Tax 3. Unit 2.

Chapter 4

Chapter 4. Introduction to Corporate Income Taxation

I. Corporate Income Taxpayers
Corporation
-Includes partnerships, no matter how created or organized, joint-stock companies, joint
accounts, associations, or insurance companies.
-Excludes general professional partnerships and joint ventures or consortium formed for
the purpose of undertaking construction projects or engaging in petroleum, coal, geothermal,
and other energy operations pursuant to an operating consortium agreement under a service
contract with the Government.

II. General Classification and Taxation of Corporations

Classification Within Without Tax Rate and Tax Base

Domestic ✔ ✔ 20% or 25% regular corporate tax

Corporation subject to Minimum Corporate Income
Tax

Resident ✔ 𐄂 25% regular corporate tax subject to

Foreign Minimum Corporate Income Tax

Non-Resident ✔ 𐄂 25% final tax on Philippine gross

Foreign income
Corporation

NOTE:•
Effectivity of the RCIT rates under CREATE; RR 5-2021:
- For DC and RFC -Beginning July 1, 2020 -20% or 25%
- For NRFC -Beginning January 1, 2021. -25%
•CREATE law, which was published on March 27, 2021, took effect on April11, 2021.
Although CREATE law took effect only on April 11, 2021, there are certain provisions in
the law with specific effectivity dates which are earlier than April 11, 2021, such as the revised
RCIT rates for DCs and RFCS as well as the revised FWT rate for NRFCS.•

Illustration:
A corporation with 100M assets had the following income and expenses for 2022

PH Abroad Total
Gross
revenues/rece
ipts 1,800,000 1,200,000 3,000,000

References: Philippine Tax Code; CREATE Law; TRAIN Law; Income Taxation, Banggawan; RR8-2018; RR14-2001 ;
RR12-2007; RA 9520
Tax 3. Unit 2. Chapter 4

Less:
Business
expenses 1,200,000 800,000 2,000,000
Net Income
from
operation 600,000 400,000 1,000,000
Add: Interest
from deposit 150,000 50,000 200,000
Net Income 450,000 350,000 800,000

Domestic Corporation
Net Income from operations 1,000,000
Other income not subject to final tax 50,000
Taxable net Income 1,050,000
Multiply by: Corporate tax rate 20%
Regular corporate income tax (RCIT )due 210000

Resident foreign corporation

Taxable net income (Philippines only) 600,000
Multiply by: Corporate tax rate 25%
Regular corporate income tax (RCIT) 150000

Non Resident foreign Corporation

Gross revenues/receipts 1,800,000
Interest income from deposit 150,000
Total gross income within 1,950,000
Multiply by: 25%
Total Final tax 487500

CREATE LAW Amendments:

1. Reduced the regular corporate income tax from 30% to 25% of the taxable income effective
July 1, 2020.
2. Domestic corporation are subject to a 20% regular corporate income tax under the following
conditions:
a. Asset test - Total assets, excluding land on which their office, plant and equipment are
situated, does not exceed P100 million; and
b. Income Test - Taxable income does not exceed P5 million pesos. (only the taxable
income subject to regular tax)
Micro,- small-, and medium-sized enterprises (MSMES) - Entities with assets not exceeding
P100 million
Domestic corporations are mandated to separately account in their Annual Financial Statements
(AFS) the cost of the land on which their office, plant and equipment are situated.

References: Philippine Tax Code; CREATE Law; TRAIN Law; Income Taxation, Banggawan; RR8-2018; RR14-2001 ;
RR12-2007; RA 9520
Tax 3. Unit 2. Chapter 4

Summary of regular corporate tax rates:

Taxpayer Type Domestic Corporation Resident foreign Corporation

MSME corporate taxpayers

-with or less than P5 million 20% 25%

taxable income

-with more than P5 million 25% 25%

taxable income

Large Corporate taxpayers

-with or less than P5 million 25% 25%

taxable income

-with more than P5 million 25% 25%

taxable income

Special Corporations
-Corporations subject to special tax treatments or preferential tax rates lower than the 25%
regular corporate income tax.

