SOUTH EAST ASIAN INSTITUTE OF TECHNOLOGY, INC.

Business Administration Department

National Highway, Crossing Rubber, Tupi, South Cotabato

_____________________________________

LEARNING MODULE FOR

BT 211
TAXATION (INCOME TAXATION)

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WEEK 07

BT 211 : Taxation (Income Taxation)

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 COURSE OUTLINE

COURSE CODE : BT 211

TITLE : Taxation (Income Taxation)
TARGET POPULATION : BS Accounting Information System and BS Business
Administration major in Marketing Management Students
INSTRUCTOR : MRS. RUBY JOY FERNANDO-VERANO

Overview:

This course is an in-depth study of income and taxation where learners will have their
initial exposure to the Philippine income tax system. This introductory taxation course is
primarily concerned with income taxation. The objective of this course is to develop a
working knowledge on basic principles and rules of the income tax system in the
Philippines as they apply to individuals, partnerships, and corporations. It covers an
overview of the national tax system, and the income taxation of employees and
unincorporated business and incorporated business. It provides the students with
knowledge of the capital gains tax, final tax on certain passive income, and the year-end
tax including the minimum corporate income tax, the normal tax, and the improperly
accumulated income tax of corporations, and withholding tax.

Objectives:

CO 1: Understand the concept of law and the environment of the Philippine legal system
CO 2: Understand the remedies available to both the taxpayer and the BIR
CO 3: Understand the concepts and rules of the income tax on individuals
CO 4: Understand the concepts and rules of the income tax on corporations
CO 5: Understand the concepts and rules of the income tax on partnerships, estates and trusts
CO 6: Understand the concept of gross income
CO 7: Understand and identify deductible items from gross income
CO 8: Understand the bases in computing the taxable income
CO 9: Understand the taxation on sale, exchange, or other disposition of property

Instruction to the Learner:

Each chapter in this module contains a major lesson involving the theory and
practical application of the concepts of Income Taxation. The units are characterized by
continuity, and are arranged in such a manner that the present unit is related to the next
unit. For this reason, you are advised to read and understand this module. After each unit,
there are exercises to be given. Submission of task given will be every Wednesday during
your scheduled class hour.

The essential topics are thoroughly discussed starting in the following page. Comprehension
of these essential topics is enough for you to pass this course. However, if you want to gain more
insights on these essential topics, expanded discussions and detailed explanations are provided
in the appendices which can be accessed in our Facebook group (see more details below).

At the end of each module, you can test your preliminary understanding by answering
the self-test questions. The answers to these questions are found at the bottom part of
the page. After answering the self-test questions, you are going to answer the remaining
bring-home questions and problems within the week while staying at home, to be
submitted by the next meeting, during your scheduled class hour.

You are also required to log in using your legitimate Facebook account and join our
group at https://www.facebook.com/groups/seaittax and participate in the discussion that
will be made there. All your questions and clarifications must also be made in the
Facebook group or personally through a scheduled consultation with the instructor.

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 WEEK 07
INCOME TAX OF CORPORATION
Objectives:

After studying this chapter, the students should be able to:

1. Distinguish a domestic corporation from a foreign corporation;

2. Enumerate the corporations that are exempt from taxation;
3. Explain the instances of inter – corporate dividends and their respective tax
treatment;
4. Identify the different kinds of taxes that may be imposed on the income of a
corporation;
5. Discuss the allowable tax credits from tax due in the annual ITR of a domestic
corporation;
6. Define “unrelated business activity”.

CONCEPT OF CORPORATION

In taxation, a corporation includes joint stock companies, joint accounts, associations,

insurance companies or partnership no matter how they were created or organized.

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 under a service contract with the government.

CLASSIFICATION OF CORPORATE TAXPAYERS

1. Domestic Corporation is one organized and existing under Philippine laws. In

general, it includes Government Owned and Controlled Corporation (GOCC) or
instrumentalities engaged in similar business industry or activity.
A domestic corporation is taxable on all income from sources within and outside
the Philippines.
2. Foreign Corporation is a corporation organized and existing under the laws of
foreign country irrespective of the nationality of its stockholders.
Foreign Corporation is taxable only on income from sources within the Philippines.

Two classification of a Foreign Corporation

a. Resident foreign corporation refers to a foreign corporation that is engaged in

business or trade in the Philippines. Generally, it establishes a branch or an office
for the purpose of doing business or trade.
b. Nonresident foreign corporation does not engage in business or trade in the
Philippines. Its earnings are derived from fixed determinable income from sources
within the Philippines that are enumerated in the Tax Code as follows:

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 1. Interest, dividends, royalties;
2. Rents, salaries;
3. Premiums, except reinsurance premiums;
4. Annuities, emoluments or other fixed or determinable annual, periodic or
casual gains, profits and income;
5. Capital gains, except capital gains from the sale of shares of stock not traded
in the stock exchange of a domestic corporation.

