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Corporations-NOTES
Corporations-NOTES

ORDINARY INCOME:

30% Regular Corporate Income Tax (RCIT); OR			30% FWT

Whichever is higher between RCIT and 2% Minimum			NA
Corporate Income Tax (MCIT) on the 4^th year of operations
Following year of registration

15% “Gross” Income Tax (GIT)”, if qualified			NA

CERTAIN PASSIVE INCOME derived from within the Philippines	**	**	30% FWT
Final withholding tax (FWT)

CAPITAL GAIN
CAPITAL GAINS TAX:
ON SALE of shares of stock of a domestic corporation
Directly to a buyer -0 Capital Gain Tax
ON SALE of land and/or buildings in the Philippines		NA	NA

Improperly Accumulated Earnings Tax (IAET)		NA	NA
** refer to the schedule of final withholding taxes on passive income below:

PASSIVE INCOME From Philippine Sources SUBJECT TO FINAL TAXES
Certain PASSIVE Income Derived From Philippine	CORPORATION
Sources subject to Final Tax	DC	RFC	NRFC
INTEREST INCOME/YIELD/Other Monetary Benefit
Interest income in any currency bank deposit	2 0%	20%	30%
Y ield or any monetary benefit from deposit from deposit substitute
Yield or any monetary benefit from trust fund and other	20%	2 0%	30%
similar arrangement
Interest income derived from depository bank under expanded
foreign currency deposit system
PRIOR to effectivity of TRAIN Law	7 1/2	7 1/2	Exempt
Under TRAIN Law	1 5 1/2	7 ½*	Exempt
Interest income derived from depository bank under expanded
foreign currency deposit system

ROYALTIES	2 0%	2 0%	3 0%

DIVIDENDS received from DC	Exempt	Exempt	15%** or 30%
*One of the apparent inconsistencies under the TRAIN Law
* *If the country where the NRFC is domiciled allows a credit for taxes deemed paid in the Philippines equivalent to 15%, otherwise, 30% (without tax sparing).

I ncome derived under foreign currency deposit system BY DEPOSITORY BANKs:

From foreign currency transactions with:
Nonresidents	Exempt
OBU in the Philippines	Exempt
Local commercial banks	Exempt
Branches of foreign banks	Exempt
From foreign currency loans granted to residents other than the enumerations above and other depository banks	10%

Income derived by nonresidents (individuals or corporations) from transactions with depository banks under the expanded foreign system shall be exempt from income tax.

Certain C APITAL GAINS Derived From Philippine	CORPORATION
Sources subject to Capital Gains Tax	DC	RFC	NRFC
On CAPITAL gains from sale of shares of stock of a domestic
corporation not traded in the local stock exchange
PRIOR to effectivity of TRAIN law
First P 100,000 capital gain	5%	5%	5%
Amount in excess of P 100,000 capital gain	1 0%	1 0%	10%
Under TRAIN Law	1 5 1/2	7 ½*	Exempt
Capital Gain, regardless of amount (if by DC only)
The 5%; 10% rates by RFC and NRFC were retained

CAPITAL GAINS TAX on sale or exchange or disposition of	6 %**	N A	N A
Land or/or buildings (Basis: Selling Price or Fair market value,
whichever is higher)
**FMV is the higher amount between the valuation provided by the Provincial or City assessors, also
k nown as “assessed value” versus the zonal valuation provided by the BIR

The % of CGT on shares of DC sold by RFC and NRFC was not amended under TRAIN Law

The 6% CGT is imposed, regardless of whether the sale resulted to gain or loss.

