CHAPTER 15 A B Autosaved

CHAPTER 15 -
A
REGULAR INCOME TAXATION:
Special Corporations
SPECIAL CORPORATIONS
Certain corporations are subject to a special tax treatments or
preferential tax rates lower than the 30% regular corporate income tax.
These are generally referred to as “special corporations”.
SUB-CLASSIFICATION OF CORPORATE INCOME
TAXPAYERS
A. DOMESTIC CORPORATIONS
1. Exempt domestic corporations 2. Special domestic corporations
a. Exempt non-profit a. Proprietary educational
corporations under the NIRC institutions and non-profit
b. Government agencies and hospitals
instrumentalities b. Foreign currency deposit units
c. Certain government-owned (FCDUs) and Expanded FCDUs
and controlled corporations c. PEZA or BOI-registered
d. Cooperatives enterprises
3. Regular domestic corporations
TAXPAYERS
B. RESIDENT FOREIGN CORPORATIONS
1. Special resident foreign corporations 2. Regular resident foreign corporations
a. Offshore banking units (OBU) and
Expanded FCDUs
b. Regional Areas Headquarters and

Regional Operating Headquarters of
Multinational Companies
c. International carrier
d. BOI and PEZA-registered enterprises

TAXPAYERS
C. NON-RESIDENT FOREIGN CORPORATIONS
1. Special non-resident foreign corporations 2. Regular resident foreign corporations
a. Non-resident cinematographic film
owner, lessor or distributor
b. Non-resident lessor of vessels,

chartered by Philippine nationals
c. Non-resident owner or lessor of

aircraft, machineries and other
equipment.
DOMESTIC
CORPORATIONS
EXEMPT DOMESTIC CORPORATIONS
(Exempt corporations under the NIRC)
1. labor, agricultural, or horticultural organizations not organized principally for

profit.
2. Mutual savings banks not having a capital stock represented by shares, and
cooperative bank without capital stock organized and operated for mutual
purposes and without profit.
3. 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 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.
4. Cemetery company owned and operated exclusively for the benefit of its
members.
5. 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
inures to the benefit of any member, organizer, officer or any specific person;
6. 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.
7. Civic league or organization not organized for profit but operated exclusively for
the promotion of social welfare.
8. A non-stock and non-profit educational institution

9. Government educational institution
10. farmers’ 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.
11. 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.
ILLUSTRATION 1
Bahay Kalinga, a social welfare charitable non-profit corporation, reported the
following statement of income and expenses:
RELATED ACTIVITIES UNRELATED ACTIVITIES TOTAL

Gross Income ₱800,000 ₱400,000 ₱1,200,000
LESS: Expenses 400,000 150,000 550,000
NET SURPLUS ₱400,000 ₱250,000 ₱650,000

SOLUTION:
The income tax due of the corporation shall be:
Net income or surplus from unrelated activities ₱250,000
MULTIPLY BY: Corporate tax rate 30%
REGULAR CORPORATE INCOME TAX ₱75,000

ILLUSTRATION 2
Toma Sengla Tumba, a non-profit fraternal organization, received total
membership dues of ₱300,000. to finance its community development project, it
conducted a fund raising drive by selling souvenir items to local tourists. The fund
raising generated ₱200,000 income.
The organization shall pay income tax on the fund raising income:
Net income from fund-raising activities ₱200,000
MULTIPLY BY: Corporate tax rate 30%

REQUSITES FOR EXEMPTION OF NON-STOCK, NON-PROFIT CORPORATIONS
1. It must be a non-stock corporation or association organized and operated exclusively for

religious, charitable, athletic or cultural purposes, or for the rehabilitation of veterans
2. It should meet the following tests:

a. Organizational test – its constitutive documents exclusively limit its purposes to one or more
of the following: religious, charitable, scientific, athletic or cultural purposes, or for the
rehabilitation of veterans.
b. Operational test – the regular activities of the corporation or association must be exclusively
devoted to the accomplishment of the aforementioned purposes. A corporation fails this test
if a substantial part of its operations is considered ”activities conducted for profit.”
REQUSITES FOR EXEMPTION OF NON-STOCK, NON-PROFIT CORPORATIONS
3. All net income or assets of the corporation or association must be devoted to its purposes and no
part of its net income or asset accrues to or benefits any member or specific person.
4. It must not be a branch of a foreign non-stock, non-profit corporation.
ILLUSTRATION
Daet Medical Center is organized as a non-stock, non-profit hospital catering to ethnic community
members. Members pay minor charges which are reimbursements in nature to replenish the working
capital of the medical center. Daet Medical Center relies on contributions from members and foreign
aid for facilities improvement.
Since there is no “purpose to make a profit over and above the costs,” Daet Medical Center is exempt
from income tax on services from paying members.
(Government agencies and instrumentalities)
Government agencies and instrumentalities such as departments

and bureaus are inherently non-profit because of their public service
functions; hence they are exempt from income tax.
However, the income of government agencies and instrumentalities

from unrelated activities or from their properties is subject to income
tax.
(Government-Owned and Controlled Corporations (GOCCs))
GOCCs are generally proprietary or commercial in nature and are

subject to the regular corporate income tax except the following
exempt GOCCs:
1. Government Service Insurance System (GSIS)

2. Social Security System (SSS)
3. Philippine Health and Insurance Corporation (PHIC)
4. Local water districts – RA No. 10026
(Cooperatives)
COOPERATIVE – it is an autonomous association of persons who

voluntarily joined together to achieve their social, economic and
cultural needs and aspirations by making equitable contributions to the
capital required, patronizing their products and services, and accepting
a fair share of risks and benefits of the undertaking.
(Cooperatives)
CLASSIFICATION OF REGISTERED COOPERATIVES FOR TAXATION PURPOSES:
A. Cooperatives which transact business only with members.

These cooperatives are not subject to any taxes and fees under the NIRC and other tax
laws, such as the following:
1. Income tax (on related regular income)
2. VAT and Percentage tax
3. Donor’s tax
4. Excise tax
5. Documentary stamp tax
6. Annual registration fee
(Cooperatives)
CLASSIFICATION OF REGISTERED COOPERATIVES FOR TAXATION PURPOSES:
B. Cooperatives which transact business with both members and non-members
1. Those with not more than ₱10M accumulated reserve and undivided net savings
are exempt from taxes, similar to cooperatives transacting business only with
members.
2. Those with more than ₱10M accumulated reserve and undivided net savings are
subject to the following tax at full rate:
a. Income tax on the full amount allocated for interest on capital
b. Value Added Tax (VAT) on transactions with non-members
c. Percentage Tax on all sales of goods or services rendered to non-members
d. All other internal revenue taxes unless otherwise provided by the law .
(Cooperatives)
Under RA 9520, the net surplus of every cooperative shall be distributed

as follows:
1. Reverse fund – at least 10% of the net surplus but must not be less than
50% of the net surplus in the first five years of operation
2. Education and training fund – not more than 10% of net surplus
3. Community development fund – not less than 3% net surplus
4. Optional land and building fund – not to exceed 7% of net surplus
5. Interest, which shall not exceed normal rate of return of investments, and
patronage refunds which must not be less than 30% of the net surplus
after deducting the statutory reserves
6. Any excess to reserve fund
(Cooperatives)
Taxability of Cooperatives to Internal Revenue Tax

all cooperatives regardless of classification are subject to the following:
1. The applicable income tax on unrelated income
2. Capital gains tax
3. Documentary stamp tax
4. VAT on purchases of goods or services except VAT exempt importations
5. Withholding tax on wages cooperatives are directly liable and not otherwise
expressly exempted by any law.
(Cooperatives)
ILLUSTRATION
Jaro Farmers Cooperative (JFC) is a marketing cooperative that sells
the vegetable productions of its members. In compliance with legal
requirements, JFC reserves the following percentage of net surplus:
- Reserve fund – 10%
- Education and training fund – 10%
- Community development fund – 5%
- Optional building fund – 5%
(Cooperatives)
ILLUSTRATION (cont.)
Per by laws, the net surplus after the reserves is distribute as follows:
- 50% as interest to capital, but must not exceed 18% normal return on
average capital of members
- 50% as patronage refunds to members
- Residual balance to reserve fund
(Cooperatives)
ILLUSTRATION (cont.)
JFC’s income statement on its sixth year of operation is presented below:
Sales ₱3,100,000
Cost of sales 1,600,000
Gross income ₱1,500,00
Operating expenses 600,000
Operating surplus ₱900,000
Operating surplus ₱900,000
ADD: non-operating income
- rental of vacant facilities 200,000
- interest on investment in bonds 20,000
- interest on bank account, net of final tax 4,000
TOTAL SURPLUS ₱1,124,000
(Cooperatives)
SOLUTION:
Only with members
The net income from unrelated sources after the statutory reserve requirements if
any, constitutes taxable income for purposes of the regular income tax. Hence,
Rental income ₱200,000
Interest on bonds investment 20,000
Total income ₱220,000
LESS: reserve fund requirement (10%) 22,000
TAXABLE INCOME ₱198,000

(Cooperatives)
SOLUTION: (cont.)
with both members and non-members
Assume that 20% of the sales were non-members, and JFC has more than ₱10,000,000 accumulated
reserves.
Operating surplus – non-members (900K x 20%) ₱180,000
Unrelated Income:
Rent Income, net 200,000
Interest on bonds investment 20,000
Total taxable surplus ₱400,000
LESS: reserve fund requirement (10%) 40,000
NET SURPLUS AFTER RESERVE FROM NON-MEMBERS ₱360,000