TAX EXEMPT CORPORATIONS

Income received by the following corporations shall be exempted from tax:

1. Government educational institutions;

2. Non-stock and nonprofit educational institutions;

3. Nonprofit labor, agricultural or horticultural organizations;

4. Associations of farmers, fruit growers, and the like whose primary function is to market

the product of their members;

5. 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 associations, mutual ditch or irrigation company and mutual or

cooperative telephone company.

6. 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.
7. Non-stock / nonprofit mutual savings bank or non-stock / nonprofit cooperative bank.
8. Nonprofit civic league or organization operating exclusively for the promotion of social
welfare.
9. Cemetery company owned and operated exclusively for the benefit of its members.
10. Nonprofit business league, chamber of commerce, or board of trade.
11. Associations, orders, beneficiary societies operating for the exclusive benefits of their
members.

Note: National Power Corporation (NPC) in general is subject to income tax. PAGCOR is now
subject to income tax.

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Corporation not mentioned above are subject to income taxes.

TAXES ON CORPORATE INCOME

RESIDENT NON-RESIDENT
CLASSIFICATIONS DOMESTIC FOREIGN FOREIGN
CORPORATIONS CORPORATIONS CORPORATIONS

SOURCES OF Within and without Within the Within

TAXABLE INCOME the Philippines the Philippines the Philippines

INCOME IN TAXABLE INCOME TAXABLE INCOME GROSS INCOME

GENERAL Normal Tax Rate Normal Tax Rate Normal Tax Rate

(R.A. 9337) 30% effective 30% effective 30% effective

January 1, 2009 January 1, 2009 January 1, 2009

INCOME TAXES OF CORPORATIONS

Corporations may be subjected to the following taxes:

1. Normal Corporate Income Tax (NCIT) - a starting January 1, 2009 = 30% based on net

taxable income;

2. Minimum Corporate Income Tax (MCIT) – 2% of gross income;

3. Optional Gross Income Tax (OGlT) - Optional effective January 1, 2000 if requirements

are met;

4. Capital Gains Tax - on sale of real property or on sale shares of stock;

5.Final Tax on passive income.

THE NORMAL CORPORATE INCOME TAX

For taxation purposes, NCIT refers to the use of regular domestic income tax rates on the
corporate taxable income which is 30% starting January 1, 2009.

BIR Form 1702 lays out the general format for income tax computation on business
income.

Sales /Revenue/Receipts/Fees from within and without P xxx

Less: Sales returns, allowances, and discounts (if any) P xxx
cost of sales xxx xxx
Gross Income from operation P xxx
Add: Non-operating and other income not subjected to
Final/capital gain tax xxx
Gross income P xxx
Less: Allowable itemized business deductions or OSD xxx
Net taxable income P xxx
Multiply by normal corporate income tax 30%
Normal Corporate income tax P xxx

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To illustrate, the corporate income subject to normal tax for a trading or manufacturing

Domestic Corporation is as follows:

Gross Sales, year 201A P1,050,000

Less: Sales returns, allowances, and discounts 50,000
Net sales P1,000,000
Less: Cost of Sales/ Goods manufactured and sold 400,000
Gross Profit from operation P 600,000
Add: Non-operating and other income not subjected to
Final/capital gain tax 100,000
Gross Income P 700,000
Less: Allowable itemized business deductions P 400,000
taxable income, subject to normal corporate income tax P 300,000
Multiply by normal corporate income tax rate 30%
Normal Corporate income tax P 90,000

The corporate income subject to normal tax for a servicing domestic corporation:

Gross receipts revenue, year 201A P 810,000

Less: Sales returns, allowances, and discounts 10,000
Net Receipts P 800,000 Add: Non-operating and
other income not subjected to
Final/capital gain tax 50,000
Gross income P 850,000
Less: Allowable itemized deduction P 650,000 taxable
income, subject to normal tax P 200,000
Multiply by normal tax rate for the year 30%
Normal Corporate income tax P 60,000

NOTES:
1. the corporation above is a resident foreign corporation, the computation of normal income
taxes would be the same if all sources of incomes and expenses where derived within the
Philippines. Any income derived outside the country is not subject to tax in the Philippines.

2. For Nonresident Foreign Corporation, the tax base would be the gross income within the
Philippines.

MINIMUM CORPORATE INCOME TAX (MCIT)

Pursuant to Section 27(E) and Sec. 28 (A2) of the NIRC, domestic and resident foreign
corporations shall be taxed with 2% based on gross income and not on taxable income
after operating expenses if they have:

1. been in their fourth year of operation;

2. incurred a net loss or zero taxable income, or a normal income tax that is lesser than

minimum income tax.

The Secretary of Finance is authorized to suspend the imposition of the minimum

corporate income tax on a corporation that suffers losses on account of prolonged labor
dispute, or because of force majeure, or of legitimate business reverses. (Sec 271E3),
NIRC)

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For purposes of minimum income tax, passive income that has been subjected to a final
tax shall not be included as a part of gross income.

