Corporations: Week 4-Notes AEC 209-Income Taxation

St.
Anthony’s College Business Education Department

San Jose de Buenavista MIDYEAR, AY 2020-2021
Week 4- Notes AEC 209-Income Taxation
CORPORATIONS
A. CORPORATION DEFINED
RA 11232, also known as the Revised Corporation Code (RCC) of the Philippines defined Corporation as
an artificial being created by operation of law, having the right of succession and the powers, attributes and
properties expressly authorized by the law or incidental to its existence.
For taxation purposes, Corporation is defined under Section 22 of the Tax Code (RA 8424) as amended
under RA 11534 or the Corporate Recovery and Tax Incentives for Enterprises Act (CREATE) and RR 5-
2021 as follows.
CORPORATION shall INCLUDE:

1. One person corporation
2. Partnerships, no matter how created or organized;
3. Joint stock companies;
4. Joint accounts (cuentas en participacion)
5. Associations; or
6. Insurance companies
A one-person corporation is a corporation with a single stockholder. Provided, that only a natural person,
trust, or an estate may form a one person corporation.
But does not include:

1. General professional partnership; and
2. A joint ventures or consortiums formed for the purpose of undertaking:
a. Construction projects; or
b. Engaging in petroleum, coal, geothermal and other energy operations pursuant to an operating or
consortium agreement under a service contract with the government.
JOINT VENTURE OR CONSORTIUM

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.
IN GENERAL, a joint venture or consortium is taxable as corporation unless it refers to joint ventures
described above. Additional requirements for tax exemption are as follows:
1. A joint venture or consortium formed for the purpose of undertaking construction projects is not
considered as corporation (RR 10-2012, effective June 2012) provided:
a. The joint venture was formed for the purpose of undertaking a construction project; and
b. Should involve joining/pooling of resources by licensed local contracts; that is, licensed as
general contractor by the Philippine Contractors Accreditation Board (PCAB) of the Department
of Trade and Industry (DTI)
c. The local contractors are engaged in construction business; and
d. The Joint Venture itself must likewise be duly licensed as such by the Philippine Contractors
Accreditation Board (PCAB) of the Department of Trade and Industry (DTI).
St. Anthony’s College Business Education Department
FOREIGN CONTRACTORS
Joint Ventures involving foreign contractors may also be treated as a non-taxable corporation provided:
 The member foreign contractor is covered by a special license as contractor by the PCAB of DTI.
 The construction project is certified by the appropriate Tendering Agency (government office) that
the project is a foreign financed/internationally –funded project and that international bidding is
allowed under the Bilateral Agreement entered into by and between the Philippine Government and
the foreign/ international financing institution pursuant to the implementing rules and regulations of
Republic Act No. 4566 otherwise known as Contractor’s License Law.
2. A joint venture or consortium for engaging in petroleum, coal, geothermal and other energy
operations pursuant to an operating consortium agreement under a service contract with the
government.
TAX treatment of Co-venture’s share in the JV Profit

TYPE OF JOINT VENTURE CO-VENTURER
CORPORATION INDIVIDUAL
Taxable Joint Venture *Exempt **Final Withholding Tax
Non- taxable Joint Venture RCIT*** Basic Tax

*treated as inter-corporate dividend
** Treated as dividend income which is generally subject to FWT of 10% but may also be subject to
20% if received by NRAET and 25% FWT if received by NRANET.
***TRAIN 30% CREATE either 25% or 20% except if derived by Special Corporation.
 JOINT STOCK COMPANIES

Joint stock companies are constituted when a group of individuals, acting jointly, establish and
operate business enterprise under an artificial name, with an invested capital dividend into
transferable shares, an elected board of directors, and other corporate characteristics, but
operating without formal government authority.
 JOINT ACCOUNT COMPANIES

Joint account (cuentas en participacion) is constituted when one interest himself in the business
of another by contributing capital thereto, and sharing in the profits or losses in the proportion
agreed upon. They are not subject to any formality and may be privately contracted orally or in
writing. The term “associations” includes all organizations which have substantially the salient
features of a corporation to be taxable as a “corporation”.
B. CLASSIFICATION OF CORPORATE TAXPAYERS
1. Domestic Corporation (DC)

 A corporation created or organized in the Philippines or under its laws.
2. Resident Foreign Corporation

 A corporation created or organized in a foreign country or under the laws of a foreign country
and engaged in business in the Philippines.
3. Nonresident Foreign Corporation (NRIFC)

 A corporation created or organized in a foreign country or under the laws of a foreign country
and is not engaged in business in the Philippines.
CORPORATIONS MAY BE CLASSIFIED FURTHER INTO:

1. Ordinary Corporations- corporations subject to normal tax or basic tax or the regular corporate income
tax (RCIT) rate of 30% under TRAIN Law and either 25% or 20% under CREATE Law.
2. Special Corporations- corporations subject to income tax rate which are lower than the regular corporate
income tax (RCIT) rate of 30%, 25% or 20%, as the case may be.
The Special Corporations under the Tax Code, as amended, are as follows.
SPECIAL CORPORATIONS TAX RATE
a. Domestic corporation Train Law: 10%
 Propriety educational CREATE:
institutions and hospitals • July 1, 2020 to June 2023: 1%
• Beg. July 1, 2023: 10%
b. Resident Foreign Corporations
 International carriers • Generally 2.5% of Gross Philippine
Billings (GPB) but it may be subject
to a lower rate or exempt under
certain
conditions
 Regional operating headquarters • TRAIN law: 10% of net income

• CREATE:
ͦ Until Dec. 31, 2021: 10%
ROHQS are no longer considered ͦ Beg. Jan. 1, 2022: Subj. to 25%
Special corporations beginning January RCIT; Taxable as RFC
1, 2022.
c. Nonresident Foreign Corporations

