OF

CORPORAT
IONs
Chapter 3
 CONTENTS OF Report

1. Identify the income taxpayers other than individuals.

2. Define corporation.
3. Identify the classification of corporate taxpayers.
4. State the sources of income of corporate taxpayers.
5. Recognize the categories of income and state the tax rates to be used by each type of
corporate taxpayer.
6. List the sources of passive income and state the final tax rates to be used by each type of
corporate taxpayer.
7. Show the pro-forma computation of the normal income tax of domestic, resident and non-
resident foreign corporations, in general.
DEFINITION OF
TERMS

CORPORATION
It includes partnerships, no matter how created or organized,
joint-stock companies, joint accounts (cuentas en
participacion), associations, or insurance companies, but does
not include general professional partnerships and a joint
venture or consortium formed for the purpose of undertaking
construction project or engaging in petroleum, coal,
geothermal and other energy operations pursuant to an
operating or consortium agreement under a service contract
with the Government.
DOMESTIC CORPORATION – means created or
organized in the Philippines or under its laws.
FOREIGN CORPORATION – means a corporation which
is not domestic.
RESIDENT FOREIGN CORPORATION – applies to a
foreign corporation engaged in trade or business within the
Philippines.
NON-RESIDENT FOREIGN CORPORATION – applies
to a foreign corporation not engaged in trade or business
within the Philippines.

DEFINITION OF TERMS
 SOURCES OF INCOME

SOURCES CORPORATION Within the

Philippines
Without the
Philippines

OF 1. Domestic / /
INCOME 2. Foreign /
 CATEGORIES OF INCOME
AND TAX RATES
1. BUSINESS
INCOME - generally, business income earned by a corporation is taxed at the following rates (Section
27(A), 28(A)(1) and 28(B)(1)):
Year Tax Rate
1997 35%
1998 34%
1999 33%
2000 - October 2005 32%
November 2005 - 2008 35%
2009 30%

2. Passive
INCOME - is subject to separate and final tax. These are taxed at fixed rates ranging 5% to 20%.
Passive income is not to be included in the gross income computation.
 Domestic and resident foreign corporations

Pro-forma computation of normal income

tax:
Gross Income P xxx
Less: Allowable Deductions xxx
Net Income P xxx
Multiply by tax rate (2009) 30%
Tax Due P xxx
DOMESTIC
CORPORATION, IN
PARICULAR
PROPRIETARY EDUCATIONAL
INSTITUTIONS AND NON-PROFIT
HOSPITALS – the 10% tax on the taxable
income is subject to limitation. If the gross
income from unrelated trade, business or other
activity exceeds fifty percent (50%) of the total
gross income derived from all sources, the tax
prescribed under Section 27(A) shall be
imposed on the entire taxable income.
DOMESTIC
CORPORATION, IN
PARICULAR
Unrelated trade, business or other activity –
means any activity which are not substantially
related to the exercise or performance by such
educational institution or hospital of its
primary purpose or function.
 Illustrations 1:

SGB University, a proprietary educational institution, has a gross income for the
taxable year 2009 of P15M. Of the gross income, P5 million derived from unrelated
trade or business. Total deductions amount to P3 million.

Gross Income P 15,000,000

Less: Deductions 3,000,000
Net Income P 12,000,000
Multiply by tax rate 10%
Tax Due P 1,200,000
 Illustrations 2:

SGB University, a proprietary educational institution, has a gross income for the
taxable year 2009 of P15M. Of the gross income, P5 million derived from unrelated
trade or business. Total deductions amount to P3 million.

Gross Income P 15,000,000

Less: Deductions 3,000,000
Net Income P 12,000,000
Multiply by tax rate 30%
Tax Due P 3,600,000
GOVERNMENT-OWNED OR –CONTROLLED
CORPORATIONS, AGENCIES OR
INSTRUMENTALITIES
Subject to the provisions of existing special laws or general laws, all
corporations, agencies, or instrumentalities owned or controlled by the
Government shall pay such rate of tax upon their taxable income as are
imposed by the Code upon corporations or associations engaged in a similar
business. Industry or activity. The following are exempted:
1. GSIS
2. SSS
3. PHIC
4. LWD
5. PCSO
 MUTUAL LIFE INSURANCE
COMPANIES

These companies are now subject to the regular

corporate income tax rates.
 RESIDENT FOREIGN CORPORATIONS,
IN PARTICULAR

INTERNATIONAL SHIPPING
- BRANCH PROFIT REMITTANCES – any profit
remitted by a branch to its head office shall be subject
Gross Philippine Billings – 2.50%
to a tax of fifteen percent (15%) which shall be based
on the total profits applied or earmarked for remittances
without deduction for the tax component thereof
OBUs – income authorized by BSP from foreign (except those activities which are registered with
currency transactions rest income derived from PEZA).
with local commercia banks, including branches
of foreign banks that may be authorized by BSP,
including any interest from foreign currency loans granted to
residents, shall be subject to a final income tax at ten percent
(10%) of such income.
 RESIDENT FOREIGN CORPORATIONS,
IN PARTICULAR

