ReSA - THE REVIEW SCHOOL OF ACCOUNTANCY

CPA Review Batch 45  May 2023 CPA Licensure Examination

TAX-702
TAXATION A. TAMAYO  E. BUEN  G. CAIGA  C. LIM  K. MANUEL

TAX RATES for CORPORATIONS

1. TAX RATES
a. In general

Sec. 27 (A) Sec. 28 (A) (1) Sec. 28 (B) (1)

DOMESTIC RESIDENT FC NONRESIDENT FC
Tax rate 35% - November 1, 2005 to 35% - November 1, 2005 to 35% - November 1, 2005
December 31, 2008 December 31, 2008 to December 31, 2008
30% - January 1, 2009 to June 30% - January 1, 2009 to June 30, 30% - January 1, 2009 to
30, 2020 2020 December 31, 2020
25% - July 1, 2020 25% - July 1, 2020 25% - January 1, 2021
20% - July 1, 2020
(with net taxable income
not exceeding
P5,000,000 AND total
assets not exceeding
₱100,000,000,
excluding the land on
which the particular
business entity's office,
plant and equipment
are situated)
Tax base Net income within and without Net income within Gross income within

b. Minimum corporate income tax

Sec. 27 (E) Sec. 28 (A) (2)
DOMESTIC RESIDENT FC NONRESIDENT FC
Tax rate 2% - Up to June 30, 2020 2% - Up to June 30, 2020 Not applicable
1% - July 1, 2020 to June 30, 1% - July 1, 2020 to June 30,
2023 2023
2% - July 1, 2023 2% - July 1, 2023
Tax base Gross income within and without Gross income within

c. On certain passive income derived from Philippines sources

DC [Sec. 27 (D)] RFC [Sec. 28 (A) (7)] NRFC Sec. 28 (B) (1)
Interest in any currency bank deposit 20% final tax 20% final tax 25% final tax
Yield or any monetary benefit from deposit 20% final tax 20% final tax 25% final tax
substitute
Yield or any monetary benefit from trust fund
and other similar arrangements 20% final tax 20% final tax 25% final tax
Royalties 20% final tax 20% final tax 25% final tax
Interest income derived from depository bank 7 ½% final tax (old)
under EXPANDED FOREIGN CURRENCY 15% upon effectivity of
DDEPOSIT SYSTEM 15% final tax CREATE Exempt

d. Capital gains taxes

Domestic corp. [Sec. 27 Resident FC Non-Resident FC
(D) (5)] [Sec. 28 (A) (7) (c)] [Sec. 28 (B) (5) (c)]
1. Capital gains from sale of shares Before TRAIN 5% - First P100,000 5% - First P100,000
of stock not traded in the local 5% - First P100,000 10% - Amount in 10% - Amount in excess
stock exchange (on net capital 10% - Amount in excess excess of of P100,000
gains) of P100,000 P100,000 (old)

Under TRAIN Under CREATE – 15% Under CREATE – 15%

15%)
2. Capital gains from sale, barter, Before TRAIN 5% - First P100,000 5% - First P100,000
transfer and/or assignment of 5% - First P100,000 10% - Amount in 10% - Amount in excess
shares of stock of publicly-listed 10% - Amount in excess excess of of P100,000
companies not compliant with of P100,000 P100,000
mandatory minimum public
ownership (10% of the publicly-
listed companies’ issued and Under TRAIN Under CREATE – 15% Under CREATE – 15%
outstanding shares, exclusive of 15%
any treasury shares) (RR No. 16-
2012) (on net capital gains)
3. Gains realized from sale or
exchange or disposition of land
and/or building
Capital asset - on gross selling price 6% final capital gains tax
or fair market value whichever is [Sec. 27 (D) (5)]
higher

