Subject: Taxation

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 NAVOTAS POLYTECHNIC COLLEGE
Bachelor of Science in Business Administration
Taxation
Atty. Christian Wilfred D. Morales, CPA1

Module 6: Taxation of Corporations, Partnerships and Joint Ventures

Intended Learning Outcomes (ILO)

At the end of this topic, the student must have understood the concept of different
types of corporations, the computation of MCIT, RCIT, various preferential rate,
the taxation of partnership and joint ventures.

Lecture Proper and Discussion

CORPORATIONS

For tax purposes, the term “corporation” shall include one person corporations,
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 consortium agreement under a service contract with the Government.

General Professional Partnerships (GPP) are partnerships formed by persons for

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

Corporations may either be domestic corporation, resident foreign corporation or

non-resident foreign corporation, joint venture or partnership.

(a) Domestic Corporation, a corporation created or organized in the Philippines or

under its laws. Domestic corporations are taxable from all sources of income within
and without the Philippines.

(b) Resident Foreign Corporation, a corporation created or organized under foreign

laws which is engaged in trade or business within the Philippines. Resident Foreign
Corporations are taxable from all sources of income within the Philippines.

(c) Non-Resident Foreign Corporation, a corporation created or organized under

foreign laws which is not engaged in trade or business within the Philippines. Non-
1
Member of the Integrated Bar of the Philippines, Member of the Philippine Institute of Certified Public
Accountant, former Associate of Maceda, Valencia and Co., Maceda Valencia & Co. (MVCo.), a
member firm of Nexia International, former Senior Financial Specialist of Financial Management
Division (FMD), former Senior Internal Control Officer and Head of Financial Audit Section (FAS) of
Internal Audit Services, National Irrigation Adminstration (NIA), former Professor of Law and
Accounting at College of Business Administration, City of Malabon University (CMU), Attorney II at
BIR Legal Division, Law Practitioner

Page 2 of 28
Resident Foreign Corporation Corporations are taxable from all sources of income
within the Philippines.

(d) Partnership, arises when two or more persons bind themselves to contribute
money, property, or industry to a common fund, with the intention of dividing the
profits among themselves. Two or more persons may also form a partnership for
the exercise of a profession. For tax purposes, a partnership may either be a Trade
Partnership (Ordinary Partnership) or General Professional Partnership.

Trade Partnership (Ordinary Partnership) is a partnership engaged in trade or

business. This partnership falls within the definition of a corporation and thus, the
tax treatment is the same as that of a corporation.

General Professional Partnership is a partnership formed by persons for the sole

purpose of exercising their common profession, no part of income of which is
derived from engaging in any trade or business. A general professional partnership
not be subject to the income tax imposed. However, persons engaging in business
as partners in a general professional partnership shall be liable for income tax only
in their separate and individual capacities.

(e) Joint Venture, an association of persons or companies jointly undertaking some

commercial enterprise; generally, all contribute assets and share risks. It requires a
community of interest in the performance of the subject matter, a right to direct and
govern the policy in connection therewith, and duty, which may be altered by
agreement to share both in profit and losses. Joint venture is formed for the
execution of single transaction and is thus of a temporary nature. 2

Domestic Corporations

Domestic Corporation, a corporation created or organized in the Philippines or

under its laws. Domestic corporations are taxable from all sources of income within
and without the Philippines. This kind of corporation is liable to pay a Regular
Corporate Income Tax (RCIT).

Regular Corporate Income Tax (RCIT)

Corporations with net taxable income not exceeding Five million pesos
(P5,000,000.00) and with total assets not exceeding One hundred million pesos
(P100,000,000.00), excluding land on which the particular business entity's office,
plant, and equipment are situated during the taxable year for which the tax is
imposed, shall be taxed at twenty percent (20%), otherwise, the taxes shall be at
twenty-five percent (25%).3

In general, RCIT of domestic corporation may be computed using the following

formulas:

2
Aurbach v. Sanitary Wares Manufacturing Corporation, 180 SCRA 130, December 15, 1989
3
Sec. 27(A) of NIRC

Page 3 of 28
Gross Sales/Receipts xxx
Less: Sales Returns, Allowances and Discounts (xx)
Net Sales/Receipts xxx
Less: Cost of Goods Sold/Cost of Services/Cost of Sales (xx)
Gross Income xxx
Add: Non-operating Income xxx
Total Income xxx
Less: Deductions (Itemized Deduction or OSD) (xx)
Taxable Income xxx
RCIT Rate (25% or 20%) x%
Income Tax Due xxx
Less: Tax Credit (xx)
Income Tax Still Due xxx

The inclusions and exclusions of gross income as well as allowable deduction are
the same as that of an individual, please refer to your Module 3 and Module 5 for
detailed discussions.

Sample 1: Nem, Inc., a domestic corporation, has the following income and
expense during the year: Gross Sales in the Philippines amounting to
P100,000,000.00, Gross Sales from Overseas amounting to Php 50,000,000.00,
Cost of Sales in the Philippines amounting to P40,000,000.00, Cost of Sales from
Overseas amounting to P20,000,000.00, Operating Expenses in the Philippines
amounting to P30,000,000.00 and Operating Expenses from Overseas amounting
to P12,000,000.00. Determine the income tax due.

Philippines Abroad Total

Gross Sales 100,000,000.00 50,000,000.00 150,000,000.00
Less: Cost of Goods Sold/Cost of Services/Cost of Sales (40,000,000.00) (20,000,000.00) (60,000,000.00)
Gross Income 60,000,000.00 30,000,000.00 90,000,000.00
Less: Deductions (Itemized Deduction or OSD) (30,000,000.00) (12,000,000.00) (42,000,000.00)
Taxable Income 30,000,000.00 18,000,000.00 48,000,000.00
RCIT Rate (25% or 20%) 25%
Income Tax Due 12,000,000.00
Less: Tax Credit -
Income Tax Still Due 12,000,000.00

Nem, Inc. is a domestic corporation, as such, it is taxable from all income derived
from sources within and outside the Philippines. The RCIT is twenty-five percent
(25%) because Nem, Inc. did not meet the qualification criteria for twenty percent
(20%), i.e., net taxable income not exceeding Five million pesos (P5,000,000.00)
and with total assets not exceeding One hundred million pesos (P100,000,000.00).

In addition, the income tax liability of domestic corporation is also subject to the
rule on Minimum Corporate Income Tax, which will be discussed later.

