MODULE 9 RETURNABLE INCOME of DOMESTIC CORP.

ITR 1702
CORPORATION
Under the Tax Code, these are considered as corporations:
 joint stock companies,
 joint accounts,
 association, insurance companies or
 Partnerships (general co-partnership) no matter how they are created or organized, except general professional partnership
which deriving income exclusively from exercise of common profession. Not exempt from withholding required withholding
tax on its payments.
Excluded from the tax definition of corporations:
For income tax purposes, however, a corporation does not include
 general professional partnerships. And
 a joint venture or consortium formed to undertake construction projects or engage in petroleum, coal, geothermal and other
energy related operation, pursuant to an operating or consortium agreement with the Government (Sec. 22A, NIRC).
Situs of income taxation for CORPORATE taxpayer:

Taxable Income
Within Outside
Domestic Corporation yes Yes
Resident Foreign corp. yes No
Non-resident Foreign corp. yes No

Other than domestic corporations, all other corporations are taxable only with Philippine income tax for income earned
within the Philippines.
Domestic Corporations:
A domestic corporation is one organized and existing under Philippine laws.
The term “domestic corporation” includes Government-Owned and Controlled Corporations (GOCC) since they are now subject to
the corporate income tax like ordinary corporations.
Subsidiary of Foreign Corporation
A subsidiary is a stock corporation organized under Philippine laws and as such, is deemed a domestic
corporation even if its capital stock is foreign-owned.
Being a domestic corporation, a subsidiary is subject to income tax on its worldwide income, i.e.,
income from all sources within and without the Philippines.
Government corporations that are exempt from income tax:
 Government Service Insurance System (GSIS),
 the Social Security System (SSS),
 the Philippine Health Insurance Corporation (PHIC),
 the Philippine Charity Sweepstakes Office (PCSO)

CORPORATIONS which are exempt from income tax:

Income received by the following corporations shall be exempted from tax BUT must carry a tax exemption certificate (CTE):
Non-stock and non-profit educational institutions if arising from the very purpose that it was created.
Fill up ITR 1702 EX (exempt), if with Tax Exemption
Government educational institutions.
Non-profit labor, agricultural or horticultural organizations. Certificate, else ITR 1702 RT (regular tax rate)
Associations of farmers, fruit growers, and the like whose primary function is to market the product of their members.
Organizations with a purely local operation whose income is derived only from assessments, dues, and fees collected from their members to meet operational expenses such as
fire insurance company, farmers’ or other mutual typhoon associations, mutual ditch or irrigation company and mutual or cooperative telephone company.
Non-stock Corporation or association organized and operated exclusively for religious, charitable, scientific, athletic, or cultural purposes, or for the rehabilitation of veterans;
provided that no individual person owns its assets or no individual person receives benefit on its earnings.
Non-stock/ non-profit mutual savings bank or non-stock/ non-profit cooperative bank.
Non-profit civic league or organization operating exclusively for the promotion of social welfare.
Cemetery company owned and operated exclusively for the benefit of its members.
Non-profit business league, chamber of commerce, or board of trade.
Associations, orders, beneficiary societies operating for the exclusive benefits of their members. (Sec. 30, )
 TAX RETURNS of corporations:
1702, Final Adjustment Return, to be filed on before April 15 or on or before 15th day of the 4th month following the close of the
taxable year.
1702Q Quarterly, to be filed within 60 days following the close of each quarter.

Deductions allowed on reportable income of corporations:

 Itemized deductions (must be ordinary, necessary, withheld with tax, incurred during the taxable year, not against moral):
these are allowed with itemized deductions, governed by the same rule as deductions allowed for taxable income of individual
taxpayers.

 Standard deduction
under RA 9504, effective July 6, 2008, these are allowed with 40% standard deduction on their gross income.