 Non-resident Cinematographic 25% of Gross Income
Film owner, Lessor or Distributor.
 Non-resident Owner or Lessor of 4.5% of Gross Income
Vessels Chartered by Philippine Nationals
 Non-resident Owner or Lessor of Aircraft, 7.5% of Gross Income
Machineries and other equipment
C. EXEMPT CORPORATIONS
 The following organization shall not be subject to income tax
[Section 30, RA 8424) National Internal Revenue Code]:
A. Labor, agricultural or horticultural organization not organized principally for profit;

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 a 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,
accident or other benefits exclusively to the members of such society, order, or association, or
non-stock corporation 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 for the rehabilitation of veterans, no part of
its net income or asset shall belong to 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 inure 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 and nonprofit educational institution;
I. Governments educational institution
J. Farmer’s or other mutual typhoon or fire insurance company, mutual ditch or irrigation
company, mutual or cooperative telephone company, or like organization 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. Farmer’s 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 quantity of produce finished by them.
Provided, that 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 income tax.
GOVERNMENT OWNED OR CONTROLLED CORPORATIONS (GOCCs)

RR 5-2021, implementing the provisions of CREATE law provides that GOCCs, agencies and
instrumentalities shall pay such rate of tax upon their taxable income as are imposed upon corporations or
associations engaged in a similar business, industry, or activity,
EXCEPT:
1. Government Service and Insurance System (GSIS)
2. Social Security System (SSS)
3. Home Development Mutual Fund (HDMF; also known as Pag-ibig)
4. Philippine health insurance corporation(PHIC)
5. Local water districts (RA 10026)
NOTE:
 PCSO is taxable beg. Jan 1, 2018 or upon effectivity of the TRAIN Law.
 HDMF or Pag-ibig is exempt only upon the effectivity of CREATE Law (April 11, 2021)
D. INCOME TAXES OF CORPORATIONS
GENERAL PRINCIPLES
A. SOURCE OF INCOME SUBJECT TO TAX:

1. DC- World
2. RFC and NRF- Within the Philippines only
B. BASIS OF INCOME SUBJECT TO TAX:

1. DC, RFC- Net Income
2. NRFC- Gross Income
C. APPLICABLE TAXES
Type of Income Applicable Tax
1. Regular or ordinary income • DC’s and RFC’s: Regular Corporate
Income Tax (RCIT)
• NRFCs: Final Withholding Tax (FWT)
2. Passive Income • FWTs
3. Capital Gains on
 Sale of shares of stock of • Capital Gains Tax (applicable to all
Domestic corporation sold directly corporations)
to a buyer; and
 Sale of real property in the Capital Gain Tax (applicable only to

Philippines classified as domestic corporations)
Capital asset
E. REGULAR CORPORATE INCOME TAX (RCIT)
TRAIN CREATE
DC Other DC’s;
MSME’s RFCs NRFC
Gross Income Pxxx Pxxx Pxxx Pxxx
Allowable Deductions (xxx) (xxx) ( xxx) NA
Taxable Income Pxxx Pxxx Pxxx Pxxx
Rate 30% 20% 25% 25%***
RCIT/FWT Pxxx Pxxx Pxxx Pxxx
NOTE:
 Effectivity of the RCIT rates under CREATE: RR 5-2021:
 For DC and RFC- Beginning July 1, 2020
 For NRFC- Beginning January 1, 2021.
 CREATE Law, which was published on March 27, 2021, took effect on April 11, 2021.
Although CREATE took effect only on April 11, 2021, there are certain provisions in the law
with specific effectivity dates which are earlier than April 11, 2021, such as the revised RCIT
rates for DCs and RFCs as well as the revised FWT rate for NFRCs.
 **Beginning July 1, 2020, the applicable RCIT rate of domestic corporations with total assets of
₱100 million and below AND net taxable income of ₱5 million and below [also known as Micro
Small and Medium Enterprises (MSMEs)] was reduced to 20%. Total assets excludes the land
on which the particular business entity’s office, plant, and equipment are situtated during the
taxable year for which the tax is imposed.
 All other “domestic” corporations are subject to RCIT rate of 25% beginning July 1, 2020.
 RFCs are subject to the revised RCIT rate of 25% beginning July 1, 2020.
 ***Revised FWT rate of 25% for NFRCs shall take effect beg. Jan. 1, 2021.
F. MINIMUM CORPORATE INCOME TAX (MCIT)

Section 27(E) (1) and Section 28(2) [for DCs and RFCs, respectively], as amended, under CREATE Law,
provide:
A minimum Corporate Income Tax MCIT of one two percent (2%) of the gross income as one of
the end of the taxable year is imposed upon any domestic corporations and resident foreign corporations
beginning on the 4th taxable year immediately following the taxable year in which such corporation
commenced its business operations, when the MCIT is greater than RCIT, Provided: that effective July 1,
2020 until June 30, 2023, the rate shall be one percent (1%).
THE MCIT SHALL BE IMPOSED WHENEVER:

 The corporation has zero taxable income; or
 The corporation has negative taxable income; or
 Whenever the amount of MCIT is greater than the regular corporate income
Tax (RCIT) due from such corporation. Hence, MCIT is always computed and compared to
RCIT starting on the fourth year of operations.
NOTE:
 RULES FOR DETERMINING THE PERIOD WHEN A CORPORATION BECOMES
SUBJECT TO MCIT (RR 2-98 as amended under RR 9-98)
Meaning of “….in the 4th taxable year immediately following the taxable year in which such
corporation commenced its business operations”
o In determining the 4th taxable year, the year the Corporation was registered shall be
disregarded
 Under RR 12-2007 MCIT shall be computed not only on a yearly basis but also in the
computation of quarterly income tax due.
 MCIT rates:
Period MCIT Rate

