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TAX 11 - Income Taxation  Prof. Alinsod, CPA  1 Semester A.Y. 2021 – 2022

INCOME TAX (CORPORATIONS, PARTNERSHIPS, ETC.)

Objectives
After this chapter, readers are expected to gain familiarization and demonstrate mastery of the following:
1. General income tax rules for corporate taxpayers
2. Nature and types of corporations
3. Rule for exempt corporations
4. Special rules on international carriers

1. Corporation and Other Terms Defined

a. Definition of The term “corporation” shall include partnerships, no matter
Corporation in how created or organized, joint stock companies, joint
the Tax Code accounts (cuentas en participacion), associations, or
insurance companies, but does not include general
professional partnerships and a joint venture or consortium
formed for the purpose of undertaking construction projects or
engaging in petroleum, coal, geothermal and other energy
operations pursuant to an operating or consortium agreement
under a service contract with the Government.

Under the CREATE Act, the term corporation shall

include ONE PESON CORPORATION (OPCs).

A one-person corporation is a corporation with single

stockholder; provided, that only a natural person, trust,
or an estate may form a one-person corporation.

b. Definition of Corporation is an artificial being created by operation of law,

corporation in having the right of succession and the powers, attributes and
the properties expressly authorized by law or incident to its
Corporation existence.
Code
c. Included in the 1. Partnerships, no matter how created or organized;
term 2. Joint stock companies;
corporation 3. Joint accounts (cuentas en participacion);
4. Associations, or insurance companies
d. Not included in 1. General professional partnerships; and
the term 2. Joint venture or consortium formed for the purpose of
corporation undertaking construction projects or engaging in
petroleum, coal, geothermal and other energy
operations pursuant to an operating or consortium
agreement under a service contract with the
Government.

2. Definition of Certain Terms

a. General General professional partnerships are formed by persons for
professional sole purpose of exercising their common profession, no part
partnerships of the income of which is derived from engaging in any trade
or business
b. Joint venture Joint venture is a commercial undertaking by two or more
persons, differing from a partnership in that it relates to the
disposition of a single lot of goods or the completion of a
single project.
c. Joint stock Joint stock companies are constituted when a group of
SOLELY FOR EDUCATIONAL PURPOSE. NONDISTRIBUTABLE & NONSALABLE. 1
INVALID FOR ANY OTHER PURPOSE.
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TAX 11 - Income Taxation  Prof. Alinsod, CPA  1 Semester A.Y. 2021 – 2022

companies individuals, acting jointly, establish and operate a business

enterprise under an artificial name, with an invested capital
divided into transferable shares, an elected board of
directors, and other corporate characteristics, but operating
without formal governmental authority.
d. Joint accounts Joint accounts are constituted when one interests himself in
cuentas en the business of another by contributing capital thereto, and
participacion sharing in the profits or losses in the proportion agreed upon.
They are not subject to any formality and may be privately
contracted orally or in writing.
e. Associations The term “associations” includes all organizations which have
substantially the salient features of a corporation to be
taxable as a “corporation.”
f. Proprietary A “Proprietary educational institution” is any private school
educational maintained and administered by private individuals or groups
institution with an issued permit to operate from the Department of
Education, Culture and Sports (DECS), or the Commission on
Higher Education (CHED), or the Technical Education and
Skills Development Authority (TESDA), as the case may be,
in accordance with existing laws and regulations.

3. Classification of Corporations
a. Domestic The term “domestic,” when applied to a corporation,
corporations means created or organized in the Philippines or
under its laws
b. Foreign corporations - The term “foreign,” when applied to corporation, means
a corporation which is not domestic.
1. Resident foreign The term “resident foreign corporation” applies to a
corporation foreign corporation engaged in trade or business
within the Philippines.
2. Non-resident The term “non-resident foreign corporation” applies to
foreign a foreign corporation not engaged in trade or business
corporation within the Philippines.

4. Tax Base and Tax Rate (under CREATE Act)

Corporation Tax Base Tax Rate
a. Domestic Net taxable income for 35% - November 1, 2005 to
corporation Regular Corporate December 31, 2008
Income Tax (RCIT) 30% - January 1, 2009
while Gross Income for
MCIT: Effective July 1, 2020
TOTAL NET TAX
From sources within ASSETS TAXABLE RATE
INCOME
and without the PH P100 P5 20%
million million &
& below below
ALL OTHER 25%
DOMESTIC
CORPORATIONS

The amount of TOTAL ASSETS does not include the

value of land on which the particular business
entity’s office, plant and equipment are situated
during the taxable year for which the tax is imposed.
SOLELY FOR EDUCATIONAL PURPOSE. NONDISTRIBUTABLE & NONSALABLE. 2
INVALID FOR ANY OTHER PURPOSE.
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TAX 11 - Income Taxation  Prof. Alinsod, CPA  1 Semester A.Y. 2021 – 2022

Cost of land on which the particular business office,

plant and equipment are situated shall be accounted
separately in the Audited FS and should not be
lumped or consolidated with the other fixed assets.

For corporations adopting the fiscal year accounting

period, the taxable income shall be computed
without regard to the specific date when the specific
sales, purchases and other transactions occur.
Income and expenses for the fiscal year shall be
deemed to have been earned and spent equally for
each month of the period.

