ReSA

The Review School of Accountancy

Tel. No. 735-9807 & 734-3989

TAXATION TAMAYO/GARCIA
TX - 601: INCOME TAX (CORPORATIONS, PARTNERSHIPS, ETC)

1. Corporation and Other Terms Defined

a. Included in the term 1) Partnerships, no matter how created or organized;
corporation 2) Joint stock companies;
3) Joint accounts (cuentas en participacion);
4) Associations, or insurance companies.
b. Not included in the 1) General professional partnerships; and
term corporation 2) Joint venture or consortium formed for the purpose of undertaking construction projects
or engaging in petroleum, coal, geothermal and other energy operations pursuant to an
operating or consortium agreement under a service contract with the Government.
c. General professional General professional partnerships are partnerships formed by persons for sole purpose
partnerships of exercising their common profession, no part of the income of which is derived from
engaging in any trade or business.
d. Joint venture Joint venture is a commercial undertaking by two or more persons, differing from a
partnership in that it relates to the disposition of a single lot of goods or the completion of a
single project.
e. Joint stock companies Joint stock companies are constituted when a group of individuals, acting jointly,
establish and operate a business enterprise under an artificial name, with an invested
capital divided into transferable shares, an elected board of directors, and other corporate
characteristics, but operating without formal governmental authority.
f. Joint accounts Joint accounts are constituted when one interests himself in the business of another by
(cuentas contributing capital thereto, and sharing in the profits or losses in the proportion agreed
en participacion) upon. They are not subject to any formality and may be privately contracted orally or in
writing.
g. Associations The term “associations” includes all organizations which have substantially the salient
features of a corporation to be taxable as a “corporation.”

2. Classification of Corporations
a. Domestic corporations The term “domestic”, when applied to a corporation, means created or organized in the
Philippines or under its laws
b. Foreign corporations The term “foreign”, when applied to corporation, means a corporation which is not
domestic.
1) Resident foreign The term “resident foreign corporation” applies to a foreign corporation engaged in
corporation trade or business within the Philippines.
2) Non-resident The term “non-resident foreign corporation” applies to a foreign corporation not
foreign corporation engaged in trade or business within the Philippines.

3. Format of Computation (Annual Income Tax Return)

Sales/Revenues/Receipts/Fees xxx
Less: Cost of sales/services xxx
Gross income from operations xxx
Add: Non-operating and taxable other income xxx
Total gross income xxx
Less: Deductions xxx
Taxable income xxx
Regular corporate income tax xxx
Minimum corporate income tax xxx
Tax due (whichever is higher) xxx
Less: Unexpired excess of prior year’s MCIT over normal income tax rate xxx
Balance xxx
Add: Tax due to the BIR on transactions under special rate xxx
Aggregate income tax due xxx
Less: Tax credits/payments
Prior year’s excess credits other than MCIT xxx
Tax payments for the first three quarters xxx
Creditable tax withheld for the first three quarters xxx
Creditable tax withheld for the fourth quarter xxx
Foreign tax credits, if applicable xxx
Tax paid in return previously filed, if this is an amended return xxx xxx
Tax payable (overpayment) xxx

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4. Tax Base and Tax Rate
Corporation Tax Base Tax Rate
a. Domestic corporation Net income within and without 35% - November 1, 2005 to December 31, 2008
30% - January 1, 2009
b. Resident foreign corporation Net income within 35% - November 1, 2005 to December 31, 2008
30% - January 1, 2009
c. Non-resident foreign Gross income within 35% - November 1, 2005 to December 31, 2008
corporation 30% - January 1, 2009
d. Taxable partnerships, Net income within and without 35% - November 1, 2005 to December 31, 2008
joint ventures, etc 30% - January 1, 2009

5. Optional Standard Deductions for Corporations (OSD) (RR No. 16-2008 as amended by RR No. 2-2010)
3) Determination of the a) In the case of corporate taxpayers, the OSD allowed shall be in an amount not exceeding
amount of OSD for forty percent (40%) of their gross income.
domestic corporation b) “Gross income” shall mean the gross sales less sales returns, discounts and allowances
and resident foreign and cost of goods sold.
corporation c) In the case of sellers of services, the term “gross income” means “gross receipts” less sales
returns, allowances, discounts and cost of services.
d) The items of gross income under Section 32 (A) of the Tax Code, as amended, which are
required to be declared in the income tax return of the taxpayer for the taxable year are
part of the gross income against which the OSD may be deducted in arriving at taxable
income. Passive income which have been subjected to a final tax at source shall not form
part of the gross income for purposes of computing the forty percent (40%) optional
standard deduction.

