Lecture: Corporate Income Tax

For income tax purposes the term corporation includes not only corporation but also: partnerships, joint
stock companies, joint accounts and associations or insurance companies.

Types of corporation

1.) Ordinary corporation – subject 30% tax rate

2.) Special corporation – subject to special rates

Classification of corporations

1.) Domestic corporation – those created under Philippine Laws.

2.) Foreign Corporations – those created under the laws of other countries
a. Resident foreign – foreign corporations engage in trade or business in the Philippines or
having an office or place for business therein.
b. Non-resident foreign – foreign corporations not engage in trade or business in the
Philippines.

Taxability of Corporations

Corporations Income within Income without Tax base

Domestic X x Taxable income
Resident Foreign X Taxable income
Non-resident foreign X Gross income

Tax rate – 30%

Passive Income

20% final tax rate for the following:

a. Interest on Philippine currency bank deposit

b. Yield or any other monetary benefit from deposit substitutes
c. Yield from trust funds and similar arrangements
d. Royalties

15% final tax rate on interest income from depository bank under the expanded foreign currency
deposit-system.

MINIMUM CORPORATE INCOME TAX (MCIT)

The following are the important points to be considered in the imposition of MCIT

1. This applies only to domestic and resident foreign corporations

2. The tax rate to be imposed is 2% of gross income
3. The computation and the payment shall apply at the time of filing the quarterly corporation
income tax.
4. The effectivity shall commence on the 4 th taxable year immediately following the year in which
such corporations commenced its business operation.
 5. This shall be imposed whenever the corporation has zero or negative taxable income or
whenever the MCIT is greater than the normal income tax due from such corporations
6. The term gross income for purposes of computing MCIT includes all other items gross income
realized or earned by the tax payer during the taxable period which are subject to normal
corporate income tax. Thus it excludes income exempt from income tax and income subject to
final tax.

Note: Any excess of the MCIT over the normal income tax shall be carried forward and credited against
the normal income tax for three (3) immediately succeeding taxable years.

In the filing of quarterly income tax return for the taxable quarter, the computation of the MCIT shall be
done on a cumulative basis covering not only the current taxable quarter but also the previous taxable
quarters of the same taxable years. The computed MCIT shall be compared with the cumulative normal
income tax, whereupon the higher amount between the two shall be the basis of the quarterly income
tax payment to be made for the said taxable quarter.

In the payment of the said quarterly MCIT, express MCIT from the previous taxable year/s shall not be
allowed to be credited. Expanded withholding tax, quarterly corporate income tax payments under the
normal income tax, and the MCIT paid in the previous taxable quarter/s are allowed to be applied
against the quarterly MCIT.

RELIEF FROM MCIT

The Secretary of Finance is authorized to suspend the imposition of MCIT on any corporation which
suffer losses on the account of:

a. Prolonged labor dispute;

b. Force majeure;
c. Legitimate business reverses

EXCEPTIONS TO MCIT

I. Domestic corporation
1. Proprietary educational institutions subject to tax at 10% of their taxable income
2. Hospital which are non-profit subject to tax at 10% of their taxable income
3. Depository banks under the expanded foreign currency deposit system
II. Resident Foreign Corporations
1. Offshore banking units’ subject to final tax at 10%
2. International carriers subject to 2.5% of their gross Philippine billings
3. Regional operating headquarters subject to 10% of their taxable income
4. Firms under special tax regime such as those in accordance with the PEZA law and the
Bases Conversion Authority Act.

OPTIONAL STANDARD DEDUCTION’

In lieu of the itemized standard deductions that may be claimed by the domestic and resident foreign
corporation, such corporation may elect a standard deduction equivalent to 40% of their gross income.

Except those:
 a. Exempt under the tax code
b. Those with income subject to special/preferential shares
c. Those income subject to rate under Sec 27 A (15% gross income tax) and Sec 28A1 (Resident
foreign corporations)

SPECIAL CORPORATIONS

Special corporation under the tax code:

A.) Domestic corporations

1. Proprietary Educational Institutions and Non Profit Hospitals

A proprietary education institution is any private school maintained and operated by private
individual or groups with an issued permit from DECS, CHED and TESDA as the case maybe in
accordance with existing laws and regulations.

It shall pay a tax of 10% of their taxable income, however if the gross unrelated income exceeds
50% of the total income derived by the educational institution and hospitals then the regular
rate imposed on corporations will be applied.

A private educational institution may at its option may elect to adopt:

a. To deduct expenditures otherwise considered as capital outlays or depreciable assets incurred

during the taxable year
b. To deduct as allowance for depreciation

2. Government owned or controlled corporations (GOCC)

GOCCs shall pay such tax rate upon their taxable income similar to associations/ corporation
engaged in similar business except SSS, GSIS, PHILHEALTH, AND LOCAL WATER DISTRICTS.

B.) Resident foreign corporations

1. International Carrier

An international carrier doing business in the Philippines will be taxed 2.5% on its gross
Philippine billing.

Gross Philippines Billings refers to the amount of gross revenue derived from carriage of
persons, excess baggage and cargo and mall 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. Exemption may be vailed of an International carrier if there is an
applicable tax treaty or an international agreement to which the Philippines is a signatory, or on
the basis of reciprocity.

2. Offshore banking units

Final withholding tax of 10% based on gross amount

 3. 15% final withholding tax of any profit remitted by the Philippines branch of a foreign
corporation to its head office based on total profit applied or earmarked except those
registered with PEZA, SBMA, CDA, and other companies within the special economic zones.
4. Regional or area headquarters not subject to tax
5. Regional operating headquarters shall pay a tax of 10% of their taxable income.
C.) Non-Resident Foreign Corporation
1. Nonresident cinematographic film owner, lessor or distributor

Subject to a tax of 25% of gross income from all sources within the Philippines

2. Nonresident owner/lessor of vessels chartered by Philippine nationals

Subject to a tax of 4.5% of gross rentals, lease, or charter fees from leases or charters to Filipino
citizens or corporations, as approved by the Maritime Industry Authority.

3. Nonresident Owner or lessor of aircraft, machineries and other equipment

Shall be subject to a tax of 7.5% of gross rentals or fees

Tax on certain incomes received by foreign corporations

1. A final tax of 15% shall be imposed on net capital gains from the sale, barter exchange or
disposition of shares of stocks in a domestic corporation. This is applicable only to shares of
stocks not traded in the stock exchanged.
2. A final withholding tax pf 20% on interest on foreign loans contracted on before August 1, 1986.

IMPROPERLY ACCUMULATED EARNINGS TAX (IAET)

A tax equivalent to 10% on improperly accumulated taxable income shall be imposed every year
to every corporation by permitting earnings and profit to accumulate instead of being divided or
distributed. IAFT and is imposed on domestic corporations and which are classified as closely held
corporations except:

a. Banks and non-banks intermediaries

b. Insurance companies
c. Publicly held corporations
d. Taxable partnerships
e. General professional partnerships
f. Non-taxable joint ventures
g. Those registered with PEZA, SBMA, CDA and in special economic zones.