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ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY
TAX RATES for CORPORATIONS TAX-702
Ordinary asset
On gross selling price/total amount of
consideration or the fair market value,
whichever is higher
1) where the seller/transferor is
habitually engaged in the real
estate business with selling price:
a) P500,000 or less 1.5% creditable
withholding tax
b) More than P500,000 but not 3.0% creditable
more than P2,000,000 withholding tax
c) More than P2,000,000 5.0% creditable
withholding tax
2) Where the seller/transferor is not 6% creditable withholding
habitually engaged in the real tax
estate business

f. Tax on income derived under expanded foreign currency deposit system by depository bank
Sec. 27 (D) (3) Sec. 28 (A) (7) (b)
DOMESTIC RESIDENT FC NONRESIDENT FC
1. Income derived by a depository bank
from foreign currency transactions with Exempt from all taxes
non-residents, OBUs in the Philippines, except net income from
local commercial bank including branches transactions specified by
of foreign banks Sec. of Finance 10% Exempt
2. Interest income from foreign currency
loan granted by depository banks under
expanded system to residents other than 10% 10% Exempt
OBUs in the Philippines and other
depository bank
3. Any income of non-residents (individual
or corporation) from transactions with Exempt from income tax
depository banks under expanded system - -

g. Inter-corporate dividends received from domestic corporation

Recipient Corporation Tax rate
1. Domestic corporation Sec. 27 (D) (4) Not subject to tax
2. Resident foreign corporation Sec. 28 (A) Not subject to tax
(7) (d)
3. Non-resident foreign corp. Sec. 28 (B)(5) 25% - in general – January 1, 2021
(b) 15% - January 1, 2021 upon effectivity of CREATE (subject to condition that if
the country in which the non-resident foreign corporation is domiciled allows a
credit equivalent to the difference between the regular income tax of 25% and the
15% tax on intercorporate dividends or does not impose tax on dividends)

h. Inter-corporate dividends received from non-resident foreign corporation

Recipient Corporation
Domestic corporation
Tax rate
25% or 20% as the case may be
For foreign source dividends, these will be exempt from Income Tax upon the
effectivity of the CREATE, subject to the following conditions:
1) The dividends actually received or remitted into the Philippines are
reinvested in the business operatons of the domestic corporation within
the next taxable year from the time the foreign-sourced dividends were
received or remitted.
2) The dividends received shall only be used to fund the working capital
requirements, capital expenditures, dividend payments, investments in
domestic subsidiaries, and infrastructure project.
3) The domectic corporation holds directly at least 20% in value of the
outstanding shares of the foreign corporation and has held the
shareholdings uninterruptedly for a minimum of 2 years at the time the of
the dividend distribution.

In case the foreign corporation has been in existence for less than 2 years
at the time of dividends distribution, then the domestic corporation must
have continuously held directly at least 20% in value of the foreign
corporation’s outstanding shares during the entire existence of the
corporation

If any of the above conditions is absent, the foreign-sourced dividends shall be

considered as taxable income of the domestic corporation in the year of actual
receipt or remittance, subject to surcharge, interest and penalties, if applicable.

