Income Taxation

of Corporations
Presented By: Group 5
Subject: Income Taxation
 CONCEPT OF
CORPORATION
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.
-SEC 22 (B), NIRC
DOMESTIC FOREIGN
CORPORATIONS CORPORATION

TAXPAYERS
CORPORATE
N OF
CLASSIFICATIO
Domestic Corporation is a business entity that is A foreign corporation is an entity formed,
organized, registered, and existing under Philippine organized, or existing under the laws of other
laws. country irrespective of the nationality of its
stockholders.
The term 'domestic, when applied to a corporation, -SEC 23 (F), NIRC
means created or organized in the Philippines or
under its laws. The term 'foreign’, when applied to a
-SEC 22 (C), NIRC corporation, means a corporation which is not
domestic
A domestic corporation is taxable on all income -SEC 22 (D), NIRC
derived from sources within and outside the
Philippines. A foreign corporation, whether engaged or not
in trade or business in the Philippines, is taxable
only on income derived from sources within the
Philippines.
SEC 23 (F),NIRC

A FOREIGN CORPORATION MAY BE:

1. RESIDENT FOREIGN CORPORATION
2. NONRESIDENT FOREIGN
CORPORATION
 TAX EXEMPT
CORPORATION
S
Income of the following corporation shall be
exempt from tax
TAX EXEMPT CORPORATIONS
SEC. 30, NIRC

“(A) Labor, agricultural or horticultural organization not organized principally for profit;

(B) Mutual savings bank not having a capital stock represented by shares, and cooperative
bank without capital stock organized and operated for mutual purposes and without
profit;
(C) A beneficiary society, order or association, operating for the exclusive benefit of the
members such as a fraternal organization operating under the lodge system, or mutual aid
association or a nonstock corporation organized by employees providing for the payment
of life, sickness, accident, or other benefits exclusively to the members of such society,
order, or association, or nonstock corporation or their dependents;
(D) Cemetery company owned and operated exclusively for the benefit of its members;
(E) Nonstock corporation or association organized and operated exclusively for religious,
charitable, scientific, athletic, or cultural purposes, or for the rehabilitation of veterans,
no part of its net income or asset shall belong to or inure to the benefit of any member,
organizer, officer or any specific person;
TAX EXEMPT CORPORATIONS
SEC. 30, NIRC

F) Business league chamber of commerce, or board of trade, not organized for profit and no
part of the net income of which inures to the benefit of any private stock-holder, or
individual;
(G) Civic league or organization not organized for profit but operated exclusively for the
promotion of social welfare;
(H) A nonstock and nonprofit educational institution;
(I) Government educational institution;
(J) Farmers' or other mutual typhoon or fire insurance company, mutual ditch or irrigation
company, mutual or cooperative telephone company, or like organization of a purely local
character, the income of which consists solely of assessments, dues, and fees collected from
members for the sole purpose of meeting its expenses; and
(K) Farmers', fruit growers', or like association organized and operated as a sales agent for
the purpose of marketing the products of its members and turning back to them the
proceeds of sales, less the necessary selling expenses on the basis of the quantity of
produce finished by them;
 OF
CORPORATION
INCOME TAXES
1. Regular Domestic Income
Tax (RCIT)
2. Minimum corporate
income tax (MCIT)
3. Optional corporate income
tax (OCIT)
4. Improperly accumulated
earnings tax
 REGULAR
CORPORATE
INCOME TAX
 INCOME TAX
REGULAR CORPORATE
Regular income is any type of
income earned by an organization
or an individual that is taxable at
ordinary rates. It includes (but is
not limited to) wages, salaries,
tips, bonuses, rents, royalties, and
interest income from bonds and
commissions.
MINIMUM
CORPORATE
INCOME TAX
Minimum corporate income tax

INCOME TAX
MINIMUM CORPORATE
(MCIT) on gross income,
beginning in the fourth taxable
year following the year of
commencement of business
operations. MCIT is imposed
where the CIT at 30% is less than
2% MCIT on gross income.
OPTIONAL
CORPORATE
INCOME TAX
SECTION 27 A of the NIRC provides an optional

INCOME TAX
OPTIONAL CORPORATE
gross income tax of 15% based on the gross
income.
A. TAX ratio of 20% of gross national product
B. 40% of income tax collection to total tax
revenue.
C. Vat tax effort of 4% of GNP
D. 0.09% ratio of the consolidated public sector
financial position to GNP.
 