*Each taxable period, DC shall be liable to the higher

between RCIT and minimum corporate income tax
(MCIT), if MCIT is already applicable.

b. Resident foreign Net taxable income for 35% - November 1, 2005 to

corporation Regular Corporate
Income Tax (RCIT)
while Gross Income for
MCIT:
From sources within
PH
December 31, 2008
30% - January 1, 2009
Effective July 1, 2020, the
income tax rate has been
amended from 30% to 25%
Each taxable period, RFC
shall be liable to the
higher between RCIT and
MCIT, if MCIT is already
applicable.

c. Non-resident Gross income within PH 35% - November 1, 2005 to

foreign corporation December 31, 2008
30% - January 1, 2009

Effective JANUARY 1,
2021, the income tax rate
has been amended from
30% to 25% (MCIT is not
applicable for NRFC)

d. Taxable Net taxable income for 35% - November 1, 2005 to

partnerships, joint Regular Corporate December 31, 2008
ventures, etc. Income Tax (RCIT) 30% - January 1, 2009
while Gross Income for
MCIT: Subjected to regular
income tax like a DC (
From sources within
PH

e. PEZA-registered Generally, gross income, 5% in lieu of local and

but depends on the national taxes
incentive applicable –
see next column Registered business
SOLELY FOR EDUCATIONAL PURPOSE. NONDISTRIBUTABLE & NONSALABLE. 3
INVALID FOR ANY OTHER PURPOSE.
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TAX 11 - Income Taxation  Prof. Alinsod, CPA  1 Semester A.Y. 2021 – 2022

enterprises (RBEs) with

incentives granted prior to
the effectivity of CREATE
Act shall be subject to the
following rules:
Current Transitory
Incentives Period
A. Granted Allowed to
only Income continue to
Tax Holiday avail the ITH
(ITH) for the
remaining
period. For
those that
have not yet
availed of the
ITH, period
specified in
the terms
and
conditions of
their
registration
B. Granted Allowed to
ITH and avail of 5%
entitled to 5% GIT based on
tax on GIE Subsection
(5% GIT after (C) (i.e., for
the ITH) 10 years).
C. Currently Continue to
availing of avail the 5%
the 5% GIT GIT for 10
years.
After the expiration of the transitory period under
item C above, export enterprises registered prior to
the effectivity of CREATE Act shall have the option
to reapply and avail of the incentives granted under
Section 294 (B) (i.e. SCIT) for the same period,
subject to conditions or qualifications set forth in
the SIPP and performance review of the FIRB.

Note: Effective July 1, 2020 until June 30, 2023, the 2% MCIT rate shall be reduced to 1% on
gross income applicable to both DCs and RFCs. Thereafter, it shall revert back to the 2%
MCIT rate.

5. Optional Standard Deductions for Corporations (OSD) (RR No. 16-2008 as amended by RR No. 2-
2010)
a. Determination of a. In the case of corporate taxpayers, the OSD allowed
the amount of shall be in an amount not exceeding forty percent
OSD for (40%) of their gross income
domestic b. “Gross income” shall mean the gross sales less sales
corporation and returns, discounts and allowances and cost of goods
resident foreign sold.
corporation c. In the case of sellers of services, the term “gross
income” means “gross receipts” less sales returns,
allowances, discounts and cost of services.
d. The items of gross income under Section 32 (A) of the
Tax Code, as amended, which are required to be
declared in the income tax return of the taxpayer for

SOLELY FOR EDUCATIONAL PURPOSE. NONDISTRIBUTABLE & NONSALABLE. 4

INVALID FOR ANY OTHER PURPOSE.
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TAX 11 - Income Taxation  Prof. Alinsod, CPA  1 Semester A.Y. 2021 – 2022

the taxable year are part of the gross income against

which the OSD may be deducted in arriving at taxable
income.
e. Unless the taxpayer signifies in the return the intention
to elect the optional standard deduction, it shall be
considered as having availed itself of the deductions
allowed
f. Such election when made in the return shall be
irrevocable for the taxable year for which the return is
made
g. The corporation that is entitled to and claimed for the
optional standard deduction shall be required to
submit with its tax return such financial statements
otherwise required under the Tax Code.
h. The corporation shall keep such records pertaining to
his gross income during the taxable year, as may be
required by the rules and regulations promulgated by
the Secretary of Finance, upon recommendation of
the Commissioner.
i. A general professional partnership and the
partners, comprising such partnership may avail
of the optional standard deduction only once,
either by the general professional partnership
(GPP) or the partners comprising the partnership.

6. Special Corporations (under CREATE Act)

a. Special domestic corporations
Special domestic Tax Base Regular Corporate
corporations Income Tax (RCIT)
Rate
1. Proprietary Net income within and 10%
educational institution without
and nonprofit hospital And IF income from
unrelated business
exceeds 50%:
35% - November 1,
2005 to December
31, 2008
30% - Starting
January 1, 2009

1% on their taxable
income beginning
July 1, 2020 until
June 30, 2023.
Thereafter, it shall
revert to 10%.

Note: MCIT is not

applicable.

Non-Profit – means that no net income or asset accrues to or benefits any

member or specific person, with all the net income or assets devoted to the
institution’s

SOLELY FOR EDUCATIONAL PURPOSE. NONDISTRIBUTABLE & NONSALABLE. 5

INVALID FOR ANY OTHER PURPOSE.
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TAX 11 - Income Taxation  Prof. Alinsod, CPA  1 Semester A.Y. 2021 – 2022

Special domestic Tax Base Regular Corporate

corporations
2. Government-owned or
controlled
corporations, agencies
or instrumentalities
3. Meaning of “unrelated
trade, business or
other activity”
4. Treatment of capital
outlays for expansion
of school facilities
5. Tax-exempt
government-owned or
controlled corporations
Income Tax (RCIT)
Rate
Net income within and Same as those
without imposed upon
corporation or
association engaged
in similar business, or
activity
“Unrelated trade, business or other activity” is not
substantially related to the exercise or
performance of the school or hospital’s primary
purpose or function.
In addition to the expenses allowable as
deductions, a private educational institution, may
at its option elect either:
a. To deduct expenditures otherwise
considered as capital outlays of
depreciable assets incurred during the
taxable year for the expansion of school
facilities or
b. To deduct allowance for depreciation
The following are tax-exempt government-owned
or controlled corporations:
a. Government Service Insurance System
(GSIS);
b. Social Security System (SSS);
c. Philippine Health Insurance Corporation
(PHIC);
d. Local Water Districts (R.A No. 10026)

b. Special resident foreign corporation (under CREATE Act)

I. Tax base and tax rate
Special RFC Tax Base Tax Rate
1. International Gross Philippine Billings 2 ½%
carrier
2. Offshore banking Income from foreign currency Exempt from all
units transactions with non- taxes except net
residents, OBUs in the income from
Philippines, local commercial transactions
bank including Philippine specified by Sec. of
branches of foreign banks Finance (used to be
10% final tax)
Interest income from foreign 10% final tax
currency loans granted to
residents other than OBUs or
local commercial banks

SOLELY FOR EDUCATIONAL PURPOSE. NONDISTRIBUTABLE & NONSALABLE. 6

INVALID FOR ANY OTHER PURPOSE.
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TAX 11 - Income Taxation  Prof. Alinsod, CPA  1 Semester A.Y. 2021 – 2022

Any income of non-resident Exempt

(individual or corporation) from
OBUs

OBUs shall now be taxed as

RFC upon effectivity of the
CREATE Act (See
discussion above [4.b]).

