3/22/2019

CORPORATE
INCOME TAXATION
(CIT) IDENTIFYING CORPORATE* TPs
TAX REVIEW CLASS
1.Ordinary / Regular
2.Special

1 2

What is a corporation? (for tax purposes) Kinds of Corporate TPs :

• Sec22(B),NIRC - . . . shall include partnerships, no matter
how created or organized, joint-stock companies, joint
accounts (cuentas en participacion), associations or
insurances companies,
***BUT DOES NOT include general professional partnerships,
Joint venture & consortium formed for the purpose of
undertaking construction projects or Joint venture &
consortium formed for the purpose of engaging
petroleum, coal geothermal and other energy operations
pursuant to an operating or consortium agreement under
a service K with the Gov’t
1. DC – corps created or organized in the
Philippines or under its laws (Sec22 (c),
NIRC)
2. FC – corps created or organized under the
laws of a foreign country
a.RFC - a FC engaged in trade or business
within the Philippines; or
b.NRFC - a FC not engaged in trade or
business within the Philippines
3 4

ORDINARY CORPORATE INCOME TAXPAYERS Determination of Taxable Income

TAX-EXEMPT
CORPS (SEC. 30, 1) DC – taxable NET income from sources within and outside
DC RFC NRFC NIRC) the Philippines
ON THEIR NET income = gross income* ( - ) allowable deductions**
INCOME-
GENERATING
ACTIVITIES 2) FC
30% UNITARY RATE a) RFC - taxed similarly as a DC on incomes derived from
Worldwide Philippine Philippine Worldwide sources WITHIN the Philippines
b) NRFC - taxable upon the ENTIRE GROSS INCOME*
TAXABLE TAXABLE GROSS TAXABLE received from all sources WITHIN the Philippines.
income income income income
5 6

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ORDINARY CORPORATE INCOME TAXPAYERS ORDINARY CORPORATE TPS

TAX-EXEMPT
CORPS (SEC. 30,
DC RFC NRFC NIRC) DC RFC NRFC
ON THEIR
INCOME- • Sources of • Phil • Phil
GENERATING
worldwide sources of sources of
ACTIVITIES
Income Income income
NIRC MANDATED INCOME TAX RATES (BI , CD, (BI, CD, PI) (PI, CD)
PHILIPPINE Philippine Remember PHILIPPINE PI)
PASSIVE PASSIVE taxing me PASSIVE
income income for 30%GI? income
7 8

SPECIAL CORPORATE INCOME TPs?

TRUE or FALSE?
DC RFC NRFC
1. Corp includes joint ventures, associations and
FILL THIS UP BASED ON SPECIFIC NIRC AND partnerships (P’p).
SPECIAL LAWS PROVISIONS APPLICABLE TO 2. Corps subject to a rate below 30% are
PARTICULAR SPECIAL TAXPAYERS referred to as special corps for tax purposes.
3. GOCCs are subject to CIT.
4. Tax-exempt corps are never subject to CIT.
9 10

TRUE or FALSE? D1 Partnership* (Ordinary Corporate TP)

GR: taxable, no matter how
1. Corporation includes joint ventures, associations
and partnerships. created or organized
2. Corps subject to a rate below 30% are referred to
as special corps for tax purposes.
•Exception: (not taxable)
3. GOCCs are subject to corporate income tax.
4. Tax-exempt corps are never subject to corporate General professional partnerships
income tax. (GPP)
11 12

2

Jose GATCHALIAN vs CIR, G.R. No. L-45425; April 29, 1939
A, & other 15 individuals put up money to
buy a sweepstakes ticket for the sole
purpose of dividing equally the prize
which they may win as they did in fact
the amount of P50K.
Is the prize taxable?
13
MODIFIED CASE PROBLEM: TP = UP
•A, B, C, D & E put up money to buy raffle
tickets for the sole purpose of dividing
equally the prize/s which they may win.
•They won the 3rd prize of P250k, is the prize
taxable and who should pay for the tax
thereon? How should the prize be taxed?
15
Is there a co-ownership or P’p?
•There is co-ownership which was
automatically converted into a P’p as the
heirs allow their shares to be held in a
common fund under a single
management and be used with the
intent of making profit which shall be
divided among themselves.
17
3/22/2019
Jose GATCHALIAN vs CIR, G.R. No. L-45425; April 29, 1939
Is the prize taxable?
•YES. An unregistered partnership*
was formed in this case therefore the
prize they won therein is taxable.
• SUBJ TO CIT RULES on Passive Income.
14
A & B are co-owners of inherited properties.
They agreed to use the said properties and the
income derived therefrom as a common fund
with the intention to produce profits for them in
proportion of their respective shares in the
inheritance.
• (For tax purposes) Is there a co-ownership or
P’p?
16
ONA DOCTRINE
• The income from inherited properties may be
considered as individual income of the respective
heirs only as long as the inheritance or estate is not
distributed, or, at least, partitioned. (NOT TAXABLE YET)
• But the moment their respective known shares are
used as part of the common assets of heirs to be used
in making profits, it is but proper that the income
from such shares should be considered as part of the
taxable income of an unregistered partnership. (NOW
TAXABLE) 18
3