• The option to be taxed based on gross sale is
not exceed 55%
• The election of the gross income tax option by
the corporation shall be irrevocable for three
consecutive taxable year.
CAPITAL GAINS WITHIN DOMESTIC RESIDENT NON RESIDENT

TAX
CAPITAL GAIN
FOREIGN FOREIGN
Capital gains on sale of shares    
of stock not traded in the local      
stock exchange net capital gains      
NET OVER P 100,000      
EXCESS of P 100,000
     
5% 5% 5%
10% 10% 10%
Percentage tax on sale of share      
of local stock exchange based      
on selling price. ½ of 1% ½ of 1% ½ of 1%

Capital gains or disposition of      

lands and or buildings located in 6% of selling price Not applicable Not applicable
Phil. or FMV, whichever
is higher.
Net capital gains on sale or      
exchange or disposition of land      
and building located outside the 30% Not taxable Not taxable
Phil.
IMPROPERLY
ACCUMULATED
EARNINGS TAX
 EARNINGS TAX (IAET)
IMPROPERLY ACCUMULATED
• IAET is in addition to other taxes imposed under title II
(Income tax)
• 10% tax is imposed for permitting the earnings and
profits of the corporation to accumulate instead of
distributing them to the shareholders.
• As a form of deterrent to the avoidance of tax upon
shareholders who are supposed to pay dividend tax.
• Tax is imposed in the nature of penalty to a corporation
for improper accumulation of earning beyond the
reasonable needs of the business.
• The IAET covers the improper accumulated earnings or
profit of Domestic Corporation only.
EXEMPT APPROPRIATE OF

IMPROPERLY ACCUMULATED EARNINGS TAX (IAET)

EARNINGS
1. Mandatory appropriations- required by law
2. Contractual appropriations- required by contract
3. Reasonable appropriations- reasonable needs of
business

REASONABLE APPROPRIATION OF
EARNINGS
1. Immediate test
2. Correlation test
 IMPROPERLY ACCUMULATED EARNINGS TAX (IAET)
INSTANCES OF REASONABLE
ACCUMULATION OF EARNINGS

1. Allowance for the increase in the accumulation of

earnings up to 100% of the paid- up capital of the
corporation as of balance sheet date, inclusive of
accumulation taken from other years.

2. Earnings reserved for definite corporate expansion

projects or programs requiring considerable capital
expenditure as approved by the board of directors or
equivalent body.
 IMPROPERLY ACCUMULATED EARNINGS TAX (IAET)
INSTANCES OF REASONABLE
ACCUMULATION OF EARNINGS

1. Allowance for the increase in the accumulation of

earnings up to 100% of the paid- up capital of the
corporation as of balance sheet date, inclusive of
accumulation taken from other years.

2. Earnings reserved for definite corporate expansion

projects or programs requiring considerable capital
expenditure as approved by the board of directors or
equivalent body.
 PRIMA FACIE INSTANCES OF
IMPROPER ACCUMULATION OF
IMPROPERLY ACCUMULATED EARNINGS TAX (IAET)
EARNINGS
1. Investment in bonds and other long term securities
2. Accumulation of earnings in excess of 100% of the
paid-up capital.

ENTITIES PRESUMED IMPROPERLY

ACCUMULATING EARNINGS
1. Holding companies- owning a controlling stake in
another corporation.
2. Investment companies- primary engage in the business
of investing reinvesting and trading in securities.
3. Closely held corporations- at least 50% value of their
capital stock or total voting power is not owned directly
or indirectly by not more than 20 individuals.
 IAET is a PENALTY tax
IMPROPERLY ACCUMULATED EARNINGS TAX (IAET) The nature of a penalty tax and is not in lieu of dividends
tax.

IAET exempt entities under NIRC

- The NIRC exempts the following from the improperly
accumulated earnings tax
(acronym PFBI’s)
1. Public-held corporation
2. Finance companies
3. Banks
4. Insurance companies
 OTHER ENTITIES EXEMPT FROM
IAET
IMPROPERLY ACCUMULATED EARNINGS TAX (IAET)
-Not subject to improperly accumulated earnings tax by their
nature:
1. Taxable partnership
2. General professional partnership
3. Taxable and non-taxable joint ventures
4. ECOZONE “5% tax imposed” registered
entities (PEZA, BCDA, etc)

PERIOD OF PAYMENT OF DIVIDEND

OR IAET
Declared within one year from the close of the taxable year.
 BRANCH PROFIT REMITTANCE TAX
IMPROPERLY ACCUMULATED EARNINGS TAX (IAET)
• Profit remitted by branch to its head office abroad shall
be subject to a tax of 15%
• 15% branch profit remittance tax is a final tax required
to be withheld source by the branch of a foreign
corporation.

SCOPE OF THE BRANCH PROFIT

REMITTANCE TAX
All resident foreign corporation, except PEZA-registered
entities.
 INDIRECT REMITTANCE
IMPROPERLY ACCUMULATED EARNINGS TAX (IAET)
• Remittance of profits to a resident affiliate or to a
Philippine regional operating headquarters of the home
office.
• Transfer of net profits to increase the branch assigned
capital account BIR ruling no. 039-2005

BRANCH CAPITAL ACCOUNTS

‘’HOME OFFICE”
• Assigned capital accounts- represent the net investment
(capital)
• Accumulated profits (losses) the net balance of
unremitted, retained.
 S
CORPORATION
SPECIAL
NON-
RESIDENT RESIDENT
DOMESTIC FOREIGN FOREIGN

PARTNERSHIP JOINT ESTATE AND

S VENTURES TRUST
 CORPORATIONS
SPECIAL
DOMESTIC CORPORATIONS

A domestic corporation is one organized and existing under

the Philippine Laws. In general, it includes government owned
and controlled corporations or instrumentalities engaged in
similar business industry or activity.
-SEC. 22 ©; 27©, NIRC
 CORPORATIONS
SPECIAL
DOMESTIC
CORPORATIONS
The following corporate income tax (CIT) rates apply to domestic corporations:
Income CIT rate (%)

In general, on net income from all sources. 30

Minimum corporate income tax (MCIT) on gross income, beginning in the

fourth taxable year following the year of commencement of business
2
operations. MCIT is imposed where the CIT at 30% is less than 2% MCIT
on gross income.