3. Tax on branch Total profits applied or 15%

profit remittance earmarked for remittance
(except on without deduction for the tax
activities component
registered with
PEZA)
4. Regional or area Exempt from tax -
headquarters of
multinational
5. Regional Taxable income 10%
operating Effective JANUARY
headquarters of 1, 202, ROHQs
multinationals shall be subject to
the RCIT.

II. International carrier

a. Preferential rate International carriers may now avail of preferential
and exemption rates or exemption from income tax on their gross
revenues derived from the carriage of persons and
their excess baggage based on the principle of
reciprocity or an applicable tax treaty or international
agreement to which the Philippine is a signatory.
b. International air A foreign airline corporation doing business in the
carrier Philippines having been granted landing rights in any
Philippine port to perform international air
transportation services/ activities or flight operations
anywhere in the world.

On-line carriers refer to international air carriers

having or maintaining flight operations to and from the
Philippines.

Off-line carriers refer to international air carriers

having no flight operations to and from the Philippines.
c. International sea A foreign shipping corporation doing business in the
carrier Philippines, having touched or intention of touching
any Philippine port to perform international sea
transportation services/activities from the Philippines
to anywhere in the world and vice versa, in the case of
on-line carrier.

A foreign shipping corporation doing business in the

Philippines having maintained business
establishment, agent or representative office in the
Philippines for the sale or owned tickets/passage
documents or tickets/passage documents of other
SOLELY FOR EDUCATIONAL PURPOSE. NONDISTRIBUTABLE & NONSALABLE. 7
INVALID FOR ANY OTHER PURPOSE.
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TAX 11 - Income Taxation  Prof. Alinsod, CPA  1 Semester A.Y. 2021 – 2022

shipping companies, which shipping companies

operate without touching any Philippine port, in the
case of offline carrier.
d. Gross Philippine In computing for “Gross Philippine Billings” of
Billings of international air carriers, there shall be included the
International Air total amount of gross revenue derived from passage
Carrier of persons, excess baggage, cargo, and/or mail,
originating from the Philippines in a continuous and
uninterrupted flight, irrespective of the place of sale or
issue and the place of payment of the passage
documents.

Gross Philippine Billings shall be determined by

computing the monthly average net fare of all the tax
coupons of plane tickets issued for the month per
point of final destination, per class of passage (i.e.,
first class, business class, or economy class) and per
classification of passenger (i.e., adult, child, infant),
and multiplied by the corresponding total number of
passengers flown for the month as declared in the
flight manifest.

Passage documents or tickets revalidated, exchanged

and/or endorsed to another on-line international airline
shall be included in the taxable base of the carrying
airline and shall be subject to Gross Philippine Billing
tax if the passenger is lifted/boarded on an aircraft
from any port of point in the Philippines towards a
foreign destination.

In the case of the passenger’s passage documents or

flights from any port or point in the Philippines and
back, that portion of revenue pertaining to the return
trip to the Philippines shall not be included as part of
“Gross Philippine Billings.”

In the case of a flight that originates from the

Philippines but transshipment of passenger, excess
baggage, cargo and/or mail takes place elsewhere in
another aircraft belonging to a different airline
company, the Gross Philippine Billings shall be
determined based on that portion of the revenue
corresponding to the leg flown from any point in the
Philippines to the point of transshipment.
e. Gross Philippine In computing for “Gross Philippine Billings” of
Billings of international sea carriers, there shall be included the
International Sea total amount of gross revenue whether for passenger,
Carriers cargo, and/or mail originating from the Philippines up
to final destination, regardless of the place of sale or
payments of the passage or freight documents.
f. Non-revenue Non-revenue passengers shall not be given value for
passengers and purposes of computing the taxable base subject to
refunded tickets tax.

Refunded tickets shall likewise not be included in the

SOLELY FOR EDUCATIONAL PURPOSE. NONDISTRIBUTABLE & NONSALABLE. 8
INVALID FOR ANY OTHER PURPOSE.
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TAX 11 - Income Taxation  Prof. Alinsod, CPA  1 Semester A.Y. 2021 – 2022

computation of Gross Philippine Billings.

III. Offshore banking units
Offshore banking units A branch, subsidiary or affiliate of a foreign banking
defined corporation which is duly authorized by the Bangko
Sentral ng Pilipinas (BSP) to transact offshore banking
business in the Philippines.
IV. Regional or area headquarters
Regional or area The term “regional or area headquarters” shall mean a
headquarters defined branch established in the Philippines by multinational
companies and which headquarters do not earn or
derive income from the Philippines and which act as
supervisory, communications and coordinating center
for their affiliates, subsidiaries, or branches in the
Asia-Pacific Region and other foreign markets.
V. Regional operating headquarters
Regional operating The term “regional operating headquarters” shall
headquarters defined mean a branch established in the Philippines by
multinational companies which are engaged in any of
the following services: general administration and
planning; business planning and coordination;
sourcing and procurement of raw materials and
components; corporate finance advisory services;
marketing control and sales promotion; training and
personnel management; logistics services; research
and development services and product development;
technical support and maintenance; data processing
and communications; and business development.

