CORPORATE INCOME Nonresident Foreign Corporations

1. Domestic Corporation Annuinities, Nonresident Nonresident NOnresident

-30% taxable income during each taxable yr from all Emoluments, Cinematogra owner/lessor owner/ lesor
sources w/in and w/out Interest, phic film of vessels of aircraft,
Proprietary Agencies, Depository Interest Income, owners, chartered by machineries
Educational Instrumentali Bank under Income from Casual Gains, lessors or Ph Nationals and other
Institutions ties, GOCC expanded foreign Capital distributors equipment
and Hospitals currency currency Gains,
(nonprofits deposit from loans Dividends,
foreign granted by Rents,
currency such Royalties,
transaction depositary Salaries,
with banks Premiums(ex
nonresident cept
reinsurrance
Offshore 30% on gross 25% gross 4.5% on gross 7.5% of gross
Banking units income all income all rentals, lease rentals, lease
sources sources or charter and other
Local within within fees fees
Commercial Exempt:
Banks Gains
including realized from
branches of sale,
foreign banks exchange, or
disposition of
Income of shares of
nonresidents stock in any
from domestic c
transactions
with Sale
depositary Less COGS
banks --------------
Gross Income - GIT and MCIT
10% on their 30% of their Exempt 10% final tax OPEX
taxable taxable --------------
income from income Taxable Income - NIT
operation
50@ of total Exception: CORPORATION TAX
gross income NO TAX 1. Capital gains tax
if unrelated GSIS 2. Normal tax - 30%
trade, SSS 3. Final tax on passive income earned by corporation
business or PHIC 4. GIT
other activity Local Water 5. MCIT
District Exemption to Corporate Tax
1. General Professional Partnership
2. Foreign Corporation 2. Joint venture/ consortium
Resident Foreign Corp - 30% all sources within
Internati Offshore Income Interest Branch
onal Banking of income profits Gross income tax
Carriers Units: nonresid derived remittan - 15% if conditions are met:
Income ent from ces
derived whether foreign MCIT
form individua currency -2% of GIT at the end of taxable yr of Domestic and
foreign l or loan Resident Foreign Corp impose beginning on 4th taxable yr
currency corporati granted - MCIT Carry-over 3 yrs (any excess)
transacti ons from to - Payable only when MCIT is greater than RCIT
ons with transacti residents -Prevents tax evasion and minimize tax avoidance
local ons with -MCIT is imposed on gross income hence capital is not
commerc offshore being taxed.
ial bank banking -MCIT is not an additional tax imposition. It is imposed in
unit lieu of RCIT
2.5 % on Exempt exempt 10% final 15%
their tax Suspension /Relief from MCIT (Any of the ff circumstance)
gross 1. Force majeure
Exempt: 2. Legitimate business reverse
Profit 3. Losses on account of prolonged labor dispute
remitted 4. Losses from strike lasted for 6 mns
y
enterpris EXEMPTED FROM MCIT
es which 1. Depositary bank
are 2. Nonresident foreign Corp
registere 3. Resident Foreign corp engaged in business in int’l
d with carrier
PEZA 4. Real estate investment trust
IMPROPERLY ACCUMULATED EARNING TAX
- 10% income tax imposed on corp if earnings/profit are
undistributed: A penalty tax designed to compel corp to
distribute earnings in order to be taxed
- Only in domestic private corp
Exemption to Improperly Accumulated Tax
1. Banks
2. Insurance
3. Enterprise Registered in Economic zones
4. Taxable partnership
5. GPP
6. Nontaxable venture
Prima Facie Evidence of Improper Accumulated Tax
- That a corp is mere holding or investment company
- Earning/ Profits are permitted to accumulate beyond
reasonable needs of business
- Investment of substantial earnings in unrelated business
-Investment in bonds and other long term securities
- Income of nonresidents is exempted from income tax
Branch Profit Remittance Tax
- 15% of total profits applied for earmarked for
remittance without deduction for tax component
- Only local branch is taxable and not those of foreign
- Does not apply to PEZA registered enterprise
Passive income not included in computation
OPTIONAL STANDARD DEDUCTION
-In lieu of itemized deduction, an individual subject to tax
excluding nonresident alien may elect OSD 40% of his
gross sales/ receipts
- Election to use OSD be irrevocable for taxable yr for w/c
return is made
Who may avail OSD
1. Citizen
2. Resident Alien
3. Taxable estate or trust