III. Sub-Classification of Corporate Income Taxpayers

Domestic Corporations

Exempt domestic corporations 1. Exempt non-profit corporations under

the NIRC
2. Government agencies and
instrumentalities
3. Certain government-owned and
controlled corporations
4. Cooperatives

Special domestic corporations 1. Proprietary educational institutions

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

3. Regular domestic Corporations

Resident Foreign Corporations

1. Special resident foreign 1. Expanded FCDUs

References: Philippine Tax Code; CREATE Law; TRAIN Law; Income Taxation, Banggawan; RR8-2018; RR14-2001 ;
RR12-2007; RA 9520
Tax 3. Unit 2. Chapter 4

corporations 2. Regional Area Headquarters and

Regional Operating Headquarters of
Multinational Companies
3. International Carries
4. PEZE or BOI-registered enterprises

2. Regular resident foreign

corporations

Non-Resident Foreign Corporations

1. Special non-resident foreign 1. Non-resident cinematographic film

corporations owner, lessor or distributor (25%% of
the Gross Income)
2. Non-resident Lessor of vessels,
chartered by Philippine nationals
(4.5% of the Gross Rentals, lease, or
charter fees)
3. Non-resident owner or lessor of
aircraft, machineries, and other
equipment (7.5% final tax on rentals,
charters, and other fees)

2. Regular non-resident foreign

corporations

Exempt domestic corporations

Qualification of Tax Exemption - income tax exemption relates only to income from related
activities. Income from activities unrelated to the purposes for which an exempt corporation is
organized and income from activities conducted for profit including income from properties are
taxable regardless of the disposition made of such income. (Sec. 30 NIRC)

Income from related activities=exempt

Income from unrelated activities=subject to regular income tax

1. Exempt non-profit corporations under the NIRC

The following organizations shall not be taxed under this Title in respect to income received by
them as such:

(A) Labor, agricultural or horticultural organization not organized principally for profit;
(B) Mutual savings bank not having a capital stock represented by shares, and cooperative
bank without capital stock organized and operated for mutual purposes and without profit;
(C) A beneficiary society, order or association, operating for the exclusive benefit of the
members such as a fraternal organization operating under the lodge system, or mutual aid
association or a nonstock corporation organized by employees providing for the payment of life,

References: Philippine Tax Code; CREATE Law; TRAIN Law; Income Taxation, Banggawan; RR8-2018; RR14-2001 ;
RR12-2007; RA 9520
Tax 3. Unit 2. Chapter 4

sickness, accident, or other benefits exclusively to the members of such society, order, or
association, or nonstock corporation or their dependents;
(D) Cemetery company owned and operated exclusively for the benefit of its members;
(E) Nonstock corporation or association organized and operated exclusively for religious,
charitable, scientific, athletic, or cultural purposes, or for the rehabilitation of veterans, no part of
its net income or asset shall belong to or inure to the benefit of any member, organizer, officer or
any specific person; *
(F) Business league chamber of commerce, or board of trade, not organized for profit and no
part of the net income of which inures to the benefit of any private stock-holder, or individual;
(G) Civic league or organization not organized for profit but operated exclusively for the
promotion of social welfare;
(H) A nonstock and nonprofit educational institution;**
(I) Government educational institution;
(J) Farmers' or other mutual typhoon or fire insurance company, mutual ditch or irrigation
company, mutual or cooperative telephone company, or like organization of a purely local
character, the income of which consists solely of assessments, dues, and fees collected from
members for the sole purpose of meeting its expenses; and
(K) Farmers', fruit growers', or like association 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;

*Requisites for exemption of non-stock, non-profit corporations

1. It must be a non-stock corporation or association organized and operated exclusively
for religious, charitable, scientific, athletic, or cultural purposes, or for the
rehabilitation of veterans.
2. It should meet the organizational test and operational test
-organized and operated exclusively for religious, charitable, scientific, athletic, or
cultural purposes, or for the rehabilitation of veterans,
3. All net income or assets of the corporation must be devoted to its purposes and no part
of its income or assets accrues to or benefits any member or specific person.
4. It must not be a branch of a foreign non-stock, non-profit corporation.