c. Special nonresident foreign corporation

Special NRFC Tax Base Tax Rate
1. Nonresident Gross income from Philippine 25%
cinematographic film sources
owner, lessor, or
distributor
2. Nonresident owner or Gross rental or fees derived 7 ½%
lessor of aircraft, within the Philippines
machinery, and other
equipment
3. Nonresident owner or Gross rentals, lease or 4 ½%
lessor of vessels charter fees from leases or
chartered by charters to Filipino citizens or
Philippine nationals corporations, as approved by
Maritime Industry Authority

d. PEZA-registered enterprises (registered prior to effectivity of CREATE Act)

1. Kinds of PEZA- a. Those enjoying income tax holiday (ITH)
registered incentive
enterprises b. Those that are taxed at 5% of gross income
(GIT) incentive (3% to BIR; 2% to local
government)
c. Those that are under or opt to be under the 30%
regular corporate income tax
Under CREATE Act
a. Those entitled to limited ITH incentive (then
will be covered by the 5% GIT)
SOLELY FOR EDUCATIONAL PURPOSE. NONDISTRIBUTABLE & NONSALABLE. 9
INVALID FOR ANY OTHER PURPOSE.

TAX 11 - Income Taxation  Prof. Alinsod, CPA  1 Semester A.Y. 2021 – 2022
2. Exemption from local
business taxes
3. Income Tax Holiday
(ITH)
4. Local taxes
SOLELY FOR EDUCATIONAL PURPOSE. NONDISTRIBUTABLE & NONSALABLE.
INVALID FOR ANY OTHER PURPOSE.
st
b. Those entitled to the 5% GIT incentive (3% to
BIR; 2% to local government)
c. Those entitled to ITH, 5% GIT and with
activities NOT entitled to any incentive (i.e.,
subject RCIT/MCIT)
All PEZA-registered economic zone locator enterprises
entitled to any or all 3 fiscal incentives [i.e. ITH
incentive, the option to pay the special 5% Tax on
Gross Income, in lieu of all national and local taxes
except real property taxes on land owned by
developers (5% GIT incentive); and/or tax and duty-free
importation of machinery and equipment, raw materials,
supplies, spare parts and other production inputs]
including Logistics Services Enterprises, are exempted
from securing Local Government Unit (LGU) permits.
(Sec. 13, R.A. No. 7916 as amended by R.A. No. 8748)
PEZA-registered economic zone enterprises availing of
ITH are exempted from payment of all local taxes,
licenses, imposts and fees, except real estate taxes;
provided that these enterprises shall also be exempted
from payment of real property taxes on machinery and
equipment they acquire for use in their production
operations, during the first 3 years use of such
machinery and equipment (Sec. 23, R.A. No. 7916 as
amended by R.A. No. 8748, Art. 78, E.O. No. 226).
PEZA-registered enterprises availing of the 5% GIT
incentive are exempted from the payment of all national
and local taxes, except real property tax on land owned
by developers (Sec. 24, R.A. No. 7916, as amended by
R.A. No. 8748)
PEZA-registered entities currently under or opting to be
under the 30% regular corporate income tax and
Logistics Services Enterprises are also covered by the
exemption.
New Registered Pioneer Firms – Six (6) years from
commercial operations.
New Registered Non-Pioneer Firms – Four (4) years
from commercial operations
Expanding Firms – Three (3) years from commercial
operation of the expansion
This shall refer to all local taxes, business taxes, real
estate taxes, and other taxes, fees and charges
imposed by local government units pursuant to the local
Government Code of 1991, as amended (R.R. No. 12-
97)
10
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TAX 11 - Income Taxation  Prof. Alinsod, CPA  1 Semester A.Y. 2021 – 2022

RBEs with incentives granted prior to the effectivity of CREATE Act shall be
subject to the following rules:
Current Incentives Transitory Period
A. Granted only Income Tax Allowed to continue to avail of the ITH
Holiday (ITH) for the remaining period. For those
that have not yet availed of the ITH,
period specified in the terms and
conditions of their registration.
B. Granted ITH and entitled to 5% Allowed to avail of 5% GIT based on
tax on GIE (5% GIT) after the Subsection (C) (i.e., for 10 years).
ITH
C. Currently availing of the 5% Continue to avail the 5% GIT for 10
GIT years.

After the expiration of the transitory period under item C above, export enterprises
registered prior to the effectivity of CREATE Act shall have the option to reapply and avail of
the incentives granted under Section 294 (B) (i.e., SCIT) for the same period, subject to
conditions or qualifications set forth in the SIPP and performance review of the FIRB.

7. Partnerships, Joint Ventures and Co-Ownership

a. Non-taxable 1. General professional partnership;
partnerships, joint 2. Joint venture undertaking construction projects
ventures and co- pursuant to an operating consortium agreement
ownership under a service contract with the Government;
3. Joint venture engaging in petroleum, coal,
geothermal, and other energy operating
pursuant to an operating consortium agreement
under a service contract with the Government;
4. Co-ownership
b. Taxable 1. Partnership engaged in business, no matter how
partnerships, joint created;
ventures and co- 2. Other joint ventures.
ownerships

8. Important Pointers in Non-Taxable Partnerships

a. General A general professional partnership is one formed for the
professional sole purpose of exercising a common profession, no
partnership defined part of income of which is derived from engaging in
trade or business.
b. Liability of partners Persons engaging in business as partners in a general
in a general professional shall be liable for income tax only in their
professional separate and individual capacities.
partnership
c. General Every general professional partnership shall file, in
professional duplicate, a return of its income, except income exempt
partnership required under the Tax Code, setting forth the items of gross
to file return income and deductions and the names, TIN, addresses
and shares of each of the partners.
d. Manner of For purposes of computing the distributive share of the
computing the net partners, the net income of the general professional
income of general partnership shall be computed in the same manner as a
professional corporation.
partnership
e. Basis of the income Each partner shall report as gross income his

SOLELY FOR EDUCATIONAL PURPOSE. NONDISTRIBUTABLE & NONSALABLE. 11

INVALID FOR ANY OTHER PURPOSE.
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TAX 11 - Income Taxation  Prof. Alinsod, CPA  1 Semester A.Y. 2021 – 2022

that a partner will distributive share, actually or constructively received, in

report the net income of the partnership.
f. Income payments to Income payments to partners of a general professional
partners of a partnership are subject to 15% creditable withholding
general professional tax, if the income payment to the partner for the current
partnership year exceeds P720,000; and 10%, if otherwise.