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ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY
TAX RATES for CORPORATIONS TAX-702
i. Interest on foreign loans contracted on or after August 1, 1986
Recipient Corporation Tax rate
Non-resident foreign corporation - Sec. 28 20% final tax
(B)(5) (a)
j. Exercises:
1. Identify whether the following are subject to final tax or not for the current year. Taxpayer is DOMESTIC CORPORATION
unless otherwise stated (Y/N).
Final tax? Rate
1) Interest from peso bank deposit, Equitable – PCIB, Makati
2) Interest from Japanese yen bank deposit, Sumitomo Bank, Japan
3) Interest from USA dollar bank deposit, First USA Bank, New York
4) Interest income from a debt instrument not within the coverage of deposit substitute, Philippines
5) Interest income from a debt instrument within the coverage of a deposit substitute, Philippines
6) Interest on government debt instrument and securities (regardless of number of lenders at the time
of the origination)
7) Interest from overdue accounts receivable, Philippines
8) Royalties, in general, Manila
9) Prize amounting to P30,000, Philippines
10) Prize amounting to P10,000, Philippines
11) Prize amounting to P40,000, USA
12) Winnings amounting to P30,000, Philippines
13) Winnings amounting to P10,000, Philippines
14) Interest received from depository bank under expanded foreign currency deposit system
15) Interest income from long-term deposit or investment evidenced by certificates issued by BSP
16) Interest income from long-term deposit or investment evidenced by certificates issued by BSP
received by RESIDENT FOREIGN CORPORATION
17) Interest income from long-term deposit or investment evidenced by certificates issued by BSP
received by NON-RESIDENT FOREIGN CORPORATION
18) Gain from sale of shares of stock not through the stock exchange
19) Gain from sale of shares of stock not through the local stock exchange received by RESIDENT
FOREIGN CORPORATION
20) Gain from sale of shares of stock not through the local stock exchange received by NON-RESIDENT
FOREIGN CORPORATION
21) Presumed capital gain from sale of piece of land classified as capital asset
22) On selling price of sale of building classified as ordinary asset (seller not habitually engaged in real
estate business)
23) On selling price of sale of building classified as ordinary asset (seller is habitually engaged in real
estate business), selling price is P500,000
24) On selling price of sale of building classified as ordinary asset (seller is habitually engaged in real
estate business), selling price is P2,000,000
25) On selling price of sale of building classified as ordinary asset (seller is habitually engaged in real
estate business), selling price is more than P2,000,000
26) Gain from sale of real property by a corporation which is registered with and certified by the Housing
and Land Use Regulatory Board (HLURB) or the Housing and Urban Development Coordinating
Council (HUDCC)
27) Income derived by a depository bank from foreign currency transactions with non-residents, OBUs
in the Philippines, local commercial bank including branches of foreign banks
28) Interest income from foreign currency loan granted by depository banks under expanded system to
residents other than OBUs in the Philippines and other depository bank
29) Dividend from a domestic corporation
30) Dividend from a foreign corporation
31) Dividend received from domestic corporation by a NON-RESIDENT FOREIGN CORPORATION (no tax
sparing credit)
32) Dividend received from domestic corporation by a NON-RESIDENT FOREIGN CORPORATION (with
tax sparing credit)
33) Interest on foreign loans contracted on or after August 1, 1986 received by non-resident foreign
corporation
34) Interest income received by RESIDENT FOREIGN CORPORATION from a depository bank under
expanded foreign currency deposit system
35) Interest income received by a NON-RESIDENT FOREIGN CORPORATION from a depository bank
under expanded foreign currency deposit system

2. ECB Corporation, a domestic corporation, owns 20% of the outstanding shares of Nippon Corporation, a non-residnet foreign
corporation (NRFC) since August 1, 2015. On June 30, 2021, it received dividends amounting to P1,000,000.00 from the said
NRFC. The said dividends has not been used until January 13, 2023. What are the consequences by its non-use within the next
taxable year after the dividends are received?

3. GCC Corporation, a domestic corporation, owns 20% of the outstanding shares of BTS Corporation, a non-resident
foreign corporation (NRFC), since August 1, 2015. On June 30, 2021, it received dividends amounting to P1,000,000
from the said NRFC. GCC Corporation utilized P800,000 for its dividend payments. On January 1, 2023, it utilized the
remaining P200,000 for its working capital. How much is tax-exempt dividend and how much shall be declared as
taxable income?

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ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY
TAX RATES for CORPORATIONS TAX-702
4. A corporation has the following income for the current year:
Interest income derived from depository bank under Expanded Foreign Currency
Deposit System (EFCDS) P100,000
Capital gain from sale of shares of stock not traded in the local stock exchange 200,000
Dividend from a domestic corporation 300,000
How much is the final tax on the passive income and the capital gains tax, assuming the corporation is a:
a) resident foreign corporation or
b) non-resident foreign corporation?
4. OPTIONAL CORPORATE INCOME TAX
a. Imposition of optional Deleted under CREATE
corporate income tax