6. Special Corporations
a. Special domestic corporations
Special domestic corporations Tax Base Tax Rate
1) Proprietary educational Net income 10%
institution and nonprofit Income from unrelated business exceeds 50%:
hospital 35% - November 1, 2005 to December 31, 2008
30% - January 1, 2009
2) Government-owned or controlled Net income Same as those imposed upon corporation or
corporations, agencies or association engaged in similar business, or activity
instrumentalities
3) Meaning of “unrelated trade, “Unrelated trade, business or other activity” is not substantially related to
business or other activity” the exercise or performance of the school or hospital’s primary purpose or function.
4) Treatment of capital outlays for Capital outlays for expansion of school facilities may either be:
expansion of school facilities a) deducted as expenditures; or
b) depreciated over the estimated life.
5) Tax-exempt government-owned The following are tax-exempt government-owned or controlled corporations:
or controlled corporations a) Government Service Insurance System (GSIS);
b) Social Security System (SSS);
c) Philippine Health Insurance Corporation (PHIC);
d) Philippine Charity Sweepstakes Office (PCSO);
e) Local Water Districts (R.A. No. 10026).
6) Exercises
1. (Phil. CPA Modified) The following information were from the records of the Central Plain University, Inc., a private
educational institution, for the fiscal year ended May 31, 2009:
Income: Miscellaneous fees P 362,600
Tuition 2,843,100
Income from rents 60,000
Net income, school canteen 36,200
Net income, book store 24,800
Dividends 15,000
Interest on time deposit 45,000
Expenses: Payroll and administrative salary 1,425,420
Other operating expenses 844,430
Depreciation, new six-room building 37,500
The capital outlay for the new building would be expensed outright.
How much was the income tax due from the Central Plain University, Inc. for the fiscal year ended May 31, 2009?

2. A proprietary private educational institution has presented the following data for the calendar year 2009:
Gross income, related activities P 5,000,000
Gross income, unrelated activities (including P2,000,000 rent from commercial
spaces, gross of 5% withholding tax) 7,000,000
Expenses, related activities 2,000,000
Expenses, unrelated activities 3,000,000
Dividend from a domestic corporation 100,000
Payments, first three (3) quarters 1,000,000

How much is the tax payable?

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b. Special resident foreign corporation
Special RFC Tax Base Tax Rate
1) International carrier Gross Philippine Billings 2 ½%
2) Offshore banking units Income from foreign currency transactions with Exempt from all taxes except
non-residents, OBUs in the Philippines, local net income from transactions
commercial bank including Philippine branches specified by Sec. of Finance
of foreign banks (used to be 10% final tax)
Interest income from foreign currency loans
granted to residents other than OBUs or local 10% final tax
commercial banks
Any income of non-resident (individual or
Exempt
corporation) from OBUs
3) Tax on branch profit remittance Total profits applied or earmarked for
(except on activities registered remittance without deduction for the tax 15%
with PEZA) component
4) Regional or area headquarters of
Exempt from tax -
multinationals
5) Regional operating headquarters
Taxable income 10%
of multinationals
6) Gross Philippine Billings for Gross Philippine Billings (for international air carrier) refers to the amount
international air carrier of gross revenue derived from carriage of persons, excess baggage, cargo or 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.
7) Gross Philippine Billings for Gross Philippine Billings (for international shipping) means gross revenue
international shipping whether for passenger, cargo, or mail originating from the Philippines up to final
destination, regardless of the place of sale or payment of the passage or freight
documents.
8) Regional or area headquarters Regional or area headquarters is a branch established in the Philippines by
multinational companies and which headquarters do not earn or derive income
from 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.
9) Regional operating headquarters Regional operating headquarters is a branch established in the Philippines by
multinational companies which are engaged in different services (e.g. general
administration and planning, business planning and coordination, marketing control
and sales promotion, etc.).
10) Exercises
a) The following data were provided by Air America, international carrier doing business in the Philippines:
Gross receipts, sales of tickets in the Philippines (Manila to Taipei flight) P8,000,000
Gross receipts, sales of tickets in Japan (only P5,000,000 actually flown) (Manila to Tokyo flight) 6,000,000
Gross receipts, sales of tickets in Japan (Tokyo to Manila flight) 3,000,000
Gross receipts, sales of tickets in the Philippines (Manila to Hongkong flight), passengers were
endorsed to another international airline which airlifted them from Manila 1,000,000
Gross receipts, sales of tickets in the Philippines (Manila to Los Angeles flight), passengers were
transshipped in Tokyo to Los Angeles by another airline (flight from Manila to Tokyo – 5 hours;
flight from Tokyo to Los Angeles – 10 hours) 4,500,000
Expenses, sales of tickets, Philippines 4,000,000
Rental income, Philippines, gross of 5% withholding tax 1,500,000
Expenses connected to rental income, Philippines 500,000
Payments, first three (3) quarters 150,000