(Cooperatives)
SOLUTION: (cont.)
Operating surplus from members (900K x 80%) ₱720,000
LESS:
Reserve fund (10%) ₱72,000
Education and training fund (10%) 72,000
Community dev’t fund (5%) 36,000
Optional building fund (5%) 36,000 216,000
NET SURPLUS AFTER RESERVE FROM NON-MEMBERS ₱504,000

(Cooperatives)
SOLUTION: (cont.)
Net surplus is distributable per by-laws as follows:
As interest on members’ capital ₱216,000
As patronage refunds (50%) 252,000
Excess balance to reserve fund 36,000
NET SURPLUS AS DISTRIBUTED ₱504,000

(Cooperatives)
SOLUTION: (cont.)
The taxable income and income tax due shall be computed as follows:
Net surplus after reserve from non-members ₱360,000
Net surplus distributed as interest to members 216,000
Taxable income ₱576,000
MULTIPLY BY: corporate tax rate 30%

DOMESTIC
CORPORATIONS
SPECIAL DOMESTIC CORPORATIONS
(Private educational institution and non-profit hospital)
Private or proprietary educational institution and non-profit hospitals are subject to
10% tax on world taxable income subject to the pre-dominance test.
what is a private or proprietary educational institution?
A proprietary educational institution is any private school maintained and
administered by private individuals or groups with an issued permit to operate
from any of the following:
1. Department of Education (DepEd)

2. Commission on Higher Education (CHED)
3. Technical Education and Skills Development Authority (TESDA)
The Pre-dominance Test

if the gross income from unrelated trade, business or other activity exceeds 50% of the gross
income derived by such educational institutions or hospitals from all sources, the 30% regular
corporate income tax applies.
Unrelated trade, business or activity

if the gross income from unrelated trade, business or other activity exceeds 50% of the gross
income derived by such educational institutions or hospitals from all sources, the 30% regular
corporate income tax applies.
ILLUSTRATIONS 1
A private educational institution reported the following during the year:

Gross Income ₱700,000 ₱500,000 ₱1,200,000
LESS: Deductions 400,000 100,000 500,000
NET INCOME ₱300,000 ₱400,000 ₱700,000

SOLUTION:
The gross income from related activities (700K/1,200K = 58%) passes the pre-
dominance test. The income tax due shall be computed as follows:
Taxable net income ₱700,000
INCOME TAX DUE ₱70,000

ILLUSTRATIONS 2
A non-profit hospitals reported the following during the year:

Gross Income ₱500,000 ₱700,000 ₱1,200,000
LESS: Deductions 100,000 400,000 500,000
NET INCOME ₱400,000 ₱300,000 ₱700,000

SOLUTION:
The gross income failed the pre-dominance test (500K/1200K = 42%); hence, the
non-profit hospital shall be taxable as a regular corporation:

Summary of Tax Rules on Educational institutions and Hospitals
Owner Educational institutions hospitals

Private 10% of taxable income 30% of taxable income
Non-profit Exempt 10% of taxable income
Government Exempt Exempt
(Foreign/Expanded Currency deposit unit)
Foreign currency deposit units (FCDUs) and Expanded FCDUs (EFCDUs)
refer to a unit or department of a local bank or a local branch of foreign
bank authorized by the BSP to engage in foreign currency-denominated
transactions pursuant to RA 6426, as amended.
AUTHORIZED TRANSACTIONS OF FCDU
FCDUs are limited under their license to short-term foreign currency-denominated
transactions. They are authorized to accept deposits and trusts accounts, borrow on short-
term maturity, and invest in short-term maturity deposits, readily marketable debt
securities, and short-term foreign currency loans. They are also authorized to enter into
currency swap with the BSP, other FCDUs/EFCDUs or OBUs, enter into security lending
activities as lender, and engage in repurchase agreement on foreign currency
denominated securities.
AUTHORIZED TRANSACTIONS OF EFCDU

The license to operate an EFCDU authorizes engagements in the same transactions
allowed to FCDUs plus authorization to enter into foreign exchange trading, issue
letters of credit for non-resident exporters, accept or negotiable drafts or bills of
exchange drawn under letters of credits or make payments to the order of a non-
resident exporter upon request of their foreign correspondent bank, purchase export
bills of resident exporters, enter into securities lending activities and repurchase
agreements involving foreign currency denominated securities.
DISTINCTION OF FCDU, OBU and EFCDU

FCDU OBU EFCDU
• limited to short-term foreign • Division of a foreign bank which • allowed both short-term and
currency transactions is authorized to conduct foreign longer-term foreign currency-
currency denominated denominated transactions
• Division of a domestic bank transactions.
• May be a division of a domestic
bank or a resident foreign bank
authorized to conduct banking
under the expanded foreign
currency deposit system
TAX ON EFDUs and OBUs
The income of depositary banks under the Expanded Foreign Currency
Deposit System from foreign currency transactions with:
A. Non-residents (offshore income ) – exempt from income tax
B. Residents
1. Banks under the foreign currency deposit system such as:
a. Offshore banking Units (OBUs)
b. Local commercial banks and branches of foreign banks authorized by the BSP to transact
business with FCDUs
– exempt from income tax
2. Other residents (onshore income)

a. Interest income only – 10% final tax
b. Other income, such as commissions and gains – regular corporate income tax.
If the interest income is not subject to final tax by the borrower, the FCDU,
EFCDU, or OBU shall report the same in its gross income in the income tax
return and shall be subject to the same 10% tax. It shall be separately
presented from other income subject to the 30% regular corporate income tax.
TAXATION ON FCDUs
Under the plain wordings of RA 9294, EFCDUs and OBUs, excluding FCDUs
are covered by the exemption. In practice, however, the BIR does not
distinguish EFCDUs and FCDUs in an apparent due recognition to the intent of
the law in promoting the country to be a center of foreign currency financing
activities. consequently, FCDUs are taxed the same way as EFCDUs and OBUs.
SUMMARY OF TAX RULES ON FCDUs/EFCDUs/OBUs

FROM
Residents
NATURE OF INCOME (E)FCDUs or OBUs Other Residents Non-Residents
Income from forex transactions
Interest income from:
-Forex loans & receivables Exempt 10% FIT Exempt
-Forex deposits Exempt - Exempt
Other forex income Exempt RCIT Exempt
Income from non-forex transactions RCIT RCIT RCIT
TAX ON INCOME OF DEPOSITORS UNDER THE EFCDS
Any income of non-residents from transactions with depository
banks under the expanded system shall be exempt from income tax.
Interest income of residents from depositary bank under the
FCDS/EFCDS is subject to 7.5% final tax.
TAX ON REGULAR BANKING UNITS OR RBUs

The income from the regular banking unit of domestic banks is
subject to the 30% regular corporate income tax.
ILLUSTRATION
The expanded foreign currency deposit unit of a domestic commercial bank derived the
following income from its foreign currency and other transactions:
Received from
Residents
INCOME ITEMS (E)FCDUs or OBUs Other Residents Non-Residents
Interest income from loans & receivables ₱5,000,000 ₱10,000,000 ₱4,000,000
Interest income – foreign currency deposits
200,000
Forex trading gains 300,000 200,000 100,000
Consultancy fees 250,000 500,000 100,000
Rent income 50,000 120,000 80,000
SOLUTION
Exempt income items are indicated in italics, income items subject to final tax
are in bold-italics and those subject to regular tax in bold font.
Received from
Residents
200,000
Rent income 50,000 120,000 80,000
SOLUTION (cont.)
The total final tax on the ₱10,000,000 shall be withheld by Philippine resident borrowers.
The FCDU of the domestic bank shall include the following in its gross income subject to the regular
corporate income tax:
Forex trading gains to other residents ₱200,000

On-shore income from non-forex transactions
Consultancy fees (250,000 + 500,000) ₱750,000
Rent income (50,000 + 120,0000 170,000 920,000
Off-shore income from non-forex transactions
Consultancy fees ₱100,000
Rent income 80,000 180,000
Gross Income ₱1,300,000
ALLOCATION OF COST AND EXPENSES OF BANKS
RR4 – 2011 prescribes the allocation method of cost and expenses of banks between
their exempt and taxable operations as follows:
a. Specific identification – expenses directly traceable to an income are allocated to that

income.
b. Pro-rata allocation - expenses directly traceable to an income are allocated pro-rata on the
ratio of all income.
Under the matching principle, only expenses traceable or reasonably allocable to

RBU or FCDU income subject to regular tax are deductible in the determination of
taxable net income.
ILLUSTRATION 1
A domestic bank reported the following summary of income and
expense as to source: Residents
FCDUs or OBUs Other Residents Non-Residents Total
RBU gross income - ₱1,200,000 ₱150,000 1,350,000
FCDU interest income 1,000,000 800,000 400,000 2,200,000
RBU expenses - 600,000 50,000 650,000

FCDU expenses 300,000 200,000 60,000 560,000
NET INCOME 50,000 120,000 80,000 2,340,000
SOLUTION
The final withheld is ₱80,000 computed as 10% x ₱800,000. The ₱1,000,000 income
from OBU and FCDUs and the ₱400,000 FCDU income from non-residents is tax exempt.
RBU gross income ₱1,350,000
LESS: RBU Expenses 650,000

