Module 6 INCOME TAX ON CORPORATIONS

CENTRAL PHILIPPINE UNIVERSITY

College of Business and Accountancy

Tax 41c – Income Taxation

First Semester
Module # 6

INCOME TAX ON CORPORATIONS

CORPORATE INCOME TAXPAYERS

The term “corporation” shall include one person corporations (OPCs), partnerships, no matter
how created or organized, joint-stock companies, joint accounts, association, or insurance
companies, except general professional partnerships and a joint venture or consortium formed for
the purpose of undertaking construction projects or engaging in petroleum, coal, geothermal, and
other energy operations pursuant to an operating consortium agreement under a service contract
with the government.

Hence, the term corporation includes profit-oriented and non-profit institutions such as charitable
institutions, cooperatives, government agencies, and instrumentalities, associations, leagues,
civic or religious and other organizations.

Domestic Corporation
A domestic corporation is a corporation that is organized in accordance with Philippines laws. It
includes one-person corporations (OPC) owned and registered by resident citizens in the
Philippines.

Foreign Corporations
A foreign corporation is one organized under a foreign law.

Types of foreign corporations:

1. Resident foreign corporations (RFC) – a foreign corporation which operates and
conducts business in the Philippines through a permanent establishment (i.e. a branch)
2. Non-resident foreign corporation (NRFC) – a foreign corporation which does not operate
or conduct business in the Philippines.

Note:
1. A corporation that incorporates in the Philippines is a domestic corporation under the
Incorporation Test even if the same is controlled by foreigners.
2. A foreign corporation that transacts business with residents through a resident branch is
taxable on such transactions as a resident foreign corporation through its branch.
However, if it transacts directly to residents outside its branch, it is taxable as a non-
resident foreign corporation on the direct transactions.
3. An individual that establishes a one-person corporation (OPC) shall be taxable as a
corporate taxpayer for the business transaction of the OPC but he shall be subject to tax
as an individual for his personal transactions.

Special Corporations
1. One-person corporation
A one-person corporation is a corporation with a single stockholder who may be a natural
person, trust or an estate.

Banks and quasi-banks, preneed, trust, insurance, public and publicly-listed companies,
and non-chartered GOCCs may not incorporate as One-person corporations. A natural
person who is licensed to exercise a profession may not organize as a One Person
Module 6 INCOME TAX ON CORPORATIONS

Corporation for the purpose of exercising such profession except as otherwise provided
under special laws.

2. Partnership
A partnership is a business organization owned by two or more persons who contribute
their industry or resources to a common fund for the purpose of dividing the profits from
the venture.

Types of partnership
a) General professional partnership (GPP)

A GPP is a partnership formed by persons for the sole purpose of exercising a

common profession, no part of the income of which is derived from engaging in any
trade or business.

A GPP is not treated as a corporation and is not a taxable entity. It is exempt from
income tax, but the partners are taxable in their individual capacity with respect to
their share in the income of the partnership.

b) Business partnership
A business partnership is one formed for profit. It is taxable as a corporation.

Examples:
a. A partnership between Atty Mendoza, a lawyer, and Mark Santos, an accountant,
to practice in taxation advisory services would be a business partnership since the
two partners are not in the same profession.
b. A partnership between accountants Khim and Vhinson to venture into a beauty
parlor would be a business partnership since the venture is not in practice of
common profession.
c. A partnership between accountants Juan and Miguel to venture into audit services
would be a general professional partnership
d. Dentists Wency and Andy partnered to operate a dental clinic. During slack
season, they are converting their clinic into a beauty salon. Their partnership is a
business partnership since it is earning income from business.

3. Joint venture
A joint venture is a business undertaking for a particular purpose. It may be organized as
a partnership or a corporation.

Types of joint ventures

a. Exempt joint ventures
Exempt joint ventures are those formed for the purpose of undertaking construction
projects or engaging in petroleum, coal, geothermal and other energy operations
pursuant to an operating consortium agreement under a service contract with the
Government.

Similar to a GPP, this type of joint venture is not treated as a corporation and is tax-
exempt on its regular income, but their venturers are taxable to their share in the net
income of the joint venture.

b. Taxable joint ventures

All other joint ventures are taxable as corporations.
Module 6 INCOME TAX ON CORPORATIONS

4. Co-ownership
A co-ownership is joint ownership of a property formed for the purpose of preserving the
same and/or dividing its income.
A co-ownership that is limited to property preservation or income collection is not a
taxable entity and is exempt but the co-owners are taxable on their share on the income of
the co-owned property.