The option available to individual taxpayers to subject the sale to either 6% CGT or Basic Tax if the buyer is the government is not domestic corporations.
CAPITAL GAINS TAX

Capital Gains Tax on Sale of Land and/or Buildings

Requisites:

The land and/or building must be a capital asset; and
It must be located in the Philippines.
Regardless of whether the transaction resulted to a gain or loss

FORMULA:

Tax Base Pxxx

Rate 6%__

CGT Pxxx

TAX BASE:

Selling Price
Fair Market Value
Zonal Value

Capital Gains Tax on Sale of Shares of Stock of a Domestic Corporation Requisites:

The share of stock sold, bartered, exchanged or disposed must be from a domestic corporation; and
The transaction must be not through the local stock exchange.
The seller should not be a dealer in securities (held as capital asset or for investment purposes only)
The transaction should result to a capital gain based on computation shown below:

FORMULA:

SELLING PRICE Pxx

COST (xx) **Prior to TRAIN Law:

SELLING EXPENSE (xx) 1^st P100,000 cap. Gain = 10%

CAPITAL GAIN Pxx In excess of P100,000 cap. Gain = 10%

RATE %** Upon effectivity of TRAIN Law:

CGT Pxx. Regardless of the amount of gain = 15%

Sale of shares of a domestic corporation through the local stock exchange is not subject to income tax but to a “business tax under Sec 127 of the Tax Code as follows:

PRIOR to effectivity of TRAIN Law

½ of 1% of GSP (also known s stock transaction tax)

Under TRAIN Law

6/10 of 1% of GSP (also known as stock transaction tax)
Sale of shares of stock by a dealer in securities such as brokerage firms, regardless of whether the shares were sold directly to a buyer or through the local stock exchange is subject to basic income tax and value added tax.
Under RR 6-2013, the value of the shares of stock at all time of sale shall be the fair market value. In determining the value of the shares, the Adjusted Net Asset Method shall be used whereby all assets and liabilities are adjustable to market values. For purposes of discussion in this review material, the selling price is assumed to be the market value computed using the aforementioned method, assuming the latter is not provided.
REGULAR CORPORATE INCOME TAX (RCIT)

Gross Income Pxxx

Allowable Deductions. (xxx)

Taxable Income. Pxxx

Rate 30%

RCIT Pxxx

GROSS INCOME – Includes all income not subject to final withholding tax, capital gain tax and not considered exempt under the law.
ALLOWABLE DEDUCTIONS:

Business Expenses & Losses (Itemized Deductions); or
Optional Standard Deduction

MINUMUM CORPORATE INCOME TAX (MCIT)
MCIT of two percent (2%) of the gross income as of the end of the taxable year (whether calendar or fiscal), is imposed upon any domestic corporations and resident foreign corporations beginning on the 4^th taxable year immediately following the taxable year in which such corporation commenced its business operations. The MCIT shall be imposed whenever:

The corporation has zero taxable income; or
The corporation has negative taxable income; or
Whenever the amount of MCIT is greater than the regular corporate income tax (RCIT) due from such corporation. Hence, MCIT is always computed and compared to RCIT starting on the fourth year of operations.

GROSS INCOME DEFINED FOR MCIT PURPOSES:

Seller of Goods

Gross Sales	Pxx
Sales Discount	(xx)
Sales Returns and Allowances	(xx)
Cost of Sales	(xx)
Gross Income	Pxx
Add: Other Income subject to RCIT	Xx
Total Gross Income for MCIT purposes	Pxx

Cost of Goods Sold:

Trader or Merchandiser

Invoice cost of goods sold	Pxx
Import duties	xx
Freight	xx
Insurance	xx
Total	Pxx

Manufacturing Concern

Raw materials used	Pxx
Direct Labor	xx
Manufacturing overhead	xx
Freight Cost	xx
Insurance Premiums	xx
Other cost of production	xx
Total	Pxx

Seller of Services

Gross Receipts	Pxx
Sales Discounts and allowances	(xx)
Cost of Services	(xx)
Gross Income	Pxx
Add: Other income subject to RCIT	xx
Total Gross Income for MCIT purposes	Pxx

COST OF SERVICES

Salaries/Employees benefits of personnel, consultants and specialists directly rendering the service	PXXX
Cost of facilities directly utilized in providing the service (e.g. rentals and cost of supplies)	XXX
Other direct costs and expenses necessarily incurred to provide the services	XXX
TOTAL	PXXX
In case of banks, “cost of services” shall include interest expense.

