CHAPTER 4

INCOME TAXES FOR CORPORATIONS

Objectives:
Explain the recognition of government grants
Identify the presentation of government grants in the financial statements and the borrowing costs

Corporation Defined
The Corporation Code of the Philippines defined “corporation” as
an artificial being created by operation of law, having the right of
succession and the powers, attributes and properties expressly
authorized by law or incident to its existence.

For purposes of income taxation, the tax code provides that, the
term “corporation” shall include partnerships, no matter how created or
organized, joint stock companies, joint accounts (ceuntas en
participacion), associations, or insurance corporations. It also includes
mutual fund companies, regional operating headquarters of multinational
corporations, and joint accounts but does not include the following:

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1. A general professional partnership – a partnership formed by
persons for the sole purpose of exercising their common profession.
2. A joint venture or consortium:
a. Formed for the purpose of undertaking construction projects
pursuant to PD No. 929 (dated May 4, 1976) to assist local
contractors in achieving competitiveness with foreign contractors
by pooling their resources in undertaking big construction
projects.
b. A joint venture or consortium for engaging in petroleum, coal,
geothermal and other energy operations pursuant to an operating
consortium agreement under a service contract with the
government.

Joint venture or consortium

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.

Joint stock companies and joint accounts

Joint stock companies are constituted when a group of
individuals, acting jointly, establish and operate business enterprise
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under an artificial name, with an invested capital divided into
transferable shares, an elected board of directors, and other corporate
characteristics.

Types of Corporations
Corporations, for tax purposes, are classified as domestic (DC),
resident foreign corporations (RFC) and nonresident foreign
corporations (NRFC).
Domestic corporation are corporations created or organized in
the Philippines or under its laws.
Foreign corporation is a corporation which is not domestic, and
may be a resident (engaged in business in the Philippines) or
nonresident corporation (not engaged in business in the Philippines).

Income tax rate and basis in computing the tax due

CORPORATE INCOME TAX RATES ON REGULAR INCOME

  DC RFC NRFC
RCIT  
Tax
Rate 30% Net Income 30% Net Income 30% Gross Income
Basis within & without within only within only
   
MCIT 2% of Gross 2% of Gross Income Not applicable
  Income within within only  
  and without  
OR  
GIT
(Optional) 15% 15% Not applicable
Tax
Rate Gross Income Gross Income  
Basis within & without within only  

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Minimum corporate income tax (MCIT)
Revenue regulations 2-98 as amended by 12-2007 provides that
a minimum corporate income tax (MCIT) of 2% of the gross income as
of the end of the taxable year depending on the accounting period
employed is imposed upon any domestic corporations and foreign
corporations beginning on the 4 th taxable year immediately following
the taxable year in which such corporation commences its business
operations.

Excess MCIT or MCIT carry over

Any excess of the minimum corporate income tax over the
normal corporate income tax shall be carried forward and credited
against the regular income tax for the three succeeding taxable year,
provided, that the normal tax should be higher than the minimum
corporate tax in the year to which the excess MCIT is forwarded.

Optional corporate income tax (15% gross income tax)

The president, upon the recommendation of the secretary of
Finance may, effective January 1, 2000, allow domestic and resident
foreign corporations to be subjected to optional corporation tax of 15%
based on gross income.
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 All of the following conditions shall have to be satisfied in the
allowance of optional corporate tax:
a. A tax ration of 20% of gross national product (GNP)
b. A ratio of 40% of income tax collection of total tax revenue
c. A VAT effort of 4% GNP
d. A 0.9 ratio of the consolidated public sector financial position
to GNP.

Final taxes on passive income and capital gains tax

CERTAIN INCOME SUBJECT TO FINAL TAXES

Certain PASSIVE Income derived from DC RFC NRFC
Philippine sources subject to final tax  
   

1. Interest in any currency bank deposit 20% 20% 30%

2. Yield/monetary benefit from deposit
substitute 20% 20% 30%
3. Yield/monetary benefit from trust fund and
other similar arrangements 20% 20% 30%
4. Royalties 20% 20% 30%
5. Interest income derived from depository
bank under expanded foreign currency
deposit system 15% 7.50% exempt

6. Inter-corporate dividends received from

domestic corporation received by exempt exempt 15%/30%

Tax on branch profit remittance

Any profit remitted by a branch office of a multinational
corporation to its head office is subject to 15% final tax based on total
profits applied or earmarked for remittance without deduction for the tax
component.
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SPECIAL CORPORATIONS
Under the tax code, certain corporations are subject to lower tax
rates on their regular income instead of the normal or regular corporate
tax of 30%. These corporations are classified as special corporations.

INCOME TAX RATES OF SPECIAL CORPORATIONS

DOMESTIC CORPORATION  
Proprietary educational institutions 10%
Non-profits hospitals 10%
RESIDENT FOREIGN CORPORATIONS  
International carriers 2.50%
Regional operating headquarters (ROHQ) multinational corporations 10%
NONRESIDENT FOREIGN CORPORATIONS  
Nonresident owner or lessor of vessel 4.50%
Nonresident cinematographic, film owner, lessor or distributor 25%
Nonresident lessor of aircraft, machinery and other equipment 7.50%

Proprietary educational institution – is any private school

maintained and administered by private individuals or groups with an
issued permit to operate from DepEd, or the CHED, or the TESDA, as
the case may be, in accordance with existing laws and regulations.