Final Income Tax on Certain Passive Income

Unlike an individual taxpayer, a domestic corporation has a limited number of

passive incomes. To be subject to Final Income Tax (FIT), the passive income must
be derived from sources within the Philippines. If the passive income is derived

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from sources outside the Philippines, the passive income is included in the gross
income and subject to RCIT.

The following income tax rates apply to passive income earned by a domestic
corporation within the Philippines:

(a) Interest on currency bank deposit and yield or any other monetary benefit from
deposit substitutes and from trust funds and similar arrangements received by
domestic corporations, and royalties, derived from sources within the Philippines
– 20%

(b) Interest income derived by a domestic corporation from a depository bank

under the expanded foreign currency deposit system – 15%

(c) Income derived by a depository bank under the expanded foreign currency
deposit system from foreign currency transactions with nonresidents, offshore
banking units in the Philippines, local commercial banks including branches of
foreign banks that may be authorized by the Bangko Sentral ng Pilipinas (BSP) to
transact business with foreign currency deposit system – Exempt

(d) Interest income from foreign currency loans granted by such depository banks
under said expanded system to residents other than offshore banking units in the
Philippines or other depository banks under the expanded system – 10%

(e) Any income of nonresidents, whether individuals or corporations, from

transactions with depository banks under the expanded system – Exempt

Intercorporate Dividends

Dividend is any distribution made by a corporation to its shareholders out of its

earnings or profits and payable to its shareholder, whether in the form of money or
property.

A domestic corporation can be a stockholder of another domestic corporation and

thus, entitled to dividends. The dividends received by a domestic corporation from
another domestic corporation is not subject to income tax.

Dividends received by a domestic corporation from a Resident Foreign

Corporation may be exempt provided that the dividend is considered an income
within the Philippines.

To recall, in determining whether a dividend received from a Resident Foreign

Corporation is considered as income within the Philippines, one must inquire into
the gross income of the foreign corporation for the last three (3) years before the
declaration of dividends. If at least fifty percent (50%) of the gross income of the
foreign corporation for the last three (3) years before the declaration of dividends
was derived from sources within the Philippines, the dividends is considered as
income within. Otherwise, the dividends are considered as sourced outside of the
Philippines (foreign-sourced dividends). On the other hand, dividends received

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from a Non-Resident Foreign Corporation are considered as sourced outside the
Philippines.

As a general rule, foreign-sourced dividends, whether received from a Resident

Foreign or Non-Resident Foreign, are included in the gross income of a domestic
corporation, hence subject to RCIT. However, the Tax Code admits exception4.
For a foreign-sourced dividends to be considered as exempt from income tax, the
following circumstances must be present:

(a) The dividends actually received or remitted into the Philippines are reinvested
in the business operations of the domestic corporation in the Philippines within the
next taxable year from the time the foreign-sourced dividends were received;

(b) The dividends received or remitted into the Philippines shall be limited to
funding the working capital requirements, capital expenditures, dividend
payments, investment in domestic subsidiaries, and infrastructure project; and

(c) The domestic corporation holds directly at least twenty percent (20%) of the
outstanding shares of the foreign corporation and has held the shareholdings for a
minimum of two (2) years at the time of the dividend’s distribution.

For the last circumstances, in case the foreign corporation has been in existence for
less than two (2) years at the time of dividend distribution, the domestic corporation
must have continuously held directly at least twenty percent (20%) of the
outstanding shares of the foreign corporation during the entire existence of the
corporation.

Sample 2: Nem, Inc., a domestic corporation, has provided you the following data:
Gross Profit from Sales – P31,000,000, Dividend received from Goodhouse, Inc.,
a domestic corporation – P200,000, Dividend received from Google Philippines, a
resident foreign corporation – P100,000, Interest on BDO Deposits – P200,000,
Interest from Trade Accounts Receivables – P500,000, Business Expenses –
P21,000,000. Per verification, Google Inc., has a ratio of 80% of gross income from
sources within the Philippines over gross income from all sources for the past three
(3) years. Determine the taxable income.

Gross Profit from Sales 31,000,000.00

Interest income on trade receivables 500,000.00
Gross Income 31,500,000.00
Business expenses (21,000,000.00)
Taxable Income 10,500,000.00

The dividend income received by Nem, Inc. from Google, Inc., a resident foreign
corporation is exempt from tax since the gross income in the Philippines over the
total gross income has a ration of 80% for the past three years, thus, considered as
income derived from sources within the Philippines. Interest on bank deposit is

4
Sec. 27(D)(4)

Page 6 of 28
excluded from gross income since this is already subject to final income tax (FIT).
Income items which are subject to FIT are no longer subject to RCIT. The interest
from trade receivables is included in the gross income since this item is not subject
to Final Income Tax (FIT).

Thus, the following rules governing dividends:

Dividends from Dividends to Tax Treatment

Domestic Corporation (DC)
Resident Foreign Corporation (RFC)
Non-resident Foreign Corporation (NRFC)
Domestic Corporation Exempt
Exempt is the situs is within the
Domestic Corporation
Philippines, otherwise subject to RCIT
Subject to RCIT, unless meets the criteria
Domestic Corporation
in which case considered as Exempt

Capital Gains from Sale of Shares of Stock not Trade in the Stock Exchange

The net capital gains realized during the taxable year from the sale, barter,
exchange or other disposition of shares of stocks in a domestic corporation not
traded in the stock exchange is subject to 15% final tax. This final tax is also called
Capital Gains Tax.

For the 15% final tax to be applicable, the shares must be shares of a domestic
corporation, classified as capital asset and not trade in the local stock exchange.
Absent any of the mentioned circumstances, the final tax is not applicable.

As will be discussed later, provisions relating to Holding Period is not applicable

to this type of tax since the Tax Code provides that the Holding Period is only
applicable to a capital asset other than sale of shares of stocks not traded in the
stock exchange.

Consequently, if the stocks are traded in the Stock Exchange, the 15% income tax
rate is not applicable. In this case, the stock transaction tax of 6/10 of 1% of the
gross selling price or gross value in money of the shares of stocks sold, bartered,
exchange or disposed shall be paid by the seller or transferor.

Sample 3: Nem, Inc. sold 10,000 shares of Good House Industries, Inc., a closely
held domestic corporation, on June 30, 2021. The shares were acquired by Nem,
Inc. a year ago from Malen, Inc. for P1,000,000. The Book Value per Share based
on the Audited Financial Statements of Good House Industries, Inc. was P200.
How much is the capital gains tax?