5. MINIMUM CORPORATE INCOME TAX (MCIT)

a. Corporations subject
to MCIT
b. Corporations not subject
to MCIT
c. Tax base
d. Tax rate
d. Gross income defined
(RR 12-2007) published
October 19, 2007
e. MCIT imposed on the 4th
taxable year
f. Tax due
g. Quarterly computation
of MCIT (RR 12-2007)
published
October 19, 2007
h. Excess MCIT as carry
forward
i. Suspension of imposition
of MCIT
j. Exercises
1. Panday Corporation’s computed normal income tax and MCIT, and creditable income taxes withheld from first quarter to fourth quarter
including excess MCIT and excess withholding taxes from prior year/s are as follows:
Normal income tax
Minimum corporate income tax
Taxes withheld
1) Domestic corporation
2) Resident foreign corporation
1) Proprietary educational institution subject to 10% tax;
2) Non-profit hospital subject to 10% tax;
3) Domestic corporation engaged in business as a depository bank under EFCDS;
4) Firms taxed under a special income tax regime (PEZA Law and the Bases Conversion Development Act);
5) Special resident foreign corporations;
6) Non-resident foreign corporations
1) Gross income within and without – Domestic corporation;
2) Gross income within – Resident foreign corporation
2% - Up to June 30, 2020
1% - July 1, 2020 to June 30, 2023
2% - July 1, 2023
1) For the purpose of the MCIT, the term “gross income” means gross sales less sales returns, discounts,
and allowances and cost of goods sold, in case of sale of goods, or gross revenue less sales returns,
discounts, allowances and cost of services/direct cost, in the case of sale of services.
2) The term “gross income” will also include all items of gross income enumerated under Sec. 32 (A) of the
Tax Code, as amended, except income exempt from income tax and income subject to final withholding
tax.
The tax is imposed beginning on the fourth taxable year immediately following the year in which such
corporation commenced its business operation.
The tax due is the higher between the minimum corporate income tax and normal or regular corporate
income tax.
1) The computation and the payment of MCIT, shall likewise apply at the time of filing of the quarterly
corporate income tax.
2) In the computation of the tax due for the taxable quarter, if the computed quarterly MCIT is higher than
the quarterly normal income tax, the tax due to be paid for such taxable quarter at the time of filing
the quarterly corporate income tax return shall be the MCIT.
3) In the payment of the quarterly MCIT (MCIT is greater than normal corporate income tax), excess MCIT
from the previous taxable year/s shall not be allowed to be credited.
4) Expanded withholding tax, quarterly corporate income tax, payments under the normal income and the
MCIT paid in the previous taxable quarter/s are allowed to be applied against the quarterly MCIT due.
Any excess of the minimum corporate income tax over the normal corporate income tax shall be carried
forward and credited against the normal income tax for the three succeeding taxable years.
The Secretary of Finance is authorized to suspend the imposition of minimum corporate income tax on any
corporation, which suffers losses on account of prolonged labor disputes, or because of force majeure, or
because of legitimate business reverses.
First Q Second Q Third Q Fourth Q
P100,000 P120,000 P250,000 P200,000
80,000 250,000 100,000 100,000
20,000 30,000 40,000 35,000

Additional information: Excess MCIT, prior year, P30,000; Excess withholding tax prior year, P10,000

REQ: Compute the income tax payable for the first three (3) quarters and the year end.

2. Using the same data in number 1 except that the normal income tax and the MCIT for the quarters are as follows:
First Q Second Q Third Q Fourth Q
Normal income tax P100,000 P120,000 P250,000 P 50,000
Minimum corporate income tax 80,000 250,000 100,000 120,000

REQ: Compute the annual income tax payable of the corporation for the year end?

3. The following data are presented to you:

Year Normal income tax Minimum corporate income tax
2014 P 50,000 P 75,000
2015 60,000 100,000
2016 50,000 60,000
2017 80,000 90,000
2018 100,000 70,000

Compute the tax payable for the years 2014 to 2018 and prepare the necessary journal entries?

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ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY
TAX RATES for CORPORATIONS TAX-702
4. LCB Corporation, a retailer, has a gross sales of P1,400,000,000.00 with a cost of sales of P560,000,000.00 and allowable deductions of
P150,000,000.00 for the calendar year 2021. Its total assets of P150,000,000.00 as of December 31, 2021 per Audited Financial
Statements include the land costing P50,000,000.00 and the building of P25,000,000.00 in which the business entity is situated, with an
aggregate amount of P75,000,000.00 as Fixed Assets.

Assuming calendar year 2021 is the 5th year of operation of LCB Corporation, how much is the income tax due.

