Master daw sa tax eto:

Classes of corporation:
1. DC - a corporation organized in, or existing under the laws of the PH which income derived during
each taxable year from all sources within and without the Philippines by every corporation, as defined in
Section 22(B) of this Code.

2. Resident Foreign Corporations

1. A corporation organized under the laws of a
foreign country, which is engaged in trade or
business in the Philippines.

3. Non Resident -
A non-resident foreign corporation is one which does not have any presence in the Philippines but
derives income in the Philippines

SOURCE AND RATE:

1. DC: Source: worldwide income
Base: taxable income rate: 30% before July 1, 2020; 25% on July 1, 2020

2. RFC: Source: within Base: taxable income rate: 30% before July 1, 2020; 25% on July 1, 2020

3.NFRC Source: within Base: gross income rate: 25% January 1, 2021

Gross income ² The total income of a taxpayer subject to tax. It includes the gains, profits, and income
derived from whatever source, whether legal or illegal.

Net income ² Means gross income less statutory deductions and exemptions.

Taxable income ² means the pertinent items of gross income specified in the Tax Code, less the
deductions and/or personal and additional exemptions, if any, authorized for such types of income by the
Tax Code or other special laws

APPLICABLE TO DOMESTIC - 20% TI not exceeding 5M total asset 100M

MINIMUM CORPORATE INCOME TAX - the rate is 1% up to June 30, 2023, then it will revert to 2%

CONCEPT OF MCIT -
a. Applies to domestic corporations and RFCs whenever such corporations (i) have zero or negative
taxable income, or whenever the (ii) MCIT is greater than the normal income tax due.

b. Imposed beginning the fourth taxable year from the taxable year the corporation commenced its
business operations
MCIT VS REGULAR TAX

How do you classify a PH corp that is fully owned by a foreign corp

BRANCH - a branch office does not acquire a separate juridical personality but becomes merely an
extension of its parent company. (Sec. 123, Corporation Code) The parent company shall be liable for all
of the obligations that the branch office may incur.

SUBSIDIARY - A subsidiary is an incorporated body (i.e. a company) and has a separate legal entity
from the overseas parent.

PH Corp owned by non-resident FC. Is it a domestic or resident?

BRANCH vs. SUBSIDIARY

1. DC - a corporation organized in, or existing under the laws of the PH which income derived during
each taxable year from all sources within and without the Philippines by every corporation, as defined in
Section 22(B) of this Code.

-A PH SUBSIDIARY IS A DOMESTIC CORP.

2. Resident Foreign Corporations

1. A corporation organized under the laws of a foreign country, which is engaged in trade or business in
the Philippines.

- PH BRANCH OF FOREIGN HEAD OFFICE IS A NFC

3. Non Resident -
A non-resident foreign corporation is one which does not have any presence in the Philippines but
derives income in the Philippines

(2) Minimum Corporate Income Tax of Resident Foreign Corporations. — A minimum corporate income
tax of two percent (2%) of gross income, as prescribed under Section 27(E) of this Code, shall be
imposed, under the same conditions, on a resident foreign corporation taxable under paragraph (1) of
this Subsection: Provided, That effective July 1, 2020 until Ju.ne 303 2023, the rate shall be one percent
(1%).

MCIT APPLIES to applies both to DOMESTIC and RFC - taxed on net taxable income

It is not applicable to NRFC - because they are taxed on gross and no provision
Regional operating headquarters shall be subject to a tax rate of ten percent (10%) of their taxable
income as provided for under the National Internal Revenue Code, as amended by Republic Act No.

Regional Operating Headquarters (ROHQ) is an extension of a foreign corporation allowed to derive

income in the Philippines by performing qualifying services to its head office, affiliates, subsidiaries or
branches in the Asia-Pacific (APAC) region and other foreign markets.

ROHQ vs Regional Office

Regional operating headquarters shall be subject to a tax rate of ten percent (10%) of their taxable
income as provided for under the National Internal Revenue Code, as amended by Republic Act No.

