INCOME TAX

UNIT III: ON
CORPORATIONS
The Philippines currently imposes the highest CIT rate in the ASEAN region, which is a burden to micro, small, and
medium enterprises (MSMEs) that are dealing with the effects of COVID-19. Even before the pandemic, the 30 percent CIT
rate hindered local businesses from expanding, growing, and competing with their regional counterparts.
For decades, the Philippines has been too generous in granting tax incentives to a few investors, in perpetuity, and
without a regular and in-depth review of the costs and benefits of doing so. We give away some of the most, if not the
most, generous incentives in the region via a special rate of 5 percent on gross income earned (GIE) that is in lieu of all
taxes, both local and national, and with no time limit.
In 2017 alone, the Filipino people granted PHP 441 billion (or 2.8 percent of GDP) in tax incentives to only 3,150
companies, including those on the elite list of Top 1,000 corporations. This is just a fifth below the annual budget of the
Department of Education (DepEd) and roughly four times larger than that of the Department of Health (DOH) in the same
year.

In principle, granting incentives is justifiable if the recipients generate a net benefit to society, such as the creation of
good jobs, investing in less developed areas, and if incentives are given for a generous but reasonable amount of time —
not forever.
CORPORATION

Under Sec. 2 of the Corporation Code (Batas Pambansa

Bilang 68), a “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
 Under Sec. 22([B] of the Tax Code)
CORPORATION

Partnerships, no matter how Created when two or more persons contribute money, property or industry to a
created or organized common fund with the intention of dividing the profit among themselves.

Group of individuals, acting jointly, establish and operate a business enterprise

under an artificial name, with an invested capital divided into transferrable shares,
Joint stock companies
an elected board of directors and other corporate characteristics, BUT operating
without formal governmental authority

Joint Accounts (cuentas en One interests himself in the business of another by contributing capital thereto, and
participacion) sharing in the profits or losses in the proportion agreed upon. They are not subject
to any formality and may be privately contracted orally or in writing.

Associations Includes all organizations which have substantially the salient features of a
corporation to be taxable as such.

Insurance companies One Person Corporation

 Under Sec. 22([B] of the Tax Code)
NOT A CORPORATION

Partnerships formed by persons for sole purpose of exercising their common

General Professional Partnership profession, no part of the income of which is derived from engaging in any trade or
business.

Joint Venture or Consortium,

A commercial undertaking by two or more persons, differing from a partnership in
formed for the purpose of
that it relates to the disposition of a single lot of goods, or the completion of a
1. Undertaking Construction
single project.
Projects
2. Engaging in Petroleum, Coal,
Geothermal and other energy
operations under a service
contract with the government
 CORPORATE TAXPAYER

DOMESTIC FOREIGN

Non- resident
Resident Foreign
Foreign
 Type Earned within the Earned outside the Philippines
Philippines

Domestic Taxable Taxable

Resident Foreign Taxable Non-Taxable

Non-resident Foreign Taxable Non-Taxable

 SOURCES OF INCOME

Business/ Passive
Income – Capital Gains
Ordinary –
Income–
Income generated
without any active Arising from the
Income derived conduct (Interest, sale of capital
from the exercise of Royalties, Dividends assets
the business etc.)
 CORPORATE TAXPAYER

Ordinary Special
Corporations Corporations
Exempt
Corporations
 REGULAR CORPORATE INCOME TAX (RCIT) TAX RATE

TYPE OF TAXABLE TAX BASIS PRIOR CREATE CREATE*

CORPORATION *Effective July 1, 2020
Taxable
Domestic Corporation in general 30% 25%
Income
Domestic MSMEs Corporation
with taxable income of not Taxable 30% 20%
exceeding P5M and with total Income
assets of not more than P100M
(excluding land value)
Taxable
Resident Foreign Corporation 30% 25%
Income
Non- Resident Foreign Gross
30% 25%
Corporation Income
 MINIMUM CORPORATE INCOME TAX (MCIT)
A company is liable for MCIT starting the 4th year immediately following the year in
which it commenced its operations. Meaning, if the Company started operating in
2016 (regardless of the month), it will be liable for MCIT (provided it is higher than
RCIT) starting 2020, which is the 4th year from 2017 (the year following the year in
which it commenced operations).

