Corporate Income Tax

Question 1

Basic Principle in Corporate Taxation

Answer 1

Basic Principle in Corporate Taxation:

1. a domestic corporation is taxable on all income derived from sources within and outside the Philippines; and
2. a foreign corporation, whether engaged or not in trade or business in the Philippines, is taxable only on income derived from sources within the Philippines

Question 2

Not taxable as corporations

Answer 2

Not taxable as corporations:

1. General Professional Partnership
2. Co-ownership
3. Tax exempt estates and trusts
4. Exempt Joint Ventures or Consortium- those that are:

• Formed for the purpose of undertaking construction projects,
• Petroleum, coal, geothermal and other energy operations in pursuant to an operating consortium agreement under a service contract with the government.

Question 3

Classification of Corporate Taxpayers

Answer 3

Classification of Corporate Taxpayers:

A. Domestic Corporations- these are corporations that are incorporated under Philippine Laws and are operating in the Philippines (includes business partnership)

1. Proprietary Educational Institutions and Non-Profit Hospitals

• If gross income comes from an unrelated trade,
• If gross income from unrelated trade, business or other activities exceeds 50% of the total gross income from all sources, the general corporate rate applies
• if the activities of these entities are primarily conducted on principal purpose (meaning unrelated gross income do not exceed 50%), they are taxable at 10%

2. Others (Domestic corporations in general) - subject to the regular income tax of 30% on taxable income

B. Resident Foreign Corporations- this pertains to corporations that are incorporated under any laws other than that of the Philippines but are operating in the Philippines

1.** International carrier**- taxable at 22% of Gross Philippine Billings

2. Offshore banking units and Foreign Currency Deposit Units - taxable at 10% of gross taxable income
3. Regional Area Headquarter and Regional Operating Headquarter of Multinational Companies- taxable at 10% of taxable income
4. Others- subject to the regular income tax of 30% on taxable income

C. Non-resident or Foreign Corporations- refers to corporations that are not incorporated in the Philippines and not operating in the Philippines except for some isolated or transactions

1. Non-resident Cinematographic Film Owner, Lessor or Distributor - film rentals and other items of gross income shall be taxed at 25%
2. Non-resident Owner or Lessor of vessels, chartered by Philippine nationals - gross rentals and other chartered fees shall be taxed at 4
3. Non-resident Owner or Lessor of aircraft, machineries, and other equipment - gross rentals shall be taxed at 72%
4. Others (Non-resident corporation in general)- taxable at 30% of gross income

D. Government Owned or Controlled Corporations

These corporations shall be subject to the same corporate tax rate on their taxable income as are imposed upon corporations or associations engaged in similar business, industry or activity

Exception:

1. Government Service Insurance System (GSIS)
2. Social Security System (SSS)
3. Philippine Health and Insurance Corporation(PHIC)
4. Local water districts

E. Exempt Corporations

1. Labor, agricultural or horticultural organizations not organized principally for profit
2. Mutual savings bank not having a capital stock represented by shares, and cooperative bank without capital stock organized and operated for mutual purposes and without profit
3. A beneficiary society, order or association, operating for the exclusive benefit of the members such as fraternal organizations operating under the lodge system, or a mutual aid association or a non-stock corporation organized by employees providing for the payment of life, sickness, accident, or other benefits exclusively to the members of such society or order, or association, or nonstick corporation or their dependents.
4. A cemetery company owned and operated exclusively for the benefit of its members:
5. Non-stock corporation or association organized and operated exclusively for religious, charitable, scientific, athletic, or cultural purposes, or for the rehabilitation of veterans, no part of its income inure to the benefit of any member, organizer, officer or any specific person
6. Business league, chamber of commerce, or board of trade, not organized for profit and no part of the net income of which inure to the benefit of any private stockholder or individual
7. Civic league or organizations not organized for profit but operated exclusively for social welfare
8. Non-stock and nonprofit educational institution
9. Government educational institution
10. Farmer’s or other mutual typhoon or fire insurance company, mutual ditch or irrigation company, mutual cooperative telephone company, or like organizations of a purely local character, the income of which consists solely of assessments, dues, and fees collected from members for the sole purpose of meeting its expenses; and
11. Farmers, fruit growers’, or like associations organized and operated as a sales agent for the purpose of marketing the products of its members and turning back the proceeds of sales, less the necessary selling expenses on the basis of the quantity of produce finished by them.

Note: Income from whatever kind and character of the above organizations from any of their properties, real or personal, or from activities conducted for profit regardless of the disposition made of such income, shall be subject to income tax

Question 4

Key points to remember with exempt corporations

Answer 4

Key points to remember with exempt corporations:

• non-stock and non-profit organization
• no income inures to the benefit of any person or organization
• exemption applies only to income received from related to their main activities on purpose

Question 5

NON-CORPORATE BUSINESSES UNDER THE LAW

Answer 5

NON-CORPORATE BUSINESSES UNDER THE LAW

1. Co-ownership
2. General Professional Partnership
3. Joint ventures for the purpose of undertaking construction projects under a service contact with the Government
4. Joint venture for engaging in petroleum, coal, geothermal and other energy operation pursuant to an operating or consortium agreement under a service contract with the Government.