On or before June 30, 2020 : 2%
July 1, 2020 to June 30, 2023 : 1%
Beginning July 1, 2023 2%
CARRY FORWARD OF EXCESS MCIT (MCIT CARRY-OVER)
Any excess of the MCIT over RCIT shall be carried forward and credited against the RCIT for
the three (3) immediately succeeding taxable years.
GROSS INCOME FOR MCIT PURPOSES:

1. Seller of Goods
Gross Sales Pxx
Sales Discounts (xx)
Sales Returns and Allowances (xx)
Cost of Sales (xx)
Gross Income Pxx
Add: Other Income Subject to RCIT xx
Total Gross Income for MCIT purposes Pxx
Cost of Goods Sold:

a. Trader Merchandiser Pxx
Invoice cost of goods sold xx
Import duties xx
Freight xx
Insurance xx
Total Pxx
b. Manufacturing Concern
Raw materials used Pxx
Direct labor xx
Manufacturing overhead xx
Freight cost xx
Insurance premiums xx
Other cost of production xx
Total Pxx
2. Seller of services
Gross Receipts Pxx
Sales of Discount and Allowances (xx)
Cost of services (xx)

Gross Income Pxx
Add: Other Income subject to RCIT xx
Total Gross Income for MCIT purposes Pxx
COST OF SERVICES:
Salaries/Employee benefits personnel, consultants and specialists directly rendering the service PXXX
Cost of facilities directly utilized in providing the service (e.g. rentals and cost of supplies) XXX
Other direct costs and expenses necessarily incurred to provide the services XXX
TOTAL PXXX
o In case of banks, “cost of services” shall include interest expense.
RELIEF FROM THE MCIT

The Secretary of Finance is authorized to suspend the imposition of the MCIT on any corporation which
suffers losses on account of:
1. Prolonged labor dispute
2. Force majeure
3. Legitimate business reverses
CORPORATIONS EXEMPT FROM MCIT:

1. Special corporations such as:
a. Proprietary educational institutions and hospitals
b. International carrier
c. Regional operating headquarters (up to Dec. 31, 2021 only)
2. Nonresident Foreign Corporations (NFRCs)

3. Corporations that are tax exempt under the law such as Regional or Area Headquarters
4. Firms that are taxed under special tax regime (e.g. covered by PEZA law and Bases Conversion
Development Act)
NET OPERATING LOSS CARRY-OVER (NOLCO)

“Net Operating Loss (NOL)” means that the excess of allowable deduction over gross income of the
business in a taxable year.
The net operating loss of the business or enterprise for any taxable year shall be carried over as a
deduction from gross income for the next three (3) consecutive taxable years immediately following
the year of such loss. However, under RA 11494, also known as the Bayanihan Act II, the NOLCO of
the business or enterprise for taxable years 2020 and 2021 shall be carried over as a deduction from
gross income for the next five (5) consecutive taxable years immediately following the year of loss.
The net operating loss for said taxable years may be carried over as a deduction even after the
expiration of RA No. 11494, provided the same are claimed within the next five (5) consecutive taxable
years immediately following the year of such loss (RR 25-2020).
GUIDE:
Taxable Year NOL was incurred Deductible as NOLCO within
Prior to 2020 3 consecutive years
2020 and 2021 5 consecutive years

Beginning 2022 3 consecutive years
o For corporations adopting Fiscal Year period, taxable year 2020 and 2021 shall
include all those corporations with fiscal year ending on or before June 30, 2021, and
June 30, 2022, respectively (RR 25-2020).
REQUISITES FOR DEDUCTIBILITY
1. At the time of incurring net loss, the taxpayer must not be exempt from income tax; and
2. There is no substantial change in the ownership of the business or enterprise in that
a. Not less than seventy-five (75%) in nominal value of outstanding issued shares, if the
business is in the name of a corporation, is held by or on behalf of the same persons; or
b. Not less than seventy-five (75%) of the paid-up capital of the corporation, if the business is
in the name of a corporation, is held by or on behalf of the same persons.
o Additional requirements for NOLCO incurred in 2020 and 2021 under Bayanihan
Act II and RR 25-2020:
Presentation of NOLCO in the Income Tax Return (ITR) and Unused NOLCO in the
Income Statement
1. The NOLCO shall be separately shown in the taxpayer’s (also shown in the
reconciliation Section of the Tax Return);
2. The Unused NOLCO shall be presented in the Notes to Financial Statements
showing, in detail, the taxable year in which the net operating loss was sustained
or incurred, and any amount thereof claimed as NOLCO deduction within five
(5) consecutive years immediately following the year of such loss.
3. The NOLCO for taxable years 2020 and 2021 shall be presented in the Notes to
the Financial Statements separately from the NOLCO for other taxable years.
G. OPTIONAL CORPORATE INCOME TAX (15% Gross Income Tax)

