vy chapter 15-A - Regular Income Taxation: Special Corporations CHAPTER 15-A REGULAR INCOME TAXATION: Special Corporations chapter Overview and Objectives ‘his chapter covers income tax rules applicable to special corporations. ‘After this chapter, readers are expected to have obtained mastery of the following: ‘The general income tax rule for regular corporate taxpayers ‘The nature and types of exempt corporations ‘The classification rule for exempt corporations Cost and expense allocation between exempt and taxable activities The dominance test on private schools and non-profit hospitals The taxation rules for FCDU/EFCDUs The special rules on international carriers The different tax rates for special non-resident foreign corporate taxpayers CORPORATE INCOME TAXATION Corporations are subject to final tax, capital gains tax, and the regular income tax. The final tax and capital gains tax of corporate taxpayers are discussed in the previous Chapters. This chapter focuses on the regular income tax of special torporation taxpayers and provides integration of the three tax schemes. us chapters, the regular income tax of corporations covers Asestablished in previo tal gains tax for corporations. any income not subject to the final tax or capi What are corporations? The term corporation shall includ organized, joint-stock companies, companies. le partnerships, no matter how created or joint accounts, associations, or insurance n excludes general professional partnerships and a joint um formed for the purpose of undertaking construction coal, geothermal, and other energy operations greement under a service contract with the The term corporatio ventures or consorti projects or engaging in petroleum, pursuant to an operating consortium aj Government. GENERAL CLASSIFICATION A. Domestic corporations - 25% or 20 poration - 25% regular corporate tax on Philippine AND TAXATION OF CORPORATIONS % regular corporate tax on world taxable income B. Resident foreign col taxable income 629a = -=<=zZ_ Chapter 15-A - Regular Income Taxation: Special Corporations C. Non-resident foreign corporation - 25% final tax on HU" gray income for domestic corporations Under thet CREATE law, domestic corporations are subject to a 20 tte Income tax under the following conditions: % regula, a. Asset test = Total assets, excluding land on which thelr office, plant af * equipment are situated, does not exceed P100,000,000; and b. Income test - Taxable Income does not exceed P5,000,000 illion are referred to as micro., th assets not exceeding P100 mil ‘O-, Smal nd medium-sized enterprises (MSMEs). The domestic corporation must be MSME by asset size. The MSMEs must also qualify the income test to avail Of the lower corporate tax. tely account in thei istic corporations are mandated to separat 1 Annual Pinandial Statements (AFS) the cost of the land on which their office, plant and equipment are situated, They are prohibited to lump the same in one account or consolidate its costs with other fixed asset accounts. Illustration ‘A domestic corporation has the following partial detail of the costs and fair values of its assets in its AFS: Book value Fairvalue Land where the office building stands P 30,000,000 35,000,000 Land where equipment warehouse stands 20,000,000 25,000,000 Vacant land (investment property) 10,000,000 12,000,000 Land held for sale (inventory) 30,000,000 40,000,000 House and lots for sale (inventory) 20,000,000 27,000,000 Office building 10,000,000 11,000,000 Factory building 15,000,000 14,000,000 Equipment 10,000,000 9,000,000 Other assets 5.000.000 __7,000,000 Total assets 180,000,000 — p-180,00,000 The corporation also have the following analysis of its reported pre-tax income for the taxable year: Passive income subject to final taxes P 1,000,000 Capital gains subject to capital gains taxes 2,000,000 Taxable income subject to regular tax 4,000,000 Income exempt from income tax ——3.000,000. Total pre-tax income P_10,000,000 630ay chapter 15-A - Regular Income Taxation: Special Corporations ‘or purposes of the asset test, accounting book values as reflected in the AFS are considered less the cost of lands used for office, plant and equipment: otal assets per AFS Jess: land held for use oem . Land used for the office building P 30,000,000 = Land used for the equipment warehouse __20,000.000 ___$0,000.000 Adjusted total assets 7 ‘The domestic corporation is a MSME since its total assets do not exceed P100 million. The taxable income subject to regular tax (i.e. P4 million) is less than the PSM threshold. The corporation is a qualified MSME subject to 20% corporate tax. summary of regular corporate tax rates Domestic | Resident foreign Taxpayer type corporation | corporation VISME corporate taxpayers -__With s P5M taxable income 20% 25% With > PSM taxable income 25% 25% Large corporate taxpayers With < PSM taxable income 25% 25% - With > P5M taxable income 25% 25% Ilustration Acorporation with P100M assets had the following income and expense for 2023: —Abroad_ __Total__ Gross revenues/receipts P 1,800,000 P 1,200,000 P 3,000,000 Less: Business expenses 1.200.000 Net income from operation P 600,000 P 400,000 P 1,000,000 -P.4,200,000 Add: Interest from deposit ___150,000 ____50,000 750,000 P__450,000 The regular income tax of a domestic corporation shall be computed as follows: Net income Net income from operations (P600,000 + P400,000) P 1,000,000 Other income not subject to final tax ——50.000 Taxable net income P 1,050,000 Multiply by: Corporate tax rate ——_20% P_210,000 Regular corporate income tax (RCIT) due Since foreign corporations are not allowed the lower 20% corporate tax, the regular income tax of a resident foreign corporation shall be computed as follows: Taxable net income (Philippines only) P 600,000 Multiply by: Corporate tax rate — P_150,000 Regular corporate income tax (RCIT) 631tions Chapter 15-A - Regular Income Taxation: Special Corporati wn is not subject to the regular corporate income tax | Anon-resident foreign corporation Jjncome from ll sources within. Resident payor, but to a 25% final tax based on gros: shall withhold the following: P 1,800,000 Gross revenues/receipts Interest income from deposit Paros 77950;000 Total gross income within Multiply by: Tax rate om 5 Total final tax Note that for purposes of fina tax, gross income on the sale of services means revenye 01 . or receipts without deduction for cost of services. RATIONS : a eens are subject to a special tax treatments or preferential tay rates lower than the 25% regular corporate income tax. These are generally referred to as “special corporations.” For easier understanding, we will further sub-classify the three broad classifications of corporations. SUB-CLASSIFICATION OF CORPORATE INCOME TAXPAYERS A. Domestic corporations 1, Exempt domestic corporations a. Exempt non-profit corporations under the NIRC b. Government agencies and instrumentalities c. Certain government-owned and controlled corporations d. Cooperatives 2. Special domestic corporations a, Proprietary educational institutions and non-profit hospitals b. Foreign currency deposit units (FCDUs) and Expanded FCDUs c. PEZA or BOl-registered enterprises 3. Regular domestic corporations B. Resident foreign corporations 1. Special resident foreign corporations a. Expanded FCDUs b. Regional Area Headquarte Multinational Companies © International carrier | ¢*/, d. BOlor PEZA-registered enterprises 2, Regular resident. foreign corporations 632 ts and Regional Operating Headquarters of> chapter 15-A - Regular Income Taxation: Special Corporations ‘ Non-resident foreign corporations 4. Special non-resident foreign corporations 2 Non eae Cinematographe film owner, lessor or distributor 3 **/s ee aout esses ariel by Philippine nationals Seen of aircraft, machineries, and other 2. Regular non-resident foreign corporations EXEMPT DOMESTIC CORPORATIONS The following corporations are exempt from the 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 Qualification of Tax Exemption Income tax exemption relates only to income from related activities. Income from activities unrelated to the purposes for which an exempt corporation is organized and income from activities conducted for profit including income from properties gre taxable regardless of the disposition made of such income. The Classification Rule Since exemption applies only to income from related activities, the income of exempt corporations are classified into income from related activities and income from unrelated activities. ‘The income from unrelated activities is subjected to regular income tax. ions