MODIFIED PROBLEM: TP = CO turned to UP
• 3 siblings inherited a common income-generating
property.
• They agreed to use the said property and the
income derived therefrom as a common fund
(property + rolled over income = resource pool)
with the intention to produce profits for them
(income-generation) in proportion to their
respective shares in the inheritance (profit sharing =
capital contribution).
19
When CO-OWNERSHIP NOT TAXABLE
❑A Co-Ownership (CO) with properties which produce
income should not automatically be considered partners
of an unregistered P’p, or a corp, within the purview of
the income tax law.
❑When the essential elements of a taxable P’p are not
present, the CO is not taxable.
(a) NO agreement to contribute money, property or industry to a common
fund; and
(b) NO intent to divide the profits among them
21
OBILLOS, JR. vs CIR, 139 SCRA 436 (1995)
• A, bought two lots and then transferred his rights
to his four children - B,C,D, and E - to enable
them to build their residences.
• B resold the two lots after a year to F for a higher
price treating the profit as capital gains and
paying an income tax of their respective shares
of the profit.
• The CIR required them to pay CIT.
• Is there a partnership liable for corporate tax? 23
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DUTERTE vs. RALLOS
→ an agreement between 2 persons to
operate a cockpit, by which one is to
contribute his services and the other to
provide the capital, the profits to be
divided between them, constitutes a
partnership (taxable as corp)
20
From Partnership Law
• The sharing of returns DOES NOT in itself establish a
P’p whether or not the persons sharing therein have a
joint or common right or interest in the property.
• There must be a clear intent to form a P’p, the
existence of a juridical personality different from the
individual partners, and the freedom of each party to
transfer or assign the whole property.
22
OBILLOS, JR. vs CIR, 139 SCRA 436 (1995)
• A, bought two lots and then transferred his rights to
his four children - B,C,D, and E - to enable them to
build their residences. (not income-generating =
capital asset)
• B resold the two lots after a year to F for a higher
price treating the profit as capital gains and paying
an income tax of their respective shares of the profit.
(subjected themselves to Individual income tax = 6%
CGT)
• The CIR required them to pay CIT. (ordinary income
that is subj. to CIT)
• Is there a P’p liable for corporate tax?
24
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OBILLOS, JR. vs CIR, 139 SCRA 436 (1995)
Is there a P’p liable for corporate tax?
• NONE. The division of profits was merely
incidental. B and his siblings were merely co-
owners.
*Art1769(3), NCC: "the sharing of gross returns does not of itself
establish a P’p, whether or not the persons sharing them have a joint or
common right or interest in any property from which the returns are derived".
There must be an unmistakable intention to form a P’p or joint venture.
PASCUAL vs. CIR
→ persons who contribute property or funds for a
common enterprise and agree to share the gross
returns of that enterprise in proportion to their
contribution, BUT who severally retain the title to
their respective contribution, are not thereby
rendered partners
→ they have no common stock or capital and no
community of interest as principal proprietors in the
business from which the proceeds derived
EVANGELISTA vs. CIR
→ when our internal Revenue Code includes “partnerships”
among the entities subject to the tax on “corporations”, said
code included those which are not necessarily
“partnerships” in the technical sense of the term
→ PARTNERSHIPS – includes a SYNDICATE, GROUP, POOL,
JOINT VENTURE, or other unincorporated org’n, through or
by the means of which any business, financial operation, or
venture is carried on
→ a joint venture (JV) need not be undertaken in any of the
standard forms, or in conformity with the usual
requirements of the law on P’p, in order that one could be
deemed constituted for purposes of the TAX on corps
3/22/2019
PASCUAL vs. CIR
→ co-ownership or co-possession does not itself
establish a P’p, whether such co-owners or co-
possessors do or do not share any profits made by
the use of the property
→an isolated transaction whereby 2 or more persons
contribute funds to buy certain real estate for profit
in the absence of other circumstances showing a
contrary intention cannot be considered a P’p
→Tax Significance?
25 26
KIEL vs. SABERT
→ the declarations of one partner, not made in
the presence of his co-partner, are not
competent to prove the existence of a P’p
between them as against such partner
→the existence of a P’p cannot be established by
general reputation, rumor or hearsay
→ tax implication?
27 28
MODIFIED PROBLEM: TP Not Taxable as CIT = CO
• M-SPSME, bought 4 lots and then transferred her
rights to her 2 children – S &D - to enable them to
build their residences.
• D resold the 4 lots after a year to 3P because the
surrounding neighborhood had become the
center of drug activities. D sold them for a slightly
lower price that their acquisition cost. D paid
capital gains thereon.
• Later, CIR assessed D&S for deficiency income
tax. (CIR: Proper CIT not CGT?)
• IS CIR CORRECT? (THINK ABOUT THIS?)
29 30
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TAX-EXEMPT P’p
GPP - is a partnership formed by persons for the
sole purpose of exercising their common
profession, no part of the income of which is
derived from engaging in any trade or business
(Section 22(B), NIRC) (GPP is not liable for income
tax)
• shall be liable for income tax in their separate
and individual capacities (but the partners
composing it is liable for individual income tax
on their distributive shares from the GPP)
31
TE P’ps (of Common Profession)
• LAW Firm = A, L and W
• ACCTG OFFICE = E, F and G
HOWEVER,
• GENERAL MANPOWER SERVICES P’p
➢(SURVEYING, ENGINEERING, CONSTRUCTION, ETC) = TAXABLE
*FINL LIST: Allowable Exercise of Profession in the Corporate Form
33
CASE FACTS
• BATANGAS TRANSPORTATION + LAGUNA BUS (separate
& distinct fr each other operating bus lines; share
common stockholders & officers)
• Formed a Joint Emergency Operation to economize in
overhead expenses; to save on the salaries of one
manager, one assistant manager, fifteen inspectors,
special agents. . . .
• 50% - 50% profit sharing
• TAXABLE or NOT?
35
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PASS-THROUGH ENTITY*
vehicle by w/c income was earned;
Withholding Tax Agent
•A GPP is not considered a taxable entity
for income tax purposes.
•Sec26, NIRC provides that persons
engaging in business as partners in a GPP
shall be liable for income tax only in their
separate and individual capacities
computed on their respective distributive
shares of the partnership profit.
32
Joint Ventures (JVs)
GR: Joint accounts or JV/s formed for profit are taxable.
• Ex. Joint Emergency Operation – “although no legal
personality may have been created by the joint
emergency operation, nevertheless said JV or joint
management operated the business affairs of the 2
companies as though they constituted a single entity,
company or P’p, thereby obtaining substantial
economy and profits in the operation”. (Collector vs
Batangas Transportation Co., G.R. No. L-9692,January
6, 1958)= TAXABLE
34
CASE FACTS
• BATANGAS TRANSPORTATION + LAGUNA BUS (separate
& distinct fr each other operating bus lines; share
common stockholders & officers)
• Formed a Joint Emergency Operation to economize in
overhead expenses; to save on the salaries of one
manager, one assistant manager, fifteen inspectors,
special agents. . . .
• 50% - 50% profit sharing
• TAXABLE
36
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TAX-EXEMPT JVs / Consortiums (C)
1)JV / C undertaking (formed for the
purpose of) construction activities /
projects (BIR Ruling No. 317-92); and
2)JV / C engaged in (formed for the
purpose of) energy-related activities (exs.
petroleum, coal, geothermal) with
operating or consortium agreement/K
with the gov’t
37
TAXABLE OR NOT?
• Two local contractors entered into a joint
development agreement to construct a residential
subdivision.
• One local contractor shall contribute the parcel of
land while the other shall contribute the construction
and development of the parcel of land into a
subdivision.
• Each shall receive an allocation of saleable house and
lot units from the project.
• Is the JV liable for income tax? 39
• It is also important to note in this BIR Ruling that
the CIR held that
the allocation of saleable units DOES NOT
constitute as a taxable event as no
income is actually realized by Avida or
Aurora.
41
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CAVEAT! TAX-EXEMPT JVs /
Consortiums (C)
1) JV / C undertaking (formed for the purpose
of) construction activities / projects (BIR Ruling
No. 317-92); and
2) JV / C engaged in (formed for the purpose
of) energy-related activities (exs. petroleum,
coal, geothermal)
with operating or consortium agreement/K with
the gov’t (DO NOT INTERPRET IT LIKE THIS!)
38
Is the JV liable for income tax?
• No.
• In BIR Ruling No. 108-2010 [October 19, 2010],
involving a JV between Avida and Aurora, the CIR
held that the joint development agreement
between the two is not subject to income tax
because JVs formed by local contractors for
construction purposes are deemed as not falling
under the definition of a taxable corp.
40
In RR No. 010-12 [JUNE 1, 2012], a JV or C formed for the purpose of
undertaking construction projects which is not considered as a taxable
corp should be: (REQUIREMENTS)
1. For the undertaking of a construction project;
2. Should involve joining or pooling of resources by licensed local
contractors, licensed by the Philippine Contractors Accreditation
Board (PCAB) of the DTI;
3. The local contractors are engaged in construction business;
4. The joint venture itself must likewise be duly licensed as such by
the PCAB
Absent one of the requirements, the JV formed for
construction purposes shall be considered a taxable
corp.
42
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May JV involving foreign contractors be treated as a

