Module 5 Taxation

ILOCOS SUR POLYTECHNIC STATE COLLEGE
Tagudin Campus
MODULE 5
THE MODULE
TITLE: TAXES IMPOSED TO CORPORATION
WHAT IS THE MODULE ALL ABOUT?
Module 5 discusses the other taxes imposed to corporation aside from the
normal or regular income tax which include the minimum corporate income
tax( MCIT), the corporate gross income tax ( GIT), Improperly acumulated eranings
tax ( IAET), the fringe benefit tax ( FBT), the capital gains tax (CGT) and the final tax
(FT). It will discuss the different concept under the different imposed taxes and it wil
presents the governing rules and policies of the different taxes imposed to a
corporation .
LIST OF TOPICS TO BE STUDIED IN THE MODULE
A. Introduction
B. Gross Income Tax
C. Minimum Corporate Income Tax
D. Fringe Benefit Tax
E. Improperly Accumulated Earnings Tax
F. Capital Gains Tax
INTENDED LEARNING OUTCOMES (ILO)
At the end of this module, the students are expected to comprehend and
demonstrate knowledge on the following :
1) The corporate gross income tax
2) The minimum corporate income tax (MCIT)
3) The rules to follow in computing income tax due if corporation already in more
than 3 years of operation
4) The rationale behind Improperly Accumulated Earnings Tax and its relation to
dividends tax
5) The improperly accumulated earnings tax
6) The Fringe benefit tax
7) The capital gains tax
8) The final Tax
Course Code: Tax 101

Descriptive Title: Taxation( Income Taxation)
Instructor: Felix M. Del Rosario, CPA
Tagudin Campus
MODULE 5
LEARNING CONTENT
CORPORATE TAXATION
A. INTRODUCTION
Corporation may imposed different taxes aside from the normal or regular income
tax. It may imposed of the 15% Gross income tax, the 10 % improperly accumulated
earnins tax, the 2 % minimum corporate income tax, the 32% fringe benfit tax and
teh 6 % capital gains tax .
Company income subject to tax is often determined much like taxable income for
individual taxpayers. Generally, the tax is imposed on net profits. In some
jurisdictions, rules for taxing companies may differ significantly from rules for taxing
individuals. Certain corporate acts, like reorganizations, may not be taxed. Some
types of entities may be exempt from tax.
Countries may tax corporations on its net profit and may also tax shareholders when
the corporation pays a dividend. Where dividends are taxed, a corporation may be
required to withhold tax before the dividend is distributed.
A domestic corporation is subject to tax on its worldwide income. On the other hand,
a foreign corporation is subject to tax only on income from Philippine sources.
B. CORPORATE GROSS INCOME TAX ( GIT)
The President upon recommendationof the secretary of finance, may, effective

January 1, 2000, allow domestic corporations the option to be taxed at 15% of
gross income after the following conditions have been satisfied:
1. A tax effort ratio of twenty percent (20%) of gross national product (GNP);
2. A ratio of forty percent (40%) of income tax collection to total revenues;
3. A VAT tax effort of four percent (4%) of GNP; and
4. A 0.9 percent (0.9%) ratio of the consolidated public sector financial position
(CPSFP) to GNP.
Cost ratio limit

The option to be taxed based on gross income shall be available only to firms whose
ratio of cost of sales to gross sales or receipts from all sources does not exceed fifty-
five percent (55%).
Lock-in period
The election of gross income tax shall be irrevocable for 3 consecutive taxable years
during which the corporation is qualified under the scheme.

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The 15% gross income tax for domestic corporation still remains in law but not in
practice. It was never implemented because the conditions for its grant were never
met.
C. MINIMUM CORPORATE INCOME TAX
The most peculiar feature of corporate income taxation is the Minimum Corporate
Income Tax (MCIT). Corporation are subject to a minimum corporate income tax of
2% of gross income.
As a minimum tax, the MCIT is payable when:

a. The corporation has zero or negative taxable income, or
b. MCIT is greater than the regular corporate income tax (RCIT)
Scope of the Minimum Corporate Income Tax

The MCIT is applicable to every corporation taxable to the 30% regular corporate
income tax including non profit , exempt, and special corporation with respect to
their taxable income subject to regular corporate income tax but not to their income
subject to special tax rates.
MCIT exempt entities:

1. Real Estate Investment Trust or REIT under RA 9856
2. Domestic corporation which opted to be taxed under the 15% corporate
income tax
3. Domestic or resident corporation subject to special tax rates
a. Proprietary educational institution and non-profit hospital
b. FCDUs and OBUs
c. Regional Operating Headquarter of multinational companies
d. International carriers
e. Firms subjectto special income tax such as PEZA and BCDA locators
4. All non-resident foreign corporations
Timing of imposition of MCIT

MCIT is imposed beginning on the fourth taxable year immediately following the year
in which such corporation commenced its operations. Simply stated, MCIT applies
on the X + 4rt year of operations
For instance, a corporation which started operations at any day in 2012 will be
covered by MCIT in 2016. The rule is apparently intended to enable the business to
obtain competitive traction before being subjected to MCIT.
MCIT Gross income under the NIRC
For corporation involved in: “Gross income” means

 Sales of goods Gross sales less sales returns, discounts and
allowance and cost of goods sold

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 Sale of service Gross receipts less sales returns, allowances,

discounts and cost of services
Gross sales – means the total consideration agreed by the buyer and the seller for
the sale of goods. Gross sales include cash (collected) sales and (uncollected)
sales.
Gross receipt – means cash collections for services rendered or to be rendered.