Repealed/ Deleted under CREATE Law
The provision pertaining to the 15% Optional Corporate Income Tax, also known as Gross Income
Tax of 15%, was deleted under CREATE Law. Consequently, this is no longer allowed upon the effectivity
of the CREATE Law.
The last paragraph of Sec. 27(A) of the Tax Code PRIOR to amendment under CREATE Law,
provides:
“……The President, upon the recommendation of the Secretary of Finance may, effective January
1, 2000, allow domestic and resident foreign corporations to be subjected to Optional corporation tax of
15% based on gross income. Election of 15% tax shall be irrevocable for the three (3) consecutive taxable
years during which the corporation is qualified under the scheme.”
REQUISITES
All of the following conditions shall have to be satisfied in the allowance of optional corporate tax:
1. A tax effort ratio of 20% of Gross National Product (GNP);
2. A ratio of 40% of income tax collection of total tax revenue;
3. A VAT effort of 4% of GNP; and
4. A 0.9 ratio of the Consolidated Public Sector Financial Position to GNP.
5. The option to be taxed based on gross income shall be available only to firms whose ratio of cost
of sales to gross sales or receipts from all sources does not exceed 55%.
FORMULA:
Sales/ Revenues Pxx
Cost of sales/Cost of direct services (xx)
Gross Income xx
Gross income tax rate 15%
Income tax due Pxx
Less: Taxes withheld (xx)
Taxes paid-previous quarters (xx)
Foreign tax credits (xx)
Income tax payable Pxx
H. SUMMARY OF REVISED INCOME TAX UNDER CREATE; RR 5-2021
The higher bet, the “Regular” or “Minimum Corporate Income Tax

TYPE OF (MCIT) rates
CORPORATION
Regular MCIT
Rate Effectivity Rate Effectivity
Domestic Corporation
Domestic corporation, 25% July 1, 2020 1% July 1, 2020 to June
in general 30, 2023
2% July 1, 2023
For corporations with 20% July 1, 2020 1% July 1, 2020 to June
net taxable income not 30, 2023
exceeding Five
Million Pesos (₱5,
000,000) AND total
assets not exceeding
One Hundred Million 2% July 1, 2023

(₱100,000,000),
excluding the land on
which the particular
business entity’s
office, plant and
equipment are
situated.
Proprietary 1% July 1, 2020 to June 30, Not
Educational 2023 Applicable
Institutions and
Hospitals
10% July 1, 2023
The higher bet, the “Regular” or “Minimum Corporate Income Tax

TYPE OF (MCIT) rates
CORPORATION
Regular MCIT
Rate Effectivity Rate Effectivity
FOREIGN
CORPORATION
[on taxable income (e.g.
net or gross income, as
applicable) derived from
all sources within the
Philippines]
Resident Foreign 25% July 1, 2020 1% July 1, 2020 to June
corporation 30, 2023
2% July 1, 2023
Offshore banking Unit 25% Upon the effectivity of 1% Upon the effectivity
(OBUs) (Note: OBUs the CREATE of the CREATE
shall now be taxed as until June 30, 2023
resident foreign
corporation upon
effectivity of the
CREATE) 2% July 1, 2023
Regional operating 25% January 1, 2022 1% January 1, 2022 to

headquarters (RHOQ) June 30, 2023
2% July 1, 2023
Non-Resident Foreign 25% January 1, 2021 Not applicable
Corporation
I. FINAL WITHHOLDING TAX (FWT) ON “CERTAIN” PASSIVE INCOME derived from

Philippine Sources
PASSIVE INCOME RECEIVED BY
DC RFC NRFC
1. INTEREST INCOME/YIELD/other monetary benefit

o Interest income in any currently 20% 20% 30%
bank deposit
o Yield or any monetary benefit 20% 20% 30%
From deposit substitute
o Yield or any monetary benefit 20% 20% 30%
From trust fund and other similar
Arrangements
o Interest income derived from

Depository bank under expanded
Foreign currency deposit system
 PRIOR to TRAIN Law 7½ 7½ Exempt
 TRAIN Law (beg. 2018) 15% 7½ Exempt
 CREATE Law; RR 2-2021 15% 15% Exempt
2. ROYALTIES
o TRAIN Law 20% 20% 30%
o CREATE Law 20% 20% 25%
3. DIVIDENDS
 TRAIN Law
o From DC Exempt Exempt 30%/15%**
 CREATE LAW; RR 2-2021, RR 5-2021

o From DC Exempt Exempt 25%/15%*
o From RFC (RMC 62-2021)
 Source within the Phils. Exempt RCIT FWT
 Source without the Phils. May be

(foreign-sourced dividend) exempt
under
certain
conditions
 From NFRC
(foreign sourced dividend RR 5-2021)
 One of the apparent inconsistencies under the TRAIN Law and corrected under CREATE.
 Tax on interest income derived from FCDS/FCDU deposit is not applicable to nonresident taxpayers
 **Dividend income from DC to NFRC
TRAIN Law: Generally 30%. However, if the country where the NFRC is domiciled allows a credit for
taxes deemed paid in the Philippines equivalent to 15% (also known as tax sparing) or does not impose tax
on dividends, the tax rate shall be 15% otherwise, 30% (without tax sparing).
CREATE Law; RR 2-2021: Dividend income received by NFRC from DC:

o In general, it is subject to 25% FWT. However, a reduced rate of fifteen percent (15%) shall be applied,
subject to the condition that the country in which the NFRC is domiciled:
a. Shall allow a credit against the tax due from the said NFRC which are equivalent to taxes deemed to
have been paid in the Philippines equal to ten percent (10%) effective January 1, 2021, which represents
the difference between the regular income tax rate for NFRC under Sec. 28 (B)(1) of the NIRC, as
amended, and the fifteen percent (15%) tax on dividends as herein provided; OR
b. Does not impose any income tax on dividends received from a domestic corporation.
SITUS OF DIVIDEND INCOME FROM FOREIGN CORPORATIONS (RMC 62-2021; RR 5-2021;