How much was the total Philippine income tax due and payable?

b) A resident foreign corporation has the following data on its income, expenses and remittances:
Gross income, Philippines P7,000,000
Gross income, USA 5,000,000
Business expenses, Philippines 2,000,000
Business expenses, USA 1,000,000
Royalties on Philippine copyrights 500,000
Interest on time deposit, PNB-Manila, Philippines 100,000
Remittances of profit during the year 200,000
Payments, first three (3) quarters 100,000
Question 1 – Determine the Philippine income tax due and payable using: a. itemized deduction b. OSD
2 - How much is the tax on the branch profit remittances, if any?

c. Special nonresident foreign corporation

Special NRFC Tax Base Tax Rate
1) Nonresident cinematographic film
Gross income from Philippine sources 25%
owner, lessor, or distributor

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2) Nonresident owner or lessor of
Gross rentals or fees derived within the 7 ½%
aircraft, machineries and other
Philippines
equipment
3) Nonresident owner or lessor of Gross rentals, lease or charter fees from leases
vessels chartered by Philippine or charters to Filipino citizens or corporations, 4 ½%
nationals as approved by Maritime Industry Authority
4) Exercise
A corporation has the following data for the calendar year 2009:
Gross income, Philippines P 2,500,000
Gross income, Japan 1,500,000
Expenses, Philippines 1,000,000
Expenses, Japan 500,000

How much is the final withholding Philippine income tax, assuming the corporation is a:
a. non-resident cinematographic film owner, lessor or distributor?
b. non-resident owner or lessor of vessels chartered by Philippine nationals?
c. non-resident owner or lessor of aircraft, machineries and other equipment?

7. Partnership, Joint Venture and Co-Ownership

a. Non-taxable partnerships, 1) General professional partnership;
joint ventures and co- 2) Joint venture undertaking construction projects pursuant to an operating consortium
ownerships agreement under a service contract with the Government;
3) Joint venture engaging in petroleum, coal, geothermal, and other energy operations
pursuant to an operating consortium agreement under a service contract with the
Government;
4) Co-ownership.
b. Taxable partnerships, joint 1) Partnership engaged in business, no matter how created;
ventures and co-ownerships 2) Other joint ventures.

8. Important Pointers in Non-Taxable Partnerships

a. General professional A general professional partnership is one formed for the sole purpose of exercising a
partnership defined common profession, no part of income of which is derived from engaging in trade or
business.
b. Liability of partners in a Persons engaging in business as partners in a general professional partnership shall
general professional be liable for income tax only in their separate and individual capacities.
partnership
c. General professional Every general professional partnership shall file, in duplicate, a return of its income,
partnership required to except income exempt under the Tax Code, setting forth the items of gross income
file return and deductions and the names, TIN, addresses and shares of each of the partners.
d. Manner of computing For purposes of computing the distributive share of the partners, the net income of
the net income of the general professional partnership shall be computed in the same manner as a
general professional corporation.
partnership
e. Basis of the income that Each partner shall report as gross income his distributive share, actually or
a partner will report constructively received, in the net income of the partnership.
f. Income payments to Income payments to partners of general professional partnership are subject to 15%
partners of a general creditable withholding tax, if the income payment to the partner for the current year
professional partnership exceeds P720,000; and 10%, if otherwise.
subject to creditable
withholding tax
g. Exercise
Jaimee, married, has two dependent minor brothers. She is a partner of a general professional partnership. She also has
a trading business of her own. The following data are made available for the year 2009:
Gross income, trading business P500,000
Expenses, trading business 100,000
Interest income, BPI-Makati 20,000
Share from the net income of a general professional partnership 300,000
Royalty, books published in the USA 150,000
Salaries as part-time teacher, gross of withholding tax 100,000

For income tax purposes, how much is Jaimee’s taxable net income?

