TAX ON CORPORATIONS

CORPORATION DEFINED:
- It includes joint stock companies, joint accounts, associations, insurance companies or partnerships no
matter how they were created or organized.
- For income tax purposes, however, a corporation does not include general professional partnerships and
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 under a
service contract with the Government.

CLASSIFICATION OF CORPORATE TAXPAYERS:

A. Domestic Corporation – is one organized and existing under Philippine laws. It includes government owned
controlled corporations {except GSIS, SSS, PHIC, and the local water district (LWD)} or instrumentalities
engaged in a similar industry or activity.
B. Foreign Corporation – is a corporation organized and existing under the laws of foreign country irrespective
of the nationality of its stockholders.
1. Resident FC – refers to a foreign corporation that is engaged in business in the Philippines. Generally, it
establishes a branch or an office for the purpose of doing business or trade.
2. Nonresident FC – refers to a foreign corporation that is not engaged in business in the Philippines.

GENERAL PRINCIPLES OF TAXATION FOR CORPORATION

RESIDENT FOREIGN NONRESIDENT FOREIGN
CLASSIFICATIONS DOMESTIC CORPORATION CORPORATION CORPORATION
SOURCES OF WITHIN AND WITHOUT THE
TAXABLE INCOME PHILIPPINES WITHIN THE PHILIPINES WITHIN THE PHILIPPINES
In general
Tax base Taxable income (NIT of 30%) Taxable income (NIT of 30%) Gross income (FWT of 30%)
OR OR
Tax base Gross income (MCIT of 2%) Gross income (MCIT of 2%) Not applicable
Whichever is higher

CLASSIFICATION OF TAXES:
A. Domestic Corporation:
1. Capital gain tax
a. On sale of shares of stocks not listed and traded in the local stock exchange, held as capital assets – On
the capital gain – 15% final tax
b. On sale of real property (land and/or building) held as capital asset – On gross selling price or current fair
market value at the time of sale, whichever is higher – 6% final tax
2. Final tax on passive income derived in the Philippines
a. Interest income under the expanded foreign currency deposit system – final tax of 15%
b. Interest income on any currency bank deposit, yield, or other monetary benefit from deposit substitute,
trust fund and similar arrangement – final tax of 20%
c. Dividend from domestic corporation (intercompany dividends) – exempt
3. Normal Income Tax (NIT) (subject to 30% flat rate) - based on taxable income
4. Minimum Corporate Income Tax (MCIT) – 2% of gross income
o Beginning on the fourth taxable year immediately following the year in which such corporation
commenced its business operations, when the MCIT is greater than the NT.
o Any excess of MCIT over NT can be carried over for the three (3) immediately succeeding taxable
years.
o However, the corporation shall be exempt from MCIT if;
a. Suffers losses on account of prolonged labor disputes (over 6 months)
b. Force majeure
c. Legitimate business reverses
5. Improperly Accumulated Earnings Tax (IAET) (BIR Form 1704) – 10% of the improperly accumulated taxable
income
Exceptions to IAET:
a. Publicly-held corporations
b. Banks and other non-bank financial intermediaries
c. Insurance companies
Format to compute improperly accumulated taxable income (R.A 2-2001):
Taxable income-----------------------------------------------------------------xxxx
Add: Income exempt from tax---------------------------- xxxx
Income excluded from gross income------------xxxx
Income subject to final tax----------------------------xxxx
NOLCO deducted--------------------------------------------xxxx xxxx
Less: Dividends paid or declared---------------------------- xxxx
Amounts reserved for the reasonable needs
of the business ----------------------------------------------xxxx
Income tax paid for the taxable year------------ xxxx (xxxx)
Improperly Accumulated Taxable Income xxx

Special Domestic Corporation

1. Proprietary educational institutions (except whose gross income from unrelated source exceeds 50% of their
total gross income) – Tax rate of 10% based on taxable income
2. Nonprofit hospitals – 10% based on taxable income
3. Government owned and controlled corporations – 30% normal income tax based on taxable income
4. Exempt government organizations (GSIS, SSS, PHIC, local water district)