ILLUSTRATION 2
A domestic bank reported the following summary of income and expense:
Residents
FCDUs or OBUs Other Residents Non-Residents Total
RBU gross income - ₱2,000,000 ₱750,000 ₱2,750,000
FCDU interest income 800,000 800,000 400,000 2,000,000
FCDU rent fees 100,000 120,000 30,000 250,000
Total gross income ₱900,000 ₱2,920,000 ₱1,180,000 ₱5,000,000
Directed expenses:
RBU expenses - 900,000 400,000 1,300,000
FCDU expenses
Interest income 450,000 350,000 150,000 950,000
Rent income 20,000 10,000 15,000 45,000
Total direct expenses ₱2,295,000

Indirect/common expenses 315,000
Total expenses ₱2,610,000
SOLUTION FCDU RBU
RBU total gross income - ₱2,750,000
FCDU rent fees 250,000 -
Gross income ₱250,000 ₱2,750,000
LESS: deductions
Directly traceable expense 45,000 1,300,000
Common expenses 15,750 173,250
total deductions ₱60,750 ₱1,473,250

Taxable net income ₱189,250 ₱1,276,750
MULTIPLY BY: corporate tax rate 30% 30%
REGULAR CORPORATE INCOME TAX ₱56,775 ₱383,025
(PEZA or BOI-Registered Enterprises)
BOI-REGISTERED ENTERPRISES
New registered firms under the Board of Investments (BOI) enjoy income
tax holiday (income tax exemption) for 6 years from commercial operations
for pioneer firms and 4 years for non-pioneer firms. The income tax holiday
may be further extended not to exceed 10 years upon meeting certain
conditions.
PEZA-REGISTERED ENTERPRISES
All business enterprises operating within the Philippine Economic Zone Authority
(PEZA), or simply ECOZONE, shall pay a tax of 5% of gross income earned in lieu of
all taxes, local and national, except real property tax on land of developers. The 5%
gross income tax shall be divided 3% to the national government and 2% to the city
or municipality where the establishment is located.
TAXABILITY OF BOI OR PEZA-REGISTERED ENTERPRISES

Note that the BOI income tax holiday incentive has a sunset
provision which expires in not more than 10 years. Upon graduation
from the net income tax holiday incentive, an entity may register as an
ordinary enterprise or remain as a BOI-Registered enterprise. But either
way, there is no more income tax holiday incentive. There are benefits,
however, of remaining as a BOI-registered enterprise particularly with
regard to the value added tax.
Under the rules and regulations implementing RA 7916, the tax

incentives to ECOZONE enterprises shall apply only:
a. To registered operations of ECOZONE enterprises; and
b. During the period of its registration with the PEZA.
ECOZONE enterprises which derive income outside their registered operations
with PEZA are therefore subject to the appropriate taxes. Items of passive income
are subject to the appropriate final tax or capital gains tax. Items of regular income
that are not part of the registered activities are subject to regular corporate tax.
the sale of scrap materials and income from other activity by a PEZA
entity are subject to the regular tax. The gain on the sale of factory and office
building by a PEZA entity is subject to 30% regular corporate income tax.
Also, ECOZONE enterprises which failed to meet their registration

requirements and other reporting requirements such as annual ITRs
and Audited Financial Statements will be subject to BIR audit and to
taxation.
TIEZA-REGISTERED ENTERPRISES
Enterprises registered with the Tourism Infrastructure and Enterprise Zone
Authority (TIEZA) are subject to the same tax rules and to the same 5% gross
income tax imposed upon ECOZONE enterprises.
RESIDENT FOREIGN
CORPORATIONS
SPECIAL RESIDENT FOREIGN CORPORATIONS
SPECIAL RESIDENT FOREIGN
CORPORATIONS
(Offshore banking units and expanded FCDUs)
OFFSHORE BANKING shall refer to the conduct of banking transactions in foreign

currencies involving the receipt of funds from external sources and the utilization of
such funds.
OFFSHORE BANKING UNIT shall mean a branch, subsidiary or affiliate of a foreign

banking corporation which is duly authorized by the Central Bank of the Philippines to
transact offshore banking business in the Philippines.
The OBU or EFCDU of a resident foreign bank is subject to the same tax rules applicable
to FCDUs/EFCDUs of domestic banks, except that all their offshore income is exempt
from income tax because foreign corporations are taxable only on income within the
Philippines
CORPORATIONS
ILLUSTRATION
The OBU of a resident foreign bank reported the following:
Received from
Residents
200,000
Rent income 50,000 120,000 80,000
CORPORATIONS
SOLUTION
Exempt income items are in italics font, gross income subject to final tax in
bold-italic and gross income subject to regular tax in bold font.
Received from
Residents
200,000
Rent income 50,000 120,000 80,000
CORPORATIONS
(Resident area headquarters and regional operating headquarters of
multinational companies)
REGIONAL OR AREA HEADQUARTERS (RAH or RHQ) mean a branch

established in the Philippines by multinational companies which
headquarters do not earn or derive income from the Philippines and
which acts as a supervisory, communication and coordinating center for
their affiliates, subsidiaries, or branches in the Asia Pacific Regional and
other foreign markets.
CORPORATIONS
REGIONAL OPERATING HEADQUARTERS (ROH or ROHQ) means 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; research and development services and
product development; technical support and maintenance; data
processing and communications; and business development.
CORPORATIONS
TAXATION OF RHQs AND ROHQs
RHQs ROHQs
• Exempt from income tax since they • Subject to income tax of 10% of
are merely administrative offices taxable income.
which serve as a supervision, • Allowed to derive income on their
communication, and coordination services to their affiliates, subsidiaries,
center of subsidiaries, branches, or or branches of their home office or
affiliates of their home office. They do parent company in the Philippines.
not earn income.
• RHQs and ROHQs are exempt from all kinds of local taxes, fees or charges imposed
by a local government unit, except real property on land improvements and
equipment.
CORPORATIONS
(International Carriers)
The term international carrier, also called as international common

carrier, refers to entities that transport passengers, mails and excess
cargoes or baggage from the Philippines to any destination abroad and
vice versa.
In the Philippine setting, international carriers are only of two types:

a. International air carrier
b. International sea or shipping carrier
CORPORATIONS
INCOME TAX RATES TO INTERNATIONAL CARRIERS

• General rule: 2 ½% of the Gross Philippine Billings
• Exception rule: preferential rate or exemption on the basis of reciprocity
applicable tax treaty or reciprocity
Under the exception rule, if the home country of the international

carrier subjects Philippine carriers thereto at a lower rate or exempts them
from tax, the Philippine government will render them the same lower rate
or exemption, as the case may be, on the basis of reciprocity.
CORPORATIONS
MEANING OF GROSS PHILIPPINE BILLINGS

a. International air carriers – Gross Philippine Billings 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 the place of payment of
the ticket or passage document.
b. International shipping carrier – Gross Philippine Billings 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.
CORPORATIONS
RULE ON REVALIDATED, EXCHANGED, OR ENDORSED TICKETS

tickets revalidated, exchanged and/or endorsed to another
international airline form part of the Gross Philippine Billings of the
carrying airline if the passenger boards a plane or a port or point in the
Philippines.
EXCLUSION IN GROSS PHILIPPINE BILLINGS
1. Non-revenue passengers – those passengers qualifying under the free
mileage programs of the air carriers
2. Refunded tickets
CORPORATIONS
ILLUSTRATION 1
Green Air, a resident foreign air carrier, reported the following summarized
results of its Philippine operations during a quarter:
Inbound Flights Outbound Flights Total

Gross receipts ₱9,000,000 ₱8,000,000 ₱17,000,000
LESS:
Direct expenses 5,000,000 4,000,000 9,000,000
Other common expenses 2,000,000
NET INCOME ₱6,000,000
CORPORATIONS
SOLUTION
Gross Philippine Billings ₱8,000,000
MULTIPLY BY: Income tax rate 2.5%

CORPORATIONS
ILLUSTRATION 2
Voyager, a resident foreign shipping company, shows the following analysis of its
gross receipts from passengers and cargoes during a month:
Inbound Flights Outbound Flights Total
Fares billed in the Philippines ₱9,000,000 ₱10,000,000 ₱19,000,000
Fares billed abroad 9,000,000 5,000,000 14,000,000
Total billings ₱18,000,000 ₱15,000,000 ₱33,000,000
Value of Fares on non-revenue passenger ₱700,000 ₱800,000 ₱1,500,000
Total billings 500,000 ₱800,000 ₱1,300,000

CORPORATIONS
SOLUTION
Total Billings for outbound flights ₱15,000,000
LESS: Tickets refunded 800,000
Gross Philippine billings ₱14,200,000