Under the TRAIN Law, if the gross income for the

current year does not exceed P3,000,000, the
withholding tax is 5%. If it exceeds P3,000,000, the
withholding tax is 10%. Individual payees whose
gross receipts/sales in a taxable year shall not
exceed P3,000,000 are required to submit a sworn
declaration of his/her gross receipts/sales together
with a copy of Certificate of Registration (COR), to
all the income payor/ withholding agents not later
than January 15 of each year or at least prior to the
initial payment of the professional
fees/commissions/talent fees.

9. Important Pointers in Taxable Partnerships

a. Taxable Taxable partnerships are required to file a cumulative
partnerships quarterly declaration and a final return just like
required to file corporations.
cumulative
declaration and
annual return
b. Share of partner in a The share of partners in the net income of a taxable
taxable partnership partnership shall be subject to 10% final tax
subject to final tax (resident/citizen), 20% (NRA-ETB) and 25% (NRA-
NETB).

10. Important Pointers in Joint Ventures

a. Taxable joint Generally, joint ventures are subject to tax.
ventures
b. Exempt joint 1. Joint venture undertaking construction projects;
ventures (pursuant 2. Joint venture engaging in petroleum, coal,
to an operating or geothermal, and other energy operations;
consortium
agreement under a
service contract with
the Government
c. Requirements for 1. Should involve joining or pointing of resources
tax – exempt joint by licensed local contractors, licensed as
ventures general contractor by Philippine Contractors
undertaking a Accreditation Board (PCAB) of the Department
construction project of Trade and Industry (DTI)
2. These local contractors are engaged in
construction business
3. The joint venture itself must likewise be duly
licensed by the PCAB of the DTI
d. Non-taxable joint 1. Covered by a special license as contractor by
ventures involving the PCAB
foreign contractors 2. The construction project is certified by the
appropriate Tendering Agency (government
SOLELY FOR EDUCATIONAL PURPOSE. NONDISTRIBUTABLE & NONSALABLE. 12
INVALID FOR ANY OTHER PURPOSE.
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TAX 11 - Income Taxation  Prof. Alinsod, CPA  1 Semester A.Y. 2021 – 2022

office) that the project is foreign

financed/internationally-funded project and
3. That international bidding is allowed under the
Bilateral Agreement entered into by and
between the Philippine Government and the
foreign/international financing institution.
e. Share in the net The share in a taxable joint venture’s net income is
income after tax in a treated as inter-corporate dividend which is generally
taxable joint exempt from income tax. In case of individual co-
ventures venturer, it is subject to 10% final tax.
f. Share in the net The share in a non-taxable joint venture’s net income is
income in an subject is subject to corporate income tax or Section 24
exempt joint venture (A), in case of individual co-venturer.

11. Important Pointers in Co-Ownership

a. Co-ownership is not Co-ownership is generally not taxable because the
taxable activities of the co-owners are usually limited to the
preservation of the property owned in common and
collection of the income therefrom.
b. Income to be Co-owners shall report in their respective income tax
reported by co- returns their shares of the income of the co-ownership.
owners
c. When may the co- When the income of the co-ownership is invested by
owners be subject to the co-owners in business or other income producing
tax properties, the co-owners will be subject to tax as a
corporation because the co-owners have constituted
themselves into a partnership.
d. Co-owners not to be Co-owners who own inherited properties which produce
automatically income should not automatically be considered as
considered as partners of an unregistered partnership or corporation
partners subject to income tax.
e. Undivided inherited Where inherited property remained undivided for more
property than 10 years, and no attempt was ever made to divide
the same among the co-heirs, nor was the property
under administration proceedings nor held in trust, the
property should be considered as owned by an
unregistered partnership and the income derived
therefrom shall be subject to corporate income tax.
f. Sharing of gross The sharing of gross return does not of itself establish a
return does not of partnership, whether or not the persons sharing them
itself establish a have a joint or common right or interest in any property
partnership from which the returns are derived. There must be an
unmistakable intention to form a partnership or joint
venture.

12. Corporate Returns

a. Filing of quarterly Every corporation subject to the tax herein imposed,
and final or except foreign corporations not engaged in trade or
adjustment return business in the Philippines, shall render, in duplicate, a
true and accurate quarterly income tax return and final
or adjustment return in accordance with the provisions
of Chapter XII of this Title.
b. Contents of the The income tax return shall consist of a maximum
returns of four (4) pages in paper form or electronic form
and shall only contain the following information:
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1. Corporate profile and information;

c. Who shall file the
corporate return?
d. Taxable year of
corporation
2. Gross sales, receipts or income from
services rendered, or conduct of trade or
business, except income subject to final tax
as provided under this Code;
3. Allowable deductions under this Code;
4. Taxable income as defined in Section 31 of
this Code; and
5. Income tax due and payable
The income tax return shall, be filed by the
president, vice-president or other principal officer
and shall be sworn to by such officer and my
treasurer or assistant treasurer.
A corporation may employ either calendar year or fiscal
year as a basis for filing its annual income tax return.

The corporation shall not change the accounting period

employed without prior approval from the
Commissioner in accordance with the provisions of
Section 47 of this Code.
e. Corporation Every corporation shall, within thirty (30) days after the
contemplating adoption by the corporation of a resolution or plan for its
dissolution or dissolution, or for the liquidation of the whole or any
reorganization part of its capital stock, including a corporation which
has been notified of possible involuntary dissolution by
the Securities and Exchange Commission, or for its
reorganization, render a correct return to the
Commissioner, verified under oath, setting forth the
terms of such resolution or plan and such other
information as the Secretary of Finance, upon
recommendation of the commissioner, shall, by rules
and regulations, prescribe.