B. Resident Foreign Corporation

1. Capital gain tax
a. On sale of shares of stocks not listed and traded in the local stock exchange, held as capital assets – On
the capital gain – Not over P100,000 – 5%; On any amount in excess of P100,000 – 10%
2. Final tax on passive income derived in the Philippines
a. Interest income under the expanded foreign currency deposit system – final tax of 7.5%
b. Interest income on any currency bank deposit, yield, or other monetary benefit from deposit substitute,
trust fund and similar arrangement – final tax of 20%
c. Dividend from domestic corporation or resident foreign corporation (intercompany dividends) – exempt
3. Normal Tax (NT) (subject to 30% flat rate) - based on taxable income
4. Minimum Corporate Income Tax (MCIT) – 2% of gross income
o Beginning on the fourth taxable year immediately following the year in which such corporation
commenced its business operations, when the MCIT is greater than the NT.
o Any excess of MCIT over NT can be carried over for the three (3) immediately succeeding taxable
years.
o However, the corporation shall be exempt from MCIT if;
d. Suffers losses on account of prolonged labor disputes
e. Force majeure
f. Legitimate business reverses

Special Resident FC:

I. International Air and Shipping Carrier – 2.5% on Gross Philippine Billings
II. Offshore Banking Unit – 10% final tax on interest income derived from foreign currency loans granted to
residents other than offshore banking units or local commercial banks.
III. Tax on Branch Profit Remittances – 15% based on total profits applied or earmarked for remittance
IV. Regional Operating Headquarters of Multinational Companies – 10% based on their taxable income

C. Nonresident Foreign Corporation

1. Capital gain tax
a. On sale of shares of stocks not listed and traded in the local stock exchange, held as capital assets – On
the capital gain – Not over P100,000 – 5%; On any amount in excess of P100,000 – 10%
2. Final tax on passive income
a. Interest on foreign loans – final tax of 20%
b. Dividends received from domestic or resident foreign corporation – 15% final tax
3. Final tax of 30% based on gross income received during the taxable year within the Philippines

I. Nonresident Cinematographic Film Owner, Lessor or Distributor – 25% final tax based on gross income
II. Nonresident Owner or Lessor of Vessels Chartered by Philippine Nationals – 4.5% final tax based on gross rentals,
lease or charter fees
III. Nonresident Owner or Lessor of Aircraft, Machineries and other Equipment – 7.5% based on gross rentals or fees
QUARTERLY PAYMENT OF MCIT or NIT:
Revenue Regulations No. 12-2007 provides that the quarterly income tax of domestic corporations (including
resident foreign corporations) shall be paid on quarterly payment.

If the computed quarterly MCIT is higher than the NIT, the tax due to be paid for such taxable quarter shall be MCIT
(2% of gross income of the said taxable quarter). Below are the rules to be observed for MCIT.

For quarterly income tax return (BIR Form 1702Q):

1. The taxes allowed to be credited against the quarterly MCIT due are:
a. Expanded withholding tax (BIR Form 2307);
b. Quarterly corporate income tax payments under NIT paid in the previous taxable quarter; and
c. Quarterly MCIT paid in the previous taxable quarter.
2. In the payment of the said quarterly MCIT due, excess MCIT from the previous taxable year/s is NOT ALLOWED
to be credited.

For the annual income tax return (BIR Form 1702):

1. If in the final computation of annual income tax due, NIT is higher than MCIT, the following taxes are allowed to
be credited:
a. Quarterly MCIT paid on the current taxable quarters;
b. Quarterly NIT paid on the current taxable quarters;
c. Excess MCIT over NIT in the previous years (subject to prescriptive period of 3 years);
d. Expanded withholding taxes of the current year; and
e. Excess withholding taxes in the previous year.
2. If the annual MCIT greater than NIT, only the following taxes are allowed to be credited against MCIT:
a. Quarterly MCIT paid on the current taxable quarters;
b. Quarterly NT paid on the current taxable quarters;
c. Expanded withholding taxes of the current year; and
d. Excess withholding taxes in the previous year.