Selling Price of Shares 1,250,000.00

Less:
Acquisition Cost 1,000,000.00
Capital Gain 250,000.00
Rate 15%
Capital Gains Tax 37,500.00

Capital Gains from Sale of Real Property

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A final tax of 6% capital gains tax based on the gross selling price or current fair
market value, whichever is higher, is imposed upon capital gains presumed to have
been realized from the sale, exchange or other disposition of real property located
in the Philippines classified as capital assets, including pacto de retro sales and
other forms of conditional sales, by individuals, estates and trust. Actual gain is not
required before the imposition of this final tax since the gain on sale of real property
classified as capital asset is always presumed.

For the 6% capital gains tax to be imposable, the property must be a real property
located in the Philippines and classified as capital asset.

Fair market value is understood as the fair market value as determined by the
Commissioner of Internal Revenue or the fair market value as determined by the
Provincial, City or Municipal Assessor, whichever is higher.

Sample 4: Nem, Inc. sold a land held as capital asset for P10,000,000 to Dan Inc.
Its Fair Market Value when it acquired the property from Elmer Inc., was
P12,000,000 although its present Fair Market Value is P15,000,000. How much is
the capital gains tax?

Fair Market Value 15,000,000.00

Rate 6%
Capital Gains Tax 900,000.00

The capital gains tax shall be based on the gross selling price or current fair market
value, whichever is higher.

Note that the sale or disposition of a real property held as capital asset to the
government, its political subdivisions, government agencies or government owned
or controlled corporations as the buyer, purchaser or transferee, the option to be
taxed at to be taxed at 6% based on the gross selling price or fair market value or
the gain on sale be subjected to the RCIT is not applicable.

Furthermore, the exemption which applies to sale of principal residence does not
apply to corporation since a corporation cannot acquire principal residence due to
the fact that it is only existing by fiction of law. Principal residence is different from
principal office.

Resident Foreign Corporation

Resident Foreign Corporation, a corporation created or organized under foreign

laws which is engaged in trade or business within the Philippines. Resident Foreign
Corporations are taxable from all sources of income within the Philippines. As
such, except for the taxable source, a resident foreign corporation is taxed the same
as a domestic corporation.

Regular Corporate Income Tax

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A resident foreign corporation is liable to pay a twenty-five percent (25%) RCIT on
its taxable sources from income within the Philippines.

In general, RCIT of resident foreign corporation may be computed using the

following formulas:

Gross Sales/Receipts xxx

Less: Sales Returns, Allowances and Discounts (xx)
Net Sales/Receipts xxx
Less: Cost of Goods Sold/Cost of Services/Cost of Sales (xx)
Gross Income xxx
Add: Non-operating Income xxx
Total Income xxx
Less: Deductions (Itemized Deduction or OSD) (xx)
Taxable Income xxx
RCIT Rate ______ 25%
Income Tax Due xxx
Less: Tax Credit (xx)
Income Tax Still Due xxx

Final Income Tax on Certain Passive Income

To be subject to Final Income Tax (FIT), the passive income must be derived from
sources within the Philippines. If the passive income is derived from sources
outside the Philippines, the passive income is exempt from taxation since a resident
foreign corporation is taxable only from sources within the Philippines.

The following income tax rates apply to passive income earned by a resident foreign
corporation within the Philippines:

(a) Interest on currency bank deposit and yield or any other monetary benefit from
deposit substitutes and from trust funds and similar arrangements received by
domestic corporations, and royalties, derived from sources within the Philippines
– 20%

(b) Interest income derived by a domestic corporation from a depository bank

under the expanded foreign currency deposit system – 15%

(c) Income derived by a depository bank under the expanded foreign currency
deposit system from foreign currency transactions with nonresidents, offshore
banking units in the Philippines, local commercial banks including branches of
foreign banks that may be authorized by the Bangko Sentral ng Pilipinas (BSP) to
transact business with foreign currency deposit system – Exempt

(d) Interest income from foreign currency loans granted by such depository banks
under said expanded system to residents other than offshore banking units in the
Philippines or other depository banks under the expanded system – 10%

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(e) Any income of nonresidents, whether individuals or corporations, from
transactions with depository banks under the expanded system – Exempt

Intercorporate Dividends

A resident foreign corporation can be a stockholder of another corporation and

thus, entitled to dividends. The dividends received by a resident foreign corporation
from another domestic corporation is not subject to income tax.

Dividends received by a resident foreign corporation from another resident foreign

corporation or from a non-resident foreign corporation is subject to RCIT provided
that the income is determine from sources within the Philippines.

Foreign-sourced dividends are not taxable since a resident foreign corporation is

taxable only from sources within the Philippines.

Capital Gains from Sale of Shares of Stock not Trade in the Stock Exchange

The net capital gains realized during the taxable year from the sale, barter,
exchange or other disposition of shares of stocks in a domestic corporation not
traded in the stock exchange is subject to 15% final tax. This final tax is also called
Capital Gains Tax.

For the 15% final tax to be applicable, the shares must be shares of a domestic
corporation, classified as capital asset and not trade in the local stock exchange.
Absent any of the mentioned circumstances, the final tax is not applicable.

As will be discussed later, provisions relating to Holding Period is not applicable

to this type of tax since the Tax Code provides that the Holding Period is only
applicable to a capital asset other than sale of shares of stocks not traded in the
stock exchange.

Consequently, if the stocks are traded in the Stock Exchange, the 15% income tax
rate is not applicable. In this case, the stock transaction tax of 6/10 of 1% of the
gross selling price or gross value in money of the shares of stocks sold, bartered,
exchange or disposed shall be paid by the seller or transferor.

Capital Gains from Sale of Real Property

Noticeably, there is no provision providing for the specific final tax rate on capital
gains from the sale, exchange or other disposition of real property located in the
Philippines classified as capital assets, including pacto de retro sales and other
forms of conditional sales.

Hence, the capital gain arising from these transactions, for a resident foreign
corporation, is included in their gross income, hence, subject to RCIT.

Offshore Banking Units (OBU)

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An OBU is a branch, subsidiary or affiliate of a foreign banking corporation located
in an Offshore Financial Center (OFC) which is duly authorized by BSP to transact
offshore banking business in the Philippines. OBUs are allowed to provide all
traditional banking services to non-residents in any currency other than Philippine
currency. OBUs are forbidden to make any transactions in Philippine Peso and
their banking transactions are limited and restricted.