under the NIRC: Exempt corporati ticultural organizations not organized pri 1) Labor, agricultural, or hor ncipally for profit 2) Mutual savings banks not havi cooperative bank without cap! purposes and without profit 3) Abeneficiary society, order, or association op of the members such as @ fraternal organizal system, or mutual aid association or 4 non-s! employees providing for the payment of life, benefits exclusively to the members of such society, non-stock corporation or their dependents 4) Cemetery company owned and operated exclusively for thgghenefit members 633 ng a capital stock represented by shares, and tal stock organized and operated for mutual erating for the exclusive benefit tion operating under the lodge tock corporation organized by sickness, accident, or other order, or association, oroo —Ja— Chapter 15-A — Regular Income Taxation: Special Corporations c 5) Non-stock corporation or association organized and operated exclusive) 1 religious, charitable, scientific, athletic, or cultural purposes, or jay rehabilitation of veterans, no part of its net income or asset shall belon, the inures to the benefit of any member, organizer, officer or any specific iia or 6) Business league chamber of commerce, or board of trade, not organized \ profit and no part of the net income of which inures to the benef st private stock-holder, or individual any 7) Civic league or organization not organized for profit but operated ex; for the promotion of social welfare 8) Anon-stock and nonprofit educational institution 9) Government educational institution 10) Farmers’ or other mutual typhoon or fire insurance company, mutual dite irrigation company, mutual or cooperative telephone company, or Ae organization of a purely local character, the income of which consist solet“® assessments, ues, and fees collected from members for the sole purpas meeting its expenses of 11) Farmers fruit growers, or lke association organized and operated as a sal agent for the purpose of marketing the products ofits members and tur: back to them the proceeds of sales, less the necessary selling expenses on fe basis of the quantity of produce finished by them Clusivay ‘Wustration 1 Bahay Kalinga, a social welfare charitable non-profit corporation, reported the following statement of income and expenses: Related Unrelated —Activities_ _Activities_ _ Total __ Gross receipts P 1,200,000 P 800,000 P 2,000,000 Less: Cost of services ___400,000 ___400,000 ___800,000 Gross income P 800,000 P 400,000 P 1,200,000 Less: Expenses Net surplus ——400,000 __150,000 ___550,000 2400000 P_ 250,000 P__ 650,000 The income tax due of the corporation shall be: Net income or surplus from unrelated activities P 250,000 Multiply by: Corporate tax rate 25% Regular corporate income tax P.62,500 Note: Exempt corporations are treated as regular domestic corporations with regard t0 ther income from unrelated sources, 634rr t t chapter 15-A ~ Regular Income Taxation: Special Corporations mnustration 2 Toma sengla Tumba, a not-profit fraternal organization, received total membership gues of P300,000. To finance its community development project, it conducted a fund faising drive by selling souvenir items to local tourists. The fund raising generated 200,000 income. ‘The organization shall pay income tax on the fund raising income: Net income from fund-raising activities P 200,000 Multiply by: Corporate tax rate 25% Regular corporate income tax PB__50,000 Note: Fund raising activities, being commercial in nature, are taxable, The membership dues are exempt. Requisites for exemption of non-stock, non-profit corporations 4. 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. Itshould meet the following tests: a. Organizational test - Its constitutive documents exclusively limit its purposes to one or more of the following: religious, charitable, scientific, athletic or cultural purposes, or for the rehabilitation of veterans. b. Operational test - The regular activities of the corporation or association must be exclusively devoted to the accomplishment of the aforementioned purposes. A corporation fails this test if a substantial part of its operations is considered “activities conducted for profit.” 3. All net income or assets of the corporation 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 ofa foreign non-stock, non-profit corporation. A non-profit organization is still allowed to engage in activities conducted for profit without losing its tax exemption but the consequence is being subject to tax only on income conducted for profit, regardless of the disposition made of such income. Mlustration Daet Medical Center is organized as a non-stock, non-profit hospital catering to ethnic community members. Members pay minor charges which are reimbursements in nature to replenish the working capital of the medical center. Daet Medical Center relies on contributions from members and foreign aid for facilities improvement. Since there is no “purpose to make a profit over and above the costs," Daet Medical Center is exempt from income tax on services from paying members. 635Chapter 15-A - Regular Income Taxation: Special Corporations Exception to the Classification rule: HJ Under: the Constitution, all revenues and assets of non-stock non, educational institutions used actually, directly, and ezeusivey for educations Purposes shall be exempt from taxes and duties. Hence, the income fir unrelated operations of these institutions is still exempt from income tax if Used for educational purposes. Profi 1 Fh eRe Pea teen a non-profit educational institution, collected P40 School fees and assessments from its students. It also earned P200,000 from ofits properties and realized P400,000 in the sale of its properties. ani Ils to fund an under, 1d University utilized the P200,000 rental 1 Braduate STs progam and invested the’ 400,000 fer. the retirement benefits university directors. 00,009 the rent In this case the P4M is an income from related activities. The 200,000 rentals ang 400,000 gain on the sale of properties are income from unrelated activities. The Pay income is exempt. The P200,000, even if arising from unrelated activities, is stl exe t because itis diverted to an educational purpose. The P400,000 is subject to regular income tax because itis not used for an educational purpose. Mlustration 2 aa “un How would Sutherland University be taxed in the immediately Preceding illustration i itisa: a. Government school b. Private school Answer: chool: The classification rule would apply because the Constitutional exemption applies only par gu stock, non-profit educational institutions. As such, the P4M would ho exempt, but the P200,000 and P400,000 income would be taxable. i I The dominance test for private schools will apply. This will be discussed later in this Chapter. Certificate of Tax Exemption Ruling Non-profit corporations or associations mu: the BIR to enjoy the tax exemption. unless sooner revoked or cancelled. ist secure a Tax Exemption Ruling from The ruling shall be valid for a period of 3 years, The Tax Exemption Ruling shall be deemed ri evoked on the date there are material changes in the character, Purpose, or method of operation of the corporation oF 636er chapter 15-A - Regular Income Taxation: Special Corporations sociation lc are inconsistent with the basis of the income tax exemption. In addition, it shall be revoked also on the basis of non-renewal of the tax exemption ruling oF non-revalidation of previously issued rulings. Failure to file an income tax return shall also result in the loss of the tax-exempt status. Government agencies and instrumentalities Government agencies and instrumentalities such as departments and bureaus are inherently non-profit because of their public service functions; hence, they are exempt from income tax. However, the income of government agencies and instrumentalities from unrelated activities or from their properties is subject to income tax. Government-Owned and Controlled Corporations (GOCCs) GOCCs are generally proprietary or commercial in nature and are subject to the regular corporate income tax except the following exempt GOCCs: 1, Government Service Insurance System (GSIS) 2. Social Security System (SSS) 3, Philippine Health and Insurance Corporation(PHIC) 4. Home Development Mutual Fund (HDMF) - RA 11534 Local water districts - RA No. 10026 *PCSO was removed from the NIRC list by the TRAIN law effective January 1, 2018. Cooperatives A cooperative is an autonomous association of persons who voluntarily joined together to achieve their social, economic, and cultural needs and aspirations by making equitable contributions to the capital required, patronizing their products and services, and accepting a fair share of risks and benefits of the undertaking. Classification of registered cooperatives for taxation purposes: A. Cooperatives which transact business only with members These cooperatives are not subject to any taxes and fees under the NIRC and other tax laws, such as the following: 1, Income tax 4. Excise tax 2. VAT and Percentage tax 5, Documentary stamp tax 3. Donor’s tax 6, Annual registration fee B. Cooperatives which transact business with both members and non- members 1. Those with not more than P10M accumulated reserve and undivided net savings are exempt from taxes, similar to cooperatives transacting business only with members. 