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 Unrelated trade, business or other activity is an activity which is
not substantially related to the exercise or performance of the school or
hospital’s primary purpose or function such as but not limited to rental
income from available school spaces or facilities.

SLMCI vs. CIR

Petitioner is a non-stock, non-profit corporation duly organized
and existing under and by virtue of the laws of the Republic of the
Philippines. Respondent is the duly appointed Commissioner of the
Bureau of Internal Revenue (BIR) vested with authority to exercise the
functions of said office, including inter alia, the power to abate or cancel
a tax liability when the tax or any portion thereof appears to be unjustly
or excessively assessed.

International carriers
International carriers (resident foreign corporations) are subject
to income tax rate of 2.5% on its Gross Philippine Billings (GBP) unless
it subject to a preferential rate (a tax rate lower than 2.5%) or exempt
on the basis of applicable tax treaty to which the Philippines is a
signatory or on the basis of reciprocity, such that an international
carrier, whose home country grants income tax exemption to the
Philippine carriers, shall likewise be exempt from income tax imposed
under the tax code (RA10378;RR 15-2013).

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Gross Philippine Billings of International Air Carriers
In computing “Gross Philippine Billings” of international air
carriers, there shall be included the total amount of gross revenue
derived from passage 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 of International Sea Carriers

In computing “Gross Philippine Billings” of international see
carriers, there shall be included the total amount of gross revenue
whether the passenger, 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.

Rationalization of taxes on International Carriers

The policy behind the rationalization of taxes on international
carriers as provided for in RA10378 and RR 15-2013 is to improve the
competitiveness of the Philippine Tourism Industry by encouraging
more international carriers to maintain flight and shipping operations in
the country and by the eventual reduction of international plane and
ship fares.

Offshore Banking Units (OBUs)

Offshore banking unit (OBU) is a branch, subsidiary or affiliate or
a foreign banking corporation located in an Offshore Financial Center
(OFC) which is duly authorized by the BSP to transact offshore banking
business in the Philippines in accordance with the provisions of P.D.

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1034 as implemented by BSP Circular No. 1389.

The following are examples of reported OBUs in the Philippines

1. BNP Paribas with office address at Philamlife Tower, Makati
City
2. Taiwan Cooperative Bank with office address at Citi Bank
Tower, Makati City
3. JP Morgan International Finance, Ltd. (formerly located at
Zuellig Bldg, Makati City) – has stopped its operations as an
offshore banking unit in the Philippines. The BSP noted the
cessation of operations on February 22, 2018.

ROHQ vs. RHQ

Income tax rate of ROHQ is 10% of net income. ROHQ is a
branch established in the Philippines which is engaged in any of the
following services:
a. General administration and planning

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 b. Business planning, coordination and business development
c. Sourcing/procurement of raw materials and components
d. Corporate finance advisory services
e. Marketing control and sales promotion
f. Training and personnel management
g. Logistic services
h. Research and development services and project development
i. Technical support and maintenance
j. Data processing and communication
RHQ is defines in section 22(DD) of the tax code as a branch
established in the Philippines by a multinational company, which
branch does not earn or derived income from the Philippines and which
acts as a supervisory, communications, and coordinating center for its
affiliates. Subsidiaries, or branches in the Asia-Pacific region and other
foreign markets. RHQ is a tax exempt entity.

Filing of Income Tax Returns

1. Manual Filing
Every corporation subject to tax shall render, in duplicate a true and
accurate quarterly return and final or adjustment return except
corporations not engaged in trade or business in the Philippines
(NRFC). For manual filing, the filing of quarterly return should be
made not later than 60 days from the close of each of the first three
quarters of the taxable year. Whether, calendar or fiscal year
summarized as follows:
Manual Filing of Quarterly Income Tax Return
- Quarterly return 60 days after end of the quarter
- First quarter Calendar year: May 15
Fiscal year: 15th day of the 5th month of

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 the fiscal year
- Final adjusted 15th day of the 4th month following the
(annual) return end of the taxable year (i.e. April 15
applying for corporation using the
calendar year
2. Electronic filing and payment system (EFPS)
RR 9-2001 defines EFPS as the system developed and maintained
by the BIR for electronically filing tax returns, including attachments,
if any, and paying taxes due thereon, specifically through the
internet. Upon filing a “Filing Reference Number” is issued by the
EFPS as a control number to acknowledge that a tax return,
including attachments, has been successfully filed electronically.
This shall serve as evidence of filing and the date of filing of the
return. Upon payment of the tax due to an authorized agent bank
under EFPS, the AAB shall issue “Acknowledgement Number” as a
control number to the BIR to confirm that tax payment has been
credited to the account of the government or recognized as revenue
by the Bureau of Treasury.
3. Use of electronic BIR forms
The eBIR forms, as provided in RR 6-2014 and RMC 61-2012, was
developed to provide taxpayers particularly the non-eFPS filers with
accessible and convenient service through easy preparation of tax
returns.

For further discussion please refer to the link provided: Corporate Income Tax
https://www.youtube.com/watch?v=jNPE8nNia94
For further discussion please refer to the link provided: Types of Corporations
https://www.youtube.com/watch?v=jaxbDa6_jBQ
For further discussion please refer to the link provided: Special Corporations
https://www.youtube.com/watch?v=0XfaCjCg4as

Reference Book:

Income11Taxation
(with special topics and properly filled BIR
forms)