9. Important Pointers in Taxable Partnerships

a. Taxable partnerships Taxable partnerships are required to file a cumulative quarterly declaration and a final
required to file cumulative return just like corporations.
declaration and annual
return
b. Share of partner in a taxable The share of partners in the net income of a taxable partnership shall be subject to
partnership subject to final 10% final tax.
tax

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c. Exercise
A business partnership organized by partners Tin and Cris, equal partners, has the following data for the calendar year
ended 2009:
Gross business income P 1,000,000
Deductible expenses 300,000
Yield from deposit substitute, net of final withholding tax 50,000
Interest income derived from a depository bank under EFCDS, net of withholding tax 100,000
Gain from sale of shares of stock not traded in the local stock exchange, net of capital gains tax 80,000
Withdrawals on the share in the net income of the partners, net of withholding tax 150,000
Rent income, gross of 5% withholding tax 300,000
Payments of quarterly taxes, first 3 quarters 120,000
Question 1 – How much is the taxable net income of the business partnership?
2 – How much is the tax payable of the business partnership?
3 – How much is the distributable net income of the partnership?
4 – How much is the final withholding tax on the share of the partners, if any?

10. Important Pointers in Joint Ventures

a. Taxable joint ventures Generally, joint ventures are subject to tax.
b. Exempt joint ventures 1) Joint venture undertaking construction projects;
(pursuant to an operating 2) Joint venture engaging in petroleum, coal, geothermal, and other energy
or consortium agreement operations;
under a service contract
with the Government)
c. Share in the net income The share in a taxable joint venture’s net income is treated as inter-corporate dividend
after tax in a taxable joint which is generally exempt from income tax. In case of individual co-venturer, it is
ventures subject to 10% final tax.
d. Share in the net income in The share in a non-taxable joint venture’s net income is subject to corporate income
an exempt joint venture tax or Section 24 (A), in case of individual co-venturer.
e. Exercise
Rhea Company and Issa Company formed a joint venture to undertake construction project pursuant to an operating
consortium agreement under a service contract with the Government. They shared equally. For the calendar year 2009,
the following data on their joint and separate operations were presented:
Joint operation: Gross income P150,000,000
Expenses 50,000,000
Separate operations (not part of joint venture) Rhea Company Issa Company
Gross income P20,000,000 P30,000,000
Expenses 5,000,000 10,000,000

REQ: a. Compute the:

1) net income of the joint venture; 3) taxable net income of Rhea Company;
2) income tax due from the joint venture; 4) taxable net income of Issa Company.
b. Assuming the above joint venture was engaged in the sale of real estate, compute the:
1) taxable net income of the joint venture. 3) taxable net income of Rhea Company.
2) tax due from the joint venture. 4) taxable net income of Issa Company.

11. Important Pointers in Co-Ownership

a. Co-ownership is not taxable Co-ownership is generally not taxable because the activities of the co-owners are
usually limited to the preservation of the property owned in common and collection
of the income therefrom.
b. Income to be reported by Co-owners shall report in their respective income tax returns their shares of the
co-owners income of the co-ownership.
c. When may the co-owners be When the income of the co-ownership is invested by the co-owners in business or
subject to tax other income producing properties, the co-owners will be subject to tax as a
corporation because the co-owners have constituted themselves into a partnership.
d. Co-owners not to be Co-owners who own inherited properties which produce income should not
automatically considered as automatically be considered as partners of an unregistered partnership or
partners corporation subject to income tax.
e. Sharing of gross return does The sharing of gross return does not of itself establish a partnership, whether or not
not of itself establish a the persons sharing them have a joint or common right or interest in any property
partnership from which the returns are derived. There must be an unmistakable intention to
form a partnership or joint venture.

12. Corporate Returns

a. Filing of quarterly and final
or adjustment return
b. Non-resident foreign
corporations
Every corporation subject to tax shall render, in duplicate a true and accurate
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quarterly return and final or adjustment return.
Corporations not engaged in trade or business in the Philippines (NRFC) shall not be
required to file income tax return.