Any income derived by OBUs are subject to twenty-five percent (25%) RCIT.

Regional or Area Headquarters (RHQ) and Regional Operating Headquarters (ROHQ) of

Multinational Companies

Regional or area headquarters are 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 or area headquarters are not subject to
income tax.

Regional operating headquarters are 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.

Regional operating headquarters is liable to pay a tax of ten percent (10%) of their
taxable income. However, on January 1, 2022, regional operating headquarters
shall be subject to the regular corporate income tax.

Sample 5: Nem, Inc., a regional operating headquarters of a multinational

corporation provided you the following data for the year 2021: Business expenses
in the amount of P41,200,000, cost of services in the amount of P66,000,000, and
gross receipts in the amount of P120,000,000. For the year 2022, the following data
was also provided: Business expenses in the amount of P42,550,000, cost of
services in the amount of P71,500,000, and gross receipts in the amount of
P130,000,000. Determine the Income Tax Due for the year 2021 and 2022.

2021 2022
Gross Receipts 120,000,000.00 130,000,000.00
Cost of Services (66,000,000.00) (71,500,000.00)
Gross Income 54,000,000.00 58,500,000.00
Business expenses (41,200,000.00) (42,550,000.00)
Taxable Income 12,800,000.00 15,950,000.00
RCIT 10% 25%
Income Tax Due 1,280,000.00 3,987,500.00

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Regional operating headquarters is liable to pay a tax of ten percent (10%) of their
taxable income. Effective January 1, 2022, regional operating headquarters shall be
subject to the regular corporate income tax.

Any income derived from Philippine sources by a regional operating headquarters

is subject to Branch Profit Remittance Tax.

Branch Profit Remittance Tax

Foreign corporation may come to the Philippines, do business and establish their
own subsidiary or branch office. A subsidiary is a separate entity from its parent
company and thus treated separately for taxation and regulatory purposes. A
subsidiary may either be a domestic corporation or resident foreign corporation
depending on the law used to incorporate.

On the other hand, a branch office is merely an extension of the foreign corporation
in the Philippines without separate legal personality. The foreign corporation,
which is the head office and the branch office, are treated as one entity under the
principle of Single Entity Theory. Hence, a branch office is not taxed separately,
except on the profits it remits to its head office.

Only branch offices in the Philippines of foreign corporations abroad are liable to
pay fifteen percent (15%) branch profit remittance tax based on the total profits
applied or earmarked for remittance without any deduction for the tax component.
For this tax to apply, the profit remitted by the branch office to its head office must
be effectively connected with the conduct of trade or business in the Philippines. If
the same is not connected with the conduct of trade or business in the Philippines,
Branch Profit Tax Remittance will not apply. Instead, the branch office is treated
as non-resident foreign corporation and taxed at a rate of twenty-five percent (25%).

To be effectively connected it is not necessary that the income be derived from the
actual operation of taxpayer-corporation’s trade or business; it is sufficient that the
income arises from the business activity in which the corporation is engaged. For
example, if a resident foreign corporation is engaged in the buying and selling of
machineries in the Philippines and invests in some shares of stock on which
dividends are subsequently received, the dividends thus earned are not considered
“effectively connected” with its trade or business in this country.5

Sample 6: Nem, Inc., a branch of a multinational company, earmarked or

appropriated an amount of P10,000,000 to be remitted in its head office located in
the United Kingdom. During the process of remittance, Nem, Inc. incurred total
expenses in the amount of P1,000,000. This cost and expenses resulted in the actual
remittance of only P9,000,000. Determine the branch profit tax resulting from this
transaction.

5
Marubeni v. Commissioner of Internal Revenue, G.R. No. 76573, September 14, 1989

Page 12 of 28
 Amount Earmarked 10,000,000.00
Branch Profit Remittance Tax Rate 15%
Branch Profit Remittance Tax 1,500,000.00

The tax base of Branch Profit Remittance Tax is based on the amount earmarked
for appropriation. Expenses incurred during the remittance process are not
deducted in determining the tax due.

Additionally, a lower rate may apply under certain applicable treaties and
remittance of profits by branch office from activities qualified or registered with
Philippine Economic Zone Authority (PEZA), Subic Bat Metropolitan Authority
(SBMA) and Clark Development Authority (CDA) is exempt from Branch Profit
Remittance Tax.

Non-resident Foreign Corporation

Non-resident Foreign Corporation is a corporation created or organized under

foreign laws which is not engaged in trade or business within the Philippines. Non-
resident Foreign Corporation Corporations are taxable from all sources of income
within the Philippines.

Gross Income Tax

Non-resident Foreign Corporation shall pay a tax equal to twenty-five percent

(25%) of the gross income received during each taxable year from all sources within
the Philippines, such as interests, dividends, rents, royalties, salaries, premiums
(except reinsurance premiums), annuities, emoluments or other fixed or
determinable annual, periodic or casual gains, profits and income, and capital
gains, except capital gains subject to tax.

The twenty-five percent (25%) tax is based on the total gross income without any
deduction allowed.

Tax on Special Non-resident Foreign Corporation’

(a) Nonresident Cinematographic Film Owner, Lessor or Distributor

A cinematographic film owner, lessor, or distributor shall pay a tax of twenty-five

percent (25%) of its gross income from all sources within the Philippines.6

(b) Nonresident Owner or Lessor of Vessels Chartered by Philippine Nationals

A nonresident owner or lessor of vessels shall be subject to a tax of four and one-
half percent (4 1/2%) of gross rentals, lease or charter fees from leases or charters

6
Sec. 28(B)(2) of the NIRC

Page 13 of 28
to Filipino citizens or corporations, as approved by the Maritime Industry
Authority.7

(c) Nonresident Owner or Lessor of Aircraft, Machineries and Other Equipment

Rentals, charters and other fees derived by a nonresident lessor of aircraft,

machineries and other equipment shall be subject to a tax of seven and one-half
percent (7 1/2%) of gross rentals or fees.8

Interest on Foreign Loans

A final withholding tax at the rate of twenty percent (20%) is hereby imposed on
the amount of interest on foreign loans contracted.9

Intercorporate Dividends

A final withholding tax at the rate of fifteen percent (15%) is imposed on the
amount of cash and/or property dividends received from a domestic corporation,
subject to the condition that the country in which the nonresident foreign
corporation is domiciled, shall allow a credit against the tax due from the
nonresident foreign corporation taxes deemed to have been paid in the Philippines
equivalent to fifteen percent (15%). This is the so-called “Tax Sparing Rule”.