637Chapter 15-A - Regular Income Taxation: Special Corporations 2 Those with more than PLOM accumulated reserve and undivided ny savings are subject to the following tax at full rate: a. Income tax on the full amount allocated for interest on capital b. Value Added Tax (VAT) on transactions with non-members ¢. Percentage Tax on all sales of goods or services rendered to np, members ; 4. Allother internal revenue taxes unless otherwise provided by the lay The accumblated reserve, commonly referred to as the reserve fund, refers to totality of the amounts legally required to be deducted annually from the anny, net surplus (income) of the cooperative for its protection and stability, The net surplus of every cooperative shall be distributed as follows: 1. Reserve fund - at least 10% of the net surplus but must not be less than 50% of the net surplus in the first five years of operation 2. Education and training fund - not more than 10% of net surplus 3. Community 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 fund 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 services 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 The taxable income of cooperatives is determined after provision for the general reserve fund. Mlustration Jaro Farmers Cooperative (JFC) is a marketing cooperative with more than P300M it total assets. It sells the vegetable productions of its members. In compliance with leg! requirements, JFC reserves the following percentage of net surplus: - Reserve fund - 10% - Education and training fund - 10% - Community development fund - 5% + Optional building fund - 5% 638| — chapter 15-A - Regular income Taxation: Special Corporations per by laws, the net surplus after the reserves is distributed as follows: 50% as interest to capital, but must not exceed 18% normal return on average capital of members 50% as patronage refunds to members Residual balance to reserve fund Members have P1,200,000 weighted average capital as of year-end. JFC’s income statement on its sixth year of operation is presented below: sales P 3,100,000 Cost of sales —1.600,000 Gross income P 1,500,000 Operating expenses —— 600,000 Operating surplus P 900,000 ‘Add: non-operating income: - Rental of vacant facilities 200,000 - Interest on investment in bonds 20,000 + Interest on bank account, net of final tax 4,000 ‘Total surplus 2£.1.124,000 Required: Compute the taxable income assuming JFC is trading: a. Only with members b. With both members and non-members Solution: The net income from unrelated sources after the statutory reserve requirements if any, constitutes taxable income for purposes of the regular income tax. Hence, Rental income P 200,000 Interest on bonds investment —— 20,000 Total income P 220,000 Less: Reserve fund requirement (10%) ——22,000 Taxable income P198,000 Note: 4. JRC is exempt from any tax on its transactions with members. 2. The interest on banks must be excluded as it is already subjected to final tax. 3. JRC shall report the same taxable income if it transacts business with non-members but with an accumulated reserve of less than P10,000,000. Assume that 20% of the sales were from non-members, and JFC has more than 10,000,000 accumulated reserves. 639 bo Bi,[4 Chapter 15-A - Regular Income Taxation: Special Corporations Operating surplus - non-members (P900Kx 20%) P 180,000 Unrelated income: Rent income, net 200,000 Interest on bonds investment 20,000 Total taxable surplus ; P 400,000 Less: Reserve fund requirement (10%) Net surplus after reserve from non-members B_360,000 Operating surplus from members (P900K x 80%) P 720,000 Less: Reserve fund (10%) P 72,000 | Education and training fund (10%) 72,000 Community dev't fund (5%) 36,000 Optional building fund (5%) 36.000 ___216,000 Net surplus distributable Net surplus is distributable per by-laws as follows: As interest on members’ capital* P 216,000 As patronage refunds (50%) 252,000 Excess balance to reserve fund 36,000 Net surplus as distributed P_504,000 *Per JFC by-laws, interest on capital is the lower of: * 50% ofdistributable surplus = 50% x P504,000 = P252,000 18% normal return on capital = 18% x P1,200,000 = P216,000 ‘The taxable income and income tax due shall be computed as follows: Net surplus after reserve from non-members P 360,000 | Net surplus distributed as interest to members — 216,000 Taxable income P 576,000 Multiply by: Corporate tax rate 25% Regular corporate income tax P_144,000, Note: 1, Under RA 9520, the ultimate distribution of the P216,000 interest to members shall no longer be subjected to final tax. The patronage refund is not d 2 leemed income by law as it is a mere return of savings to the members. ALLOCATION OF COMMON EXPENSES OF EXEMPT CORPORATIONS Expenses of an exem| empt corporation that are not directly traceable to either related and unrelated activities are allocated based on gross income. Mlustration Anon-profit entity presented the following analysis of its net surplus: 64015-A~ chapter 15-A Regular Income Taxation: Special Corporations Related Unrelated Gross receipts P 1,200, ee 90 Pp pio.ne0 P 2,000,000 Gross income P 800,000 P 400,000 P 1,200,001 Less: Direct expenses 280,000 70,000 350000 Common expenses . i ara Surplus 2_670,000 The taxable income from unrelated activities will be computed as follows: Gross income from unrelated activities P 400,000 Less: ‘ Direct expenses P 70,000 Allocated common expense (P400K/(P400K+P800K)) x P180K __60,000 __ 130,000 Taxable net income P_270,000 Note: This common expense allocation procedure is also applicable to corporations with income subject to special tax regimes or to preferentiai rates. REPORTING REQUIREMENTS FOR EXEMPT CORPORATIONS Exempt corporations with no taxable income shall file BIR Form 1702-EX using itemized deductions only. If they are not delinquent in filing their return or have no violations on withholding taxes, they will not pay any tax. The information furnished by BIR Form 1702-EX is essential to the BIR’s tax mapping effort and a test of compliance of the corporation to the withholding tax regulations on income payments. shall file BIR Form Exempt corporations with taxable income subject to regular tax they are must file 1702-RT. If they also earn income subject to special tax rates, BIR Form 1702-MX. SPECIAL DOMESTIC CORPORATIONS 1. Private educational institutions 2. Non-profit hospitals | : 3. Foreign Currency Deposit Units or Expanded Foreign Currency Deposit Units 4. . PEZA or BOI-Registered Enterprises TITUTION AND NON-PROFIT HOSPITAL titution and non-profit hospitals are subject ject to the pre-dominance test. PRIVATE EDUCATIONAL INS' Private or proprietary educational inst ‘010% tax on world taxable income sul Duri i 10% tax rate is temporarily lowered to 1% between July ng the pandemic, the 1’ It” shall revert back to 10% effective July 1, 2023. 1,2020 to June 30, 2023. The same 641oo — Chapter 15-A - Regular Income Taxation: Special Corporations nd 2023, the tax rate shall be computed by During transition periods like 2020 a .d by 1% and those covered by 10%, pro-rating the number of months covere Examples: Private school tax rate - Year 2023 1. Schools reporting under a fiscal year ending every May 31 would have a tax rate of 6.25%, computed as (1% x 5 months + 10% x7 months) / 12 months. 