Tax Exempt under Special Laws Rules in determination of amnt of OSD

1. Brgy Micro business enterprise 1. Individuals
2. Cooperatives -Based on gross sales: if acrrual basis
3. Foster Child agencies -Gross receipts: If cash
4. Tourism Enterprise zone operators 2. Corporations: Gross income
5. Associations dues and income from rentals of home
owners association properties Amnt of OSD of GPP:
- GPP is not subject to income tax but the partners shall
Exception from paying taxes be liable to pay income tax on their separate and
1. GSIS individual capabilities.
2. SSS -GPP may claim itemized deductions or in lieu my opt to
3. PhilHealth avail of OSD
4. Local Water Districts - If GPP availed of the itemized deductions in computing
- Pertain only to income taxes its net income, a partner may still claim itemized
deductions from his share in the net income of the
SPECIAL CORPORATIONS partnership
Proprietary Educational Institutions and Hospitals w/c are - However if GPP availed of the OSD in computing its net
nonprofit income, partner can no longer claim further deductions
-10% (Primary Activity) of their taxable income except from his share in the said net income
passive income. Ex St. Lukes income from payee patients
is taxable ITEMIZED DEDUCTIONS
- 30% if entire taxable income from unrelated trade 1. Bad debt
business exceeded 50% of total gross income 2. Charitable and other contributions
3. Depreciation/ depletion
Ancillary Activity 4. Expense (business/trade/ profession)
1. Caffeteria 5. Interest on indebtedness
2. Bookstores 6. Losses
3. Dorm 7. Taxes
4. Hospital 8. Research and dev’t
5. Schools 9. Pension trust
6. Pharmacies and drugstore
Nature of Deduction
Ex. Ancillary is 100 income; Primary purpose has 50 - Nature of tax exemption. Strictly construed agnst tax
income= tax is 30% bcus more than 50% of ancillary which the payer
30% is taxable from the 100 income ancillary
Req before deductions are allowed
Rules on GOCCs, Instrumentalities, Agencies 1. Deductions must be paid or incurred in connection with
- Pay same rate in taxable income engaged in similar taxpayer trade/ business/ profession
business 2. Specific provision of law
3. Requirements of deductibility must be met
INTERNATIONAL CARRIERS 4. Proof
- Tax at 2.5% of Gross Ph Billing or apply Preferential tax 5. Nonwaiver of deductions
exmptions unless there is reciprocity clause 6. Withholding and payment of tax required must be
shown
Gross Ph Billing
- Gross revenue from passage or persons, excess baggage 2 Kinds of Deductions
cargo and mail originating from Ph in continuous and 1. Optional standard Deductions
uninterrupted flight - 40% of the gross income (corp) or gross sale (individ)