CARRY FORWARD OF EXCESS MCIT (MCIT CARRY-OVER)

Any excess of the MCIT shall be carried forward and credited against the RTIC for three (3) immediately succeeding taxable years.
RELIEF FROM THE MCIT

The Secretary of Finance is authorized to suspend the imposition of the MCIT on any corporation which suffers losses on account of:

Prolonged labor dispute
Force majeure
Legitimate business reverses

DOMESTIC CORPORATIONS EXEMPT FROM MCIT:

Proprietary educational institutions and hospitals which are non-profit
Depository banks under expanded foreign currency deposit system

RESIDENT FOREIGN CORPORATIONS EXEMPT FROM MCIT:

International carrier
Offshore banking units
Regional or area headquarters
Regional operating headquarters
Firms that are taxed under special tax regime (e.g. Covered by PEZA law and Bases Conversion Development Act)

OPTIONAL CORPORATE INCOME TAX (15% Gross Income Tax)
The President, upon the recommendation of the Secretary of Finance may, effective January 1, 2000, allow domestic and resident foreign corporations to be subjected to optional corporation tax of 15% based on gross income. Election of 15% tax shall be irrevocable for three (3) consecutive taxable years during which the corporation is qualified under the scheme.
REQUISITES:

All of the following conditions shall have to be satisfied in the allowances of optional corporate tax:

A tax effort ratio of 20% of Gross National Product (GNIP);
A ratio of 40% of Income tax collection of total tax revenue;
A VAT effort of 4% of GNP; and
A 0.9 ration of the Consolidated Public Sector Financial Position of GNP.
The option to be taxed based on gross sales or receipts from all sources does not exceed 55%.

FORMULA:

Sales/Revenue

Pxx

Cost of Sales/Cost of Direct Services

(xx)

Gross income

xx

Gross income tax rate

15%

Income tac due

Pxx

Less: Taxes withheld

(xx)

Taxes paid – previous quarters

(xx)

Foreign tax credits

(xx)

Income tax payable

Pxx

IMPROPERLY ACCUMULATED EARNINGS TAX (IAET)
This tax is only applicable to domestic corporations which are classified as closely-held corporations.

The following shall be exempt:

Banks and other non-bank financial intermediaries;
Insurance companies;
Publicly-held corporations;
Taxable partnerships;
General professional partnerships;
Non-taxable joint ventures; and
Enterprises duly registered with the:

PEZA
Pursuant to Bases Conversion and Development Act of 1992
Special Economic Zones
BOI registered entities

TAXABLE EVENT

The taxable event in IAET is the accumulation of earnings BEYOND the reasonable needs of the business.
REASONABLE NEEDS OF THE BUSINESS

The test used in determining the reasonable needs of the business is the so called “Immediacy Test”. It provides that “reasonable needs” of the business is equivalent to:

Immediate Needs Pxxx

Reasonably anticipated needs xxxx

Reasonable Needs Pxxx
The following constitute accumulation of earnings for the reasonable needs of the business:

Earnings reserved for definite corporate expansion projects or programs requiring considerable capital expenditure as approved by the Board of Directors or equivalent body;

Earnings reserved for building, plants or equipment acquisition as approved by the Board of Directors or equivalent body;

Earnings reserved for compliance with any loan covenant or pre-existing obligation established under a legitimate business agreement;

Earnings required by law or applicable regulations to be retained by the corporation or in respect of which there is prohibition against its distribution;

In the case of subsidiaries of foreign corporations in the Philippines, all undistributed earnings intended or reserved for investments within the Philippines as can be proven by corporate records and/or relevant documentary evidence.