Sec. 42 NIRC)
 Dividend income received by DC from NFRC- considered as foreign sourced dividend under RR 5-
2021
 Dividend income received by DC from RFC (RMC 62-2021)
 The tax treatment of dividends received by Domestic Corporation from RFC will
depend on the sources of income of the RFC. Under Section 42(A)(2)(b) of the Tax
Code, as amended, dividend from a foreign corporation shall be treated as income
derived from sources WITHIN THE PHILIPPINES UNLESS less than 50% of the
gross income of the foreign corporation for the three year period ending with the close
of its taxable year preceding the declaration of such dividends (or for such part of the
period as the corporation has been in existence) was derived from sources within the
Philippines.
 *** May be exempt under Certain conditions as follows:
FOREIGN-SOURCED DIVIDENDS (RR 5-2021 and RMC 62-2021)

Foreign-sourced dividends, if received by a domestic corporation, are exempt under CREATE law
subject to the following conditions:
a. The dividends actually received or remitted into the Philippines are reinvested in the business
operations of the domestic corporation within the next taxable year from the time the foreign-source
dividends were received or remitted.
b. The dividends received shall only be used to fund the working capital requirements, capital
expenditures, dividend payments, investment in domestic subsidiaries; and infrastructure project; and
c. The domestic corporation holds directly at least twenty percent (20%) value of the outstanding shares of
the foreign corporation and has held the shareholding uninterruptedly for a minimum of two (2) years at
the time of the dividends distribution. In case the foreign corporation has been in existence for less than
two (2) years at the time of dividends distribution, then the domestic corporation must have
continuously held directly at least twenty percent (20%) in value of the foreign corporation’s
outstanding shares during the entire existence of the corporation.
Absent any one of the above conditions, the foreign-sourced dividends shall be considered as taxable
income of the domestic corporation in the year of actual receipt or remittance, subject to surcharges,
interest, and penalties as applicable (RR-2021).
GUIDE:
FROM TO TRAIN LAW CREATE LAW
DC DC Exempt Exempt
RFC Exempt Exempt
NRFC 30%;15% 25%;15%
RFC DC:
If situs of the dividends is within Exempt
If situs of the dividends is without May be exempt

NRFC DC Considered foreign-sourced under under certain
RR 5-2021 conditions**
J. INCOME DERIVED BY DEPOSITORY BANKS UNDER FCDS

INCOME TAX
Income derived by a depository bank under the expanded foreign currency

Deposit system from foreign currency transactions with from foreign currency
transactions with nonresidents, OBUs in the Philippines, local commercial bank EXEMPT
including branches of foreign banks
Interest income from foreign currency loans granted by a depository bank under
the expanded foreign currency deposit system to residents other than depository banks 10% FWT
under the expanded system
Any income of non-residents, whether individuals or corporations from transactions

With depository banks under the expanded system shall be exempt from income tax. EXEMPT
NOTE:
 The taxes presented are applicable to DCs and RFCs under the following provisions:
 Sec 27 (D)(3)-DCs; Sec 28 (A)(6)(b)-RFCs; re-arranged only
 The provisions were not amended under CREATE Law
K. CAPITAL GAINS TAX (CGT)
Certain CAPITAL GAINS derived from Philippine Sources

CORPORATION
DC RFC NRFC
1. On CAPITAL gains from sale of shares of stock
Of a domestic corporation not traded in the local stock
Exchange
 PRIOR to TRAIN Law or before 2018
First 100,000 capital gain 5% 5% 5%
Amount in excess of 100,000 capital gain 10% 10% 10%
 Under TRAIN Law or beginning Jan 1, 2018 15% 5%;10% 5%;10%

Capital Gain, regardless of amount (if by DC only)
The only CGT rates of 5% on the 1st 100,000
capital gain were retained if the seller is a foreign
corporation
 under CREATE Law

Capital Gain, regardless of amount 15% 15% 15%
2. CAPITAL GAINS TAX on sale or exchange or 6%** NA NA

disposition of Land or/or buildings (Basis; Selling Price or
Fair market value, whichever is higher)
 The 6% CGT regardless of whether the sale resulted to a gain or loss is imposed to domestic
corporations only. Moreover, the option available to individual taxpayers to subject the sale to
either 6% CGT or Basic Tax, if the buyer is the government, is not applicable to domestic
corporations.
 **For purposes of computing the 6% CGT on real properties, FMW shall pertain to the higher
amount between the valuation provided by the Provincial or City assessors (also known as
“assessed value” or valuation for real property tax purposes) and the Zonal Value provided by the
BIR. The FMV determined by independent parties is not used for CGT purposes.
 CGT is due within 30 days from date of sale
CAPITAL GAINS TAX
Capital gains tax on sale of land and/or buildings

Requisites:
1. The land and/or building must be a capital asset; and
2. It must be located in the Philippines
3. Regardless of whether the transaction resulted to a gain or loss
FORMULA:
Tax base Pxxx
Rate 6%
CGT Pxxx
TAX BASE:
HIGHEST
1. Selling Price
2. Fair Market Value
3. Zonal Value
 Capital gains tax on sale of shares of stock of a domestic corporation

Requisites:
1. The shares of stock sold, bartered, exchanged or disposed must be from a domestic
corporation; and
2. The transaction must be not through the local stock exchange.
3. The seller should not be a dealer in securities (held as capital asset or for investment
purposes only)
4. The transaction should result to a capital gain based on computation shown below:
FORMULA:
Selling price Pxx
Cost (xx)
Capital gain Pxx
Rate %**
CGT Pxx
Sale of shares of a domestic corporation through the local stock exchange is not subject
to income tax but to a “business tax” of 6/10 of 1% (also known as stock transaction tax)
under Sec. 127 of the Tax Code.
Sale of shares of stock by a dealer in securities such as brokerage firms, regardless of

