Module No.

1 – Introduction to Corporate Income Taxation and Exempt Domestic

Corporations

Learning Outcome/s:
 Familiarize with the concept of corporation and the general classification of corporation
 Determine the exempt domestic corporations

Core Values/Biblical Principles:

Competency is defined as the quality or state of having sufficient knowledge, skill or strength. A lack
of competency can cause problems within the work environment and can lead to poor quality work.
This could lead to fatalities or rework which may cost the company money and possibly their
reputation.

Definition of Corporation

o Corporation is an artificial being created by operation of law, having the right of succession
and the powers, attributes, and properties expressly authorized by law or incidental to its
existence (Republic Act No. 11232 Section 2)

o The term "corporation" shall include partnerships, no matter how created or organized, joint-
stock companies, joint accounts (cuentas en participacion), association, 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. (National Internal Revenue Code
(NIRC), Section 22(b))

For income tax purposes, the term “corporation” shall include:

1. Partnerships, no matter how created or organized
2. Joint Stock Companies
3. Joint accounts
4. Associations
5. Insurance Companies
6. One Person Corporation (OPC)
EXCEPT:
 General Professional Partnership
 Joint Venture or Consortium formed:
o For the purpose of undertaking construction project
o Engaging in petroleum, coal, geothermal, and other energy operations
pursuant to an operating or consortium agreement under a service contract
with the government
Classification of Corporate Income Taxpayers
A. Domestic Corporations
a. Exempt Domestic Corporations
i. Exempt non-profit corporations under the NIRC
ii. Government agencies and instrumentalities
iii. Certain government-owned and controlled operations
iv. Cooperatives
b. Special Domestic Corporations
i. Proprietary educational institutions and non-profit hospitals
ii. Foreign currency deposit units (FCDU) and Expanded FCDUs
iii. PEZA or BOI registered enterprises
c. Regular Domestic Corporations*

B. Resident Foreign Corporations

a. Special resident foreign corporations
i. Expanded FCDUs
ii. Regional Area Headquarters and Regional Operating Headquarters of
Multinational Companies
iii. International carrier
iv. BOI or PEZA-registered enterprise
b. Regular resident foreign corporations*

C. Non-resident foreign corporations

a. Special non-resident foreign corporations
i. Non-resident cinematographic film owner, lessor or distributor
ii. Non-resident lessor of vessels, chartered by Philippine nationals
iii. Non-resident owner or lessor of aircraft, machineries, and other equipment
b. Regular non-resident foreign corporations*

*Regular Corporate tax

Resident Foreign Non-resident foreign

Domestic Corporation
Corporation Corporation
25% in world taxable income
25% regular corporate tax on 25% regular corporate tax on
20% if the domestic corporation
Philippine taxable income Philippine taxable income
passed the Asset and Income
Test

Note: The CREATE Law reduced the regular corporate income tax from 30% to 25% of taxable
income effective July 1, 2020
EXEMPT DOMESTIC CORPORATIONS
Corporations that are exempt from Regular Corporate Tax:
1. Exempt non-profit corporations under the NIRC
2. Government agencies and instrumentalities
3. Exempt government-owned and controlled corporations
4. Cooperatives
Classification rule: Exemption applies only to income from related activities. Income from unrelated
activities is subjected to regular income tax
Exception: Non-profit educational institutions
- All revenues and assets of non-stock non-profit educational
institutions used actually, directly, exclusively for educational
purposes shall be exempt from taxes and duties.
- Income from unrelated operations is still exempt from income tax if
used for educational purposes

Exempt non-profit corporations under the NIRC (under Sec. 30 of NIRC)

