CORPORATION AND GPP INCOME TAXATION

Classification of Income Taxpayers (other than individuals)

1. Corporation
1. Domestic Corporations (DC)
2. Foreign
1. Resident Foreign Corporations (RFC)
2. Non-resident Foreign Corporations (NRFC)
2. General Professional Partnership (GPP)

Corporation - is an artificial being created by operation of law, having the right of succession and the powers,
attributes, and properties expressly authorized by law or incident to its existence.
1. Artificial being – juridical person
2. Created by operation of law – created under Corporation Code of the Philippines or any other
special laws
3. Has right of succession – corporation will continue to exist, regardless of change of ownership
brought about by death, withdrawal, insolvency or incapacity of the existing owners
(shareholders)
4. Has the powers, attributes, and properties expressly authorized by law or incident to its existence
– corporation can enter into a contract, can sue and be sued, and can acquire properties and
rights necessary for its existence.

Corporation - includes partnerships, joint stock companies, joint accounts, associations, or insurance
companies (except for GPP and joint venture)
5. Domestic – corporation created or organized in the Philippines or under its laws
6. Foreign – corporation which is NOT domestic
1. RFC – foreign corporation engaged in trade or business within the Philippines
2. NRFC – foreign corporation NOT engaged in trade or business within the Philippines

SOURCE OF TAXABLE INCOME

TYPE OF CORPORATION SOURCE
DC World
RFC
Within only
NRFC

TYPES OF INCOME TAX

1. Final Withholding Tax (FWT) On Passive Income
2. Capital Gains Tax
3. Basic Tax
4. Tax on Branch Profit Remittances
5. Improperly Accumulated Earnings Tax
Final Withholding Taxes on passive
income Pro-forma Computation:
Passive income Pxxx
Rate x%
FWT Pxxx

KINDS OF PASSIVE INCOME

 1. Interest Income
2. Royalties
3. Dividends

INTEREST INCOME Taxpayer RATE

Interest income from: DC 20%

a) Bank deposit RFC
b) Deposit substitute
c) Trust funds
Interest FROM (Depositor) a depositary bank under FCDU DC 15% TRAIN Law
NIRC of 1997 - 7.5% RFC

Taxpayer BORROWER RATE

Interest BY a depositary bank under FCDU DC Resident 10%
RFC Non-resident 0%
Local Banks and
OBU’s

ROYALTIES
Taxpayer RATE

DC 20%
RFC

DIVIDENDS
PAYOR (ISSUER) Taxpayer RATE
DC DC 0%
RFC
NRFC 15%
FC DC BASIC TAX

CAPITAL GAINS TAX

KINDS of Capital Gains Tax
1. Capital Gains from Sale of Shares of Stock not Traded in the Stock Exchange
2. Capital Gains from Sale of Land and/or Building
CGT ON SHARES
Selling price Pxxx
Cost (xx)
Selling expense (xx)
Net gain Pxxx
x 15%*
Capital Gains Tax Pxxx

TRAIN Law – flat rate 15%

NOTE: Applicable to ALL classes of corporations.
CGT ON REAL PROPERTY

Tax Base Pxxx

Rate 6%
Capital Gains Tax Pxxx

Tax Base =
NOTE: Not applicable to FC.

BASIC TAX

SPECIAL CORPORATIONS
Types of Special Corporations
1. Domestic Corporations
a) Proprietary Educational Institutions (PEI’s)
b) Non-profit Hospitals (NPH’s)
c) Government-owned or Controlled Corporations (GOCC’s)
2. Resident Foreign Corporations
a) International Carriers
b) Offshore Banking Units
c) Regional Operating Headquarters
3. Non-Resident Foreign Corporations
a) Cinematographic Film Owner, Lessor or Distributor
b) Owner or Lessor of Vessels Chartered by Philippine Nationals
c) Owner or Lessor of Aircraft, Machineries & Other Equipment

Domestic Corporation: PEI’S & NPH

AMOUNT OF TAX
Gross Income PXXX
Allowable Deductions (XX)
Taxable Income PXX
Rate ?
Basic Tax PXX

RATE
In General (Income Related > Income NOT related) 10%
Income Related < Income not related 30%

• Pre-Dominance Test – to check if the income related is HIGHER than the income not related.