Gross receipts include reimbursement by the client for out-of-pocket expenses
incurred by the service provider.
Cost of goods sold (COGS) includes all business expense directly incurred to
produce the merchandise to bring them to their present location and use.
a. For a trading or merchandising concern, COGS shall include the invoice cost
of the goods sold, plus import duties, freight in transporting the goods to the
place where the goods are actually sold including insurance while the goods
are in transit.
b. For a manufacturing concern, COGS shall include all cost of production of
finished goods, such as raw materials used, direct labor and manufacturing
overhead, freight cost, insurance premiums and other cost incurred to bring
the raw materials to the factory or warehouse.
Cost of services shall mean all direct cost and expenses necessarily 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, and
b. Cost of facilities directly utilized in providing the service such as depreciation
or rental of equipment used and cost of supplies
In case of banks, ‘cost of services’ shall include interest expense.

It is submitted that the gross income referred into by the NIRC is the gross income
from operation
MCIT Gross income under the regulations
RR12-2007 included all other items of taxable income not subjected to final tax and
capital gains tax as part of gross income.
While this may be questioned as an improper introduction of legislation, it is an

established rule in taxation that revenue regulations and rulings are presumed
valid interpretations of law unless challenge and reversed before the courts.
Thus, MCIT shall be computed as 2% of the total gross income subject to regular
income tax. Needless to say the MCIT concept of gross income is the same with
the OSD concept of gross income.

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EXCESS MCIT CARRY-OVER

The excess of the MCIT over the RCIT in any year is a tax credit that is deductible
against any RCIT tax due in the immediately succeeding three years.
Excess MCIT Carry Over Rules

 Excess MCIT can be used only as a tax credit against RICT tax due in any of
the three subsequent years. Excess MCIT cannot be deducted against MCIT
tax due.
 Credit for the excess MCIT from prior years can be taken up to the full
amount of RCIT tax due in the next three years. This means that the income
tax payable when credit is made can get below the amount of MCIT for that
year.
 When there are several excess MCITs from prior years, tax crediting shall be
made in a first in -first basis.
 Unused Excess MCIT at the end of the three-year period shall expire and will
no longer be used.
RELIEF FROM THE MINIMUM CORPORATE ONCOME TAX

Upon recommendation of the commissions of internal revenue, the secretary of
finance may suspend the imposition of proof that the corporation sustained
substantial losses on account of
a. Prolonged labor dispute

b. Force majeure, or
c. Legitimate business reverses
ILLUSTRATIVE MCIT COMPUTATION
Illustration 1: MCIT of trading concern

A corporate taxpayer subject to MCIT reported the following:
Gross sales P 1,000,000

Sales discounts & allowance for defects 30,000
Sales return by customers 20,000
Interest income from bank deposit 20,000
Rental income from vacant premises 60,000
Inventory, at the start of the year 220,000

Gross purchases of merchandise 700,000
Net freight on purchases during the year 25,000
Purchase discounts and allowances on defective
Merchandise 40,000
Purchase returned to suppliers 50,000
Inventory, at the end of the year 60,000

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The cost of goods sold shall first be computed as:

Beginning inventory P 220,000
Add: Net purchases
Gross purchases P 700,000
Add: freight in 25,000
Less: purchase disc. And allowance 40,000
Purchase return 50,000 635,000
Total goods available for sale P 855,000
Less: ending inventory 160,000
Cost of goods sold P 695,000
The minimum corporate income tax shall be computed as follows :
Gross Sales P 1,000,000

Less: Sales Discounts P 30,000
Sales Return 20,000 50,000
Net Sales P 950,000
Less: Cost of Goods Sold 695,000
Gross Income from Operation P 255,000
Add: Other taxable income not subject to FT
Rental Income 60,000
Total Gross Income P 315,000
Multiply by MCIT Rate 2%
MCIT P 6,300.00
Illustration 2: MCIT of a Service Provider
Emjhay Corporation provides consultancy services to various clients . It reported the

following in 2020,its fifth year of operation:
Collection and Billings :
Collection P 3,200,000
Uncollected bills for services rendered 800,000
Advanced collections for services to be provided 600,000
Client reimbursements for out of pocket expenses
Incurred by consulting staff 400,000
Client reimbursements for client expenses paid
Or advanced by Emjhay 150,000
Royalties from a software developed by Emjhay 30,000
Expenses :
Salaries of Consulting staff P 1,600,000

Salaries of administrative employees 700,000
Office rent and utilities expenses 420,000