non-taxable corp?
Yes, provided that the member foreign contractor is:
1. covered by a special license as contractor by the PCAB;
and
CORPORATE TAX LIABILITIES
2. construction project is certified by the appropriate govt
office as a foreign financed/internationally-funded project
and that international bidding is allowed under the
bilateral agreement between the Philippine govt; and
foreign/international financing institution
43 44

OF REGULAR / ORDINARY CORPS

OF REGULAR / ORDINARY CORPS
DC: DC: ON FOREIGN INCOME EARNED (as it is taxed for worldwide
1. Gross Income Tax* OR Regular Corporate Income Tax income)
2. Subject to MCIT Rule (under RCIT) – 2% of GI
3. IAET
• It is taxed on income from foreign sources when earned or received,
depending on the accounting method used
4. Final Tax on Passive Incomes (within)
5. 6% CGT for real properties classified as capital assets located within the • Income earned through a foreign subsidiary is taxed only when paid to
Philippines + DST a Philippine resident shareholder as a dividend.
6. Other capital gains subject to RCIT (only to the extent of capital losses, no
holding period allowed, no NCLCO)
• Meanwhile, income earned through a foreign branch is taxed as it
accrues. The losses incurred by the foreign branch are deductible
7. Net capital gains derived from the sale, exchange, transfer, or against other income earned by the DC.
similar transactions of shares of stock not traded through a LSE are
now taxed at a flat 15% rate under the TRAIN law • Double taxation is generally relieved through a credit for foreign taxes.
Optional/Alternative Taxation: 15% of GI after certain economic conditions and tax efforts have
been satisfied. (Pres upon SoF recommendation) – never implemented but still in the statutes
However (option), it can take a deduction for foreign taxes instead, if
that leads to a more favorable outcome.
45 46

OF REGULAR / ORDINARY CORPS OF REGULAR / ORDINARY CORPS

RFC:
1. Regular Corporate Income Tax
2. Subject to MCIT Rule (under RCIT)
3. Final Tax on Passive Incomes (within)
4. Regular CIT for sale of real properties classified as
capital assets located within the Philippines
5. Other capital gains subject to RCIT (only to the extent of
capital losses, no holding period allowed, no NCLCO)
6. Net capital gains derived from the sale, exchange, transfer, or similar
transactions of shares of stock not traded through a LSE - the old rates are
applicable (i.e. 5% on the first PHP 100,000 of gains, and 10% on gains in excess
of PHP 100,000).
NRFC:
1. Regular Corporate Income Tax at gross
2. Final Tax on Certain Passive Income within
3. Net capital gains derived from the sale, exchange,
transfer, or similar transactions of shares of stock not
traded through a LSE - the old rates are applicable
(i.e. 5% on the first PHP 100,000 of gains, and 10%
on gains in excess of PHP 100,000)
47 48