Per BIR form 1702, the format to compute the minimum corporate income tax would be:

Gross income from operation P xxx

Add: Non-operating and other income not
Subject to final / capital gain tax xxx
Total Gross income subject to MCIT P xxx
Multiply by MCIT tax rate 2%
Minimum Corporate Income (MCIT) P xxx

CARRY FORWARD OF EXCESS OF MCIT

Any excess of the minimum corporate income tax (MCITT) over the normal tax shall be
carried forward and credited against the normal tax immediately for three (3) succeeding
taxable years.

Illustration

Abuel Corporation has been operating since January 1, 2008. Data pertinent to its
operations covering 2010 to 2012 are as follows:

2010 2011 2012

Gross Sales P3,080,000 P4,100,000 P5,200,000
Sales returns, discounts / allowance 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 Abuel Corporation is as follows:

1. Computation of Normal Corporate Income Tax (NCIT):

2010 2011 2012

Gross Sales P3,080,000 P4,100,000 P5,200,000
Sales returns, discount / allowances 80,000 100,000 200,000
Net Sales P3,000,000 P4,000,000 P5,000,000
Cost of sales 1,500,000 P2,000,000 P2,500,000
Gross income P1,500,000 P2,000,000 P2,100,000
Operating expenses 1,450,000 1,900,000 2,100,000
Net taxable income P 50,000 P 100,000 P 400,000
Multiply by Normal Corporate Tax 30% 30% 30%
Normal Corporate Income Tax P 15,000 P 30,000 P 120,000

2. Computation of Minimum Corporate Income Tax (MCIT)

2011 2012
Gross Income P2,000,000 P2,500,000
Multiplied by Minimum Corporate Income Tax Rate 2% 2%
Minimum Corporate Income Tax P 40,000 P 50,000

Note: The minimum corporate income tax for 2010 is not applicable because the company
has not yet reached its fourth year.

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3. Determination of income tax due and payable:

2010 2011 2012

NCIT or MCIT, whichever is higher P15,000 P40,000 P120,000
Less: Excess of MCIT over NCIT 10,000
Income Tax due and payable P15,000 P40,000 P110,000

The computation of excess of MCIT over NCIT is computed as follows:

2011 Minimum Corporate Income Tax – MCIT (P2,000,000 x 2%) P40,000
2011 Normal Corporate Income Tax – NCIT (P100,000 x 30%) 30,000
Excess of MCIT over NCIT P10,000

ACCOUNTING TREATMENT OF MCIT

Any amount of excess MCIT shall be recorded in the corporations books as an asset as
"Deferred charges, MCIT”. The excess of MCIT over the normal tax due shall be carried
forward and maybe credited against the latter within 3 years immediately succeeding the
taxable year(s) in which the MCIT has been paid.

Any amount of the excess MCIT that has not or cannot be credited against normal
income taxes due for the three-year reglementary period shall lose its creditability.

Such amount shall be removed and deducted from “Deferred charges, MCIT” account by
a debit entry to Retained Earnings account and a credit entry to "Deferred charges, MCIT
account since this tax is not allowable as deduction from gross income, it being an
income tax.

Illustration

Forever Corporation, a domestic corporation, has been inexistence for 6 years. It reported
the following results of its operations for its 5th and 6th year:

5th Year 6th Year

Business Income P8,000,000 P4,600,000
Itemized Expenses 7,800,000 4,250,000

Forever’s income tax and its related journal entries for each year would be

5th Year:
Normal Tax (P8,000,000 – P7,000,000) x 30% P 60,000
MCIT (P8,000,000 x 2%) 160,000
Excess of MCIT over normal tax P100,000

GENERAL JOURNAL
Date Page 5

5th Year Descriptions F Credit Debit

(a) Income tax expense 60,000

Deferred Changes 100,000

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 Income Tax Payable 160,000

6th Year:
Normal Tax (P4,600,000 – P4,250,000) x 30% P 105,000
MCIT (P4,500,000 x 2%) P 90,000

The excess of MCIT over normal tax on the 5th year can reduce the normal tax, hence:

Normal Tax P105,000

Less: Excess of MCIT over normal tax – 5th year 100,000
Income tax payable P 5,000

The journal entry would be:

GENERAL JOURNAL
Date Page 6
6th Year Descriptions F Credit Debit

(a) Income tax expense 105,000

Deferred Changes 100,000
Income Tax Payable 5,000

EXPANDED WITHHOLDING TAX AS DEDUCTION FROM MCIT

A taxpayer who is liable to MCIT and at the same time has an expanded withholding tax
(EWT) may deduct the EWT from MCIT and if there is still an excess EWT, he may
request for tax creditor refund of tax withheld.