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Office depreciatione expenses 50,000

Office supplies expense 35,000
Interest Expense 20,000
Insurance Expense 40,000
Local tax expense 14,000
The gross receipts of Emjhay Corp. shall be determined as:
Net collection on services rendered P 3,200,000

Collections on services to be provided (advances) 600,000
Reimbursement for firm out-of-pocket cost 400,000
Gross receipts P 4,200,000
The direct cost of services of Emjhay Corp. shall be:
Consulting salaries expense P 1,600,000

Office rent and utilities expense 420,000
Office depreciation expense 50,000
Office supplies expense 35,000
Direct cost of services P 2,105,000
The minimum corporate income tax shall be computed as:
Gross receipt P 4,200,000

Less: cost of services 2,105,000
Gross income from operations P 2,095,000
Add: other gross income not subject to final tax 0
Total gross income P 2,095,000
Multiply by: MCIT rate 2%
Minimum corporate income tax P 41,900
Illustration 2 : MCIT AND RCIT: BASIC APPLICATION
A corporate taxpayer which started operation in 2017 had the following results of operations
in 2020 and 2021:
2020 2021 .
Total gross income P2,100,000 P 4,000,000
Dividend income – domestic - 50,000
Business expense 2,600,000 3,300,000
Net income (Net loss) ( P 500,000 ) P 750,000
The MCIT will commence in 2021 (i.e. 2010 + 4). Since there is no MCIT yet, the tax
payable in 2020 is nil( zero).
The 2021 income tax due of the corporation shall be determined as:
Total gross income P 4,000,000

Less: Itemized deduction

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Regular allowable deductions P 3,000,000

NOLCO – 2020 500,000 3,800,000
Taxable net income P 200,000
Multiply by: Corporate income tax rate 30%
Regular corporate income tax – 2021 P 60,000
Illustration 3: Excess MCIT – Basic Application

A corporation had the following MCIT and RCIT data since 2018:
2018 2019 2020 2021 .

MCIT P 80,000 P 95,000 P 20,000 P 60,000
RCIT 20,000 85,000 40,000 80,000
Income tax due P 80,000 P 95,000 P 40,000 P 80,000
MCIT Excess (MCIT-RCIT) P 60,000 P 10,000
Required: ignoring the effects of creditable withholding tax and estimated tax payments,
compute the income tax payable.
Solution:
In 2018, the income tax payable is the P80,000 MCIT. The P60,000 Excess MCIT is a tax
credit referred as Excess MCIT-2018 and is valid until 2021.
In 2019, the income tax payable is the P95,000 MCIT. The P10,000 Excess MCIT, referred
to as Excess MCIT-2019, valid until 2012. No tax credit shall be made since Excess MCIT
cannot be credited against MCIT tax due.
In 2020, the income tax payable is nil.
2018 2019 2020 .

Excess MCIT prior year P 60,000 P 10,000
Income tax due P 40,000
Tax credit ( 40,000) - - - - - - - - ( 40,000
Adjustment excess MCIT P 20,000 P 10,000 P 0
Note that full credit against the available RCIT tax due is taken. Since there are two Excess
MCITs, first-in first out crediting is employed.
In 2021, the income tax payable is P50,000.
2018 2019 2020 2021 .

Adjusted MCIT Excess P 20,000 P 10,000
RCIT tax due P 80,000
Tax credit ( 20,000) ( 10,000) - - - - - - - - - - ( 30,000)
P 50,000

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D. FRINGE BENEFIT TAX (FBT)
Fringe Benefits – it pertain to all other benefits or incentives of employees other

than the basic pay. It was also defined to pertain goods , services or other benefits
furnished by the employer to the employees.
Classification of Fringe Benefit
a. Taxable Fringe Benefit – Fringe benefit under the following category.
1. Given to the managerial employee or Management Perquisite Benefits
2. Employee personal expenses shouldered by the employer.
3. Taxable de minimis benefit
3.1 Excess de minimis benefit over their limits
3.2 Benefits not included in the de minimis benefit
b. Non Taxable Fringe benefit – Fringe benefit given to the rank and file employee
and those form part of the Di minimis benefit .
Difference between a Managerial Employee over a rank and file employee
Managerial Employees are those individual who holds the key position of certain
organizations and at the same time , they fire, hire employees and made a important
decision in the organization .They also given powers or prerogatives to lay down
and execute managerial policies and /or to hire , transfer, suspend , layoff, recall ,
assign or discipline employees
Example of Managerial Employee:
College Dean, Campus Administrator, President , Vice President for Academic
Affairs, Chief Executive Officer, Chief Financial officer, CHED Dircetor, Secretary of
Health
Rank and File Employees are those individuals who performed routinary duties in
a certain organization.
Example of Rank and File Employee:
Instructor, Security Guard, Police, Factory Worker , Private Secretary, Health
workers.
DI MINIMIS BENEFIT