CORPORATIONS
RULES ON TRANSHIPMENTS OR INTERRUPTED FLIGHTS OR VOYAGES

For a flight which originates from the Philippines, but transhipment
pf 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 transhipment shall
form part of Gross Philippine Billings.
CORPORATIONS
ILLUSTRATION
Viet Airways, an international air carrier, had the following gross receipts on outgoing flights for
the quarter:
DESTINATION COMPUTATION AMOUNT
Hongkong ₱1,500 x 10,000 passengers ₱15,000,000
Thailand ₱2,000 x 500 passengers 1,000,000
UAE ₱4,000 x 300 passengers 1,200,000
China ₱2,500 x 400 passengers 1,000,000
Total gross receipts ₱18,200,000
The flight to Thailand was transhipped in Vietnam to another plane of Viet Airways.
The flight to UAE is endorsed to another air carrier which airlifted them in the
Philippines. The flight to China was transhipped to another carrier which airlifted
them in Hongkong.
CORPORATIONS
SOLUTION
Direct outgoing flights – Philippines to Hongkong ₱15,000,000
Flight to Thailand 1,000,000
Endorsed flights – Philippines to UAE -
Re-transhipped flights – Philippines to China 600,000
Gross Philippine billings ₱16,600,000
CORPORATIONS
THE “48-HOUR” RULE ON TRANSIENT PASSENGERS
flights or voyages of passengers, mails, or excess baggage commencing from
foreign countries which will be interconnected in the Philippine of continuance of the
flight or voyage to a foreign destination by the same international carrier shall not be
considered originating from the Philippines if the actual departure is made within 48
hours from embarkation in the country, except only when delayed by force majeure.
As such, the portion of the ticket pertaining to the outgoing flight or voyage shall be
excluded from the Gloss Philippine Billings.
However, if continuation of the flight or voyage to a foreign destination is made by

another airline company or international sea carrier, the cost of the outgoing flight or
voyage shall be included in the Gross Philippine Billings of the airline or carrier regardless if
the intervening period of the time between the arrival and departure from the Philippines.
CORPORATIONS
ILLUSTRATION
Fair Airways, an international carrier, had the following summary of flights during a quarter:
Direct outgoing flights

To Guam (₱2,400 x 5000 passengers) ₱12,000,000
To USA (₱6,000 x 4000 passengers) 24,000,000
Inter-connecting flights
The following inter-connecting flights were continued in the Philippines:
Flights Nos. of passengers Status
Korea for Guam 600 passengers Continued after 96 hours as scheduled
China for Guam 400 passengers Delayed 52 hours; due to storm
Taiwan for USA 500 passengers Continued after 40 hours as scheduled
Guam for USA 300 passengers Delayed 52 hours; due to storm
Korea for USA 200 passengers Continued after 24 hours
CORPORATIONS
SOLUTION
The gross receipts from inter-connecting flights to be included in the Gross Philippine Billings
of Fair Airways shall be:
Korea for Guam 600 passengers x ₱2,400 ₱1,440,000
The following shall be included in the Gross Philippine Billings of Fresh Airlines:
Guam for USA 300 passengers x ₱6,000 ₱1,800,000

Korea for USA 200 passengers x ₱6,000 1,200,000
Total ₱1,800,000
CORPORATIONS
SOLUTION (cont.)
The Gross Philippine Billings and the income tax due of Fair Airways for the
quarter shall be:
Direct flight to Guam ₱12,000,000

Direct flight to USA 24,000,000
Connected flight from Korea for Guam 1,440,000
Gross Philippine Billings ₱37,440,000
CORPORATIONS
(BOI or PEZA-Registered Enterprises Foreign Corporations)
BOI OR PEZA-REGISTERED ENTERPRISES FOREIGN CORPORATIONS

These enterprises are subject to the same incentives as those
domestic corporation counterparts.
REPORTING OF SPECIAL CORPORATIONS TAXABLE ON NET INCOME

Special corporations, domestic or resident foreign, subject to tax on
net income are mandatorily required to used the itemized deduction.
They are not allowed the optional standard deduction. They file their
income using BIR Form 1702-MX.
NON-RESIDENT
FOREIGN
CORPORATIONS
SPECIAL NON-RESIDENT FOREIGN CORPORATIONS
SPECIAL NON-RESIDENT FOREIGN
CORPORATIONS
(Non- Resident cinematographic film owner, lessor or distributor)
Cinematographic film includes motion picture films, films, tapes,

discs and such other similar or related products.
Under the NIRC, owners, lessors, or distributors of cinematographic

films are subject to a 25% final tax on their gross income from all
sources within the Philippines. The phrase “from all sources within” is
broad to encompass any taxable income, passive or active, other than
those arising from rentals of cinematographic films.
CORPORATIONS
(Non- Resident lessor or vessels chartered by Philippine nationals)
These are subject to a 4 ½% final tax on gross rentals, lease, or charter fees from leases or
charters to Filipino residents or corporations as approved by the Maritime Industry Authority.
ILLUSTRATION
PhilOil, a domestic corporation, wished to import a scientific deep
sea drilling vessel but wanted to rent a unit to assess its capabilities
first. PhilOil chartered a unit from Explorer Lab, Inc., a non-resident
foreign lessor, at a total charter fee of ₱2,000,000. Satisfied with the
unit, PhilOil contracted Explorer Lab to provide training for its
employees at a training fee of ₱1,000,000 before buying a new one.
CORPORATIONS
(Non- Resident lessor or vessels chartered by Philippine nationals)
SOLUTION
The total final tax shall be computed as follows:
Charter fees (₱2,000,000 x 4.5%) ₱90,000

Training fees (₱1,000,000 x 30%) 300,000
Total final withholding tax ₱390,000
CORPORATIONS
(Non-Resident owner or lessor of aircraft, machineries, and other equipment)
These are subject to a 7 ½% final tax on rentals, charters, and other fees.
ILLUSTRATION
Goldrich Mining, a resident corporation, rented specialized mining equipment
from abroad. The non-resident lessor billed Goldrich the following amounts in peso
equivalents:
Equivalent rental ₱10,000,000
Set-up and training fee 1,000,000
Initial service and maintenance fee 500,000
Interest on rent in arrears 50,000
TOTAL BILL ₱11,550,000
CORPORATIONS
SOLUTION
The total final tax to be withheld is:
Equivalent rental (₱10,000,000 x 7.5%) ₱750,000

Set-up and training fee (₱1,000,000 x 7.5%) 75,000
Initial service and maintenance fee (₱500,000 x 7.5%) 37,500
Interest on rent in arrears (₱50,000 x 30%) 15,000
TOTAL FINAL WITHHOLDING TAX ₱877,500
CORPORATIONS
A DIFFERENTIATION
Lease or charter of:
Lessor
Cinema films Vessels Aircrafts Other equipment
Domestic 30% WTI 30% WTI 30% WTI 30% WTI

Resident foreign 30% PTI 2.5% GPB 2.5% GPB 30% PTI
Non-Resident foreign 25% PGI 4.5% PGI 7.5% PGI 7.5% PGI
LEGEND:
WTI = World taxable income
PTI = Philippine taxable income
PGI = Philippine Gross Income
GPB = Gross Philippine Billings
CHAPTER 15 -
B
REGULAR INCOME TAXATION:
Regular Corporations
THE REGULAR CORPORATE INCOME TAX
The regular corporate income tax applies to all corporations in
general. It covers all taxable income of corporations that are not subject
to final tax or capital gains tax. The regular corporate income tax (RCIT)
is 30% of taxable income.
CORPORATE TAX SCHEMES ON REGULAR CORPORATIONS
Domestic Gross income tax or Regular Corporate tax subject to the
Corporation Minimum Corporate Income Tax
Resident Regular Corporate Income Tax subject to the Minimum
Corporation Corporate Income Tax
OPTIONAL TAX SCHEMES FOR DOMESTIC CORPORATIONS

Under the NIRC, domestic corporations may opt to be taxed at either:
1. The corporate gross income tax; or
2. The regular corporate income tax subject to the minimum corporate income tax.
OPTIONAL TAX SCHEMES FOR DOMESTIC
CORPORATIONS(The corporate gross income tax)
The President, upon recommendation of the Secretary of Finance,

may, effective January 1, 2000, allow domestic corporations the option
to be taxed at 15% of gross income after the following conditions have
been satisfied:
1. A tax effort ratio of 20% of Gross National Product (GNP);

2. A ratio of 40% of income tax collection to total tax revenues;
3. A VAT tax effort of 4% of GNP;
4. A 0.9% ratio of the Consolidated Public Sector Financial Position (CPSFP) to
GNP.
CORPORATIONS(The corporate gross income tax)
COST RATIO LIMIT

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%.
LOCK-IN PERIOD
The election of gross income tax shall be irrevocable for 3
consecutive taxable years during which the corporation is qualified
under the scheme.
CORPORATIONS
(The minimum corporate income tax)
The most peculiar feature of corporate income taxation is the

Minimum Corporate Income Tax (MCIT). Corporations are subject to a
minimum corporate income tax of 2% of gross income.
As a minimum tax, the MCIT is payable when:

a. The corporation has zero or negative taxable income.
b. MCIT is greater than the regular corporate income tax (RCIT).
CORPORATIONS
SCOPE OF THE MINIMUM CORPORATE INCOME TAX

The MCIT is applicable to every corporation taxable to the 30%
regular corporate income tax including non-profit, exempt, and special
corporations with respect to their taxable income subject to regular
corporate income tax, but not to their income subject to special tax
rates.
CORPORATIONS
MCIT EXEMPT ENTITIES:

1. Real Estate Investment Trusts or REITs under RA 9856
2. Domestic corporations which opted to be taxed under the 15%
corporate income tax (gross income tax)
3. Domestic or resident corporations subject to special tax rates
a. Proprietary educational institutions, and non-profit hospitals
b. FCDUs and OBUs
c. Regional Operating Headquarters of multinational companies
d. International carriers
e. Firms subject to special income tax such as PEZA and BCDA locators
4. All non-resident foreign corporations
CORPORATIONS
TIMING OF IMPOSITION OF MCIT