Proprietary educational institutions and non-profit hospitals, on net income

if gross income from unrelated trade, business, and other activities does 10
not exceed 50% of the total gross income from all sources.

Non-stock, non-profit educational institutions (all assets and revenues

used actually, directly, and exclusively for educational purposes) and other Exempt
non-profit organisations.
 CORPORATIONS
SPECIAL
RESIDENT FOREIGN
CORPORATION
The term 'resident foreign to a foreign corporation
engaged in trade or business in the Philippine. -SEC
22 (H), NIRC

A physical store, branch or office within Philippines

for the purpose of business and trade.
RESIDENT FOREIGN

CORPORATIONS
SPECIAL
CORPORATION
Income CIT rate (%)

Income of international carriers on their gross Philippine billings 2.5

Interest income from foreign currency loans granted to residents other than offshore
10
business units (OBUs) or local commercial banks

Income of OBUs and foreign currency deposit units (FCDUs) of depository banks from
foreign currency transactions with non-residents, other OBUs or FCDUs, and local
Exempt
commercial banks (including branches of foreign banks) authorized by the Bangko
Sentral ng Pilipinas (BSP; central bank) to transact business with OBUs and FCDUs

Regional operating headquarters (ROHQs) earning income from the Philippines 10

Regional or area headquarters of multinational corporations that do not earn or derive

income from the Philippines, and that act as supervisory, communications, and
Exempt
coordinating centers for their affiliates, subsidiaries, or branches in the Asia-Pacific
region and other foreign markets
 CORPORATIONS
SPECIAL
NON RESIDENT FOREIGN
CORPORATION
The term 'nonresident foreign corporation' applies to a
foreign corporation not engaged in trade or business NON RESIDENT
within the Philippines. FOREIGN
-SEC 22 (I), NIRC
CORPORATION
Taxable earnings are derived from fixed determinable
income within the Philippines such as follows:
• interests, dividends, royalties 30% final tax on Philippine
• rents, salaries,
• premiums (except reinsurance premiums), gross income.
• annuities, emoluments or other fixed or determinable
annual, periodic or casual gains, profits and income,
and;
• capital gains, except capital gains from sale of stock
not traded in the stock exchange of a domestic
corporation
 CORPORATIONS
SPECIAL
PARTNERSHIP
is one formed by persons for the sole purpose of exercising their common profession, no part
of the income of which is derived from engaging in any trade or business.

- A GPP (General professional partnership) shall not be subject to the income tax but is
required to file an annual income tax/return for information about the share of each of the
partner in the partnership.

- It does not pay national income taxes rather, it just serves as a conduit or pass-through
where its income is ultimately taxed to the partners comprising it.
 CORPORATIONS
SPECIAL
JOINT VENTURES
A joint venture involves two or more businesses pooling their
resources and expertise to achieve a particular goal. The risks
and rewards of the enterprise are also shared.
However, a joint venture could give you:
1. More resources
2. Greater capacity
3. Increased technical expertise
4. Access to established markets and distribution channels
 CORPORATIONS
SPECIAL
ESTATE AND
TRUST
Estate Tax – Estate Tax is a tax on the right of the deceased
person to transmit his/her estate to his/her lawful heirs and
beneficiaries at the time of death and on certain transfers,
which are made by law as equivalent to testamentary
disposition.
It is not a tax on property. It is a tax imposed on the privilege
of transmitting property upon the death of the owner. The
Estate Tax is based on the laws in force at the time of death
notwithstanding the postponement of the actual possession or
enjoyment of the estate by the beneficiary.
 CORPORATIONS
SPECIAL
ESTATE AND
TRUST
Trust - A trust is traditionally used for minimizing
estate taxes and can offer other benefits as part of a
well-crafted estate plan.

A trust is a fiduciary arrangement that allows a third

party, or trustee, to hold assets on behalf of a
beneficiary or beneficiaries. Trusts can be arranged in
many ways and can specify exactly how and when the
assets pass to the beneficiaries.
 LIMOSINERO,

MEMBERS
GROUP 5
REYCHILIN
BSA-II

MATA, MA.
SHANRILA
BSA-II

NAVARRO, JOYCE ANN

BSA-II
 MEMBERS
GROUP 5
NAZARENO, LENARD
BSBA-II

NOLIDO, HYA
NICOLE
BSBA-II
THANK YOU
FOR
LISTENING
 REFERENCES:
BOOKS:

● A Study on Income Tax Law and Accounting

by VIRGILIO D. REYES

WEB SEARCHES

● https://
taxsummaries.pwc.com/philippines/corporate/t
axes-on-corporate-income
● https://home.kpmg/xx/en/home/insights/20
11/12/philippines-income-tax.html