MMCO Continuing Professional Development Training Center (CPDTC)

2F MMCO Building, 8000 Lakeview Ph3 Angela Street, Halang Calamba City Laguna, Philippines
Tel No. (02) 330-8617, (049) 523-6031, (02) 330-6057
CPA REVIEW (May 2020 Batch)
Corporate Income Tax Ismael R. Cabonse, CPA

Definition and Concept of Income Tax

Income tax is a tax on all yearly profits arising from property, professions, trades or offices, or as a tax on a person’s income,
emoluments, profits and the like (Fisher v. Trinidad).
Income tax is a direct tax on taxable actual or presumed income (gross or net) of a taxpayer received, accrued or realized during the
taxable year.
An income tax is one levied on the income from property or an occupation. It is a direct tax upon the thing called income.

Situs of Taxation
Situs of taxation literally means a place of taxation, the country that has the power and jurisdiction to levy and collect taxes.
The basis or rationale of taxation may be used as a tool for analysis in determining where the situs of taxation lies. It is the country,
state or sovereign that gives protection that has the right to demand payment of taxes with which to finance activities so that it could
continue to give protection.
Taxation is basically territorial in character because it is only within the territorial boundaries of the taxing authority where tax laws may
be enforced. This is so, because it is only within the confines of its territory that a country, state or sovereign may give protection.

Criteria in Imposing Income Tax

• Citizenship principle
For Filipino citizens and domestic corporations, who are entitled to Philippine government protection wherever they are situated.
• Residence principle
For alien individuals and foreign corporations.
• Source principle
For alien individuals and foreign corporations.

Definition: Corporate Taxpayer

The term “taxpayer” means any person subject to tax imposed under Title II of 1997 Tax Code.
The term “person” means an individual, a trust, estate, or corporation.
The term “corporation” shall include partnerships, no matter how created or organized, joint stock companies, joint accounts
(cuentas en participacion), associations, or insurance companies, but does not include 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 or consortium agreement under a service contract with the Government

Kinds of Corporate Taxpayers

• Domestic corporation – means created or organized in the Philippines. (TEST: Law of incorporation)
• Foreign corporation – means a corporation which is not domestic, which include:
(a) Resident foreign corporation – means a foreign corporation engaged in trade or business within the Philippines
(b) Non-resident foreign corporation – applies to a corporation not engaged in trade or business within the Philippines.
• Partnership except General Professional Partnership (GPP), no matter how created or organized.
• Joint venture or consortium except those formed for the purpose of undertaking construction projects or engaging in petroleum,
coal, geothermal and other energy operations pursuant to an operating or consortium agreement under a service contract with the
Government.
• Joint stock companies;
• Joint accounts (cuentas en participacion);
• Associations; or
• Insurance companies.

Note: The foregoing enumerations are not exclusive because the terms “including” and “includes” when used in a definition, shall not be
deemed to exclude other things otherwise within the meaning of the term defined.

Sources of Income Taxable in the Philippines

A domestic corporation is taxable on all income derived from sources within and without the Philippines; and
A foreign corporation, whether engaged or not in trade or business in the Philippines, is taxable only on income derived from sources
within the Philippines. (Sec. 23, (E)(F), NIRC).

Income From Sources Within

GROSS INCOME FROM SOURCES WITHIN
Interests The capital is employed within the Philippines; interests derived within the Philippines;
and interests on bonds, notes, or other interest-bearing obligations of residents,
corporate or otherwise.
Dividends Amount received as dividends from a domestic corporation;
1. Amount received as dividends from a foreign corporation, subject to the following
conditions:
 50% or more, of the gross income for the 3-year period ending with the close
of its taxable year preceding the declaration of such dividends, was derived
from sources within the Philippines – but only to the extent of dividends

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 which bears the same ratio as the gross income of the corporation for such
period derived from sources within the Philippines.;
Formula: [Phil. Gross Income / Worldwide Gross Income] x Dividend Received
 Less than 50% of the gross income for the 3-year period ending with
the close of its taxable year preceding the declaration of such dividends, was
derived from sources within the Philippines – EXEMPT – WITHOUT the
Philippines.
Services Compensation for labor or personal services PERFORMED in the Philippines, regardless
of the residence of the payor, of the place in which the contract for service was made,
or of the place of payment.
If no accurate allocation or segregation of compensation for labor or personal services
performed in the Philippines can be made, or when such labor or service is performed
partly within and partly without the Philippines, the amount to be included in the gross
income shall be determined by an apportionment of the time basis.