ILLUSTRATIONS:
1. The following income tax records were revealed by Hilong-Hilo Corporation:

Year 4 business operations: NIT MCIT

Corporate income tax computed P300,000 P500,000

Excess withholding taxes in year 4 was P20,000.

Year 5 business operations: NIT MCIT

1st quarter – noncumulative P100,000 P160,000
2nd quarter – noncumulative 180,000 100,000
rd
3 quarter – noncumulative 150,000 190,000
4th quarter – cumulative ending computation 900,000 250,000

The expanded withholding taxes in year 5 is P50,000.

Solution:
The year 5 income tax still due and payable of Hilong-Hilo Corporation would be:

Year 5 income tax, end – NIT, higher P900,000

Less: Previous income taxes paid:
1st quarter – MCIT, higher P160,000
2nd quarter – NT, higher 180,000
3rd quarter – MCIT, higher 190,000
Excess of MCIT over NT – year 4 200,000
Expanded withholding tax – year 5 50,000
Excess withholding tax – year 4 20,000 800,000
Income tax still due and payable – year 5 P100,000

2. ABC Corporation has been operating since January 2, 2012. Data pertinent to its operations covering 2014 to 2016
are as follows:
 2014 2015 2016
Gross sales P3,080,000 P4,100,000 P5,200,000
Sales returns, discounts/allowances 80,000 100,000 200,000
Cost of sales 1,500,000 2,000,000 2,500,000
Operating expenses 1,450,000 1,900,000 2,100,000

The determination of the appropriate income tax of ABC Corporation is shown as follows:
2014 2015 2016
Gross sales P3,080,000 P4,100,000 P5,200,000
Sales returns, discounts/allowances 80,000 100,000 200,000
Net sales P3,000,000 P4,000,000 P5,000,000
Cost of sales 1,500,000 2,000,000 2,500,000
Gross income P1,500,000 P2,000,000 P2,500,000
Operating expenses 1,450,000 1,900,000 2,100,000
Taxable income P50,000 P100,000 P400,000
Multiply by: NIT of 30% 15,000 30,000 120,000
MCIT of 2% on gross income - 40,000 50,000
Higher 15,000 40,000 120,000
Less: Excess MCIT carry over (10,000)
Income tax due and payable 15,000 40,000 110,000

3. ABC Corporation has the following capital asset transactions for the year 2018:
a. Sold 10,000 ordinary shares of stock not traded in the local stock exchange for P1,200,000. The cost per
share is P100.
b. Sold land located in the Philippines for P6,000,000. The cost of the land is P3,000,000 with a fair market
value of P6,500,000.
c. Sold land located in Japan for P5,000,000. The cost of the land is P4,000,000.

Required: Compute ABC’s taxes payable on sale of capital assets assuming the taxpayer is:
a. Domestic corporation
b. Resident foreign corporation
c. Nonresident foreign corporation

Solution:
DC RFC NRFC
Sales of shares of stocks
(15%)
(1.2M – 1M = 200k x 15%) 30,000
First 100k = 5,000
Excess 100k x 10% = 10,000 15,000 15,000
Sale of land – Phil. (6%) 390,000 390,000
Capital gain (3M x 30%) 900,000
Sale of land – Japan
(5M – 4M = 1M x 30%) 300,000 Not taxable Not taxable

Note: In general, only Filipino citizens and corporations or partnerships with at least 60% of the shares owned by
Filipinos are entitled to own or acquire land in the Philippines. The sale of real property by nonresident foreign
corporation is subject to a 30% final withholding tax based on casual gains.