Illustration

A real estate lessor collected P1,140,000 rent during the taxable year, net of 5%
expanded withholding tax. Total expenses amounted to P1,130,000. The net income tax
payable (refundable)1or the period would be:

Gross Receipts (P1,140,000 / 95%) P1.200,000

Multiplied by MCIT rate 2%
Minimum Corporate Income tax P 24,000
Less: Expanded withholding tax 60,000
Income tax refund (P 32,000)

NCIT VS MCIT
Summary Application

After three years of operation: NCIT MCIT

Losses or break-even Not Applicable Applicable
MCIT greater than NCIT Not Applicable Applicable
NCIT greater than MCIT Applicable Not Applicable

*When the tax to be paid is NCIT the “Deferred Charges, MCIT” (excess of MCIT over NCIT)
within the past three years can be claimed as a tax credit against NCIT.

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OPTIONAL GROSS INCOME TAX (GIT)

Section 27 A of the NIRC provides an optional gross income tax of15% based on the
gross income. The rules for the application of this tax are as follows:

1. "...The President, upon the recommendation of the Secretary of Finance, may,

effective January 1, 2000, allow corporations the option to be taxed at fifteen
percent (15%) of gross income as defined therein, after the following conditions
have been satisfied:

a. A tax ratio of twenty percent (20%) of Gross National Product (GNP);

b. A ratio of forty percent (40%) of income tax collection to total tax revenues,

c. A VAT tax effort of four percent (4%) of GNP;

d. A 0.9 percent (0.9%) ratio of the Consolidated Public Sector Financial Position

(CPSFP) to GNP."

2. 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 do not exceed fifty-
five percent (55%).
3. The election of the gross income tax option by the corporation shall be irrevocable for
three (3) consecutive taxable years during which the corporation is qualified under
the scheme.

For purposes of gross income tax, gross income should be the same as gross income for
purposes of MCIT in cases of trading, merchandising and manufacturing concern
business. However, for service enterprises, gross income means gross receipts less
sales returns, discounts, allowances and cost of services.

Illustration

Janette Corporation’s information regarding its 201A operation is:

Gross sales P3,700,000

Cost of sales 2,000,000
Operating expenses 1,000,000

The computation of income taxes due and payable by Janette Corporation would be:

201A NCIT MCIT GIT____

Gross sales P3,700,000 P3,700,000 P3,700,000
Less: Cost of Sales 2,000,000 2,000,000 2,000,000
Gross Income P1,700,000 P1,700,000 P1,700,000
Less: Operating expenses 900,000
Net Income P 800,000
Multiply by tax rate 30% 2% 15%
Income Tax P 240,000 P 34,000 P 255,000

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 Cost ratio over sales (P2,000,000 / P3,700,000) 54%

Janette Corporation may opt to pay gross income tax of P255,000 or pay normal
corporate income tax of P240,000. The corporation is not qualified for MCIT.

Note: As of the writing of this book, the gross income tax of 15% base on the corporate gross
income has not been implemented in the Philippines.

CAPITAL GAIN TAX

The tax on capital gains of a corporation derived within the Philippines is summarized as
follows:

C O R P O R A T I O N S

RESIDENT NONRESIDENT
CAPITAL GAIN WITHIN DOMESTIC FOREIGN FOREIGN
1. Capital gains on sale of shares of
stock not traded in the local stock
exchange. Net capital gains:

Not over P100,000 5% 5% 5%

Excess of P100,000 10% 10% 10%

2. Percentage tax on sale of shares of

stock traded in the local stocks
½ of 1% ½ of 1% ½ of 1%
exchange. Based on selling price.

3. Capital gains on sale or exchange 6% of selling

Price or FMV,
or disposition of lands and/or Not applicable Not applicable
whichever is
buildings located in the Philippines higher
4. Net capital gains on sales or
exchange or disposition of lands or 30% Not taxable Not taxable
buildings located outside the
Philippines

Notes:
1. 1/2 of 1% tax on sale of shares of stock traded in local stock exchange is a percentage
tax not an income tax;
2. Sale of real property sold outside by resident citizen and domestic corporation is subject to
normal tax rate based on gain;
3. In general, only Filipino citizens and corporations or partnerships with at 60% of the shares
are owned by Filipinos are entitled to own or acquire land in the Philippines;
4. Foreign individuals and foreign corporations are not allowed to acquire real property in the
Philippines as provided by anti-dummy law.

Illustration
Diamond Corporation has the following capital asset transactions for the year 201A:

1. Sold 10,000 common shares of stock not traded in the local stock exchange for
P1,200,000. The cost per stock is P100.
2. Sold 20,000 preferred shares of preferred stock traded in the local stock exchange
for P1,800,000. The cost per stock is P100.
3. Sold land located in Japan for P5,000,000. The cost of the land is P4,000,000.

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 4. Sold land located in the Philippines for P6,000,000. The cost of land is P3,000,000
with a fair market value of P6,500,000.