whether the shares were sold directly to a buyer or through the local stock exchange is
subject to basic income tax and value added tax.
Under RR 6-2013, the value of the shares of stock at the time of sale shall be the fair
market value. In determining the value of the shares, the Adjusted Net Asset Method
shall be used whereby all assets and liabilities are adjusted to market values. For
purposes of discussion in this review material, the selling price is assumed to be the
market value computed using the aforementioned method, assuming the latter is not
provided.
L. IMPROPERLY ACCUMULATED EARNINGS TAX (IAET)
NOTE: repealed under CREATE LAW
The provision pertaining to IAET was deleted under CREATE Law. Consequently, this is no longer
applicable upon the effectivity of the CREATE Law.
IAET prior to CREATE law is applicable only to domestic corporations which are classified as closely-held
corporations. However, the following shall be exempt:
a. Banks and other non-bank financial intermediaries;
b. Insurance companies;
c. Publicly-held corporations;
d. Taxable partnerships;
e. General professional partnerships;
f. Non-taxable joint ventures; and
g. Enterprises duly registered with the:
i. PEZA
ii. Pursuant to Bases Conversion and Development Act of 1992
iii. Special economic zones
iv. BOI registered entities
TAXABLE EVENT
The taxable event in IAET is the accumulation of earnings BEYOND the reasonable needs of
the business.
REASONABLE NEEDS OF THE BUSINESS
The test used in determining the reasonable needs of the business is the so called “immediacy
Test”. It provides that reasonable needs of the business is equivalent to:
Immediate needs Pxxx

Reasonably anticipated needs xxx
Reasonable needs Pxxx
The following constitute accumulation of earnings for the reasonable needs of the business:
1. Earnings reserved for definite corporate expansion projects or programs requiring

considerable capital expenditure as approved by the Board of Directors or equivalent body;
2. Earnings reserved for building, plants or equipment acquisition as approved by the Board of
Directors or equivalent body;
3. Earnings reserved for compliance with any loan covenant or pre-existing obligation
established under a legitimate business agreement;
4. Earnings required by law or applicable regulations to be retained by the corporation or in

respect of which there is legal prohibition against its distribution;
5. In the case of subsidiaries of foreign corporations in the Philippines, all undistributed
earnings intended or reserved for investments within the Philippines as can be proven by
corporate records and/or relevant documentary evidence.
FORMULA (REVISED UNDER RMC 35-2011)
Taxable income for the year Pxxx

Add: Income exempt from tax Pxxx
Income excluded from gross income xxx
Income subject to final taxes xxx
Net operating carry over (NOLCO) xxx xxx
Less: dividends (actually or constructive paid) (xxx)
Income tax paid/payable for the whole year* (xxx) (xxx)
Total Pxxx
ADD: Retained earnings prior years xxx
Accumulated earnings as of the end of the current year xxx
LESS: AMOUNT THAT MAY BE REATINED
(100% of paid up capital as of year-end) (xxx)
EXCESS (considered Improperly accumulated earnings) xxx
× IAET rate 10%
Improperly accumulated earnings tax (IAET) Pxxx
 (total applicable basic, final and capital gain taxes)
M. SPECIAL CORPORATIONS
Special corporations are corporations subject to lower RCIT rates of 30% (TRAIN Law) and either 20% or
25% under CREATE Law, as the case may be, on their regular or ordinary income.
1. DOMESTIC CORPORATIONS (RR 5-2021; RMC 62-2021)
 Non-profit Proprietary Educational Institutions (PEIs) and Hospitals

The rules applicable to ordinary corporations will also apply to proprietary educational
institutions and hospitals which are nonprofit, except the following:
1. Subject to special income tax rate as provided under Section 27 (B) of the Tax Code
as amended by RA 11534-CREATE Law:
Proprietary educational institutions and hospitals which are nonprofit shall pay a tax of ten
percent (10%) on their taxable income: provided, that beginning July 1, 2020 until June 30,
2023, the tax rate herein imposed shall be one percent (1%); Provided, further, that if the
gross income from unrelated trade, business or other activity exceeds fifty percent (50%) of
the total gross income derived by such educational institutions or hospital from all sources ,
the tax prescribed in Subsection (A) hereof shall be imposed on the entire taxable income.
SUMMARY
(provided unrelated income is not higher than related income):
 TRAIN Law: 10%
 CREATE:
From July 1, 2020 to June 30, 2023: 1%
Beginning July 1, 2023: 10%
“Unrelated trade, business or other activity” is an activity which is not substantially related
to the exercise or performance of the school or hospital’s primary purpose or function such
as but not limited to rental income available school spaces or facilities.
Examples of related income (RMC 4-2013)
 Income from tuition fees and miscellaneous school fees
 Income from hospital where medical graduates are trained or residency
 Income from canteen situated within the school campus
 Income from bookstore situated within the school campus
“Proprietary educational institution” refer any private schools which are nonprofit
maintained and administered by private individuals or groups with an issued permit
to operate from the Department of Education, Culture and Sports (DECS), or the
Commission on Higher Education (CHED), or the Technical Education and Skills
Development Authority (TESDA), as the case may be, in accordance with existing
laws and regulations (RR 50-2021).
2. It is not subject to MCIT

3. CAPITAL EXPENDSITURES for expansion of school facilities may not be
capitalized but instead claimed as outright expense. This rule shall not apply,
however, to a non-profit hospital.
APPLICABLE INCOME TAX OF EDUCATIONAL INSTITUTIONS IN THE PHILIPPINES

EDUCATIONAL INSTITUTIONS ORDINARY INCOME PASSIVE INCOME CAPITAL GAINS
Proprietary educational institutions • Generally 10% or 1% of net FWT CGT
(PEIs) which are NONPROFIT income, as the case may be
(Basis: RR 5-2021, RMC 62-2021) (SPECIAL CORP.)
• TRAIN: 30%; CREATE: 25%
Or 20% if unrelated income is
Higher than related income
PEIs distributing dividends Regular Corporate Tax of either FWT CGT

to shareholders 20% or 25% (Basis: RMC 62-2021)
Non-stock non-profit • Philippine Constitution, Art XIV,