NB: Charity is essentially a gift to an indefinite number of persons which lessens the burden of
government. In other words, charitable institutions provide free goods and services to the public
which would otherwise fall on the shoulders of the government. Thus, as a matter of efficiency,
the government forgoes taxes which should have been spent to address public needs, because
certain private entities already assume a part of the burden. This is the rationale for the tax
exemption of charitable institutions. The loss of taxes by the government is compensated by its
relief from doing public works which would have been funded by appropriations from the
Treasury.

Charitable institutions, however, are not ipso facto entitled to a tax exemption

References: Philippine Tax Code; CREATE Law; TRAIN Law; Income Taxation, Banggawan; RR8-2018; RR14-2001 ;
RR12-2007; RA 9520
Tax 3. Unit 2. Chapter 4

A non-profit organization is still allowed to engage in activities conducted for profit without losing
its tax exemption. The income conducted for profit will be subject to tax, regardless of the
disposition made of such income. (CIR v. St. Luke’s Medical Center Inc.) An institution under
Section 30(E) or (G) does not lose its tax exemption if it earns income from its for-profit
activities. Such income from for-profit activities, under the last paragraph of Section 30, is
merely subject to income tax, previously at the ordinary corporate rate but now at the
preferential 10% rate pursuant to Section 27(B). (CIR v. St. Luke’s Medical Center Inc. G.R.
195909)

**Non-profit educational institutions

Under Article XIV, Section 4 (3) of the Constitution, all revenue and assets of nonstock
nonprofit educational institutions used actually, directly and exclusively for educational
purposes are exempt from taxes and duties.

When a non-stock, non-profit educational institution proves that it uses its revenues actually,
directly, and exclusively for educational purposes, it shall be exempted from income tax, VAT,
and LBT.

Illustration:
De La Salle University, a non-profit educational institution, collected P5,000,000 school fees and
assessments from its students. It also earned P200,000 from the rent of its properties and
realized P300,000 in the sale of its properties. The University utilized the P200,000 rentals to
fund an undergraduate scholarship program and invested the P300,000 for the retirement
benefits of university directors.

Here, the P5,000,000 is an income from related activities. The P200,000 rentals and P300,000
gain in the sale of its properties are income from unrelated activities. The P5,000,000 income is
exempt. The P200,000 is still exempt even if arising from unrelated activities because it is used
for educational purpose. The P300,000 is subject to regular income tax because it is not used
for educational purpose. (CIR v. De La Salle University, Inc. G.R. No. 196596).

2. Government agencies and instrumentalities

General Rule: Exempt from income tax
Rationale: they are inherently non-profit
Exception: income from unrelated activities or from their properties is subject to income tax.

3. Government-Owned and Controlled Corporations (GOCCs)

General Rule: Subject to income tax
Rationale: generally proprietary or commercial in nature
Exceptions:
1. GSIS
2. SSS
3. PHILC
4. Home Development Mutual Fund (HDMF)
References: Philippine Tax Code; CREATE Law; TRAIN Law; Income Taxation, Banggawan; RR8-2018; RR14-2001 ;
RR12-2007; RA 9520
Tax 3. Unit 2. Chapter 4

5. Local water districts

PCSO is taxable beg. Jan. 1, 2018 or upon effectivity of the TRAIN Law.
HDMF or Pag-ibig is exempt only upon the effectivity of CREATE Law

4. Cooperatives
Cooperatives which transact business Cooperatives which transact business
only with members both with members and non-members

Not Subject to any taxes and fees under the 1. Those with not more than P10M
NIRC and other tax laws, such as the accumulated reserve and undivided
following: net savings are exempt from taxes,
1. Income tax (on related regular similar to cooperatives transacting
income) business only with members.
2. VAT and Percentages tax
3. Donor’s tax 2. Those with more than P10M
4. Excise Tax accumulated reserve and undivided
5. Documentary stamp tax net savings are subject to the
6. Annual Registration fee following taxes at full rate:
a. Income tax on the full amount
allocated for interest on capital
b. VAT on transactions with
non-members
c. Percentage Tax on all sales of
goods or services rendered to
non-members
d. All other internal revenue
taxes unless otherwise
provided by law

Taxability of Cooperatives to Internal Revenue Tax

All cooperatives regardless of classification are subject to the following:
1. The applicable income tax on unrelated income
2. Capital gains tax
3. Documentary stamp tax
4. VAT on purchases of goods or services except VAT exempt importations
5. Withholding tax on wages except for minimum wage employees
6. All other taxes for which cooperatives are directly liable and not otherwise expressly
exempted by any law.