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Are facilities or privileges that are relatively small value and are furnished by the
employer merely as a means of promoting the health , goodwill , contentment or
efficiency of his employees.
1. Monetized unused vacation leave credits of private employees – not exceeding 10
days during the year .
2. Monetized unused vacation and sick leave credits paid to government officials and
employees.
3. Medical cash allowances to dependents of employees – not exceeding P750 per
employee per semester , or P125 per month.
4. Rice subsidy – 1 sack per month or not more than P 1,500
5. Uniform and clothing allowances – not exceeding P 6,000.00
6. Actual Medical Assistance - not exceeding P 10,000 per annum.
7. Laundry allowance – not exceeding P300/month.
8. Employee achievement award- not more than P 10,000.00
9. Cash gifts – not more than P 5,000 per annum.
10. Daily meal allowances for overtime – not exceeding the 25% of the basic
minimum wage.
11. Benefits received by an employee by virtue of collective bargaining agreement.
Example :
1. Danny Boy , a private employee who is paid a P 800 daily rate, receives the
following benefits during the year 2019
Monetized unused vacation leave credits 9 days
Monetized unused sick leave credits 9 days
Medical assistance 12,000
Rice Subsidy ( 2,000 per month) 24,000
Clothing Allowance 10,000
Laundry Allowance 6,000
Required : Determine the taxable amount of de-minimis benefits.
Solution :
Actual Limit Excess
Monetized unused VL 7,200.00 8,000. 0.00
Monetized unused SL 7,200.00 0.00 7,200.00
Medical Assistance 12,000.00 10,000.00 2,000.00
Rice Subsidy 24,000.00 18,000.00 6,000.00
Clothing Allowance 10,000.00 6,000.00 4,000.00
Laundry Allowance 6,000.00 3,60000 2,400.00

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Taxable De minimis benefit 21,600.00
2. Giovanni, a government rank and file employee , received the following benefits:
Monetized unused vacation leave credits ( 10 days ) P 8,000.00

Monetized unused sick leave credits ( 15 days ) 12,000.00
Uniform Allowance 15,000.00
Laundry Allowance 4,800.00
Required : Determine the amount to be included in other benefits .
Solution :
Actual Limit Excess
Monetized unused VL 8,000.00 exempt 0.00
Monetized unused SL 12,000.00 exempt 0.00
Uniform allowance 15,000.00 6,000.00 9,000.00
Laundry Allowance 4,800.00 3,600.00 1,200.00
Taxable De-minimis benefit 10,200.00
EXAMPLE OF TAXABLE FRINGE BENEFIT TAX
1. HOUSING BENEFITS
2. EXPENSE ACCOUNT
3. VEHICLE OF ANY KIND
4. HOUSEHOLD PERSONNEL
5. INTEREST , FOR THE DIFFERENCE BETWEEN THE MARKET RATE AND THE
ACTUAL INTEREST GRANTED
6. MEMBERSHIP FEES
7. EXPENSES FOR FOREIGN TRAVEL
8. HOLIDAY AND VACATION EXPENSES
9. EDUCATIONAL ASSISTANCE
10. LIFE OR HEALTH INSURANCE
CHARACTERISTICS OF THE FRINGE BENEFIT TAX

1. Final Tax - FBT is withheld by the employer at source.
2. Tax upon managerial or supervisory employee- The FBT is not tax to the
employer. It is a tax upon the fringe benefit .
3. Paid by the employer.
4. Grossed up Tax – The monetary value or the amount of FB realized or taken
home by the employee is effectively net of the final tax which is to be withheld at
source.
5. Due quarterly . The FBT will due for remittance quarterly and reported through BIR
Form 1603 . Deadline of filing will be on or before the 10 th day of the month following
the quarter in which withholding was made.

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PROCEDURES IN COMPUTING THE FRINGE BENEFIT TAX

1. Determine the monetary value
Monetary value refers to the taxable amount of benefits taken home or
realized by the managerial or supervisory employee.
2. Determine the gross up rate and FBT rate applicable for the taxpayer.
The gross up arte is the complement of the FBT rate. IF FBT rate is 32%, the
gross up rate is 68 % ( 100% less 32%).
3. Determine the gross up monetary value by dividing the monetary value by the
gross up rate.
4. Determine the fringe benefit tax by multiplying the fringe benefit tax rate to the
GMV( gross up monetary value)
RULES ON VALUATION OF FRINGE BENEFITS
1. When benefit is given in cash or paid in cash , the MV (monetary value) is the
amount paid for in cash with the exception when the employer pays for the rent of
the residence of the employee, the MV is 50% of the rental payment.
2. When benefit is given in kind , the monetary value is the fair value of the thing
given unless its book value is higher.
3. When a benefit is given in the form of free use the employer’s property , the MV is
50% of the rental value of the property. If the property has no rental value, the
depreciation value is used. The presumptive lives of the property are:
3.1 20 years for real properties
3.2 5 years for movable properties.
SPECIAL GUIDELINES ON MONETARY VALUE DETERMINATION