REGIONAL OPERATING HEADQUARTERS –

shall mean a branch established in the Philippines by
multinational companies which are engaged in various
services.
TEN PERCENT (10%) OF TAXABLE INCOME

REGIONAL OR AREA HEADQUARTERS – shall

mean a branch in the Philippines by multinational
companies and which headquarters do not earn or
derive income from the Philippines and which act as
supervisory, communications and coordinating center
for their affiliates, subsidiaries, or branches in the Asia-
Pacific Region and other foreign markets. EXEMPT
FROM INCOME TAX
 RESIDENT FOREIGN CORPORATIONS,
IN PARTICULAR

INTERNATIONAL AIR CARRIER – refer to a

foreign airline corporation doing business in the
Philippines having been granted landing rights in any
Philippines port to perform international air
transportation services/activities or flight operations
anywhere in the world.

Generally, subject to GROSS PHILIPPINES BILLING

TAX of 2.50% unless subject to a different tax rate
under the applicable treaty to which the Philippines is a
signatory.
 In computing for gross Philippines billings, the
following should be included:
a. Gross revenue derived from passage of persons
Determination b. Excess baggage
c. Cargo and/or mail
of gross Originating from the Philippines in a continuous and
uninterrupted flight, irrespective of the place of sale or
Philippine issue and the place of payment of passage documents.

billings
 Non-resident foreign corporation, in
general

The basis of tax for non-resident foreign corporations is gross income from sources
within the Philippines, such as interests, dividends, rents, royalties, salaries, premiums
(except reinsurance premiums) annuities, emoluments or other fixed or determinable
annual, periodic or casual gains, profits and income, and capital gains.

Gross Income P xxx

Multiply by tax rate 2009 30%
Tax Due P xxx
 Non-resident foreign corporation, in
PARTICULAR

• CINEMATOGRAPHIC FILM OWNER, LESSOR OR DISTRIBUTOR – 25% of

GROSS INCOME

• OWNER OR LESSOR OF VESSELS CHARTERED BY PHILIPPINES

NATIONS – 4.5% of GROSS RENTALS, LEASE OR CHARTER FEES FROM
LEASES OR CHARTERS TO FILIPINO CITIZENS OR CORPORATIONS, AS
APPROVED BY THE MARTIME INDUSTRY AUTHORITY.

• OWNER OR LESSOR OF AIRCRAFT, MACHINERY AND OTHER

EQUIPMENT – 7.5% of GROSS RENTALS, CHARTERS AND OTHER FEES.
 PASSIVE INCOME OF NON-RESIDENT
FOREIGN CORPORATIONS

1. Interest on foreign loans contracted on or after August 1, 1986 are taxed at 20%.
2. Income derived by a depository bank under the expanded foreign currency deposit
system from foreign currency transaction with local commercial banks, including
branches of foreign that may be authorized by the BSP, including interest income
from foreign currency loans are EXEMPT.
3. Dividends received from a domestic corporation – final withholding tax at 15%
on the condition that the country in which the non-resident foreign corporation is
domiciled, shall allow a credit against the tax due from the non-resident foreign
corporation taxes deemed to have been paid in the Philippines equivalent to: 2009
– 15%.
 Non-resident foreign corporation, in
PARTICULAR

4. CAPITAL GAINS from sale of shares of stock not traded in the stock exchange. A
final tax at the rates prescribed below is imposed upon the net capita gains realized
during the taxable year from the sale, barter, exchange or other disposition or shares of
stock in a domestic corporation, except shares sols, or disposed of through the stock
exchange:
Not over P100,000 5%
On any amount in excess of P100,000 10%
 ALLOWABLE
DEDUCTIONS

Allowable deduction are items or amounts which the law allows to be

deducted from gross income in order to arrive at the taxable income. A
domestic or resident foreign corporation may deduct from its business
income, itemized deductions under the Tax Code, or, these corporations may
elect a standard deduction in an amount not exceeding forty percent (40%)
of its gross income (RA 9504). Non-resident foreign corporations are not
allowed deductions from gross income.
 TAXABLE INCOME
AND TAX DUE