Question 6

ITEMS OF INCOME OF CORPORATIONS

Answer 6

ITEMS OF INCOME OF CORPORATIONS

a. Passive Income subject to final tax

1. Dividends - 0%
2. Interest from banks - 20% or 15%
3. Royalties - 20%
4. PCSO winnings - 20%

b. Capital Gains

1. Sale of shares of stock - 15% CGT applies to all corporate taxpayers
2. Sale of real property capital assets - 6% CGT applies to domestic corporations only

c. Regular & Other Income - 30% corporate tax

Question 7

SPECIAL TAXATION RULES FOR REGULAR CORPORATIONS

Answer 7

SPECIAL TAXATION RULES FOR REGULAR CORPORATIONS

1. Gross Income Taxation
2. Minimum Corporate Income Tax
3. Improperly Accumulated Earnings Tax
4. Branch Profit Remittance Tax

Question 8

Gross Income Taxation

Answer 8

SPECIAL TAXATION RULES FOR REGULAR CORPORATIONS

A. GROSS INCOME TAXATION

The president, upon recommendation of the Secretary of Finance, may effective January 1, 2000 allow corporations the option to be taxed at 15% of gross income after the following conditions are satisfied:

1. tax effort ratio of twenty percent (20%) of gross national product(GNF)
2. a ratio of forty percent (40%) of income tax collection to total tax revenues
3. a VAT tax effort of four (4%) of GNP
4. a 0.9 percent (9%) ratio of the Consolidated Public Sector Financial Position (CPSFP) to GNP

• this option shall be allowed only to firms whose ratio of gross income tax to gross sales or receipts from all sources does not exceed 55%
  this option shall be allowed only to firms whose ratio of gross income tax to gross sales or receipts from all sources does not exceed 55%
• the election of gross income taxation shall be irrecoverable for the three consecutive taxable years during which the corporation is qualified under the scheme

Meaning of Gross Income for Purposes Gross Income Taxation:

1. Sale of goods- Gross income-gross sales less sales returns, discounts and allowances and costs of goods sold

Cost of goods sold include all business expenses directly incurred to produce the merchandise or to bring them to their present location and use.

• merchandising concern - 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 in transit
• manufacturing concern-include costs of production of finished goods, such as raw materials, labor and manufacturing overhead, freight cost, insurance premiums and other costs incurred to bring the new materials to the factory or warehouse.

2. Sale of service - Gross income-gross receipts less sales returns, allowances and discounts

As compared with MCIT gross income from service; this does not have direct cost of service

Note: With respect to corporations adopting fiscal accounting period, the taxable income shall be computed without regard to the specific date to which the relevant income is earned.

Question 9

Minimum Corporate Income Tax

Answer 9

MINIMUM CORPORATE INCOME TAX

• computed as 2% of gross income
• beginning on the fourth taxable year immediately following the year in which such corporation commenced its business operation
• when the minimum corporate income tax is higher than the regular corporate income tax during the period, the minimum corporate income tax shall be payable
• excess of minimum corporate income tax can be carried over and credited to the regular income tax for the next three immediately succeeding taxable years
• applies only to domestic and resident corporations and excludes those entities enjoying preferential rates

Exemption Rule to MCIT

The Secretary of Finance is authorized to suspend the imposition of minimum corporate income tax on any corporation which suffers losses on account of:

• prolonged labor disputes (over 6 months)
• force majeure
• legitimate business reverses

Gross Income for purposes of MCIT shall be:

• for sale of goods - gross sales less sales returns, allowances, discounts and cost of goods sold
• gross receipts less sales returns, allowances discounts and cost of services sold

Cost of services shall include all direct costs and expenses incurred to provide the services required by the customers and clients and including salaries and employee benefits of personnel, consultants and specialists directly rendering the services and cost of facilities used directly in providing the service such as depreciation, rental of property and cost of supplies. For banks, cost of services includes interest expense

Question 10

Improperly Accumulated Earnings Tax

Answer 10

IMPROPERLY ACCUMULATED EARNINGS TAX

• 10% of the 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 profits and hence avoidance of tax payables of stockholders:

1. holding companies
2. investment companies
3. business closely-held corporations
4. profit accumulation beyond the needs of

Indicators of improper profit accumulations:

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

Reasonable accumulation of profits:

1. additional working capital purposes
   purchase of long-life assets reasonably required by the business (expansion, improvement and repairs)
2. the acquisition of a related business or the purchase of the stock of a related business where a subsidiary relationship is established
3. obligation in a contract to set aside funds in a sinking fund to settle a debit
4. 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 tax net income
   2 income subject to final tax
2. Income exempt from final tax.
3. NOLCO deducted in determining the relevant income

IAET Exempt Corporations:

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

Question 11

Branch Profit Remittance Tax

Answer 11

BRANCH PROFIT REMITTANCE TAX

Any profit remitted by the branch to its head office shall be subject to a final tax at 15% which shall be based on the total profit (exclusive of investment income) applied or earmarked for remittances, without any deduction for the tax component thereof, except those activities that are registered with the Philippine Economic Zone Authority (PEZA)