1. TAXABLE HOUSING BENEFITS
1.1 Employer leases a residential property for the use of his employee and the
said property is the usual residence of the employee
MV = 50 % of the benefit
Illustration :
A sole proprietorship business leases a residential house and lot for the use
of his business manager for P 20,000/month
The MV shall be
Quarterly value = ( 20,000 x 3 months ) P 60,000
Quarterly MV = P 60,000 x 50 % P 30,000
1. 2 Employer owns a residential property and assigns the same for the use
of his employee as his usual place of residence , the annual value of benefit is 5 %
of whichever is higher of the zonal or assessed value of the land and improvement
MV = 50 % of the annual value of the benefit
Illustration :
Danny Boy Inc., allowed one of its unused realty investment costing P 3.5
million with zonal value of P 4M and assessed value of 3M to be used by its Vice
President

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MV shall be :
Annual Depreciation value = P 4M x 5 % P 200,000
Quarterly value = P 200k / 4 quarters 50,000
Quarterly MV = ( 50K x 50%) 25,000
1.3 The employer purchases a residential property on instalment basis and

allows his employee to use the same as his usual place of residence, the annual
value is 5 % or 1/20 of the acquisition cost , exclusive of interest
MV = 50% of the annual value of the benefit. This is the same with 1.2 except
the basis is the purchase price of the property.
Illustration :
Danny Corporation purchased a residential property for the use of its
production manager . The property is payable over 11 annual instalment of P200,000
including interests but have a cash price of P 2M . For accounting purposes , Danny
Corporation opted to capitalize the interest and recorded the P 2.2 M contract price
as the acquisition cost of the property .
The MV shall be
Annual depreciation value = P 2M x 5% P 100,000
Quarterly Value = P100k/4 quarters 25,000
Quarterly MV = 25K x 50% 12,500
1.4 Purchase by the employer of residential property and transfer of
ownership in the name of the employee, the value of the benefit is whichever is
higher of the acquisition cost or zonal value.
MV = 100 % of the value of the benefit
Illustration
Baby boy corp bought a residential dwelling for P 5M and transferred to its
president. The property has 3M zonal value
MV = P 5M
1.5 Purchase by the employer of residential property and transfer of title to

employee for less than adequate consideration , the value is Market value or zonal
value which ever is higher less the consideration paid by the employee
MV = 100% of the value of the benefit
Illustration
Thrisha Mae , a professional practitioner , transferred his residential property
in the name of his president for P 2M. The propert has fair value of P3.5 M per tax
declaration and P 5m zonal value
MV = P 5M – P 2M = P 3M
EXEMPT HOUSING PRIVILEGES

1. Housing for the AFP , PAF , PA and Philippine Navy
2. Housing unit situated to the premises of a business( within a maximum of
50 meters)
3. Temporary housing for an employee in a housing unit for 3 months or less.

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2. EXPENSE ACCOUNT
The expense incurred by an employee but which are paid by his employer or
incurred and paid by employee but reimbursed or advanced by the employer are
taxable fringe benefits. The monetary value is the amount paid by the employer.
3. MOTOR VEHICLES OF ANY KIND

3.1 Purchase by employer of motor vehicle in the name of employee
regardless of whether the same is used partially in the business of the employer
MV = 100% cost of the motor vehicle
3.2 Cash benefit to employee for the purchase of vehicle , even if the vehicle
is partly used in the business of employer
MV = 100 % of the cash benefit , except when the amount is subjected
to withholding tax on compensation
3.3 Purchase of car on instalment basis by the employer with ownership
placed in the name of the employee even if the car is used partly for the employer’s
business, the benefit is the acquisition cost divided by 5 years
MV = (1/5) or 20% of the acquisition cost
Illustration :
An employer purchased a car for P 1M payable in four instalment plus
10 % interest on the outstanding unpaid balance of the car.
The entire acquisition cost shall be recognized as monetary value since there
is transfer of ownership but the regulation requires amortization of 5 years. Hence
the employer shall recognize 1M /5 or P200K MV annually until years.
3.4 Employers shoulders a portion and is placed in the name of the

employee , even if partially used in business.
MV = the portion shouldered by the employee
Illustration :
An employer assisted its managerial employee to purchase a brand
new car for P 4M . 60 % of the value is deductible against future salaries of the
managerial employee.
MV = P 4M x40% = P 1.6 M
3.5 Fleet of motor vehicles owned for the use of the business and the
employees , the value of benefit is the cost of all motor vehicles not used for sales ,
freight , delivery service and other non-personal uses divided by 5 years
MV = 50 % of the value of benefit
4. HOUSEHOLD EXPENSES
Employee expenses borne by the employer for household personnel , salaries
of household help, personal driver of employee and other personal expenses are
taxable fringe benefit. THE MV is the amount paid by the employer.