For the Tax Sparing Rule to apply, the following circumstances must be present:

(a) A non-resident foreign corporation receive dividend;

(b) The dividend, whether cash or property, is declared by a domestic corporation;

and

(c) The country in which the non-resident foreign corporation is domiciled allows
a credit against the tax due from the non-resident foreign corporation taxes deemed
to have been paid in the Philippines equivalent to fifteen percent (15%).

Capital Gains from Sale of Shares of Stock Not Traded in the Stock Exchange

A final tax at the rate of fifteen percent (15%) is hereby imposed upon the net capital
gains realized during the taxable year from the sale, barter, exchange or other
disposition of shares of stock in a domestic corporation, except shares sold, or
disposed of through the stock exchange.

Educational Institution

The term “educational institution” when used in laws granting tax exemptions,
refers to a to the school system (synonymous with formal education); it includes a

7
Sec. 28(B)(3) of the NIRC
8
Sec. 28(B)(4) of the NIRC
9
Sec. 28(B)(5) of the NIRC

Page 14 of 28
college or an educational establishment; it refers to the hierarchically structured
and chronologically graded learnings organized and provided by the formal school
system.10

Educational institution may be classified into Government Educational Institution

(GEI) or Private Educational Institution (PEI). Government educational
institution is exempt from income tax except for other income derived from the use
of its properties for profit.

Private educational institutions may either be proprietary educational institution or

non-stock non-profit educational institution.

“Proprietary” means a private any private school maintained and administered by

private individuals or groups with an issued permit to operate from the Department
of Education (DepEd), 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.11

“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.

Tax Liability of Proprietary Educational Institutions (PEI)

Proprietary educational institutions and hospitals which are nonprofit shall pay a
tax of ten percent (10%) on their taxable income. However, beginning July 1, 2020
until June 30, 2023, the tax rate herein imposed shall be one percent (1%).

If the gross income from “unrelated trade, business or other activity” exceeds fifty
percent (50%) of the total gross income derived by such educational institutions
from all sources, an income tax rate of twenty-five percent (25%) or twenty percent
(20%), as the case maybe.

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.

Sample 7: Nem Institute of Engineering and Architecture, a private educational

institution, has presented you the following data from its 2021 Financial
Statements: gross income from related activities amounting to P5,000,000, gross
income from unrelated activities amounting to P5,000,000, rental income
amounting P2,000,000 gross of 5% withholding tax, expenses from related
activities amounting to P2,000,000, expenses from unrelated activities amounting
to P3,000,000, dividend income from a domestic corporation amounting to

10
Commissioner of Internal Revenue v. YMCA, Inc., G.R. 124043, October 14, 1998
11
Sec. 27(B) of the NIRC

Page 15 of 28
P100,000, quarterly income tax paid for the first three (3) quarters. Determine the
income tax payable for the year 2021.

Gross income related activities 5,000,000.00

Gross income unrelated activities 5,000,000.00
Rental income, gross of 5% withholding tax 2,000,000.00
Total Gross Income 12,000,000.00
Expenses related activities (2,000,000.00)
Expenses unrelated activities (3,000,000.00)
Taxable income 7,000,000.00
RCIT (Unrelated activites > related activities) 25%
Income tax due 1,750,000.00
Quarterly tax payments (500,000.00)
Withholding tax on rentals (2,000,000 x 5%) (100,000.00) (600,000.00)
Income tax payable 1,150,000.00

If the unrelated income of the proprietary educational institution is more than fifty
percent (50%) of its total gross income, the applicable income tax rate shall be the
RCIT of either twenty percent (20%) or twenty-five percent (25%). Since the taxable
income is more than five million pesos (P5,000,000), the rate is twenty-five percent
(25%).

Tax Liability of Non-stock Non-profit Educational Institution

By express of the Constitution12, non-profit educational institutions are.

constitutionally exempt from tax on all revenues derived in pursuance of. its
purpose as an educational institution and used actually, directly and exclusively for
educational purposes.

This means that regardless of the source of income, the non-stock non-profit
educational institution remain exempt from income tax as long as the income is
used actually, directly and exclusively used for educational purposes. The use of
the revenue or income, which must be actually, directly or exclusively used for
educational purposes is the only condition imposed by the Constitution.

The revenues and assets of non-stock non-profit educational institution proved to

have been used actually, directly, and exclusively used for educational purposes are
exempt from duties and taxes. The tax exemption granted is conditioned only on
the actual, direct, and exclusive use of their assets, revenues, and income for
educational purposes.

Income and revenues of non-stock non-profit educational institution not used

actually, directly, and exclusively used for educational purposes are not exempt
from duties and taxes. To avail of the exemption, the taxpayer must factually prove

12
Sec. 4(3), Art. XIV

Page 16 of 28
that it used actually, directly, and exclusively for educational purposes the revenues
or income sought to be exempted.

Furthermore, revenues derived from assets used in the operations of cafeteria or

canteens and bookstores are exempt from taxation provided they are owned and
operated by the educational institution as ancillary activities and the same is
located within the school premises.

Minimum Corporate Income Tax (MCIT)

A minimum corporate income tax of two percent (2%) of the gross income as of
the end of the taxable year is imposed on a corporation, beginning on the fourth
taxable year immediately following the year in which such corporation
commenced its business operations, when the minimum income tax is greater than
the tax computed under RCIT. However, effective July 1, 2020 until June 30, 2023,
the rate shall be one percent (1%).13 Hence, domestic corporations and resident
foreign corporation will pay which ever is higher between the RCIT and the MCIT.

The rationale behind the MCIT is to prevent the over reporting of expenses by
corporations to avoid paying taxes. It is a means that every corporation will make
some contributions to support the public sector. The MCIT is imposed on the gross
income which is arrived by deducting the cost of sale or the cost of goods sold, the
capital spent by the corporation in generating the income.14

In determining the fourth year of operation, the year the corporation shall be
disregarded. MCIT shall be computed not only on yearly basis but also in the
computation of quarterly income tax return.

Any excess of MCIT over the RCIT shall be carried forward and credited against
RCIT for the three (3) immediately succeeding years. This is called Carry Forward
MCIT or MCIT Carry-Over.

