TAXATION: Corporations Subjected to Special Tax Rates R.C.

Pendon
2020
Exempt Corporations & Corporations Subjected to Special Income Tax Rates

Summary of Tax Rates:

Particulars Tax Rate Tax Base

Propriety/Private educational institutions* 10% Taxable net income
Non-profit educational institute* Exempt -
Propriety Hospitals* 30% RCIT Taxable net income
Proprietary Non-profit Hospitals* 10% Taxable net income
FCDU & Offshore Banking Units (OBUs)*
- Offshore Income Exempt -
- Onshore Income 10% FWT Gross
- All Other Income 30% RCIT sales/receipts
Taxable net income
Regional or Area Head Quarters (RHQ) Exempt
Regional Operating Headquarters (ROHQs) 10% Taxable Net Income
International Carriers* 2.5% Gross Philippine
Billings
Non-resident cinematographic film owner, 25% Gross Income
lessor, or distributors
Non-resident owner or lessors of vessels 4.5% Gross rentals or
chartered by Philippine Nationals charter fees
Non-resident owner or lessors of aircraft, 7.5% Gross rentals or
machineries, and other equipment fees
*to be further discussed in this handout

GOCCs exempt from Income Tax

1. GSIS
2. SSS
3. Phil Health
4. Local Water Districts

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Exempt Corporations and Associations (Sec. 30)

(1) labor, agriculture or horticultural organizations not organized principally
for profit;
(2) mutual savings banks not having capital stock represented by shares,
and cooperative banks without capital stock organized and operated for
mutual purposes and without profit;
(3) beneficiary society orders or associations, operating for the exclusive
benefit of the members;
(4) cemetery company, owned and operated exclusively for the benefit of its
members;
(5) non-stock corporations or associations operated exclusively for religious,
charitable, scientific, athletic, or cultural purposes, or for the
rehabilitation of veterans;
(6) business leagues, chambers of commerce, boards of trade not organized
for profit;
(7) civic leagues or those organized exclusively for the promotion of social
welfare;
(8) non-stock and nonprofit educational institutions;
(9) government educational institutions;
(10) farmers’ or other mutual typhoon or fire insurance companies, mutual
ditch or irrigation companies, mutual or cooperative telephone
companies, or like organizations of a purely local character;
(11) as well as farmers’, fruit growers’ associations operated as a sales agent
for the purpose of marketing the products of its members.
*see RMO 38-2019 for further details of the above corporations
Mere registration with the Securities and Exchange Commission (SEC) as a non-stock,
nonprofit corporation does not automatically entitle an entity to the tax exemption.

Tax Exemption Test

Tax exemption is strictly construed against the taxpayer. It is a corporation’s activities
that determine the true nature of the organization and its taxability or exemption from
taxes. Thus, to determine whether a corporation qualifies for income tax exemption
under Section 30 of the NIRC, the BIR provided two tests:

 Organizational Test: This requires that the corporation or association's

constitutive documents (SEC Registration, Articles of Incorporation and By-
Laws) must show that its primary purpose/s of incorporation fall under Section
30 of the NIRC.

 Operational Test: This requires that the regular activities of the corporation or
association be exclusively devoted to the accomplishment of the purposes

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specified in Section 30 of the NIRC. A corporation or association fails to meet
this test if the corporation has no activities conducted in furtherance of the
purpose for which it was organized, or if a substantial part of its operations
constitutes "activities conducted for profit".

Income from other activities

Section 30 corporations are allowed to engage in activities conducted for profit without
losing their tax exemption but such activities will render it taxable.
The tax exemption granted to Section 30 corporations is not absolute as it covers only
the income received by corporations in furtherance of the purpose for which they were
established; hence, income of whatever kind and character from any of their
properties, real or personal, or from any of their activities conducted for profit
regardless of the disposition is subject to tax.
Thus, interest income from bank deposits, gains from investments, rental income from
real or personal properties shall be subject to income tax. Consequently, Section 30
corporations are required to file quarterly and annual income tax returns to report
such other income.

PROPRIETY EDUCATIONAL INSTITUTIONS (PEI)

A propriety/private educational institution is
1. Any private school maintained and operated by private individuals or group
2. With a permit to operate from
a. DepEd
b. CHED
c. TESDA
To put it simply, it is any private school, not operated by the government, that is
registered with DepEd, CHED, or TESDA.
They are subjected to a rate of 10% based on their taxable net income (computed in
the same manner as a domestic corporation). Non-profit educational institutions
are tax exempt.