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FINAL TAX ON PASSIVE INCOME of CORPS
(Recipient of the Income)
INTEREST INCOME from current bank deposits or
deposit substitutes (short-term or long term) – 20%
*pre-termination rules applies only to Individual TPs
49
FINAL TAX ON PASSIVE INCOME of CORPS
(Recipient of the Income)
DIVIDEND INCOME:
from DC: tax exempt (inter-corporate dividends)
- to minimize double taxation effects
from FC: subject to regular tax (DC, RFC) BUT if
recipient is NRFC, subject to TAX-
SPARING RULE*
- when applicable, imposable tax rate is
15%
51
STOCK DIVIDENDS
• A Philippine corporation can distribute stock
dividends TAX-FREE, proportionately to all
shareholders (including corporate shareholders
which would not be subject to tax thereon).
53
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FINAL TAX ON PASSIVE INCOME of CORPS
(Recipient of the Income) – TRAIN UPDATES
• Interest on bank savings, time deposits, deposit substitutes,
and money market placements received by DC or RFC from
a DC - subject to a final tax of 20%, while
• interest income derived from FCDU deposits - subject to a
final tax of 15% under the TRAIN law. Such income is
excluded from gross income reportable in CIT returns.
50
CORPORATE DIVIDEND INCOME TAX
HIGHLIGHT (Cash/Property Dividends)
• Dividends received by a DC or RFC from another DC are NOT
SUBJECT TO TAX. These dividends are excluded from the taxable
income of the recipient DC or RFC.
• Dividends received by a NRFC from a DC are subject to a general
final WHT at the rate of 30%. A lower rate of 15% applies if the
country in which the corporation is domiciled either does not
impose income tax on such dividends or allows a tax deemed paid
credit of 15%. (APPLICATION OF THE TAX SPARING RULE.
• Treaty rates ranging from 10% to 25% may also apply if the recipient
is a resident of a country with which the Philippines has a tax treaty.
52
QUERY: What about Receipt of Corporate
Shareholders of Liquidating Dividends?
✓Mere distribution of liquidating dividends of a corporation
should not be treated as sale for purposes of the imposition
of CGT. CGT is a final tax on the gain from the sale of
property considered as capital asset. Hence, there must be
profit or gain from the sale, exchange or disposition of real
property before one can be liable for said tax. In other
words, CGT shall not be imposed in case there is no sale,
disposition or conveyance of real property, or no income
was derived from said transaction.
54
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QUERY: What about Receipt of Corporate FINAL TAX ON PASSIVE INCOME of CORPS
Shareholders of Liquidating Dividends? (Recipient of the Income)
✓In case of existence of gain (loss) upon liquidation; however, it is
subject to ordinary income tax as expressly provided under the Tax ROYALTY INCOME:
Code. Section 73 (A) of the Tax Code provides that any gain derived ✓Royalties received by DC or RFC from a DC - Subject
or any loss sustained by the stockholder from its receipt of to a final tax of 20%
liquidating dividends shall be treated as taxable income or
deductible loss, as the case may be. ROYALTIES ON CINEMATOGRAPHIC FILMS – 25% NRFC
✓The said tax treatment was echoed by Section 8 of Revenue NOT FINAL TAX BUT REGULAR TAX:
Regulations No. 06-2008 where it states that the capital gain or loss ✓when royalties within accrue from undertaking where
derived from such transaction shall be subject to regular income tax
rates in case of individual taxpayers or to corporate income tax rate
the TP has active involvement
in case of corps. 55 56

TAX ON PASSIVE INCOME of CORPS (Recipient TAX ON PASSIVE INCOME of CORPS (Recipient
of the Income) of the Income) FROM ABROAD BY DC

CORPORATE PRIZES – REGULAR TAX SUBJECT TO REGULAR TAX

CORPORATE WINNINGS, IN GENERAL – REGULAR TAX

57 58

Gross Sales is not Gross Income Gross Receipts is not Gross Income

Gross Sales TP: engaged in service-industry:

Less: Sales returns, discounts and allowances
Cost of goods sold Gross receipts
GROSS INCOME
Less: Returns, allowances and discounts
GROSS INCOME

59 60

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EXCLUSIONS FROM
CORPORATE GROSS INCOME
(L A G C I R M)
• LIMITED
✓NOT ALL EXCLUSIONS ARE APPLICABLE TO A CORPORATE
TP (insurance proceeds, retirement pays, compensation,
prizes, etc.)
• Applicable - INCOME EXEMPT UNDER TREATY,
Statutes (ex. PEZA)
61
Exclusions from Gross Income
✓Income derived by foreign gov’ts, financing institutions owned,
controlled or enjoying financing from foreign gov’ts*, and
international or regional financing institutions established by
foreign gov’ts, from their investments in loans, stocks, bonds or
other domestic securities or from interest on their deposits in
banks in the Philippines
✓Income derived from any public utility or from the exercise of
any essential government function accruing to the Philippine
gov’t or to any political subdivision
63
PROBLEM: EXCLUDED INCOME?
A DC entered into a loan and sales K with a foreign corp
where the latter shall extend a loan to the former and the
former shall sell to the latter all copper concentrates to be
produced from the machine to be purchased using the
loaned amount.
The foreign corp applied for the loan from one of its gov’t
financing institutions. (TP = FGFI)
Is the interest income from the loan automatically exempt
from withholding tax?
65
3/22/2019
Exclusions from Gross Income
• The following are not included in the computation
of the gross income of CORPORATE TPs:
1) Value of property acquired by gratuitous transfer
but not the income from such property;
2) Income exempt under treaty;
3) Miscellaneous
62
Exclusions from Gross Income
✓ Gains from the sale of bonds, debentures or
other certificate of indebtedness with a
maturity of more than 5 years
✓ Gains from the redemption of shares of stock in
a mutual fund company
64
PROBLEM: EXCLUDED INCOME?
A DC entered into a LOAN* and sales K with a foreign corp
where the latter shall extend a loan to the former and the
former shall sell to the latter all copper concentrates to be
produced from the machine to be purchased using the
loaned amount. (Situs of interest income = residence of the
debtor; DC is the debtor; DC is the constituted withholding
agent of the FC TP-creditor)
The foreign corp applied for the loan from one of its gov’t
financing institutions. (TP = FGFI)
Is the interest income from the loan automatically exempt
from withholding tax? 66
11