Relief from MCIT

The Secretary of Finance is authorized to suspend the imposition of MCIT on any

corporation which suffers loss on account of prolonged labor dispute, force majeure
and legitimate business reverses.

The term “substantial losses from a prolonged labor dispute” means losses arising from
a strike staged by the employees which lasted for more than six (6) months within
a taxable period and which has caused the temporary shutdown of business
operations. The term “force majeure” means a cause due to an irresistible force as an
“Act of God” like lightning, earthquake, storm, flood, and the like. This term shall
also include armed. The term “legitimate business reverses” shall include

13
Sec. 27(E)(1)
14
Chamber of Real Estate and Builder’s Association v. The Honorable Executive Secretary, G.R. No.
160756, March 9, 2010

Page 17 of 28
substantial losses sustained due to robbery, theft or embezzlement, or for any other
economic reasons.15

Corporations Exempt from MCIT Imposition

The following domestic corporations are exempted from imposition of MCIT

a. Domestic corporations operating as proprietary educational institutions subject

at ten percent (10%) preferential rate on their taxable income;

b. Domestic corporations engaged in hospital operations which are non-profit

subject to tax at ten percent (10%) on their taxable income;

c. Non-resident Foreign Corporations

d. Corporations that are exempt from RCIT

e. Corporations that are taxed under special tax regime.

Manner of Filing and Payment of MCIT

MCIT shall be paid in the same manner prescribed for the payment of the normal
corporate income tax which is on a quarterly and on a yearly basis. It shall be
covered by a tax return designed for the purpose which will be submitted together
with the corporation’s annual final adjustment income tax return. Domestic
corporations shall be required to pay the minimum corporate income tax on a
quarterly basis.16

Sample 8: Nem, Inc., a domestic corporation, on its 4th year of business operation
has provided you the following 2021 data: Gross Profit from Sales – P31,000,000,
Dividend received from Goodhouse, Inc., a domestic corporation – P200,000,
Dividend received from Google Philippines, a resident foreign corporation –
P100,000, Interest on BDO Deposits – P200,000, Interest from Trade Accounts
Receivables – P500,000, Business Expenses – P21,000,000, Income Tax Withheld
from Previous Quarters – P1,150,000, Excess Tax Payments for 2021 – P100,000,
Total Assets – P125,000,000. Per verification, Google Inc., has a ratio of 80% of
gross income from sources within the Philippines over gross income from all
sources for the past three (3) years. Determine the income tax payable.

15
Revenue Regulation No. 9-98 dated August 25, 1998
16
Sec. 2, Revenue Regulation 12-2007, October 10, 2007

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Gross Profit from Sales 31,000,000.00
Interest Income on Trade Receivables 500,000.00
Total Gross Income 31,500,000.00
Business Expenses (21,000,000.00)
Taxable Net Income 10,500,000.00

RCIT
Taxable Net Income 10,500,000.00
RCIT Rate 25% 2,625,000.00

MCIT
Gross Income 31,500,000.00
MCIT Rate 1% 315,000.00

Income Tax Due (higher between RCIT and MCIT) 2,625,000.00

Quarterly Tax Payments (600,000.00)
Excess Tax Payments in 2021 (100,000.00)
Income Tax Withheld from Previous Quarters (1,150,000.00)
Income Tax Payable 775,000.00

Net Operating Loss Carry Over (NOLCO)

Net Operating Loss means the excess of allowable deduction over gross income of
the business in a taxable year.

The net operating loss of the business for any taxable year can be carried over as a
deduction from gross income for the next three (3) consecutive taxable years
immediately following the year of such loss.

However, the net operating loss of business for taxable years 2020 and 2021 shall
be carried over as a deduction from gross income for the next five (5) consecutive
years immediately following the year of loss.17 The net operating loss for said
taxable years may be carried over as a deduction even after the expiration of R.A.
11494.

Finally, net operating loss of business for taxable years 2022 and beyond can be
carried over as a deduction from gross income only for the next three (3)
consecutive taxable years immediately following the year of such loss.

Requisites for Deductibility

17
R.A. 1194, Bayanihan Act II

Page 19 of 28
For NOLCO to be claimed by a business or enterprise as an allowable deduction
for purposes of determination of taxable income, the following circumstances must
be present:

(a) At the time of incurring net loss, the taxpayer must not be exempt from income
tax;

(b) There is no substantial change in the ownership of the business or enterprise in

that not less than seventy-five percent (75%) in nominal value of outstanding issued
shares, if the business is in the name of a corporation, is held by or on behalf of the
same persons, or not less than seventy-five percent (75%) of the paid-in capital, if
the business is in the name of a corporation, is held by or on behalf of the same
persons

Sample 9: Nem, Inc., a domestic corporation, on its 4th year of business operation
has provided you the following 2021 data: Gross Profit from Sales – P31,000,000,
Dividend received from Goodhouse, Inc., a domestic corporation – P200,000,
Dividend received from Google Philippines, a resident foreign corporation –
P100,000, Interest on BDO Deposits – P200,000, Interest from Trade Accounts
Receivables – P500,000, Business Expenses – P21,000,000, Income Tax Withheld
from Previous Quarters – P1,150,000, Excess Tax Payments for 2021 – P100,000,
Total Assets – P125,000,000, Net Operating Loss for 2019 – P5,000,000. Per
verification, Google Inc., has a ratio of 80% of gross income from sources within
the Philippines over gross income from all sources for the past three (3) years.
Determine the income tax payable (refundable).