Regional Operating Headquarters (ROHQ) is an extension of a foreign corporation allowed to derive

income in the Philippines by performing qualifying services to its head office, affiliates, subsidiaries or
branches in the Asia-Pacific (APAC) region and other foreign markets.

DIFFERENCE BETWEEN REGIONAL HQ AND REGIONAL OPERATING HQ:

- BOTH ARE RFC (cite definition)

DEFINITION: Regional or area HQ (Sec22DD) a branch established in the Philippines by multinational

companies and which headquarters do not earn or derive income from the Philippines and which act as
supervisory, communications and coordinating center for their affiliates, subsidiaries, or branches in the
Asia-Pacific Region and other foreign markets.

TAX: Regional operating headquarters shall be subject to a tax rate of ten percent (10%) of their taxable
income as provided for under the National Internal Revenue Code.

- 25% ON 2022??

Regional operating HQ (Sec22EE)

DEFINITION: a branch established in the Philippines by multinational companies which are engaged in
any of the following services:

general administration and planning; business planning and coordination; sourcing and procurement of
raw materials and components;
corporate finance advisory services; marketing control and sales promotion; training and personnel
management; logistic services;

TAX: EXEMPTED - THEY DO NOT DERIVE INCOME

See separate entity concept

Unlike a domestic subsidiary, a branch office does not acquire a separate juridical personality but
becomes merely an extension of its parent company. (Sec. 123, Corporation Code) The parent company
shall be liable for all of the obligations that the branch office may incur.

A subsidiary is an incorporated body (i.e. a company) and has a separate legal entity from the overseas
parent. A branch, which is an extension of the parent company, requires you to register the overseas
entity as having a UK establishment with Companies House.

BRANCH
- also called head office
- a branch office does not acquire a separate juridical personality but becomes merely an extension of its
parent company. (Sec. 123, Corporation Code) The parent company shall be liable for all of the
obligations that the branch office may incur.

SUBSIDIARY
- parent company
- A subsidiary is an incorporated body (i.e. a company) and has a separate legal entity from the
overseas parent.

Separate Entity Concept refers to distinction of identity between owners and the business for recording
transactions between owners and the business.

As general rule, the head office of a foreign

corporation is the same juridical entity as its branch in the Philippines following the single entity concept.

Under the single entity approach, a head office and a permanent establishment are treated as one
taxpayer for tax purposes, even though they may be considered separate entities for purposes of
accounting or commercial law.

on all revenues and assets used actually, directly and exclusively for educational purposes (Paragraph
3, Section 4, Article XIV of the Constitution)

Test –
i. Organized and operated for one or more of the specified purposes;
ii. No part of its net income must inure to the benefit of private stockholders or individuals.

Thus, to determine whether a corporation qualifies for income tax exemption under Section 30 of the Tax
Code, the BIR provided two determinative tests: (1) organizational test; and (2) operational test.

The organizational test requires that the corporation’s constitutive documents (i.e., SEC registration,
Articles of Incorporation (AOI), and By-Laws) show that its primary purpose(s) falls under Section 30 of
the Tax Code.
The operational test, on the other hand, requires that the regular activities of the corporation be
exclusively devoted to the furtherance of such primary purpose.

Further, the earnings of a Section 30 corporation that chiefly come from donations, grants, or
contributions should not inure to the benefit of its trustees, organizers, officers, members, or any specific
person. As such, the RMO listed certain payments to individuals that would be considered as inurement
prohibitions.

However, realistically, Section 30 corporations need other sources of income to survive and continue
serving their purpose. Thus, in concurrence with the law, the RMO recognizes that these corporations
are allowed to engage in activities conducted for profit without losing their tax exemption.

Tax exemption is a grant of immunity to particular persons or corporations or entities from a particular
class from a tax which such persons generally within the same state or taxing district are obliged to pay.
These exemptions should be expressly granted. These are not favored and are strictly construed against
the taxpayer. (Surigao Consolidated Mining v. Commissioner or Internal Revenue, G.R. No. L-14878, 26
December 1963.)