Is the interest income from the loan automatically exempt
from withholding tax?
NO. As held in CIR V. MITSUBISHI METAL CORPORATION
[JANUARY 22, 1990], the burden of proof rests upon the
party claiming an exemption to prove that it is in fact
covered by the exemption.
In the said case, the SC found that the foreign gov’t
financing institution had nothing to do with the sales and
loan agreement.
It is the foreign corp, not the foreign government financing
institution that is the sole creditor of the DC.
67
PROBLEM: Who is the TP? (classification?)
•ABC Airways is a foreign airline.
•While it did not carry passengers and/or cargo to
or from the Philippines, ABC maintains a general
sales agent of its tickets in the Philippines.
Is the sale of the tickets taxable as income from
sources within the Philippines?
69
INCOME IS TAXABLE
• For the source of income to be considered as coming from the
Philippines, it is sufficient that the income is derived from activity
within the Philippines.
• In ABC’s case, the sale of tickets in the Philippines is the
activity that produces the income. The tickets exchanged hands
here in the country and the payments for fares were also made
with Philippine currency. The site of the source of payments is the
Philippines. The absence of flight operations to and from the
Philippines IS NOT determinative of the source of income/site of
income taxation for the test of taxability is the “source.”
(see CIR VS. JAPAN AIRLINES [MARCH 6, 1991]; CIR VS. BOAC [APRIL 30,
1987]) 71
3/22/2019
When is a FC considered as a RFC?
•In order that a FC may be regarded as doing
business within a State, there must be
continuity of conduct (Habituality Test) and
intention to establish a continuous business,
such as the appointment of a local agent, and
not one of a temporary character. (*FC doing
business in the Philippines under the
Corporation Code?)
68
Is the sale of the tickets taxable as income
from sources within the Philippines?
• YES. The TP is a RFC and thus its Philippine
income is subject to Phil. corporate income tax.
• ABC Airways maintained a general sales agent
and it was engaged in selling or issuing tickets,
which is considered the main lifeblood of an
airline.
70
CIR vs MARUBENI (2001)
Assuming that Marubeni (FC) was disqualified
from availing of the income tax amnesty, would
the income from the services rendered in
connection with the turn-key projects constitute
as income from Philippine sources?
72
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TURN-KEY AGREEMENTS
✓An agreement under which a contractor
completes a project, then hands it over in
fully operational form to the client, which
needs to do nothing but ""turn a key"", as it
were, to set it in motion
73
PROBLEM:
XYZ entered into reinsurance contracts with foreign insurance
companies not doing business in the Philippines.
XYZ was to cede portions of premiums underwritten in the
Philippines to the foreign corporations in consideration for the
assumption of risk.
Is the cession of the premiums taxable as income from
sources within the Philippines?
75
Is the cession of the premiums taxable as income
from sources within the Philippines?
YES. “Sources” means the activity, property, or service
giving rise to the income. The original insurance undertakings
took place in the Philippines. It is not required that the FC be
engaged in business in the Philippines. What is controlling is
not the place of business, but the place of activity that
created the income. Thus, the income is subject to income
tax.
(see PHILIPPINE GUARANTY V. CIR [APRIL 30, 1965] and HOWDEN & CO. V.
CIR [APRIL 14, 1965]).
77
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CIR vs MARUBENI (2001)
Assuming that Marubeni (FC) was disqualified from availing of the
income tax amnesty, would the income from the services rendered
in connection with the turn-key projects constitute as income from
Philippine sources? - (question dwells on situs of service)
➢The answer is both yes and no.
➢The answer is yes with regard to those services performed in the
Philippines. The answer is, however, no with regard to those
services rendered in Japan. Such services were rendered outside
the taxing jurisdiction and thus constitute as income without the
Philippines.
➢Marubeni, being a foreign corporation, is taxable only on
income within the Philippines and, hence, income from
services rendered in the Philippines. 74
PROBLEM:
XYZ (INSURANCE CO.=CTP) entered into reinsurance Ks with
foreign insurance companies not doing business in the
Philippines. (Who is the income earner?)
XYZ was to cede portions of premiums underwritten in the
Philippines to the FCs in consideration for the assumption of
risk. (what does these amounts represent = income of TP
foreign reinsurers from Philippine sources)
Is the cession of the premiums taxable as income from
sources within the Philippines? (SITUS RULE!)
76
PROBLEM: TAXABLE INCOME OF A NRFC
• ABC, a DC,
entered into a “Management Service Agreement” with
XYZ, a NRFC, under which the latter shall
provide services for ABC’s US branch
and advice on ABC’s corporate structure, all performed
abroad.
• Is the compensation for services taxable as income from
sources within the Philippines?
78
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PROBLEM: TAXABLE INCOME* (THINK ABOUT THIS)
• ABC, a DC,
entered into a “Management Service Agreement” with
XYZ, a NRFC, under which the latter shall
provide services (INCOME PAYOR) for ABC’s US branch
and advice on ABC’s corporate structure, all performed
abroad. (who is the income earner thus the TP?)
• Is the compensation for services taxable as income from
sources within the Philippines? (situs rule?)
79
ROYALTIES.
The services covered by the management service agreement
(MSA) fall under the meaning of ROYALTIES. It is immaterial if the
NRFC has no properties in the Philippines. The test of taxability is
the source and the source of an income is that activity which
produced the income. It is not the presence of any property from
which one derives rentals and royalties that is controlling, but
rather as expressed under the expanded meaning of
royalties, it includes “royalties for the supply of scientific,
technical, industrial, or commercial, knowledge or information;
and the technical advice, assistance or services rendered in
connection with the technical management and administration of
any scientific, industrial or commercial undertaking, venture,
project or scheme”.
(see PHILAMLIFE V. CTA [CA-GR SP. NO. 31283, APRIL 25, 1995])
81
Yes. By virtue of RAMO No. 1-86 [April 25, 1986],
• an income tax is imposed on the GI
generated from “constructive” trading and commission
income derived from brokering activities of Philippine
branches of FCs engaged in trading activities.
RAMO No. 01-95 [March 21, 1995] expanded RAMO No. 1-86
• to cover taxation of Philippine branches of FCs engaged in
soliciting orders, purchases, service contracts, trading,
construction & other activities
83
3/22/2019
PHILAMLIFE CASE: ANOTHER SITUS RULE PROBLEM