Domestic Corporation: GOCC’s

APPLICABLE TAX
In General Taxable like Ordinary Corp.
SPECIFIC Exempt
1. Social Security System (SSS)
2. Government Service Insurance System (GSIS)
3. Philippine Health Insurance Corp. (PHIC)
4. Philippine Charity Sweepstakes Office (PCSO) (subject to
Tax base on TRAIN Law)
5. Local Water Districts (LWD)

RFC: International Carriers

Gross Philippine Billings PXXX
Rate 2.5%
Basic Tax PXX

RFC: Offshore Banking Units (OBUs)

TYPE OF INCOME BORROWER RATE
Interest income from foreign currency loans Resident 10% FWT
Non-resident 0%
Local Banks & OBUs
RFC: Regional Operating Headquarters (ROHQs)
Taxable Income PXXX
Rate 10%
Basic Tax PXX

NRFC in General
Tax base is Gross Income from sources within the Philippines, such as interest, dividends, rents, royalties,
salaries, premiums (except reinsurance premium) annuities, emoluments, or other fixed or determinable
annual, periodic or casual gains, profits and income, and capital gains.
Gross Income xxx
Tax rate x 30%
Tax Due xxx

NRFC in Particular
1. Cinematographic Film Owner, Lessor, or Distributor
2. Owner or Lessor of Vessels
3. Owner or Lessor of Aircraft, Machinery and other Equipment

NRFC: Cinematographic Film Owner Etc.

Gross Income PXXX
Rate 25%
Basic Tax PXX

NRFC: Owner/Lessor of Aircraft etc.

Gross Income PXXX
Rate 7.5%
Basic Tax PXX

NRFC: Owner/Lessor of Vessels

Gross Income PXXX
Rate 4.5%
Basic Tax PXX

Income Tax of NRFC

TYPE OF INCOME RATE

Interest income on foreign loans 20%
Interest income from a depository bank under FCDU 0%
Dividend income w/ tax sparring 15%
All other income 30%

Branch profit remittances TAX (BPRT)

Profit remitted to HO PXXX
Rate x15%
BPRT PXXX
NOTE:
1. Applicable only to RFC
2. Income not connected to trade or business is not included.

EXEMPTION FROM BPRT

Entities registered with the following:
1. PEZA
2. SBMA
3. CDA
4. Other companies within the special economic zones
Ordinary Corporation
Taxable Income Pxxx
x30%
Regular Corporate Income Tax (RCIT) Pxxx
VS.
Minimum Corporate Income Tax
Gross Income from Operation x 2% Pxxx

Regular Corporate Income Tax (RCIT)

Sales/Revenues/Receipts/Fees P xxx
Less: Cost of Sales/Services (xxx)
Gross Income from Operation P xxx
Add: Non-operating Income xxx
Total Gross Income PXXX
Allowable Deductions (XX)
Taxable Income PXXX
Rate 30%
RCIT Pxxx

Allowable Deductions

- items or amounts which the law allows to be deducted from gross income in order to arrive at the
taxable income.
DC/RFC- may deduct from its business income
1. Itemized Deductions; or
2. OSD (40% of gross income)
NRFC – are NOT allowed deductions from gross income.

Minimum Corporate Income Tax

• MCIT – 2% of Gross Income as of the end of the taxable year imposed beginning the fourth 4th taxable
year (whether calendar or fiscal year) in which such corporation commenced its business operations.
MCIT shall be imposed whenever:
a. Such corporation has zero or negative taxable income; or
b. The amount of MCIT is greater than the RCIT

Relief from MCIT

Corporations which suffers losses on account of:
a. Prolonged labor dispute – losses arising from strike staged by the employees which lasted for more
than six (6) months within a taxable period and which has caused temporary shutdown of business
operation
b. Force majeure – cause due to an irresistible force as by “Act of God” like lightning, earthquake, storm,
flood and the like. It also include armed conflicts like war and insurgency.
c. Legitimate business reverses – includes substantial losses sustained due to fire, robbery, theft or
embezzlement, or for other economic reason as determined by the Secretary of Finance.
Gross Income for Trading/Merchandising and Manufacturing Concerns

Gross Sales xxx

Less: Sales Returns xxx
Sales Discounts xxx
Sales Allowances xxx (xxx)
Net Sales xxx
Less: Cost of Sales/Cost of Goods Sold (xxx)
Gross Income xxx
X rate 2%
MCIT xxx
 Cost of Sales for Trader/Merchandiser
Invoice Cost PXXX
Import Duties XXX
Freight XXX
Insurance while in transit XXX
COS PXXX