Not taxble oin Ph if did not stay for 48hrs in Ph applicable
also to int’l shipping
Offshore Banking Units
- Any interest income foreign currency loans granted to
resident subject to 10% final tax
EXPENSES
- Ordinary and Necessary to trade, business or
professional expenses
- Salaries, forms of compensation, travel expenses, rental,
entertainment, amusement, recreation which is
connected to the business
Ordinary Expense
- Normal and helpful to business. Need not be recurring
Necessary Expense
- Appropriate and helpful to business. Intended to
maximize profit and minimize losses
Req of Expenses to be deducted
1. Ordinary and necessary
2. Paid (cash) or incurred (accrual) during taxable yr
3. Paid/ incurred in carrying trade/ business
4. Proof: Receipt, invoice
5. Must be reasonable
6. Must not be agnst law, morals, public policy, order
Receipt must be under the name of taxpayer; presented;
should be deducted only during that taxable year and not later
Private Educational Institutions
- Allowed to deduct expenditures incurred for expansion
of sch facilities
- Allowed to capitalized expenditures and claim deduction
by way of depreciation
Deductibility of Representation, Amusement, recreation and
entertainment
- For meeting with guest provided not for ill repute
If for employee- fringe benefit tax
-Req:
1. Paid/ incurred during taxable yr
2. Furtherance of conduct of trade/business/profession
3. Not contrary to law, morals, pubic policy, order
4. Not constitute bribe, kickback
5. Not exceed ceiling
6. Proof

Types of Business Expense Deductibility of Training Expenses as business expense

1. Reasonable allowance for salaries/ compensation -Must constitute ordinary and necessary expense of
2. Rental purpose of trade/business taxpayer
3. Travel expense in pursuit of trade/business/profession
4. Entertainment, Amusement and Recreation expense NOT earn expenses
connected to development and operation of trade not 1. Charitable and fund raising
contrary to law, morals, public policy, order 2. Concerts, conferrences, conventions
3. Fringe benefit
Advertising expense 4. Seminar of Es and professional organization meeting
- Deductible if ordinary and necessary for business
1. Immediately deductible- if stimulate sales or use of Ceiling for EAR
service - Taxpayers engaged in sale of goods as properties -o.5
2. Deductible in the future- if stimulate future sale of NET sales
merchandise/use of service. Treat merely as an asset - Taxpayers engaged in sale of service - 1% of Net revenue

Salaries Deductible? Other expenses allowed by special law

- Yes. Req: Personal req actually rendered and reasonable 1. Adopt a sch program- 50%
amnt 2. Senior citizen and pwd- 20%
3. Free legal service to indigent - not more than 10% of
Bonuses to Es alloweable deductions from Gross Income? gross income or actual legal service
- Yes. Provided:
1. Gf INTEREST Req:
2. Personal service actually rendered 1. Indebtedness
3. Reasonable 2. Connected with taxpayers trade/business/profession
3. Interest expense paid/ incurred upon such
Deductibility of Travel/ Transportation Expense indebtedness
1. Paid/ Incured while away form home 4. Interest payment not be between related parties
2. In pursuit of taxpayers trade/business 5. Interest not be incurred to finance petrol operation
3. Reasonable and necessary 6. Interest stipulated in writing
7. Paid by that of taxpayer
Deductibility of Cost of Materials 8. Paid during taxable yr
- Only in the amnt they are actually consumed and used in
operation during the yr for which the return is made Tax Arbitrage System
-Interest expense will be deduce by interest income to
Deductibility of Repairs final tax of 33%
1. Ordinary -Not applicable to interest paid or accrued on taxes
2. Replacement related to business
- to prevent deterioration, prolong life of property should
be charge in the depreciation reserves Interest not deductible
- May increase useful life,usage, value 1. Between member of Family
2. Between grantor and fiduciary of trust and fiduciary of
Allowable Deductions by Lessor another
- Rentals are considered income of lessor 3. Individual or Corp where more than 50% of outstanding
- Lessor may deduct all ordinary and necessary expenses capital is owned
paid/ incurred during taxable yr 4. Interest expense equal to 33% of interest income
subject to final tax
Allowable Deductions by Lessee 5. Finance petrol exploration
- Deduct amnt of rent paid or accrued including all 6. Fiduciary and beneficiary
expenses which under the terms of agreement 7. Two corp where 50% of OCS is owned by sae individual

