Tax 3: Unit 2 Chapter 5

Chapter 5: Special Corporate Income

I. SPECIAL DOMESTIC CORPORATIONS - these are domestic corporations that are

subject to concessionary tax rates that are lower than those imposed upon ordinary
domestic corporations. They are not usually conducted for profit, or even if they are, they
are usually engaged in activities that would generally benefit the public.

1. Proprietary educational institutions and non-profit hospitals

2. Foreign currency deposit units (FCDUs) and Expanded FCDUs
3. PEZA or BOI-registered enterprises

1. Proprietary educational institutions and non profit hospital

-shall pay a tax of ten percent (10%) on their taxable income except those income
subject to Certain Passive Income. (NIRC as amended by TRAIN, Sec. (B)

NB: To alleviate the impact of the pandemic, the 10% tax rate is temporarily lowered to
1% starting July 1,2020 to June 30, 2023. The same shall revert back to 10% effective
July 1, 2023.

What is a private or proprietary educational institution?

-any private school maintained and administered by private individuals or groups with an
issued permit to operate from any of the following:
1. DepEd
2. CHED
3. TESDA

Pre-dominance Test
- if the gross income from unrelated trade, business or other activity exceeds fifty percent
(50%) of the total gross income derived by such educational institutions or hospitals from
all sources, the 25%regular corporate income tax shall be imposed on the entire taxable
income.

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

Requisites for Applicability of 10% Rate: (SPUP)

1. Stock and non-profit institutions:
2. Private educational institution or hospital
3. Gross income from Unrelated trade, business or activity does not exceed 50% of
gross income from all sources
4. For educational institutions, issued a Permit to operate from DepEd, CHED, or
TESDA.

References: Philippine Tax Code; CREATE Law; TRAIN Law; Income Taxation, Banggawan; RR8-2018; RR14-2001;
RR5-202!; https://philippinesbusinessregistration.com
Tax 3: Unit 2 Chapter 5

'Proprietary' means private, following the definition of a 'proprietary educational

institution' as 'any private school maintained and administered by private
individuals or groups' with a government permit. 'Non-profit' means no net
income or asset accrues to or benefits any member or specific person, with all
the net income or asset devoted to the institution's purposes and all its activities
conducted not for profit.

Illustration:
Private educational institution

Related Activities Unrelated Activities Total

Gross
receipts 1,100,000 900,000 2,000,000
Less: Cost of
Services 400,000 400,000 800,000
Gross income 700,000 500,000 1,200,000
Less:
Deductions 400,000 100,000 500,000

The gross income from related activities (P700,000/P1200,000)=58%

The income tax due shall be computed as follows:

taxable net income 700,000

multiply by: corporate tax rate 1%
income tax due 7000

Illustration:
A Non-profit hospital with more than P200M in total assets, net of cost of landholdings, reported
the following during a year.

Related Activities Unrelated Activities Total

Gross
receipts 1,000,000 1,100,000 2,100,000
Less: Cost of
Services 500,000 400,000 900,000
Gross income 500,000 700,000 1,200,000

References: Philippine Tax Code; CREATE Law; TRAIN Law; Income Taxation, Banggawan; RR8-2018; RR14-2001;
RR5-202!; https://philippinesbusinessregistration.com
Tax 3: Unit 2 Chapter 5

Less:
Deductions 100,000 400,000 500,000
Net Income 400,000 300,000 700,000

The gross income from related activities (P500,000/P1200,000=42%)

The income tax due shall be computed as follows:

taxable net income 700,000

multiply by: corporate tax rate 25%
income tax due 175,000

2. Foreign currency deposit units (FCDUs) and Expanded FCDUs

In practice, the BIR does not distinguish EFCDU from FCDUs. FCDUs are taxed the same way
as EFCDUs

Summary of Tax Rules on Foreign Currency Deposit Units and Expanded FCDUs
FROM
Residents

(E)FCDUs or OBUs Other Residents Non-Residents

Income from forex transactions
Interest income from
-Forex loans & receivables exempt 10%FIT exempt
-Forex deposits exempt - exempt
Other forex income exempt RCIT exempt
Income from non-forex
transactions RCIT RCIT RCIT

Tax on income of depositors under EFCDS

Any income of nonresidents from transactions with depository banks under the expanded
system shall be exempt from income tax.
Interest income of residents from depositary bank under the FCDS/ EFCDS is subject to final
tax 15%

Tax on Regular Banking Units

The income from the regular banking unit of domestic bank is subject to the 25% regular income
tax.

