Week 10-B

Corporate Taxation

TX - : Corporation (Income Tax Rates)

1. TAX RATES
a. In general
Sec. 27 (A) Sec. 28 (A) (1) Sec. 28 (B) (1)
DOMESTIC RESIDENT FC NONRESIDENT FC
Tax rate 35% - November 1, 2005 to 35% - November 1, 2005 to 35% - November 1, 2005
December 31, 2008 December 31, 2008 to December 31, 2008
30% - January 1, 2009 30% - January 1, 2009 30% - January 1, 2009
Tax base Net income within and Net income within Gross income within
without
b. Optional corporate tax
Sec. 27 (A) Sec. 28 (A) (1)
DOMESTIC RESIDENT FC NONRESIDENT FC
Tax rate 15% 15% -
Tax base Gross income Gross income -
c. Minimum corporate income tax
Sec. 27 (E) Sec. 28 (A) (2)
DOMESTIC RESIDENT FC NONRESIDENT FC
2% of gross income within 2% of gross income within
and without
d. On certain passive income derived from Philippines sources
Domestic corporation (DC) – Sec. 27 (D)
Resident foreign corporation (RFC) - Sec. 28 (A) (7)
Non-resident foreign corporation (NRFC) – Sec. 28 (B) (1)
DC and RFC NRFC
Interest in any currency bank deposit 20% final tax 30% final tax
Yield or any monetary benefit from deposit substitute 20% final tax 30% final tax
Yield or any monetary benefit from trust fund and other similar 20% final tax 30% final tax
arrangements
Royalties 20% final tax 30% final tax
Interest income derived from depository bank under EFCDS 7½% final tax Exempt
Exercises
1. A domestic corporation has the following the data for the fiscal year starting June 1, 2008 and ending May 31,
2009:
Gross income, Philippines P 5,000,000
Gross income, USA 10,000,000
Deductions, Philippines 2,000,000
Deductions, USA 4,000,000
Payments, first three (3) quarters 1,000,000
How much is the tax payable for the fiscal year ending May 31, 2009?
2. ABC Corporation was created in accordance with Philippines laws. During the calendar year 2009, it has the
following data on income and expenses:
Gross income, Philippines (gross sales, P15,000,000) P10,000,000
Business expenses, Philippines 2,000,000
Gross income, USA (gross sales, P8,000,000) 5,000,000
Business expenses, USA 1,500,000
Interest income, Bank of PI-Manila, Philippines 300,000
Dividend from a domestic corporation 150,000
Interest income from domestic depository bank under EFCDS 120,000
Interest income, JP Morgan-Chase Bank, USA 100,000
Prizes, Manila 200,000
Rent income from equipment, Philippines, gross of applicable withholding tax 1,000,000
Payments, first three (3) quarters 500,000
Question 1 – How much is the Philippine income tax payable?
2 – How much is the total final withholding tax?
3 – How much is the Philippine income tax payable using OSD?
4 – Assuming the above corporation is a foreign corporation engaged in trade or business in the
Philippines, how much is the Philippine income tax payable?
5 – Disregarding certain information which are not applicable and assuming the corporation is not
engaged in business in the Philippines, how much is the final withholding taxes in the Philippines?
3. A corporation has the following income:
Interest income derived from depository bank under Expanded Foreign
Currency Deposit System (EFCDS) P100,000
Capital gain from sale of shares of stock not traded in the local stock exchange 200,000
Dividend from a domestic corporation 300,000
Question 1 – How much is the final tax on the passive income and the capital gains tax, assuming the

TX901
Income Taxation Page 2 of 4

corporation is a resident foreign corporation?

2 – How much is the final tax on the passive income and the capital gains tax, assuming the
corporation is non-resident foreign corporation?
e. Capital gains taxes
Corporation Tax base Tax rate
1. Capital gains from sale of shares Domestic corporation 5% - First P100,000
of stock not traded in the local Sec. 27 (D) (5) Net capital gain 10% - Amount in
stock exchange excess of P100,000
Resident foreign 5% - First P100,000
corporation Net capital gain 10% - Amount in
Sec. 28 (A) (7) (c) excess of P100,000
Non-resident foreign 5% - First P100,000
corporation Net capital gain 10% - Amount in
Sec. 28 (B) (5) (c) excess of P100,000
2. Capital gains realized from sale or Domestic corporation Capital asset - on gross 6% final tax
exchange or disposition of land Sec. 27 (D) (5) selling price or fair
and/or building market value whichever
is higher
Ordinary asset (not 6% creditable
habitually engaged in withholding tax
real estate business)–on
selling price
f. Tax on income derived under expanded foreign currency deposit system by depository bank
Sec. 27 (D) (3) Sec. 28 (A) (7) (b)
DOMESTIC RESIDENT FC NONRESIDENT FC
1. Income derived by a depository
bank from foreign currency Exempt from all taxes Exempt from all taxes
transactions with non-residents, except net income except net income from Exempt
OBUs in the Philippines, local from transactions transactions specified
commercial bank including specified by Sec. of by Sec. of Finance
branches of foreign banks Finance
2. Interest income from foreign
currency loan granted by depository
banks under expanded system to 10% 10% Exempt
residents other than OBUs in the
Philippines and other depository bank
3. Any income of non-residents
(individual or corporation) from Exempt from income
transactions with depository banks - - tax
under expanded system