Accumulated reserves (reserve fund) - the totality of the amounts legally required to be
deducted annually from the annual surplus (income) of the cooperative for its protection and
stability.
Under RA9520, the net surplus of every cooperative shall be distributed as follows:
1. Reserve fund - at least 10% of the net surplus but must not be less than 50% of the net
surplus in the first five years of operation

References: Philippine Tax Code; CREATE Law; TRAIN Law; Income Taxation, Banggawan; RR8-2018; RR14-2001 ;
RR12-2007; RA 9520
Tax 3. Unit 2. Chapter 4

2. Education and training fund - not more than 10% of net surplus
3. Community development fund - not less than 3% of net surplus
4. Optional land and building fund - not to exceed 7% of net surplus
5. Interest, which shall not exceed normal rate of return on investments and patronage
refunds which must not be less than 30% of the net surplus after deducting the statutory
reserves
6. Any excess to reserve fund

Allocation of Common Expenses of Exempt Corporations

Expenses of an exempt corporation not directly traceable to either related and unrelated
activities are allocated based on gross income

Illustration:
A non-profit entity presented the following analysis of its net surplus:

Related Unrelated
Activities Activities Total
Gross
receipts 1,200,000 800,000 2,000,000
Less: Cost of
Services 400,000 400,000 800,000
Gross income 800,000 400,000 1,200,000
Less: Direct
expenses 280,000 70,000 350,000
Common
expenses 180,000
Surplus 670,000

Gross income from unrelated activities 400,000

Less: Direct Expenses 70,000
Allocated common expenses
(400,000k/(400,000+800,000))x180,000 60000 130,000
Taxable Net Income 270,000

MINIMUM CORPORATE INCOME TAX (MCIT)

As a minimum tax, the MCIT is payable when:
a. The corporation has zero taxable income
b. The corporation has negative taxable income
c. MCIT is greater than the regular corporate income tax. (MCIT>RCIT)

References: Philippine Tax Code; CREATE Law; TRAIN Law; Income Taxation, Banggawan; RR8-2018; RR14-2001 ;
RR12-2007; RA 9520
Tax 3. Unit 2. Chapter 4

Rationale for the Imposition of MCIT

As a tax on gross income, MCIT prevents tax evasion and minimizes tax avoidance schemes
achieved through sophisticated and artful manipulations of deductions.

Scope of the MCIT

-applicable to every corporation taxable to the regular corporate income including non-profit,
exempt, and special corporations with respect to their taxable income subject to regular
corporate income tax.

Entities Exempt from MCIT

1. Real Estate Investment Trusts or REITs
2. Domestic corporations which opted to be taxed under the 15% corporate income tax
(gross income tax)
3. Domestic or resident corporations subject to special tax rates
a. Proprietary educational institutions and non-profit hospitals
b. Foreign currency deposit units (FCDUs) and Expanded FCDUs
c. International carriers
d. PEZA or BOI-registered enterprises
4. All non-resident foreign corporations

When MCIT Commences

MCIT is imposed beginning on the 4th taxable year immediately following the year in which
such corporation commenced its business operations. (X+4th year of operation) (NIRC, as
amended by TRAIN, Sec. 27 (E)(1))

Tax Rate: 2% or 1% (DC and RFC)

Tax Base: Gross income except income exempt from income tax and income subject to final
withholding tax.

CREATE Law: starting July 1, 2020 until June 30, 2023, the MCIT rate of both DC and RFC will
only be 1%. Starting July 1, 2023, the MCIT will again be 2%.