Required: Compute Diamond Corporation's taxes payable on sales of capital assets

assuming the taxpayer is:

1. Domestic corporation (DC)

2. Resident foreign corporation (RFC)

3. Nonresident foreign corporation (NRFC)

Solution:

Capital gains tax on: DC RFC NRFC

1. Sales of stock not traded
Net capital gain of P200,000
Tax on P100,000 x 5% P 5,000 P 5,000 P 5,000
Tax on excess P100,000 x 10% 10,000 10,000 10,000
P15,000 P15,000 P15,000
2. Sales of stock – traded
(P1,800,000 x ½ of 1% P 9,000 P 9,000 P 9,000

3. Sales of land in Japan

(P5,000,000 – P4,000,000) x 30% P300,000 Not Taxable Not Taxable

4. Sales of land in the Philippines

(P6,500,000 x 6%) P390,000 not applicable not applicable

PASSIVE INCOME TAX

The tax on passive income of the corporation is summarized as follows:

C O R P O R A T I O N S

Domestic and Residence Nonresident

Foreign Foreign
PASSIVE INCOME WITHIN
1. Interest from depository
bank under the expanded 7.5%
Tax exempt
foreign currency deposit Sec. 27 D(1); Sec.
Sec. 27 D (3)
system. 28 A 7(a)

2. Royalties, Yield or
Normal Corporate
monetary substitutes, trust 20%
Income Tax
funds and similar
arrangements.

3. Interest on currency bank 20%

Normal Corporate
deposit. Income Tax

Illustration

Golden Corporation has the following passive income for the year 201A:

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 1. Interest from depository bank under expanded FCDS at P120,000.
2. Royalties of P300,000.
3. Yield deposit substitutes and trust fund at P180,000.
4. Interest on currency bank deposit at P50,000.

Compute the passive income taxes of Golden Corporation assuming that the corporation
is a:

(a)Domestic corporation;
(b) Resident foreign corporation;
(c) Nonresident foreign corporation.

Solution

PASSIVE INCOME: DC / RFC NRFC

1. Interest from depository bank under expanded
FCDS, (P120,000 x 7.5%) P 9,000 Tax exempt

2. Royalties (P300,000 x 20%) P 60,000

(P300,000 x 30%) P90,000

3. Yield deposit substitutes and trust fund

(P180,000 x 20%) P 36,000
(P180,000 x 30%) P 54,000

4. Interest on currency bank deposit

(P50,000 x 20%) P 10,000
(P50,000 x 30%) P 15,000

OTHER PASSIVE INCOME OF DOMESTIC AND RESIDENT FOREIGN

CORPORATIONS

The income of domestic banks under the Expanded Foreign Currency Deposit System is
subject to a final tax of 10%.

a. Income derived by a depository bank from foreign currency transactions with

local commercial banks including branches of foreign banks, other depository
banks and residents.
b. Interest income from foreign currency loans granted residents.

2. Inter-corporate dividends

a. Received by a domestic corporation from another domestic corporation = tax

exempt.

b. Received by a resident foreign corporation from a corporation liable to tax under

Philippine Tax Code = tax exempt.
c. Received by resident foreign corporation from another foreign corporation =
taxable
at 30% on the portion which is earned in the Philippines which should be 50%
or more of the total income earnings for the past 3 years.

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Illustration

A Philippine Bank has been authorized to operate a Foreign Currency Deposit Unit by the
Bangko Sentral ng Pilipinas and has the following revenue and expenses:

a. Dividend income from San Miguel Corporation amounting to P3,000,000.

b. Interest income on US dollar deposit with local bank authorized to operate a FDCU at

$20,000.

c. Interest income on US dollar loans from resident borrower $5,000.

d. Interest on Philippine peso loans from borrowers at P3,000,000.

e. Interest on US dollar loans to nonresident borrower at $30,000.

f. Interest on US dollar deposit in Hongkong at $10,000.

g. Operating expenses of P2,000,000. Exchange rate: one US dollar is P50.

The final taxes of Philippine Bank would be

Interest Interest
Dividend Dollar deposit Dollar loans
Income P3,000,000 $ 20,000 $ 5,000
Multiply by rate Tax exempt 10% 10%
Final Taxes -0- $ 2,000 $ 500

Income subject to normal corporate income tax

Interest in the Philippines peso loan P3,000,000

Interest on US dollar loans ($30,000 x P50,000) 1,500,000
Interest on US dollar deposit ($10,000 x P50,000) 500,000
Gross Income P5,000,000
Less: Operating expenses 2,000,000
Taxable income P3,000,000
Multiply by tax rate 30%
Income Tax due P 900,000

OTHER PASSIVE INCOME OF NONRESIDENT FOREIGN CORPORATION

1. Interest income on foreign loans contracted on or after August 1, 1986 is subject

to 20% Final Withholding Tax.
2. Inter-corporate dividend received by a nonresident foreign corporation from a
domestic corporation is subject to 15% Final Withholding Tax provided that foreign
law allows taxpayer clause; otherwise, it will be subject to the normal domestic
rate of 30%.

The tax rate of 15% shall be applicable if the foreign country does not impose any income
tax on dividends received by the nonresident foreign corporation from a domestic
corporation. The15%% tax rate shall be effective starting January 1, 2009.

