derived by a depository bank under the expanded foreign currency deposit system from foreign currency transactions with local commercial banks, including branches of foreign banks that may be authorized by the Bangko Sentral ne i Pilipinas (BSP), including interest income i baer 1 10%, 20% 20% ‘i : Royalties ki Dividends 4 Dividends received by a domestic/resident foreign corporation from a domestic corporation. Capital Gains ‘On the net capital gain from sale, exchange or other disposition of shares of stock in a domestic corporation not traded in the stock ‘exchange Not over P100,000 5% 3% ‘Amount in excess of P100,000 10% 10% Exempt Exempt (On the capital gain presumed to have been ( realized on the sale, exchange or disposition of lands and/or buildings not actualy used in the business and treated as capital assets, the higher value between Gross selling price, and Fair market value as determined by the Commissioner 6% 142 Scanned with CamScannerJ, Note that the Income tax treatments for domestic and resident foreign corporations are almost the same, But remember that resident forelgn corporations are taxed only on thelr Income within the Philippines, Passive Income of non-resident corporations Is discussed near the end of this chapter 2 Interest Income from long-term deposit or Investment shall be subject to 30% FWT if received by a non-resident foreign corporation (Sec. 3, Revenue Regulations 14-2012, Nov. 7, 2012) 3, Interest Income received by a domestic corporation or resident foreign corporation from long-term deposits not issued by banks or Investment certificates that are not considered deposit substitutes shall be subject to 20% Creditable WT and reported as part of taxable Income subject to regular corporate income tax of 30% (Sec, 4, Revenue Regulations 14- 2012, Nov, 7, 2012) Mustration. Source: Hance de Oro vt. al. vs. Repubile of the Philppines wt. al, Supreme Court (En Bane), 6.8 In 2001, the Caucus of Development NGO Networks (CODE-NGO) requested the approval of the Department of Finance for the Issuance by the Bureau of Treasury (BTr) of 10-year zero-coupon Treasury Certificates. Initially, these Treasury Certificates were to be purchased by a special purpose vehicle, on behalf of CODE-NGO, repackaged, and sold at a premium to investors as ‘Poverty Eradication and Alleviation Certificates or the PEACe Bonds’ On May 31, 2001, the BIR issued BIR Ruling 020-2001 in response to CODE-NGO's queries as to the tax tugatment of the proposed PEACe Bonds. The BIR confirmed that the PEACe Bonds would not be classified a5 deposit substitutes and would therefore not be subject to the 20% final withholding tax (FW), In light of the representation that the PEACe bonds will be issued to only one entity, Le. CODE-NGO. The tax treatment of the PEACe Bonds was reiterated in BIR Rulings Nos, 035-2001 and DA-175:01, which held that to determine whether debt instruments and securities are deposit substitutes, the “20 or more individual or ‘corporate lenders” rule must apply. The BIR added that the determination of the phrase “at any one time” for purposes of determining the "20 or more lenders” is to be determined at the time of the original issuance. ‘An auction was conducted and Rizal Commercial Banking Corporation (RCBC), on behalf of CODE-NGO, ‘emerged as the winning bidder. CODE-NGO and RCBC Capital Corp. (RCBC Capital) entered Into an underwriting agreement whereby the latter was appointed the Issue Manager and Lead Underwriter for the offering of the PEACe Bonds. RCBC Capital sold the Government Bonds in the secondary market. Petitioner bbanks purchased the PEACe bonds on different dates. ‘Shortly before the maturity of the PEACe bonds, and in response to a query by the Department of Finance, the BIR issued Ruling 370-2011, which declared that the PEACe Bonds are deposit substitutes subject to the 20% FWT on the discount or interest earned, and directed the BTr to withhold said FWT at maturity. ‘Subsequently, the BIR clarified in Ruling DA-378-2011 that the liability for the FWT should be imposed not only on RCBC/CODE-NGO, but also on all subsequent holders of the PEACe Bonds. The BIR held that all treasury bonds, including the PEACe bonds, regardless of the number of purchasers/lenders at the time of rigination/issuance, are considered deposit substitutes, and that the interest on these deposit substitutes are subject to the 20% FWT. On Oct. 28, 2011, the Supreme Court Issued a temporary restraining order enjoining the implementation of BIR Ruling 370-2011 against the PEACe Bonds, subject to the condition that the 20% FWT on interest income shall be withheld by the petitioner banks and placed in escrow pending resolution of the petition. 143 Scanned with CamScannerper banks 10 petition ve Btr paid 0% FWT, and that the g Petitioner banks allege that on the samve day the TRO War i pond af tna 2 ; bondholders the amounts representing the face value & refused to release the amounts corresponding to the 2 oth 20% FWT? Does the "20 lender rule” inciuy, ‘Are the PEACe Bonds considered ‘deposit substitutes’ subleet "2 trading of the bonds in the secondary market? a + gepending on deposi substitutes: are ry or fre number of lender scondary market The PEACe Bonds may or may not constitute Me any one time.” The “20 lender rule” applies to every 14s ly ane time.” The “20 lender rule” applies to everY naw, domestle and fori, ” ah x code impose UPON IM e415 defined In Sec. 22(1) Sections 24(8)(1), 27(0)(1) and 28(A)(7) of the Tax Co¥ posit subsite, whic ¢ borrowing from twer corporations, respectively, a 20% FWT on Interest from der ‘public’ met 5 “ar aternatve for of tara tus rom the publ (8 27 Pi epost, hous the Issn, (20) or more individual or corporate lenders at any one time) vee ‘own ‘account eK ‘endorsement, or acceptance of debt instruments for the borrowe Pee in considered substitute ‘The number of lenders determines whether a debt instrument a for the purpose of determining and consequently subject to the 20% FWT. The phrase ‘an ony en din ‘the primary oF SEERTATY marke, whether the 20 lender rule applies, means every transaction ere in connection with the purchase or sale of securities the reckoning of '20 oF more bonds, Where the financial assets Involved are government securities romhase ov sale of the COVED lenders/investors is made at any transaction in connection with Bonds, such as; 4 to various lenders/investors in the 4. Sale and lstributin by Government Secu Hii Dealers (65) 12 secondary market; inthe b. Subsequent sale or trading bya bondholder to another enderinvestr In broker or dealer; or 5 to individu ests in the bonds to ual or €. Sale by a financial intermediary-bondholder ofits partlpation Interest? 1° corporate lenders in the secondary market secondary market usually through W id from 20 or mo yen, through an imultaneously obtaines ore hen, through any of the foregoing transactions, funds are smulMnee Te thar point, are deemed lenders/investors, there is deemed to be a public borrowing deposit substitutes. Consequently, the seller fb required to withhold the 20% FWT on the Hnpiited interest income from the bonds. The transactions executed forthe sale of the PEAGe Bonds are (a) the lauaies of the Hones Oy the BTr to RCBC/CODE-NGO, and (b) the sale and distribution by RCBC Capital on behalf of CODE-NGo of the PEACe Bonds to undisclosed investors. A reading of the underwriting agreement and RCBC term sheet reveals that the settlement dates for the sale and distribution by RCBC Capital to various undisclosed investors would fall on the same day when the PEACe Bonds were supposedly issued to CODE-NGO/RCBC. In reality, therefore, the entire borrowing received by the BTr in exchange for the PEACe Bonds was sourced directly from the undisclosed number of investors to whom RCBC Capital/CODE-NGO distributed the PEACe Bonds, ali at the time of origination or issuance. Should there have been a simultaneous sale to 20 or more lenders/investors, the PEACe Bonds are deemed deposit substitutes and RCBC Capital/CODE-NGO would have been obliged to pay the 20% FWT. The obligation to withhold the 20% FWT on the interest would likewise be required of any lender/investor had the latter turned around and sold said PEACe Bonds, whether in whole or part, simultaneously to 20 or more lenders or investors. However, interest income earned by individuals from long-term deposits or investments that have a holding period of not less than 5 years, is exempt from the FWT. a v Scanned with CamScannerrr If the bonds are found to be deposit substitutes, the proper procedure is for the BTr to pay the face value of the PEACe Bonds to the bondholders and for the BIR to collect the unpaid FWT from RCBC Capital/ CODE-NGO as withholding agents. The BIT is ordered to immediately release and pay to the bondholders the amount corresponding to the 20% FWT that it withheld on Oct, 1, 2011. Ifthe PEACe Bonds are considered ‘deposit substitutes,” is the BIR estopped from Imposing and/or collecting the 20% FWT? The BIR is not estopped from imposing and collecting the taxes. The three-year prescriptive period to assess and collect internal revenue taxes Is extended to 10 years In cases of (1) fraudulent returns, (2) false returns with intent to evade tax; and (3) failure to file a return, to be counted from the time of the discovery of the falsity, fraud or omission, Should it be found that RCAC Capital/CODE-NGO sold the PEACe Bonds to 20 or more lenders/investors, the BIR may still collect the unpaid tax from RCBC Capital/CODE-NGO within 10 years after discovery of the omission. Mlustration. Source: BIR Ruling 443-2011, Nov. 11, 2011 'S Savings and Loan Association (S-SLA) derives interest income from bank deposits and monetary benefit from deposit substitutes. Is S-SLA exempt from the 20% FWT on interest income from bank deposit and yield, or any monetary benefit from deposit substitutes imposed under Section 27(D)(1) of the Tax Code? ‘Yes. Under Section 5 of Republic Act 8367, otherwise known as the “Revised Non-Stock Savings and Loan. ‘Associations Act of 1997," an association shall be exempt from payment of tax with respect to income it receives, including interest on its deposits with any bank, Illustration. Source: BIR Ruling 103-99, July 13, 1999 ‘On Aug. 23, 1998, Asian Bank Corp. requested for a ruling regarding the applicable rate of tax to be withheld on the interest income received by a Foreign Currency Deposit Unit (FCDU) from another Foreign Currency Deposit Unit (FCDU) on its foreign currency transactions. It is represented that Westmont Bank is a FCDU and Asian Bank is also a FCDU. Westmont Bank receives interest income from foreign currency deposit transactions from Asian Bank. Section 2.27(A) of Revenue Regulations 10-98 explicitly provides: “Interest income actually or constructively received by a domestic corporation or a resident foreign corporation from a foreign currency bank deposit shall be subject to a final withholding tax at the rate of 7.5% based on the gross amount of such interest income. On the other hand, par. (C) of said Section provides that income derived by an FCDU or an offshore ‘banking unit (OBU) from foreign currency transaction with residents of the Philippines, including local commercial banks, local branches of foreign banks, and other depository banks under the foreign currency deposit system, shall be subject to a final withholding tax of 10% based on gross income. In short, par. (A) refers to interest income derived by a domestic corporation or a resident foreign corporation from a depository bank under the foreign currency bank deposit system while par. (C) pertains to income derived by an FCDU or OBU from foreign currency transactions, such as interest income from lending operations including bank charges, commissions, service fees, and net foreign exchange transaction gains. ‘Accordingly, the BIR opined that interest income derived by Westmont Bank from foreign currency bank deposit with Asian Bank shall be subject to 7.5% final withholding tax while the interest income it derives from foreign currency transactions shall be subject to 10% final withholding tax. 145 Scanned with CamScanner‘ ‘ons, in gener! Domestic and Resident Foreign Corporations, '" Retr tornestc ta) ang income Generally, the pro-forma computation of the normal resident foreign corporations follows: Gross Income Led Less: Allowable Deductions ee Net Income ae Multiply by: Tax rate aie Tax Due a year accounting Period, ti. For domestic and resident corporations adopting the ee Trecifc date when specific egard to tne © 4 expenses for the fisca| taxable income shall be computed without Fr ani sales, purchases and other transactions occur. Their INCOME "7 each month of the year shall be deemed to have been earned and spent equal period. inning Nov. 1, 2005 (Ra et ay 10 Octobe 2005 ae we calendar or fiscal) followed, the be as follows (RMC 16-05, The corporate income tax rate of 35% becam 9337). This law presented a scenario where the mon under the rate of 32%. Regardless of the taxable year (cats formula for determining the total tax due for the year shall Feb. 21, 2006): 3% = Pw Taxable Income x No. of months covered by 32% “ 12 5% = 1 Taxable Income _x No. of months covered by 35% x 3! ca Px Total Tax Due per ITR aa Illustration: Warranty Corporation’s fiscal year ended Mar. 31, 2006. ee income of P600,000 for the fiscal year, its second year of operations. The aX payable for the fiscal year ended Mar. 31, 2006 is computed below: April - Oct. 2005: Nov. 2005 ~ Mar. 2006: ee = 250,000 x .35 = P 87,500 Total —pise.s00- Effective Jan. 1, 2000, the President upon the recommendation of the Secretary of Finance is allowing corporations to be taxed at fifteen percent (15%) of gross income on certain conditions. This is discussed in the next chapter. 146 Scanned with CamScannerDomestic and resident foreign corporations are subject to the minimum corporate income tax (MCIT), This is likewise discussed in the next chapter. Domestic Corporations, in Particular Real Estate Investment Trust (REIT), per Republic Act 9856 and Revenue Regulations 13-2011, is a stock corporation established in accordance with the Corporation Code of the Philippines and the rules and regulations promulgated by the SEC, principally for the purpose of owning income-generating real estate assets. For tax purposes, a REIT is considered a taxpayer engaged in the real estate business. Hence, real properties owned by a REIT are considered ordinary assets. Income-generating real estate means real property which is held for the purpose of generating a regular stream of income such as rentals, toll fees, user's fees and the like, as may be further defined and identified by the SEC. Investor securities mean shares of stock issued by a REIT or derivatives thereof. Overseas Filipino investor refers to an individual citizen of the Philippines who is working abroad, including one who has retained or reacquired his Philippine citizenship under R.A. 9225. Principat stockholder means a stockholder who is, directly or indirectly, the beneficial owner of more than 10% of any class of investor securities of the REIT combined. Public company means a company listed with the Exchange which has, upon and after listing, at east 1,000 public shareholders each owning at least 50 shares of any class and who, in the ‘aggregate, own at least 40% of the outstanding capital stock of the REIT at the initial year; provided, that the minimum ownership shall be increased to 67% within 3 years from its listing. Distributable income means net income earned for the taxable year, as adjusted for unrealized gains and losses/expenses and impairment losses and other items in accordance with internationally accepted accounting standards. Distributable income excludes proceeds from the sale of the REIT’s assets that are re-invested in the REIT within 1 year from the date of the sale. A REIT’s taxable net income means gross income /ess all allowable deductions (itemized or ‘optional standard deductions) and the dividends distributed by a REIT out of its distributable income as of the end of the taxable year as: (a) dividends to owners of the common shares; and {b) dividends to owners of the preferred shares pursuant to their rights and limitations specified in the articles of incorporation of the REIT. To qualify for the tax incentives under Section 5 of RR 13-2011, a REIT must: @. bea public company and maintain its status as a public company; b. for the DST incentive on transfer of real property provided for under Section 6 of RR 13-2011, enlist with an Exchange within 2 years from the date of initial availment of DST incentive and ‘maintain the listed status of the investor securities on the Exchange and the registration of the investor securities by the SEC; and ©. distribute at least 90% of its distributable income. 147 Scanned with CamScannerof a REITS distributati, To be deductible, the dividends distributed shauid Pt a int later than the last day og ‘income for the taxable year, and actually paid to the shate |! Neupaheadle the Sth month from the close of the taxable year sr batore the last day of the Sry distributable income after the close of a taxable year aNd OF OF aig on the Ist day Of sucy, ‘month following the clove ofthe taxable year shall be considered Tacable year the dividends deducts See 10 of RR 13-2011 mandates that the income ta conc On authorized agent bang from gross income should be placed in escrow in favor of the BIR WNT ery shalt maintain tne By the end of the Ard year from its listing, at the latest and there! ‘shalt not be allowed ay 67% minimum public ownership, Otherwise, dividend deduction from its taxable income tac of ters percens In general cash of property daasends pa yw nar pha Be mse OP Sane (10%), uniess: (a) the dividends are received by & NOn ae ine of les tha t6n perc foreign corporation entited to claim a preferential withhoMO® 18 ONe TO dome, (10%) pursuant to an applicable tax treaty, or (b) the dividends we Me ee corporation of resident foreign corporation, of an overseas — ‘overseas Filipino inve are exempt from income tax oF any withholding tax. In the ae Ue oe tne ap they are exempt from the dividends tax for sever (7) years from the aon withholding tax.of o Ail income payments to a REIT shail be subject to a lower Se oh Other incent», percent (1%). REITs shall not be subject to the minimum corporate 5 Of stoc incade reduces documentary stamp tax (OST) for transfers of rel property and aves &f So: to the REIT and exemption of REIT securities from the initial public offering The 10% tax on the taxable income is subject to limitation. If the gross income from ee wae business or other activity exceeds fifty percent (50%) of the total gross income derived from ail sources, the tax prescribed under Section 27(A) shall be imposed on the entire taxable income. Mhestration 1: SGB University, a proprietary educational institution, has @ gross income for the taxable year 2014 of P15 million. Of the total gross income, P5 million was derived from unrelated trade or business. Total deductions amount to P3 million. Gross Income 15,000,000 Less: Deductions Net Income P12,000,000 ‘Multiply by: Tax rate 4 Tax Due P i Li ‘The 10% tax rate applies because the gross income from de or business did not exceed the 50% limit of the total gross income (only rF )M/P1SM). Roa oes ra * nom grofit means no net income or asset accrues to or benefits any member or specific person, with all (et icomnn or seat dave to the nO ee * “ = a Scanned with CamScannerMlustration 2; in the preceding illustration, maintain all assumptions except that the institution's gross income derived from unrelated trade or business is P9 million. How much tax is due? Gross Income P15,000,000 Less: Deductions 3,000,000 Net Income 12,000,000 Multiply by: Tax rate (2009) hh Se 30R% Tax Due 3,600,000 ‘The gross income from unrelated trade or business is more than 50% of the total gross income. It is actually 60% (P9M/P15M). Hence, the tax rate that applies is the tax rate prescribed in Section 27(A). Unrelated trade, business or other activity means any trade, business or other activity, the conduct of which is not substantially related to the exercise or performance by such educational institution or hospital of its primary purpose or function. A proprietary educational institution is any private school maintained and administered by private individuals or groups with an issued permit to operate from the Department ‘of Education, Culture and Sports (DECS), or the Commission on Higher Education (CHED), or the Technical Education and Skills Development Authority (TESDA), as the case may be, in accordance with existing laws and rules and regulations. Mlustration. Source: Commissioner of Internal Revenue vs. St. Luke’s Medical Center, Inc., Supreme Court (Second Division) G.R. 195909 & 195960, Sept. 26, 2012; RMC 67-2012, Oct. 31, 2012; RMC 4-2013, Jan. 11, 2013 The BIR assessed Respondent st. Luke's Medical Center, Inc. (SLMC), a hospital organized as a non-stock and. ‘non-profit corporation, deficiency income tax for the year 1998. For failure to act on its protest, SLMC filed ‘Petition for Review with the CTA. The BIR claimed that SLMC was actually operating for profit and that its charitable services amount to only 13% of its total revenue. Hence, SLMC is liable for the 10% income tax on proprietary hospitals under Section 27(8) of the Tax Code, which provides that “Proprietary educational institutions and hospitals which ‘are non-profit shall pay a tax of 10% on their taxable income” except for passive income, which shall be subject to final taxes. ‘On the other hand, SLMC argued that itis exempt from income tax as an institution for charitable and social ‘welfare purposes under Sections 30 (E) and (G) of the Tax Code. Thus, the Tax Code exempts from income taxa “non-stock corporation or association organized and operated exclusively for xx charitable xx purposes 2%, no part of its net income or asset shall belong to or inure to the benefit of any member, organizer, officer or any specific person” and a “Civic league or organization not organized for profit but operated exclusively or the promotion of social welfare.” The CTA ruled that SLMC is exempt from income tax as it is covered by Section 30(E) and (6) of the Tax Code, as evidenced by the primary purposes stated in its Articles of Incorporation and various documents Identifying SLMC as a charitable institution. The CTA ruled that the generation of income does not per se destroy the charitable nature of SLMC. 's SLM exempt from income tax under Section 30 (E) and (G) of the Tax Code? No. SLMC is not exempt from income tax under Section 30(E) and (G) of the Tax Code. Instead, it is subject to the 10% income tax on proprietary hospitals, ‘ 149 Scanned with CamScannermust meet the follow, tion % le Intl cgi £ACsivey joe ait and 4) 10 Part of hs na 1) IL must bo a non-stack corporation OF ie purposes! ny charitable P or any specif Perse, poses; 4) it must be oneratad exclusively 10 ber, OTNAniEe: ae enetion mune Income oF asset shall Belong oF inure to the id oan incon (2% st be “operated exclusively” for social welfare fas shown by Its Articiog Although SLMEC is organized as « non-stck ond nonvprott charitable HUNT Y isvaly for chartaniy Incorporation, laws and ater eanattive dacnents #088 ty ggcion 27 (8) of he Ta, wrposes, Hene incom tax at the 1a 1 tax since It had goo, eg is SME lb for oa a sch defen for" ourely cherhtane, lowever, it is not Hable weharge and in cor pe reasons to rely on the 1990 letter of the Bilt, whic OP and social welfare purposes,” ns In Section 30(E) ang Notwithstanding the income tax exemption of charitable and social welf ae mt aph of Section 3, (G) of the Tax Code on their operations (ie, their regular activities), We ae ea or persona, oy Provides that their income of whatever kind and character from any of thelt ie ‘of such Income, shall be from any of their activites conducted for profit regardless of the disposition MMT a so4, preterany subject to income tax. Rather than the 30% regular corporate Income f2% fate under Section 27(8) shall apply it organizations operat Per Revenue Memorandum Circular 4-2013, all hospitals and non-stock, pelea eeeavalkiation ae hospitals which were issued taxvexempt rulings by the BIR shall submit @ anaes ganization |s registered tarexempt status by submitting the following documents to the RDO wht 40 of the Tax Code under which it seeks Lutter application which must state the speeifie paragraph of Section . ‘exemption, a b. Contes ofthe corporation's latest Aticesof Incorporation and By Laws duly certified bythe € BIR Certificate of Registration; , 6. Tax Oearance sued by the Revenue District Office where the corporation registered: | ‘© Copies of income Tax Returns oF Annual Information Returns and Financia Statements 7 1, statement ofits modus operandi stating therein its sources of revenues led Corporations, ¢_Instrumentalities {GOCCs). Subject to the provisions of existing special laws or general laws, all corporations, agencies, or instrumentalities owned or controlled by the Government shall pay such rate of tax upon their taxable income as are imposed by the Code upon corporations or associations engaged in a similar business, industry or activity. The following are exempt: Government Service Insurance System (GSIS), Social Security System (SSS), , Philippine Health and Insurance Corporation (PHIC), Philippine Charity Sweepstakes Office (PCSO), PCSO Is no longer exempt from income tax under TRAIN. — 5. Local Water Districts (LWD). Seer Republic Act 10026 granted income tax exemption to local water districts (LWO). The law mandates that the amount saved due to the exemption shall be used by the local water districts for capital equipment expenditure that will result to an expanded water services coverage and improved water quality in the provinces, 150 Scanned with CamScannercities, and municipalities. It also required the water districts to adopt internal control reforms that would bring about their economic and financial viability. The act further directed the water districts not to increase by more than twenty percent (20%) a year its appropriation for personal services, as well as for travel, transportation or representation expenses and purchase of motor vehicles. Mustration. Source: Philjypine Ay wrt (En Bane), GR. 215427, Dec 10, 2014 nent and Gaming Corporati pure On Mar. 15, 2011, the Supreme Court (PAGCOR vs. BIN, G.R. 172087) ruled that R.A 9237 Is valid and constitutional insofar as it amends Sec. 27(c) of the Tax Code of 1997 by excluding petitioner PAGCOR from the enumeration of government-owned and -controlied corporations (GOCCs) that are exempt from corporate income tax. The Supreme Court declared that PAGCOR Is liable for corporate income tar without making any distinction as to the nature of the income subject to tax. On the basis of this decision, the BIR issued Revenue Memorandum Circular 33-2013, Apr 17, 2013, which provides that PAGCOR is no longer exempt from corporate income tax, and that its income frorn operations and licensing of gambling casinos, gaming clubs and other similar recreation or amusement places, gaming pools and other related operations, and other income not connected with the foregoing operations are ‘subject to the corporate income tax under the Tax Code. RMC 33-2013 also prescribes that PAGCOR is subject to the 5% franchise tax pursuant to its Charter, Presidential Decree (PD) 1869, on gross revenue or ‘earnings it derives from its operations and licensing of gambling casinos, gaming clubs and other similar recreation or amusement places, gaming pools and from other related operations. PAGCOR sought clarification from the Supreme Court and alleged that the RMC is an erroneous interpretation and application of the Mar. 15, 2011 Supreme Court decision. Js the income earned by PAGCOR from gaming operations and other related services subject to both income tax under the Tax Code and the 5% franchise tax under its Charter? No. PAGCOR's i jamning ect to the 5% franchise tox, in lieu of all national and local taxes, pursuant to its Charter. On the other hand, its income from other related services is subject to the corporate income tax under the Tax Code. PAGCOR's exemption in Sec. 27(c) of the Tax Code, before its amendment by R.A. 9337, only pertains to income tax on revenues from other related services and not on the revenues from gaming operations. This is because the tax exemption for the income from gaming operations is granted in PAGCOR’ Charter, which imposes a 5% franchise tax on the gross revenues derived from its operations conducted under the franchise, in lieu of all taxes of any kind, which necessarily includes corporate income tax. The exemption attached to the income from gaming operations existed even before the enactment of the Tax Code. ‘There is no conflict between P.D. 1869 and R.A. 9337 because the former imposes the 5% franchise tax on the gross revenues derived from PAGCOR’s operations conducted under its franchise, in lieu of all taxes of any kind, while the latter merely reinstates the income tax imposed by R.A. 8424 on PAGCOR's income from other necessary and related services, shows, and entertainment. A special law, j.e., PAGCOR’s Charter, prevails over a general law, i.e., R.A. 9337, regardless of their dates of ‘passage, and the special law will be considered as an exception to the general law. Without any categorical repeal or amendment in R.A, 9337 of the income tax exemption of PAGCOR, its income tax exemption remains. Hence, PAGCOR’s income derived from gaming operations is subject only to 5% franchise tax in accordance with its Charter. With respect to PAGCOR’s income from operation of other related services, the same is subject to income tax only, pursuant to its Charter which provides that any income from other related 151 Scanned with CamScannerjdered a5 a separ pouid be cons : yz, but shou! yichise 2% services shall not be Included as income subject to the f2 income subject to income t LM). RMC 11-20; are as folloy,. Power Sector jabilitie: tions of the psALM, they lows 3a Clarifies the income tax consequences of tran: 1 power corporation (Np tional ) generation assets and other real properties to wil 4 other eat properties, pri ts and 0 i 2. The rental income of PSALM from the NPC wenerain” ne to its sale to winning bidders, is subject to income t ition facilities is subj. the genera! ct 3. Any income to be derived by PSALM from the operation toi Ka (0 Income tax and withholding tax sain shall administ ea the transferred genera evecirie Pr company with cespect 10 Its sal serra pur GOCCS exert fFOM Icom ton derived from such ts SUBJectt0 Income inc ang Prior to privatization of the NPC assets transfert operate the same. PSALM will be sell assets and, thus, PSALM will be treated a generated electric power, Since PSALM is no! tax under Section 27 (C) of the Tax Code, any tax forma as forfeiture of per nce 4. Other income or receipts from miscellaneous activities, ee bidders, and from othe, bonds, interest income from persons other than the wa cable taxes under the Ta, activities not related to PSALM's mandate are subject to al 2P! Code. . ject to the regula Mutual Life Insurance Companies. These companies are now SUD! corporate income tax rates. Homeowners’ Association. Association or condominium dues, menpersin oe Sather assessments or charges, which are held initshUMiexeaiaannnt aa oon fefielised solefy for administrative exaeseatare ercCacemmcMa NG aon Ty fegpekation’s ‘gross Income, ance) nobisdblereLtoMocamemamaae anno e (Officemetro Philippines, Inc. vs. Commissioner of Internal Revenue, Court of Tax Ap {Third Division) Case 8382, June 3, 2014). Earlier, the BIR, in RMC 9-2013, stated that the amounts paid as dues or fees by members of a homeowners’ association form part of the gross income of the latter and is subject to income tax, considering that a homeowners’ association furnishes its members with benefits, advantages, and privileges in return for such payments. Pursuant to Section 18 of R.A. 9904, association dues and income derived from rentals of the homeowners’ associations’ properties may be exempted from income tax, VAT and percentage tax subject to the following conditions: 152 Scanned with CamScanner1, The homeowners’ association must be @ duly constituted “association” as defined under Section ab) of R.A, 9904; 2. The loc al government unit having jurisdiction over the homeowners’ association must issue 2 Certification identifying the basic services being rendered by the homeowners’ association, and stating in the said certification its lack of resources to render such services despite its clear mandate under applicable laws, rules and regulations; 3. Such services must fall within the purview of the term “basic community services and facilities", which is defined under Section 3(d) of R.A. 9904 as referring to services and facilities that redound to the benefit of all homeowners and from which, by reason of practicality, no homeowner may be excluded such as, but not limited to: security, street and vicinity lights, maintenance, repairs and cleaning of streets, garbage collection and disposal, and other similar services and facilities; and The homeowners’ assaciation must present proof (i.e, financial statements) that the income and dues are used for the cleanliness, safety, security and other basic services needed by the members, including the maintenance of the facilities of their respective subdivisions or villages, Recreational Clubs. RMC 35-2012 clarifies the taxability of clubs organized and operated exclusively for pleasure, recreation, and other non-profit purposes. Income from whatever source, including but not limited to membership fees, assessment dues, rental income and service fees, of clubs organized and operated exclusively for pleasure, recreation, and other non-profit purposes, are subject to income tax. Resident Foreign Corporations, In Particular International Carrier. Per Republic Act 10378 (passed into law on Mar. 7, 2013 and took effect on Mar. 29, 2013) and Revenue. Regulations 15-2013 (issued Sept. 30, 2013), an international carrier doing business in the Philippines shall pay a tax of two and one-half percent (2.50%) on its Gross Philippine Billings (GPB) as follows: 1. International Air Carrier? — Gross Philippine Billings refers to the amount of gross revenue derived from passage of persons, excess baggage, cargo, and mail, originating from the Philippines in a continuous and uninterrupted flight, irrespective of the place of sale or issue and the place of payment of the passage documents: Provided, That passage documents or tickets revalidated, exchanged and/or endorsed to another on-line international airline shall be included in the taxable base of the carrying airline and shall be subject to the Gross Philippine Billings tax if the passenger is lifted/boarded on an aircraft from any port or point in the Philippines towards a foreign destination: Provided, further, That for a flight which originates from the Philippines, but transshipment of passenger, excess baggage, cargo and/or mail takes place elsewhere in another aircraft belonging to a different airline company, the GPB shall be determined based on that portion of the * An International Air Carrier refers to a foreign airline corporation doing business in the Philippines which has been granted landing rights in any Philippine port to perform international air transportation services/activities or flight operations anywhere in the world. On-line carriers refer to international air carriers having or maintaining flight operations to and from the Philippines. Off-line carriers refer to international air carriers having no flight operations to and from the Philippines. 153 Scanned with CamScannerpoint i the PINPDINES Yo thy revenue corresponding to the leg flown from an point of transshipment. ns gross revenue Wheth,, jeans BF 2. International Shipping? — Gross Philippine Lhe ines up to final destinatig,, for passenger, cargo or mail originating fie be passage OF freight documents, regardless of the place of sale or payments lippines may avail of Provided, That international carriers doing business IN ee ina gross revenue preferential rate or exemption from the tax herein wile aggage on the basis of a, derived from the carriage of persons and their exces TET philippines is applicable tax treaty or international agreement 1 international Carrier, Whore signatory or on the basis of reciprocity such that an ine yeaa home country grants income tax exemption to Philippine exempt from the tax imposed under this provision. Mlustration. Source: BIR TAD Ruling 212-11, Aug. 15, 2011 providing alr transportation services 2°¢ Subject to the The gross Philippine billings of a Korean corporation pr ings of a Korean corpor erextresty 1.5% preferential Philippine income tax rate under the RP-Kore Mlustration. Source: BIR ITAD Ruling 071-11, Mar. 2, 2011 derived by a resident o Article 9 of the RP-US Tax Treaty provides that the Philippines may tax the reach Manel ocome ta, the US from the operation of aircrafts in international trafic in the Philippines, otirk thereof, or the that may be imposed on such profits shall not exceed te lesser of 15% f the Bross ATEN te lowest rate of income tax imposed by the Phiippines on such profits derives Py Area SE tay ‘under similar circumstances. Since the Philippines has not yet granted 3 esta the Gre Profits from the operation of aircrafts in intenational traffic, the rate of income tax that applies 10 the Gre of a US company is 1.5% Offshore Banking Units (BUS). Income derived by offshore banking units authorized by the BSP, from foreign currency transactions with local commercial banks, including branches of foreign banks that may be authorized by the BSP to transact business with offshore banking units, including any interest income derived from foreign currency loans granted to residents, shall be subject to a final income tax at ten percent (10%) of such income. ? An International Sea Carrier refers to a foreign shipping corporation doing business in the Philippines, having touched or with the intention of touching any Philippine port, to perform international sea transportation services/activities from the Philippines to anywhere in the world and vice versa, in the case of on-line carriers; or having maintained business establishments, agents or representative offices in the Philippines for the sale of owned tickets/passage documents or tickets/passage documents of other shipping companies, which shipping companies operate without touching any Philippine port, in the case of off-line carriers. Scanned with CamScannerBranch Profits Remittances. Any profit remitted by a branch to its head office shall be subject to @ tax of fifteen percent (15%) which shall be based on the total profits applied oF earmarked for remittance without deduction for the tax component thereof (except those activities which are registered with the Philippine Economic Zone Authority). Regional Operating Headquarters (ROHQs) shall mean a branch established in the Philippines by multinational companies which are engaged in any of the following services: general administration and planning, business planning and coordination; sourcing and procurement of raw materials, and components; corporate finance advisory services; marketing control and sales promotion, training and personnel management; logistic services; research and development services and product development; technical support and maintenance; data processing and communication, and business development. Regional operating headquarters shall pay a tax of ten percent (10%) of their taxable income Regional or Area Headquarters (RHQs) shall mean a branch established in the Philippines by multinational companies and which headquarters do not earn or derive income from the Philippines and which act as supervisory, communications and coordinating center for their affiliates, subsidiaries, or branches in the Asia-Pacific Region and other foreign markets. Regional or area headquarters as such shall not be subject to income tax. Mustration. Source: BIR Ruling 047-01, Sept. 28, 2001 ‘The regional headquarters to be established by Caltex (Asia) Limited (CAL) will be exempt from income tax as long as its billing to Caltex Operating Companies (COCs) will not include any fees or compensation paid to RHQ for services rendered or performed, but more of reimbursement of their share in the allocated RHO. ‘expenses, provided further that there would be no excess of the amount received from the COCs for the costs of operating the RHQ as its costs will be shared among the COCs and therefore should not result to any income. Non-Resident Foreign Corporation, in General The basis of tax for non-resident foreign corporations is gross income from sources within the Philippines, such as interests, dividends, rents, royalties, salaries, premiums (except reinsurance premiums), annuities, emoluments or other fixed or determinable annual, periodic or casual gains, profits and income, and capital gains. Generally, the pro-forma computation of the income tax of non-resident foreign corporations follows: Gross Income 200 Multiply by: Tax rate 30% + Tax Due 2K Under Section 42(A)(3) of the Tax Code, income from services is considered derived from sources within the Philippines only if the services are performed in the Philippines. 155 Scanned with CamScannerign corporation eng t foreign CO! ire| resident iain Ruling 458-2012 , July y a non-resET (Bl Hence, income from services performed b i outside the Philippines is exempt from Philippine 10, 2012). aration vs. commission® Mlusteation. Source: Be re considered income fo, Satie bin src es pal abn rlent orsgn ENDOCR m ‘sources within the Philippines that are subject to 30% Pwr. F Is not the residence of y sonal services i rsomihe place of payment, but thes). The important factor that determines the source of income of Pe ‘ome is determined by the situs whe, is entered into, ayor, or the place where the contract for servic ‘ pay place where the contract in of ince where the services were actually rendered. The source oF Ori the activity or service was performed, ‘communication time The activity that produces the income i the undertaking of providing satcONE CETTE be delivered by the NRFC and utilized by Aces and its subscribers in the PRIIPPO TS ac vereg can satelite airtime for voice or data calls but exclude satelite utilzation WME 7 a ines. the evidencs and incomplete call. Thus, the activity that produced the income took PIAEE 1 Te per chou resented by Aces is insufficient to support its claim that the service fees P “ considered as income from sources outside the Philippines. i Aces failed to present Moreover, the 7.5% FWT under Sec. 28(8)(4) of the Tax Code will not Se rent Face evidence fo prove that the fee paid to the NRFC is for the use of equipment. The Peres pleted dig ‘ot stipulate that the payment of satellite airtime fees is for the rental or use of the NRFC. Non-Resident Foreign Corporation, in Particular Non-Resident Cinematographic Film Owner, Lessor or Distributor is taxed at 25% of gross income. Non-Resident Owner or Lessor of Vessels Chartered by Philippine Nationals is taxed at four and one-half percent (4.50%) of gross rentals, lease or charter fees from leases or charters to Filipino citizens or corporations, as approved by the Maritime Industry Authority. Non-Resident Owner or Lessor of Aircraft, Machinery and Other Equipment is taxed at seven and one-half percent (7.50%) of gross rentals, charters and other fees. Mlustration. Source: 81R Ruling 337-2011, Sept. 7, 2011 Rental payments to a nonresident foreign corporation, for the lease of electronic g subject to the 7.5% FWT pursuant to Section 28(B)(4) of the Tax Code, ing equipment, are IMlustration. Source: 6/R Ruling DA-ITAD-13-05, Feb, 16, 2005 ‘A Japanese company performs maintenance services in Japan for its client Philippine company and transmits the same electronically through recorded media, The following maintenance services shall not be subject to income tax and VAT in the Philippines 156 Scanned with CamScanner1. provision of updated versions; 2. technical consultation via telephone, fax or e-mail; 3. technical training; and 4, annual platform changes. Non-resident foreign corporations are liable to income tax imposed in the Philippines only on income from services performed in the Philippines. Mustration. Source: BIR Ruling 09-2005, July 28, 2005 A domain name service company that merely renders administrative functions that do not involve any transfer of technology, equipment or property to Its subscribers is classified as engaged in the sale of services, not of goods, Anon-resident foreign corporation performing domain name services outside of the Philippines shall not be subject to Philippine taxation even on fees collected in the Philippines from Philippine-based clients. The Philippine company, acting, as agent for and on behalf of the non-resident foreign domain name service company, shall not be subject to Philippine income tax on service fees collected for its principal. However, the Philippine company’s gross commission earned for collecting such fees shall be subject to the regular corporate income tax and the 10% VAT (now 12%). Passive Income of Non-Resident Foreign Corporation 1. Interest on foreign loans contracted on or after Aug. 1, 1986 are taxed at 20%. Interest arising from a loan extended by a US corporation to a domestic corporation, which is guaranteed by the US Eximbank, is exempt from Philippine income tax pursuant to the RP-US Tax Treaty. Interest on a loan paid by a domestic corporation to the Export-Import Bank of Korea is exempt from Philippine income tax pursuant to the RP-Korea Tax Treaty. Under the RP-Japan Tax Treaty, interest on foreign loans will qualify for the 10% preferential tax rate if the recipient of such interest is also the beneficial owner. Interest payments made by a domestic corporation to a Belgian corporation are subject to the 10% preferential WT rate under the RP-Belgium Tax Treaty. Under Article 11(2) of the RP-Singapore Tax Treaty, interest payments arising in the Philippines and paid to a resident of Singapore are entitled to the preferential tax rate of 15% of the gross amount of interest, provided the debt-claim in respect of which the interest is paid is not effectively connected with a permanent establishment (PE) which the recipient has in the Philippines. Interest payments arising in the Philippines and paid to a resident of Thailand are entitled to the 15% preferential tax rate pursuant to Article 12(2)(b) of the RP- Thailand Tax Treaty. 157 ‘ Scanned with CamScanner2. Dividends ,. ece at 15% on ie rom a domestic corporation is subject to a final withholding , I€ Condition which the non-resident fo, Corporation is domiaiee that the country in a re fr en Fesident foreig shall allow a credit against the tax due from the ," Corporation t have been paid in the Phijj equi ‘axes deemed to have PPin, 2005, 20% 2 20% for 1997, 19% for 1998, 18% for 1999, 17% for 2000 ts 0. z °F Nov. 2005 to 2008 and 15% for 2009. es ct Fie! the RP-Netherlands Tax Treaty provides that dividends paig ye Netherlands, near’ *© the beneficial owner of the dividends, which is a resident is dividends if tro” 2° '@Xed at a rate not exceeding 10% of the gr0ss amount of the TGs if the recipient is a company which holds directly at least 10% of 4," ca Capital of the company (excluding cooperatives) paying the dividends. In allo), ses, the rate shall not exceed 15%, ea the RP-Germany Tax Treaty, the Philippines may tax dividends paid by - PPine company to a German company at a rate not exceeding 10%, if th. German company directly holds at least 25% of the voting shares of the Philipping company. Under the RP-korea Tax Treaty, dividends paid by a domestic corporation to 4 Meaant, of Korea are subject to the tax eta ef tom! onithe Bross amount of dividends if the resident of Korea is a company (other than a Partnership) directiy holding at least 25% Of the capital of the domestic company. Under Article 10) (2)(a) of the RP-Switzerland Tax Treaty, dividends arising in the Philippines and p: aid to a resident of Switzerland may be taxed in the Philippines t 3 rate not to exceed 10% of the gross amount of the dividends, if the recipient of the dividends is a company (excluding partnerships) which directly holds at least 10% of the capital of the paying company. Under the RP-Singapore Tax Treaty, the Philippines may tax dividends paid bya Philippine company to a Singaporean company at a rate not exceeding 15%, if the Singaporean company is the beneficial owner of at least 15% of the outstanding shares of the voting stock of the Philippine company. Dividends paid by a Philippine company to an Australian and a Hong Kong company shall be subject to the 15% FWT. Dividends paid by a domestic corporation to a resident of the Bermuda and Cayman Islands are subject to the 15% FWT under Section 28(B)(5)(b) of the Tax Code. Dividends paid by domestic corporations to a Swiss foundation are subject to 15% FWT. Under the RP-US Tax Treaty, dividends paid by a Philippine corporation to a US resident are subject to the 20% preferential tax rate if during the part of the Philippine corporation’s taxable year which precedes the date of payment of the 158 Scanned with CamScannerOe dividend and during the whole of its prior taxable year, if any, the US corporation ‘owns at least 10% of the outstanding shares of the voting stock of the Philippine corporation, Capital gains from sale of shares of stock not traded in the stock exchange. A final tax at the rates prescribed below is imposed upon the net capital gains realized during the taxable year from the sale, barter, exchange or other disposition of shares of stock in a domestic corporation, except shares sold, or disposed of through the stock exchange: Not over P100,000 5% On any amount in excess of P100,000 10% Income derived by a bank from its FCDUs/EFCDUs or OBUs with respect to foreign currency transactions with non-residents, OBUs in the Philippines, and local commercial banks, including branches of foreign banks authorized to transact business with FCDUs/EFCDUs, are exempt from income taxes. Royalty payments made by a PEZA-registered enterprise to a non-resident Japanese corporation are subject to the preferential tax rate on the gross amount of the royalties under the RP-Japan Tax Treaty - Under Article 10 of the RP-Japan Tax Treaty, royalty income derived in the Philippines by a corporation which is a resident of Japan shall be taxed at either one of the following preferential rates: a, 10% if the payor-company is an entity registered with the Board of Investments (BO!); b, 15% if the payments are with respect to the use-or the right to use cinematographic films and films or tapes for radio or television broadcasting; and ¢. 25% inal other cases. However, the Protocol amending the RP-Japan Tax Treaty reduced the 25% tax rate to 10% effective Jan. 1, 2009. Payments for the use of a patent, trademark, design or model, plan, secret formula or process are subject to 10% preferential tax rate on royalties under Article 12(2)(b) of the RP-Japan Tax Treaty. Royalties paid by a domestic corporation to a US corporation are subject to the 10% preferential tax rate pursuant to the most-favored nation clause of the RP-US Tax Treaty in relation to the RP-UAE Tax Treaty. Royalties paid by a Philippine company to a non-resident foreign corporation existing under the laws of the Netherlands are subject to the 10% preferential tax rate if the Philippine company is registered and engaged in preferred areas of activities, or to the 15% preferential tax rate in all other cases, pursuant to Article 12(2) of the RP-Netherlands Tax Treaty. Royalties paid by a domestic corporation to a French corporation are entitled to the 15% preferential tax rate under the RP-France Tax Treaty. 159 Scanned with CamScannerin the Philippir Article 11 of the RP-UK Tax Treaty provides that royalties ale but the i ce and paid to a resident of the UK may be taxed in the Sek of the royalties « may be imposed should not exceed: (a) 15% of the BT 870 and engageg ,, the royalties are paid by an enterprise registered with Pe, with respect 1, preferred areas of activity, or if the royal P and (b) 25% ;. cinematographic films or tapes for television oF 4 " all other cases, ities are , dio broadcasting, ications (TTRA) under RMO 1-2000 is nox under the treaty, provided the mplied with. The prior filing of a tax treaty relief appli mandatory before a taxpayer can avail of the benefits conditions for availment as prescribed in the treaty are CO! The Bureau of Internal Revenue (BIR) has previously required that a tax treaty relict must first be procured (at Jeast 15 days before the intended He with the International Tax Affai i applying the preferential t@x rates under 5 Division (ITAD) before applying Bra cinitraD shay the different tax treaties. Failure to make such an application wit subject the NRFC’s income to the usual tax rates. missioner of Internal Reve Mlustration. Source: Deutsche Bunk AG Manila Branch vs. Com er of Interna! Reve Court 6.R. 488550, Aug. 19, 2013 and Lindberg Subic, inc. vs. Commission Division) Case 8524, Feb. 11, 2014 ‘Our Constitution adheres to the general prncinles of international law as part ofthe law ofthe fd The time-honored international principle of pacta sunt servanda demands the performance © good faith of treaty obligations on the part of the States that enter into the agreement. Every treaty In force is binding upon the parties, and obligations under the treaty must be performed by them in good faith. More importantly, treaties have the force and effect of law in the Philippines. jons is bound to make in its legislations those ‘of the obligations undertaken, Thus, laws and ‘are accorded to the parties entitled Id negate the availment of the reliefs AA State that has contracted valid international obligati modifications that may be necessary to ensure fulfillment issuances must ensure that the reliefs granted under tax treaties thereto. The BIR must not impose additional requirements that woul provided for under international agreements. the TTRA under RMO 1-2000 should not operate to divest entitlement to the tar treaty provision/benefit, since to do so would constitute a violation of the duty required by good faith in complying with a tax treaty. The denial of the tax treaty availment for failure to apply within the 15-day period would impair the value of the tax treaty, At most, the TTRA should merely operate to confirm the entitlement of the taxpayer to the relief under the treaty. The obligation to comply with a tax treaty must take precedence over the objective of RMO 1-2000, Non-compliance with tax treaties has negative implications on international relations, and unduly discourages foreign investors. The 15-day period for ALLOWABLE DEDUCTIONS Allowable deductions are items or amounts which the law allows to be deducted from gross income in order to arrive at the taxable income. A domestic or resident foreign corporation may deduct from its business income, itemized deductions under the Tax Code. Or, these corporations may elect a standard deduction in an amount not exceeding forty percent (40%) of its gross income (R.A. 9504). Non-resident foreign 160 Scanned with CamScannercorporations are not allowed deductions from gross income. Discussions in another chapter. TAXABLE INCOME AND TAX DUE In case of corporations, taxable income is the pertinent items of gross income less the deductions authorized for such types of income. Taxable income is the amount or tax base upon which tax rate is applied to arrive at the tax due. Depending on the taxpayer involved and for purposes of computing the income tax liability of a corporation, taxable income may refer to either one of the following: 1, Net income. The income arrived at after subtracting from the gross income the deductions of the taxpayer. For domestic and resident foreign corporations, in general; and other corporations from whose gross income deductions are allowed, Sales/Revenues/Receipts/Fees 0K Less: Cost of Sales/Services 0K Gross Income from Operati 70K ‘Add: Non-Operating and Taxable Other Income. 2K Total Gross Income Less: Deductions Optional Standard Deduction or Itemized Deduction 2x Taxable Income 20% Multiply by: Tax Rate x%_ Tax Due X00 2. Gross income. The entire or gross income from business without any deductions for either optional standard deduction or itemized deduction. For domestic and resident foreign corporations subject to the MCIT; and non- resident foreign corporations not subject to the normal income tax rate (Section 28(B)(1). Gross Income 7K Multiply by: Tax Rate x% Tax Due 200 CORPORATION AVAILING OF OSD PER REV. REG. 8-2018 IMPLEMENTING TRAIN Mlustration. The gross sales of GEAL Corporation for 2018 amounted to P6,000,000, with cost of sales amounting to P4,000,000. It incurred operating expenses amounting to 1,000,000, and on the filing of its First Quarter Income Tax Return, it signified its intention to avail of the OSD. Computation of OSD and Tax Due follows: Gross Sales 6,000,000 Less: Cost of Sales 000,000 161 Scanned with CamScannerCORPORATIONS EXEMPT FROM INCOME TAX (Sectio! Gross Income Less: OSD (P2,000,000 x 40%) 1,200,000 Taxable Income Tax Due: 360,000 30% x P1,200,000 * OSD for corporation is based on gross nes , * Income tax rate of corporation is currently a n 30, NIRC) - ized principally for profit; Labor, agricultural or horticultural organization not organi resented by shares, ang tock rep a4 rated for mutual purpose: Mutual savings bank not having a caplt : : ized and ope! cooperative bank without capital stock organ and without profit; 1 the exclusive benefit of the yg under the lodge system, or a rganized by empIOYEeS PrOViding r benefits exclusively to the tock corporation or their A beneficiary society, order or association, operating for members such as fraternal organization operatin mutual aid association or a non-stock corporation for the payment of life, sickness, accident, or othe! members of such society, order, or association, OF non-st dependents; Cemetery company owned and operated exclusively for the benefit of its members; Non-stock corporation or association organized and operated exclusively for religious, charitable, scientific, athletic, or cultural purposes, OF forthe rehabilitation of veterans, no part of its net income or asset shall belong to or inure to the benefit of any member, organizer, officer or any specific person (Sec: 30 (E)); Revenue Memorandum Circular 51-2014, issued June 8, 2014, clarifies the inurement prohibition on tax-exempt non-stock and/or non-profit organizations (NSNPs) under Sec. 30 of the Tax Code: ‘Non-stock” means no part of its income is distributable as dividends to its members, trustees o officers, and that any profit obtained as an incident to its operations shall, whenever necessary 0: proper, be used for the purpose or purposes for which the NSNP was organized. “Non-profit” means that no net income or asset accrues to, or benefits, any member or specih person, with all the net income or assets devoted to the NSNP's purposes and all its activities an conducted not for profit. ‘Therefore, for an entity to qualify as an NSNP exempt from income tax under Sec. 30 of the Tax Code its earnings or assets shall not inure to the benefit of any of its trustees, organizers, officers, member cr any specific person. The following are considered “inurements” of such nature: 1. Payment of compensation, salaries, or honorarium to its trustees or organizers; 2. Payment of exorbitant or unreasonable compensation to its employees; 162 Scanned with CamScanner3, Provision of welfare aid and financial assistance to members. An organization is not exempt from income tax if its principal activity is to receive and manage funds associated with savings or investment programs, including pension or retirement programs. This does not cover a society, oder, association, or non-stock corporation under Sec. 30(C) of the Tax Code providing for the payment of life, sickness, accident and other benefits exclusively to its members or their dependents; 4. Donation to any person or entity (except donations made to other entities formed for a purpose/purposes similar to its own); 5. Purchase of goods or services for amounts in excess of the fair market value of such goods or value of such services from an entity in which one or more of its trustees, officers or fiduciaries has an interest; and 6. When, upon dissolution and satisfaction of all liabilities, its remaining assets are distributed to its trustees, organizers, officers or members. Its assets must be dedicated to its exempt purpose. Organizations enumerated under Section 30 of the Tax Code are exempt from the payment of income tax on income received by them as such organization. However, they are subject to the corresponding internal revenue taxes on their income derived from any of their properties, real or personal, or from any activity conducted for profit regardless of the disposition thereof, e.g. rental payment from their building/premises (RMC 76-2003, Nov. 14, 2003). Ilustration. Source: BIR Ruling DA-059-05, Mar. 2, 2005, ‘A non-stock nonprofit corporation (NSNP) shall be subject to the 32% income tax, withholding tax, value added tax (VAT), and documentary stamp tax (DST) on the sale of its share of condominium units and parking slots from its joint venture project with a developer even if the proceeds of the sale will be used exclusively in furtherance of its purpose as an NSNP organization. Income derived by an NSNP from any of its properties, real or personal, or any activity conducted for profit shall be subject to taxes regardless of the disposition of such income. They are also liable for the following final WT (RMC 76-2003, Nov. 14, 2003): (ON PASSIVE INCOME Interests Interest income from currency bank deposits and yield or any other monetary benefit from deposit substitute instruments and from trust funds and similar arrangements. 20% Interest income from a depository bank under the expanded foreign currency deposit system. 7.50% Royalties 20% Wlustration. Source: BIR Ruling 14-99, Feb. 1, 1999 In BIR Ruling 064-98 dated May 21, 1998, the BIR reiterated its previous ruling dated Feb. 27, 1996 (Ruling 26-96). ‘The two rulings opined that the Philippine National Red Cross (PNRC) is subject to the 110% VAT on its importations of goods and on its procurement of materials and services for its exclusive 163 Scanned with CamScannertuncome derived bY PNIC frp, ther monetary benefit fro, 10 20% fina ia, ), Also, inter ts or any 0 ise (Sections 106, 107 and 108 of the Tax Code of 1997) hall be subject to Currency bank deposits and yield from currency bank depos deposit substitutes and from trust funds and similar arto based on Section 27(0)(1) of the Tax Code of 1997, Hence, iv its Ruling 14°99 dated Fed, 19.0, 1264 otherwise knows ventioned In the preceding su vs, and other charges of aj aster Fellet Wor, On Jan, 18, 1999, the PNR requested for reconsideration 1999, the BIR revoked the two previous rungs. "An Act to Incorporate the PNRC™: “In furtherance of the roses Mi paragraphs, the PNAC shall be exempt from payment ofall duties, 880 ts dis Winds on all importations andl purchases for its exciusive use; on donations or WC arte Th and other Red Cross services; and in its benefits and fund rasing dives: al pe contrary notwithstanding.” on a(b) 0 PNRC’s tax exemption has not been withdrawn by Executive Order 98 which Ld ae Mar. 10, 1997, The withdrawal of all tax and duty Incentives granted to private entities rere 1 Ble Otie, Which are engaged In trade or business or In an economic actMity. it does not therefore, apy to PNAC which is a non-profit and charitable Institution. of trade, not organized for profi Business league, chamber of commerce, or board he benefit of any private and no part of the net income of which inures to tI stockholder or individual; Civic league or organization not organized for profit but operated exclusively for the promotion of social welfare (Sec. 30 (6)); Anon-stock and non-profit educational institution; The exemption of non-stock, non-profit educational institutions refers to internal revenue taxes imposed by the National Government on all revenues and assets used actually, directly, and exclusively for educational purposes (Paragraph 3, Section 4, Article XIV of the Constitution). A BIR Certificate of Tax Exemption is not required for a non-stock, non-profit educational institution to enjoy the income tax exemption provided under Section 4, Article XIV of the Constitution and Sec. 30(H) of the Tax Code, The BIR cannot prescribe a condition for tax exemption that is not provided for by law (The Abbas Orchard School, Inc. vs. Commissioner of internal Revenue, CTA (Third Division) Cose 8377, Nov. 4, 2014). Mlustration. Source: Ateneo de Manila University (ADMU) vs. Commissioner of internal Revenue (Ci), Court of Tax Appeals (Special First Division) Case 7246 and 7293, Mar. 12, 2010 In order to come within the ambit of the Constitutional exemption, the following conditions must be met: (1) the institution must be a non-stock, non-profit educational institution; and (2) the income must be used actually, directly, and exclusively for educational purposes. ADMU clearly met the first requisite as it is a non-stock, non-profit educational institution. On the second requisite, ADMU’s witnesses testified, among others, that the Grade School canteen is ‘used as a medium for teaching preparatory level and grade school students since it links the students) classroom lesson with practical applications. 164 Scanned with CamScannerIncome from cafeteria concession fees is commingled with the other funds that make up ADMU's “other educational income” and this income is made available for school operations, The documents submitted by ADMU established that ADMU’s expenses or disbursements from the general fund were for educational purposes as these consisted of salaries, employee benefits, utilities, scholarship and financial aid, faculty development, program development, other educational expenses allocated to school units, and provision for doubtful accounts. Hence, ADMU has proven that the concession fees. for the fiscal years ending Mar. 31, 2001 to 2003 were actually, directly, and exclusively used for educational purposes. The CiR's argument that the canteen must be owned and operated by the educational institution, and not by concessionaires, is without basis Wlustration. Source: BIR Ruling 17-2005, Aug. 30, 2005 Revenues from a school bus service operated by @ non-stock, non-profit educational institution exclusively to transport its students are exempt from taxes. A non-stock, non-profit educational institution is exempt from taxes on all revenues derived in pursuance of its purpose as an educational institution and used actually, directly and exclusively for educational purposes. Transport of its students is deemed directly and exclusively for the school’s educational purposes and functions. However, they shall be subject to internal revenue taxes on income from trade, business or other activity, the conduct of which is not related to the exercise or performance of their educational purposes or functions (Sec. 2, Finance Department Order 137-1987 as amended by FDO 92-1988). To be exempt from income tax and VAT under Section 4(3), Article XIV of the 1987 Constitution, a non-stock, nonprofit educational institution must prove with sufficient documents that the income for which exemption is sought is actually, directly and exclusively used for educational purposes. Wustration. Source: De La Salle University, Incorporated (DLSU) vs. Commissioner of internal Revenue, Court of Tax Appeals (First Division) Case 7303, Jan. 5, 2010 While DLSU clearly met the first requirement (being a non-stock, non-profit educational institution), it failed to sufficiently prove that the rent income it had earned was actually, used for educational purposes. irectly and exclusively Thus, while DLSU utilized its rent income to finance the loan payments to Philippine Trust Company, the proceeds of the loan were not accounted for, nor reported as an addition to the PE Sports Complex Fund. Thus, the claimed use of the loan proceeds for construction of the PE Sports Complex was not sufficiently proven, With respect to the contributions to St. Yon's (an institution that operates a dormitory for DLSU's visiting professors) which also came from the rent income, while DLSU submitted the Articles of Incorporation of St. Yon’s, it did not submit its contract with St. Yon’s for the operation of a dormitory for DLSU’s visiting professors. Hence, the nature of DLSU’s transactions and the basis of the amounts paid to St. Yon’s cannot be ascertained, With respect to DLSU’s other disbursements, a discrepancy was noted between the amount of expenditures recorded in the subsidiary ledgers and the amount reflected in the disbursement vouchers. DLSU explained that the discrepancy refers to disbursements made for renovations, although the supporting documents were inadvertently misplaced. In the absence of documents, DLSU was not able to fully account for and substantiate all disbursements; hence, the court was unable to ascertain that the rent income was indeed used for educational purposes. 165 Scanned with CamScannerSubject to compliance requirements, their interest income when alk ica” directly, and exclusively in pursuance of their purposes as an educational institution are exempt from final withholding taxes (FWT) ON PASSIVE INCOME Interests Interest income from currency bank deposits and yield or any other monetary benefit from deposit substitute instruments and | Exempt from | from trust funds and similar arrangements. | 20% FWT Interest income from a depository bank under the expanded foreign currency deposit system, Exempt from 7.50% FWT 9. Government educational institution; 10. Farmers’ or other mutual typhoon or fire insurance company, mutual ditch or irrigation company, mutual or cooperative telephone company, oF like organization Of a purely local character, the income of which consists solely of assessments, dues, and fees collected from members for the sole purpose of meeting its expenses; and 11. Farmers’, fruit growers’, or like association organized and operated as a sales agent for the purpose of marketing the products of its members and turning back to them the proceeds of sales, less the necessary selling expenses on the basis of the quantity of produce finished by them. 12. Per Sec. 5 of R.A. 10072, the Philippine National Red Cross, to be known as the Philippine Red Cross, shall be exempt from payment of all direct and indirect taxes, all provisions of law to the contrary notwithstanding, including value-added tax, fees and other charges of all kinds on all income from its operations, including the use, lease or sale of its real property, and provision of services. 13. Per Rule 24 of the IRR of R.A. 10165, any child-caring or child-placing institution licensed and accredited by the DSWD to implement the Foster Care Program shall be exempt from income tax on income derived by it as such organization pursuant to Section 30 of the NIRC as implemented by Revenue Regulation 13-98. Corporations may also be declared exempt from income tax or any other tax under special laws. TAXATION FOR COOPERATIVES Cooperative refers to an autonomous and duly registered association of persons, with common bond of interest, who have voluntarily joined together - to achieve their social, economic, and cultural needs and aspirations by making equitable contributions to the capital required, patronizing their products and services and accepting a fair share of the 166 Scanned with CamScannerrisks and benefits, of the undertaking in accordance with universally accepted cooperative principles. The following discussion came from the Joint Rules and Regulations implementing Articles 60, 61 and 144 of Republic Act 9520, the Philippine Cooperative Code of the 2008 in relation to the NIRC, as amended, which was signed by the Department of Finance, Bureau of Internal Revenue and Cooperative Development Authority last Feb. 5, 2010. Definition of Terms 1 10 1. 12, 13, 14. ‘Accumulated Reserves - refers to the accumulated amount of money annually deducted from the net surplus, which shall be less than fifty (50%) for the first five years of operation after registration and at least ten per centum (10%) of the net surplus thereafter, intended not for-the allocation or distribution to the members but for the protection and stability of the cooperative, commonly referred to as the Reserve Fund. Business Transaction ~ refers to any business activity or livelihood engaged in by the cooperative where such cooperative generates savings. Capital Assets - refers to the property held by the taxpayer (whether or not connected with trade or business), but does not include stock in trade of the taxpayer or other property of a kind which would properly be included in inventory of the taxpayer if on hand at the close of the taxable year, or property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business, or property, used in the trade or business, of a character which is subject to the allowance for depreciation. Certificate of Good Standing - refers to the certificate issued annually by the CDA to cooperatives which comply with the requirements provided in CDA-Memorandum Circular’ 2008-03, and any subsequent amendments thereto. For internal revenue tax purposes, said Certificate of Good Standing is one of the essential requirements for the grant of the Certificate of Tax Exemption/ Ruling. Certificate of Tax Exemption/Ruling - refers to the certificate/ruling issued by BIR granting exemption toa cooperative, which is valid for a period of five (5) years from the date of issue. Cooperative Development Authority (CDA) - refers to the government agency created under R.A. 6939 mandated to register, regulate and develop cooperatives. Interest on Share Capital - refers to the interest earned by the member's paid-up to the capitalization ‘of the cooperative. It is based on the average share capital contribution of members computed on 2 per month basis against the preset amount earmarked by the board of directors for interest on share capital. Patronage Refund - refers to the refund or return to the members of net savings generated from the operations of the cooperative. Registration - refers to the operative act granting juridical personality to a proposed cooperative as evidenced by a Certificate of Registration issued by the CDA. Related operations/transactions - refers to transactions of cooperatives which are part of the objectives and purposes, as enumerated in the Articles of Cooperation. ‘Transaction with members - refers to the cooperative activity that provides goods and services to members where the cooperative generates net savings/surplus, Transaction with non-members - refers to the cooperative activity that provides goods and services to non-members where the cooperative generates net savings/surplus. Undivided Net Surplus/ Undivided Net Savings - refers to the net amount arising from the operations of the cooperative after deducting the operational expenses from revenue generated, not construed as profits, but as excess of payments made by the members for the loans borrowed or the goods and Forvices bought- from the cooperative including other inflows of assets resulting from its other Sperating activities and which shall be deemed to have been returned to them if the same is distributed as prescribed in accordance with Article 86 of R.A. 9520 and the by-laws of the cooperative. Unrelated Transactions - refers to transactions of cooperatives which are not part of the objectives ‘and purposes as enumerated in the Articles of Cooperation. 167 Scanned with CamScannerClassification of Cooperatives According to the Extent of the Tax Exemptions Granteq 1. Those duly registered cooperatives which transact business with members only, ang Those duly registered cooperative which transact business with both members ang hon-members which are further sub-classified according to the following 4. Cooperatives with accumulated reserves and undivided net savings of not more than P10 million; and Cooperatives with accumulated reserves and undivided net savings of more than P10 million. Tax Exemptions of Duly Registered Cooperatives which Transact Business with Members Only Duly registered cooperatives dealing/transacting business with members only shall be exempt from paying any taxes and fees, including but not limited to: 1, Income Tax imposed by Title Il of the NIRC, as amended; 2. Value-Added Tax (VAT) imposed under Title IV of the NIRC, as amended; 3. Percentage Tax imposed under Title V of the NIRC, as amended; 4. Donor's Tax imposed under Title Il of the NIRC, as amended, on donations to duly accredited charitable research and educational institutions and reinvestment to socio-economic projects within the area of operation of the cooperatives; 5. Excise Tax under Title VI of the NIRC, as amended, for which itis directly liable; 6. Documentary Stamp Tax imposed under Title Vil of the NIRC, as amended, provided, however, that the other party to the taxable document/transaction who is not exempt shall be the one directly liable for the tax; 7. Annual Registration Fee of P500 under Sec. 236(8) of the NIRC, as amended; 8. All taxes on transactions with insurance companies and banks, including but not limited to 20% final tax on interest deposits and 7.5% final income tax on interest income derived from 2 depository bank under the expanded foreign eurrency deposit system; and 9. Electric cooperatives duly registered with the Authority shall be exempt from VAT on revenues on systems loss and VAT on revenues on distribution, supply, metering and lifeline subsidy of electricity to their members. Taxability/Exemption of Duly Registered Cooperatives which Transact Business with Members and Non-Members Cooperatives with accumulated reserves and undivided net savings of not more than P10 million — Exempt from all national internal revenue taxes for which these cooperatives are liable as enumerated in the previous section, Cooperatives with accumulated reserves and undivided net savings of more than P10 million = Business transactions with members - Exempt from all national internal revenue taxes for which these cooperatives are liable as enumerated in the previous section; 2) Business transactions with non-members — 1) 168 Scanned with CamScannera) ») Q pay the following taxes at the full rate: i) ii) it) ™) Income Tax - On the amount allocated for interest on capitals: Provided, That the same taX 's. not consequently imposed on interest individually received by the members, The tax base for all cooperatives liable to income tax shall be the net surplus arising from the business transactions with non-members after deducting the amounts for the statutory reserve funds a5 provided for in the Cooperative Code and other laws. Value Added Tax (VAT) - On transactions with non-members: Provided, however, That cooperatives, pursuant to Sec. 109, par. (L), (M) and (N) of the NIRC, as amended by R.A. 9337, shall be exempt from the imposition of VAT, namely the following: (1) Salesby agricultural cooperatives duly registered and in good standing withthe CDA to their members, 35 well as Sale of thelr produce, whether nits origina state or processed form, to non-members, their importation of direct farm inputs, machineries and equipment, including spare parts thereof, to be used directly an in the production and/or processing of ther produce (Se, 109 (1) ofthe NIRC, as amended), Provided, further, That the exempt transactions pursuant to the above shall include sales made by 2 duly registered agricultural cooperate organited and operated by its members to undertake the production and processing of raw materials or of goods produced by its members int finshed or processed products for sle by {hid cooperative tots members and non-members: Provided, finaly, That any processed product or ts derivative ‘ising from the row materials produced by its members, sold in the name and forthe account ofthe cooperative, ‘shallbe deemed the product ofthe cooperative Sale by agricultural cooperatives to non-members can only be exempted from VAT if the producer of the ‘agricultural product sld i the cooperative itself f the cooperative isnot the producer (eg, trader), ony those Sales to its members shal be exempted from VAT. exempt transactions shall include sales made by a duly registered agricultural cooperative organized and ‘operated by its members to undertake the production and processing of ra materials or of goods produced by is members int finished or processed product for saleby said cooperative tots members and non-members Products produced/processed by non-members or production not related to the purposes for which 2 cooperative is created as stated in its Articles of Cooperation even if old inthe name of said cooperative shall, not be considered a5 produced/processed by said cooperative. To illustrate, raw materials produced by the ‘members and processed by the cooperative shall be exempt from VAT, Its to be reiterated however, that sale or Importation of agrcutural food products in their original state is fexempt from VAT irrespective ofthe seller and buyer thereof, pursuant to Sec. .109-1 (8) (a) of Revenve Regulations 16-05, as amended, (2) Gross receipts from lending activities by credit or multipurpose cooperatives duly registered with the CDA (Sec, 109 (1) (M) ofthe NIRC, as amended); oF (3) Sales by non-agricultural, non-electric and non-credit cooperatives duly registered with the CDA: Provided, That the share capital contribution of each member does not exceed P15,000 and regardless of the aggregate capital and net surplus ratably distributed among members (Sec. 109(1) (Qi) of the NIRC, as amended); or (4) Transactions of cooperatives as may be deemed VAT exempt under the NIRC. Percentage Tax - all sales of goods and/or services fendered to non-members shall be subject, to the applicable percentage taxes imposed by Title V of the NIRC, as amended, except sales made by producers, marketing or service cooperatives; All other Internal Revenue Taxes unless otherwise provided by the law; and, Be entitled to limited or full deductibility of donations to duly accredited charitable, research and ‘educational institutions and reinvestment to socio-economic projects within the area of operation of such cooperative. Pursuant to Article 61(3) be entitled to an exemption on taxes on transactions with insurance companies and banks, including but not limited to 20% final taxon interest deposits and 7.5% final income tax on interest income derived from a depository bank under the expanded foreign currency deposit system. 169 Scanned with CamScanner(20peratives which are duly registered with and regulated by the CDA are 2a per {inal WT on the interest paid to members on thei savings and time deposits. The Court ited BIR Rulings 551-88 and 0A-591-2006 dated Oct. 5, 2006 wherein Hwa hel tha dose ne members’ deposits with the cooperatives are not currency ban epost no dePosit substitutes, Sec, 24 (8) will not apply to interest from such deposits (Dumaguer. fathedral Credit Cooperative vs. Commissioner of Internal Revenue, Supreme Coury (Second Division) G.R, 182722, Jan, 22, 2010). Taxability of Unrelated income of Cooperative Arancome of cooperatives not related to the main/prinipal business under its Articles of Cooperation shall be subject to all the appropriate taxes under the NIRC, as amended This is applicable to all types of cooperatives whether dealing purely with members o; both members and non-members, Taxability of Cooperatives to Other Internal Revenue Taxes All cooperatives, regardless of classification shall be subject to: 1. Capital Gains Tax from sale of shares of stock or sale, exchange or other disposition of real property classified as capital assets; 2," Documentary stamp taxes on transactions of cooperatives dealing with non-members, except Ganseetions with banks and insurance companies, Provided that whenever one party to the toratie document enjoys the exemption from DST, the other party who is not exempt shall be the one cnn tly liable for the tax; 3. VAT billed on purchases of goods and services, except the VAT on the importation by agricultural can atives of direct farm inputs, machineries and equipment, including spare parts thereot, te to ised directly and exclusively if the production and/or processing of their produce, Pursuant to Sec fe ey ogthe NIRG as amended. Al ax free importations shall not be transferred to any person a {ve (5) years, otherwise, the cooperative and the transferee or assignee shal be solidarity liable to pay twice the amount of the tax and/or the duties thereon; 4. Withholding tax on compensation/wages, except in the case where an employee is a minimum wage Casaticaniey cseaitable and final withholding taxes, if applicable. All cooperatives, repordiecs ot Cassiication, are considered as withholding agents on all income payments thet ae subject to withholding pursuant to the provisions of Revenue Regulations 2-98, as amended; and 5. All other taxes for which cooperatives are directly lable and not ‘otherwise expressly exempted by any law. Taxability of Members/Share Holders of Cooperatives All members of cooperatives shall be liable to pay all the necessary internal revenue taxes under the NIRC, as amended, except for the following: 1. Any tax and fee, including but not limited to final tax on member's deposits of fed deposits {otherwise known as share capital) with cooperative, and documentary tax on teamcer cos of members with the cooperative; and 2. Patronage Refund which includes all refunds, returns or rebates of the net savings generated from the operation of the cooperative. 170 Scanned with CamScannerPAL AND OTHER FRANCHISE GRANTEES SIMILARLY SITUATED The franchise of Philippine Airlines (PAL) provides that it shall pay government the lower of the basic corporate income tax or franchise tax in lieu of all other taxes, duties, royalties, registration, license, and other fees and charges, except only real property tax. The “in lieu of all other taxes” clause includes the MCIT (Commissioner of Internal Revenue vs. Philippine Airlines, Inc., Supreme Court (Third Division) G.R. 180066, July 7, 2009), Thus, RMC 66-2003 is set-aside. Section 13 of P.D. 1590 grants the Philippine Airlines two options to pay its income tax liability. PAL’s income tax liability shall be the lower amount between: basic corporate income tax or 2% franchise tax. In the case of PAL, its gross revenues include passenger revenue; cargo revenue; other transport revenue; and non-transport revenue. Cost of services consist of salaries, wages and other employee benefits directly engaged in the transport of passenger, cargo or mail; commissions paid to sales agents; fuel and oil used in transport equipment/aircraft; insurance expenses incurred which are directly connected to transport activities (e.g. hull insurance, passenger liability insurance, and the like); traffic servicing expenses; aircraft servicing expenses; passenger service expenses; depreciation of and/or lease/rental charges for aircraft, flight equipment and ground equipment; and maintenance and repairs of aircraft, flight and ground equipment. ENTERPRISES REGISTERED UNDER THE BASES CONVERSION & DEVELOPMENT ACT OF 1992 & THE SPECIAL ECONOMIC ZONE ACT OF 1995 (R.A. 7916) Enterprises that are registered with the Subic Bay Metropolitan Authority (SBMA), the Clark Development Authority (CDA) or the Philippine Economic Zone Authority (PEZA) engage in registered as well as unregistered activities. Registered Activities Income derived by such enterprises from registered activities shall be subject to such tax treatment as may be specified in the terms of registration, ie.: * 5% preferential tax rate * income tax holiday (ITH) © regular income tax rate Except for real property taxes on land owned by developers, no taxes, local and national, shall be imposed on business establishments operating within the ecozone. In lieu thereof, five percent (5%) of the gross income earned (GIE) by all business enterprises within the ecozone shall be paid and remitted as follows: a. Three percent (3%) to the National Government; a7. Scanned with CamScannerb. Two percent (2%) which shall be directly remitted by the ae to the treasurer's office of the municipality or city where the enterprise The Revenue Regulations of the PEZA Law defines “gross income earned (GIE)" as “gro; Sales ar gross revenues derived from business activity within the ecozone, net of sale, discounts, sales return and allowances and minus costs of sales or direct costs buy before any deduction is made for administrative expenses or iiseiie eses during a kiven taxable period,” For PEZA-registered export enterprises, free trade enterprises and domestic marker enterprises, the regulations state that “(for) purposes of computing the total five Percent tax rate imposed, the following direct costs are included in the allowable deductions to arrive at gross income earned: 1. Direct salaries, wages or labor expenses 2. Production supervision salaries 3. Raw materials used in the manufacture of products 4. Decrease in goods in process account (intermediate goods) 5. Decrease in finished Boods account 6. Supplies and fuels used in production . 7. Depreciation of machinery and equipment used in production, and of that portion of the ‘building owned or constructed that is used exclusively in the production of goods 8. Rent and utility charges associated with building, equipment and warehouses used in Production, and 9. Financing charges associated with fixed assets used in production the amount of which were not previously capitalized.” (RR 11-2005) The enumeration in RR 11-2005 on the direct costs that are deductible from GIE is not exclusive. PEZA-registered enterprises that are subject to the 5% tax on GIE are allowed to deduct expenses which are in the nature of direct costs, even if these are excluded in the list. Mustration. Source: East Asiy Utilities Corporation vs. Commissioner of Internal Revenue, Court of Tax Agpeols (Second Division) Case 8179, May 21, 2014 East Asia Utlities Corporation (EAC) is a PEZA-registered Ecozone Utilities Enterprise that operates a power plant within the Mactan Export Processing Zone. The criterion in determining whether the item of cost or expense should be part of direct cost is the relation of such item in the conduct of its PEZA-registered activities. If the cost or expense can be directly attributed ‘© providing the PELA-registered services, then it should be treated as direct cost. Section 27(E)(4) of the Tax Code defines cost of services as “sox direct costs and expenses necessarily incurred to provide the services required by the customers and clients including (A) salaries and employee benefits of personnel, consultants and specialists directly rendering the services and (B) cost of facilities directly wtllaed in providing the service such as depreciation or rental of equipment used and cost of supplies: a. The rest of the costs can be classified as operating expenses which are defined as “primary recurring costs associated with central operations, other than cost of goods sold, which are incurred to generate sales.” im Scanned with CamScanneroe eee EAC needs to prove that the disallowed expenses were directly used in or r F generation services, and not just for the continued efficient and effective operations of Geter i continued efficient and effective operations of Upon evaluation, the CTA determined that certain expenses form part of direct cost that are deductible from ross Income, including SSS and Pag-ibig employer cost, medical/health and accident/ife insurance, uniform/working gears, technical training and development, hauling, and trucking services, insurance and freight, brokerage fees, other inventory incidental cost, Insurance for power plant and other assets, safety program and services, and other professional fees (On the other hand, the CTA held that the following expenses are deemed operating expenses, hence, not deductible from gross income: employee activities, nontechnical training and development, DOE electrification fund, general office expense, business expense, taxes and licenses A BOl-registered developer of a low-cost mass housing project is exempt from income tax/CWT on revenues from its BOI-registered activity. This exemption shall not extend to sales of units with selling price exceeding P3,000,000. In the computation of the ITH incentive, interest income from in-house financing shall not be considered as revenye generated from the registered activity (B/R Ruling 317-2013, Aug. 12, 2013) ABOl-registered corporation enjoying the ITH incentive is exempt from CWT on income payments received during the ITH period with respect to its BOI-registered activities (B/R Ruling 371-2011, Oct. 7, 2011). Since a PEZA-registered enterprise is subject to the preferential tax rate of 5% in lieu of all national and local taxes pursuant to R.A. 7916, income payments made to a PEZA- registered enterprise by its customers, whether Ecozone-registered enterprises or within the Customs Territory, for the performance of a PEZA-registered enterprise's registered activities are not subject to CWT (BIR Ruling 049-2010, Sept. 1, 2010). Sec. 1 of the Department of Finance Department Order 18-2013 (dated Apr. 16, 2013) amended Sec. 12 of DOF Department Order 03-08. It reads: “It is understood that henceforth, registered Ecozone and Freeport Enterprises already availing of the incentives and benefits under R.A. 9400 in accordance with these rules, shall be expressly disqualified from availing of the incentives and benefits defined and/or granted under other laws, rules and regulations. Qualified enterprises already enjoying incentives under other preferential regimes should have their registrations thereunder cancelled before they may subsequently avail of the benefits provided under R.A. 9400.” PEZA Board Resolution 12-610, published Nov. 22, 2012, amends the PEZA guidelines on the registration and administration of incentives to Tourist Economic Zones (TEZ) developers and locator enterprises, as follows: 1r be granted to developers of TEZs in 1. The 5% Gross Income Tax (GIT) incentive shall no lon Metro Manila, Cebu City, Mactan Island, and Boracay Island; The Income Tax Holiday (ITH) and 5% GIT incentives shall no longer be granted to locator enterprises of TEZs in these four areas, except for tax and duty-free importation and zero- VAT rating on local purchases of capital equipment; and 173 Scanned with CamScannerIsland, and Bor, 4 No new Te2s shall be established in Metro Manila, Cebu City, Mactan Oracay Island, e This new policy shall Not be given retroactive effect, but TEZ i ee a locator onterprises in these four areas that have not signe ration Agreements with PEZA shall be covered by this new policy. Existing and future TEZ developers and locator enterprises outside these 4 areas shay Fanalue {© avail of the incentives granted by PEZA subject to existing guidelines, 5, follows; 1. For TEZ developer/operator - 5% GIT; and 2. For TE2 locator enterprises - ITH, 5% GIT, tax and duty-free Importation, and zero-VAT ee 9n local purchases of capital equipment, Unregistered Activities Revenue Regulations 20-2002 clarified the tax treatment of income earned from piregistered activities by enterprises registered under the Bases Conversion ang Development Act of 1992 and the Philippine Economic Zone Act of 1995. Income derived from unregistered activities shall be subject to the regular internal revenue taxes such as the following: Interests Interest income from Philippine currency bank Geposits, yield or any other monetary benefit. from deposit substitutes, from trust funds and similar arrangements 20% Final Income Tax Interest income from foreign currency deposits 7.50% Final Income Tax Sale of Shares of Stock Not traded in the stock exchange On the net capital gain from sale, exchange or ‘other disposition of shares of stock in a domestic corporation Not over P100,000 5% ‘Amount in excess of 100,000 10% Capital Gains Tax Traded in the stock exchange-- ' On the gross selling prince 0.50% | Stock Transaction Tax ae See Income payments made by a registered enterprise to an entity in the Customs territory shall not be subject to the preferential tax rates or tax exemption enjoyed by the registered enterprise. They shall be subject to the appropriate rate of tax imposable on the recipient of such income. The following are examples: 1. Dividends paid to the shareholders 4 174 Scanned with CamScanner2, Interest payments to creditors 3, Other similar payments Foreign exchange gains derived by a contact center from currency hedging contracts are not attributable to its registered activity; hence, are not covered by the Income Tax Holiday (ITH) incentive (Aegis PeopleSupport, Inc. vs. Commissioner of Internal Revenue, CTA (En Banc) Case £8 996, Aug. 4, 2014). The 5% preferential tax granted to PEZA-registered enterprises does not cover FWT on their interest payments to non-resident lender corporations (Edison (Bataan) Cogeneration Corporation vs. Commissioner of Internal Revenue, Court of Tax Appeals (En Banc) 735, Apr. 12, 2012) The sale of fixed assets by a PEZA-registered export enterprise is not part of its registered activities of manufacture and assembly of electronic equipment and components; thus, the gain from the sale is subject to the 30% regular corporate income tax rate (BIR Ruling 291-2012, Apr. 25, 2012) When a sale of land by an ecozone developer/operator violates the developer/operator’s registration agreement with PEZA, profits from such sale cannot be subject to 5% preferential tax rate (BIR Ruling 504-2011, Dec. 19, 2011). Iilustration. Source: B/R Ruling 1-2005, June 16, 2005 Interest income from foreign currency deposits derived by enterprises registered under the Bases Conversion and Development Act (BCDA) and the Philippine Economic Zone Act (PEZA) shall be subject to final income tax at the rate of 7.5% under the Tax Code. Incentives granted to an ecozone enterprise apply only to its registered operations. Income from its unregistered activities shall be subject to the regular tax rates. DECLARATION OF QUARTERLY CORPORATE INCOME TAX Every corporation shall file in duplicate a quarterly summary declaration of its gross income and deductions on a cumulative basis for the preceding quarter or quarters upon which the income tax shall be levied, collected and paid. The income tax computed decreased by the amount of tax previously paid or assessed during the preceding quarters shall be paid and the return filed not later than sixty (60) days from the close of each of the first three (3) quarters of the taxable year, whether calendar or fiscal. A return showing the cumulative income and deductions shall still be filed even if the operations for the quarter and the preceding quarters yielded no tax due. Every taxable corporation is likewise required to file a final adjustment return covering the total taxable income of the corporation for the preceding calendar or fiscal year, which is required to be filed and paid on or before April 15, or on or before the 15 day of the 4" month following the close of the fiscal year, as the case may be. 175 Scanned with CamScannerIf the sum of the quarterly tax payments made during the said to the total tax due on the entire taxable income of that yea" either: 1 2, 3 Pay the balance of tax still due; or carry over the excess credit; or bbe credited or refunded with the excess amount paid. taxable year is not equa) the corporation shajj Mlustration: The result of operations of a corporation for 2014 whose taxable year is on a calendar year basis, is as follows: Gross Income Deduction Net Income 1* quarter (ian. 1 to March 31) 500,000 300,000 200,000 2" quarter (April 1 to June 1) 600,000 350,000 250,000 3° quarter (uly 1 to Sept. 30) 700,000 400,000 300,000 4® quarter (Oct. 1 to Dec. 31) 800,000 450,000 350,000 Tax credit for overpaid income tax for the preceding year is P50,000. The return to be filed for the 1* quarter follows: Gross Income this quarter 500,000 Less: Deductions 300,000 Taxable Income 200,000 Income Tax Due (200,000 x 30%) 60,000 Less: Tax Credit 50,000 Balance of Tax to be paid this quarter 10,000 The return for the second quarter to be filed follows: 1,100,000 Gross Income this quarter 600,000 ‘Add: Gross Income for 1* quarter 500,000 Gross Income for 1* and 2" quarters Less: Deductions 1* quarter . P300,000 2" quarter 350,000 Taxable Income Income Tax Due (P450,000 x 30%) Less: Tax Due for previous quarter 1 quarter Income Tax due this quarter 176 650,000 P 450,000 135,000 is Scanned with CamScannerThe return to be filed for the 3" quarter is shown below: Gross Income this quarter P 700,000 ‘Add: Gross income for previous quarters: 1 quarter 500,000 2” quarter 600,000 _1,100,000_ Gross Income for 1", 2" and 3° quarters 53,800,900 Less: Deductions 2" quarter 300,000 2" quarter 350,000 3° quarter 400,000 | Taxable Income E Income Tax Due | (P750,000 x 30%) 225,000 [ Less! Income Tax Due for previous quarters i 1 quarter 60,000 | 2°4 quarter 70,000 130,000 j Income tax Due this quarter ws P_ 95,000 The final adjustment return shall be filed and the tax due thereon paid on or before f April 15 of the following year. Computation follows: / Gross Income, 4th quarter P 800,000 | ‘Add: Gross Income for previous quarters: , 1* quarter 500,000 j 2" quarter 600,000 ‘ 3° quarter 000 1,800,000 [ Gross Income for the year 2,600,000 i Less: Deductions 1 quarter 300,000 2" quarter 350,000 3% quarter 400,000 4 quarter ___ 450,000 Taxable income Income Tax Due (P1,100,000 x 30%) 330,000 Less: Income Tax Due for previous quarters 2* quarter 60,000 204 quarter 70,000 3° quarter 95,000 225,000 Income Tax Due, 4th quarter Note at this point that the computation and the payment of MCIT, shall likewise apply at the time of filing the quarterly corporate income tax. Thus, in the computation of the tax due for the taxable quarter, if the computed quarterly MCIT is higher than the quarterly normal income tax, the tax due to be paid for such taxable quarter at the time 77 Scanned with CamScannerMCIT (which of filing the quarterly corporate income tax return shall be ee. i ° Percent (2%) of the gross income as of the end of the taxable a4 5 taxabl In the payment of said quarterly MCIT, excess MCIT from te Borate fine tt shall not be allowed to be credited. Expanded WT, quarterly ie i revious ti payments under the normal income tax, and the MCIT a BDA ‘arable quarter/s are allowed to be applied against the quarterly MCIT du 178 Scanned with CamScanner