6. IMPROPERLY ACCUMULATED EARNINGS TAX (FOR CLOSELY HELD CORPORATIONS) (NO LONGER IMPOSED UNDER
CREATE)
a. Imposition of improperly The improperly accumulated earnings tax shall no longer be imposed on corporations upon the
accumulated earnings tax effectivity of the CREATE onwards. This shall apply to the entire taxable year for all fiscal
years/taxable years ending after the effectivity of CREATE.

b. Exercise: A domestic corporation has an unappropriated retained earnings in excess of its paid-up capital stock
amounting to P20,000,000 and P50,000,000 as of fiscal year ending June 30, 2020 and June 30, 2021, respectively. How
much is improperly accumulated earnings tax on June 30, 2020 and June 30, 2021?

7. Exercises
a. KLM Corporation, a manufacturer, has gross sales of P190,000,000 for CY 2021, its fourth year of operation. Its total assets amounted to
P50,000,000, net of the value of the land of P6,000,0000 where its manufacturing plant and business operations are situated. Its cost of
sales and allowable operating expenses amounted to P100,000,000 and P50,000,000, respectively.

REQ: Compute the income tax due

b. Using the same data in letter a above except for the allowable operating expenses, which amounted to P85,000,000 and it
is the corporation’s fifth year of operation, compute the income tax due.

c. AST Corporation, a domestic corporation, holds 20% of the stocks of UK Corporation, a non-resident foreign corporation (NRFC). AST
Corporation is a wholly-owned subsidiary of SG Corporation, a non-resident foreign corporation. AST’s holding in UK Corporation started in
2018, and the holding period is uninterrupted . On July 1, 2021, AST Corporation received dividends from UK Corporation amounting to
P2,000,000.00 and subsequently paid our dividends on December 31, 2022, in the amount of P1,500,000.00. The remaining amount of
P500,000.00 has ben been used in any qualified activity for exempt foreign-sourced dividends. What are the consequences on AST
Corporation for the unused amount?

d. FCT Corporation, a domestic retailer, has gross sales of P1,400,000,000.00 with cost sales of P560,000,000.00 and allowable deductions of
P150,000,000.00 for calendar year 2020, its fourth quarter of operation after the year it registered with the BIR. Its total assets of
P180,000,000.00 includes the land and building in which the business is situated, amounting to P50,000,000.00 and P25,000,000.00,
respectively. How much is the income tax due?

e. Using the same data in letter d except that the corporation uses fiscal year ending April 30, 2021. How much is the income
tax due?

Integrative Case: ABC Corporation was created in accordance with Philippines laws. During the calendar year 2021, it has the
following data on income and expenses:
Gross income, Philippines (gross sales, P15,000,000) P10,000,000
Business expenses, Philippines 2,000,000
Gross income, USA (gross sales, P8,000,000) 5,000,000
Business expenses, USA 1,500,000
Interest income, Bank of PI-Manila, Philippines 300,000
Interest income from long-term deposit, Philippines 80,000
Dividend from a domestic corporation 150,000
Interest income from domestic depository bank under EFCDS 120,000
Interest income, JP Morgan-Chase Bank, USA 100,000
Prizes, Manila 200,000
Interest income from loans, Philippines 300,000
Gain from sale of shares of stock directly to the buyer (par value is P200,000) 100,000
Gain from sale of real property (ordinary asset) seller not habitually engaged in real estate
business, Philippines, gross of applicable withholding tax (selling price, P500,000) 250,000
Gain from sale of real property (capital asset), Philippines, gross of applicable
withholding tax (selling price, P600,000; FMV time of sale, P800,000) 100,000
Rent income from equipment, Philippines, gross of applicable withholding tax 1,000,000
Payments, first three (3) quarters 1,500,000

Question 1 – How much is the Philippine income tax payable?

2 – How much is the total final withholding tax?
3 – How much is the Philippine income tax payable using OSD?
4 – How much is the documentary stamp tax on the sale of real property?
5 – How much is the documentary stamp tax on sale of shares of stock?
6 – Disregarding certain information that are not relevant and assuming the above corporation is a foreign corporation
engaged in trade or business in the Philippines, how much is the Philippine income tax payable?
7 – Disregarding certain information which are not applicable and assuming the corporation is not engaged in business
in the Philippines, how much is the final withholding taxes in the Philippines?