2. Schools reporting under a calendar year would have 5.5% tax rate. What is a private or proprietary educational institution? A proprietary educational institution is any private school maintained ang administered by private individuals or groups with an issued permit to operate from any of the following: 1. Department of Education (DepEd) 2. Commission on Higher Education (CHED) / 3. Technical Education and Skills Development Authority (TESDA). The Pre-dominance Test 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 Or hospitals from all sources, the 25% regular corporate income tax applies. Unrelated trade, business or activity 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 from its primary purpose or function. Mlustrations 1 A private educational institution reported the following during the year 2024: Related Unrelated Activities. _Activities_ __Total__ Gross receipts P 1,100,000 P 900,000 P 2,000,000 Less: Cost of services __400,000 ___400,000 Gross income P 700,000 P 500,000 P 1,200,000 Less: Deductions 400,000 100,000 500,000 Net income P_300,000 P_409,000 P__700,000 The gross income from related activities (P700K/P1,200K = 58%) passes oe predominance test, The income tax due shall be computed as follows: Taxable net income P 700,000 Multiply by: Corporate tax rate ——10% Income tax due P__70,000 642Chapter 15-A — Regular Income Taxation: Special Corporations Mlustration 2 ‘Anon-profit hospital with more th; i A ie fale luring can P200M in total assets, net of cost of landholdings, Related Unrelated Gross receipts P 1,000,000 P 1,100,000 P 2,100,000 Less: Cost of services "400; “900,000 Gross eae P 500,000 P 700,000 P 1,200,000 Less: Deductions 100,000 400,000 500,000 Net income P_400,000 P 300,000 P_700,000 The gross income failed the pre-dominance test (P500K/P1,200K = 4 a = 42%); hence, th non-profit hospital shall be taxable as a regular corporation, ei aete Taxable net income P 700,000 Multiply by: Corporate tax rate 25% Regular corporate income tax P__175,000 Summary of Tax Rules on Educational Institutions and Hospitals Owner Educational institutions Hospitals Private 10% (1%) of taxable income 25% (20%) of taxable income Non-profit Exempt 10% (1%) of taxable income Government Exempt Exempt FOREIGN/EXPANDED CURRENCY DEPOSIT UNIT Foreign currency deposit units (FCDUs) and Expanded FCDUs (EFCDUs) refe to a unit or department of a local bank or a local branch of a foreign banl authorized by the BSP to engage in foreign currency-denominated transaction pursuant to RA 6426, as amended. A local bank refers to a commercial bank, universal bank, and a thrift ban organized under the laws of the Philippines (RR10-98). The bank shall secure Taxpayer Identification Number (TIN) for its EFCDU or FCDU separate from tk TIN of its regular business unit (RBU). Authorized transactions of FCDU FCDUs are limited under their license to short-term foreign currency-denominat transactions. They are authorized to accept deposits and trusts ca arr e short-term maturity, and invest in short-term maturity deposits, readily bated debt securities, and short-term foreign currency loans. They are also a red enter into currency swap with the BSP, other FCDUs/EFCDUs or saat a Security lending activities as lender, and engage in repurchase agree! Currency denominated securities. 643ay Chapter 15-A - Regular Income Taxation: Special Corporations Authorized transactions of EFCDU ‘The license to operate an EFCDU authorizes engagements in the same transa thet ne Rebus plus authorization to enter into foreign exchange trading i allowed to dit for non-resident exporters, accept or negotiate drafts or bills m vaehonge drawn under leters of credits or make payments to the order of ine csnent exporter upon request of their foreign correspondent bank, purchase exp = bills of resident exporters, enter into securities lending activities, and repurchert agreements involving foreign currency denominated securities. ase tions Distinction of FCDU, OBU and EFCDU FCDUs are limited to short-term foreign currency transactions while EFCDUs ay, allowed both short-term and longer-term foreign currency-denominateg transactions ‘An FCDU isa division of a domestic local bank. An Offshore Banking Unit (OBU) isa division of a foreign bank which is authorized to conduct foreign curren; denominated transactions. An EFCDU may be a division of a domestic bank ora resident foreign bank authorized to conduct banking under the expanded foreign currency deposit system. Tax on EFCDUs The income of depositary banks under the Expanded Foreign Currency Deposit System from foreign currency transactions with: ‘A. Non-residents (offshore income) - exempt from income tax B. Residents 1, Banks under the foreign currency deposit system such as: a. Offshore banking units (OBUs) b. local commercial banks and branches of foreign banks authorized by the BSP to transact business with FCDUs ~ exempt from income tax 2. Other residents (onshore income) a. interest income only - 10% final tax b. other income, such as commissions and gains - regular corporate income tax (Deutsche Bank AG Manila Branch vs. Commissioner of Internal Revenue, CTA Case No. 6566, May 17, 2005) If the interest income is not subjected to final tax by the borrower, the FCDU 0! EFCDU shalll report the same in its gross income in the income tax return and shal be subject to the same 10% tax. It shall be separately presented from othe income subject to the 25% regular corporate income tax. Taxation of FCDUs In practice, the BIR does not distinguish EFCDU from FCDUs. Consequently are taxed the same way as EFCDUs. FCDL 644 _~-yr chapter 15-A ~ Regular Income Taxation: Special Corporations summary of Tax Rules on FCDUs/EFCDUs ———___FROM_____ ———Residents __ (E)FcDUs Other Non- Income from forex transactions Interest income from: -Forexloans & receivables exempt 10% FIT —_ exempt - Forex deposits exempt - exempt Other forex income exempt RCIT exempt Income from non-forex transactions RCIT RCIT RCIT Tax on income of depositors under the EFCDS Any income of nonresidents from transactions with depository banks under the expanded system shall be exempt from income tax. Interest income of residents from depositary bank under the FCDS/EFCDS is subject to 15% final tax. Tax on Regular Banking Units or RBUs The income from the regular banking unit of domestic banks is subject to the 25% regular corporate income tax. Illustration The expanded foreign currency deposit unit (EFCDU) of a domestic commercial bank derived the following income from its foreign currency and other transactions: Received from Residents FCDUs/ Non- Income items EFCDUs Other residents Residents | Interest income from loans & receivables 5,000,000 | _P10,000,000 |_P4,000,000 Interest income - foreign currency deposits 200,000 Forex trading gains 300,000 200,000 [100,000 Consultancy fees 250,000 500,000 [100,000 Rent income 50,000 120,000 80,000 Required: Identify the exempt income, gross income subject to final tax, and those subject to regular tax. 645Chapter 15-A - Regular Income Taxation: Special Corporations Solution: aot : Exempt income items are indicated in italics, income items subject to final tax a, Fe iy bold-italics and those subject to regular tax in bold font. Received from Residents OBUs or Non. i FCDUs/ Other resident oe EFCDUs | _ Residents i Interest income from forex loans F5.000.000 10,000,000 |" 4.000000 i 200,01 Interest income from forex deposits ) Forex trading gains 300,000 200,000 100,000 | Consultancy fees 250,000 500,000 | 100,009 Rent income 50,000 120,00 ‘The total final tax on the P10,000,000 shall be withheld by Philippine resident borrowers. ‘The FCDU of the domestic bank shall include the following in its Bross income subject to the regular corporate income tax: Forex trading gains to other residents P 200,000 On-shore income from non-forex transactions Consultancy fees (P250,000 + P500,000) — P 750,000 Rent income (P50,000 + P120,000) —120,000 920,000 Off-shore income from non-forex transactions Consultancy fees P 100,000 Rent income 80,000 180,000 Gross income 21,300,000 Treatment of Costs and Expenses of Banks Related to income subject to regular tax _| Deductible Related to income subject to final tax Non-deductible Related to exempt income Non-deductible | Only expenses traceable or Teasonably allocable to RBU and FCDU income subject regular tax are deductible in the determination of taxable net income. Allocation of Cost and Expenses of Banks RR¢ - 2011 prescribed for the allocation of the indirect expenses of the FCD between exempt, final tax and ‘This ; . regular tax pro- i income. effectively curved the deductibilin a Eee i ity of some legitimate banking expenses. citing 'ack of legal basis, RR4-2011 was declared null and void by the Supreme Court. 