Educational institutions (NSEIs) Sec 4(3):
ALL REVENUES and ASSETS of
non-stock, non-profit educational institutions used actually, directly and
exclusively for educational purposes shall be exempt from taxes and duties: and
• Exempt under Section 30, NIRC FWT CGT

The following shall not be taxed in
respect to income received by them as
such:
(H) A non-stock non-profit
Educational institution
Government educational • Exempt under Section 30, NIRC- The FWT CGT
Institution (GEIs) following shall not be taxed in respect
to income received by them as such:
(1) Government educational institution; &
• As provided for in the law or charter creating the GEI
**On certain passive income derived from Philippines sources
***On sale of shares of stock of a non-listed domestic corporation and real properties located in the Philippines
classified as capital assets.
Exemption from Real Property Tax

Section 234 of the local Government Code (LGC)- The following are exempted from payment of the real
property tax: (b) Charitable institutions, churches, parsonages or covenants appurtenant thereto, mosques,
nonprofit or religious cemeteries and all lands, buildings and improvements actually, directly, and exclusively
used for religious, charitable, or educational purposes. Real property tax, a local tax, is different from CGT.
APPLICABLE INCOME TAX OF HOSPITALS IN THE PHILIPPINES

HOSPITAL ORDINARY INCOME PASSIVE INCOME CAPITAL GAINS
For PROFIT • RCIT FWT CGT
Hospitals TRAIN: 30%; CREATE; 25%
Or 20%
For Non-profit • Generally 10% or 1% of net income, FWT CGT

Hospitals as the case may be
(SPECIAL CORP) TRAIN: 30%; CREATE: 25% or 20% if
Unrelated income is higher than related income
May also be exempt if all the requirements for exemptions under the
law are complied with as decided by the Supreme Court in the case of
St. Luke’s Medical Center vs. CIR.
DEFENITION OF TERMS UNDER RR 5-2021

 Proprietary Hospitals- refer to any private hospitals, which are non-profit, maintained and administered by
private individuals or groups.
 Non-profit- as used in the definition of Proprietary Educational Institutions and Proprietary Hospitals,
means that no net income or asset accrues to or benefits any member or specific person, with all the net
income or assets devoted to the institution’s purposes and all its activities conducted not for profit
2. RESIDENT FOREIGN CORPORATIONS:

INTERNATIONAL CARRIERS
Gross Philippine Billings Pxxx
Rate 2.5%**
Income Tax Pxxx
**International carriers may avail of a lower tax rate (preferential rate) or exemption under RA 10378
on the basis of:
a. Tax Treaty
b. International agreement
c. Reciprocity- An international carrier, whose home country grants income tax exemption to
Philippine carriers, shall likewise be exempt from income tax.
GROSS PHILIPPINE BILLINGS (GPB):

A. International Air Carrier- 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 place of payment of the ticket or
passage of document.
NOTE:
1. Tickets revalidated, exchanged and/or indorsed to another international airline form part of the
GPB if a passenger boards a plane in a port or point in the Philippines.
2. Flight which originates from the Philippines, but transshipment of passenger takes place at any
port outside the Philippines on another airline, only the aliquot portion of the cost of the ticket
corresponding to the leg flown from the Philippines to the point of transshipment shall form of
the GPB.
B. International shipping- means gross revenue whether for passenger, cargo or mail originating
from the Philippines up to final destination, regardless of the place of sale or payments of the
passage or freight documents.
 REGIONAL OPERATING HEADQUARTERS (ROHQs)
The rules applicable to ordinary corporations will also apply to Regional Operating
Headquarters except the following:
1. In computing basic income tax, the rate is 10%
2. It is not subject to MCIT.
CREATE LAW
The 10% preferential tax on regional operating headquarters (RHOQ) shall continue up to 31
December 2021. Beginning January 1, 2022. RHOQs shall no longer be considered special
corporations and shall be subjected to regular corporate income tax just like an ordinary
resident foreign corporation.
REGIONAL OR AREA HEADQUARTERS (RHQs)

RHQs shall not be subject to income tax. RHQs are not included in the definition of
corporation for income tax purposes. Hence, RHQs are neither ordinary nor special
corporations.
3. NON-RESIDENT FOREIGN CORPORATIONS
TYPE TAX BASE RATE
Non-resident Cinematographic Film Owner, Lessor, or Distributor Gross Income 25%
Non-resident Owner or Lessor of Vessels Chartered by Philippine Gross Rentals, lease 4.5%
Nationals or charter fees
Non-resident Owner or lessor of Aircraft, Machineries and Other Gross rentals,
Equipment charters/other fees 7.5%
OFFSHORE BANKING UNITS (OBU)

Sec 28(A) (4) of the Tax Code
Repealed/Deleted Under CREATE Law
An OBU is a branch, subsidiary or affiliate or a foreign banking corporation located in a/an