The dissolving or reorganizing corporation shall, prior to

the issuance by the Securities and Exchange
Commission of the Certificate of Dissolution or
Reorganization, as may be defined by rules and
regulations prescribed by the Secretary of Finance,
upon recommendation of the Commissioner, secure a
certificate of tax clearance from the Bureau of Internal
Revenue which certificate shall be submitted to the
Securities and Exchange Commission.
f. Extension of time to The Commissioner may, in meritorious cases, grant a
file returns reasonable extension of time for filing returns of income
(or final and adjustment returns in case of
corporations), subject to the provisions of Section 56 of
the Tax Code.
g. Corporate Declaration of quarterly corporate income tax on a
declarations and cumulative basis not later than 60 days from the close
returns of each of the first three quarters of the taxable year,
whether, calendar or fiscal year. The tax so computed
shall be decreased by the amount of tax previously paid
or assessed during the preceding quarters.
h. Final adjustment Covers the total taxable income for the preceding
return calendar or fiscal year filed on or before 15th day of the
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4th month following the close of the taxable year.

i. Sum of quarterly If the sum of the quarterly tax payments made during
payments not equal the taxable year is not equal to the total tax due on the
to the total tax due entire taxable income of that year, the corporation shall
for the year either pay the balance of tax still due, or carry over the
excess credit, or be credited or refunded with the
excess amount paid.
j. Corporation is 1. In case the corporation is entitled to a tax refund
entitled to tax refund or credit of the excess estimated quarterly
or credit income taxes paid, the excess amount shown
on its final adjustment return may be carried
over and credited against the estimated
quarterly income tax liabilities for the taxable
quarters of the succeeding taxable years.
2. Once the option to carry-over has been made,
such option shall be considered irrevocable for
that taxable period.
k. Filing of the income The quarterly income tax declaration and the final
tax return adjustment shall be filed with:
1. Authorized agent banks, or
2. Revenue District Office, or
3. Collection Agent, or Duly authorized Treasurer
of the city or municipality having jurisdiction over
the location of the principal office of the
corporation filing the return or place where the
main books of accounts and other data from
which the return is prepared are kept.
l. Payment of the The income tax due shall be paid at the time the
income tax declaration or return is filed.

13. Sec. 30 Exemption from Tax on Corporation – the following organizations shall not be taxed in
respect to income received by them as such:
A. Not organized for profits
1. Labor Organization,
2. Agricultural organization,
3. Horticultural organization

B. Organized and operated for mutual purposes and without profits;

1. Mutual savings bank not having a capital stock represented by shares
2. Cooperative bank without capital stock

C. A beneficiary society, order or association, operating for the exclusive benefit of the members
such as:
1. Fraternal organization operating under the lodge system, or
2. A mutual aid association or
3. A non-stock corporation organized by employees

Providing for the payment of life, sickness, or other benefits exclusively to the members of such
society, order, or association, or non-stock corporations or their dependents;

D. Cemetery company owned and operated exclusively for the benefit of its members;

E. Non-stock corporation or association organized and operated exclusively for:

1. Religious,
2. Charitable
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3. Scientific
4. Athletic
5. Cultural purposes
6. Rehabilitation of veterans

No part of its net income or assets shall belong or inure to the benefit of any member, organizer,
officer or any specific person;

F. Not organized for profit and not part of the net income of which inure to the benefit of any private
stockholder or individual;
1. Business league
2. Chamber of commerce; or
3. Board of trade

G. Civic league or organization not organized for profit but operated exclusively for the promotion of
social welfare;

H. A non-stock nonprofit educational institution;

I. Government educational institution;

J. The income of which consists solely of assessments, dues, and fees collected from members for
the sole purpose of meeting its expenses;
1. Farmers or other mutual typhoon or fire insurance company
2. Mutual ditch or irrigation company
3. Mutual or cooperative telephone company, or
4. Like organizations of a purely local character

K. Organized and operated as a sales agent for the purpose of marketing the products of its
members and turning back to them the proceeds of sales, less the necessary selling expenses
on the basis of the quantity of produce finished by them.

Note: Notwithstanding the provisions in the preceding paragraphs:

1. The income of whatever kind and character of the foregoing organizations,
2. From any of their properties, real or personal, or
3. From any of their activities conducted for profit
4. Regardless of the disposition made of such income,
5. Shall be subject to corporation tax

In determining entitlement to tax exemption, two tests are applied; organizational test and
operational test.

Organization test require that the corporation or association’s constitutive documents exclusively
limit its primary purpose to those described in Sec. 30 of the 1997 Tax Code, as amended.

Operational test requires that the regular activities of the corporation or association be exclusively
devoted to the accomplishment of the purpose specified in Sec. 30 of the 1997 Tax Code. A
corporation or association fails to meet this test if substantial part of its operation are considered
“activities conducted for profit.

SOURCES:

[1] Revised National Internal Revenue Code of 1997

[2] RA No. 10963 – “An Act Amending Sections 5, 6, 24, 25, 27, 31, 32, 33, 34, 51, 52, 56, 57, 74,
79, 84, 90,91, 97, 99, 100, 101, 106, 107, 108, 109, 110, 112, 114, 116, 127, 128, 129, 145, 149,
SOLELY FOR EDUCATIONAL PURPOSE. NONDISTRIBUTABLE & NONSALABLE. 16
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151, 155, 171, 174, 175, 177, 178, 179, 180, 181, 182, 183, 186, 188, 189, 190, 191, 192, 193, 194,
195, 196, 197, 232, 236, 237, 249, 254, 264, 269, and 288; Creating New Sections 51-A, 148-A,
150-A, 150-B, 237-A, 264-A, 264-B, and 265-A; and Repealing Sections 35, 62 and 89; All Under
Republic Act No. 8424, Otherwise Known as the National Internal Revenue Code of 1997, as
amended, and for Other Purposes,” also known as Tax Reform for Acceleration and Inclusion
(TRAIN) Law, Approved 19 December 2017; with Presidential veto on certain portions; Effective 1
January 2018

EXERCISE 1

Case
CPA College, a private educational institution organized in 2000, had the following data for 2018
Tuition fees P480,000
Rental income (net of 5% CWT) 494,000
School related expenses 945,000
The tax still due for 2018 is?