Allocation of Cost and Expenses of Banks

a. Specific identification - Expenses directly traceable to an income are allocated to that
income

References: Philippine Tax Code; CREATE Law; TRAIN Law; Income Taxation, Banggawan; RR8-2018; RR14-2001;
RR5-202!; https://philippinesbusinessregistration.com
Tax 3: Unit 2 Chapter 5

b. Pro-rata allocation - Expenses that are not directly traceable to an income are allocated
pro-rata on the ratio of all income.

Illustration
A domestic multinational bank reported the following summary of income and expense:

FROM
Residents
(E)FCDUs or Other
OBUs Residents Non-Residents Total
RBU total gross income 2,000,000 750,000 2,750,000
FCDU interest income 800,000 800,000 400,000 2,000,000
FCDU rent fees 100,000 120,000 30,000 250,000
Total gross income 900,000 920,000 430,000 5,000,000
Direct Expenses
RBU Expenses 900,000 400,000 1,300,000
FCDU Expenses
Interest income 450,000 350,000 150,000 950,000
Rent fees 20,000 10,000 15,000 45,000
Total direct expenses 2,295,000
Indirect /Common Expenses 315,000
Total Expenses 2,610,000

Computation of the tax due of the FCDU and RBU

FCDU RBU
RBU total gross income 2,750,000
FCDU rent fees 250,000
Gross income 250,000 2,750,000
Less: Deductions
Directly traceable expense 45,000 1,300,000
Common expenses 15,750 173,250
Total deductions 60,750 1,473,250
Taxable net income 189,250 1,276,750
Multiply by 25% 25%
Regular corporate income tax 47312.5 319187.5

References: Philippine Tax Code; CREATE Law; TRAIN Law; Income Taxation, Banggawan; RR8-2018; RR14-2001;
RR5-202!; https://philippinesbusinessregistration.com
Tax 3: Unit 2 Chapter 5

Note:
1. FBU interest income from Resident OBU/ FCDU and Non residents are exempt from
income tax.
2. FBU interest income from other Residents is subject to 10% final tax.
3. The non-forex income of FCDU (in this case, FCDU rent fees) is subject to regular tax.
4. The expense allocable to the exempt income and income subject to final tax shall not be
deductible against gross income subject to regular tax.
5. The common expenses are allocated on the ratio of total gross income subject to regular
income tax and final tax including those exempt from income tax.
The allocation of common expenses is computed as follows:

Computation of
Common
Expenses
FCDU income
subject to regular tax 250,000
Divide by the Total
Gross income of the
bank 5,000,000
Multiply to the
Common expenses 315,000
Common expense
allocated to FCDU 15,750

RBU income subject

to regular tax 2,750,000
Divide by the Total
Gross income of the
bank 5,000,000
Multiply to the
Common expenses 315,000
Common expense
allocated to FCDU 173250

II. Special Resident Foreign Corporation

1. Expanded FCDUs
2. Regional Area Headquarters and Regional Operating Headquarters of Multinational
Companies
3. International Carries
4. PEZA or BOI-registered enterprises

References: Philippine Tax Code; CREATE Law; TRAIN Law; Income Taxation, Banggawan; RR8-2018; RR14-2001;
RR5-202!; https://philippinesbusinessregistration.com
Tax 3: Unit 2 Chapter 5

1. Expanded FCDUs
The EFCDU of a resident foreign bank is subject to the same rules applicable to
FCDUs/EFCDUs of domestic local banks, except that all their offshore income is exempt
from income tax because foreign corporations are taxable only on income within the
Philippines.