Gross Profit from Sales 31,000,000.00

Interest Income on Trade Receivables 500,000.00
Total Gross Income 31,500,000.00
Business Expenses (21,000,000.00)
NOLCO -2019 (9,500,000.00)
Taxable Net Income 1,000,000.00

RCIT
Taxable Net Income 1,000,000.00
RCIT Rate 25% 250,000.00

MCIT
Gross Income 31,500,000.00
MCIT Rate 1% 315,000.00

Income Tax Due (higher between RCIT and MCIT) 315,000.00

Quarterly Tax Payments (600,000.00)
Excess Tax Payments in 2021 (100,000.00)
Income Tax Withheld from Previous Quarters (1,150,000.00)
Income Tax Payable (Refundable) (1,535,000.00)

Page 20 of 28
Government Owned and/or Controlled Corporations

All corporations, agencies, or instrumentalities owned or controlled by the

Government, except the Government Service Insurance System (GSIS), the Social
Security System (SSS), the Home Development Mutual Fund (HDMF), the
Philippine Health Insurance Corporation (PHIC), and the local water districts shall
pay such rate of tax upon their taxable income as are upon corporations or
associations engaged in a similar business, industry, or activity.18

Tax-Exempt Corporations

The following organizations shall not be taxed in respect to income received by

them as such:

(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;

(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 inure
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;

18
Sec. 27(C) of the NIRC

Page 21 of 28
(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;

The income of whatever kind and character of the foregoing organizations from
any of their properties, real or personal, or from any of their activities conducted
for profit regardless of the disposition made of such income, shall be subject to tax
imposed.19

Corporate Returns

A corporate taxpayer, in general, is required to file four (4) income tax returns every
year based on its taxable year, namely three (3) quarterly returns and one (1) final
or adjustment return.

Corporations Required to File Income Tax Return

A domestic corporation and resident foreign corporation are required to file in

duplicate quarterly income tax return and final or adjustment return. Non-resident
foreign corporation is not required to file income tax returns because its entire
income from sources within the Philippines is subject to gross income tax and this
is withheld at source.

The return shall be filed by the president, vice-president or other principal officer,
and shall be sworn to by such officer and by the treasurer or assistance treasurer.20

The corporate income tax return shall consist a maximum of four (4) pages in paper
form or electronic form and shall only contain the following: corporate profile and
information, gross sales, receipts or income from services rendered, or conduct of
trade or business, except income subject to final tax, allowable deductions, taxable
income, and income tax due and payable.

Taxable Year of Corporation

“Taxable Year” means the calendar year, or the fiscal year ending during such
calendar year, upon the basis of which the net income is computed.21 A calendar
year is a twelve (12) month period ending December 31. On the other hand, a fiscal

19
Sec. 30 of the NIRC
20
Sec. 51(A) of the NIRC
21
Sec. 22(P) of the NIRC

Page 22 of 28
year means an accounting period of twelve (12) months ending on the last day of
any month other than December.22

Unlike an individual taxpayer who is only allowed to use a calendar year as its
taxable year, a corporation may employ either calendar or fiscal year as a basis for
filing its annual income tax return. A corporation cannot change the accounting
period employed without prior approval from the Commissioner of Internal
Revenue.

Quarterly Income Tax Return

Domestic corporation and resident foreign corporation are required to file a

quarterly income tax return containing the gross income and deductions. The
quarterly income tax return filed in duplicate, shall be filed in cumulative basis for
the preceding quarter and quarters upon which the income tax is levied, collected
and paid.

This means the first quarter corporate income tax return shall cover the gross
income and deductions for the first three (3) months for the first quarter. The
second quarter income tax return shall cover the first and second quarter, while the
third quarter corporate income tax return shall cover the first, second and third
quarter gross income and deductions.

In view of the cumulative basis of computation and declaration of gross income

and deduction of every quarter, the tax computed every quarter shall be decreased
by the amount of tax previously paid or assessed during the preceding quarters.23

Final Adjustment Return

In addition to quarterly corporate income tax return, every corporation liable to

regular corporate income tax return is required to file a final adjusting return
covering the total taxable income for the preceding calendar or fiscal year. This
applies to both domestic corporation and resident foreign corporation because both
corporations are liable to regular corporate income tax return.

In preparing the final adjustment return, the corporation shall consider the previous
quarterly tax payments made. In this case, it is possible that the sum of quarterly
tax payments during the said taxable year is (1) equal to the total tax due, or (2) not
equal to the total tax due on the entire taxable income. If the sum of quarterly tax
payments is equal to the total tax due on the entire taxable income, then the
corporation has no further tax liabilities. If the sum of quarterly tax payments is not
equal to the total tax due on the entire taxable income, the corporation shall either;

(a) Pay the balance of tax still due;

(b) Carry-over the excess credit; or

22
Sec. 22(Q) of the NIRC
23
Sec. 75 of the NIRC

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(c) Be credited or refunded with the excess amount paid, as the case may be.

Irrevocability Rule

In the event the sum of the quarterly tax payments made during the taxable year is
more than the total tax due on the entire taxable income of that year, the
corporation has the option to carry-over the excess tax credit, or credit the amount
or refunded with the excess amount paid.

Simply put, a corporation has the option to carry-over or apply a refund. When the
option to carry-over has been chosen, the corporation cannot later on change the
choice to apply for a refund. This is the irrevocability rule. The option to choose
carry-over, once made, is irrevocable.

However, if a corporation choose to apply for a refund, the corporation may change
it to carry-over. Once the change has been made to carry-over, the irrevocability
rule applies. Finally, excess tax payments carried over shall be carried over to the
succeeding quarter or quarters until fully utilized.

As an exception to irrevocability rule, a dissolved corporation without excess tax

payments being fully utilized is allowed to file a claim for refund.

Place and Time of Filing

The final adjustment return required shall be filed with the authorized agent banks
or Revenue District Officer or Collection Agent or duly authorized Treasurer of the
city or municipality having jurisdiction over the location of the principal office of
the corporation filing the return or place where its main books of accounts and
other data from which the return is prepared are kept.24

The corporate quarterly declaration shall be filed within sixty (60) days following
the close of each of the first three (3) quarters of the taxable year. The final
adjustment return shall be filed on or before the fifteenth (15th) day of April, or on
or before the fifteenth (15th) day of the fourth (4th) month following the close of
the fiscal year, as the case may be.25

The income tax due on the corporate quarterly returns and the final adjustment
income tax returns computed shall be paid at the time the declaration or return is
filed. This is called the Pay-As-You-File System.26

PARTNERSHIP

Partnership, arises when two or more persons bind themselves to contribute

money, property, or industry to a common fund, with the intention of dividing the

24
Sec. 77(A) of the NIRC
25
Sec. 77(B) of the NIRC
26
Sec. 77(C) of the NIRC

Page 24 of 28
profits among themselves. Two or more persons may also form a partnership for
the exercise of a profession. For tax purposes, a partnership may either be a Trade
Partnership (Ordinary Partnership) or General Professional Partnership.

Trade Partnership (Ordinary Partnership) is a partnership engaged in trade or

business. This partnership falls within the definition of a corporation and thus, the
tax treatment is the same as that of a corporation. The share of the partners in an
ordinary partnership is subject to final tax.