Answer:
P6,000

Computation
Gross income (P494,000/ 95% = P520,000 + P480,000 P1,000,000
MCIT Rate 2%
MCIT P20,000
CWT (26,000)
Tax Due (6,000)

Note:
1 - Proprietary Educations Institutions - refer to any private school, which are non-profit for the
purpose of these Regulations, maintained and administered by private individuals or groups, with
an issued permit to operate from the Department of Education (DepEd) or the Commission on
Higher Education (CHED) or the Technical Education and Skill Development Authority (Tesda), as
the case may be, under existing law and regulations (Revenue Regulations 5-2021).

However, they will cease to enjoy the benefit of 10% special tax rate and be subject to RCIT/MCIT
same with Domestic Corporation if they did not dedicate their operations to providing educational
services, that is if the gross income from unrelated trade, business or activity exceeds fifty percent
(50%) of the total gross income derived from all sources (e.g. Rental Income is 50% of the total
Gross Income, including Tuition Fees).

EXERCISE 2

Case
Hidilyn Airlines, a resident foreign international carrier has the following records of income for the
period. The income represents the gross PH billings.
A. Continuous flights from Manila to Tokyo = 1,000 tickets at P2,000 per ticket
B. Flights from Manila to Singapore; transfer from Singapore to Tokyo = 2,000 tickets at P2,000
per ticket
C. Continuous flights from Manila to Singapore = 3,000 tickets at P1,000 per ticket
Requirement: Determine the income tax due

Answer:
P175,000

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Computation:
Gross PH billings
A (Continuous) Manila to Tokyo 1,000 x P2,000 P2,000,000
B (Interrupted) Manila to Singapore 2,000 x P1,000 (Adj) P1,000,000
C (Continuous) Manila to Singapore 3,000 x P1,000 P3,000,000
TOTAL P7,000,000

Tax due = P7,000,000 x 2.5% = P175,000

EXERCISE 3

The A Corporation provided the following data for calendar year ending December 31, 2018 ($1 =
P50):
PH Abroad
Gross Income P4,000,000 $40,000
Deductions 2,500,000 15,000
Income tax paid - 3,000
If It is a domestic corporation, its income tax after tax credit is?

Answer:
P675,000

Computation:
Taxable Income (PH) (P4,000,000 – P2,500,000 = P1,500,0000) P1,500,000
Taxable Income (Abroad) [($40,000 – 15,000) x P50] P1,250,000
Taxable income (World) P2,750,000
Tax Rate 30%
Tax Due 825,000
Foreign Tax Credit (P3,000 x 50) 150,000
Tax Payable P675,000

QUESTIONS

1. (PEZA-Registered Enterprise) A PEZA-registered enterprise has the following data for the current
year: Gross revenue P100,000,00; Cost of Services P50,000,000; Operating Expenses
P10,000,000; and Other income P5,000,000.
a. P13,500,000
b. P2,750,000
c. Zero
d. None of the choices

2. Using the same data in the preceding number (No. 1). How much is the tax due assuming it is
subject to 5% preferential rate?
a. P13,500,000
b. P2,750,000
c. Zero
d. None of the choices

3. Using the same data in the preceding number (No. 1). How much is the tax due assuming to the
30% regular corporate income tax rate?
a. P13,500,000
b. P2,750,000
c. Zero
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d. None of the choices

4. (PEZA-Registered Enterprise) The JD Company is a PEZA-registered manufacturer entitled to

Income Tax Holiday (ITH) incentive for CY 2018. It is the company’s fourth year of operations. The
following information pertain to the CY 2018 activities of the company:
Registered Unregistered
Activities Activities
Gross sales P121,700,000 P10,425,000
Cost of sales P103,400,000 P7,297,500
Other income (net gain of disposal of P550,500
office PPE)
Operating expenses of P9,890,100 (use
90%-10% allocation between registered
and unregistered activities
Creditable withholding taxes (CWTs) from its first three (3) quarters amounted to P98,000 (including
P10,000 CWTs dated 2019) while CWTs for the fourth quarter totaled P33,600 (excluding CWTs not
in the name of JD Company). How much is the 2% minimum corporate income tax (MCIT)?
a. P439,560
b. 73,560
c. P62,550
d. None of the choices

5. Using the same data in the preceding number (No. 4). How much is the 30% Regular Corporate
Income Tax (RCIT)?
a. P1,103,400
b. P806,697
c. Zero
d. None of the choices

6. Using the same data in the preceding numbers (No. 4 & 5). How much is the income tax still due?
a. P685,097
b. P675,097
c. Zero
d. None of the choices

7. Using the same data in the preceding number (No. 4). Assuming the company is entitled to the 5%
gross income tax (GIT), how much is the tax due?
a. P915,000
b. P469,946
c. Zero
d. None of the choices

8. Using the same data in the preceding numbers (No. 4, 5 & 6). Determine the income tax still due to
the BIR.
a. P1,721,697
b. P1,600,097
c. P1,234,097
d. None of the choices

9. For income taxation purposes, the term “corporation” excludes one of the following:
A. Ordinary partnership C. General professional partnership
B. An incorporated b u s i n e s s D. Business partnership
organization

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10. Which of the following is subject to the corporate income tax?

A. A non-stock and non-profit educational institution
B. Public educational institution
C. Civic league or organization not organized for profit and operated exclusively for
the promotion of social welfare
D. Mutual savings bank and cooperative bank having a capital stock represented by
shares organized and operated for mutual purposes and profit.

11. A corporation organized and created under the laws of a foreign country and is authorized to do
business / trade in the Philippines is:
A. Domestic corporation C. Non-resident foreign corporation
B. Resident foreign corporation D. General co-partnership

12. One of the general principles of income taxation:

A. A foreign corporation engaged in business in the Philippines is taxable on all
income derived from sources within and without the Philippines.
B. A foreign corporation engaged in business in the Philippines is taxable on all
income derived from sources within the Philippines only.
C. A domestic corporation is taxable on income from sources within the Phil. only.
D. A domestic corporation is taxable on income from sources without the Phil.
only.