FROM
Residents

(E)FCDUs or OBUs Other Residents Non-Residents

Income from forex transactions
Interest income from
-Forex loans & receivables exempt 10%FIT exempt
-Forex deposits exempt - exempt
Other forex income exempt RCIT exempt
Income from non-forex
transactions RCIT RCIT exempt

Taxation of Offshore Banking Units

Offshore banking - shall refer to the conduct of banking transactions in foreign currencies
involving the receipt of funds from external sources and the utilization of such funds. (PD1034)
Offshore banking unit - shall mean a branch, subsidiary or affiliate of a foreign banking
corporation which is duly authorized by the Central Bank of the Philippines to transact offshore
banking in the Philippines. (PD1035)

OBUs are enjoying the same tax treatment privileges of FCDUs and EFCDUs.
CREATE Law amendment: OBUs are now treated as regular foreign corporations subject to
the 25% regular corporate income tax and other taxes.

2. Regional Area Headquarters and Regional Operating Headquarters of Multinational

Companies

Regional Headquarters (RHQ) in the Philippines

-is an administrative branch of a multinational company which:
a. Principally serves as a supervision, communications and coordination center for its
subsidiaries, branches or affiliates in the Asia-Pacific Region; and
b. Does not derive income in the Philippines.

Regional Operating Headquarters (ROHQ)

References: Philippine Tax Code; CREATE Law; TRAIN Law; Income Taxation, Banggawan; RR8-2018; RR14-2001;
RR5-202!; https://philippinesbusinessregistration.com
Tax 3: Unit 2 Chapter 5

-is an extension of a foreign corporation allowed to derive income in the Philippines by

performing qualifying services to its head office, affiliates, subsidiaries or branches in the
Asia-Pacific (APAC) region and other foreign markets.
-allowed to derive income from the qualifying services it renders in the Philippines, which could
be any of the following:
a. General administration and planning;
b. Business planning and coordination;
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. Logistics services;
h. Research and development services, and product development;
i. Technical support and maintenance;
j. Data processing and communication; and
k. Business development.

Taxation of RHQs and ROHQs

Income tax Local taxes, fees or

charges imposed by a local
government unit

Regional Headquarters Exempt Exempt

(RHQ) Reason: They do not earn
income

Regional Operating Subject to income tax at 10% Exempt

Headquarters (ROHQ) of taxable income within the
Philippines

NB: Effective January 1, 2022

RHOQs shall be subject to
whichever is higher between
the RCIT of 25%

or MCIT of 1%, (January 1,

2022 to June 30, 2023) or
MCIT 2% (Starting July 1,
2023.) (RR5-2021 ,Sec 23;
CREATE Law Sec 7.)

3. International Carriers
-refers to entities that transport passengers, mail and excess cargoes or baggage from the
Philippines to any destination abroad and vice versa.

References: Philippine Tax Code; CREATE Law; TRAIN Law; Income Taxation, Banggawan; RR8-2018; RR14-2001;
RR5-202!; https://philippinesbusinessregistration.com
Tax 3: Unit 2 Chapter 5

Income tax rates to International carriers

General Rule: 2.5% of the Gross Billings
Exception rule: Preferential rate or exemption on the basis of reciprocity applicable tax treaty
or reciprocity.
An international carrier whose home country exempts Philippine carriers shall likewise be
exempt from income tax.

Meaning of Gross Philippine billings

a. International air carriers
Gross Philippine Billings refers to the amount of gross revenue derived from carriage
of persons, excess baggage, cargo, and mail originating from Philippines in a
continuous and uninterrupted flight, irrespective of the place of sale or issue and the
place of sale or issue and the place of payment of the ticket or passage document.
b. International shipping carrier
Gross Philippine Billings means gross revenue, whether for passenger, cargo or mail
originating from the Philippines up to final destination, regardless of the place of sale
or payments of the passage or freight documents.
NB:
1. Tickets revalidated, exchanged and/or endorsed to another international airline form part
of the Gross Philippine Billings of the carrying airline if the passenger boards a plane or
a port in the Philippines.

Exclusions in Gross Philippine billings

1. Non-revenue passenger - those passengers qualifying under the free mileage programs
of the air carriers.
2. Refunded tickets.