MCIT is imposed beginning on the fourth taxable year
immediately following the year in which such corporation
commenced its operations. Simply stated, MCIT applies only
on the X + 4th year of operations.
For instance, a corporation which started operations on

any day in 2012 will be covered by MCIT in 2016. the rule is
apparently intended to enable the business to obtain
CORPORATIONS
MCIT GROSS INCOME UNDER THE NIRC

For corporation involved “Gross income” means
in:
1. Sale of goods Gross sales less sales returns, discounts,
allowances and costs of good sold
2. Sale of service Gross receipts less sales returns, allowances,
discounts, and cost of services
CORPORATIONS
MCIT GROSS INCOME UNDER THE REGULATIONS

RR12-2007 included all other items of taxable income not subjected to final tax
and capital gains tax as part of gross income.
While this may be questioned as an improper introduction of legislation, it is

an established rule in taxation that revenue regulations and rulings are presumed
valid interpretations of the law unless challenged and reversed before the courts.
Thus, MCIT shall b e computed as 2% of the total gross income subject to

regular income tax. Needless to say, the MCIT concept of gross income is the same
with the OSD concept of gross income.
CORPORATIONS
ILLUSTRATION 1: MCIT of a trading concern
A corporate taxpayer subject to MCIT reported the following:
Gross sales ₱1,000,000
Sales discounts & allowances for defects 30,000
Sales returned by customers 20,000
Interest income from bank deposit 20,000
Rental income from vacant premises 60,000
Inventory, at the start of the year 220,000

Gross purchases of merchandise 700,000
Net freight on purchases during the year 25,000
Purchase discounts and allowances on defective merchandise 40,000
Purchases returned to suppliers 50,000
Inventory, at the end of the year 160,000
CORPORATIONS
SOLUTION
The costs of goods sold shall first be computed as follows:
Beginning inventory ₱220,000
ADD: Net purchases
Gross purchases ₱700,000

Add: Freight in 25,000
LESS: Purchase disc. And allowances 40,000
Purchase returns 50,000 635,000
Total goods available for sale ₱855,000

LESS: Ending inventory 160,000
COST OF GOODS SOLD ₱695,000
CORPORATIONS
SOLUTION (cont.)
Gross sales ₱1,000,000
LESS: Sales discounts and allowances ₱30,000
Sales returns 20,000 50,000
NET SALES ₱950,000
LESS: Cost of goods sold 695,000
Gross income from operations ₱255,000
ADD: other taxable income not subject to final tax
rental income from vacant premises 60,000
Total gross income ₱315,000
MULTIPLY BY: MCIT rate 2%
MINIMUM CORPORATE INCOME TAX (MCIT) ₱6,300
CORPORATIONS
ILLUSTRATION 2: MCIT of a manufacturing concern
A foreign corporation had the following data on its fourth year of operation:
Sales, net of discounts and allowances ₱2,400,000
Gain on sale of machineries 100,000
Dividend income from domestic corporations 20,000
Material purchased 980,000
Conversion costs incurred:
direct labor used 350,000
factory overhead 280,000
January 1 December 31
Raw materials ₱120,000 ₱180,000
Work-in-process 230,000 170,000
Finished goods 130,000 160,000
CORPORATIONS
SOLUTION
The costs of goods sold shall determined as follows:
Raw materials, beginning ₱120,000
Net purchases of materials 980,000
LESS: Raw materials, end 180,000
Raw materials used ₱920,000
ADD: conversion costs
direct labor ₱350,000
factory overhead 280,000 630,000
Total manufacturing costs incurred ₱1,550,000
ADD: work in process, beginning 230,000
Total manufacturing costs placed into process ₱1,780,000
LESS: work in process, end 170,000
COST OF GOODS MANUFACTURED OR FINISHED ₱1,610,000
CORPORATIONS
SOLUTION (cont.)
Cost of goods manufactured or finished ₱1,610,000
ADD: finished goods, beginning 130,000
Total cost of goods available for sale ₱1,740,000
LESS: finished goods, end 160,000
Cost of goods sold ₱1,580,000
The minimum corporate income tax shall be computed as follows:

Sales, net of discounts and allowances ₱2,400,000
LESS: cost of goods sold 1,580,000
Gross income from operations ₱820,000
ADD: other taxable income not subject to final tax
gain on sale of machineries 100,000
Total gross income ₱920,000
MINIMUM CORPORATE INCOME TAX ₱18,400
CORPORATIONS
ILLUSTRATION 1: MCIT of a trading concern
Lacoste Corporation provides consultancy services to various clients. It reported the following in
2020, its 5th year of operation:
Collections and billings

Collections on services rendered net of discounts ₱3,200,000
Uncollected bills for services rendered 800,000
Advanced collections for services to be provided 600,000
Client reimbursements for out-of-pocket expenses incurred by consulting staff 400,000
Client reimbursements for client expenses paid or advanced by Lacoste 150,000
Royalties from a software developed by Lacoste 30,000

CORPORATIONS
Expenses:
salaries of consulting staff ₱1,600,000
salaries of administrative employees 700,000
office rent and utilities expense 420,000
office depreciation expense 50,000
office supplies expense 35,000
interest expense 20,000
insurance expense 40,000
local tax expense 14,000

CORPORATIONS
SOLUTION
The gross receipts of Lacoste shall be determined as follows:
Net collections on services rendered ₱3,200,000
Collections on services to be provided (advances) 600,000
Reimbursement for firm’s out-of-pocket costs 400,000
Gross receipts ₱4,200,000
The direct cost of services of Lacoste shall be as follows:

Consulting salaries expense ₱1,600,000
Office rent utilities expense 420,000
Office depreciation expense 50,000
Office supplies expense 35,000
Direct cost of services ₱2,105,000
CORPORATIONS
SOLUTION (cont.)
The minimum corporate income tax shall be computed as follows:
Gross receipt ₱4,200,000

LESS: cost of services 2,105,000
Gross income from operations ₱2,095,000
ADD: other gross income not subject to final tax 0
Total gross income ₱2,095,000
CORPORATIONS
ILLUSTRATIVE 1
A corporate taxpayer which started operations in 2017 had the
following results of operations in 2020 and 2021:
2020 2021
Total gross income ₱2,100,000 ₱4,000,000
Dividend income – domestic - 50,000
Business expenses 2,600,000 3,300,000
NET INCOME (net loss) (₱500,000) ₱750,000
The MCIT will commence in 2021. Since there is no MCIT yet, the tax payable in 2020 is
nil.
CORPORATIONS
SOLUTION
The 2021 income tax due of the corporation shall be determined as:

LESS: itemized deductions
regular allowable deduction ₱3,300,000
NOLCO -2020 500,000 3,800,000
MULTIPLY BY: corporate income tax rate 30%
REGULAR CORPORATE INCOME TAX - 2021 ₱60,000

MINIMUM CORPORATE INCOME TAX – 2021 (HIGHER) ₱80,000
The ₱80,000 MCIT is the income tax due in 2021. Note that the dividend income is exempt from tax.
CORPORATIONS
ANNUAL RCIT AND MCIT: INTEGRATIVE ILLUSTRATION
INTEGRATION 1
La-View Trading Corporation reported the following on its fifth year of operation:
Sales, net of 1% withholding tax ₱4,950,000

Cost of sales 2,000,000
Interest from deposit, net of tax 75,000
Gain on sale of domestic stocks directly to buyer 150,000
Casual rent income, net of 5% creditable withholding tax 95,000
Interest income from advances to employees 50,000
Business expenses 3,100,000
Estimated quarterly tax payments 10,000
CORPORATIONS
SOLUTION
The regular income tax and minimum corporate income tax shall be computed as
follows:
Sales (₱4,950,000 / 99%) ₱5,000,000

LESS: cost of sales 2,000,000
ADD: other gross income not subject to final tax
casual rent income (₱95,000 / 95%) ₱100,000
interest from employees advances 50,000 150,000
CORPORATIONS
SOLUTION

LESS: regular allowable deductions 3,100,000

CORPORATIONS
SOLUTION (cont.)
The income tax payable of La-View Trading shall be computed as follows:
Income tax due – MCIT ₱5,000,000

LESS: tax credits
creditable withholding tax withheld on gross income:
sales (1% x 5,000,000) ₱50,000
rent income (5% x 100,000) 5,000
total creditable withholding tax ₱55,000
estimated quarterly tax payments 10,000 65,000
Income tax payable or (refundable) (₱2,000)
CORPORATIONS
ANNUAL RCIT AND MCIT: INTEGRATIVE ILLUSTRATION
INTEGRATION 2
PC Repair, a business partnership providing computer repair services, reported the following on
its sixth year of operation:
Service fees, net of 100,000 withholding tax ₱1,900,000
Salaries of staff, supplies, and other direct costs 1,000,000
Interest from bank deposits, net 50,000
Gain on sale of land classified as capital asset 400,000
Gain on sale of used equipment 150,000
Administrative business expenses 500,000
Estimated quarterly income tax payments 60,000
CORPORATIONS
SOLUTION
The RCIT and MCIT shall be computed as follows:
Service fees (1,900,000 + 100,000) ₱2,000,000
LESS: direct cost of services 1,000,000
ADD: other gross income not subject to final tax
ordinary gain on sale of equipment 150,000
LESS: regular allowable deductions 500,000
Taxable net income 650,000
CORPORATIONS
SOLUTION (cont.)
The income tax due and payable of PC Repair shall be computed as:
Income tax due – RCIT ₱195,000