However, a co-ownership that reinvests the income of the co-owned property to other
income-producing properties or ventures will be considered an unregistered partnership
taxable as a corporation.

THE GENERAL RULE IN INCOME TAXATION

Taxable on income earned

Corporate Taxpayers Within Without
Domestic corporation √ √
Resident foreign corporation √
Non-resident foreign
corporation √

Reporting Format for Corporate Taxpayers

Net Sales/Revenues/Receipts/Fees P xxx,xxx

Less: Cost of sales or services xxx,xxx
Gross income from operations P xxx,xxx
Add: Other taxable income not subject to final tax xxx,xxx
Total gross income P xxx,xxx
Less: Allowable deductions xxx,xxx
Net income P xxx,xxx

Note: For corporate taxpayers, revenues or receipts from secondary or incidental operations will
be included under the classification “Sales/Revenues/Receipts/Fees.”

Other taxable income not subject to final tax

This category includes other items of gross income whether or not arising from the operations of
the corporation such as gains from dealings in properties, income distribution from an exempt
joint venture, and other passive income not subject to final tax.

Illustration
An corporate taxpayer who is using the accrual basis in its manufacturing business reported the following
results of operations in the preceding year:

Sales, net of returns, and discounts P4,000,000

Cost of sales 1,800,000
Dividend income, net of final tax 36,000
Business expenses 1,600,000
Gain on sale of old equipment 100,000
Sale of scrap metals 200,000
Interest income on employee advances 45,000
Gain on sale of domestic stocks directly to a buyer 10,000
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The business income shall be reported as follows:

Net Sales/Revenues/Receipts/Fees (P4M + P0.2M) P4,200,000

Less: Cost of sales 1,800,000
Gross income from operations P2,400,000
Add: Other taxable income not subject to final tax
Gain on sale of equipment P100,000
Interest income on employee advances 45,000 145,000
Total gross income P2,545,000
Less: Allowable deductions (Business expenses) 1,600,000
Net income P 945,000

The difference in presentation between individuals and corporations is necessitated by the

Optional Standard Deduction (OSD). The basis of the OSD for individual taxpayers is the total
revenues or receipts from operations while the basis of the OSD for corporations is total gross
income subject to regular income tax whether or they arise from the regular business operations.

CORPORATE INCOME TAX

The corporate income tax, commonly referred to as the regular corporate income tax (RCIT), is
generally a proportional or flat tax at a rate of 25% on taxable income for domestic and foreign
corporation.

However, a lower 20% proportional tax on taxable income is imposed on domestic micro-,
small-, and medium-sized enterprises (MSMEs) with not more than P100 million assets,
excluding land, and not more than P5 million taxable income.

The RCIT applies to any corporation other than those:

a. Subject to final tax such as non-resident foreign corporation and FCDU interest income
not subject to final tax
b. Special corporations or those subject to preferential (i.e lower) tax rates or special
regimes
c. Exempt corporations

Illustration
A corporation has a net income of P1,200,000 in the Philippines and P800,000 from abroad.

Assuming the corporation is a large domestic corporation, the income tax shall be computed as
follows:

Taxable income (world) P2,000,000

Multiply by: Tax Rate 25%
Income tax due P 500,000

Assuming the corporation is a domestic MSME, the income tax shall be computed as follows:

Taxable income (world) P2,000,000

Multiply by: Tax Rate 20%
Income tax due P 400,000

Note:
1. Domestic corporations are taxable on global income.
2. If the taxable income is more than P5 million, the 25% tax is applicable without regard to
whether the domestic corporation is a MSME or a large corporation.
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Assuming the corporation is a resident foreign corporation, the income tax shall be computed as
follows:

Taxable income (world) P1,200,000

Multiply by: Tax Rate 25%
Income tax due P 300,000

Note:
1. Resident foreign corporation is taxable on Philippine income.
2. There is no distinction between large corporation or MSME when it comes to foreign
corporation. The 25% proportional tax simply applies.

The Minimum Corporate Income Tax (MCIT)

Corporate taxpayers are normally subject to minimum tax, computed as 2% of total gross income
subject to regular tax. This minimum tax is temporarily reduced to 1% this pandemic from July
1, 2020 to June 30, 2023. Even if corporations are losing in business, they are subject to the
minimum tax.

Special Corporations
Special corporations are those enjoying lower tax rates but not 0%, such as private schools, non-
profit hospitals and PEZA or TIEZA-registered enterprises.

Exempt Corporations
Exempt corporations are those enjoying 0% tax rate with no tax dues such as government
agencies, non-profit organizations with no taxable income, cooperatives, and those registered
with the Board of Investments (BOI) enjoying income tax holiday or ITH.