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5. INTEREST ON LOAN AT LESS THAN MARKET RATE
The interest forgone by the employer representing the difference between 12

% and the actual interest charged is TFBT.
Illustration :
Danny Corporation lent is Chief Financial Officer P1M at a minimal 3% annual
interest rate.
The MV shall be
Annual MV = 1M x ( 12%-3%) P 90,000
Quarterly MV = P90K/4 P 22,500
6. EXPENSES FOR FOREIGN TRAVEL
Any foreign travel that is for the luxury of the employee is TFB (Taxable
Fringe Benefit ) but reasonable business expense for foreign travel for attending
business meetings and conventions are exempt.
7. HOLIDAY and VACATION EXPENSE
Holiday and vacation expense are TFB if shouldered by the employer. The
MV is the amount paid or shouldered by the employer.
8. Educational assistance to the employee or his dependents

Educational assistance to the employee is generally taxable except when it is
incurred for the convenience or furtherance of the employer’s business such as
8.1 The education or study is directly connected with the employer’s trade ,
business or profession
8.2 There is a written contract that the employee is under obligation to remain
at the employ of the employer for the period of time they mutually agreed.
Educational assistance granted to dependents of the employee is generally

taxable except when the assistance was provided through a competitive scheme
under a scholarship program of the company.
Illustration
Trisha Corporation , a distributor of cosmetics , provides educational
assistance to the following employee under an employment bond.
Position Field of Study Amount per semester

VP for Management DBA P 50,000
VP for Marketing Master in Marketing Mgmt 35,000
Operations Manager BS Cosmetology 25,000
Accounting Supervisor BS Criminology 24,000
Accounting Staff BS Accountancy 20,000
MV = P 24,000

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The fringe benefit of all the other employees except the accounting supervisor will
neither be subject to TFB nor the regular income tax under the “ convenience of the
employer rule “.
TAX TREATMENT of the TOTAL FRINGE BENEFIT EXPENSE

The total fringe benefit expense including the FBT( Fringe Benefit Tax) is a
deductible expense to the employer against his gross income in the computation of
his taxable income.
E. IMPROPERLY ACCUMULATED EARNINGS TAX (IAET)
IAET is a 10% penalty tax imposed on the improper accumulation of corporate

earnings beyond the needs of business. It is intended as a deterrent for corporations
intending to defeat the 10% dividend tax by mere non-declaration of dividends . The
imposition of the 10 % IAET is not automatic. It is due only upon formal assessment
by the BIR .
SCOPE OF IAET
The IAET covers the improperly accumulated earnings of domestic
corporations only.
EXEMPT APPROPRIATIONS EARNINGS

1. MANDATORY APPROPRIATIONS – appropriations required by law such
as appropriation to cover the cost of treasury stock acquisitions
2. CONTRACTUAL APPROPRIATION S – appropriations required by
contract such as appropriation for bond sinking fund required by creditors
3. REASONABLE APPROPRIATIONS – appropriations for reasonable needs
of business
INSTANCES OF REASONABLE ACCUMULATION OF ERANINGS
A. Allowance for the increase of earnings up to 100 % of the paid up capital of

the corporation as of balance sheet date , inclusive of accumulations taken from
other years.
B. Earnings reserved for definite corporate expansion projects or programs
requiring considerable capital expenditure as approved by the Board of Directors or
equivalent body.
C. Earnings reserved for building, plants or equipment acquisition as
approved by the Board of Directors or equivalent body.
D. Earnings reserved for compliance with any loan covenant or pre-existing
obligation established under a legitimate business agreement;
E. Earnings required by law or applicable regulations to be retained by the
corporation or in respect of which there is legal prohibition against its distribution.

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F. In the case of subsidiaries of foreign corporations in the Philippines , all

undistributed earnings intended or reserved for investments within the Phils. As cab
be proven by corporate records and/or relevant documentary evidence.
PRIMA FACIE INSTANCES of IMPROPERLY ACCUMULATION EARNINGS
1. Investment of substantial profit in unrelated business or stocks or securities

of unrelated business.
2. Investment in bonds and other long –term securities
3. Accumulation of eranings in excess of 100 % of the paid up capital
ENTITIES PRESUMED IMPROPERLY ACCUMULATION EARNINGS

1. Investment Companies
2. Holding Companies
3. Closely Held Corporations
PRO FORMA for the computation of IAET
Taxable income XXX

Add : NOLCO XXX
Passive Income XXX
Capital Gains XXX
Exempt or Excluded Income XXX XXX
TOTAL Earnings XXX
Less :
Income Tax Due XXX
Final Tax XXX
Capital gains Tax XXX
Dividends Declared XXX
Reasonable appropriations XXX XXX
Improperly Accumulated Earnings XXX
Multiply by IAET rate 10 %
Improperly Accumulated Earnings Tax P XXX
Illustration :
Trisha Corp. was assessed by the BIR for improperly accumulating profits . Trisha
reported the following in 2020
Gross Income P 2M
Business Expenses 1.4 M
NOLCO Prior years 500 K
Dividend income – Domestic 30k
Gross interest income – bank 50K
Gain on sale of domestic stock 200K
Gain on sale on land , classified as capital asset
( SP = 2M ; MV 2.5 M) 500K

Tagudin Campus
MODULE 5
Dividends Declared 100K

Appropriations for treasury stocks 50K
Appropriation for plant expansion 150K
Compute the IAET :
Taxable Income 100K