LESS: tax credits
withholding tax on gross income ₱100,000
Quarterly estimated tax payments 60,000 160,000
Income tax payable ₱35,000
CORPORATIONS
EXCESS MCIT CARRY-OVER
The excess of the MCIT over the RCIT in any year is a tax credit that is deductible against
any RCIT tax due in the immediately succeeding three yours.
EXCESS MCIT CARRY-OVER RULES

• Excess MCIT can be used only as a tax credit against RCIT tax due in any of the three
subsequent years. Excess MCIT cannot be deducted against MCIT tax due.
• Credit for the except MCIT from prior years can be taken up to the full amount of RCIT
tax due in the next three years. This mean that the income tax payable when credit is
made can get below the amount of MCIT for that year.
• When there are several excess MCITs from prior years, tax crediting shall be made in a
first in first out basis.
• Unused excess MCIT at the end of the three-year period shall expire and will no longer
be used.
CORPORATIONS
ILLUSTRATION 1: Excess MCIT – basic application

A corporation had the following MCIT and RCIT data since 2018:
2018 2019 2020 2021

MCIT ₱80,000 ₱95,000 ₱20,000 ₱60,000
RCIT 20,000 85,000 40,000 80,000
Income tax due ₱80,000 ₱95,000 ₱40,000 ₱80,000
MCIT Excess (MCIT – RCIT) ₱60,000 ₱10,000 - -

CORPORATIONS
SOLUTION
In 2018, the income tax payable is the ₱80,000 MCIT. The ₱60,000 Excess
MCIT is a tax credit referred as Excess MCIT-2018 and is valid until 2021.
In 2019, the income tax payable is the ₱95,000 MCIT. The ₱10,000 Excess
MCIT, referred to as Excess MCIT-2019, is valid until 2022. No tax credit shall
be made since Excess MCIT cannot be credited against MCIT tax due.
CORPORATIONS
SOLUTION
In 2020, the income tax payable is nil.
2018 2019 2020

Excess MCIT prior year ₱60,000 ₱10,000
Income tax due ₱40,000
Tax credit (40,000) (40,000)
Adjusted Excess MCIT ₱20,000 ₱10,000 ₱0
Note that full credit against the available RCIT tax due is taken. Since there are
two Excess MCITs, first in first out (FIFO) crediting is employed.
CORPORATIONS
SOLUTION
In 2021, the income tax payable is ₱50,000.
2018 2019 2020 2021

Adjusted MCIT Excess ₱20,000 ₱10,000
RCIT Tax due ₱80,000
Tax credit (20,000) (₱10,000) (30,000)
- - ₱50,000
CORPORATIONS
ILLUSTRATION 2: Expired Excess MCIT
Iligan, Inc. became subject to MCIT in 2017. MCIT and RCIT data through the years were:
2017 2018 2019 2020 2021

MCIT ₱400 ₱620 ₱200 ₱350 ₱350
RCIT 0 500 300 200 400
Income tax due ₱400 ₱620 ₱300 ₱350 ₱400
Excess MCIT ₱400 ₱120 ₱- ₱150 ₱-
CORPORATIONS
SOLUTION
The income tax payable (still due) in each year is indicated in bold font.
2017 2018 2019 2020 2021
Income tax due ₱400 ₱620 ₱300 ₱350 ₱400
Ecxess MCIT ₱400 ₱120 150

MCIT application (300) (300)
Adjusted Excess MCIT ₱100 ₱120
₱0
MCIT Application (Expired) (120) (150) (270)
₱130
CORPORATIONS
ILLUSTRATION 3: NOLCO and MCIT

A corporation which became subject to MCIT in 2020 had the following statement of income in 2020 and
2021:
2020 2021
Gross income ₱300,000 ₱500,000
Business expenses 420,000 250,000
NET INCOME (₱120,000) ₱250,000
CORPORATIONS
SOLUTION
The 2021 taxable net income and RCIT shall be computed as follows:
2020 2021
Total Gross income ₱300,000 ₱500,000
LESS: Allowable deductions 420,000 250,000
Net income (NOLCO) (₱120,000) ₱250,000
LESS: NOLCO-2020 application (₱120,000)
TAXABLE INCOME (₱120,000) ₱130,000
2020 2021
Taxable income 0 ₱130,000
MULTIPLY BY: 30% 30%
Regular corporate income tax ₱0 ₱39,000
Minimum corporate income tax ₱6,000 ₱10,000
Excess MCIT ₱6,000
CORPORATIONS
SOLUTION (cont.)
the income tax payable in each year is indicated in bold font:
2020 2021
Income tax due ₱6,000 ₱39,000
LESS: Excess MCIT – 2020 (6,000)
Income tax payable (still due) ₱33,000
Recall that net operating loss is carried over as a deduction over 3 years after
its incurrence. Excess MCIT is likewise creditable over the same period.
CORPORATIONS
QUARTERLY FILING OF INCOME TAX RETURN
Corporations shall file their quarterly income tax returns for the first three
quarters of the year due on or before 60 days from the end of each quarter.
ILLUSTRATION
Henry Corporation had the following quarterly gross income and deductions:
1st Qtr 2nd Qtr 3rd Qtr 4th Qtr

Gross income ₱200,000 ₱250,000 ₱220,000 ₱280,000
Itemized deductions 100,000 130,000 120,000 140,000
Withholding tax 22,000 30,000 28,000 32,000

CORPORATIONS
The quarterly estimated tax payable shall be computed as follows:
1st Qtr 2nd Qtr 3rd Qtr 4th Qtr
Gross income ₱200,000 ₱250,000 ₱220,000 ₱280,000
LESS: itemized deductions 100,000 130,000 120,000 140,000
Net income, this quarter ₱100,000 ₱120,000 ₱100,000 ₱140,000
Net income, prior quarters 0 100,000 220,000 320,000
Taxable Income ₱100,000 ₱220,000 ₱320,000 ₱460,000
MULTIPLY BY: 30% 30% 30% 30%
Income tax due ₱30,000 ₱66,000 ₱96,000 ₱138,000
LESS: Tax Credit:
CWT this quarter ₱22,000 ₱30,000 ₱28,000 ₱32,000
Cwt prior quarters 0 22,000 52,000 80,000
Total credits ₱22,000 ₱52,000 ₱80,000 ₱112,000
₱8,000 ₱14,000 ₱16,000 ₱26,000
LESS: Estimated tax paid in prior quarters 0 8,000 14,000 16,000
Quarterly tax payable ₱8,000 ₱6,000 ₱2,000 ₱10,000
CORPORATIONS
QUARTERLY MCIT
ILLUSTRATION
Borongan Inc. had the following quarterly RCIT and MCIT during 2016:
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter TOTAL

RCIT ₱80,000 ₱50,000 ₱80,000 ₱60,000 ₱270,00
MCIT 50,000 100,000 40,000 120,000 310,000
Excess MCIT prior year 10,000
Creditable Withholding tax 20,000 12,000 10,000 20,000 62,000
Excess withholding tax prior year 30,000
CORPORATIONS
SOLUTION
The cumulative balances of RCIT, MCIT, and prior quarter CWTs shall first be determined. The income tax
due per quarter is indicated in bold italics.
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter TOTAL

RCIT ₱80,000 ₱130,000 ₱210,000 ₱270,000 ₱270,00
MCIT 50,000 150,000 190,000 310,000 310,000
Excess MCIT prior years 10,000
Excess CWT prior year 30,000
Creditable Withholding tax
This quarter ₱20,000 ₱12,000 ₱10,000 ₱20,000
Prior quarters - 20,000 32,000 42,000
CORPORATIONS
SOLUTION
The quarterly income tax payable shall be computed as follows:
1st quarter 2nd quarter 3rd quarter 4th quarter

Quarterly income tax due ₱80,000 ₱150,000 ₱210,000 ₱310,000
LESS: Tax credits
MCIT – prior year ₱10,000 ₱- ₱10,000 ₱-
Excess CWT – prior year 30,000 30,000 30,000 30,000
CWT – current quarter 20,000 12,000 10,000 20,000
CWT – prior quarters - 20,000 32,000 42,000
Estimated tax payments in prior quarters - 20,000 88,000 128,000
TOTAL ₱60,000 ₱82,000 ₱170,000 ₱220,000
Income tax payable ₱20,000 ₱68,000 ₱40,000 ₱90,000
CORPORATIONS
RELIEF FROM THE MINIMUM CORPORATE INCOME TAX

Upon recommendation of the Commissioner of Internal Revenue,
the Secretary of Finance may suspend the imposition of MCIT upon
submission of proof that the corporation sustained substantial losses
on account of:
a. prolonged labor dispute
b. Force majeure
c. Legitimate business reverses
IMPROPERLY ACCUMULATED EARNINGS TAX
(IAET)
IAET is a 10% penalty tax imposed on the improper accumulation of
corporate earnings beyond the needs of business. It is intended as a
deterrent for corporations intending to defeat the 10% dividend tax by
mere non-declaration of dividends.
The imposition of the 10% IAET is not automatic. It is due only upon
formal assessment by the BIR upon determination of an improper
accumulation of earnings by the corporation.
(IAET)
SCOPE OF TE IAET
The IAET covers the improperly accumulated earnings or profits of
domestic corporations only, whether special or regular domestic
corporations.
Certain appropriations of earnings are not subject to the IAET.