646SS chapter 15-A ~ Regular Income Taxation: Special Corporations mlustration 2 Assume that the following figures relate to a large domestic bank: ) — Feb Operations ——Residents Non- ; OBU/FCDU Others Residents _ Total _ Interest income P 780,000 P 820,000 P 400,000 P 2,000,000 Rent fees 30,000 Total receipts P. 880,000 P 940,000 P_430,000 Less: Direct costs of expenses: Interest income P 450,000 P 350,000 P 150,000 P_ 950,000 Rent fees —20,000 ___10,000 15,000 45.000 Subtotal Gross income P 410,000 P 580,000 P 265,000 P1,255,000 Less: Indirect expenses 115,000 Net income P1.140,000 ———_—ibU Operations ——Residents _____Non- OBU/FCDU Others Residents __Total _ Gross receipts ~ P 2,000,000 P 750,000 P 2,750,000 Less: Direct costs of services : 400.000 Gross income ~ P1,000,000 P 350,000 P1,450,000 Less: Indirect expenses - RBU — 450.000 Net income 21,000,000 Analysis of the FCDU income Amount Remarks Income subject to regular tax P 250,000 P100,000 + P120,000 + P30,000 Income subject to 10% final tax 820,000 Interest on residents ‘Income exempt from tax —1.180,000 P 780,000 + P400,000 Total FCDU income 22,250,000 Income tax due - FCDU and RBU The income tax due of the FCDU and RBU shall be computed as follows: —ECDU_____RBU ‘ules/revenue/recelpts/fees P 250,000 P2,750,000 a Ss: Cost of sales or cost of services* "ss income from operations P 205,000 P 1,450,000 . 8: Deductions ale netincome P 90,000 P 1,000,000 Ply by: Tax rate ——25% __25% ‘ular corporate income tax b_22.500 P_250,000 647ee Chapter 15-A - Regular Income Taxation: Special Corporations ap “A a UY {ie rentals) i subject to regular tax; hence, Pig arace rai Sea ee for these is computed as P20K + P10K Pig Ks ec aparabemioc expense allocation method was voided, the PLisagg Foy 2 ines will no longer be allocated between P250,000 RIT income, P820,000 my indir ; income and P1,180,000 exempt income. I ORATIONS RESIDENT FOREIGN CORPORATI / Tae section discusses the special tax rules on the following Special ! resident foreign corporations: . Expanded FCDUs : ‘ 5 Regional Area Headquarters and Regional Operating Headquarters of Multinational Companies 3. International carriers 4. PEZA-registered foreign corporations - ~ Salata! EXPANDED FCDUs The EFCDU ofa resident foreign bank is si FCDUs/EFCDUs of domestic local banks, exempt from income tax because foreign ubject to the same tax rules applicable to except that all their offshore income is corporations are taxable only on income within the Philippines. Mlustration The EFCDU of a resident foreign bank reported the following: Received from Residents OBUs or Non- Income items FCDUs/ Other residents EFCDUs Residents Interest income from loans & receivables P5,000,000 10,000,000 P4,000,000 Interest income - foreign Currency deposits 200,000 Forex. trading gains 300,000 200,000 100,000 catstltaney fees 250,000 500,000, 100,000 ‘ent income 50,000 120,000. 80,000 Required: Determine the exemy income, i income subject t p e, Bross it .d gross 0 regular tax, come subject to final tax and gro Solution: Exempt income tems are in ital font and gross in is : ics font, gross income Subject to final tax in bold-italie ‘ome subject to Tegular tax in bold font. 648i Se \ Chapter 15-A — Regular Income Taxation: Special Corporations | \ oo | rT Received from. ———*di % Residents OBUs or : Noe. J Income items FCDUs/ Other eae | EFCDUs Residents interest income from | forex loans __|__P 5,000,000 | P10,000,000 | _P4,000,000 Interest income from | forex deposits 200,000 | Forex trading gains 300,000 zoe ino aaa | [consultancy fees 250,000 Son 0g eee [Rent income "50,000 | ~120,000-| 30,000" Note: Resident foreign corporations are taxable only on income within hence those marked with asterisks(*) are exempt, Taxation of OBUs Offshore banking shall refer to the conduct of banking transactions in foreign currencies involving the receipt of funds from external sources and the utilization of such funds (PD 1034). Offshore Banking Unit (OBU) shall mean a branch, subsidiary or affiliate of a foreign banking corporation which is duly authorized by the Central Bank of the Philippines to transact offshore banking business in the Philippines. (PD 1035) OBUs are now treated as regular foreign corporations subject to the 25% regular tax on taxable and other taxes upon the effectivity of the CREATE law. REGIONAL AREA HEADQUARTERS AND REGIONAL OPERATING HEADQUARTERS OF MULTINATIONAL COMPANIES Regional or area headquarters (RAH or RHQ) mean a branch established in the Philippines by multinational companies which headquarters do not earn or derive income from the Philippines and which acts as a supervisory, communication, and Coordinating center for their affiliates, subsidiaries, or branches in the Asia Pacific Regional and other foreign markets. Regional operating headquarters (ROH or ROHQ) mean a 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 evelopment; technical support and maintenance; data Processing and ‘ommunications; and business development. 649OS Re me Ti c ion: i tions axation: Special Corpora’ “A - Regular Income Chapter 15 j A multinational company is a foreign company or group of foreign companies It mul ori business establishments in two or more countries. With i , Taxation of RHQs and ROHQs i rely administrative a income tax since they are mei 1 af Se he communication, and coordination center Fi wbiaisnee branches, or affiliates of their home office. They do not AMM income, ji income tax at 25% of 1, 2022, ROHQs are now subject to incor ince, Contrary to Rigs, RONG ae alowed a Gere nee le on their Services t to their affiliates, subsidiaries, or branches of their home office or Parent Company in the Philippines. RHQs and ROHQs are exempt from all kinds of local taxes, fees or charges impos by a local government unit, except real Property tax on land improvements and equipment. INTERNATIONAL CARRIERS The term international carrier, also called international Common carrier, refers tp entities that transport passengers, mails and excess cargoes or baggage from th Philippines to any destination abroad and vice versa, In the Philippine setting, international carriers are only of two types: a. International air carrier b. International sea or shipping carrier Income tax rates to international carriers Y Generalrule : 2%% of the Gross Philippine Billings Y Exception rule : Preferential rate or exemption on the basis of reciprocity applicable tax treaty or reciprocity Under the exception rule, if the home country of the international carrier subjects Philippine Carriers thereto at a lower rate or exempts them from tax, the Philippine Sovernment will render them the same lower rate or exemption, as the case may be onthe basis of reciprocity, Readers should be advised that RA1037g ki eT ll expire 2014. But this sunset provist By thes Panne, 259% tax shall mene as Vetoed by then President Aquino. Hence, the tat “tll collected by the government cs this day. na ioe to RR1S-2013 which implements the amendments introduced by competiti © exceptional minimal gross income tax is intended to improve Petitiveness of the Philippine Tourism Industry by encouraging ™ 650= Chapter 15-A - Regular Income Taxation: Special Corporations international carriers to maintain flight and shipping operations in the country. ‘ith International carriers should be distinguished from Philippine carriers. The latter isa domestic carrier taxable at 25% of world taxable income. Meaning of Gross Philippine billings a. International air carriers of Gross Philippine Billings refers to the amount of gross revenue derived from R carriage of Persons, excess baggage, cargo, and mail originating from the Philippines in a continuous and uninterrupted flight, irrespective of the place of dle sale or issue and the place of payment of the ticket or passage document. Xs b, International shipping carrier y Gross Philippine Billings means gross ‘revenue, whether for passenger, cargo or mail originating from the Philippines up to final destination, regardless of the a place of sale or payments of the passage or freight documents. nd Continuous and uninterrupted flight or voyage means a flight or voyage from the Philippines up to the point of final destination of the passenger, excess baggage, cargo, and/or mails, Rule on revalidated, exchanged, or endorsed tickets Tickets revalidated, exchanged and/or endorsed to another international airline to form part of the Gross Philippine Billings of the carrying airline if the passenger he boards a plane or a port or point in the Philippines. Exclusion in Gross Philippine Billings 1. Non-revenue passengers - those passengers qualifying under the free mileage programs of the air carriers 2. Refunded tickets Mlustration 1 Pacific Ring Air, a resident foreign air carrier, reported the following summarized results of its Philippine operations during a quarter: v Inbound Outbound —Filights__ —Total__ Gross receipts P 9,000,000 P 8,000,000 P17,000,000 Less: a Direct expenses 5,000,000 4,000,000 9,000,000 Other common expenses —2.000,000 Net income P.6,000,000 Green Air shall pay the following income tax: Gross Philippine Billings P 8,000,000 Multiply by: Income tax rate ——25% 4 Income tax due P_200,000 ¥ Note: The Gross Philippine Billings is the gross recripts from outbound flights. 