4. ABC Corporation, a closely-held corporation, reported the following during the taxable year:
Accumulated retained earnings P3,000,000
Paid up share capital 2,000,000
Income tax due and payable 900,000
20% final tax on interest income 60,000
Dividend income 200,000
Gain on life insurance 1,000,000
Dividend declared and paid 300,000
Reserved for plant expansion 200,000
Investment in bonds 2,000,000

The IAET of ABC Corporation would be:

 Taxable income (P900,000/30%) P3,000,000
Add: Gain on life insurance P1,000,000
Interest income 300,000
Dividend income 200,000 1,500,000
Total P4,500,000
Less: Income tax due and payable P900,000
Dividend declared and paid 300,000
Reserved for plant expansion 200,000
Final tax on interest income 60,000 1,460,000
Improperly accumulated earnings P3,040,000
Multiplied by IAET rate 10%
Improperly accumulated earnings tax P304,000

Illustration:
Masikap Corporation, a domestic corporation, has the following information regarding its income and expenses for
the taxable year 2018:
1st 2nd 3rd 4th
Sales 1,000,000 1,500,000 2,200,000 2,800,000
Cost of sales 600,000 900,000 1,320,000 1,680,000
Itemized deductions 320,000 480,000 704,000 896,000

Assume that the amounts are cumulative from first quarter to the fourth quarter, the income tax credit and income
tax still due and payable in the fourth quarter would be?

1st 2nd 3rd Year

Sales 1,000,000 1,500,000 2,200,000 2,800,000
Cost of sales (600,000) (900,000) (1,320,000) (1,680,000)
Gross profit 400,000 600,000 880,000 1,120,000
Less: Itemized ded. (320,000) (480,000) (704,000) (896,000)
Taxable income 80,000 120,000 176,000 224,000
NT 24,000 36,000 52,800 67,200
1st (24,000) (24,000) (24,000)
2nd (12,000) (12,000)
3rd - - - (16,800)
24,000 12,000 16,800 14,400

Total income tax credit

from 1st to 3rd quarter 52,800
income tax still due and payable - 4th 14,400

Note: See Section 30 of the exempt corporations from taxation.

Minimum Corporate Income Tax (MCIT) vs. Regular Corporate Income Tax (RCIT)
MCIT – 2% of gross income beginning fourth year of operations (counted at the start of registration with the BIR)
RCIT – 30% effective 2018

Meaning of gross income:

1. For sale of goods – gross sales less sales returns, allowances, discounts and cost of goods sold.
2. For sale of services – gross receipts less sales returns, allowances, discounts and cost of services sold. Cost of
services sold means all direct costs and expenses incurred to provide the services required by the customers and
clients including:
a. Salaries and employee benefits of personnel, consultants and specialist directly rendering the service;
b. Cost of facilities used directly in providing the service such as depreciation, rental of property and cost of
supplies.
c. In the case of bank, cost of services sold shall include interest expense.
3. It shall also include all items of income enumerated under Section 32 (A) of the Tax Code, as amended, except
income exempt from tax and income subject to final tax.

Corporations covered:
1. Domestic Corporation
2. Resident Foreign Corporation
3. Those whose taxable income are subject to the regular or normal tax rate of 30%. Not those enjoying
preferential rates on their taxable income.

Amount payable:
MCIT when: There is zero taxable income or net loss
In excess of the RCIT
When payable: Quarterly and annual bases. Simultaneous: (a) to filing the quarterly ITR (within 60 days from the
close of each of the first three quarters of the taxable year); and (b) to filing the annual Final or
Adjustment ITR (on or before the 15 th day of the 4th month following the close of the taxable year).
Excess MICT over RCIT paid: Creditable against RCIT of the immediate following 3 years provided the RCIT is greater
than the MCIT. The excess MCIT losses its credibility after 3 years.

Suspension of imposition (exception):

Proven substantial losses due to:
a. Prolonged labor dispute (over 6 months)
b. Force majeure (act of GOD or insurgency)
c. Legitimate business reverses (fire or theft)

QUARTERLY CORPORATE RETURNS

a. Who are required to file? Every corporation or partnership subject to income tax shall file a quarterly summary
declaration of its gross income and deductions on a cumulative basis.
b. Time of filing and payment – The return shall be filed and the tax paid within 60 days from the close of each of
the first (3) three quarters of the taxable year, whether calendar or fiscal.
c. Time of filing or adjustment return – A final or adjustment return shall be filed on or before the 15 th day of the 4th
month following the close of the calendar or fiscal taxable year.
d. Final payment of income tax – The amount of income tax to be paid shall be the balance of the tax on the final
return after deducting therefrom the quarterly income taxes paid during the preceding first three quarters of
the same calendar or fiscal taxable year.
Note: If quarterly payments exceed the tax on the final return, the excess shall either be (a) Refunded or (b)
Credited against the estimated quarterly income tax liabilities for the quarter of the succeeding taxable year.