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SPECIAL DOMESTIC CORPORATION

SPECIAL DOMESTIC CORPORATIONS

CLASSIFICATIONS APPLICABLE TAX

1. Proprietory educational Institution
((Except those whose gross income from
10% of net taxable income
unrelated source exceeds 50% of their total
Gross income)
10% of net taxable income
2. Nonprofit hospitals

3. Government owned and controlled

Normal corporate income tax
corporations

4. Exempt government organizations Tax Exempt

(GSIS, SSS, PHIC, PCSO)

DOMESTIC PRIVATE EDUCATIONAL INSTITUTIONS AND HOSPITALS

Domestic private educational institutions and hospitals which are nonprofit shall pay a tax
of 10% on their net taxable income

However, if their business income from unrelated business activities exceeds 50% of the
total gross income from all sources, the regular tax rate for domestic corporation shall be
applied.

The term "unrelated business activity” means any trade, business or other activity, the
conduct of which is not substantially related to the exercise or performance by such
educational institution or hospital or its primary purpose or function.

A “proprietary educational institution” any private school and administered by private

individuals or groups within an issued permit to operate from the DepEd or CHED, or
TESDA.

Illustration 1

The following data were reported for 200A business activities of Western University (WU),
a private educational institution:

Tuition fees P3,000,000

Miscellaneous fees 200,000
Rent income, net of 5% withholding tax 475,000
Cash dividend (domestic), tax-exempt 200,000
Interest income, net of 20% final tax 80,000
Operating expenses 1,200,000

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The income tax payable of WU per ITR is determined as follows:

1. Computation of percentage of unrelated income

Unrelated Related Total

Rent income(P475,000/95%) P 500,000 P 500,000
Cash dividend 200,000 200,000
Interest income(P80,000/80%) 100,000 100,000
Tuition fees 3,000,000 3.000,000
Miscellaneous fees 200,000 200,000
Total gross income – all sources P 800,000 P3,200,000 P4,000,000

Percentage of unrelated income over total gross income

From all sources (P800,000 / 4,000,000) 20%

2. Computation of income tax payable per ITR:

Tuition fees P3,000,000

Rent income 500,000
Miscellaneous fees 200,000
Total gross income per ITR P3,700,000
Less: Operating expenses 1,200,000
Net taxable income P2,500,000
Multiplied by special tax rate 10%
Income tax due 250,000
Less: creditable withholding tax on rent (P500,000 – P475,000) 25,000
Income Tax payable P 225,000

Illustration 2
Suppose that in 200A, the composition of WU income is as follows:
Tuition fees P1,200,000
Miscellaneous fees 200,000
Rent income, net of 5% withholding tax 950,000
Cash dividend (domestic), tax-exempt 500,000
Interest income, net of 20% final tax 80,000
Operating expenses 1,200,000

The income tax payable of WU per ITR is determined as follows:

1. Computation of the percentage of unrelated income:

Unrelated Related Total

Rent income(P950,000/95%) P1,000,000 P1,000,000
Cash dividend 500,000 500,000
Interest income(P80,000/80%) 100,000 100,000
Tuition fees 1,200,000 1.200,000
Miscellaneous fees 200,000 200,000
Total gross income – all sources P 1, 600,000 P1,400,000 P3,000,000

Percentage of unrelated income over total gross income

From all sources (P1,600,000 / P3,000,000) 53%

2. Computation of income tax payable per ITR:

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 Tuition fees P1,200,000
Rent income 1,000,000
Miscellaneous fees 200,000
Total gross income per ITR P2,400,000
Less: Operating expenses 1,200,000
Net taxable income P1,200,000
Multiplied by normal tax rate 30%
Income tax due 360,000
Less: creditable withholding tax on rent (P500,000 – P475,000) 50,000
Income Tax payable P 310,000

Note:
The minimum corporate income tax may be applied if the private educational institution
qualifies to be taxed under normal corporate income tax. If it remains under special tax of
10% the minimum corporate income tax is not applicable.

SPECIAL RESIDENT FOREIGN CORPORATION

The income tax imposed to special resident foreign corporation are as follows:
Special Resident Foreign Corporation
CLASSIFICATIONS APPLICABLE TAX for income within
1. Internal carrier 2 ½% of the Philippines Gross billings
2. Offshore banking units 10% of gross income
3. Branch remittances 15% of remittances
4. Regional area headquarters Tax exempt
5. Regional operating 10% of taxable income
headquarters

INTERNATIONAL CARRIER

The applicable tax would be 2 % of the Gross Philippine Billings (PGB). PGB means
gross revenue realized from carriage or persons, excess baggage, cargo and mail
originating from the Philippines under the following conditions:

 In a continuous and uninterrupted flight;

 In case of transshipment, that portion of the cost of ticket corresponding to the leg
flown from the Philippines to the point of transshipment.

OFFSHORE BANKING UNITS (OBU)

These resident foreign corporations are subject to a final 10% tax on interest income
derived from foreign currency loans granted to residents.

Exceptions

1. Income derived by OBU authorized by BSP from foreign currency transactions with
nonresidents, other OBUs, local commercial banks and foreign banks shall be exempt
from all taxes, except net income from such transactions as specified by the Secretary of
Finance.