“Appropriation” means setting aside or earmarking of profits for a
particular purpose.
(IAET)
EXEMPT APPROPRIATION OF EARNINGS
1. Mandatory appropriations – appropriations required by law
such as appropriation to cover the cost of treasury stock
acquisitions.
2. Contractual appropriations – appropriations required by

contract such as appropriation for bond sinking fund required by
creditors.
3. Reasonable appropriations – appropriation for reasonable

needs of business.
(IAET)
PRIMA FACIE INSTANCES OF IMPROPER ACCUMULATION OF
EARNING:
1. Investment of substantial profit in unrelated business or stocks or

securities of unrelated business
2. Investment in bonds and other long-term securities
3. Accumulation of earnings in excess of 100% of the paid-up capital

(IAET)
ENTITIES PRESUMED IMPROPERLY ACCUMLATING EARNINGS
Improper accumulation in prima facie presumed for the following:
1. Holding Companies
Holding companies are corporations formed for the purpose of owning a
controlling stake in another corporation.
Investment and holding companies are focused toward the long-term capital
gain formation rather than dividend collection. By their nature, they are prima
facie presumed formed for the purpose of avoiding the dividends tax on their
shareholders.
2. Investment Companies
Investment companies are entities that primarily engage in the business of
investing, reinvesting, and trading in securities. They normally pool money from
different investors and invest in different securities. Investment companies
include mutual funds.
(IAET)
ENTITIES PRESUMED IMPROPERLY ACCUMLATING EARNINGS
Improper accumulation in prima facie presumed for the following:
3. Closely held corporations
Closely held corporations are those at least 50% of the value of their
capital stock or total voting power is not owned directly or indirectly by not
more than 20 individuals.
For the purpose of the 50% ownership threshold, ownership is traced to

individual shareholders of the parent company, if applicable. If ownership of
the top 20 shareholders is below 50%, the corporation is a public
corporation.
It is also held that a corporation owned by a publicly-listed corporation

is a public corporation.
THE IAET UNDER THE NIRC
(IAET)
Upon determination of an improper accumulation, the tax is computed as follows:
Taxable income ₱xxx,xxx
LESS: corporate income tax due xxx,xxx
ADD: net operating loss carry-over xxx,xxx
Earnings from regular income, net of tax ₱xxx,xxx
Passive income, net of final tax xxx,xxx
Capital gains, net of capital gains tax xxx,xxx
Exempt or excluded income xxx,xxx
Total earnings ₱xxx,xxx
LESS:
Dividends declared ₱xxx,xxx
Reasonable appropriation xxx,xxx xxx,xxx
Improperly accumulated earnings ₱xxx,xxx
MULTIPLY BY: IAET rate 10%
IMPROPERLY ACCUMULATED EARINGS TAX ₱xxx,xxx
(IAET)
ILLUSTRATION 1: IAET Basic Application
Diego Inc. was assessed by the BIR for improperly accumulating profits. Diego reported the
following in 2020:
Gross income ₱ 500,000
Business expense 200,000
Dividend income – domestic 30,000
Royalties, net of final tax 40,000
Dividends declared 100,000

(IAET)
SOLUTION
The improperly accumulated earnings tax shall be computed as follows:
Gross income ₱500,000
LESS: Regular allowable itemized deductions 200,000
LESS: corporate income tax due 90,000
Profit from regular income ₱210,000
ADD: dividend income – domestic 30,000
royalties, net of final tax 40,000
Total profits ₱280,000
LESS: Dividends declared 100,000
Improperly accumulated earnings ₱180,000
IMPROPERLY ACCUMULATED EARINGS TAX ₱18,000
(IAET)
ILLUSTRATION 2: IAET Advanced Application
Aleppo Corporations is on its fifth year of business operation when it was
assessed by the BIR for improperly accumulating profits.
Gross income ₱ 2,000,000
Business expense 1,400,000
NOLCO prior years 500,000
Dividend income – domestic 30,000
Gross interest income – bank 50,000
Gain on sale of domestic stocks directly to buyer 200,000
Gain on sale of land classified as capital asset (Selling price =
2,000,000; fair value = 2,500,000) 500,000
Dividends declared 100,000
Appropriation for treasury stocks 50,000
Appropriation for plant expansion 150,000
SOLUTION (IAET)
NOTE
Taxable income 1 ₱100,000
LESS: corporate income tax due – MCIT 40,000
ADD: NOLCO prior years 500,000
Earnings from regular income ₱560,000
Dividend income 2 30,000
Interest income bank, net of final tax 3 40,000
Net gain on sale of domestic stocks 4 170,000
Net gain on sale of land, a capital asset 5 ₱350,000
Total earnings ₱1,150,000
LESS: Dividends declared ₱100,000
Reasonable appropriations
- Treasury stock 50,000
- Plant expansion 150,000 300,000
IMPROPERLY ACCUMULATED EARINGS TAX ₱85,000
(IAET)
NOTES TO IAET COMPUTATION
Note 1: Earnings from regular income
LESS: Business expense ₱1,400,000
NOLCO prior years 500,000 1,900,000
MULTIPLY BY: regular corporate tax rate 30%
Regular corporate income tax ₱30,000

MINIMUM CORPORATE INCOME TAX (TAX DUE) ₱40,000
(IAET)
Earnings from regular income
The earnings regular income can be computed directly as follows:

LESS: Actual expenses
Business expense ₱1,400,000
Corporate income tax 40,000 1,440,000
Earnings from regular income ₱560,000
Note that the NOLCO is not an actual expense but is merely a deduction
incentive which is allowed by the law to be carried over.
(IAET)
Note 2: Profits from exempt income
Note that the inter-corporate dividend income is a profit in its entirety
as it is exempt from income tax.
Note 3: Net profits from passive income subject to final tax

Interest income from bank ₱50,000
LESS: Final tax (20% x 50,000) 10,000
Net earnings from interest ₱40,000
Note 4: Net profits from capital gains of stocks directly to buyer

Capital gains from sale of domestic stocks ₱200,000
LESS: capital gains tax (15% x 200,000) 30,000
Net gains from sale of domestic stocks ₱170,000
(IAET)
Note 5: Net profits from capital gain on the sale of realty capital asset
Capital gains from sale of real property capital asset ₱200,000

LESS: 6% capital gains tax on higher of selling price or fair value (6% x
2,500,000) 150,000
Net gains from sale of domestic stocks ₱170,000
(IAET)
THE IAET UNDER THE REGULATIONS
Upon RMC 35-2011, the statutory formula discussed in the previous section
is added with the following additional feature in bold font::
Taxable income ₱xxx,xxx
LESS:
Dividends declared ₱xxx,xxx
reasonable appropriations xxx,xxx xxx,xxx
Total ₱xxx,xxx
ADD: Retained earnings from prior years
LESS: amount that may be retained (100% of paid-up
capital as of year-end)
Improperly accumulated earnings ₱xxx,xxx
IMPROPERLY ACCUMULATED EARINGS TAX ₱xxx,xxx
(IAET)
ILLUSTRATION 1
Nayari Co., a domestic corporation, had the following data in 2020:
Total Gross income ₱1,000,000
LESS: deductions including 400,000 NOLCO 900,000
PLUS: Other Income
Income exempt from tax ₱100,000
Capital gains, net of tax 140,000
Passive income, net of tax 150,000 390,000
Total Income ₱490,000
LESS: Income tax due 30,000
Accounting net income ₱460,000
(IAET)
ILLUSTRATION 1 (cont.)
Nayari Co. had the following shareholder’s equity on January 1, 2020:
Common stocks ₱2,000,000

Additional paid-up capital (share premium) 200,000
Retained earnings 1,700,000
Total shareholder’s equity ₱3,900,000
During the year, Nayari Co. declared only 100,000 dividends and
appropriated 200,000 for a plant expansion project next year. Nayari
was assessed by the BIR for improperly accumulating earnings.
SOLUTION
ADD: NOLCO 400,000
LESS: Income tax due 30,000
Earnings from regular operations ₱470,000
ADD: Exempt income 100,000
Capital gains, net of tax 140,000
Passive income, net of tax 150,000
Total earnings ₱860,000
LESS:
Reasonable appropriations ₱200,000
Dividends declared 100,000 300,000
Total ₱560,000
ADD: Retained earnings beginning 1,700,000
Total ₱2,260,000
LESS: Amount that may be retained (2,000,000 x 100%) 2,000,000
Improperly accumulated earnings tax ₱26,000
(IAET)
ILLUSTRATION 2
Assume that the corporation in ILLUSTRATION 1 is a resident foreign
corporation with the shareholder’s paid up capital as its assigned
capital. Compute the improperly accumulated earnings tax.
(IAET)
ANSWER:
Resident foreign corporations are not subject to the IAET because they are
not required to withhold the 10% dividend tax. These corporations are subject
to another special form of dividend tax, the branch profit remittance tax.
(IAET)
IAET IS A PENALTY TAX

IAET partakes of the nature of a penalty tax and is not lieu of
dividend tax. Hence, the declaration of profits already subjected to the
IAET will still be subject to dividend tax.
(IAET)
IAET EXEMPT ENTITIES UNDER THE NIRC
The NIRC exempts the following from the improperly accumulated earnings tax:
1. Publicly-held corporations
2. Finance companies
3. Banks
4. Insurance companies
OTHER ENTITIES EXEMPT FROM IAET