EXCESS MCIT CARRY-OVER (Sec. 27[E][2]): Any excess of the MCIT over the RCIT shall
be carried forward and credited against normal tax (RCIT) for the three (3)
immediately succeeding taxable years.
 RELIEF FROM MCIT

Prolonged Labor Force Majeure

Dispute

Legitimate Special
Business Reverses Corporations
 TAX RATE

TYPE OF CORPORATE TAX TAX BASIS PRIOR CREATE CREATE

Minimum Corporate Income Tax

Gross 2% 1%
(MCIT) – Applicable from July
Income
1,2020 to June 30, 2023
GROSS INCOME TAX (GIT) – 15% of the Gross Income

1. A tax effort ratio of 20% of Gross Income (GNP)

2. A ratio of 40% of income tax collection of total tax revenue
3. A VAT effort of 4% of GNP
4. A 0.9% ratio of the consolidated Public Sector Financial
Position to GNP
5. Cost of Sales Ratio do not exceed 55%
 ORDINARY DC RFC NRFC
CORPORATION

RCIT (Regular Corporate

Income Tax)- 20%/25% of
the Taxable Income 25% FWT based on Gross
Income

MCIT (Minimum Corporate

Income Tax) – 1%/2% of
the Gross Income

GIT (Gross Income Tax) –

15% of the Gross Income
 Non-Profit Proprietary
Taxable Income 10%

DC
Educational Institutions
Non- Profit Proprietary
SPECIAL CORPORATIONS
Taxable Income 10%
Hospitals

International Carriers Gross PH Billings 2.5%

RFC
Regional Operating
Taxable Income 10%
Headquarters (ROHQ)

NR Owner or Lessor of
Gross Income 4.5%
Vessel
NRFC

NR Cinematographic film
owner, lessor or Distributor Gross Income 25%

NR lessor of aircraft,
Gross Income 7.5%
machinery or equipment
 TAX RATE

TYPE OF CORPORATE TAX TAX BASIS PRIOR CREATE CREATE

Non-Profit Proprietary
Educational Institutions - Taxable
10% 1%
Applicable from July 1,2020 to Income
June 30, 2023

Non-Profit Proprietary Hospitals

Taxable
- Applicable from July 1,2020 to 10% 1%
June 30, 2023 Income

Regional Operating Headquarters

Taxable
(ROHQ) – RCIT effective Jan 1, 10% 20%/25%
2022 Income
TAX EXEMPT CORPORATIONS
A. Labor, Agriculture, or Horticultural Organization not organized principally for profit.
B. Mutual Savings Banks and Cooperative Banks (Non-Stock & Non-Profit)
C. Fraternal Beneficiary Society, Order or Association (Non-Stock)
D. Cemetery Companies owned and operated exclusively for the benefit of its
members;
E. Religious, Charitable, Scientific, Athletic or Cultural Corporations
F. Business League, Chamber of Commerce, or Board of Trade (Non-Profit)
G. Civic League (Non-Profit)
H. Non-Stock, Non-Profit Educational Institutions (Non-Profit)
I. Government Educational Institution
J. Mutual Fire Insurance Companies and Like Organizations (For the purpose of
meeting it’s expense requirements)
K. Farmers, Fruit Growers’ or Like Associations (For the purpose of meeting it’s
marketing expense requirements)
 TAX % Base
RCIT (MSME) 20% TI
TYPE OF
CLASSIFICATION RCIT 25% TI
CORPORATION
MCIT 2% GI
• Domestic (DC) TAX EXEMPT 0%
• Resident Foreign (RFC) CORPORATION
• Non-resident Foreign
(NRFC)
SPECIAL
CORPORATIONS Refer to Slide 20-21
Not
Applicable
to NRFC ORDINARY
Already in 4th year? NO MSME?
CORPORATIONS