In case of corporations, TAXABLE INCOME is the pertinent items of gross

income less the deduction authorized for such types of income. Taxable
income is the amount or tax base upon which tax rate is applied to arrive at
the tax due. Depending on the taxpayer involved and for purposes of
computing the income tax liability of a corporation, taxable income may
refer to either one of the following:
1. NET INCOME – the income arrived at after subtracting from the gross
income the deductions of the taxpayer. For domestic and resident
foreign corporations, in general; and other corporations from whose
gross income deductions are allowed:
 PRO-FORMA
COMPUTATION

Sales/Revenue/Receipts/Fees xxx
Less: Cost of Sales/Services xxx
Gross Income from Operation xxx
Add: Non-Operating and Taxable Other Income xxx
Total Gross Income xxx
Less: Deductions
Optional Standard Deduction or
Itemized Deduction xxx
Taxable Income xxx
Multiply by: Tax Rate %
Tax Due xxx
 TAXABLE INCOME
AND TAX DUE

2. GROSS INCOME – the entire or gross income from business without

any deductions for either optional standard deduction or itemized deduction.

For domestic and resident foreign corporations subject to the MCIT; and
non-resident foreign corporation not subject to the normal income tax rate
(Section 28(B)(1)).

Gross Income xxx

Multiply by tax rate 2009 %
Tax Due xxx
 CORPORATIONS EXEMPT FROM INCOME
TAX (SECTION 30, NIRC)

GENERALLY, CORPORATIONS ESTABLISHED NOT FOR

PROFIT ARE EXEMPTED FROM INCOME TAX. (refer to slide 15-
17)
 TAXATION FOR
COOPERATIVES

Cooperatives with accumulated reserves and undivided net savings

of not more than TEN MILLION PESOS (P10M) – EXEMPT
FROM ALL NATIONAL INTERNAL REVENUE TAXES FOR
HICH COOPERATIVES ARE LIABLE.

Cooperatives with accumulated reserves and

undivided net savings of more than TEN
MILLION PESOS (P10M) – (refer to slide 20-21)
 Declaration of quarterly income tax

Every corporation shall file in duplicate a quarterly summary

declaration of its gross income and deductions on a cumulative basis
for the preceding quarter or quarters upon which the income tax shall
be levied, collected and paid. The income tax computed decreased by
the amount of tax previously paid or assessed during the preceding
quarters shall be paid and the return filed not later than sixty (60) days
from the close of each of the first three (3) quarters of the taxable year,
whether calendar or fiscal.

A return showing the cumulative income and

deductions shall still be filed even if the operations
for the quarter and the preceding quarters yielded
no tax due.
 Declaration of quarterly income tax
(cont’d)

Every taxable corporation is likewise required to file a final adjustment return covering the
total taxable income of the corporation for the preceding calendar or fiscal year, which is
required to be filed and paid on or before April 15, or on or before the 15 th day of the 4th
month following the close of the fiscal year, as the case may be. If the sum of the quarterly
tax payments made during the said taxable year is not equal to the total tax due on the entire
taxable income of that year, the corporation shall either:
1. Pay the balance of tax still due; or
2. Carry over the excess credit; or
3. Be credited or refunded with the excess amount paid.
 illustration

The result of operations of a corporation for 2010 whose taxable year

in on a calendar basis is as follows:

GROSS INCOME DEDUCTIONS NET INCOME

1ST Quarter (January –
500,000.00 300,000.00 200,000.00
March)
2nd Quarter (April –
600,000.00 350,000.00 250,000.00
June)
3rd Quarter (July –
700,000.00 400,000.00 300,000.00
September)
4th Quarter (October –
800,000.00 450,000.00 350,000.00
December)
2,600,000.00 1,500,000.00 1,100,000.00

Tax credit for overpaid income tax for the preceding year is P50,000.
 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter TOTAL
Gross Income
this quarter 500,000.00 600,000.00 700,000.00 800,000.00 2,600,000.00
previous quarter/s 500,000.00 1,100,000.00 1,800,000.00
Total Gross Income 500,000.00 1,100,000.00 1,800,000.00 2,600,000.00 2,600,000.00
Less: Deductions
this quarter 300,000.00 350,000.00 400,000.00 450,000.00
previous quarter/s 300,000.00 650,000.00 1,050,000.00
Total Deductions 300,000.00 650,000.00 1,050,000.00 1,500,000.00 1,500,000.00
Taxable Income 200,000.00 450,000.00 750,000.00 1,100,000.00 1,100,000.00
Tax Rate 30% 30% 30% 30% 30%
Tax Due 60,000.00 135,000.00 225,000.00 330,000.00 330,000.00
Less: Previous Tax Payments/Credits 50,000.00 60,000.00 135,000.00 225,000.00 225,000.00
Tax Still Due 10,000.00 75,000.00 90,000.00 105,000.00 105,000.00