651—r—“‘“‘C ‘COCR. Chapter 15-A — Regular Income Taxation: Special Corporations apter 15-A — en 5 resident foreign shipping company, sor ce following analysis fig ergreen, : gross recipe fom passengers and cargoes GUringa mon Incoming Outgoing P19,0 Fares billed inthe Philippines P_ 9,000,000 P10,000,000 P19,000,000 —5.000,000 Fares billed abroad —9,000,000 Total billings 218,000,000 P15,000,000 ae onnoeenee 700,000 P 800,000 P 1,500,000 Fares cancelled and refunded 500,000 800,000 1,300,000 Nevergreen shall pay the following income tax: Total billings for outbound flights P15,000,000 Less: Tickets refunded — 200,009 Gross Philippine billings P14,200,000 Multiply by: Income tax rate 25% Income tax due z 355, Note: 1, The Gross Philippine Billings is the total receipts from Outgoing flights, regardless of he place where they are actually billed or paid, The gross receipt is the billing less refundeg tickets, Non-revenue passengers are not billed, Hence, the Passengers is not deducted from the gross Philippi Rule on transshipments or interrupted flights or voyages h originates from the Philippines, but transshipment of Passenger takes place at any port outside the Philippines i ine, only the alqut value of fares on non-reveny e Billings, Mustration Kilo Airways, an international air carrier, had t i i going fights forthe quarter, + had the following gross receipts on outg. —Amount _ mangiong P1500 x 10,000 passengers P15,000,000 UAE P2,000 x 500 passengers 1,000,000 China Pa.000 * 300 passengers 1,200,000 Total gross receipts "0% 400 passengers —1,000,000 652a The fight to Thailand was transshipped in Vietnam to another plane of Kiko Airways. The flight to UAE is endorsed to another air carrier which airlifted them in the Philippines. The flight to China was transshipped to another carrier which airlifted them in Hongkong. Chapter 15-A ~ Regular Income Taxation: Special Corporations | ‘The Gross Philippine Billings of Kiko Airways and its income tax due shall be: | | | Direct outgoing flights - Philippines to Hongkong P 15,000,000 Flight to Thailand? 1,000,000 Endorsed flights - Philippines to UAE? - | Re-transshipped flights - Philippines to China? 600,000, | Gross Philippine Billings P 16,600,000 | Multiply by: income tax rate 2.5% | Income tax due P_415,000 Note: 1. In foreign transshipment involving the same carrier, the gross receipts from the entire flight is included in gross income and is not split! 2, Endorsed tickets are taxable to the carrying airline, Hence, they are excluded in the Gross Philippine Billings of Kiko Airways2 3, In foreign transshipment involving another carrier, only the portion pertaining to the leg flown from the Philippine port to an immediate foreign port (i.e. Hong Kong) is included in Gross Philippine billings. Hence, P1,500 x 400 = P600,000.3 hit The “48-hour” rule on transient passengers Flights or voyages of passengers, mails, or excess baggage commencing from foreign countries which will be interconnected in the Philippine for continuance of the flight or voyage to a foreign destination by the same international carrier shall not be considered originating from the Philippines if the actual departure is made within 48 hours from embarkation in the country, except only when delayed by force majeure. As such, the portion of the ticket pertaining to the outgoing flight or voyage shall be excluded from the Gross Philippine Billings. However, if continuation of the flight or voyage to a foreign destination is made by another airline company or international sea carrier, the cost of the outgoing flight or voyage shall be included in the Gross Philippine Billings of that airline or carrier regardless of the intervening period of time between the arrival and departure from the Philippines. Illustration Fair Airways, an international carrier, had the following summary of flights during a quarter: Direct outgoing flights To Guam (P2,400 x 5,000 passengers) P 12,000,000 To USA (P6,000 x 4,000 passengers) 24,000,000 653oo — Chapter 15-A - Regular Income Taxation: Special Corporations Inter-connecting flights The following inter-connecting flights were continued in the Philippines: Nos, of passengers. _________Status____ Korea for Guam 600 passengers Continued after 96 hours as scheduled ChinaforGuam 400 passengers Delayed 52 hours; due to storm Taiwan for USA 500 passengers Continued after 40 hours as scheduled Guam for USA 300passengers Delayed 52 hours; due to storm* KoreaforUSA 200passengers Continued after 24 hours* “Endorsed to Fresh Airlines, another international air carrier, which airlifted the pass. their final destination ener ty ‘The gross receipts from inter-connecting flights to be included in the Gross Phil Billings of Fair Airways shall be: pine Korea for Guam 600 passengers x P2,400* P1.440,000 Note: 1. . Fares for transient passengers staying herein for more than 48 hours are include. in Philippine Billings, except when they are delayed by force majeure, Hence, the fares ofan passengers stranded by storm shall not be included, " 2. The applicable average fair rate from Philippines to Guam is P2,400 similar to the average used in direct flights.* c 3, Fares on endorsed flights are excluded. They are gross receipts of the carrying airline, The following shall be included in the Gross Philippine Billings of Fresh Airlines: Guam for USA 300 passengers x P6,000* P. 1,800,000 Korea for USA 200 passengers x P6,000 1.200.000 Total B_-3.000,000 Note: The 48-hour exemption rule on force majeure applies only to flights continued by the same international carrier." The Gross Philippine Billings and the income tax due of Fair Airways for the quartet shall be: Direct flight to Guam P 12,000,000 Direct flight to USA 24,000,000 Connected flight from Korea for Guam 1.440.000 Gross Philippine Billings P 37,440,000 Multiply by: Income tax rate __2.5% Income tax due P__936,000 Note to readers national All previous illustrations on international carriers are made in the context of internat carriers, but it must be noted that the same principles and procedures apply '° ie carriers on their voyages. 654 —_—_—_—_bo Chapter 15-A - Regular Income Taxation: Special Corporations Foreign currency translation In the computation of the Gross Philippine billings, tickets in foreign currencies are translated at whichever is higher of the following conversion rates: 1. Monthly average Airline Rate in the Bank Settlement Plan (BSP) Monthly sales report 2, Bankers Association of the Philippines (BAP) rate treaty or Reciprocity Consideration International carriers may avail of a prefyrential rate or exemption from income tax on the basis of applicable tax treaty or international agreement to which the Philippines is a signatory or on the basis of reciprocity such that an international carrier whose home country exempts Philippine carriers shall likewise be exempt from income tax in the Philippines, Treatment of Income Other Than Income from International Transport The other income of international carriers other than from international transport is subject to the appropriate type of income tax. Active income such as demurrage fees, which are in the nature of a rent for the use of property of the carrier in the Philippines, detention fees, and other charges relating to outbound and inbound cargoes as charge for the use of property or rendition of services are subject to the regular corporate income tax. Off-line international carriers Off-line international carriers are those without flights or voyage starting from or passing through any point in the Philippines (ie., no landing rights). The branch or sales agent in the Philippines of off-line international carriers which sells passage documents for compensation or commission to cover off-line flights or voyages of its head office or other airline or sea carriers covering flight or voyages originating from Philippine ports or off-line flights or voyages is subject to the regular corporate income tax. BOI OR PEZA-REGISTERED ENTERPRISES Corporations, domestic or foreign, may register with the Board of Investments (BOI) or to various economic zones such the PEZA to avail of preferential tax incentives. BOI-registered enterprises are given tax holidays whereas PEZA and other economic zones offers tax holidays and or 5% gross income tax in lieu of all taxes, national or local. Details of these preferential tax treatments will be discussed under Local and Preferential Taxation by the same author. 