An exclusion, on the other hand, “relates to a transaction that is not taxable because it falls outside the
scope of the statute giving rise to the tax, ab initio. Transactions excluded from the tax are those which,
by the language of the statutes, are defined as beyond the reach of the tax.

Passive income vs active income

(4) Intercorporate Dividends. - Dividends received by a domestic corporation from another domestic
corporation shall not be subject to tax.

Tax sparing - Instead of the regular corporate income tax rate of 30%, a 15% rate was imposed on
dividends received. ... This preferential tax rate is still present in the current Tax Code and is popularly
known as the “tax sparing rule”

"(C) Capital Gains from Sale of Shares of Stock not Traded in the Stock Exchange. - The provisions of
Section 39(B) notwithstanding, a final tax at the rate of fifteen percent (15%) is hereby imposed upon the
net capital gains realized during the taxable year from the sale, barter, exchange or other disposition of
shares of stock in a domestic corporation, except shares sold, or disposed of through the stock
exchange.
The shares are listed in a stock exchange and not a regular share or an IPO share. what's the
taxation?
Section 39. Section 127 of the NIRC, as amended, is hereby further amended to read as follows:

"Sec. 127. Tax on Sale, Barter or Exchange of Shares of Stock Listed and Traded through the Local
Stock Exchange or through Initial Public Offering -

"(A) Tax on Sale, Barter or Exchange of Shares of Stock Listed and Traded through the Local Stock
Exchange.— There shall be levied, assessed and collected on every sale, barter, exchange or other
disposition of shares of stock listed and traded through the local stock exchange other than the sale by a
dealer in securities, a tax at the rate of six-tenths of one percent (6⁄10 of 1%) of the gross selling price or
gross value in money of the shares of stock sold, bartered, exchanged or otherwise disposed which shall
be paid by the seller or transferor.

CAPITAL GAINS:

If the shares of stock are not LISTED AND TRADED - SEC. 27 (tax: 15% based on NET CAPITAL
GAINS; under TRAIN LAW)

LISTED AND TRADED - The tax is 6/10th of the 1% of the GROSS SELLING PRICE (SEC. 127)

A, DC, sells its land to Y corp. What is the taxation?

(5) Capital Gains Realized from the Sale, Exchange or Disposition of Lands and/or Buildings. - A final
tax of six percent (6%) is hereby imposed on the gain presumed to have been realized on the sale,
exchange or disposition of lands and/or buildings which are not actually used in the business of a
corporation and are treated as capital assets, based on the gross selling price of fair market value as
determined in accordance with Section 6(E) of this Code, whichever is higher, of such lands and/or
buildings.
1.) What is meant by capital asset?

Capital assets shall refer to all real properties held by a taxpayer, whether or not connected with his
trade or business, and which are not included among the real properties considered as ordinary assets
under Sec. 39(A)(1) of the Code. [Sec. 2(a) of RR No. 7-2003]

2.) What is meant by ordinary asset?

Ordinary assets shall refer to all real properties specifically excluded from the definition of capital assets
under Sec. 39(A)(1) of the Code, namely:

Stock in trade of a taxpayer or other real property of a kind which would properly be included in the
inventory of the taxpayer if on hand at the close of the taxable year; or
Real property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or
business; or
Real property used in trade or business (i.e., buildings and/or improvements) of a character which is
subject to the allowance for depreciation provided for under Sec. 34(F) of the Code; or
Real property used in trade or business of the taxpayer.

TAXABLE INCOME VS. FINAL TAXES

Taxable income means the pertinent items of gross income specified in the Tax Code as amended, less
the deductions, if any, authorized for such types of income, by the Tax Code or other special laws.

FINAL TAX:

- Final taxes are taxes prescribed on certain income. Once an income is subjected to Final Tax, it will not
be furthered taxed under the normal or capital gains tax. It is a tax specifically extracted on a specifically
defined income on the Tax Law.