Non-profit educational institution

Under the 1987 Constitution, it provides for the tax exemption of educational
institutions to wit:
All revenues and assets of non-stock, non-profit educational institutions used
actually, directly, and exclusively for educational purposes shall be exempt
from taxes and duties. Upon the dissolution or cessation of the corporate

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existence of such institutions, their assets shall be disposed of in the manner
provided by law.
Proprietary educational institutions, including those cooperatively owned, may
likewise be entitled to such exemptions subject to the limitations provided by
law including restrictions on dividends and provisions for reinvestment. 1
In the case of CIR v. De La Salle University, Inc., the Supreme Court laid down the
following requisites for availing the tax exemption under the 1987 Constitution:
1. the taxpayer falls under the classification non-stock, non-profit educational
institution; and
2. the income it seeks to be exempted from taxation is used actually, directly and
exclusively for educational purposes.
To determine if the educational institution is “non-stock, non-profit”, the Articles of
Incorporation must include the following provisions:
a. that the corporation is non-stock, non-profit;
i. "Non-stock" means that no part of its income is distributable as dividends
to its members, trustees, or officers and that any profit obtained as an
incident to its operations shall, whenever necessary or proper, be used for
the furtherance of the purpose or purposes for which the corporation was
organized.
ii. “Non-profit" means that no net income or asset accrues to or benefits any
member or specific person, with all the net income or asset devoted to the
institution's purposes and all its activities conducted not for profit.
b. that the primary purpose for which it was created is one of those enumerated
under Sec. 30 of the Tax Code of 1997;
c. that no part of the net income shall inure to the benefit of any its members;
d. that the trustees do not receive any compensation; and
e. in case of dissolution, assets of the corporation shall be transferred to similar
institution or to the government;2
Therefore, in order for an entity to qualify as a non-stock and/or non-profit
corporation/association/organization exempt from income tax, its earnings or assets
shall not inure to the benefit of any of its trustees, organizers, officers, members or
any specific person. The following are considered "inurements" of such nature:
1. The payment of compensation, salaries, or honorarium to its trustees or
organizers;
2. The payment of exorbitant or unreasonable compensation to its employees;
3. The provision of welfare aid and financial assistance to its 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, order,
association, or non-stock corporation under Section 30 (C) of the NIRC
1
Section 4 (3), Article XIV of the 1987 Philippines Constitution
2
RMC No. 14-2001

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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 the purpose/purposes similar to its own);
5. The 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. Accordingly, its constitutive documents must
expressly provide that in the event of dissolution, its assets shall be distributed
to one or more entities formed for the purpose/purposes similar to its own, or
to the Philippine government for public purpose.

BIR Ruling No. 1031-18, June 28, 2018

Facts Jesus Christ King of Kings and Lord of Lords Academy (JCKL
ACADEMY) is said to be a non-stock, non-profit educational
institution.
Issue Is JCKL Academy qualified for the tax exemption for non-stock, non-
profit educational institutions?
Ruling No. The submitted Amended Articles of Incorporation of JCKL
Academy disclosed that its registration with the SEC is only a non-
stock corporation. Consequently, it cannot be qualified as a non-profit
educational institution. Therefore, it shall be treated as a proprietary
educational institution.

BIR Ruling No. 1031-18, June 28, 2018

Facts It is represented that JPI Technologies Training and Services, Inc., is
a non-stock, non-profit association. They seek for the issuance of a
certificate of tax exemption enjoyed by a non-stock corporation or
association organized and operated exclusively for educational
purposes.

Issue Is JPI qualified for the tax exemption for non-stock, non-profit
educational institutions?

Ruling No. In the submitted documents of JPI, it was disclosed that the
Board of Trustees are entitled to reasonable per diems. The giving of
per diems to the members of the Board of Trustees is considered as
distribution of equity (including the net income) of JPI. This act
violates the requirement that no part of the net income or assets of
the corporation shall inure to the benefit of any individual or specific
person. Thus, JPI cannot be qualified as a non-stock, non-profit
educational institution.