655~*~ Chapter 15-A - Regular Income Taxation: Special Corporations apt “A ~ BLE ON NET INCOME CORPORATIONS TAXABLE O} / REPORTING OE ree or resident foreign, subject to tax on net income ar ani renered to use the terized deduction. They are not allowed fe pear deduction. They file their income using BIR Form 1702-My. opti |-RESIDENT FOREIGN CORPORATION ; SSS ee corporations are generally subject to 25% final t section discusses the tax rules on the following special non-resident corporations which are subject to lower final taxes: feet 1, Non-resident cinematographic film owner, lessor, or dis! i 2. Non-resident lessor of vessels chartered by Philippine nationals) 3. Non-resident owner or lessor of aircraft, machineries, and other equipment aX. This foreigy NON-RESIDENT CINEMATOGRAPHIC FILM OWNER, LESSOR OR DISTRIBUTOR Cinematographic film includes motion picture films, films, tapes, discs and such other similar or related products (RR6-2001). Under the NIRC, owners, lessors, or distributors of cinemat subject to a 25% final tax on their gross income from all sources within the Philippines. The phrase “from all sources within” is broad to encompass any taxable income, passive or active, other than those arising from rentals of cinematographic films, tographic films are NON-RESIDENT LESSOR OF VESSELS These are subject to a 4 %4% fi leases or charters to Filipin Maritime Industry Authority. CHARTERED BY PHILIPPINE NATIONALS inal tax on gross rentals, lease, or charter ‘fees from 10 residents or corporations as approved by the Mlustration Required: Compute the final tax to be withheld by ChangeOil, Solution: The total final tax shall be cemputed as follows: Charter fees (P2,000,000 an 000,000 x 4.5%) oo Training fees (P1,000,000 Yan 990,000 x 25%) Total final withholding. tax ! zsenaia Note: Oni aha. soar hon eso charter fees are covered by the 4 59% final tax. The normal 25% i NC ie: ; " 656chapter 15-A ~ Regular Income Taxation: Special Corporations NON-RESIDENT OWNER OR LESSOR OF AIRCRAFT, MACHINERIES, AND OTHER FQUIPMENT ‘These are subject to a 7 %4% final tax on rentals, charters, and other fees. IMlustration ; NotSoRich Mining, a resident corporation, rented specialized mining equipment from abroad. The non-resident lessor billed NotSoRich the following amounts in peso equivalents: Equipment rental P10,000,000 set-up and training fee 1,000,000 initial service and maintenance fee 500,000 Interest on rent in arrears “50,000 11,550,000 Total bill Required: Compute the total final tax to be withheld by NotSoRich Mining, Solution: ‘The total final tax to be withheld is: Equipment rental (P10,000,000 x 7.5%) P 750,000 Set-up and training fee (P1,000,000 x 7.5%) 75,000 Initial service and maintenance fee (P500,000 x 7.5%) 37,500 Interest on rent in arrears (P50,000 x 25%) 12.500 P__875,000 Total final withholding tax Note: Exemption is limited to charter, rentals, and other fees. Other income from within such as the interest income in this case is subject to the 25% final income tax. ADifferentiation: Lease or charter of: Lessor Cinema Other ‘films Vessels_| Aircraft | equipments Domestic 25%WTI 25%WTI 25%WTI 25%WTI Resident foreign 25%PTI 2.5%GPB 2.5%GPB 25%PTI Non-resident foreign 25%PGI 4.5%PGI 7.5%PGI 75%PGI Legend: WTI = World taxable income; PTI = Philippine Taxable income PGI= Philippine gross income; GPB = Gross Philippine biljings Note that gross income is gross receipts less the direct cost of services while Gross Philippine Billings relates to gross receipts. e tax Non-resident foreign corporations, special or resident, do not file incom hhold returns. Philippine residents who make income payments to them musi wi the final tax and remit the same to the government through BIR Form 1601- 657 iis Ba,5 aot "17, Exempt corporation { 11. BOL-registered enterprises enj 112. FCDU and OBU are ~S Chapter 15-A - Regular Income Taxation: Special Corporations CHAPTER 15-A: SELF-TEST EXERCISES tions | 1 Gente the gener! nae axles or reguar ype of orporaiong 2 Enumerate the different types of resident foreign OTPOFaIONS and 44 ding tax rates. : ~ ee 4, What are sicapeouporationst Whatis ther Primary distinguishing featury Explain the classification rule. : Explain the dominance test. What types of taxpayers are covered bY the dominance test? | ; ey Discs tis esti ies for FCDU and offshore banking units, 7. Explain the meaning of Gross Philippine billings. 8. What are the special types of non-resident foreign corporations and thet rates? True or False 1 1. Foreign and domestic banks may have an EFCDU, 2. The income of FCDU, OBU, and EFCDU from residents other than depositary bans in the EFCDS or FCDS is subject to a 10% final tax. 3. The income of FCDU or EFCDU fri tax, Corporations subject to a rate below 25% are referred to as special corporations Corporation includes joint ventures, associations, and partnerships, Joint ventures formed for the Purpose of undertaking Construction projects or engaging in energy operations are taxable as corporations, Exempt corporations are never subject to Corporate income tax, Government-owned and controlled Corporations are subject to corporate income tax, om foreign sources is subject to regular income ae oN 9. A non-profit hospital is unrelated activities, 10. PEZA-registered ent an exempt corporation taxable only on income fom terprises are exempt from tax, joy income tax holiday for 20 years, divisions of a foreign bank, 13. The income of OB 14. International Carri 15. A domestic carri 16, Special corporations can claim optional standard deduction, S are not required to file income tax returns because they do Not pay tax, Exempt corporations and special Corporations are mandated to use the itemized deductions, 19. Exempt cor No tax due, 18, 2 Tporations who fi led late are not subject to penalties because they have 658> ée48=.8684@=sdSsrsése.=—aeémeémaésacseémsécéCSCNOCt*tsN aa. | chapter 15-A - Regular Income Taxation: Special Corporations 20. Exempt corporations filing BIR Form 1702-EX will not pay tax as 2 rule. rue or False 2 Cee classification rule applied to private schools and non-profithospitas. ‘The dominance test is applied to non-profit schools and private hospitals. Agovernment school is exempt from income tax. A ee ‘owner or lessor of vessel is subject to tax at 7.5% of the gross rental. 5 A regional area headquarters is exempt from tax because it does not derive income. F6, Aregional operating headquarter of a multinational company is subject to 10% on world income, 7, Anon-resident cinematographic film owner, lessor, or distributor is subject to 25% tax on taxable income. ye, Anon-resident owner or lessor of aircraft, machineries and other equipment is subject to tax at 4.5% of gross rentals. 9, Afarmers’ or fruit growers’ association is exempt from income tax. 40, Exempt corporations are subject to income tax on their income from unrelated activities. 41, A non-stock, non-profit institution must be organized for religious, charitable, scientific, athletic, cultural, or for the rehabilitation of veterans. 42, To be exempt, all of the net income or asset of a non-profit corporation or association must be devoted to its purposes, and no part of its net income or asset accrues to benefit any member or a specific person. . The unrelated income of non-profit corporations is exempt from income tax if the same is diverted to its non-profit purpose. The exemption of non-stock and non-profit corporations or associations shall commence when they secure their tax exemption ruling £15, The certificate of tax exemption ruling is valid for one year and renewable every year thereafter. F2 3. +4. 1 4 e True or False 3 1. The FCDUs, OBUs and EFCUs are never subject to regular income tax. 2. Persons and service establishments inside an ECOZONE are subject to the regular tax. £3, The Gross Philippine Billings of international carrlers includes receipts from outgoing voyage or flights which must be billed in the Philippines. 4. Expenses of an exempt corporation not ‘directly traceable to either related or unrelated operations are allocated based on the ratio of gross income. 5. Local water districts are exempt from income tax. 6. Cooperatives that transacts business with non-members are taxable on income allocated to interest on members’ capital when their accumulated reserve exceeds P10,000,000. 