Allowable Deductions of Professionals Interest paid in advance

1. Cost of supplies used -interest shall be allowed as deduction in the yr
2. Dues to professional societies indebtedness is paid
3. Hire of office assistants
4. Expenses of fuel, light, water, telephone etc GR: all taxes are deductible
5. Expense paid in operation and repair of transportation EX;
equipment in making professional calls
TAXES Foreign Exchange Losses
1. Estate and Donors tax - Result in devaluation of peso based on contract of loan
2. Income tax imposed on foreign country entered
3. Stock transaction tax - Apply only when u paid your loan
4. VAT (subject to input/output tax)
5. Special assessment BAD DEBTS
6. Ph Income tax - debt amnt borrowed from taxpayer w/c become
worthless or uncollectible
Requisites for Deductibility of Taxes
1. Payments for tax Conditions for bad debts to be deductible
2. Paid/incurred during taxable yr 1. Ascertained to be worthless and uncollectible at the
3. Imposed by law end of taxable yr
4. Not excluded by law 2. Existing debt due: vaid and legally demandable
3. Connected to trade/business/profession
LOSSES req: 4. Charged off within taxable yr- recorded in books
1. Charged off w/in taxable yr 5. Not between related parties
2. Evidence 6. Uncollectible despite diligent effort
3. Not compensated by insurance
4. If individual: Incurred in business/ trade/ profession/ Effect of recovery of Bad debts
profit - Included as gross income in the yr recovered
5. If Casualty loss: declaration of such within 45 days from
occurrence of casualty TAX BENEFIT RULE/ EQUITABLE DOCTRINE
- Recovery of amnt deducted in previous yrs shall be
Kinds of Losses included as part of the gross income in the yr of recovery
1. Ordinary- day to day operations to the extent of the income tax benefit of said deductions
2. Capital losses - If taxpayer claimed deduction of bad debt, subsequent
3. Losses on Wash Sale recovery shall be treated as receipt of realized taxable
4. Securities becoming worthless income
5. Wagering losses - If taxpayer did not benefit from deductions of bad debt,
6. Net Operating Loss recovery treated as mere return of capital
7. Casualty
- embezzlement, theft. Damage suffered by property used DEPRECIATION
in trade/business/ profession from unforseen event -tangible and intangible property
- Gradual diminution in the useful value resulting from
Voluntary removal of Bldng wear and tear and normal use. Also applied to
- Demolition for practical reason for life safety\ amortization
- Demolition with intention to construct a new bldng - If Taxpayer and CIR come to an agreement of useful life
on which the depreciation will be based, binding
Net Operating Loss Carry Over (NOLCO) - Only 1 vehicle for Land transportation is allowed for use
- Excess of allowable deductions over gross income of of official, employee. Value should not exceed 2.4 m.
business in a taxable yr Proof
- Deduction from Gross income for next succeeding 3
consecutive yrs Req for deductibility of depreciation
- No substantial change in the ownership of business (75% 1. Charged off during taxable yr
rule) 2. Reasonable
- NOLCO is transferable to new corporation by merger 3. Used in trade/business/profession
4. Statement on the allowance must be attached to the
Req for Deductibility of NOLCO return
1. Net operating loss of business/enterprise
2. Any taxable yr preceeding current taxable yr Exemption to Depreciation
3. Previously offset as deduction from gross 1. Airplanes/ Aircrafts
4. Carried over as deduction from gross 2. Yatch
5. For next 3 consecutive yrs 3. Helicopter
6. Any net loss incurred in taxable yr was exempt from 4. Land vehicles which exceed the amnt of 2.4M unless
income tax shall not be alllowed as deductions the taxpayer has business in transport operation
7. Allowed only if there has been no substantial change in
ownership of business : 75% equity rule Exemption to the exemption
- Taxpayer is in the business of transport operations/lease
Taxpayers entitled to deduct NOLCO from Gross Income of transportation equipment and vehicles
1. Individual engaged in trade/business/ profession
2. Domestic Corp Deductibiity of Charitable Contributions
3. Resident foreign corp 1. Actually paid to Ph Govt. Pol subdiv, Domestic Corp/
Asso
WASH SALES 2. Paid w/in taxable yr
- Sale or other disposition of stock/ securities where 3. Proof
substantially identical securities are acquired/ purchased 4. Not exceeding 10% if individ or 5% if corp
within 61 day period, begiining 30 days before sale and 30
days after sale Donations Deductible in full
- Losses from wash sales are not deductible 1. Accredited nongov’t org/ nonprofit domestic corp
2. To Gov’t/Its entities/Pol Subdiv/Fully owned corp
Abandonment Losses exclusively for undertaking priority activities in
- Refer to Petrol, all accumulated exploration expenses accordance with national priority plan
shall be allowed as deduction 3. To Foreign institutions/Int’l Org pursuant to treaty,
agreement
Donations subject to limitations De Facto Merger Elements (TaxFree)
1. Accredited domestic corp for charitable, religious, 1. Transfer of all or substantially all properties solely for
scientific stock (80% assets, cash)
2. Gov’t for public purpose 2. Bona fide business purpose
3. Not accredited NGOs
4. Social welfare institutions Income subject to graduated tax rate
1. Business income
Deductibility of Pension Trust 2. Compensation income
1. Employer established a pension trust 3. Passive income nit subject to final tax
2. Reasonable 4. Gains not subject to capital gains tax
3. Funded by ER
4. Amnt contributed must no longer be subject to the Income tax rate imposed on ordinary income
control of ER -Graduated tax rate of 5%/ 32%
5. Payment has not yet been allowed as deduction
ITEMS NOT DEDUCTIBLE FROM GROSS INCOME
Tax treatment of Passive Income 1. Amnt paid out for new bldngs/ permanent
1. Schedular Rate improvements made to increase value of the property/
- eg dividend income received by domestic corp from estate
foreign corp 2. Amnt expende in restoring property
2. Final Tax 3. Personal, living or family expense
- interest income from foreign currency bank deposits by 4. Losses from sales/ exchange of property directly/
resident citizen indirectly between related person
5. Nondeductible interest
Interest Income 6. Nondeductible taxes
- Amnt of compensation paid for the use 7. Nondeductible losses
- Included in Gross income unless exempt or subject to 8. Losses from wash sales of stock
final tax
Tax treatment of Passive income which do not meet the
Dividend Income conditions to be subjected to final tax
-Taxable at the time of their declarations by corp and not -Income included in gross income of taxpayer subject to
at the time of actual payment graduated tax rate