Illustration:
A resident foreign shipping company, shows the following analysis of its gross receipts from
passengers and cargoes during a month:

Incoming Flights Outgoing Flights Total

Fares billed in the Philippines 9,000,000 10,000,000 19,000,000
Fares billed in the Abroad 9,000,000 5,000,000 14,000,000
Total billings 18,000,000 15,000,000 33,000,000

Value of fares on non revenue

Passengers 700,000 800,000 1,500,000
Fares canceled and refunded 500,000 800,000 1,300,000

References: Philippine Tax Code; CREATE Law; TRAIN Law; Income Taxation, Banggawan; RR8-2018; RR14-2001;
RR5-202!; https://philippinesbusinessregistration.com
Tax 3: Unit 2 Chapter 5

Computation income Tax

Total billings for outbound flights 15,000,000

Less: Ticket Refunded 800,000
Gross Philippine Billings 14,200,000
Multiply by: Income Tax Rate 2.50%
Income Tax Due 355000

GPB= total receipts from outgoing flights (regardless of the place where they are actually billed
or paid) less refunded tickets. Non-revenue passengers are excluded in the computation of
GPB.

Rule on Transshipments or interrupted flights or voyages

Requirement for Transshipment/Flight interruption
1. Flight originates from the Philippines
2. Transhipment of passenger takes place at any port outside of the Philippines on another
airline
Effect of transshipment or interrupted flights or voyages
- Only the aliquot portion of the cost of the ticket corresponding to the leg flown from the
Philippines to the point of transshipment shall form part of the GPB. (flown revenue)

Illustration
PK Airways, an international air carrier, had the following gross receipts on outgoing flights for
the quarter:

Number of
Destination Price passengers Amount
Hongkong 1,500 10,000 15000000
Thailand 2,000 500 1000000
UAE 4,000 300 1200000
China 2,500 400 1000000
Total Gross Receipts 18200000

The flight to Thailand was transshipped in Vietnam to another plane of PK Airways.

The flight to UAE is endorsed to another carrier which airlifted them in the Philippines.
The flight to China was transshipped to another carrier which air lifted them in Hongkong.

Computation
Direct outgoing flights -PH to HK 15000000
Flight to Thailand 1000000
Endorsed flights - PH to UAE -

References: Philippine Tax Code; CREATE Law; TRAIN Law; Income Taxation, Banggawan; RR8-2018; RR14-2001;
RR5-202!; https://philippinesbusinessregistration.com
Tax 3: Unit 2 Chapter 5

Re-Transhipped flights - PH to China (1,500x400) 600000

Gross Philippine Billings 16600000
Multiply by: income tax rates 2.50%
income tax due 415000

Note:
1. Transshipment involving same carrier, the gross receipts from the entire flight is included
in gross income
2. Endorsed tickets are taxable to the carrying airline.
3. Transshipment involving another carriers, only the aliquot portion pertaining to the leg
flown from the Philippine port to an immediate foreign port is included in GPB.

“48-Hour” rule on transient passengers

Where the flight or voyage originally commenced from any foreign port which will be
interconnected in the Philippine for continuance of the flight or voyage to a foreign destination
by the same international carrier shall not be considered originating from the Philippines if the
actual departure is made within 48 hours from embarkation in the country, except only when
delayed by force majeure. The portion of the ticket pertaining to the outgoing flight or voyage
shall be excluded from the GPB.

If continuation of the flight or voyage to a foreign destination is made by another airline

company, the cost of the outgoing flight or voyage shall be included in the GPB.