g. Inter-corporate dividends received from domestic corporation

Recipient Corporation Tax rate
1. Domestic corporation Sec. 27 (D) (4) Not subject to tax
2. Resident foreign corporation Sec. 28 (A) (7) (d) Not subject to tax
3. Non-resident foreign corp. Sec. 28 (B)(5) (b) 15% final tax (subject to condition that the
country where the non-resident foreign corp. is
domiciled allows a credit for taxes deemed paid
in the Philippines equivalent to 15%)
a. Imposition of optional The President, upon the recommendation of the Secretary of Finance may, effective
corporate income tax January 1, 2000, allow corporation to be subjected to optional corporation tax.
b. Tax base and tax rate The tax rate is 15% based on the gross income.
c. Conditions for the The following conditions shall have to be satisfied in the allowance of optional corporate
imposition of optional tax:
corporate income tax 1) A tax effort ratio of 20% of Gross National Product (GNP);
2) A ratio of 40% of income tax collection of total tax revenue;
3) A VAT tax effort of 4% of GNP; and
4) A 0.9% ratio of the Consolidated Public Sector Financial Position to GNP.
2. OPTIONAL CORPORATE INCOME TAX

d. Option to be taxed based
on gross income
e. Election of the gross
income shall be
irrevocable
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 55%.
The election of the gross income option by the corporation shall be irrevocable for the
three (3) consecutive taxable years during which the corporation is qualified under the
scheme.

3. Minimum Corporate Income Tax (MCIT)

TAXATION – Corporation: Income Tax Rates

Team Magis
Income Taxation Page 3 of 4

a. Corporations subject 1) Domestic corporation

to MCIT 2) Resident foreign corporation
b. Corporations not subject 1) Proprietary educational institution subject to 10% tax;
to MCIT 2) Non-profit hospital subject to 10% tax;
3) Domestic corporation engaged in business as a depository bank under EFCDS;
4) Firms taxed under a special income tax regime (PEZA Law and the Bases Conversion
Development Act);
5) Special resident foreign corporations;
6) Non-resident foreign corporations
c. Tax base and tax rate The tax rate is 2% based on:
1) Gross income within and without – Domestic corporation;
2) Gross income within – Resident foreign corporation
d. MCIT imposed on the The tax is imposed beginning on the fourth taxable year immediately following the year
4th taxable year in which such corporation commenced its business operation.
e. Tax due The tax due is the higher between the minimum corporate income tax and normal or
regular corporate income tax.
f. Quarterly computation 1) The computation and the payment of MCIT, shall likewise apply at the time of filing of
of MCIT (RR 12-2007) the quarterly corporate income tax.
published 2) In the computation of the tax due for the taxable quarter, if the computed quarterly
October 19, 2007 MCIT is higher than the quarterly normal income tax, the tax due to be paid for such
taxable quarter at the time of filing the quarterly corporate income tax return shall be
the MCIT.
3) In the payment of the quarterly MCIT (MCIT is greater than normal corporate income
tax), excess MCIT from the previous taxable year/s shall not be allowed to be credited.
4) Expanded withholding tax, quarterly corporate income tax, payments under the
normal income and the MCIT paid in the previous taxable quarter/s are allowed to be
applied against the quarterly MCIT due.
g. Excess MCIT as carry Any excess of the minimum corporate income tax over the normal corporate income tax
forward shall be carried forward and credited against the normal income tax for the three
succeeding taxable years.
h. Suspension of The Secretary of Finance is authorized to suspend the imposition of minimum corporate
imposition of MCIT income tax on any corporation, which suffers losses on account of prolonged labor
disputes, or because of force majeure, or because of legitimate business reverses.
i. Exercises
1. Panday Corporation’s computed normal income tax and MCIT, and creditable income taxes withheld from first
quarter to fourth quarter including excess MCIT and excess withholding taxes from prior year/s are as follows:
First Q Second Q Third Q Fourth Q
Normal income tax P100,000 P120,000 P250,000 P200,000
Minimum corporate income tax 80,000 250,000 100,000 100,000
Taxes withheld 20,000 30,000 40,000 35,000