- When it is withheld, the payor is the withholding agent, the payor will report to the BIR. Therefore, the
NRFC will not do anything anymore

Allowable deductions - only applicable in DC and RFC BECAUSE ANG SOURCE OF INCOME AY
NET TAXABLE INCOME

not applicable in NRFC dahil gross income lang ang tina tax

How is sale of shares taxed?

(C) Capital Gains from Sale of Shares of Stock not Traded in the Stock Exchange. -

The provisions of Section 39(B) notwithstanding, a final tax at the rate of fifteen percent (15%) is hereby
imposed upon the net capital gains realized during the taxable year from the sale, barter, exchange or
other disposition of shares of stock in a domestic corporation, except shares sold, or disposed of through
the stock exchange.

If sales of shares is taxed from net capital gains, then what is the tax?

- the excess of the gains from sales or exchanges of capital assets over the
losses from such sales or exchanges

- Listed = 6/10 of 1%
- Unlisted - 15%

Why is it important to determine ordinary vs. capital asset?

Capital Asset - final tax

Ordinary Asset – ITR

A Company sell lots of the subdivision. What is the tax of the real estate company?

IF ORDINARY ASSET (REAL PROPERTY) –RCIT *25%

IF CAPITAL ASSET (SEC 27D5)- 6%

A person owns a house. A portion was rented to others for a business space and derives
income. After 2 years, he decided to sell the house and lot. Is it capital gains stock or ordinary?

CAPITAL ASSET VS. ORDINARY ASSET:

1.) What is meant by capital asset?

Capital assets shall refer to all real properties held by a taxpayer, whether or not connected with his
trade or business, and which are not included among the real properties considered as ordinary assets
under Sec. 39(A)(1) of the Code. [Sec. 2(a) of RR No. 7-2003]

2.) What is meant by ordinary asset?

Ordinary assets shall refer to all real properties specifically excluded from the definition of capital assets
under Sec. 39(A)(1) of the Code, namely:

Stock in trade of a taxpayer or other real property of a kind which would properly be included in the
inventory of the taxpayer if on hand at the close of the taxable year; or

Real property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or
business; or

Real property used in trade or business (i.e., buildings and/or improvements) of a character which is
subject to the allowance for depreciation provided for under Sec. 34(F) of the Code; or
Real property used in trade or business of the taxpayer.

Dividends received by NRFC:

SEC. 28. Rates of Income Tax on Foreign Corporations. -

B) Tax on Nonresident Foreign Corporation. -

(1) In General. - Except as otherwise provided in this Code, a foreign corporation not engaged in trade
or business in the Philippines, effective January 1, 2021, shall pay a tax equal to twenty-five percent
(25%) [37] of the gross income received during each taxable year from all sources within the Philippines,
such as interests, dividends, rents, royalties, salaries, premiums (except reinsurance premiums),
annuities, emoluments or other fixed or determinable annual, periodic or casual gains, profits and
income, and capital gains, except capital gains subject to tax under subparagraph 5(c)

(5) Tax on Certain Incomes Received by a Nonresident Foreign Corporation. -

(a) Interest on Foreign Loans. - A final withholding tax at the rate of twenty percent (20%) is hereby
imposed on the amount of interest on foreign loans contracted on or after August 1, 1986;

(b) Intercorporate Dividends. - A final withholding tax at the rate of fifteen percent (15%) is hereby
imposed on the amount of cash and/or property dividends received from a domestic corporation, which
shall be collected and paid as provided in Section 57(A) of this Code, subject to the condition that the
country in which the nonresident foreign corporation is domiciled, shall allow a credit against the tax due
from the nonresident foreign corporation taxes deemed to have been paid in the Philippines equivalent
to fifteen percent (15%), [38] which represents the difference between the regular income tax and the
fifteen percent (15%) tax on dividends as provided in this subparagraph: Provided, That effective July 1,
2020,[38] the credit against the tax due shall be equivalent to the difference between the regular income
tax rate provided in Section 28(B)(1) of this Code [38] and the fifteen percent (15%) tax on dividends;

(c) Capital Gains from Sale of Shares of Stock not Traded in the Stock Exchange. - A final tax at the rate
of fifteen percent (15%) [35] is hereby imposed upon the net capital gains realized during the taxable
year from the sale, barter, exchange or other disposition of shares of stock in a domestic corporation,
except shares sold, or disposed of through the stock exchange.