FORMULA (REVISED UNDER RMC 35-2011)

Taxable Income for the year		Pxxx
Add: Income exempt from tax	Pxxx
Income excluded from gross income	xxx
Income subject to final taxes	xxx
Net Operating loss carry over (NOLCO)	xxx	xxx
Less: Dividends (actually or constructively paid)	(xxx)
Income tax paid/payable for the whole year*	(xxx)	(xxx)
Total		Pxxx
ADD: Retained earnings prior yearts		xxx
Accumulated earnings as of the end of the current year		xxx
LESS: AMOUNT THAT MAY BE RETAINED
(100% of paid up capital as of year-end)		(xxx)
EXCESS (considered improperly accumulated earnings)		xxx
X IAET rate		10%
Improperly accumulated earnings tax (IAET)		Pxxx
*(total applicable basic, final and capital gains taxes)

SPECIAL CORPORATIONS

DOMESTIC CORPORATIONS:

Proprietary Non-Profit Educational Institutions and Hospitals

The rule applicable to ordinary corporations will also apply to proprietary educational institutions and hospitals which are nonprofit except the following:

In computing basic income tax, the rate is 10%. However, if income not related to its primary purpose or function is more than 50% of its gross income, the rate applicable is 30%.

*Unrelated trade, business or other activity” is an activity which is not substantially related to the exercise or performance of the school or hospital’s primary purpose or function such as but not limited to rental income from available school spaces or facilities.”

Examples of related income (RMC 4-2013)

* Income from tuition fees and miscellaneous school fees

* Income from hospital where medical graduates are trained for residency

* Income from canteen situated within the school campus

* Income from bookstore situated within the school campus

Proprietary educational institution” is any private school maintained and administered by private individuals or group with an issued permit to operate from the Department of Education, Culture and Sports (DECS), or the Commission on Higher Education (CHED), or the Technical Education and Skills Development Authority (TESDA), as the case may be, in accordance with existing laws and regulations.

It is not subject to MCIT
Expenditures for expansion of school facilities may not be capitalized but instead claimed as outright expense. This rule shall not apply, however, to a non-profit hospital.

Applicable Income Tax of Educational Institutions in the Philippines

EDUCATIONAL INSTITUTION	ORDINARY INCOME	PASSIVE INCOME*	CAPITAL GAINS**
Proprietary educational institution (PEIs)***	Generally 10% of net income 30% if unrelated income >related income	FWT	CGT****
Non-stock non-profit educational institution (NSEIs)	Philippine Constitution, Art XIV, Sec. 4(3): ALL REVENUES and ASSETS of non-stock, non-profit educational institutions used actually, directly and exclusively for educational purposes shall be exempt from taxes and duties; and Exempt under Section 30, NIRC: The following shall not be taxed in respect to income received by them as such: (H) A non-stock non-profit educational institution	FWT	CGT****
Government educational institutions (GEIs)	Exempt under Section 30, NIRC – The following shall not be taxed in respect to income received by them as such (I)Government educational institution; & As provided for in the law or charter creating the GEI	FWT	CGT

* On certain passive income derived from Philippine sources.

**On sale of shares of stock of a non-listed domestic corporation and real properties located in the Philippines classified as capital assets.

***Only PEIs are classified as special corporations unless its Unrelated Income (UI) is higher than Related Income (RI). Hence, the discussions regarding PEIs in the preceding pages shall not be applied to NSEIs and GEIs.

****Section 234 of the Local Government Code (LGC) – the following are exempted from payment of the real property tax: (b) charitable institutions, churches, parsonages or covenants appurtenant thereto, mosques, nonprofit or religious cemeteries and all lands, buildings and improvements actually, directly, and exclusively used for religious, charitable or educational purposes.

Applicable Income Tax of Hospitals in the Philippines

HOSPITAL	ORDINARY INCOME	PASSIVE INCOME*	CAPITAL GAINS**
Proprietary Hospital	(higher): 30% RCIT; 2% MCIT	FWT	CGT
Non-stock Non-profit Hospitals (Special Corp.)***	10% of net income, however, 30% if unrelated income>related income	FWT	CGT****
Non-stock Non-profit Hospital	May be exempt if all the requirements for exemptions as provide for under the law as in the case of St Luke’s Medical Center vs. CIR are complied	FWT	CGT****

*On certain passive income derived from Philippine sources.

**On sale of shares of stock of a non-listed domestic corporation and real properties located in the Philippines classified as capital assets.

***Generally, non-stock non-profit hospitals are classified as special corporations. Therefore, generally taxable at 10% unless its Unrelated Income (UI) is higher that Related Income (RI).