YES
YES NO
RCIT
Whichever is OR
Higher MCIT NO MSME?
RCIT (MSME) RCIT
RCIT (MSME)
Whichever is
OR
Higher YES
MCIT
ILLUSTRATION: Assume the following data for Davide Corporation, Domestic Corporation in
it’s first year of operation in 2019. Davide has a total assets amounting to P50M excluding
land where the manufacturing site and offices are located.
Income Amount
Gross Income, Philippines P 975,000
Expenses, Philippines 750,000
Gross Income, Malaysia 770,000
Expenses, Malaysia 630,000
ILLUSTRATION: Assume the following data for Davide Corporation, Domestic Corporation in
it’s second year of operation in 2020. Davide has a total assets amounting to P150M
excluding land where the manufacturing site and offices are located.
Income Amount
Gross Income, Philippines P 975,000
Expenses, Philippines 750,000
Gross Income, Malaysia 770,000
Expenses, Malaysia 630,000
ILLUSTRATION: Assume the following data for Davide Corporation, Domestic Corporation in
it’s third year of operation in 2021. Davide has a total assets amounting to P98M excluding
land where the manufacturing site and offices are located.
Income Amount
Gross Income, Philippines P 975,000
Expenses, Philippines 750,000
Gross Income, Malaysia 770,000
Expenses, Malaysia 630,000
ILLUSTRATION: Assume the following data for Davide Corporation, Resident Foreign
Corporation in it’s first year of operation in 2021. Davide has a total assets amounting to
P250M including land where the manufacturing site and offices are located amounting to
P100M.
Income Amount
Gross Income, Philippines P 975,000
Expenses, Philippines 750,000
Gross Income, Malaysia 770,000
Expenses, Malaysia 630,000
ILLUSTRATION: Assume the following data for Davide Corporation, Non-Resident Foreign
Corporation in it’s first year of operation in 2021.

Income Amount
Gross Income, Philippines P 975,000
Expenses, Philippines 750,000
Gross Income, Malaysia 770,000
Expenses, Malaysia 630,000
ILLUSTRATION: Assume the following data for Davide Corporation, Domestic Corporation in
it’s 4th year of operation in 2021. Davide is not an MSME.
Income Amount
Gross Income, Philippines P 975,000
Expenses, Philippines 750,000
Gross Income, Malaysia 770,000
Expenses, Malaysia 630,000
ILLUSTRATION: Assume the following data for Davide Corporation, Domestic Corporation in
it’s 4th year of operation in 2021. Davide is not an MSME.
Income Amount
Gross Income, Philippines P 975,000
Expenses, Philippines 950,000
Gross Income, Malaysia 770,000
Expenses, Malaysia 730,000
ILLUSTRATION: In relation to the last question, Assume the following data for Davide
Corporation, Domestic Corporation in it’s 5th year of operation in 2022. Davide is not an
MSME.
Income Amount
Gross Income, Philippines P 1,075,000
Expenses, Philippines 550,000
Gross Income, Malaysia 870,000
Expenses, Malaysia 430,000
ILLUSTRATION: Assume the following data for Davide Corporation, Non-Resident Foreign
Corporation in it’s 4th year of operation in 2021.

Income Amount
Gross Income, Philippines P 975,000
Expenses, Philippines 750,000
Gross Income, Malaysia 770,000
Expenses, Malaysia 630,000
ILLUSTRATION: Trinity College a non-profit proprietary educational institution provided the
following data for 2021:
Income Amount
Income from tuition fees 1,000,000
Miscellaneous fees 1,500,000
Operating Expenses 600,000
Income from Canteen 700,000
ILLUSTRATION: Trinity College a non-profit proprietary educational institution provided the
following data for 2024:
Income Amount
Income from tuition fees 1,000,000
Miscellaneous fees 1,500,000
Operating Expenses 600,000
Income from Canteen 700,000
ILLUSTRATION: Trinity College a non-profit proprietary educational institution provided the
following data for 2021:
Income Amount
Income from tuition fees 1,000,000
Miscellaneous fees 1,500,000
Operating Expenses 600,000
Income from Canteen 3,000,000