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Special rules on Capital Expenditure
When a PEI purchased a depreciable asset for the expansion of school facilities, they
have the option to either:
1. Claim the full amount as an expense for the taxable year
2. Capitalize the equipment and claim the yearly depreciation as an expense

Pre-dominance Test
In order for a propriety educational institute to be subjected to the special 10% rate,
they must comply with the pre-dominance test.
If the total gross income from unrelated trade, business or activities exceeds fifty (50%)
of the total gross income derived from ALL sources, the 25% RCIT shall apply.
Unrelated trade, business or other activity means any trade, business or activity, the
conduct of which is not substantially related to the exercise or performance by such
educational institution of its primary purpose or function.
Simply put, if MAJORITY of the gross income of the educational institute came from
activities other than “educational” activities, then they are subject to the normal 30%
RCIT. Because, as schools, they should provide educational services as their main line
of business. If majority of their gross income does not came from such educational
activities, it is as if the main purpose of the school is not to teach or educate the
students but for some other purpose.
Illustration:
FUE Dil is an educational institution has the following income and expenses during
2019:

Gross income, tuition fees 5,000,000

Rental Income, from stalls in the school canteen 1,000,000
Dividend from domestic corporation 2,500,000
Interest Income from Bank 600,000
Operating Expenses 3,900,000

Compute the tax payable

Solution:

1.) Pre-dominance test

Determining total gross income

Gross income, tuition fees 5,000,000
Rental Income, from stalls in the school 1,000,000
canteen
Dividend from domestic corporation 2,500,000

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Interest Income from Bank 600,000
Total Gross Income* 9,100,000

*notice that I included the income subjected to FWT, because the law said,
“gross income from ALL sources”, hence it includes income no matter the tax
treatment is. So, when in doubt if the income is included in the predominance
test, IT IS INCLUDED.

Determining gross income from unrelated activities

Rental Income, from stalls in the school 1,000,000
canteen
Dividend from domestic corporation 2,500,000
Interest Income from Bank 600,000
Total Gross Income 4,100,000

Percentage of unrelated income

4,100,000
=45 %(it is not majority hence subject ¿the10 % rate)
9,100,000

2.) Compute Tax Payable

Gross income, tuition fees 5,000,000

Rental Income, from stalls in the school 1,000,000
canteen
Total Gross Income 9,100,000
Less: Operating Expenses (3,900,000)
Net Taxable Income 5,200,000
Income Tax rate 10%
Income Tax Due 520,000

PROPRIETARY NON-PROFIT HOSPITALS

They are subjected to the same 10% tax as a proprietary educational institute. They
are also subjected to the same pre-dominance test. The only difference is that the
hospital should be “non-profit” and the educational institute should ONLY be
“proprietary”.

A non-profit hospital can be exempt from income tax if it satisfies the following
requisites:
1. Organized as a non-stock corporation
2. Operated exclusively for charitable purposes
3. No part of its net income or asset shall belong to or inure to the benefit of any
member, organizer, officer or any specified person (non-profit)

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Tax exemption to non-profit charitable institutions are not automatic, they need to
demonstrate that they operate exclusively for charitable purposes. Because the
requisite of non-stock, non-profit may simply be checked on the appropriate
documents.

Some Clarification:

 Non-profit vs Proprietary
o NON-PROFIT means no net income or asset accrues to or benefits any
members or specific persons
o PROPRIETARY means “private”, so in other words it is privately owned.

 Non-profit vs charitable/charity
o NON-PROFIT does not necessarily mean “charitable”
o CHARITABLE/CHARITY is when they offer goods or services for free to
the public which would otherwise fall on the shoulders of the
government. (Hence they are called non-government organization
because they perform some responsibilities of the government)

Illustration:

A non-profit hospital which started operations in 2001 has the following results of
operations in 2019:
Hospital Related Non-hospital Total
Related
Gross receipts and P 300,000,000 P 200,000,000 P 500,000,000
sales
Cost of services & 280,000,000 140,000,000 420,000,000
sales
Gross Income 20,000,000 60,0000,000 80,000,000
Less: Expenses 52,000,000 26,000,000 78,000,000
Net Income (P 32,000,000) P 34,000,000 P 2,000,000

Compute the income tax due

Answer: P1,600,000

Solution:

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To clarify the income tax treatment of a hospital:

Hospital

is it non-profit?

Yes No

Does it satisfy the

30% RCIT
requisites for exemption?

Yes No

Does it satisfy the pre-

Exempt
dominance test?

Yes No

10% Tax Rate 30% RCIT

INTERNATIONAL CARRIES DOING BUSINESS IN THE PH

Taxpayers: International air & shipping carriers (air and sea)

Tax Rate: 2.5%
Tax Base: Philippine Gross Billings.
Reciprocity: Rule on reciprocity shall apply
*emphasis on “international”, so local carriers like Philippine Airlines, and Cebu
Pacific are not subjected to such tax because they are subjected to the 30% RCIT.