IMPROPERLY ACCUMULATED EARNINGS TAX (PENALTY TAX; ADDITIONAL TAX TO RCIT)

Corporations covered: Every domestic corporation formed or availed for the purpose of avoiding the imposition of
income tax to its stockholders or stockholders of other corporation by permitting its profits to accumulate instead
of being distributed.

Penalty rate: 10% of the improperly accumulated profits every taxable year (whether calendar or fiscal)

Presumption or evidence of avoiding the payment of income tax to stockholders:

1. Corporation is a mere holding company
2. Corporation is an investment company
3. Profits of the corporation are permitted to accumulate beyond the reasonable needs of the business
4. Closely-held corporations (family corporation)

Circumstance indicative of improper accumulation of profits:

1. Withdrawals by stockholders disguised as loans.
2. Expenditures by the corporation for the personal benefit of the stockholders.
3. Yearly substantial advances made to stockholders-officers.
4. Investment in unrelated business.
5. Radical change of business when large profits have been accumulated.

Circumstance considered proper accumulation of profits:

1. Additional working capital purposes.
2. Purchase of long-life assets reasonably required by the business.
3. Obligation in a contract to set aside funds in a sinking fund to settle debt.
Improperly accumulated taxable profits:
1. After tax net income
2. Net operating loss carry-over deducted
3. Income subject to final tax (net)
4. Income exempt from income tax
5. Income excluded from gross income
6. Reduced by dividends actually or constructively paid
7. Legitimate appropriation of retained earnings

Exempt corporations: (BI-PNB)

1. Business partnerships
2. Insurance companies
3. Publicly-held corporations
4. Non-bank financial intermediaries
5. Banks

INCOME TAXES OF PARTNERSHIPS, CO-OWNERSHIPS, AND JOINT VENTURE

A. PARTNERSHIP – is defined as a contract whereby two or more persons bind themselves to contribute money,
property, or industry to a common fund to engage in profitable activities with the intention of dividing profits
among themselves.

For income tax purposes, partnership is classified into two major categories:
1. General Professional Partnership (GPP) – one formed for the sole purpose of exercising their common
profession of which no part of income is derived from engaging in any trade or business.
E.g. CPA Firms, Law Firms, Medical Partnerships and others

Implication of taxes:
- They are exempt from income tax. However, they are required to file a tax return for its income for the
purpose of furnishing information as to the share of the partners in the profits which will be subject to
income tax on their individual tax return.

Format:
Gross receipts------------------------------------------------------Pxxx
Less: Sales returns, discount and allowances--------xxx
Cost of services---------------------------------------xxx xxx
Gross income xxx
Less: Allowable deductions (or OSD of 40%) xxx
Distributable net income xxx

- Share of the partners in the general professional partners (which includes drawings, advances, sharing,
allowances, stipends, etc.) are subject to creditable withholding tax of:
a. 10% if the income payments to the partner is P720,000 or less;
b. 15% if it exceeds P720,000

SAMPLE ILLUSTRATION: (General Professional Partnership)

Atty.Ko is one of the partners of N&M Partnership. The partnership is engaged in rendering professional services
(the sole source of income of the partnership) with a net income before tax of P500,000. Atty. Ko has 60% share in
the profit or loss of the partnership. The other income of Atty. Ko is a buy and sell business with a gross income of
P200,000 and related expenses of P100,000.

Required: Compute the following:

1. How much is the income tax of N&M? None. N&M is engaged in purely professional services.
2. How much is the net income tax payable of Atty. Ko?
Solution:
Share in the net income of general professional partnership (P500k x 60%) P300,000
Gross income from buy and sell business P200,000
Less: Allowable deductions 100,000 100,000
Total gross income P400,000
Income tax payable (Normal tax) 30,000
 Less: Creditable withholding tax (10% x 300k) 30,000
Income tax due 0

2. Business Partnership (General Co-Partnership) – is a partnership wherein part or all of its income is derived from
the conduct of trade or business.

