B-BTAX313

Module 5
Incorporation and Financing
Professor: Lourene Bautista
Accountancy Department
College of Business Administration and Accountancy
De La Salle University - Dasmariñas
 Table of Contents

• Incorporation – Slides 4 to 6
• Additional Financing – Slides 7 to 13
 Course and Topic Learning Outcome/s

CLO1. Explain the principles and requirements related to Philippine corporate taxes.
CLO2: Understand the common tax management issues in a corporate setting and identify the
related tax risks.
CLO4. Formulate recommendations on how to mitigate tax risks or take advantage of
opportunities for tax savings and recovery.

TLO4. Identification of tax risks associated with incorporation and financing, and formulation of
recommendations on mitigating such risks
 Incorporation

• Incorporation can be done either via cash or property contribution.

• Submission of incorporation documents to the Securities and Exchange
Commission or “SEC” (e.g., Articles of Incorporation or “AOI”, By-Laws)
• AOI includes proposed Authorized Capital Stock or “ACS”, Subscribed
Capital Stock, Paid-up Capital Stock, as well as the class/es of shares that will
be issued and subscribed.
 Incorporation
• 1% Documentary Stamp Tax or “DST” based on par value of the subscribed capital stock
indicated in AOI, not based on the ACS nor the par value of paid-up capital stock
• DST above should be remitted on or before the 5th of the day after the end of the month when
the SEC issued the corporate taxpayer’s Certificate of Incorporation or “COI”
• Close coordination with the department or personnel handling SEC matters (e.g., Legal
Department) is suggested to track the date when the COI will be issued by the SEC
• Budget for the payment of the DST must be requested as early as possible, even before the
receipt of the COI, to avoid late filing and payment, especially when the COI is expected to
be received near month-end
• Note that before the paying the DST on share subscription, SEC filing fee (0.20% of ACS)
and Legal Research Fee (1% of SEC filing fee), among other fees, must be paid.
 Incorporation
• In cases where incorporation will be done, in full or in part, through contribution of
property/ies (e.g., land, shares in investee company), the said contribution in exchange of new
or fresh shares qualifies as a tax-free exchange or “TFE” if the contributor/s-shareholder/s,
not exceeding four (4) persons, will attain control or further control of the company that will
be incorporated.
• “Control” means more than 50% of the voting rights.
• The SEC requires review of the valuation of the property/ies to be contributed as capital.
• A favorable TFE ruling should be obtained from the Bureau of Internal Revenue or “BIR” to
facilitate issuance of Certificate Authorizing Registration or “CAR” and the subsequent
transfer of the property/ies’ ownership. Otherwise, the taxes on the transfer of the property/ies
contributed as capital should be paid, in addition to the 1% DST on share subscription.
 Additional Financing
• Additional financing can be obtained either internally or externally, or a mix of the two (2)
types.
• Financing can be done through the following:
 Additional equity financing by the existing shareholder/s
 Cash advances or loans extended by existing shareholder/s
 Conversion to equity from either internal or external debts
 Loans extended by external financing institutions (e.g., banks)
 Additional equity financing by third-party investors
 Issuance of publicly-traded equity and debt instruments
 Additional equity financing by existing
shareholder/s
• Issuance of same type or different type of share/s (e.g., common shares, preferred shares,
redeemable preferred shares)
• If ACS is not sufficient to cover the new or fresh shares to be issued, an increase in the ACS
should be applied for with the SEC
• Recorded as Deposit for Future Stock Subscription or “DFFSS” before SEC-approved
conversion to equity
• DFFSS is not subject to DST
• 1% DST based on par value of the subscribed capital stock, in addition to the fees associated
with the ACS increase
• Portion of paid-up capital stock may be classified as Additional Paid-in Capital or “APIC” to
lessen DST impact, subject to ownership considerations
Cash advances or loans extended by existing
shareholder/s or related parties

• Used either to address short-term business requirements or maintaining current equity

structure
• Usually non-interest bearing
• 0.75% DST as these advances can be construed by the BIR as taxable debt instrument
• Can be converted to the shareholder/s’ or related party/ies’ equity, subject to SEC’s approval,
which is likewise subject to 1% DST based on par value of the subscribed capital stock
• Recorded as DFFSS, which is not subject to DST, before SEC-approved conversion to equity
• Portion of paid-up capital stock may be classified as APIC to lessen DST impact
 Conversion to equity from either internal or
external debts

• Does not improve cash position but makes a better debt-to-equity ratio if certain
level is required under an existing or new debt facility, which are usually extended
by lender banks
• Recorded as DFFSS, which is not subject to DST, before SEC-approved conversion
to equity
• Subject to 1% DST based on par value of the subscribed capital stock
• Portion of paid-up capital stock may be classified as APIC to lessen DST impact
Loans extended by external financing institutions

• Type of loan and amount to be extended depend on the financing requirements and lendee’s
qualifications
• 0.75% DST upon execution of loan, which is usually deducted from the loan proceeds (e.g.,
lender bank remits the DST as required by the BIR)
• Gross Receipts Tax or “GRT” which is a passed-on tax by the lender to the lendee
• Withholding tax on interest, either final or expanded, depending on the type of loan (e.g.,
interest on plain bank loan is subject to 2% EWT if the lendee if a Top Withholding Agent or
“TWA”, interest on debt instruments which is are not deposit substitutes but with more than
one (1) lender but not exceeding twenty (20) is subject to 15% EWT)
 Additional equity financing by third-party
investors
• Issuance of same type or different type of share/s (e.g., common shares, preferred shares,
redeemable preferred shares), subject to agreed ownership structure upon entry of third-party
investor/s
• If ACS is not sufficient to cover the new or fresh shares to be issued, an increase in the ACS
should be applied for with the SEC
• Recorded as Deposit for Future Stock Subscription or “DFFSS” before SEC-approved
conversion to equity
• DFFSS is not subject to DST
• 1% DST based on par value of the subscribed capital stock, in addition to the fees associated
with the ACS increase
• Portion of paid-up capital stock may be classified as Additional Paid-in Capital or “APIC” to
lessen DST impact, subject to ownership considerations
Issuance of publicly-traded equity and debt
instruments
• New or fresh financing either through equity or debt
• Depends on business scale and industry
 Listing of shares with local stock market (primary and secondary
offering), subject to Stock Transaction Tax (Philippine Stock
Exchange or “PSE” Main or Small, Medium, and Emerging Board,
Real Estate Investment Trust or “REIT”
 Issuance of public debt instruments