Philippine Gross billings

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Includes only outgoing flights from the Philippines, more specifically, the following are
the criteria:
 Gross revenue from the carriage of people, & cargo
 Flight should be originating from the Philippines (hence flights from USA to PH
is not subject to the 2.5% tax)
 Should be continues and uninterrupted.
 Place of sale & payment of the ticket is not relevant (hence the IMPORTANT
factor is the origin and destination stated in the ticket)
Connecting Flights/Transshipment

 Originating from the PH (PH to Country 1 to Country 2)

o Different airline handled the flight from Country 1 to Country 2
 Taxable only for the flight between PH to Country 1
 Price of ticket should be allocated

o Same Airline handled the flight f for whole journey

 Taxable for the whole journey

 Originating from Foreign Country

o Scenario 1 (Country 1 to PH to Country 2)
 Different airline handled the flight from PH to Country 2
 Taxable only for the flight between PH to Country 2
 Price of ticket should be allocated (based on hours of flight
or
 Same Airline handled the flight for whole journey
 Not taxable
 Subject to the 48-hour rule

o Scenario 2 (Country 1 to Country 2 to PH)

 Not subjected to tax on gross billings
 Because PH is the destination, and there is no outgoing flights
from the PH

48 Hour Rule
Transshipment passengers should stay in the PH for 48 hours or less. If they go
beyond such time, they are not considered as transient passengers hence taxable
because it is considered originating from the PH. Unless the reason for such lengthy
stay is due to force majeure.

Online & off-line carriers

 Online carriers refer to international carriers having or maintaining
transportation operations to and from the PH.

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 Off-line carriers refer to international carriers having no transportation

operations to and from the Philippines. They not certificated by the Civil
Aeronautics Board, and have no landing rights in the PH, but who maintains
office or who has designated or appointed agents or employees in the
Philippines, who sells airline tickets.

The milestone case for this is G.R. No. 169507, Air Canada vs. CIR
Facts: Air Canada is an offline international carrier selling passage tickets in
the Philippines, through a general sales agent. Air Canada is a resident foreign
corporation doing business in the Philippines.

Issue: Is Air Canada subjected to RCIT or the 2.5% special tax rate?

Ruling: Subject to 30% RCIT

Illustration:

BSA Airways, an international carrier has the following data for the year 2020:

Tickets sold in the Philippines:

PH to Japan P 450,000
PH to Taiwan (see #1) 900,000
Thailand to Hongkong 700,000
USA to PH 570,000

Tickets sold in USA:

PH to USA P 850,000
USA to Taiwan 640,000
Germany to Thailand (see 120,000
#2)
USA to PH 610,000

Tickets sold in the UK:

UK to PH P 340,000
UK to USA 900,000
PH to Thailand (see #3) 220,000
PH to UK 100,000

Additional information:
1. Passengers were transshipped in Hongkong to Taiwan by BSBA Airways. The
estimated flight hours were:
PH to HK – 2 hours
HK to Taiwan – 1 hour

2. Passengers were transshipped in the PH and stayed for 54 hours due to a major
storm. The whole flight was handled by the same airline company. Estimated
flight hours were:
Germany to PH – 7 hours

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PH to Thailand – 3 hours

3. Due to shortage of pilots during that time, the flight was subsequently endorsed
to another airline company.
4. Cost of serves for the airline is P2,500,000 and operating cost is P1,200,000.

How much is the income tax of BSA Airways?

Solution:
Tickets sold in the Philippines:
PH to Japan P 450,000
PH to Taiwan 600,000
(800k x 2 hrs/3 hrs)

Tickets sold in USA:

PH to USA P 850,000

Tickets sold in the UK:

PH to UK 100,000
Total Gross PH Billings 2,000,000
Tax Rate 2.5%
Income Tax Due 50,000

Comments:
1. In determining the gross PH billings, I disregard where the tickets were sold.
Because the place where the ticket is sold is irrelevant.
2. COGS & operating expenses is ignored because the tax base of the 2.5% tax
is the gross receipts and NOT the gross income or the net income.
3. Additional info #2 is not taxable because the 48 hour rule is satisfied even
thou they stayed for 54 hours. Because the cause of their extended stay are
factors beyond their control hence they have no choice but to stay longer
(sana ol na matagal mag stay)
4. Additional information #3 is not taxable because the one who pays the tax is
the other airline and not BSA Airways.