2. Income of nonresident individuals and nonresident corporations from transactions with

offshore banking units is exempted from Philippine income tax.

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TAX ON BRANCH PROFITS REMITTANCE
They are subject to 15%% tax on the amount remitted by branch to its head office
excluding:

a. Income from activities that are registered with Philippine Economic Zone Authority.

b. Passive income gains and profits received not directly connected with the conduct of its
trade or business in the Philippines.

REGIONALOPERATING HEADQUARTERS

Regional operating headquarters are branches established in the Philippines by multi-

national companies, which are engaged in any of the following services, are subject to
10% tax rate based on their taxable income:

a. General administration and planning;

b. Business planning and coordination;

C. Sourcing and procurement of raw materials and components;

d. Corporate finance adv1sory services;

e. Marketing control and sales promotion;

f. Training and personnel management;

8 Logistic services;

h. Research and development services and product development;

i. Technical support and maintenance;

J. Data processing and communication;

k. Business development.

SPECIAL NONRESIDENT FOREIGN CORPORATIONS

The applicable tax rates for special nonresident foreign corporations are as follows:

SPECIAL NONRESIDENT FOREIGN CORPORATION

CLASSIFICATIONS APPLICABLE TAX – Income within

1. Cinematographic film owner.
Lessor/Distributor 25% of gross income
(Sec. 28B, NIRC)
2. Lessor of machinery, equipment, 7 1/2% of gross income
Aircraft and others (Sec. 28C,
NIRC) 4 ½ of gross income
3. Lessor of vessels chartered by
Philippine Nationals (Sec. 28D,
NIRC)

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Illustration

X, a special nonresident foreign corporation reveals its income and expenses within the
Philippines as follows:

Gross receipts P5,000,000

Operating Expenses 2,000,000

Compute the income taxes due if X is a:

(a) Cinematographic film distributor;

(b) Lessor of aircraft;
(c) Lessor of vessels chartered by Philippine National

The income tax due would be:

(a) Cinematographic film (b) Lessor Aircraft (c) Lessor of vessels

Gross Receipts P5,000,000 P5,000,000 P5,000,000
Multiplied by applicable tax 25% 7.5% 4.5%
Income tax due P1,250,000 P 375,000 P 225,000

INSURANCE COMPANIES

In the case of insurance companies, whether domestic or foreign doing business in the
Philippines, the net additions, if any, required by law to made within the year to reserved
funds and the sums other than dividends paid within the year on policy and annuity
contracts maybe deducted from their gross income: Provided, however, that the released
reserve be treated as income in the year of release.

FRANCHISING COMPANIES

When royalties are received in active pursuit of business, it is subject to 30% regular
corporate income tax, If royalties are derived from passive income, these are generally
subject to 20% final tax.

CORPORATE INCOME TAX RETURNS

Section 52 (A) of the NIRC provides that every corporation subject to the tax herein
imposed, except 1oreign corporations not engaged in trade or business in the Philippines,
shall render, induplicate, a true and accurate quarterly income tax return (BIR Form
1702Q) and final or adjustment return (BIR Form 1702).

The return shall be filed by the president, vice president or other principal officers and
shall be sworn to by such officer and by the treasurer or assistant treasurer.

Rules in filing and payment of corporate income tax:

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 1. The corporate quarterly return shall be filed within sixty (60) days following the
close of each of the first three quarters of the taxable year.
2. The income tax due on the corporate quarterly returns and the final adjusted
income tax returns computed in accordance with Section 75 and 76 shall be paid
at the time the declaration or return is filed.
3. The final adjustment return shall be filed on or before the fifteenth(5 th) day of April,
or on or before the fifteenth (15 th) day of the fourth month following the close of the
fiscal year, as the case may be

ITR OF CORPORATE DISSOLUTION OR REORGANIZATION

Within 30 days after the adoption of a plan for dissolution or reorganization, a corporation
should render a correct ITR to the BIR Commissioner.

Prior to the issuance of the Certificate of Dissolution or Reorganization by the SEC, the
dissolving or reorganizing corporation shall secure a certificate of tax clearance from the
BIR which shall be submitted to the SEC.

TAXABLE YEAR OF CORPORATION

A corporation may employ either a calendar year or a fiscal year as a basis for filing its
annual income tax return. A corporation shall not change the accounting period employed
without prior approval from the Commissioner in accordance with the prohibitions of
Section 47 of the Tax Code.

The quarterly corporate income tax is computed as follows:

Sales for the quarter P xxx

Less: Cost of sales xxx
Gross income P xxx
Less: Deductible expenses xxx
Taxable income for the quarter P xxx
Add: taxable income from previous quarter xxx
Total taxable income to date P xxx
Multiply by corporate tax rate 30%
Less: Income tax paid in previous quarterly return P xxx
Income tax withheld by various payor xxx xxx
Tax payable this quarter P xxx

ANNUAL INCOME TAX RETURN

The corporate annual income tax return contains the accumulated report of sales cost of
sales and allowable deductions from the first quarter to the fourth quarter during the
taxable year.