Offshore Financial Center (OFC) which is duly authorized by the BSP to transact offshore banking business in the
Philippines (PD1034; BSP Circular No. 1389). OBUs are allowed to provide all traditional banking services to
non-residents in any currency other than Philippine national currency. Offshore banking units are forbidden to
make any transactions in Philippine Peso. Banking transactions to residents are limited and restricted. OBUs are
not special corporations.
Under the CREATE Law, OBUs are now taxable just like an ordinary resident foreign corporations. They
are now subject to the revised RCIT rate of 25% as well as final tax on certain passive income and capital gains tax
on gain on sale of shares of a closely-held domestic corporation.
The income tax liabilities of OBUs are summarized as follows:
TAX
TRAIN Law UNDER CREATE
Income derived from foreign currency
Transactions with:
 Non-residents Exempt 25% RCIT
 Other OBUs Exempt 25% RCIT
 Local Commercial Banks Exempt 25% RCIT
 Branches of foreign banks Exempt 25% RCIT
 Other residents 10% 25% RCIT
Income other than those derived 30%RCIT 25% RCIT
From FCDS transactions
N. BRANCH PROFIT REMITTANCES TAX (BPRT) of RFCs
FORMULA:
Profit Remittances Pxxx
Rate 15%
BPRT Pxxx
PROFIT REMITTANCES
PROFIT REMITTED APPLICABLE TAX

Connected with the conduct of its trade or business in the Subject to 15% BPRT
Philippines
Others (i.e. passive income) Not subject to BPRT
EXEMPT ENTITIES
Activities registered with the following shall be exempt from BPRT:

1. Philippine Economic Zone Authority (PEZA)
2. Subic Bay Metropolitan Authority (SBMA)
3. Clark Development Authority (CDA)
Sec. 28 (A) (5) of the Tax Code

This provision was not amended under CREATE Law but transferred to Sec. 28(A) (4)
Tax on Branch Profit Remittances-any profit remitted by a branch to its head office shall be subject to a
tax of fifteen percent (15%) which shall be based on the total profits applied or earmarked for
remittance without any deduction for the tax component thereof (except those activities which are
registered with the Philippine Economic Zone Authority). The tax shall be collected and paid in the
same manner as provided in Sections of the Tax Code. Provided, that interest, dividends, rents,
royalties, including remuneration for technical services, salaries, wages, premiums, annuities,
emoluments or other fixed or determinable annual, periodic or casual gains, profits, income and capital
gains received by a foreign corporation during each taxable year from all sources within the Philippines
shall not be treated as branch profits unless the same are effectively connected with the conduct of its
trade or business in the Philippines.

Corporations: Week 4-Notes AEC 209-Income Taxation

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Corporations: Week 4-Notes AEC 209-Income Taxation

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St.

Anthony’s College Business Education Department

CORPORATION shall INCLUDE:

But does not include:

JOINT VENTURE OR CONSORTIUM

TAX treatment of Co-venture’s share in the JV Profit

Non- taxable Joint Venture RCIT*** Basic Tax

 JOINT STOCK COMPANIES

 JOINT ACCOUNT COMPANIES

B. CLASSIFICATION OF CORPORATE TAXPAYERS

1. Domestic Corporation (DC)

2. Resident Foreign Corporation

3. Nonresident Foreign Corporation (NRIFC)

CORPORATIONS MAY BE CLASSIFIED FURTHER INTO:

 Regional operating headquarters • TRAIN law: 10% of net income

c. Nonresident Foreign Corporations

A. Labor, agricultural or horticultural organization not organized principally for profit;

GOVERNMENT OWNED OR CONTROLLED CORPORATIONS (GOCCs)

D. INCOME TAXES OF CORPORATIONS

A. SOURCE OF INCOME SUBJECT TO TAX:

B. BASIS OF INCOME SUBJECT TO TAX:

2. NRFC- Gross Income

2. Passive Income • FWTs

 Sale of real property in the Capital Gain Tax (applicable only to

E. REGULAR CORPORATE INCOME TAX (RCIT)

F. MINIMUM CORPORATE INCOME TAX (MCIT)

THE MCIT SHALL BE IMPOSED WHENEVER:

Period MCIT Rate

CARRY FORWARD OF EXCESS MCIT (MCIT CARRY-OVER)

GROSS INCOME FOR MCIT PURPOSES:

Cost of Goods Sold:

Cost of services (xx)

RELIEF FROM THE MCIT

CORPORATIONS EXEMPT FROM MCIT:

2. Nonresident Foreign Corporations (NFRCs)

NET OPERATING LOSS CARRY-OVER (NOLCO)

2020 and 2021 5 consecutive years

REQUISITES FOR DEDUCTIBILITY

2. There is no substantial change in the ownership of the business or enterprise in that

G. OPTIONAL CORPORATE INCOME TAX (15% Gross Income Tax)

H. SUMMARY OF REVISED INCOME TAX UNDER CREATE; RR 5-2021

The higher bet, the “Regular” or “Minimum Corporate Income Tax

One Hundred Million 2% July 1, 2023

The higher bet, the “Regular” or “Minimum Corporate Income Tax

Regional operating 25% January 1, 2022 1% January 1, 2022 to

I. FINAL WITHHOLDING TAX (FWT) ON “CERTAIN” PASSIVE INCOME derived from

1. INTEREST INCOME/YIELD/other monetary benefit

o Interest income derived from

 CREATE LAW; RR 2-2021, RR 5-2021

 Source without the Phils. May be

CREATE Law; RR 2-2021: Dividend income received by NFRC from DC:

SITUS OF DIVIDEND INCOME FROM FOREIGN CORPORATIONS (RMC 62-2021; RR 5-2021;

FOREIGN-SOURCED DIVIDENDS (RR 5-2021 and RMC 62-2021)

If situs of the dividends is without May be exempt

J. INCOME DERIVED BY DEPOSITORY BANKS UNDER FCDS

Income derived by a depository bank under the expanded foreign currency

Any income of non-residents, whether individuals or corporations from transactions

K. CAPITAL GAINS TAX (CGT)

Certain CAPITAL GAINS derived from Philippine Sources

 Under TRAIN Law or beginning Jan 1, 2018 15% 5%;10% 5%;10%

 under CREATE Law

2. CAPITAL GAINS TAX on sale or exchange or 6%** NA NA

CAPITAL GAINS TAX