Cost of Goods Sold for Manufacturer

DO - FIRM
Direct Labor PXXX
Other Costs of Production XXX
Freight XXX
Insurance premiums XXX
Raw materials used XXX
Manufacturing Overhead XXX
COGMS PXXX

Gross Income for Sale of Services Under Cash Basis

Gross Receipts xxx

Less: Sales Returns xxx
Sales Discounts xxx
Sales Allowances xxx (xxx)
Net Receipts xxx
Less: Cost of Services (xxx)
Gross Income xxx
x rate 2%
MCIT xxx
* If under Accrual Basis (Gross Receipts x 2%)
Cost of Services
CORDS
Cost of Supplies PXXX
Other Direct Costs XXX
Rental XXX
Depreciation XXX
Salaries & Employee Benefits XXX
COS PXXX
Cost of Services for Banks & Financial
Intermediaries I-CORDS
Interest Expense PXXX
Cost of Supplies XXX
Other Direct Costs XXX
Rental XXX
Depreciation XXX
Salaries & Employee Benefits XXX
COS PXXX

Period subject to MCIT

 Beginning 4th taxable year following the year of commencement of business operations.
Accounting Treatment of Excess of MCIT over RCIT
 Any excess MCIT over RCIT shall be recorded as “deferred charges – MCIT”
 It shall be carried forward and credited against RCIT for 3 immediately succeeding taxable years.
 Any excess MCIT which has not or cannot be so credited against the RCIT due for 3 – year
reglementary period shall LOSE its creditability. (expired)
  Such amount shall be remove from deferred charges-MCIT and debited (charge) to Retained
Earnings and debited to deferred charges - MCIT

Entities Exempt from MCIT

Domestic Corporation
1. Proprietary educational institutions
2. Non-profit hospitals
3. Depository banks under expanded FCDS
4. Firms under a special tax regime such as:
a. PEZA/SBMA registered entities
b. Bases Conversion Devt’ Act registered entities

Entities Exempt from MCIT

Resident Foreign Corporations
1. International Carriers
2. Offshore banking units (OBU’s)
3. Regional operating headquarters
4. Firms under a special tax regime such as:
a. PEZA/SBMA registered entities
b. Bases Conversion Devt’ Act registered entities

Suspension of MCIT
In order that cessation of business activities as a result of being placed under involuntary receivership may be
a basis for the recognition of the suspension of the MCIT, such a situation should be properly defined and
included in the regulations. Pending such inclusion, the same cannot yet be invoked. (BIR Ruling 007-01, Feb
22, 2001)

Improperly Accumulated Earnings Tax (IAET)

The 10% IAET is imposed on improperly accumulated earnings starting Jan. 1, 1998 by domestic
corporations as defined under the Tax Code and which are classified as closely-held corporations.
Who Are Exempted?
IAET shall not apply to (BPI):
1. Banks and other nonbank financial intermediaries;
2. Publicly- held corporations; and
3. Insurance companies.
-partnerships-
1. Taxable Partnership
2. GPP
3. Non-taxable joint ventures
4. PEZA registered enterprises

Closely – held Corporations

Corporations with at least fifty percent (50%) in value of the outstanding capital stock or at least fifty percent
(50%) of the total combined voting power of all classes of stock entitled to vote is owned directly or indirectly
by or for not more than twenty (20) individuals.
Domestic corporations not falling under the aforesaid definition are, therefore, publicly-held corporations.

Who Are Liable?

• Corporation permitting its earnings and profits to accumulate beyond the reasonable needs of the
business.

Presumption of evidence of improper accumulation of profits and hence avoidance of tax payables of
stockholders:
1. holding companies 3. closely-held corporations
2. investment companies 4. profit accumulation beyond the needs of business
Reasonable accumulation of profits:
1. additional working capital purposes
2. purchase of long-life assets reasonably required by the business (expansion, improvement and
repairs)
3. the acquisition of a related business or the purchase of the stock of a related business where a
subsidiary relationship is established
4. obligation in a contract to set aside funds in a sinking fund to settle a debt
5. anticipated losses or business reverses

Immediacy Test – profit must be applied not too long from the time of retention of profits. This rule
applies if the accumulation of profit is deemed for the reasonable needs of business.

Limit under the Corporation Code of the Philippines – a corporation can retain profits not exceeding 100%
of its paid in capital. Accumulation of profits up to 100% of the paid up capital therefore is not an improper
accumulation of profit.