1. Labor, agricultural or horticultural organization not organized principally for profit
2. 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
3. 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 non-stock 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 non-stock corporation or their dependents
4. Cemetery company owned and operated exclusively for the benefit of its members
5. Non-stock 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 belongs to or inures to the benefit of any member, organizer,
officer or any specific person;
6. 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
7. Civic league or organization not organized for profit but operated exclusively for the
promotion of social welfare
8. A non-stock and nonprofit educational institution
9. Government educational institution
10. 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
11. 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
Reminders for the taxation of organizations and Corporations under Sec. 30 of the NIRC
(Based on RMO 38-2019)
1. Income Tax Exemption is not absolute
2. There is still an obligation as Withholding Agent for the Government
3. Liability for Value-Added Tax (VAT)/Percentage Tax
Requisites for exemption of non-stock, non-profit corporations
1. It must be a non-stock corporation or association organized and operated exclusively for
religious, charitable, scientific, athletic, or cultural purposes, or for the rehabilitation of
veterans
2. It must meet the following tests:
a. Organizational test - This requires that the corporation or association's constitutive
documents must show that its primary purpose/s of incorporation fall under Section
30 of the NIRC.
b. Operational test - This requires that the regular activities of the corporation or
association be exclusively devoted to the accomplishment of the purposes specified in
Section 30 of the NIRC.
3. All net income or assets of the corporations or association must be devoted to its purposes and
no part of its net income or asset accrues to or benefits any member or specific person
4. It must not be a branch of a foreign non-stock, non-profit corporation
Certificate of Tax Exemption Ruling
 Non-profit corporations or associations must secure a Tax Exemption ruling from the BIR to
enjoy the text exemption.
- Valid for 3 years unless sooner revoked or cancelled
 Tax exemption Ruling shall be revoked on:
o the date there are material changes in the character, purpose, or method of operation
of the corporation or association which are inconsistent with the basis of the income
taxation
o the basis of non-renewal of the tax exemption ruling or non-revalidation of previously
issued rulings
 Failure to file an income tax results to a loss of tax exempt status

Government agencies and instrumentalities

 Income from related activities – Exempt
 Income from unrelated activities – Taxable

Exempt government-owned and controlled corporations

General rule: GOCCs are generally proprietary or commercial in nature and are subject to the regular
corporate income tax
Exception:
1. Government Service Insurance System (GSIS)
2. Social Security System (SSS)
3. Philippine Health and Insurance Corporation (PHIC)
4. Home Development Mutual Fund (HDMF)
5. Local water districts
 Note: PCSO was removed from list of the GOCCs exempt by the TRAIN Law January 1,
2018

Cooperatives
Classification of registered cooperatives
1. Cooperatives which transact business only with members
- Treatment: Exempt to the following taxes and fees:
a. Income tax (on related income)
b. VAT and Percentage tax
c. Donor’s tax
d. Excise tax
e. Documentary Stamp Tax
f. Annual registration fee

2. Cooperatives which transact business with both members and non-members

 Accumulated reserves and undivided net savings > P10 Million
- Treatment: Exempt similar to cooperatives transacting business with members
only
 Accumulated reserves and undivided net savings < P10 Million
- Treatment: Taxable at full rate for the following taxes:
a. Income tax on the full amount allocated for interest on capital
b. Value Added Tax (VAT) on transactions with non-members
c. Percentage Tax on all sales of goods or services rendered to non-members
d. All other internal revenue taxes unless otherwise provided by law

Accumulated reserves, also referred to as the reserve fund, refers to the totality of the
amounts legally required to be deducted annually from the annual net surplus (income) of the
cooperative for its protection and stability

Under RA 9520, Net surplus of every cooperative shall be distributed as follows:

1. Reserve funds – atleast 10% of the net surplus but must not be less than 50% of the net
surplus in the first years of operation
2. Education and training fund – not more than 10% of net surplus
3. Community and development fund – not less than 3% of net surplus
4. Optional land and building fund – not to exceed 7% of net surplus
5. Interest, which shall not exceed normal rate of return on investments, and patronage
refunds which must not be less than 30% of the net surplus after deducting the
statutory reserves
6. Any excess to reserve funds

Taxability of Cooperatives to Internal Revenue Tax

All cooperatives regardless of classification are subject to the following:
1. The applicable income tax on unrelated income
2. Capital Gains Tax
3. Documentary Stamp Tax
4. VAT on purchases of goods or service except VAT exempt importations
5. Withholding tax on wages except for minimum wage employees
 6. All other taxes for which cooperatives are directly liable and not otherwise expressly
exempted by any law

Note: The taxable income of cooperatives is determined after provision for the general reserve fund

Reporting Requirements for Exempt Corporations

 BIR Form 1702-EX = Exempt corporations with no taxable income

 BIR Form 1702-RT = Exempt corporations with taxable income subject to regular tax
 BIR Form 1702-MX = Exempt corporations with taxable income subject to special tax rates

Summary:

For tax purposes, the term corporation also includes partnerships, joint stock corporations, joint
accounts, association, or insurance companies. Corporations are also classified into three groups
which are domestic corporation, resident foreign corporation and non-resident foreign corporation,
where each classification have different tax treatments.

Reference:
Income Taxation, 2021 edition, Rex B. Banggawan, CPA, MBA
BIR-RMO-38-2019.pdf (pcnc.com.ph)
Tax Code - Bureau of Internal Revenue (bir.gov.ph)