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c. Who shall file the corporate 1) President; 3) Other principal officers.
return? 2) Vice – President; or
The return shall be sworn to by above officer and by the Treasurer or Assistant
Treasurer.
d. Corporate declarations and Declaration of quarterly corporate income tax on a cumulative basis not later than 60
returns days from the close of each of the first three quarters of the taxable year, whether,
calendar or fiscal year. The tax so computed shall be decreased by the amount of tax
previously paid or assessed during the preceding quarters.
e. Final adjustment return Covers the total taxable income for the preceding calendar or fiscal year filed on or
before 15th day of the 4th month following the close of the taxable year.
f. Sum of quarterly payments If the sum of the quarterly tax payments made during the taxable year is not equal
not equal to the total tax to the total tax due on the entire taxable income of that year, the corporation shall
due for the year either pay the balance of tax still due, or carry over the excess credit, or be credited
or refunded with the excess amount paid.
g. Corporation is entitled to 1) In case the corporation is entitled to a tax refund or credit of the excess estimated
tax refund or credit quarterly income taxes paid, the excess amount shown on its final adjustment
return may be carried over and credited against the estimated quarterly income
tax liabilities for the taxable quarters of the succeeding taxable years.
2) Once the option to carry-over has been made, such option shall be considered
irrevocable for that taxable period.
h. Filing of the return The quarterly income tax declaration and the final adjustment shall be filed with:
1) Authorized agent banks, or
2) Revenue District Office, or
3) Collection Agent, or Duly authorized Treasurer of the city or municipality having
jurisdiction over the location of the principal office of the corporation filing the
return or place where the main books of accounts and other data from which the
return is prepared are kept.
i. Payment of the income tax The income tax due shall be paid at the time the declaration or return is filed.
j. Exercise: The 2010 and 2011 data of Alice Corporation are shown below:
Income tax due 2010 P250,000
Less: Tax credits
Quarterly payments for the first three quarters 300,000
Excess tax payments (to be carried over as chosen by the corporation) (P 50,000)
:
2011 data First Q Second Q Third Q Year
Sales, gross of 1 % withholding tax P500,000 P1,100,000 P1,500,000 P2,200,000
Cost of sales 250,000 650,000 800,000 1,200,000
Operating expenses 50, 000 150,000 300,000 500,000

REQ: Compute the income tax payable using: a. itemized deductions b. OSD.

13. Sec. 30 Exemption from Tax on Corporation. – The following organizations shall not be taxed in respect to
income received by them as such:
(A) Labor, agricultural or horticultural organizations not organized principally for profits;
(B) Mutual savings bank not having a capital stock represented by shares, and cooperative bank without capital stock,
organized and operated for mutual purposes and without profit;
(C) A beneficiary society, order or association, operating for the exclusive benefit of the members such as fraternal
organization operating under the lodge system, or a mutual aid association or a non-stock corporation organized by
employees providing for the payment of life, sickness, or other benefits exclusively to the members of such society,
order, or association, or non-stock corporations or their dependents;
(D) Cemetery company owned and operated exclusively for the benefit of its members;
(E) Non-stock corporation or association organized and operated exclusively for religious, charitable, scientific, athletic, or
cultural purposes, or rehabilitation of veterans, no part of its net income or asset shall belong or inure to the benefit of
any member, organizer, officer or any specific person;
(F) 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 stockholder or individual;
(G) Civic league or organization not organized for profit but operated exclusively for the promotion of social welfare;
(H) A non-stock nonprofit educational institution;
(I) Government educational institution;
(J) Farmers or other mutual typhoon or fire insurance company, mutual ditch or irrigation company, mutual or cooperative
telephone company, or like organizations of a purely local character, the income of which consists solely of
assessments, dues, and fees collected from members for the sole purpose of meeting its expenses; and
(K) Farmers, fruit growers, or like association organized and operated as a sales agent for the purpose of marketing the
products of its members and turning back to them the proceeds of sales, less the necessary selling expenses on the
basis of the quantity of produce finished by them.
Note: Notwithstanding the provisions in the preceding paragraphs, the income of whatever kind and character of the
foregoing organizations from any of their properties, real or personal or from any of their activities conducted for
profit regardless of the disposition made of such income, shall be subject to corporation tax.
- = END = -
THOT: Being intelligent involves being ignorant about those things that are not worth knowing.
jb

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