The annual income tax return is the adjusted income tax return and is to be filed on or
before April 15 of the succeeding year.

Sales for the year P xxx

Less: Cost of sales xxx

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 Gross income P xxx
Less: Deductible expenses xxx
Taxable income for the year P xxx
Multiplied by normal tax rate or 30%
MCIT 2% of gross income 2%
Total annual income tax (applicable tax, the higher
of normal tax or MCIT) P xxx
Less: Income tax paid in the first 3 quarters P xxx
Income tax withheld by various payor xxx xxx
Tax payable this year P xxx

NOTE: If the total quarter tax paid during the taxable year is more than the tax due on the final
return, the corporation may claim tax credit carry-over or be refunded with the excess amount.

IMPROPERLY ACCUMULATED EARNINGS TAXON FAMILY OR CLOSELY-HELD

CORPORATION

In general, accumulation of earnings would be improper if such accumulation were not

within the reasonable needs of the business.

The term "reasonable needs of the business" are hereby construed to mean the
immediate needs of the business, including reasonably anticipated needs.

In either case, the corporation should be able to prove an immediate need for the
accumulation of the earnings and profits, or the direct correlation of anticipated needs to
such accumulation of profits. Otherwise, such accumulation would be deemed to be not
for the reasonable needs of the business, and the penalty tax would apply.

The improperly accumulated earnings tax shall not apply to the following corporations:

1. Publicly - held corporation;

2. Banks and other nonbank financial intermediaries;
3. Insurance companies.

EARNING FOR THE REASONABLE NEEDS OF THE BUSINESS

Revenue Regulations No. 2-2001 provides the following which constitute accumulation of
earnings for the reasonable needs of business:

1. Allowance for the increase in the accumulation to earnings up to 100% of the

paid-up capital of the corporation as of balance sheet date, inclusive of
accumulations taken from other years.
2. Earnings reserved for definite corporate expansion projects or programs requiring
considerable capital expenditure approved by the Board of Directors or equivalent
body;
3. Earnings reserved for building, plants, or equipment acquisition as approved by
the Board of Directors or equivalent body;
4. Earnings reserved for compliance with any loan covenant or pre-existing
obligation established under a legitimate business agreement;
5. 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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 6. In the case of subsidiaries of foreign corporations in the Philippines, all
undistributed earnings intended or reserved investments within the Philippines as
can be proven by corporate records and/or relevant documentary evidence.

ACCUMULATED PROFITS BEYOND REASONABLE NEEDS

The following are prima facie instances of accumulation of profits beyond the reasonable
needs of a business and are indicative of purpose to avoid income tax upon shareholders

1. Investment of substantial earnings and profits of the corporation in unrelated

business or in Stock or Securities of unrelated business,
2. Investment in bonds and other long-term securities;
3. Accumulation of earnings in excess of 100% of paid - capital, not otherwise
intended for the reasonable needs of the business as defined.

OBJECTIVE OF IMPROPERLY ACCUMULATED EARNINGS TAX (IAET)

The objective of imposing tax on the improperly accumulated income is to force

corporations to distribute dividends to stockholders in order that related tax on dividends
will be collected.

A corporation that does not distribute dividends deprives the government of income taxes
from the stockholders’ dividend income.

If there is a determination that a corporation has accumulated income beyond the

reasonable needs of the business, the 10% improperly accumulated earnings tax (1AET)
shall be imposed.

TAX BASE OF IMPROLY ACCUMULATED EARNINGS TAX (LAET)

For closely - held or family corporations found subject to the tax, Revenue Regulations 2-
2001 provides that the IAET for a particular year is first determined by adding to the
year's taxable income the following:

a) Income exempt from tax;

b) Income excluded from gross income;

c) Income subject to final tax;

d) NOLCO deducted.

The sum of the above amounts shall be reduced by the sum of

a) income tax paid or payable for the taxable year;

b) dividends actually or constructively paid/issued from the applicable year's taxable

income;

c) Amount reserved for the reasonable needs of the business as defined, emanating from

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 the covered year's taxable income.

Illustration

Amaro Corporation, a closely – held corporation, reported the following during the taxable
year:

Accumulated retained earnings P3,000,000

Paid - up share capita 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 Amaro Corporation would be

Taxable income (P900,000 / 30%) P3,000,000

Add: Gain in life insurance P1,000,000
Interest income (P60,000 / 20%) 300,000
Dividend income 200,000 1,500,000
Total P4,500,000
Less: Income tax due and Payable P1,000,000
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 P 304,000

Sources:

Llamado, C.P. & de Vera, J.L.A. (2019) – Philippine Income Tax Volume 1 (2019 Edition)
Naranjo, C.V.R. (2017) – General Principles of Taxation Review Material. SMARTS CPA Review, General Santos City
Rosada, F.U. (2018) – Notes in General Principles of Taxation Review Material. IRS CPA Review, Iloilo City and Leganes

Make Activity

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