The following entities are not subject to improperly accumulated earnings tax by their
nature:
1. Taxable partnerships
2. General professional partnerships
3. Taxable and non-taxable joint ventures
4. ECOZONE-registered entities (PEZA, BCDA, etc.)
BRANCH PROFIT REMITTANCE TAX
• Any profit remitted by a branch to its head office abroad shall be
subject to a tax of 15% based on the total profits applied or
earmarked for remittance without any deduction for the tax
component thereof.
• The 15% branch profit remittance tax is a final tax which is required to
be withheld at source by the branch of a foreign corporation.
• The income should be an active income or an income from sources
that are effectively connected with the conduct of the taxpayer’s
trade or business of the resident foreign corporation to be subjected
to the branch profit remittance tax. Passive investment income and
gains are excluded.
ILLUSTRATION 1
A resident foreign corporation engaged in wholesale of imported goods had
the following profit statement:
Gross income from sale of goods ₱5,000,000

Interest income, net of final tax 80,000
Domestic dividends 120,000
LESS:
Operating expenses ₱2,500,000
NET PROFIT ₱1,950,000
SOLUTION
Net profit ₱1,950,000

LESS: Investment income
Interest income ₱80,000
Dividend income 120,000 200,000
Taxable profit ₱1,750,000
MULTIPLY BY: portion remitted 100%
Actual profit remittance ₱1,750,000
MULTIPLY BY: Profit remittance tax rate 15%
Branch profit remittance tax ₱262,500
ILLUSTRATION 2
A branch of a foreign corporation engaged in servicing reported the following income
statement in 2020
Service fees ₱4,000,000
Gain on the sale of fully depreciated properties 400,000
Dividend income 50,000
Capital gain on the sale of stocks, net of tax 90,000
LESS: business expenses 3,600,000
Profit before income tax ₱940,000
Profit before income tax ₱940,000
LESS: income tax due – RCIT 240,000
Net Profits ₱700,000
The branch earmarked 40% of the entire profits for remittance to the
home office abroad.
SOLUTION
The branch profit remittance tax shall be determined as follows:
Net profits ₱7,000,000
LESS: Investment income
Dividend income ₱50,000
Capital gain on the sale of stockes 90,000 140,000
Taxable profit ₱560,000
Profit remittance ₱224,000
MULTIPLY BY: 15%
ILLUSTRATION 3
A resident foreign corporation engaged in the financial leasing and sale of equipment
on a deferred payment basis. The following data relates to its net income for the year:
Gross profit on sale ₱4,000,000

Interest income on instalment notes 600,000
Dividend income 50,000
Rental of equipment 1,800,000
Total income ₱6,450,000
LESS:
Business expense ₱3,400,000
NET PROFIT ₱2,150,000
SOLUTION
Assume the branch remitted all its profits to its head office abroad. The branch profit
remittance tax shall be computed as follows:
Gross profit on sale ₱4,000,000
Interest on instalment notes 600,000
Rental of equipment 1,800,000
LESS:
Business expenses ₱3,400,000
Net income from operations ₱2,100,000
Gross remittance ₱2,100,000
MULTIPLY BY: branch profit remittance tax 15%
REMITTANCE FROM PRIOR YEAR EARNINGS IS STILL TAXABLE

The NIRC used the phrase “any profit remitted” without limiting the
same to current year profit remittance. The branch profit remittance
tax therefore is understood to apply to remittance of prior year
earnings.
ILLUSTRATION
A resident foreign corporation earning purely active income reported the
following since it started operation in 2019:
2019 2020
Profit after tax ₱200,000 ₱150,000
Remittance 80,000 300,000
The branch profit remittance tax in 2019 shall be 12,000, computed as

(80,000 x 15%)
SOLUTION
The 2020 remittance can be analysed with the branch profit remittance tax as
follows:
Source of Remittance: Tax

2020 Profit ₱150,000 x 15% ₱22,500
2019 unremitted profit balance 120,000 x 15% 18,000
Excess – return of capital 30,000
Total remittance ₱300,000
BRANCH PROFIT REMITTANCE TAX ₱40,500
INDIRECT REMITTANCE
Even without actual remittance of profits abroad, indirect
remittance such as the following are still subject to branch profit
remittance tax:
1. Remittance of profits to a resident affiliate or to a Philippine regional
operating headquarters of the home office.
2. Transfer of net profits to increase the branch assigned capital account
The remittance to affiliates will be construed as indirect profit remittance if the
same was used to increase the home office’s capital or investment in the
affiliates, or when the same was treated as borrowings by the affiliate from the
home office. If the remittance to the affiliate constitutes a loan from the branch,
it is not an indirect remittance.
BRANCH CAPITAL ACCOUNTS
In accounting, the capital or equity of a branch is commonly referred
to as the “home office” account. This account has two components:
a. Assigned capital account – represents the net investment (capital) of the
home office to the branch
b. Accumulated profits (losses) – contains the net balance of unremitted,

retained, or accumulated profits or losses of the branch since inception of
operation.
BRANCH CAPITAL ACCOUNTS
a. change in assigned capital account
This account increases by additional investment of the home office
to the branch and decreases by capital withdrawal of the home office.
b. change in accumulated profits account

This account increases by amount of profits and decreases when the
branch incurs a net loss or when profit is remitted by the branch to the
home office.
ILLUSTRATION
A branch of a foreign corporation reports the following comparative
figures in its statement of changes in equity.
2019 2020
Assigned capital ₱3,000,000 ₱3,500,000
Accumulated profits 1,000,000 500,000
The net changes in the capital accounts were due to the following:
1. Branch profit of 700,000 in 2020
2. Remittance of:
a. 400,000 to the home office
b. 300,000 to a resident affiliate as an addition to the home office’s investment therein
3. Transfer of 500,000 accumulated profit to the assigned capital
SOLUTION
Tax
Remittance to home office ₱400,000 x 15% ₱60,000
Remittance to resident affiliate ₱300,000 x 15% 45,000
Profit transferred to capital ₱500,000 x 15% 75,000
• Note that the actual amount to be remitted to the home office and the affiliate
shall be net of the branch profit remittance tax.
A DIFFERENTIATION ON FOREIGN PROFIT REMITTANCE
Remitting entity to its head office Tax rate

• Branch of resident foreign corporation 15% of branch remittance
• Subsidiary of a foreign corporation – 30% final tax, 15% if the tax sparing rule
through dividend declaration applies
• Branch of domestic corporation Not subject to tax

CHAPTER 15 A B Autosaved

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CHAPTER 15 A B Autosaved

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CHAPTER 15 -

b. Regional Areas Headquarters and

d. BOI and PEZA-registered enterprises

b. Non-resident lessor of vessels,

c. Non-resident owner or lessor of

1. labor, agricultural, or horticultural organizations not organized principally for

8. A non-stock and non-profit educational institution

RELATED ACTIVITIES UNRELATED ACTIVITIES TOTAL

LESS: Expenses 400,000 150,000 550,000

NET SURPLUS ₱400,000 ₱250,000 ₱650,000

Net income or surplus from unrelated activities ₱250,000

MULTIPLY BY: Corporate tax rate 30%

REGULAR CORPORATE INCOME TAX ₱75,000

MULTIPLY BY: Corporate tax rate 30%

REGULAR CORPORATE INCOME TAX ₱60,000

1. It must be a non-stock corporation or association organized and operated exclusively for

2. It should meet the following tests:

4. It must not be a branch of a foreign non-stock, non-profit corporation.

Government agencies and instrumentalities such as departments

However, the income of government agencies and instrumentalities

GOCCs are generally proprietary or commercial in nature and are

1. Government Service Insurance System (GSIS)

COOPERATIVE – it is an autonomous association of persons who

A. Cooperatives which transact business only with members.

Under RA 9520, the net surplus of every cooperative shall be distributed

Taxability of Cooperatives to Internal Revenue Tax

Rental income ₱200,000

Interest on bonds investment 20,000

Total income ₱220,000

LESS: reserve fund requirement (10%) 22,000

TAXABLE INCOME ₱198,000

Operating surplus – non-members (900K x 20%) ₱180,000

Rent Income, net 200,000

Interest on bonds investment 20,000

Total taxable surplus ₱400,000

LESS: reserve fund requirement (10%) 40,000

NET SURPLUS AFTER RESERVE FROM NON-MEMBERS ₱360,000

Reserve fund (10%) ₱72,000

Education and training fund (10%) 72,000

Community dev’t fund (5%) 36,000

Optional building fund (5%) 36,000 216,000

NET SURPLUS AFTER RESERVE FROM NON-MEMBERS ₱504,000

As interest on members’ capital ₱216,000

As patronage refunds (50%) 252,000

Excess balance to reserve fund 36,000

NET SURPLUS AS DISTRIBUTED ₱504,000

Net surplus after reserve from non-members ₱360,000

Net surplus distributed as interest to members 216,000

Taxable income ₱576,000

MULTIPLY BY: corporate tax rate 30%

REGULAR CORPORATE INCOME TAX ₱172,800

1. Department of Education (DepEd)

The Pre-dominance Test

Unrelated trade, business or activity

RELATED ACTIVITIES UNRELATED ACTIVITIES TOTAL

LESS: Deductions 400,000 100,000 500,000

NET INCOME ₱300,000 ₱400,000 ₱700,000

Taxable net income ₱700,000

MULTIPLY BY: corporate tax rate 10%

INCOME TAX DUE ₱70,000

RELATED ACTIVITIES UNRELATED ACTIVITIES TOTAL

LESS: Deductions 100,000 400,000 500,000

NET INCOME ₱400,000 ₱300,000 ₱700,000