Add : NOLCO 500K
Dividend Income 30K
Interest Income 40K
Gain on Sale of Domestic Stocks 200K
Gain on Land 500K 1,270K
Total 1,370K
Less :
INCOME TAX 40K
Final tax 10K
CGT 165K
Dividends Declared 100K
Appropriations 200K 515K
Improperly Accumulated Earnings 865K
Multiply by rate 10 %
IAET P 86500
NOTES TO REMEMBER FOR IAET

 10% of improperly accumulated earnings to be determined by the Bureau of
Internal Revenue.
 Effective January 1, 1998.
 This is assessed by the Bureau of Internal Revenue on its contention for
improper accumulation of profits and not applied for or computed by the
corporation in its income tax return.
Presumption of evidence of improper accumulation of profit and hence avoidance

of tax payables of stockholders:
1. holding companies
2. investment companies
3. closely-held corporations
4. profit accumulation beyond the needs of business
Indicators of improper profit accumulations:

1. withdrawals of stock holders disguised as loans
2. expenditures by the corporation for the personal benefits of the
stockholders
3. yearly substantial advances made to stockholders-officers
4. investment unrelated business
5. radical change of business when large profit have been accumulated
Reasonable accumulation of profits:

1. additional working capital purposes

Tagudin Campus
MODULE 5
2. purchase long-life assets reasonably required by the business (expansion,

improvement, and repairs)
3. the acquisition of related business or the purchase of stock of a related
business where subsidiary relationship is established
4. obligation in a contract to set aside funds in a sinking fund to settle a debt
5. anticipated losses or business reverses
Immediacy Test- profit must be applied not too long from the time of retention of
profits, this rule applies if the accumulation of profit is deemed for the reasonable
needs of business.
Limit under the Corporation Code of the Philippines- a corporation can retain profits
not exceeding 100% of its paid in capital. Accumulation of profits up to 100% of the
paid up capital therefore is not an improper accumulation of profit.
Taxable items of improperly accumulated profits:

1. after net income
2. income subject to final tax
3. Income exempt from final tax
4. NOLCO deducted in determining the relevant income
IAET Exempt Corporations:
1. Insurance companies
2. Publicly-held corporation
3. Non-bank financial intermediaries
4. Banks
F._CAPITAL GAINS TAX
Capital gains subject to Capital Gains Tax

1. Capital gains on the sale domestic stocks sold directly to buyer
2. Capital gains on the sale of properties not used in business
TAX on Sale, exchange and other disposition of domestic stock directly to

buyer
Net gain up to P 100K 5%

Excess net gain above P 100K 10 %
Tax on Sale of properties not used in business
6 % whichever is higher between the selling price or market value .
Summary of the Module :

Module 5 discuss the concept of Corporate gross income taxation, minimum
corporate income taxation, fringe benefit taxation, improperly accumulated income

Tagudin Campus
MODULE 5
taxation and capital gains taxation . It discuss also the general rule of taxes imposed
to corporation
References:
 Bangawan, Rex B. (2018). Income Taxation (Laws, Principles and
Applications ) Real Excellence Publishing, Baguio City
 Urbano, Bartolome R, (2015). Income Taxation Made Available, C & E
Publishing , Inc. Manila
INTENDED LEARNING ACTIVITY
ACTIVITY 1
Name: _____________________ Class Schedule: ________________

Course/Year/Section: ____________ Date: _________________________
I. IDENTIFICATION . Identify the following employee if they belong to

managerial or rank and file. Write Danny if Managerial Employee and
Trisha if Rank and File. Place your answer in another sheet of paper
. Erasures means wrong.
1. Human Resource Officer 6. Vice President For Academics
2. Administrative Aide 7. Tax Instructor
3. Chief Finance Officer 8. External Auditor
4. DTI Secretary 9. Bookkeeper
5. Private Secretary 10. Municipal Accountant
II. CLASSIFICATION. Classify the following fringe benefits if Taxable or

Non taxable. Write Danny if Taxable andTrisha Mae if Non Taxable. Write
your answer in another sheet of paper. Erasures means wrong. ( 10 points)
1. Housing allowance for less than 3 months of the HRD Officer
2. Clothing allowance amounting to P10,000 of Accounting Instructor
3. Housing allowance of Branch Manager situated within the Business premises.
4. Travel Allowance of Chief Executive Officer for seminar attended in Canada.
5. Recreation Appliances given to Vice President for Academics.
6. Household expenses given to Secretary of Education
7. Housing privilege given to Branch Manager
8. 2 % interest on loan for Vice President for Non Academics and the market
rate is 15 %.
9. Monetized unused leave of 9 days of External auditor
10. Monetized unused leave of 9 days of Bookkeeper.