Formula: [No. of days performed in the Phils./ Total no. of days worked] x Gross income

Rentals and Royalties
From property located in the Philippines or from any interest in such property, including
rentals or royalties for:
1. The use of or the right or privilege to use in the Philippines any copyright,
patent, design or model, plan, secret formula or process, goodwill, trademark, trade
brand or other like property or right;
2. The use of, or the right to use in the Philippines any industrial, commercial or
scientific equipment;
3. The supply of scientific, technical, industrial or commercial knowledge or
information;
4. The supply of any assistance that is ancillary and subsidiary to, and is furnished
as a means of enabling the application or enjoyment of, any such property or right as is
mentioned in paragraph (a), any such equipment as is mentioned in paragraph (b) or
any such knowledge or information as is mentioned in paragraph (c);
5. The supply of services by a non-resident person or his employee in connection
with the use of property or rights belonging to, or the installation or operation of any
brand, machinery or other apparatus purchased from such non-resident person;
6. Technical advice, assistance or services rendered in connection with technical
management or administration of any scientific, industrial or commercial undertaking,
venture, project or scheme; and
7. The use of or the right to use:
• Motion picture films;
• Films or video tapes for use in connection with television; and
• Tapes for use in connection with radio broadcasting.

Sale of Real Property
Sale of Personal Property
Services of International
Shipping lines and Air Carriers
Gains, profits and income from the sale of real property located in the Philippines.
1. Gains, profits and income derived from the purchase of personal property within
and without the Philippines but sold within the Phils. (Test: The place where the sale
is perfected and consummated)
2. For personal property produced in whole or in part and sold outside; or produced in
whole or in part of and sold within; gain is considered derived from partly within and
without the Phils.; and
3. Gain from the sale of shares of stock in a domestic corporation
4. Other intangible property – Mobilia sequuntur personam (e.g., gain from sale of
shares of stocks of a foreign corporation)
Revenues from trips originating from the Phil are considered as income from sources
within the Philippines, irrespective of the place of sale or issue and the place of
payment of the ticket or passage document.
Revenues from inbound trips are treated as income from sources outside the
Philippines.

Note:
 Rules on sources of income are relevant only when you are dealing with a foreign corporation.
 If domestic corporation, source of income is irrelevant for income tax purposes because it is taxable on all income derived from within
and without the Philippines.

Tax Exempt Corporations

A) Labor, agricultural or horticultural organization not organized principally for profit;
B) Mutual savings bank not having a capital stock represented by shares, and cooperative bank without capital stock organized and
operated for mutual purposes and without profit;
C) A beneficiary society, order or association, operating for the exclusive benefit of the members such as a fraternal organization
operating under the lodge system, or mutual aid association or a nonstock 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 nonstock
corporation or their dependents;
D) Cemetery company owned and operated exclusively for the benefit of its members;

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 E) Nonstock 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;
F) 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 stock-holder, or individual;
G) Civic league or organization not organized for profit but operated exclusively for the promotion of social welfare;
H) A nonstock and nonprofit educational institution;
I) Government educational institution;
J) 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; and
K) 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;

Exception to the Exception

Notwithstanding the provisions in the preceding paragraphs, the income of whatever kind and character of the foregoing organizations
from any of their activities conducted for profit regardless of the disposition made of such income, shall be subject to tax imposed under this
Code.