****Under Section 234 of the Local Government Code (LGC) – the following are exempted from payment of the real property tax: (b) charitable institutions, churches, parsonages or covenants appurtenant thereto, mosques, nonprofit or religious cemeteries and all lands, buildings and improvements actually, directly, and exclusively used for religious, charitable or educational purposes.

RESIDENT FOREIGN CORPORATIONS:

INTERNATIONAL CARRIERS

Gross Philippine Billings Pxxx

Rate 2.5%**

Income Tax Pxxx
**International carriers may avail of a lower tax rate (preferential rate) or exemption under RA10378 on the basis of:

Tax Treaty
International agreement
Reciprocity – An international carrier, whose home country grants income tax exemption to Philippine carriers, shall likewise be exempt from income tax.

GROSS PHILIPPINE BILLINGS (GPB):

International Air Carrier – refers to the amount of gross revenue derived from carriage of persons, excess baggage, cargo and mail:

Orginating from the Philippines;
In a continuous and uninterrupted flight;
Irrespective of the place of sale or issue and the place of payment of the ticket or passage of document.

NOTE:

Tickets revalidated, exchanged and/or indorsed to another international airline from part of the GPB if a passenger boards a plane in a port in the Philippines.
Light which originated from the Philippines, but transshipment of passenger takes place at any port outside the Philippines on another airline, only the aliquot portion of the cost of the ticket corresponding to the leg flown from the Philippines to the point of transshipment shall form part of the GPB.

International Shipping – means gross revenue whether for passenger, cargo or mail originating from the Philippines up to final destination, regardless of the place of sale or payments of the passage or freight documents.

REGIONAL OPERATING HEADQUARTERS (ROHQs)

The rules applicable to ordinary corporations will also apply to Regional Operating Headquarters except the following:

In computing basic income tax, the rate is 10%.
It is not subject to MCIT.

NON-RESIDENT FOREIGN CORPORATIONS:

TYPE	TAX BASE	RATE
Non-resident Cinematographic Film Owner, Lessor or Distributor	Gross Income	25%
Non-resident Owner or Lessor of Vessels Chartered by Philippine Nationals	Gross rentals, lease or charter fees	4.5%
Non-resident Owner of Lessor of Aircraft, Machineries and Other Equipment	Gross rentals, charters/other fees	7.5%

OFFSHORE BANKING UNITYS (OBU)
An OBU is a. branch, subsidiary or affiliate or a foreign banking corporation located in a/an Offshore Center (OFC) which is duly authorized by the BSP Circular No. 1389). OBUs are allowed to provide all traditional banking services to non-residents in any currency other than Philippine national currency. Offshore banking units are forbidden to make any transactions in Philippine Peso. Banking transactions to residents are limited and restricted. Income derived by offshore banking units (OBU’s) from foreign currency transactions shall be taxed as follows:

COUNTERPARTY

RATE

Non-residents

Exempt

Other OBU’s

Exempt

Local Commercial Banks

Exempt

Branches of foreign banks

Exempt

Other residents

10%

If an OBU earn income other than from foreign currency transactions, it will be subject to b asic tax (RCIT vs. MCIT, whichever is higher). Hence, OBUs are not classified as special corporations. Any Income derived by nonresidents (individuals or corporations) from transactions with OBUs shall not be subject to income tax.

REGIONAL OR AREA HEADQUARTERS (RHQs)

RHQs shall not be subject to income tax. RHQs are not included in the definition of corporation for income tax purposes. Hence, RHQs are not special corporations.

BRANCH PROFIT REMITTANCES TAX (BPRT) OF RFCs

FORMULA:
Profit Remittance	PXXX
Rate	15%
BPRT	PXXX

PROFIT REMITTANCE

PROFIT REMITTED	APPLICABLE TAX
Connected with the conduct of its trade or business in the Philippines	Subject to 15% BPRT
Others (i.e. passive income)	Not subject to BPRT

EXEMPT ENTITIES

Activities registered with the following shall be exempt from BPRT:

Philippine Economic Zone Authority (PEZA)
Subic Bay Metropolitan Authority (SBMA)
Clark Development Authority (CDA)

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