Formula in computing IAET:

Taxable income for the year xxx
Add:
a) Income subjected to final tax xxx
b) NOLCO xxx
c) income exempt from tax xxx
d) income excluded from gross income xxx xxx
Total xxx
Less:
a) income tax paid xxx
b) dividends declared/paid xxx xxx
Total
Add: Retained Earnings from prior years
Accumulated earnings as of the year xxx
Less: Amount that may be retained (100% of paid up (xxx)
Improperly Accumulated Taxable Income xxx
Multiply by rate 10%
Improperly Accumulated Earnings Tax xxx

Period of Payment of Dividend/ Payment of IAET

The dividend must be declared and paid or issued not later than one year following the close of the
taxable year, otherwise IAET, if any, should be paid within fifteen (15) days thereafter.

Determination of Purpose to Avoid Income Tax

Prima Facie Evidence – the fact that any corporation is a mere holding company or investment
company.

Holding or Investment Company – refer to a corporation having practically no activities except holding
property, and collecting the income from therefrom or investing the same.
Prima facie instances:
1. Investment of substantial earnings of the corporation in unrelated business or in stock or securities of
unrelated business
2. Investment in bonds and other long-term securities
3. Accumulation of earnings in excess of 100% of paid-up capital, not otherwise intended for the
reasonable needs of the business.

Exempt Corporations (Section 30 of the Tax Code)

a. Labor, agricultural or horticultural organizations not organized principally for profit
b. Mutual savings bank not having a capital stock represented by shares, and cooperative bank without
capital stock organized and operated for mutual purposes and without profit (now governed by RA
8367 or the Revised Non-Stock Savings and Loan Association Act of 1997 and RA 6938, as
amended by RA 9520 or the Philippine Cooperative Authority Law of 2008)
c. A beneficiary society, order or association, operating for the exclusive benefit of the members such as
fraternal organizations operating under the lodge system, or a mutual aid association or a non-stock
 corporation organized by employees providing for the payment of life, sickness, accident, or other
benefits exclusively to the members of such society or order, or association, or nonstick corporation or
their dependents.
d. A cemetery company owned and operated exclusively for the benefit of its members
e. Non-stock corporation or association organized and operated exclusively for religious, charitable,
scientific, athletic, or cultural purposes, or for the rehabilitation of veterans, no part of its income inure
to the benefit of any member, organizer, officer or any specific person
f. Business league, chamber of commerce, or board of trade, not organized for profit and no part of the
net income or which inures to the benefit of any private stockholder or individual
g. Civic league or organizations not organized for profit but operated exclusively for social welfare
h. Non-stock and nonprofit educational institution
i. Government educational institution
j. Farmer’s or other mutual typhoon or fire insurance company, mutual ditch or irrigation company,
mutual cooperative telephone company, or like organizations 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
k. Farmer’s, 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 the proceeds of sales, less the necessary
selling expenses on the basis of the quantity of produce finished by them.

Note: Income from whatever kind and character of the above organizations from any of their properties, real or
personal, or from activities conducted for profit regardless of the disposition made of such income, shall be
subject to income tax except on non-stock, non-profit educational institution which remain exempt.

PARTNERSHIP
By the contract of partnership, two or more persons bind themselves to contribute money, property or
industry to a common fund with the intention of dividing the profits among themselves.
Two or more persons may also form a partnership for the exercise of profession. Art. 1767 of the Civil
Code

Kinds of Partnerships
KINDS OF Partnerships Regular Income Tax
General Professional Partnerships (GPP’s) Exempt
General Co-Partnerships (GCP’s) Taxable like Ordinary Corp.
Unregistered Partnerships (UP’s)

KINDS OF Partnerships Regular Income Tax

General Professional Partnerships (GPP’s) Exempt
General Co-Partnerships (GCP’s) Taxable like Ordinary Corp.
Unregistered Partnerships (UP’s)

Allowable Deductions
1. Itemized deductions
2. Optional Standard Deductions

Net Distributable Income from GCP/ UPs

• Income distributed to each partner is subject to 10% Final Withholding Tax like the dividends received
by individuals from corporations.

Net Distributable Income of GPPs

 • Part of Taxable Income of each or individual partners. Subject to Basic Tax.
• Not more than 720, 000 – 10% CWT
• 720, 000 or more – 15% CWT

Co-ownerships
There is co-ownership whenever the ownership of an undivided thing or right belongs to different
persons (Art. 484, NCC)
A co-ownership is exempt from tax.

-done-