Who is the TP?; Classification of TP?
WHAT IS THE INCOME SOURCE -ROYALTIES OR SERVICES?
❖DOCTRINE: Confirms the acceptance of the
Philippine taxing jurisdiction of the rule that as
to intangible property, the country of use is the
country that protects the owner of that property
against its unauthorized use by other persons.
80
PROBLEM (na naman!)
• Is the GI of BRANCHES of FCs generated from
solicitation of orders from local importers where
the branches merely relay to its head office
abroad said purchase orders and where the head
office is the entity which actually consummates
the sale liable for income tax?
82
TAX NOTES on Inventory valuation
• Why study this? Tax consequence on Cost of goods
sold. Error here would affect reported GI.
• Inventories are generally stated at cost or at the
lower of cost or market.
• Last in first out (LIFO) is not allowed for tax
purposes. Generally, the inventory valuation method
for tax purposes must conform to that used for
financial reporting purposes.
84
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Is there a particular method of valuing inventory that a TP
should follow?
No. The TP may choose the method of valuing its inventory for any
taxable year, and such method should be used in all subsequent
years; unless - (TP’s choice but once had chosen, becomes
irrevocable – for consistency)
1. With the approval of the CIR, a change to a different method is
authorized; or
2. The CIR finds that the nature of the stock on hand is such that
inventory should be considered realized for tax purposes and
therefore, it is necessary to modify the valuation method
85
PROBLEM on claimable corporate business deductions
ABC, a MNC, claimed as deduction from GI its share of
the overhead expenses of its foreign head office.
Can these overhead expenses of the foreign head
office be deducted from the GI of the Philippine
branch?
87
IT DEPENDS. Either it can be deducted in full or partly. (MATCHING
PRINCIPLE)
Where an expense is clearly related to the production of Philippine-
derived income or to Philippine operations (e.g. salaries of Philippine
personnel, rental of office building in the Philippines), that expense
can be deducted from the GI acquired in the Philippines without
resorting to apportionment. However, where there are items included
in the overhead expenses incurred by the parent company, all of which
cannot be definitely allocated or identified with the operations of the
Philippine branch, the company may claim as its deductible share a
ratable part of such expenses based upon the ratio of the local
branch's gross income to the total gross income, worldwide, of the
MNC.
(see COMMISSIONER VS. CTA & SMITH KLINE [JANUARY 17, 1984]; see
89
also
RAMO 4-86 [April 5, 1986])
3/22/2019
BIR RULING DA-128-08 [AUGUST 11, 2008]
Pilipinas Shell requested to change its valuation method from the
Weighted Average Method (WAVE) to the First-In-First-Out (FIFO) to
conform with the adoption by a new computerized accounting system
based on the Global Systems Application and Product Data Processing
(GSAP) by its parent company and its affiliates, including Pilipinas
Shell. Their system uses FIFO. (WAVE to FIFO)
CIR approved the shift to FIFO noting that the WAVE method is no
longer compatible with the new accounting system to be introduced
and to be consistent with the inventory method used by its parent’s
company and affiliates all over the world.
86
PROBLEM on claimable corporate business deductions
ABC, a MNC, claimed as deduction from GI its share
of the overhead expenses of its foreign head office. (DC
or RFC?)
Can these overhead expenses of the foreign head
office be deducted from the GI of the Philippine
branch?
88
ALLOWABLE DEDUCTIONS
FROM CORPORATE GROSS INCOME (ISD)
• Deductions from corporate income – refers to the itemized
deductions in Sec34 (A) to (J) which corps (including
partnerships other than GPPs) engaged in trade or business
are authorized to claim
• Special deductions – refer to the deductions allowed in
addition to the itemized deductions allowable to corps which
may be availed of by INSURANCE COMPANIES and
PROPRIETARY EDUCATIONAL INSTITUTIONS and NON-PROFIT
HOSPITALS. 90
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Deductions from CORPORATE GI
1)DC - same deductions allowed for individual taxpayers
2)RFC - Same deductions allowed to DCs and conditions
and limitations except on the following items of
deductions:
a) Taxes
b) Losses
c) Bad debts
d) Depreciation
e) Depletion of oil and gas wells and mines
3)NRFC - No deductions are allowed 91
PROBLEM
ABC and XYZ entered into two compromises:
the first involved alleged indebtedness by XYZ from the
advances of ABC and the second involved long-term
loans guaranteed by ABC w/c have not yet matured.
ABC deducted the amounts as bad debts.
Is the claimed deduction proper?
Case in Point: PHILEX MINING CORPORATION VS.
COMMISSIONER OF INTERNAL REVENUE [APRIL 16,
2008] 93
As for the amounts that ABC paid as guarantor to
XYZ’s creditors, the debts were not yet due and
demandable at the time that ABC paid the same.
ABC cannot claim the advances as a bad debt deduction from
its GI.
Deductions for income tax purposes partake of the nature of
tax exemptions and are strictly construed against the TP, who
must prove by convincing evidence that he is entitled to the
deduction claimed.
ABC, for failing to substantiate its assertion that the advances
were subsisting debts of XYZ that could be deducted from its
GI, it (ABC) could not claim the advances as a valid bad debt
deduction. 95
3/22/2019
PROBLEM on Deductibility of claimed Bad Debts
ABC Mining entered into a MGMT K with XYZ Mining.
The agreement provided for a distribution of assets of
the mine upon termination.
ABC made advances of cash and property. However,
XYZ’s mine suffered continuing losses which led to
ABC’s withdrawal as manager and cessation of mine
operations.
92
• No. ABC cannot deduct the amounts as bad debts. The
agreement provided for a distribution of assets of the mine
upon termination, a provision that is more consistent with a
partnership than a creditor-debtor relationship. In this
connection, there is no contractual basis for the execution
of the two compromise agreements in which XYZ
recognized a debt in favor of ABC.
• ABC’s advances should be treated as investments in a
partnership. The advances were not "debts" of XYZ to ABC
inasmuch as the latter was under no unconditional
obligation to return the same to the former.
94
TAX-EXEMPT Corporations: (Sec30, NIRC)
❑Cemetery company owned & operated exclusively for
the benefit of its members;
❑Religious, charitable, scientific, athletic, and cultural
organizations or those organized for the rehabilitation of
veterans, under certain conditions;
❑Business league, chamber of commerce, or board of
trade, not organized for profit and no part of the net
income of which inures to the benefit of any private
individual;
96
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TAX-EXEMPT Corporations: (Sec30, NIRC) TAX-EXEMPT Corporations: (Sec30, NIRC)