GR: Stock dividends not taxable
EX:
1. Change in stockholders equity, right or interest
2. Cancellation of redemption of shares
3. Distribution of treasury stocks
4. Dividends declarations in the guise of treasury stock
5. Diff classes of stockholders
6. Recepient is other than shareholder
Liquidating Dividends
- Subject to income tax
Disguised dividends
- Payments usually for services made in the form of
dividends in order to evade higher taxes imposed on gross
income.
- Not a return of investment; taxable as part of
compensation income
Domestic Corp and Resident foreign Corp
- RCIT(30%) imposed on taxable income
Resident Foreign Corp
-RCIT imposed on Gross
Proprietary- private
Nonprofit- no net income/ asset accrues. Does not necessarily
means charitable
To be exempt from income tax charitable institution must
be organized and operated exclusively for charitable purpose.
It is nevertheless allowed to engage in activities conducted for
profit without losing its tax exemption status- such subject to
tax

Income received from lease of real property

- Considered as business income included in year end
gross income of lessor

Improvements made by lessees taxable?

- Yes provided such are not subject to removal by lessee

Advanced rental paid by lessee

- Taxable income to the lessor in the yr received under
claim of right, regardless of method of accntng

GR in gain/ loss in exchange of property

- Entire amnt of gain/ loss be recognized upon sale or
exchange
-If there is gain, shall be taxed
-If there is loss, loss shall be allowed as deductions

EX: Bona fide business purpose

1. Exchange solely in kind (Merger/ Consolidation)
2. Estate Planning or transfer of controlled corp
3. Stock for stock
4. Security for stock