Additional information: Excess MCIT, prior year, P30,000; Excess withholding tax prior year, P10,000
REQ: Compute the income tax payable for the first three (3) quarters and the year end.
2. Using the same data in number 1 except that the normal income tax and the MCIT for the quarters are as follows:
First Q Second Q Third Q Fourth Q
Normal income tax P100,000 P120,000 P250,000 P 50,000
Minimum corporate income tax 80,000 250,000 100,000 120,000
REQ: Compute the annual income tax payable of the corporation for the year end?
4. IMPROPERLY ACCUMULATED EARNINGS TAX (FOR CLOSELY HELD CORPORATIONS)
a. Imposition of In addition to other taxes imposed, there is imposed for each year on the
improperly accumulated improperly accumulated taxable income of each corporation an improperly
earnings tax accumulated earnings tax equal to 10% of the improperly accumulated taxable
income.
b. Not subject to improperly The improperly accumulated earnings tax shall not apply to:
accumulated earnings tax 1) Publicly held corporations;
2) Banks and other non-bank financial intermediaries;
3) Insurance companies;
4) Taxable partnerships;
5) General professional partnerships;
6) Non-taxable joint ventures; and
7) Enterprises registered with PEZA and under Bases Conversion and
Development Act, special economic zones.
c. Prima facie evidence to avoid the The fact that any corporation is a mere holding company or investment company
tax upon the shareholders shall be prima facie evidence of a purpose to avoid the tax upon its shareholders or
members.
d. Holding company A holding company is a corporation having practically no activities except holding
property and collecting the income therefrom or investing therein.
e. Investment company If the activities further include, or consist substantially of, buying and selling
stocks, securities, real estate, or other investment property (whether upon an
TAXATION – Corporation: Income Tax Rates
Team Magis
Income Taxation Page 4 of 4

outright or a marginal basis) so that the income is derived not only from the
investment yield but also from profits upon market fluctuations, the corporation
shall be considered an investment company.
f. Earnings or profits of a The fact that the earnings or profits of a corporation are permitted to accumulate
corporation are permitted to beyond the reasonable needs of a business shall be determinative of the purpose
accumulate beyond the to avoid the tax upon its shareholders or members, unless the corporation, by
reasonable needs clear preponderance of evidence, shall prove to the contrary.
g. Pro forma computation of Taxable income xxx
improperly accumulated taxable Add: Income exempt from tax xxx
income Income excluded from gross income xxx
Income subject to final tax xxx
Amount of net operating loss carry over deducted xxx xxx
Total xxx
Less: Dividends, actually or constructively paid xxx
Income tax paid for the whole year xxx
Amount reserved for the reasonable needs of the business xxx xxx
Improperly accumulated taxable income xxx
h. Reasonable need of the Reasonable needs of the business include the reasonably anticipated needs of the
business business.
i. Profits subjected to IAET no Once the profits have been subjected to IAET, the same shall no longer be
longer subject to same tax in subjected to IAET in later years even if not declared as dividends.
later years
j. Profits subjected to IAET still Profits which have been subjected to IAET when finally declared as dividends shall
subject to tax on dividends be subject to tax on dividends.
k. Declaration of dividend to avoid The dividend must be declared and paid or issued not later than one (1) year
IAET following the close of the taxable year.
l. Payment of IAET Improperly accumulated earnings tax shall be paid within 15 days after one year
following the close of the taxable year if dividends are not declared and paid or
issued.
m. Exercise
1. The record of a closely held corporation, registered with the BIR in 2008, reveals the following:
2013: Gross income P 3,000,000
Less: Operating Expenses 3,800,000
Net Operating Loss (800,000)
Accumulated retained earnings, end of 2010 P 6,000,000
2014: Gross Income P 5,000,000
Expenses: 3,000,000
Rent Income, net of 5% withholding tax 475,000
Interest on money market placement, net of 20% withholding tax 80,000
Inter-corporate dividends received 500,000
Dividends paid by the Corporation 1,500,000
Retained earnings appropriated for sinking fund 300,000
It had a paid-up capital stock of P5,000,000 as of December 31, 2014.
Upon examination of the 2014, return, the BIR concludes that there is an improper accumulation of profit. The
Corporation fails to show proof to prove the contrary.
Q1: How much is the tax payable and the tax payable of the Corporation per return in the year 2014?
Q2. How much is the tax on the improperly accumulated income in 2014?
Illustration
The 2011 records of Alpine Corporation, a domestic Corporation show the following:
Gross Sales, net of 1% withholding tax P 4,950,000
Cost of Goods Sold 2,575,000
Expenses 350,000
Taxes paid for the first three quarters 25,000
Royalties, net of 20% final withholding tax 52,000
Dividend from a domestic company 75,000
Gain on sale of business asset 37,500
The Corporation suffered a net operating loss of P125,000 in 2010 which was carried over as a deduction from gross
income in 2011.
Out of the earnings during the year, P500,000 was paid as dividends to its shareholders, while P700,000 was reserved
for construction of new building and acquisition of new equipment.
REQUIRED: Compute the following:
1. The regular income tax for 2011
2. The additional tax on improperly accumulated earnings
3. The final tax on dividends declared and issued by Alpine Corporation.

=Prayers Can Move Mountains= jdta

TAXATION – Corporation: Income Tax Rates

Team Magis