FOREIGN CURRENCY DEPOSIT UNIT

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In computing an FCDU’s income tax, we classify the income into 3 categories namely:

1. On shore Income (10% tax on gross receipts/sales)

- Foreign Currency Interest income from Residence (individuals &
corporations)
*Again, it is INTEREST only

2. Offshore income (Exempt)

- All foreign exchange income & foreign currency interest income from
non-residence & banks

3. All other income (30% RCIT)

- All non-forex related transactions (residency does not matter)

FCDU

Are they residents AND non-

banks?

Yes No

is it interest/forex
Is it interest income?
income?

Yes No Yes No

All others Offshore All others (30%

On shore (10%)
(30% RCIT) (exempt) RCIT)

Simple guide for Interest income of FCDU:

To further simplify the application of taxes for FCDU, if one lives outside the
Philippines, exempt. If he lives inside the Philippines, taxable. But if he is a bank, it is
exempt regardless of residency.

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If you see that the income is NOT interest or foreign exchange gain. It is
automatically all others.

Expense Allocation
Since the FCDU is subjected to different rates, the expenses shall be allocated between
the 3 classification. The allocation can b made through the following:
1. Specific Identification- based on directly tracing each expense
2. Pro-rata allocation- based on the ratio of all income

Illustration:

Identity if the following transactions by an FCDU is on shore, offshore, or all others

Particulars Classification
Interest on US dollar loans granted to resident aliens On shore
Interest on US dollar loans granted to non-resident Off shore
citizens
Gain on foreign exchange trading from NRC Off shore
Gain on foreign exchange trading from resident All others
corporations
Consultancy fees from NRA-ETB All others
Consultancy fees from RFC All others
Gain on foreign exchange trading from BPI Off shore
Interest on foreign loans granted to Landbank of the PH Off shore
Interest from foreign currency deposit in a US bank Off shore

Illustration:

An FCDU derived the following income:

Interest income from bank deposits with an OBU P 2,300,000

Interest Income from Foreign Currency loans granted to 1,177,000
Resident Aliens
Interest income from a US dollar deposit with another 978,000
FCDU

Realized foreign exchange gains

- With Residence 300,000
- With non-residence 240,000

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Fees & commissions

- With Residence 50,000
- With non-residence 43,000

Penalties
- With Residence 76,000
- With non-residence 94,000

Cost of services of P900,000 and Operating Expenses are P 500,000. Compute the
income tax due of the FCDU

Solution:

Offshore Onshore All Others

Interest income from bank deposits 2,300,000
with an OBU
Interest Income from Foreign Currency 1,177,000
loans granted to Resident Aliens
Interest income from a US dollar 978,000
deposit with another FCDU
Realized foreign exchange gains 240,000 300,000
Fees & commissions 93,000
Penalties 170,000
Total 3,518,000 1,177,000 563,000
Cost of Services - - (96,300)
Gross Income 3,518,000 1,177,000 466,700
Operating Expenses - - (53,500)
Net Income/ Tax Base 3,518,000 1,177,000 413,200
Tax Rate Exempt 10% 30%
Tax Due -0- 117,700 123,960

Allocation of expenses:

“All others” allocation ratio = [563,000 / (3,518,000 +1,177,000 + 563,000)] =

10.7%

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“All others” COGS = 10.7% x 900,000 = 96,300

“All others” Operating Expenses = 10.7% x 500,000 = 53,500

Comments: Notice that I did not allocate to the expenses to Offshore & On shore
income, because in determining their income tax due, IT IS IRRELEVANT. Because
offshore is exempt, we compute their income for the purposes of determining the ratio
to be allocated to the All Others. While for Onshore, the tax base is the gross
sales/receipts so finding the COGS is again irrelevant and will just add confusion and
unnecessary labor.

RHQ & ROHQs

- RHQs are exempt from income because they don’t derive income. They are a
branch establish by a multinational company in the PH and act merely as a
supervisory, communications, and coordinating centers for their affiliates,
subsidiaries, or branches.

- ROHQs is taxed at 10% of their net taxable income. It is a branch in

established by a multinational corporation in the PH who may perform the
following:
a.) General and administrative planning
b.) Business planning and coordination
c.) Logistics services
d.) Training and personnel management
e.) Tech support and maintenance

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