NOLCO
Net Operating Loss' shall mean the excess of allowable deduction over gross income of the business in a taxable year.
 Allowed as item of deduction for the next 3 succeeding years.
 Not available if opting for standard deduction
 any net loss incurred in a taxable year during which the taxpayer was exempt from income tax shall not be allowed as a deduction

Gross income' derived from business shall be equivalent to gross sales less sales returns, discounts and allowances and cost of goods
sold. "Cost of goods sold' shall include all business expenses directly incurred to produce the merchandise to bring them to their present
location and use.
In the case of taxpayers engaged in the sale of service, 'gross income' means gross receipts less sales returns,
allowances and discounts, (no deductible direct cost of services)
Income tax rate on Net Taxable Income of Domestic Corporation in 1702 ITR until June 30,2020:
 Normal rate of 30% until June 30, 2020 on the net taxable income in 1702
 Minimum corporate income tax (MCIT) of two percent (2%) until June 30, 2020 of the gross income beginning on the fourth
taxable year immediately following the year in which such corporation commenced its business operations, when the minimum
income tax is greater than the tax computed under the normal tax rate.
ILLUSTRATION
On the fourth taxable year of domestic corp., the following were reported in 2019:
Sales P10,000,000
Cost of sales 6,000,000 base of MCIT
Gross business income P 4,000,000
Itemized expenses 3,750,000
Net income before tax P 250,000 base of normal tax

How much is its income tax liability in ITR 1702 for 2019?
ANSWER
Normal tax, P250,000 x 30% P75,000
Minimum Corporate Income tax, 4,000,000 x 2% = P 80,000

The income tax due is P80,000, the higher amount between the normal tax and the
MCIT.

BOOK ENTRY:
Income tax expense, (normal tax ) 75,000
Deferred Tax (excess of MCIT over Normal) 5,000 available as tax credit against normal tax liability for the next 3 yrs.
Income tax payable 80,000
Corporate Income Tax Rate effective July 1, 2020 :
25% on the Net Taxable Income, if the total assets is more than P100,000,000
20% on the Net Taxable Income, if the total assets is P100,000,000 or less

Minimum Corporate Income Tax of 1% on the Gross Business Income

ILLUSTRATIVE CASE
For taxable year 2020, a domestic corporation reported the following :
Sales P5,000,000
Cost of sales 3,000,000
Item of expenses 1,000,000

1. How much is its normal income tax on the net taxable income if its total assets is P80,000,000?
ANSWER (5,000,000 -3,000,000 – 1,000,000) = Net taxable income of P1,000,000
Income Tax at normal tax rate:
1,000,000 x 30% x (6/12) = P150,000 prior to July 1, 2020
1,000,000 x 20% x (6/12) = 100,000
Tax on net taxable income = P250,000

2. How much is its normal income tax on the net taxable income if its total assets is P120,000,000?
ANSWER (5,000,000 -3,000,000 – 1,000,000) = Net taxable income of P1,000,000
Income Tax at normal tax rate:
1,000,000 x 30% x (6/12) = P150,000 prior to July 1, 2020
1,000,000 x 25% x (6/12) = 125,000
Tax on net taxable income = P275,000
The minimum Corporate Income Tax Rate effective July 1, 2020 is 1% of the Gross Business Income

ILLUSTRATIVE CASE
For taxable year 2020, a domestic corporation reported the following :
Sales P5,000,000
Cost of sales 4,000,000
Item of expenses 950,000

1. How much is its Minimum Corporate Income tax on the Gross taxable income ?
ANSWER (5,000,000 -4,000,000 = Gross taxable income of P1,000,000
Minimum Corporate Income Tax on the Gross Income:
1,000,000 x 2% x (6/12) = P10,000 prior to July 1, 2020
1,000,000 x 1% x (6/12) = 5,000
Tax on the gross taxable income = P15,000

2. How much is its income tax due in its 1702 ITR if its total assets is P120,000,000?

ANSWER (5,000,000 -4,000,000 – 950,000) = Net taxable income of P50,000

Income Tax at normal tax rate:
50,000 x 30% x (6/12) = P7,500 prior to July 1, 2020
50,000 x 25% x (6/12) = 6,250
Tax on net Income = P13,750
Income tax due is the higher between P13,750 normal and P15,000 MCIT = P15,000