Gross Income for MCIT purposes

-Gross income shall mean gross sales/gross receipt less sales returns, discounts and
allowances and cost of sales/cost of services.
-Gross income will also include all items of gross income enumerated under Sec. 32(A) of the
NIRC, except income exempt from income tax and income from final withholding tax. Thus, if
apart from deriving income from these core business activities, there are “other items” of gross
income realized or earned by the taxpayer during the taxable period which are subject to the
NCIT, the same items must be included as part of the gross income for computing MCIT.

Computation of MCIT:
Gross Sales/receipts, net of discounts and allowances XX
Less: Cost of Goods Sold/service (xx)
References: Philippine Tax Code; CREATE Law; TRAIN Law; Income Taxation, Banggawan; RR8-2018; RR14-2001 ;
RR12-2007; RA 9520
Tax 3. Unit 2. Chapter 4

Gross income from operations XX

Add: Other taxable income not subject to final tax (xx)
Total Gross income XX
Multiply by: MCIT rate 2%
MCIT XX

Illustration
A domestic corporation started operations in 2018. It had the following results of operations in
2021 and 2022

2021 2022
Total gross income 2,100,000 4,000,000
Dividend income -
domestic - 50,000
Business expenses 2,600,000 3,400,000
Net Income (Net loss) (500,000) 650,000

The MCIT will commence in 2022 (2018+4). Since there is no MCIT yet in 2021, the tax payable
for 2021 is nil.

The 2022 income tax due of the corporation shall be determined as:
Total gross income 4,000,000
Less: Itemized deductions
Regular allowable deductions 3,400,000
NOLCO-2021 500,000 3,900,000
Taxable net income 100,000
Multiply by: Corporate income tax rate 25%
Regular corporate income tax rate -2022 25000

Total gross income 4,000,000

Multiply by: MCIT rate 1%
MCIT - 2022 (Higher) 40000

The P40,000 MCIT is the income tax due in 2022.

Illustration:
A corporation which is also an MSME, reported the following on its fifth year of operation

Sales, net of 1% withholding

tax 4,950,000

References: Philippine Tax Code; CREATE Law; TRAIN Law; Income Taxation, Banggawan; RR8-2018; RR14-2001 ;
RR12-2007; RA 9520
Tax 3. Unit 2. Chapter 4

Cost of Sales 2,000,000

Interest from deposit, net of
tax 75,000
Gain on sale of domestic
stocks directly to buyer 150,000
Casual rent income, net of
5% creditable withholding
tax 95,000
Interest income from
advances to employees 50,000
Business expenses 3,100,000
Estimated quarterly tax
payments 10,000

*Gain on sale of domestic stocks directly to buyer is subject to 15% capital gains tax

The regular income tax and minimum corporate income tax shall be computed as follows:

Sales (4,950,000/99%) 5,000,000

Less: Cost of sales 2,000,000
Gross income from operations 3,000,000
Add: Other gross income not subject to final tax
Casual rent income (95,000/95%) 100,000
Interest from employee advances 50,000 150,000
Total gross income 3,150,000

Total gross income 3,150,000

Less: Regular allowable deduction 3,100,000
Taxable net income 50,000
Multiply by: Corporate income tax rate 20%
RCIT 10,000

Total gross income 3,150,000

Multiply by: MCIT rate 1%
MCIT 31500

The income tax payable shall be computed as follows

Income tax due-MCIT 31500
Less: Tax Credits
Creditable withholding tax withheld on gross income
Sales (1%x 5,000,000) 50000

References: Philippine Tax Code; CREATE Law; TRAIN Law; Income Taxation, Banggawan; RR8-2018; RR14-2001 ;
RR12-2007; RA 9520
Tax 3. Unit 2. Chapter 4

Rent Income (5%x100,000) 5000

Total creditable withholding tax 55000
Estimated quarterly tax payments 10,000 65,000
Income tax payable or (refundable) (33,500)

Excess MCIT Carry-Over

The excess of the MCIT over the RCIT in any year is a tax credit that is deductible against any
RCIT tax due in the immediately succeeding three years.