Actual departure is within 48hrs from

Same international carrier embarkation = excluded from GPB

Actual departure is more 48hrs from

embarkation
General Rule = included in GPB
Exception: delay is due to force majeure =
excluded from GPB

Another Airline Company outgoing flight or voyage shall be included in

the GPB of that another airline or carrier
company

Illustration:
Fair Airways, an international carrier had the following summary of flights during the quarter:

direct outgoing flights

References: Philippine Tax Code; CREATE Law; TRAIN Law; Income Taxation, Banggawan; RR8-2018; RR14-2001;
RR5-202!; https://philippinesbusinessregistration.com
Tax 3: Unit 2 Chapter 5

To Guam (P2,400 x 5,000

passengers) 12,000,000
To US (P6000 x4,000
passengers 24,000,000
interconnecting flights
Nos. of
Flights passengers Status
Included in GPB
The applicable
average rate from
PH to Guam is
similar to the
Continued after 96 hours as average used in
Korea for Guam 600 scheduled direct flights.
China for Guam 400 Delayed 52 hours; due to storm Not included
Continued after 40 hours as
Taiwan for USA 500 scheduled Not included
Not Included in
Delayed 52 hours; due to storm; the GPB of Fair
endorsed to HK Airways, another Airways
international air carrier, which But included in
airlifted the passengers to their final the GPB of HK
Guam for USA 300 destination Airways
Not Included in
the GPB of Fair
Continued after 24 hours; endorsed Airways
to HK Airways, another international But included in
air carrier, which airlifted the the GPB of HK
Korea for USA 200 passengers to their final destination Airways

Computation of the GBP and income tax due of Fair Airways

Direct Flight to Guam 12,000,000
Direct Flight to US 24,000,000
Connected flight from Korea to Guam (P2,400x600) 1440000
GPB 37,440,000
Multiply by: 2.50%
Income tax due 936000

Computation of the GBP of HK Airways

Guam for USA (300 passengers xP6000) 1800000

KOREA for USA (200 passengers x P6000) 1200000
Total 3000000

References: Philippine Tax Code; CREATE Law; TRAIN Law; Income Taxation, Banggawan; RR8-2018; RR14-2001;
RR5-202!; https://philippinesbusinessregistration.com
Tax 3: Unit 2 Chapter 5

Note: tickets in foreign currencies are translated at whichever is higher of the following
conversion rates:
1. Monthly average Airline in the Bank Settlement Plan (BSP) Monthly sales report
2. Bankers Association of the Philippines (BAP) rate.

Off-line international carriers

If the international air carrier does not have flights to and from the Philippines but
nonetheless earn income from other activities in the country, then it shall be subject to
30% (now 25%) RCIT or 30% (now 25%) final tax on gross income, respectively. (South
African Airways v. CIR., G.R. No. 180356)
An offline carrier which has a branch/agent in the Philippines and sells passage
documents to cover offline flight of its principal or other airline is taxed for the sale of the
tickets even if the service to be rendered is outside of the Philippines based on the situs
of taxation principle. (Air Canada v. CIR., G.R. No. 169507)

III. Special Non-Resident Foreign Corporations

1. Non-Resident Cinematographic film owner, lessor, distributor
2. Non-Resident lessor of vessels chartered by Philippine nationals
3. Non-Resident owner or lessor of aircraft, machineries, and other equipment,

Tax Base Tax Rates

Non-Resident Gross income from all 25% final tax

Cinematographic film owner, sources derived within the
lessor, distributor Philippines only

“All sources” broad enough to

encompass any taxable
income, passive or active,
other than those arising from
rentals of cinematographic
films

Non-Resident lessor of Gross rentals, lease, or 4.5% final tax

vessels chartered by charter fees from leases or
Philippine nationals charters to Filipino residents
or corporations

NB: other items of gross

income earned within the
Philippines are subject to the
normaal 25% final tax.

Non-Resident owner or lessor Rentals, charters, and other 7.5% final tax

References: Philippine Tax Code; CREATE Law; TRAIN Law; Income Taxation, Banggawan; RR8-2018; RR14-2001;
RR5-202!; https://philippinesbusinessregistration.com
Tax 3: Unit 2 Chapter 5

of aircraft, machineries, and fees derived within the

other equipment, Philippines
NB: other items of gross
income earned within the
Philippines are subject to the
normal 25% final tax.

References: Philippine Tax Code; CREATE Law; TRAIN Law; Income Taxation, Banggawan; RR8-2018; RR14-2001;
RR5-202!; https://philippinesbusinessregistration.com