Implication of taxes:
- For income tax purposes, they are considered as a corporation and therefore liable to normal tax of 30%.
They are also subject to MCIT in the same manner as corporation.
- The share of the partners in the net income (dividends) after tax is subject to final tax of:
a. 10% if the partner is a resident citizen, nonresident citizen and resident alien;
b. 20% if the partner is a nonresident alien engaged in business
c. 25% if the partner is nonresident alien not engaged in business

SAMPLE ILLUSTRATION: (Business Partnership)

A and B are partners of AB’s Enterprise, sharing 60% and 40% profit and loss, respectively. The partnership net
income before tax during the year amounts to P2, 000,000.The partnership also earned interest income from their
savings account amounting to P30,000, net of final tax.

Required: Determine the following:

1. Income tax due of AB’s Enterprise
Solution:
Net income P2,000,000
Less: income tax of 30% 600,000
Net income after tax 1,400,000
Add: Interest income, net of final tax 30,000
Distributable net income 1,430,000
2. Final income taxes on the share of A and B partners.
Partner A Partner B
Distribution of net income after tax:
Partner A (P1.430M x 60%) P858,000
Partner B (P1.430M x 40%) 572,000
Multiplied by: final tax of 10% 10% 10%
Final income taxes P85,800 P57,200

B. CO-OWNERSHIP – It arises when more than one person acquired the right to own a piece of property or mass of
properties. The ownership acquisition by more than one person over a property or properties may be due to
succession of an estate or donation.

Implication of taxes:
- Generally, co-ownership is tax exempt. The income derived by the co-owner from the property shall be
reported in his individual tax return.
- Co-ownership is subject to income tax (normal tax of 30% or MCIT of 2% whichever is applicable) in the
following circumstances:
a. When co-ownership is formed or established voluntarily, or upon agreement of the parties.
b. When the individual co-owner reinvested his share in the co-ownership to produce another income-
generating activity.
c. Where the inherited property remained undivided for more than ten (10) years, and no attempt was
ever made to divide the same among the co-heirs, the property should be considered as owned by an
unregistered partnership.

SAMPLE ILLUSTRATION: (CO-OWNERSHIP)

After the death of their parents, A and B, inherited a P6,000,000 worth of building through intestate succession.
During the year, the building has a gross income of P1,200,000 which was divided equally between A and B.

Required:
a. How much is the income tax of the co-ownership? None.
b. Income tax of A and B?
Solution: A B
Gross income received P600,000 P600,000
Less: OSD of 40% (240,000) (240,000)
Taxable income P360,000 P360,000
Income tax due 22,000 22,000
C. JOINT VENTURE – a business activity that is organized or established only for temporary or short-period of time.
It is dissolved once its business objective is accomplished.

Implication of taxes:
- They are generally subject to 30% normal tax just like a corporation. However, joint venture for the
construction project of the government is not subject to income tax.
- The share of joint venture partners (assuming juridical person) will no longer be taxable because they
partake of dividends (tax exempt intercompany dividends).

SAMPLE PROBLEM: JOINT VENTURE

X Co. and Y Co., both domestic corporations, form a joint venture to construct a building with a contract price
excluding VAT amounting to P50,000,000. The joint venture incurred total construction costs amounting to
P40,000,000 and use OSD. The corporations agreed to share any income or losses equally.

Required:
a. Income tax of joint venture assuming that the construction is not a government project
Solution:
Contract price P50,000,000
Less: Construction cost 40,000,000
Gross income 10,000,000
Less: OSD (10M x 40%) 4,000,000
Net income of joint venture 6,000,000
Multiplied by: normal tax of 30% 30%
Income tax due 1,800,000

b. Income tax of X Co.and Y Co. in the share of net income of joint venture
None. The respective share from the net income of the joint venture is exempt from income tax. (Tax-
exempt intercompany dividends)