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ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY
TAX RATES for CORPORATIONS TAX-702
Answers:
Question 1
Gross income, Philippines P10,000,000
Gross income, USA 5,000,000
Other income 15,000,000
Interest income from long-term deposit, Philippines 80,000
Gain from sale of real property (ordinary asset), Philippines 250,000
Interest income, USA 100,000
Prizes, Manila 200,000
Interest on loans, Philippines 300,000
Rent income, Philippines 1,000,000 1,930,000
Total gross income 16,930,000
Less: Deductions
Business expenses, Philippines 2,000,000
Business expenses, USA 1,500,000 3,500,000
Taxable net income 13,430,000
Tax rate 25%
Tax due 3,357,500
Less: Tax credits/payments
Creditable tax withheld tax on rent (5% x P1,000,000) 50,000
Creditable tax withheld on sale of real property (ordinary asset)
(500,000 x 6%) 30,000
Payments, first 3 quarters 1,500,000 1,580,000
Tax payable P 1,777,500

Question 2
Interest income, BPI- Manila, Philippines (300,000 x 20%) P 60,000
Interest income from domestic depository bank under EFCDS (120,000 x 15%) 18,000
Total P 78,000

Fair market value (higher) P800,000

Tax rate 6%
Capital gains tax 48,000

Gain from sale of shares of stock directly to the buyer P100,000

Tax rate 15%
Capital gains tax 15,000
Total P141,000

Question 3
Gross income, Philippines P10,000,000
Gross income, USA 5,000,000
Other income 15,000,000
Interest income from long-term deposit, Philippines 80,000
Gain from sale of real property (ordinary asset), Philippines 250,000
Interest income, USA 100,000
Prizes, Manila 200,000
Interest on loans 300,000
Rent income 1,000,000 1,930,000
Total gross income 16,930,000
Less: Optional standard deduction (40% X 16,930,000) 6,772,000
Taxable net income 10,158,000
Tax rate 25%
Tax due 2,539,500
Less: Tax credits/payments
Withholding tax on rent (5% x P1,000,000) 50,000
Creditable tax withheld on sale of real property (ordinary asset)
(500,000 x 6%) 30,000
Payments, first 3 quarters 1,500,000 1,580,000
Tax payable P 959,500

Question 4
Sselling price (real property ordinary asset) P500,000
Tax rate 1.5% P 7,500

FMV time of sale (higher) (real property capital asset) P800,000

Tax rate 1.5% 12,000
Total documentary stamp tax P19,500

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ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY
TAX RATES for CORPORATIONS TAX-702
Question 5
Par value P200,000
Divided by 200
Tax base 1,000
Multiplied by 1.50
Documentary stamp tax P 1,500
Question 6
Gross income, Philippines P10,000,000
Other income
Interest income from long-term deposit, Philippines 80,000
Prizes, Manila 200,000
Interest on loan, Philippines 300,000
Rent income, Philippines 1,000,000 1,580,000
Total gross income, Philippines 11,580,000
Less: Deductions
Business expenses, Philippines 2,000,000
Taxable net income, Philippines 9,580,000
Tax rate 25%
Tax due 2,395,000
Less: Tax credits/payments
Withholding tax on rent (5% x P1,000,000) 50,000
Payments, first 3 quarters 1,500,000 1,550,000
Tax payable P 845,000

Question 7
Gross income, Philippines (P10,000,000 x 25%) P 2,500,000
Interest income, Bank of PI-Manila, Philippines (P300,000 x 25%) 75,000
Interest income from long-term deposit, Philippines (80,000 x 25%) 20,000
Dividend from a domestic corporation (P150,000 x 25%) 37,500
Interest income from domestic depository bank under EFCDS Exempt
Prizes, Manila (P200,000 x 25%) 50,000
Interest on loan, Philippines (300,000 x 20%) 60,000
Gain from sale of shares of stock directly to the buyer (100,000 x 15%) 15,000
Rent income from equipment (P1,000,000 x 7 ½%) 75,000
Total P 2,832,500

END

“The future we will have is the future we work for at the moment.”- Tamthewise

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