659¥ ~ 10. When the income from unrelated activities exceeds 50% of total income, g { 15. Domestic film owners, lessors or distributors shall be subject to 25% tax TO Chapter 15-A — Regular Income Taxation: Special Corporations 7. All cooperatives, regardless of classification, are subject to income income from unrelated activities. "2X on thi 8. The expenses of exempt corporations from exempt operations are ded its gross income from unrelated operations. luctibiy, 9. When the income from related activities constitutes atleast 50% oftotg Private schools are subject to tax at 10% of taxable income fr unrelated activities. 1 inco ‘0M related ‘ng income from unrelated activities of private schools and non-profit heen subject to 25% tax. sPital ig 11. Refunded tickets and tickets of non-revenue passengers are excluded in th Philippine Billings. Goss 12. The gross receipts from transient passengers are excluded from Gross Phil Billings if they depart from the Philippines through the same carrier with"? hours from their arrival. in 48 13. The 48-hour rule does not apply when another carrier continued the flgh voyage of transient passengers. or 14, The 48-hour rule may be extended by force majeure. : oe On gross income from all sources within. Multiple Choice: Theory 1 1. Anon-resident foreign corporatian is taxable on a. worldtaxable income. _ c. Philippine taxable income. b. world gross income @) philippine gross income. 2. The resident and non-resident.classifications do not apply to. @ domestic corporation. b. foreign corporation. c. both domestic and foreign corporations. d. neither domestic nor foreign corporations. 3. Which of these is a special corporate taxpayer? @ Aprivate school c. A business partnership b. Aprivate hospital d.A trading corporation 4. As arule non-profit, non-stock corporations are exempt from income tax. ‘Which of these non-profit entities is subject to income tax? a. Association ©. Farmer's cooperative b. School @ Hospital 5. The exemption of non-profit carporations specifically pertains to income from @) Telated parties. c. related activities. b. unrelated activities. d. both related and unrelated activities. 660 — |Se Chapter 15-A — Regular Income Taxation: Special Corporations -orporation is taxable on 6. @ world taxable income. c. Philippine taxable income. world gross income. —_d. Philippine gross income. rr ir 'e 7. Aresident foreign corporation is taxable on a’ world taxable income. (c)Philippine taxable income, i b. world gross income. 4d, Philippine gross income. e - eee a Bi ite University, a public educational institution, is a. subject to income tax at preferential rate. ' b. subject to income tax at the regular rate. ¢._ subject to both regular and preferential income tax. § @J exempt from corporate income fax. { 9. Generally, government-owned and controlled corporations are subject to preferential income tax. ae a BF subject to regular income tax. c. subject to both regular and preferential income tax. d. exempt from income tax. 10, Generally, private proprietary educational institutions are subject to preferential income tax. subject to regular income tax. subject to both regular and preferential income taxes. exempt fom income tax. e b. c d. 11. Which is not an exempt corporation? a. Social Security System b. Philippine Health Insurance System <) Government-owned and controlled corporations a. Home Development Mutual Fund 12. Which of these foreign corporations is subject to the 25% regular corporate tax? a. Offshore banking units b, International carrier ¢. Regional operating headquarters of a multinational company @} Call center 13. A non-resident foreign corporation is a. subject to 25% tax on taxable income. b. subject to 25% tax on gross income. ¢. not subject to 25% tax on gross income. {@) never subject to 25% tax on gross income abroad. 661i al Chapter 15-A - Regular Income Taxation: Special Corporations 14. Aresident foreign corporation is : a, subject to 10% tax on global taxable income, subject to 10% tax on Philippine taxable income, b. 8 not subject to 25% tax on foreign income. A a. b. not subject to 25% tax on Philippine taxable income, income tax on is foreign income. c, Philippine income. global income. @ Jgross income. Multiple Choice: Theory 2 1. An allocation of common expenses, between related and unrelated activi made to properly reflect taxable income. This procedure Ts Fequired only of a. domestic corporations. b. resident foreign corporations. @© exempt corporations. d, non-profit hospitals. 2. What percentage of profit will shareholders ultimately receive from the corporate earnings? , a. 70% of taxable income (@163% of taxable income b. 70% of gross income —_d. 63% of gross income 3. Which of these concepts is not relevant to corporations? a, Exclusion ‘c. Deduction b. Gross income @Personal exemptions 4, The preferel 1% on taxable income applies to a. proprietary hospital. c. non-profit school. (® proprietary school, @non-profit association. 5, When applicable, the 10% preferential tax rate applies to income from a. related activities. b. unrelated activities. both related and unrelated activities, g neither related and unrelated activities. 6, Exempt corporatious,re nevertheless subject to 25% tax on income from a. related activities. wo unrelated activit cs Both related and unrelated d. neither related and unreia ies. activities, 662> ae Chapter 15-A ~ Regular Income Taxation: Special Corporations 7.. Which is not taxable on unrelated activities? a. Government agencies b. Non-profit corporations c. Government-owned and controlled corporations @ None of these 8, The income from properties of exempt corporations is considered income from related sources, {bY unrelated sources. either related or unrelated activities at the discretion of the examiner. d. either related or unrelated activities depending on the nature of the properties concerned. 9, The classification rule is not relevant to a a. cooperative. a b. farmers’ association. government school. ‘. (@ profit-oriented agricultural organization, 10, Which is subject to. corporate income‘tax? a. Joint venture engaged in-construction b. Joint venture engaged in oil exploration fc) Philippine Charity Sweepstakes Office d. Acharitable medical hospital 11, International carriers are taxable on their gross income or receipt from a incoming shi pment or flight. e flight, both incoming rtm outgoing flight. a any sources. 12. A domestic carrier is subject to tax on a ippine gross income. _ c. Philippine taxable income. b. world gross income. d.'world taxable income. 13, Anon-resident lessor of. €essel) chartered by Filipino nationals is subject to a. 25% tax on its gross rentals from Filipino nationals. b. 25% tax on its worldwide rentals. {@5 4.5% tax on its gross rentals from Filipi i d. 7.5% tax on its gross rentals from Filipino nationals. 14. A omestic cinematographic fil ier, distributor, or lessor is subject to 25% tax on Philippine gross income. ~ ia * 25% tax on global taxable income, 25% tax on global taxable income. 259 tax on Philippine gross income. 663 3993peeeeeetnise Chapter 15-A - Regular Income Taxation: Special Corporations | 15. A non-resident film owner, di itor or lessor is subject to 25% tax on Philippine gross income. 25% tax on global taxable income. ¢. 25% tax on global taxable income. d, 25% tax on Philippine gross income. jon-resident lessor of aircraft is subject to “oe 7.5% tax on PI . }. 4.5% tax on global taxable income. ¢. 25% tax on global taxable income. d. 25% tax on Philippine gross income. 17. A domestic lessor of aircraft and other equipment is subject to é 4.5% tax on Philippine gross income. | 25% tax on glahal taxable income. - 7.5% tax on global taxable income. d. 25% tax on Phisippine gross income. 18. An exempt corporation with no taxable income is delinquent in tin filing its tax petuen. Which - Renalty is it liable to? a. Surcharge Compromise | b. Interest |. All of these | Multiple Choice: Case Problems Problems 1 Dark Desire Corporation, a MSME, reported the following gross income and expenses in 2024: Philippines Abroad Total Gross income 400,000 —- P.300,000 ~—- P-700,000 Deductions —200,000 150,000 Taxable income 200,000 P150,000 P.350,000 Compute the income tax due if the corporation is a/an: 1, domestic corporation 20°/6 Taele Gio Income. a. P100,000 epsooan |, 350,000) * Ln a 70m @) P70,000 ~ d,P40,000 - 7 2. resident foreign corporation 15% Taxabic Pit meome SN ri00 O00 aaa @psoo00 00.000 y 15% = 50,00 b. P70,000 4. P40,000 3. non-resident foreign corporation 75% PH Sw Income aay . P175,000 .P75,000 Or6ss come Ph ae (b)’ P100,000 4. 50,000 — 190,000 664