2 test to determine whether a NRFC is considered doing business:

1. substance test - must have performed acts from which its intention to do business. intention has to be
established

2. continuity test - commercial dealings must be characterized by continuity of transactions for the goal
of the Corp.

Case: mentolatum comp. vs mangaliman GR 44701, June 27, 1941

pan zeuden vs. GVL GR 147905, May 28, 2007

importance of registration in SEC = to have the capacity to sue

Concept of Withholding Taxes

Withholding tax
- a method of collecting income tax in advance from the taxable income of the recipient of income. It is a
systematic way of collecting taxes at source, an indispensable method of collecting taxes to ensure
adequate revenue for the government.

Creditable Withholding tax

- Under the creditable withholding tax system, taxes withheld on certain income payments are intended
to equal or at least approximate the tax due of the payee on said income.

Memorize :
i. Expenses must be ordinary (common or usual) in relation to the business and necessary, appropriate
and helpful in the development of the taxpayer’s business.
ii. Must be incurred in trade or business carried on by the taxpayer
iii. Must be supported by proof
iv. Must be reasonable
v. Paid or incurred during the taxable year
vi. Must not be against public policy
vii. Subject to withholding tax, proof of payment to BIR

ORDINARY - normal and usual in relation to the taxpayer's business and surrounding
circumstances; need not be recurring

CAPITAL EXPENDITURE or capital expense (capex or CAPEX) is the money an organization or

corporate entity spends to buy, maintain, or improve its fixed assets, such as buildings, vehicles,
equipment, or land.
- can spread through amortization

it is allowed to be deducted ung consultancy, provided na it will be supplemented by the withholding tax
return of the consultancy

to ensure that taxes are remitted properly by a business and on a timely basis

pursuant to the life blood doctrine, purpose withholdng tax, in effect, advance payment

before you can claim it as deductible expense, you are required to withhold the tax as a requirement,
and show proof

if you failed to withhold the tax, if you are audited and the BIR would issue an assessment which is
withholding tax assessment for failure to withhold and deficiency income tax

TWO ACCOUNTING METHOD FOR TAX PURPOSES

paid - cash basis; incurred - accrual

cash basis - means that he will deduct those expense in case he paid in cash

while accrual basis - when he incur expense but not yet paid, he will deduct

Cash accounting recognizes revenue and expenses only when money changes hands, but accrual
accounting recognizes revenue when it's earned, and expenses when they're billed (but not paid).

The “all events test” is used to determine when an accrual of income or expense is permitted for
claiming deductions.

It requires:
1. Fixing of a right to income or liability to pay; and
2. The availability of the reasonable accurate determination of such income or liability all events test is
applicable in accrual method of accounting
CIR vs Isabela cultura corporation, gr 172231 feb 12 2007, discussed the all events test req – labas daw
sa exam sabi ni sir

Tax Benefit Rule on Bad Debts

Bad debts claimed as deduction in the preceding year(s) but subsequently recovered
shall be included as part of the taxpayer‘s gross income in the year of such recovery the extent
of the income tax benefit of said deduction. Also called the equitable doctrine of tax benefit.

The 'tax arbitrage rule' reduces the allowable deduction for interest expenses by 33% of the interest
income subjected to final tax. Mergers and consolidations are tax-free exchange transactions. However,
gain or loss shall be recognized on subsequent transfers of properties subject to the merger or
consolidation.

Read

1. all events test

2. tax benefit rule
3. tax arbitrage (int exp)