Note that a distributive share of a partner in the net income of a trade partnership
is treated as dividend declaration subject to Final Income Tax of 10%. With respect
to a general professional partnership, a distributive share of a partner in the net
income is not subject to Final Income Tax, instead, the distributive share is
included in the gross income of the partner and then subjected to Normal Income
Tax.

General Professional Partnerships (GPP) are partnerships formed by persons for

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

As an entity, a general professional partnership is exempt from imposition of

income tax. However, persons engaging in business as partners in a general
professional partnership are liable for income tax on their separate individual
capacities.

For purposes of distributive share, the net income is computed in the same manner
as a corporation. Thus, a partner’s distributive share from the net income of the
general professional partnership, whether actually or constructively received, forms
part of the gross income of the partner subject to normal or net income tax.

Allowed Deductions of a GPP

A GPP may claim either itemized deduction or an optional standard deduction in

an amount not exceeding forty percent (40%) of gross income. The share in the net
income of the partnership shall be reported as taxable income of the partners in
accordance to their profit and loss agreement.

The partners can no longer claim additional deductions from their share in their
taxable income of a GPP and are not allowed to avail of the eight percent (8%)
income tax rate option since their distributive share is already net of deductions.

If the partner also derives other income from trade, or business or practice of
profession apart and distinct from the share in the net income of the GPP, a
deduction can be claimed by such partner either as itemized deduction or optional
standard deduction.

Sample 10: Nem and Darwin formed a general professional partnership focus on
Human Resource Administration. They name their partnership as TND General
Professional Partnership. Nem owned 25% interest in the partnership. During the

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year, the gross receipts of the partnership amounted to P10,000,000. The recorded
cost of services and operating expenses were P2,750,000 and P1,500,000,
respectively. The partnership availed of the optional standard deduction.
Determine the income tax due of the partnership and the income tax due of Nem.

Gross Receipts 10,000,000.00

Cost of Services (2,750,000.00)
Total Gross Income 7,250,000.00
Operating Expenses (2,900,000.00)
Net Income for Distribution 4,350,000.00

Share in the Distrubutive Profit 1,087,500.00

(P4,350,000 x 25%)
On P800,000 130,000.00
In Excess of P800,000
(P1,087,500 - 800,000) x 30% 86,250.00
Income tax Due 216,250.00

The partnership is a general professional partnership (GPP), hence, its income is

not subject to income tax.

Sample 11: Nem and Darwin formed an ordinary or trade partnership. They name
their partnership as TND Partnership. Nem owned 25% interest in the partnership.
During 2021, the gross receipts of the partnership amounted to P10,000,000. The
recorded cost of services and operating expenses were P2,750,000 and P1,500,000,
respectively. The partnership availed of the optional standard deduction. The
partnership is in its 5th year of operation. Determine the income tax due of the
partnership and the income tax due of Nem.

Gross Receipts 10,000,000.00

Cost of Services (2,750,000.00)
Total Gross Income 7,250,000.00
Operating Expenses (2,900,000.00)
Net Income 4,350,000.00

RCIT
Net Income 4,350,000.00
RCIT Rate 25% 1,087,500.00

MCIT
Gross Income 7,250,000.00
MCIT Rate 1% 72,500.00
Income Tax Due of the Partnership 1,087,500.00
(Higher between MCIT and RCIT)

The share of Nem in the partnership is treated as dividend income subject to Final
Income Tax of 10%.

Page 26 of 28
Returns of a GPP

Despite being exempt from Income Tax, a general professional partnership is still
required to file a return of its income, except income subject to final income tax.
the return filed shall set the information regarding gross income, deduction
allowed, and names, shares, address and Tax Identification Number (TIN) of each
partner.27

JOINT VENTURES

Joint Venture is an association of persons or companies jointly undertaking some

commercial enterprise; generally, all contribute assets and share risks. It requires a
community of interest in the performance of the subject matter, a right to direct and
govern the policy in connection therewith, and duty, which may be altered by
agreement to share both in profit and losses. Joint venture is formed for the
execution of single transaction and is thus of a temporary nature. 28

Joint ventures are treated like a corporation as to tax liability except for joint
ventures 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. In
such case, the joint venture is not taxable.

-o0o-

Suggested Teaching Activities (TAs)

Refer to our Google Classroom for the Suggested Teaching Activities

27
Sec. 55 of the NIRC
28
Aurbach v. Sanitary Wares Manufacturing Corporation, 180 SCRA 130, December 15, 1989

Page 27 of 28
Assessment Tasks / Output (ATOs)

Refer to our Google Classroom for the Assessment Task/Output

Readings and Other References

1. Taxation Law, Volume 1, Raegan L. Capuno (2020)

2. Taxation Law, Volume 2, Raegan L. Capuno (2020)
3. CPA Reviewer in Taxation, Enrico D. Tabag (2021)
4. CPA Reviewer in Taxation, Omar Erasmo G. Ampongan (2021)
5. Republic Act No. 8424 or the Tax Reform Act of 1997
6. Republic Act No. 10963 or the Tax Reform for Acceleration and Inclusion
Law
7. Republic Act No. 11534 or the Corporate Recovery and Tax Incentives for
Enterprises (CREATE) Act
8. Republic Act No. 11469 or the The Bayanihan to Heal as One Act
9. Republic Act No. 11494 or the The Bayanihan to Recover as One Act
10. RR No. 8-2018 - Implements the amended provisions on Income Tax
pursuant to RA No. 10963 (TRAIN Law)
11. RR No. 2-2021 - Amends certain provisions of RR No. 2-98, as amended,
to implement the amendments introduced by RA No. 11534 (Corporate
Recovery and Tax Incentives for Enterprises Act or CREATE Act) to the
NIRC of 1997, as amended, relative to the Final Tax on certain passive
income
12. RR No. 3-2021 - Prescribes the Rules and Regulations to implement Section
3 of RA No. 11534 (Corporate Recovery and Tax Incentives for Enterprises
Act or CREATE Act), amending Section 20 of the NIRC of 1997
13. RR No. 5-2021 - Implements the new Income Tax rates on the regular
income of corporations, on certain passive incomes, including additional
allowable deductions from Gross Income of persons engaged in business or
practice of profession pursuant to RA No. 11534 (Corporate Recovery and
Tax Incentives for Enterprises Act or CREATE Act), which further
amended the NIRC of 1997.

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