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MODULE 5
III.INCOME TAX DUE COMPUTATION

In 2020 , Habbab company purchased a brand new car for use by its Financial
Manager. The car costing P 612,000 was registered in the name of the manager
1.The monetary value of the benefit 3. The Gross Up monetary value
2.The Fringe Benefit Tax
In 2020 Marlon Company approved a loan of P 200,000 to its manager at 5%. The
Loan is payable in 6 months. The prevailing rate is 15 %
4. The monetary value of benefit 5. The gross up monetary value
6. The Fringe Benefit Tax
Sir Jan , a professor of ISPSC and Dean of College of BSBA was required by the school
to take Masteral Degree in Business Administration as required by CHED. His study was
financed by ISPSC amounting to P100,000.
7.The monetary value of benefit 8. The gross up monetary value

9.The Fringe Benefit Tax
Trisha Mae Corporation is on its fifth year of business operation when it was assessed by the BIR for
improperly accumulating profits.
Gross Income P 5,500,000
Business Expense 1,800,000
NOLCO prior years 700,000
Dividend Income – domestic 150,000
Gross Interest income-Bank 100,000
Gain on sale of domestic stocks directly to buyer 400,000
Gain on sale of land, classified as capital asset
( SP= P 3,000,000; Fair Value =P 3,500,000) 500,000
Dividends Declared 420,000
Appropriations for treasury stocks 150,000
Appropriations for plant expansion 350,000
10.Compute the improperly accumulated earnings tax.

11. The NIT
12. The MCIT
13. The CGT
14. The FT
Trisha Mae Corporation, a domestic corporation, had the following data for the year 2020:
Gross sales………………………………………………………………………………… P12,440,000

Cost of sales………………………………………………………………………………... 4,750,000
Business expenses………………………………………………………………………….. 3,544,000
Other income:
Dividend income from another domestic corporation…………………………350,000

Tagudin Campus
MODULE 5
Interest income from banks…………………………………………………………………105,000

Capital gains on the sale of land,
(SP: P3M; FMV: P2.5M)…………………………………………………………………….500,000
Royalty income………………………………………………………………………………. 145,000
Dividend income from a foreign corporation……………………………………450,000
Dividend paid during the year………………………………………………………… 280,000
Amount set aside for legal cases in court…………………………………………750,000
15. Compute the IAET.
ACTIVITY 2
Answer the assessment made by your instructor by clicking the link to be

given to you by your instructor. Different link will be given per major .
You may now proceed to the next module of this course. I hope you have
learned some information if not a lot in the
lessons discussed earlier.


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ILOCOS SUR POLYTECHNIC STATE COLLEGE

TITLE: TAXES IMPOSED TO CORPORATION

WHAT IS THE MODULE ALL ABOUT?

LIST OF TOPICS TO BE STUDIED IN THE MODULE

INTENDED LEARNING OUTCOMES (ILO)

Course Code: Tax 101

B. CORPORATE GROSS INCOME TAX ( GIT)

The President upon recommendationof the secretary of finance, may, effective

Cost ratio limit

Course Code: Tax 101

C. MINIMUM CORPORATE INCOME TAX

As a minimum tax, the MCIT is payable when:

Scope of the Minimum Corporate Income Tax

MCIT exempt entities:

Timing of imposition of MCIT

MCIT Gross income under the NIRC

For corporation involved in: “Gross income” means

Course Code: Tax 101

 Sale of service Gross receipts less sales returns, allowances,

Gross receipt – means cash collections for services rendered or to be rendered.

In case of banks, ‘cost of services’ shall include interest expense.

While this may be questioned as an improper introduction of legislation, it is an

Course Code: Tax 101

EXCESS MCIT CARRY-OVER

Excess MCIT Carry Over Rules

RELIEF FROM THE MINIMUM CORPORATE ONCOME TAX

a. Prolonged labor dispute

ILLUSTRATIVE MCIT COMPUTATION

Illustration 1: MCIT of trading concern

Gross sales P 1,000,000

Inventory, at the start of the year 220,000

Course Code: Tax 101

The cost of goods sold shall first be computed as:

The minimum corporate income tax shall be computed as follows :

Gross Sales P 1,000,000

Illustration 2: MCIT of a Service Provider

Emjhay Corporation provides consultancy services to various clients . It reported the

Collection and Billings :

Salaries of Consulting staff P 1,600,000

Course Code: Tax 101

Office depreciatione expenses 50,000

The gross receipts of Emjhay Corp. shall be determined as:

Net collection on services rendered P 3,200,000

The direct cost of services of Emjhay Corp. shall be:

Consulting salaries expense P 1,600,000

The minimum corporate income tax shall be computed as:

Gross receipt P 4,200,000

Illustration 2 : MCIT AND RCIT: BASIC APPLICATION

Total gross income P 4,000,000

Course Code: Tax 101

Regular allowable deductions P 3,000,000

Illustration 3: Excess MCIT – Basic Application

2018 2019 2020 2021 .

MCIT Excess (MCIT-RCIT) P 60,000 P 10,000

In 2020, the income tax payable is nil.

2018 2019 2020 .

In 2021, the income tax payable is P50,000.

2018 2019 2020 2021 .

Course Code: Tax 101

Name: _____ Class Schedule: