VII.

TAX ON CORPORATIONS

A. DOMESTIC CORPORATIONS

1. In General
a. A domestic corporation is generally liable for net income tax because the
NIRC says:”taxable income.”
b. The net income tax is imposed at a rate of 35% on all income derived
from sources within and without the Phils.

2. Optional Corporate Income Tax

a. The tax rate is 15%
b. Immaterial since the President has not yet implemented this option.

3. Proprietary Educational Institutions and Hospitals

 Liable for net income tax at a rate of only 10% provided:
a. It must a stock and non-profit institutions
b. It must be a private educations institution or hospital
c. Their gross income from unrelated activity does not exceed 50%.
d. Must have been issued a permit to operate from the government.
Note: Non-stock and non-profit educational institution is exempt from income tax

4. GOCCs, Agencies or Instrumentalities

 The 35% net income tax rate is applicable to all GOCCs except the following:
a. SSS
b. Philhealth
c. PCSO
d. GSIS

5. Final Income Tax

 Interest from deposits and yield from deposit substitutes and from trust funds and
similar arrangements, and royalties from sources within the Philippines are
subject to 20% final income tax.
 If these are derived from sources without , these shall be subject to the net
income tax and not the final income tax.

6. Capital Gains from the Sale of Shares of Stock Not Traded in the Stock Exchange
 Apply rules on individuals

7. Tax on Income Derived under the Expanded Foreign Currency Deposit System
 The depository bank is the income earner and is subject to the net income tax of
35%
 However, when the depository bank under the system transacts with the
following, its income is exempt from net income tax:
a. Non-residents
b. OBUs
c. Local commercial banks
d. bBranches of foreign banks authorized by the BSP
e. Other depository banks under the system
  With regard to FX loans, income derived therefrom shall be subject to a final
tax at the rate of 10%

8. Inter-corporate Dividends
 The domestic corporation is the stockholder of another domestic corporation.
Being a stockholder, it is entitled to dividends. The dividends received by it
shall not be subject to tax, in other words, exempt.

9. Capital Gains Realized from the Sale, Exchange or Disposition of Lands and/or
Buildings
 Apply final income tax rate of 6% is imposed on the gain presumed to have
been realized

B. RESIDENT FOREIGN CORPORATIONS

1. In General
 Like a domestic corporation, a resident foreign corporation is subject to the
net income tax at a rate of 35%.
 However, unlike a domestic corporation, a resident foreign corporation is only
liable for income derive by it from sources within the Philippines.

2. Optional Corporate Income Tax of 15%

 Tax rate is 15% of Gross Income

3. MCIT
 Compare the 2% of Gross Income versus net income, choose higher of the 2.

4. International Carrier Doing business in the Philippines

 Liable to pay tax of 2½% on its Gross Philippine Billings (GPB)

 For international air carriers, the following requisites must be present:

o The persons, excess baggage, cargo, and the mail must be
originating in the Philippines
o In a continuous and uninterrupted flight or shipment
o Irrespective of the place of sale or issue and the place of payment of
the ticket.

 For international shipping carriers, the following are the pre-requisites:

o It must originate from the Philippines
o It must be up to the final destination
o Regardless of the place of sale or payments of the passage or freight
documents

5. Offshore Banking Units

 A final income tax at the rate of 10% is imposed on income derived by OBUs
authorized by the BSP from its foreign currency transactions (e.g branches of
commercial banks).
 Transactions of these OBUs are exempt from final income tax provided it is
with the following:
 a. Nonresidents
b. Other OBUs
c. Local commercial banks
d. Branches of foreign banks

6. Tax on Branch Profit Remittance

 A 15% final income tax based on the total profits applied or earmarked for
remittance is imposed on any profit remitted by a branch to its head office.
 If the profit remitted us nor from activities connected with the conduct of its
business in the Phils., the net income tax rate of 35% shall apply.
 This tax does not apply to local subsidiaries of foreign corps. (for branch
offices only)

7. Regional Area Headquarters and Regional Operating Headquarters of MNCs

 RAH – a branch established in the Phils by MNC and which headquarters do
not earn or derive income from the Philippines and which acts supervisory,
communications and coordinating center for their affiliates, subsidiaries, or
branches in the Asia-Pacific Regions and other foreign markets.
 ROH – a branch established in the Philippines by MNCs which are engaged
in any of the following: general administration and planning; business
planning and coordination; sourcing and procurement of raw materials and
components; corporate finance advisory services; marketing and control and
sales promotion; training and personnel management; logistic services; R &
D; product development; technical support and maintenance; data processing
and communication; and business development.
 RAH is exempt from income tax’ ROH is subject to a net income tax of 15%.

8. Final Income Tax

 Interest income and Royalties – subject to 20% final income tax
 Income derived from Expanded Foreign Currency Deposit Systems – The
income earner is a resident foreign corporation depository bank . The tax rate
is 35%.
 Intercorporate Dividends – The income received by the foreign corporation
from the domestic corporation shall be exempt from income tax.

C. NON-RESIDENT FOREIGN CORPORATIONS

1. In General
 Liable for gross income tax at the rate of 35% on income derived from sources within
the Philippines.

2. Interest on foreign loans

 A final WHT at the rate of 20% is imposed on the amount of interest on foreign loans.
 Contemplated transaction here is one where the lender is a non-resident foreign
corporation and the borrower is a domestic corporation.
 Exemption applies only when the lender is a foreign government or any of its GFI,
international and regional financial institutions (supra-nationals).

3. Intercorporate Dividends
 Among the three corporate taxpayers, only the NR foreign corporation is liable for
dividends received by it from a domestic corporation at the rate of 35%.
 Tax deemed paid credit rule (tax sparing rule) – The country of domicile of the non-
resident foreign corporation allows a tax credit of 20% for taxes deemed paid in he
Philippines to be entitled to the lower rate of 15%.

4. CGT from Sale of Shares not Traded in the Stock Exchange

 Rules on individuals apply.