Types of Corporate Income Tax

1. Normal (Regular) corporate income tax on corporations (RCIT);
2. Minimum corporate income tax on corporations (MCIT);
3. Special income tax on certain corporations (e.g., private educational institutions; foreign currency deposit units; international
carriers);
4. Capital gains tax on sale or exchange of unlisted shares of stock of a domestic corporation classified as a capital asset;
5. Capital gains tax on sale or exchange of real property located in the Philippines classified as a capital asset;
6. Final withholding tax on certain passive investment incomes;
7. Final withholding tax on income payments made to non-resident foreign corporation;
8. Branch profit remittance tax (BPRT);
9. Tax on improperly accumulated earnings (IAET).
10. 15% Gross income tax – not yet effective

Income Tax Rates and Tax Base (Domestic Corporations)

Ordinary Income:
TAXPAYER
Ordinary domestic corporation
Proprietary non-profit educational
institutions and hospitals
Government-owned or controlled
corporation, agencies or
instrumentalities
TAX BASE TAX RATES
Taxable income Effective January 1, 2009 – 30% RCIT
th
Gross income On the 4 year of operations – 2%
MCIT
Taxable income General rule: 10%
Exception: If gross income from
unrelated trade, business or other
activity exceeds 50% - 30% RCIT shall
be imposed on the entire Taxable
income
Same rate of tax upon their taxable income as are imposed upon corporations or
associations engaged in a similar business, industry or activity. EXEMPT: GSIS,
SSS, PCSO, Philippine Health Insurance Corporation

Proprietary Non-Profit Educational Institutions and Hospital

“Proprietary" means private, following the definition of a "proprietary educational institution" as "any private school maintained and
administered by private individuals or groups" with a government permit from the Department of Education, Culture and Sports (DECS), or
the Commission on Higher Education (CHED), or the Technical Education and Skills Development Authority (TESDA), as the case may be, in
accordance with existing laws and regulations..
"Non-profit" means no net income or asset accrues to or benefits any member or specific person, with all the net income or asset
devoted to the institution's purposes and all its activities conducted not for profit.
The term “unrelated trade, business or other activity” means any trade, business or other activity, the conduct of which is not
substantially related to the exercise or performance by such educational institution or hospital of its primary purpose or function.

Income Tax Rates and Tax Base (Resident Foreign Corporations)

Ordinary Income:
TAX BASE TAX RATES
Resident Foreign Corporation Taxable income Effective January 1, 2009 – 30% RCIT
Gross income On the 4th year of operations – 2%
MCIT
International Carrier, e.g., Air carrier Gross Philippine Billings 2 ½%
and shipping lines

International Carriers – Definition

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 International Air Carrier — refers to a foreign airline corporation doing business in the Philippines having been granted landing rights in
any Philippine port to perform international air transportation services/activities or flight operations anywhere in the world. On-line carriers
refer to international air carriers having or maintaining flight operations to and from the Philippines. Off-line carriers refer to international air
carriers having no flight operations to and from the Philippines.
International Sea Carrier — refers to a foreign shipping corporation doing business in the Philippines, having touched or intention of
touching any Philippine port to perform international sea transportation services/activities from the Philippines to anywhere in the world and
vice versa, in the case of on-line carrier, or having maintained business establishment, agent or representative office in the Philippines for the
sale of owned tickets/passage documents or tickets/passage documents of other shipping companies, which shipping companies operate
without touching any Philippine port, in the case of off-line carrier.

International Carriers – Tax Rate

An international carrier having flights or voyages originating from any port or point in the Philippines, irrespective of the place where
passage documents are sold or issued, is subject to the Gross Philippine Billings Tax of two and one-half percent (2 1/2%) imposed under
Section 28 (A) (3) (a) and (b) of the NIRC, as amended, UNLESS it is subject to a preferential rate or exemption on the basis of an applicable
tax treaty or international agreement to which the Philippines is a signatory or on the basis of 'reciprocity.

Preferential Income Tax Rate or Exemption of International Carrier

International carriers doing business in the Philippines may avail of a preferential income tax rate or income tax exemption on their
gross revenues derived from the carriage of persons and their excess baggage on the basis of the following:

A. Applicable tax treaty to which the Philippines is a signatory.

Tax Treaties generally allow the Philippines to impose preferential income tax rates on profits from the operation of ships or
aircrafts in international traffic by residents of the other contracting states. There are Tax Treaties which provide that the tax shall not
exceed the lesser of one and one-half percent (1 1/2%) of the gross revenues derived from sources in the Philippines, or the lowest rate
of the Philippine tax that may be imposed on profits of the same kind derived under similar circumstances by a resident of a third State.