❑Civic league or organization organized for profit but ❑ Farmers’ or other mutual typhoon or fire
operated exclusively for the promotion of social insurance company or like organization of
welfare; purely local character; and
❑Non-stock and non-profit educational ❑ Farmers’, fruit growers’, or like associations
institutions*; organized and operated as sales agent, under
❑Government educational institutions; certain conditions.
(ex. State colleges, public schools)
97 98

TAX-EXEMPT Corporations: (Sec30, NIRC) TAX-EXEMPT Corporations: (Sec30, NIRC)

• The following are exempt from the payment of corporate income tax, subject to certain conditions:
HOWEVER,
❑Labor, agricultural, or horticultural organizations not • last paragraph of Sec. 30, NIRC provides that
organized principally for profit;
income from any activity conducted for profit
❑Mutual savings bank not having a capital stock
represented by shares, and cooperative bank without regardless of the disposition shall be subject to
capital stock organized and operated for mutual purposes tax
and without profit;
❑A beneficiary society, order, or association, such as
fraternal organization, or a mutual aid association or a
non-stock corporation, organized and operated exclusively
for the benefit of its members; 99 100

TAX-EXEMPT NSNPEI: (Sec30, NIRC)

HOWEVER, last paragraph of Sec. 30, NIRC provides that EXAMPLE OF TAXABLE INCOME OF NSNPEI (S30)
income from any activity conducted for profit regardless of the
disposition shall be SUBJECT TO TAX • Income from Profit-generating activities like leasing
✓There is an apparent conflict between the Constitutional
activities
provision and Sec30, NIRC: The Constitutional provision indicates • INTEREST INCOME on deposit in a bank (amount
that the basis for exemption is the use of revenue but under deposit is from tuition fees, rentals of spaces)
Sec30, NIRC, the source of revenue is the basis of the exemption.
Solution: Apply the rules of StatCon - Follow the NIRC because it
is considered as a special law as opposed to the Constitution
which is considered to be a general law. Therefore, exempt from
payment of income tax under Sec30. This is considered as
income “ as such”. 101 102

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EXAMPLE OF TAX-EXEMPT INCOME OF NSNPEI PROBLEM: Bahay Kalinga, a social welfare

(UNDER CONSTI) – INCOME AS SUCH charitable non-profit corp
• Tuition FACTS:
• From canteen, bookstore, etc. (incidental income) Net income from Related Activities P400,000
Net income from Unrelated Activities P250,000*
*taxable at 30%

103 104

(VARIED) Tax Base or/ and Tax Rates on Special DCs

Proprietary 10% of TI if total GI from
educational unrelated trade,
institutions *Apply business, or activity
and Predominance Test DOES NOT EXCEED
hospitals which are 50% of total income
SPECIAL CORPORATE TPs non-profit 30% of TI if total GI from
unrelated trade,
(Sec. 27) *Apply business, or activity
Predominance Test EXCEED 50% of total
income

105 106

EDUCATIONAL INSTITUTIONS AND HOSPITALS 'proprietary educational institution'

OWNER Educational Hospitals ➢is any private school maintained and administered by
Institutions private individuals or groups with an issued permit to
operate from the Department of Education, Culture
Private 10%* of Taxable 30% of Taxable
and Sports (DECS), or the Commission on Higher
Income Income Education (CHED), or the Technical Education and
Non-Profit Exempt 10% * of Taxable Skills Development Authority (TESDA), as the case may
Income be, in accordance with existing laws and regulations
Government exempt exempt
107 108

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'proprietary educational institution’ - what makes it special
➢As a rule, it is subject to a special income tax rate of ten percent
(10%) on their taxable income except on certain passive income.
➢must dedicate their operations to providing educational services
because if they does not, then, they will cease to enjoy the benefit of
10%.
➢If the GI from unrelated trade, business or other activity exceeds fifty
percent (50%) of the total GI derived from all sources, they shall be
taxed at 30% on the entire taxable income.
➢'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
of its primary purpose or function. 109
'proprietary educational institution’ - what makes it special
SPECIAL DEDUCTIONS: In addition to the expenses allowable as
deductions, it may at its option elect either:
a) to deduct expenditures otherwise considered as capital outlays of
depreciable assets incurred during the taxable year for the
expansion of school facilities, or
b) to deduct allowance for depreciation thereof.
❖capital outlays which would have been normally considered as an
asset subject to depreciation maybe (if elected) claimed by
proprietary educational institutions as an outright deduction from
its GI 110

(VARIED) Tax Base or/ and Tax Rates on Special DCs

GOCC, Agencies and 30% upon their taxable INCOME TAX EXEMPTION OF LOCAL WATER
Instrumentalities, *taxable like ordinary income in a DISTRICTS
including PAGCOR corps similar business,
RA 10026*
industry, or activity
GSIS/ SSS / PHIC/ Exempt
• Local water districts are exempt from income
PCSO
taxes under Sec27 provided that the amount
saved by virtue of the exemption is to be used
Depository Banks 10% On interest income
for capital equipment expenditure to expand
from foreign currency
transactions including
water services coverage
* Lapsed into law on MAR 11 2010 without the signature of then
interest income from President Arroyo, in accordance with Article VI, Sec27 (1) of the
foreign loans Constitution.
111 112

Tax Base and Tax Rates on Resident Foreign Corporations

International 2.5% On Gross Philippine Billings* (GPB)
carriers
Offshore 10% Any interest income derived from foreign
banking units currency loans granted to residents other
than OBUs or local commercial banks,
including local branches of foreign banks
that may be authorized by the BSP to
transact business with OBUs
Gross Philippine Billings (GPB)
• Refers to the amount of gross revenue derived from
carriage 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 ticket or passage
document.(Section 28 (A)(3)(a), NIRC)
• Originating Rule – to form part of GPB, passenger/cargo must
originate from the Philippines (does not apply to domestic corp.)