13. One of the following does not fall under the definition of a “corporation” for income tax purpose:
A. General partnership C. Insurance company
B. Joint stock company D. Sole proprietorship

Which of the following is classified as special corporation subject to preferential corporate

14.
income tax rate?
A. Social Security System C. Phil. Charity Sweepstakes Office
B. Proprietary Educational Institution D. Government Service Insurance
System
15. A corporation which may be classified as either a resident corporation or a non-resident
corporation is
A. Domestic corporation
B. Foreign corporation
C. Government owned and controlled corporation
D. Non-profit hospital

16. The Philippine Health Insurance Corporation, a government owned corporation is:
A. Exempt from the corporate income tax
B. Subject to the preferential corporate income tax for special corporations
C. Subject to the basic corporate income tax
D. Subject to final tax

17. Public educational institutions, like the University of the Philippines is deemed by law:
A. Subject to the preferential corporate income tax for special corporations
B. Subject to the basic corporate income tax
C. Subject to both preferential income tax and the basic corporate income tax
D. Exempt from the corporate income tax

18. Which of the following maybe subject to the corporate income tax?
A. A non-stock and non-profit educational institution
B. A public educational institution
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C. A private educational institution

D. Government Service Insurance System

19. A domestic corporation may employ, as a basis for filing its annual corporate income tax return
the:
A. Calendar year only C. Either calendar or fiscal year
B. Fiscal year only D. Neither calendar nor fiscal year

20. A corporation files a quarterly return within

A. 30 days after the end of each of the first 3
quarters
B. 60 days after the end of each of the first 3
quarters
C. 30 days after the end of each of the first 4
quarters
D. 60 days after the end of each of the first 4
quarters
21. A final or annual return is filed on or before the 15th day of the
A. Month following the close of the taxable year
B. 2 nd month following the close of the taxable year
C. 3 rd month following the close of the taxable year
D. 4 th month following the close of the taxable year

22. A corporation on a fiscal year ending March 31, should file its annual return
A. On or before April 15 of the same year
B. On or before April 15 of the following year
C. On or before July 15 of the same year
D. On or before July 15 of the following year

23. The improperly accumulated earnings tax shall apply to

A. Publicly held corporation
B. Banks and other non-bank financial intermediaries
C. Insurance companies
D. Private corporations

24. Which of the following statements is not correct?

A. MCIT is not applicable to non-resident foreign corporations
B. The corporate quarterly return shall be filed within 60 days following the close of each of the
first three quarters of the taxable year
C. Resident foreign corporations would be taxed on net income from within the Philippines only
D. Non-resident foreign corporations are taxed on gross income from within and without the
Philippines.

25. The following income are subject to final tax, except

A. Royalty income received by a domestic corporation from a domestic corporation.
B. Cash dividends received by a non-resident foreign corporation from a domestic corporation.
C. Cash dividends received by a domestic corporation from a domestic corporation.
D. Interest income received by resident foreign corporation from a Philippine bank.
26. The MCIT shall not apply to the following resident foreign corporations, except
A. RFC engaged in business as international carrier subject to 2 1/2% of their Gross
Philippine Billings
B. RFC engaged in business as Offshore Banking Units on their income from foreign
currency transactions with local commercial banks.
C. RFC engaged in business as regional operating headquarters
D. RFC engaged in hotel, motel and resort operations

SOLELY FOR EDUCATIONAL PURPOSE. NONDISTRIBUTABLE & NONSALABLE. 21

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27. The President, upon recommendation of the Secretary of Finance, may allow corporations the
option to be taxed at 15% of gross income, after the following conditions, except one, have
been satisfied. Which is the exception?
A. A tax effort ratio of 40% of Gross National Product (GNP)
B. A ratio of 40% of income tax collection to total tax revenue
C. A VAT tax effort of 4% of GNP
D. A 0.9% ratio of consolidated public sector financial position to GNP

28. Which of the following is not correct? The gross income tax
A. Is optional to a qualified corporation
B. Is available if the ratio of cost of sales to gross sales or receipts from all sources
does not exceed 55%
C. Shall be irrevocable for three consecutive taxable years that the corporation is
qualified under the scheme
D. Is compared with the normal income tax and minimum corporate income tax

29. A Corporation declared and distributed to its stockholders shares of B Corporation. One of its
stockholders, W, received 100 shares of B Corporation shares of dividends. At the date of dividend
declaration, the fair market value of B Corporation shares was P120 per share and by the time
W received the dividend, the fair market value per share was P180. Which of the following is
correct? The dividend is
A. A stock dividend, hence exempt from tax
B. A property dividend, hence part of taxable income of W
C. A property dividend, hence subject to final tax based on its fair market value of P120
per share
D. A property dividend, hence subject to final tax based on its fair market value of P180
per share

TRUE OR FALSE

1. Any net loss incurred in a taxable year during which the taxpayer was exempt from income tax shall
not be allowed as a net operating loss carryover deduction.
2. A taxpayer who claims the optional standard deduction shall not simultaneously avail of the
deduction of the NOLCO.
3. NOLCO shall be availed of on a “first-in, first-out” basis.
4. Domestic and resident foreign corporations cannot enjoy the benefit of NOLCO for as long as it is
subject to MCIT in any taxable year (MCIT is greater than NCIT).
5. The running of the three-year period for the expiry of NOLCO is not interrupted by the fact that such
corporation is subject to MCIT in any taxable year during such three-year period.
6. In order that compliance with the three-year statutory requisite may be effectively monitored, the
taxpayer, shall, at all times show its NOLCO deduction in its income tax return, as a separate item
of deduction and not as part of deductible losses, in general.

SOLELY FOR EDUCATIONAL PURPOSE. NONDISTRIBUTABLE & NONSALABLE. 22

INVALID FOR ANY OTHER PURPOSE.