B. Reciprocity.
• This may be invoked by an international carrier as basis for Gross Philippine Billings Tax exemption when its Home Country grants
income tax exemption to Philippine carriers.
• The domestic law of the Home Country granting exemption shall cover income taxes and shall not refer to other types of taxes that
may be imposed by the relevant taxing jurisdiction. The fact that the tax laws of the Home Country provide for exemption from
business tax, such as gross sales tax, in respect of the operations of Philippine carriers shall not be considered as valid and sufficient
basis for exempting an international carrier from Philippine income tax on account of reciprocity.
• Reciprocity requires that Philippine carriers operating in the Home Country of an international carrier are actually enjoying the
income tax exemption.

Income Tax Rates and Tax Base (Resident Foreign Corporations)

Ordinary Income:
TAX BASE TAX RATES
Foreign Branch (except those Taxable income 30% RCIT
activities which are registered with Gross income 2% MCIT
the PEZA) Profit remittance. Branch Profits Remittance Tax – 15%

Branch Profit Remittance Tax

• TAX BASE – Total profits applied or earmarked for remittance without any deduction for the tax component thereof.
• EXCLUSIONS - Interests, dividends, rents, royalties, including remuneration for technical services, salaries, wages, premiums,
annuities, emoluments or other fixed or determinable annual, period or casual gains, profits, capital gains received by a foreign
corporation during each taxable year from all sources within the Philippines shall not be treated as branch profits unless the same
are effectively connected with the conduct of its trade or business in the Philippines.
• EXEMPTION – Activities registered with PEZA or SBMA and other freeport zones

Income Tax Rates and Tax Base (Resident Foreign Corporations)

Ordinary Income:
TAX BASE TAX RATES
Regional or Area Headquarters of Not Applicable EXEMPT
Multinational Companies
Regional Operating Headquarters of Taxable Income 10%
Multinational Companies

Regional Area or Operating Headquarters: Definition

Regional Area Headquarters is a branch established in the Philippines by multinational companies and which headquarters do not
earn or derive income from the Philippines and which act as supervisory, communications and coordinating center for their affiliates,
subsidiaries, or branches in the Asia-Pacific Region and other foreign markets.
Regional Operating Headquarters is a branch established in the Philippines by multinational companies which are engaged in any of
the following services: (1) general administration and planning; (2) business planning and coordination; (3) sourcing and procurement of raw
materials and components; (4) corporate finance advisory services; (5) marketing control and sales promotion; (6) training and personnel
management; (7) logistic services; (8) research and development services and product development; (9) technical support and maintenance;
(10) data processing and communication; and (11) business development.

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Income Tax Rates and Tax Base (Non-Resident Foreign Corporations)
Ordinary Income:
TAX BASE TAX RATES
Nonresident foreign corporation Gross income Final tax of 30%
Nonresident cinematographic film owner, Gross income Final tax of 2%
lessor or distributor
Nonresident owner or lessor of vessels Gross rentals, lease or charter Final tax of 4 ½%
chartered by Philippine nationals fees
Nonresident owner or lessor of aircraft, Gross rentals and other fees Final tax of 7 ½%
machineries and other equipment

Concept of Income
Income means cash or its equivalent coming to a person within a specified period, whether as payment for services, interest or
profit from investment. It covers gain derived from capital, from labor, or from both combined, including gain from sale or conversion of
capital assets. Return of capital is exempt from income tax. Capital, labor, or property is the tree; income is the fruit. Capital is the fund,
income is the flow of fund.

To be taxable:
• There must be income, gain or profit;
• Gain is received, accrued or realized during the year; and
• It is not exempt from income tax under the Constitution, treaty or law.
Mere increase in the value of property does not constitute taxable income. It is not yet realized during the year. Transfer of
appreciated property to the employee for services rendered is taxable income.