113 114

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Tax Base and Tax Rates on Resident Foreign Corporations Tax Base and Tax Rates on Resident Foreign Corporations
Offshore Exempt Income derived by OBUs
banking units authorized by the BSP, from foreign Branch profits 15% on any profit remitted by a branch to
currency transactions with Non- remittances its head office abroad,
residents, other OBUs, local except profit remitted by enterprises
commercial banks, including branches which are registered with the PEZA
of foreign banks that may be Regional/Area Exempt
authorized by the BSP to transact Headquarters
business with OBUs

115 116

Tax Base and Tax Rates on Resident Foreign Corporations

Branch Profit Remittance Tax (BPRT) Regional 10% On taxable income
Operating
• Imposed to any profit remitted by a branch Headquarters
to its head office. of MNCs
• If subsidiary – amounts received by NRFC Depository Exempt Except:
would be treated as dividends – it becomes banks under Interest income from foreign currency
part of its Gross Income from within taxable the Expanded loans granted by such depository banks
at 30% Foreign under said expanded system to residents
Currency other than OBUs in the Philippines or
• Branch first subjected to 30% ordinary Deposit System other depository banks under the
corporate tax as RFC ,then to 15% BRPT (EFCDS) expanded system- 10% final tax
117 118

FYI: FCDU, OBU, EFCDU SUMMARY OF TAX RULES on FCDU, OBU, EFCDU
FCDUs – limited to short-term foreign currency transactions * Due to lack of time will be mentioned,
*FCDU – is a division of a domestic bank discussed and explained during the Banking laws
discussion. (Okay!)
EFCDUs – allowed to both short-term and longer-term FC-
denominated transactions
*EFCDUs – may be a division of a domestic bank or a resident
foreign bank to conduct banking under the EFCDS

OBU – is a division of a foreign bank which is authorized to conduct

foreign currency denominated transactions. 119 120

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Tax Base & Tax Rates on SPECIAL Non-Resident Foreign Corporations Tax Base and Tax Rates on SPECIAL Non-Resident Foreign Corps

Owner / lessors of vessel 4.5% On gross income

charted by Philippine
Cinematographic 25% On gross income Nationals (lower
Film owner, lessor rate)
or distributor Owner / lessors of aircraft, 7.5% On gross income
machineries and other
equipment (higher
rate)

121 122

Minimum Corporate
MCIT when imposed
Income Taxation (MCIT)
• Rate : 2% of GI • Beginning on the fourth taxable year immediately
• Purpose: to prevent the prevailing practice of corps of over- following the year in which such corp commenced its
claiming deductions in order to reduce their income tax operations.
payments
• EX:
• Covers only DCs and RFCs (taxed at 30%)
Any day of 2012: commencement
• Applicable on the x+4th year of operations
? : MCIT coverage
• Excess MCIT carried over to the next 3 succeeding years ;
(Note: only if Regular income tax is greater than MCIT on the
4th year)

123 124

Minimum Corporate
MCIT when imposed
Income Taxation (MCIT)
• Beginning on the fourth taxable year immediately • SoF may suspend MCIT upon recommendation
following the year in which such corp commenced its of CIR in any of the following cases:
operations.
1) Sustained losses from prolonged labor dispute
• EX:
2) Force Majeure
Any day of 2012: commencement
3) Legitimate Business reverses
2016: MCIT coverage
Why the extended period for coverage to set in? • Paid on Quarterly and Yearly Basis
- to enable the business to obtain competitive
traction before being subjected to MCIT
125 126

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IAET (closely-held DCs, whether regular or special
– when taxed at 30%)
✓10% PENALTY tax / SURTAX
✓Imposition is not automatic. It is due only upon formal
assessment by the BIR upon determination of an
improper accumulation of earnings
✓Dividend must be declared within one year from the
close of the taxable year. Any IAET from the same
taxable year will be determined and should be paid
WITHIN 15 DAYS from the end of the following year.
IAET
• Imposed as a form of penalty to corps retaining earnings for
more than the reasonable needs of business in order to recoup
the lost taxes.
• Except:
1) publicly-held corporations
2) banks and other nonbank financial intermediaries
3) insurance companies
4) Taxable Partnerships
5) General Professional Partnership
6) Non-taxable joint ventures
7) Enterprises duly registered with the Philippine Economic Zone
Authority (PEZA)
BIR RULING 005-2002 on 50% ownership
threshold
✓ownership is traced to individual
shareholders of the parent company, if
applicable (application of control test in
corporate layering)
✓If ownership of the top 20 shareholders is
below 50%, the corp is a PUBLIC
CORPORATION
3/22/2019
IAET
• 10% IAET imposed on improperly accumulated
taxable income earned by DC as defined under the
Tax Code and which are classified as closely-held
corps
127 128
IAET on Closely-held corps
• Closely-Held Corps – are corps at least 50 % in value
of the OCS or at least 50% of the total combined
voting power of all classes of stock entitled to vote is
owned directly or indirectly by not more than 20
individuals
129 130
YOUR TASK! Update/add to these notes, highlights
from the following topics -
1. Sec 27 versus Sec 30 NIRC (what computation of taxable income
includes in one but does not include in the other)
2. Qualifiers for income tax exemption of special GOCCs
3. Understanding Nuances of Tax-Exemption of Pass-through entities
(no income earner is excused from taxation; concept of ‘following
the money’ to make him/it liable for tax)
4. Complications in taxability or non-taxability of dividend income
5. Complications in taxability or non-taxability of other sources of
corporate income
6. Read / review your tax casebook! Update the same to reflect
subsequent tax amendments/changes.
131 132
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