Requisites for Taxability of Income

• Gain is received, accrued or realized during the year
Not all economic gain is taxable income. Thus, a mere increase in the value of the property is not income but merely an unrealized
increase in capital. [Lynch vs Turrish, 264 U.S. 221]
The increase in value, i.e., the gain, can only be taxed when a disposition of the property has occurred, which is of such a nature as
to constitute a realization of such gain, that is a severance of the gain from the original capital invested in the property.
• Gain is received, accrued or realized during the year
The realization of income need not take the form of actual receipt of cash or property by the taxpayer as it may occur as where
there is a constructive receipt of the income by the taxpayer. [85 C.J.S. 734;see Chapter XI-A]
• The gain must not be excluded by law from taxation
Income exempt from the tax by law is not considered in determining gross income. (De Leon, The Law of Income Taxation, 1998
edition).

Taxable Income
The term “taxable income” means the pertinent items of gross income specified in this Code, less the deductions and/or personal and
additional exemptions, if any, authorized for such types of income by this Code or other special laws.

Computation:
Gross Income P XXX
Less: Allowable Deductions XXX
Taxable Income P XXX

Illustration 1

XYZ Corporation, a domestic corporation had the following data during the calendar year 2011.

Gross Income P 1,000,000

Business connected expenses 400,000
Dividends from:
Domestic Corporation 100,000
Foreign Corporation 90% of the gross income
was derived from the Phils. 100,000
Foreign corporation 60% of the gross income
was derived from the Phils. 80,000
Foreign corporation 30% of the gross income
was derived from the Phils. 40,000
The taxable income is

a. P 920,000 b. P 820,000 c. P 748,000 d. P 750,000

Solution:

Gross Income P 1,000,000

Business connected expenses 400,000
Gross Income 600,000

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 Add:
Foreign Corporation 90% of the gross income was
derived from the Phils. 100,000
Foreign corporation 60% of the gross income was
derived from the Phils. 80,000
Foreign corporation 30% of the gross income was
derived from the Phils. 40,000
Total Taxable Income P 820,000
Note : Dividend from Domestic Corporation is exempt

Illustration 2

ABC, a 100 bed proprietary hospital organized in 2000, had the following data for 2011:

Gross receipts from patients and laboratory services P 8,500,000

Rental Income (net of 5% w/t) 1,425,000
Total Hospital Expenses 8,200,000

The income tax still due for 2011 is:

a. Php 540,000 b. Php 105,000 c. Php 180,000 d. 465,000

Solution:

Patients and laboratory fees P 8,500,000

Rental Income (gross P 1,425,000/95%) 1,500,000
Total P 10,000,000
Ratio of unrelated activities to total gross
income 15% 15%
Total school expenses 8,200,000
Net Taxable Income P 1,800,000

Tax due at 10% 180,000

Deduct: Tax withheld by lessees 75,000
Tax Payable P 105,000

Illustration 3

DEF College, a private educational institution organized in 2009 had the following data in 2011:

Tuition Fees P 4,800,000

Rental Income (net of 5% withheld tax) 4,940,000
Total School expenses P 9,450,000
The income tax still due for 2011 is

a. Php 165,000 b. (Php 95,000) c. (Php 60,000) d. Php 200,000

Solution:

Tuition fees P 4,800,000

Rental Income (gross P 4,940,000/95%) 5,200,000
Total P 10,000,000
Ratio of unrelated activities to total gross
income 52%
Total school expenses 9,450,000
Net Taxable Income P 550,000

Tax due at 30% 165,000

Deduct: Tax withheld by lessees 260,000
Tax Payable (Refundable) ( P 95,000 )

Illustration 4

Mr. Araki, a non-resident alien stockholder, received a dividend income of P300,000 in 2010 from a foreign corporation doing
business in the Philippines. The gross income of the foreign corporation from within and without the Philippines for the three
years preceding 2010 is as follows:

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Sources of Income 2007 2008 2009
From within the Philippines P 20,000,000 P 12,000,000 P 20,000,000
From without the Philippines 18,000,000 14,000,000 16,000,000

How much of the dividend income received by Mr. Araki is considered income from sources within the Philippines?
a. Zero b. P156,000 c. P144, 000 d. P300, 000

Solution:

Sources within P 52,000,000

Sources without 48,000,000
Total 100,000,000
Percentage of Sources Within Total 52%

Dividend income P 300,000

Percentage of Sources within 52%
Total Income Sources Within P 156,000

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