Rules on Carry-Forward of Excess MCIT

1. The excess of MCIT vet the RCIT can be carried forward;
2. It can be credited against the RCIT due in the next 3 immediately succeeding taxable
years;
3. Any excess not credited in the next 3 years shall be forfeited;
4. Carry forward is possible only if RCIT is greater than MCIT;
5. The maximum amount that can be credited is up to the amount of the RCIT;
6. The excess MCIT cannot be claimed as credit against the MCIT itself or against any
other losses;
7. The tax payable shall be the MCIT whenever it is greater than the RCIT.
8. When there are several Excess MCITs from prior years, tax crediting shall be made in
first in-first out basis.

Illustration 1:
A corporation became the subject to MCIT in 2017. MCIT and RCIT data through the years

2017 2018 2019 2020 2021

MCIT 400 620 200 350 350
RCIT 0 500 300 200 400
Income tax due 400 620 300 350 400

Excess MCIT 400 120 150

The income tax payable(still due) in each year is indicated in Bold font.

2017 2018 2019 2020 2021

Income tax due 400 620 300 350 400
Excess MCIT 400 120 150
MCIT Application (300) —------------> (300)
Remaining Excess
MCIT *100 120

References: Philippine Tax Code; CREATE Law; TRAIN Law; Income Taxation, Banggawan; RR8-2018; RR14-2001 ;
RR12-2007; RA 9520
Tax 3. Unit 2. Chapter 4

0
MCIT application (expired) (120) (150) (270)
130

Note:
1. The 100 unused Excess MCIT-2017 cannot be used in 2020 since the tax due for that
year is the MCIT. Excess MCIT prior year cannot be credited against MCIT tax due.
2. The unused Excess MCIT-2017 expired at the end of 2020 and cannot be carried over
as tax credit in 2021. Thus only the 2018 and 2020 excess MCITs are credited in 2021.

Illustration 2
An MSME which became subject to MCIT in 2021 had the following statement of income in
2021 and 2022

2021 2022
Total gross income 300,000 500,000
Business expenses 420,000 250,000
Net income (120,000) 250,000

2022 taxable net income and RCIT

2021 2022
Total gross income 300,000 500,000
Less: Allowable deductions 420,000 250,000
Net Income (NOLCO) (120,000) 250,000
Less: NOLCO-2021
application (120,000)
Taxable income (120,000) 130,000

2021 2022
taxable income 0 130,000
Multiply by: 20% 20%
RCIT 0 26000

MCIT 3000 5000

Excess MCIT 3000

References: Philippine Tax Code; CREATE Law; TRAIN Law; Income Taxation, Banggawan; RR8-2018; RR14-2001 ;
RR12-2007; RA 9520
Tax 3. Unit 2. Chapter 4

The income tax payable in each year is indicated in Bold Font

2021 2022
income tax due 3000 26000
Less: Excess MCIT-2021 3000
Income tax payable 23000

Schedules of Effectivity of New tax rates

Regular CIT MCIT

Domestic Corporations Rate Effectivity Rate Effectivity
7/1/2020 to
Domestic Corporations, in 1% 6/30/2023
general 25% 7/1/2020 2% 7/1/2023
7/1/2020 to
MSME with <P5m taxable 1% 6/30/2023
income 20% 7/1/2020 2% 7/1/2023
Special CIT MCIT
7/1/2020 to
Proprietary Educational 1% 6/30/2023
Institutions and Hospitals 10 7/1/2023 Not applicable
Regular CIT MCIT
Foreign Corporations Rate Effectivity Rate Effectivity
7/1/2020 to
Resident foreign 1% 6/30/2023
corporations 25% 7/1/2020 2% 7/1/2023
Upon
effectivity of
Upon the the CREATE
effectivity of the law until
CREATE law 1% 6/20/2023
Offshore banking units 25% (4/11/2021) 2% 7/1/2023
7/1/2020 to
Regional Operating 1% 6/30/2023
Headquarters 25% 1/1/2022
References: Philippine Tax Code; CREATE Law; TRAIN Law; Income Taxation, Banggawan; RR8-2018; RR14-2001 ;
RR12-2007; RA 9520
Tax 3. Unit 2. Chapter 4

2% 7/1/2023
Final Income Tax MCIT
Non-resident foreign
corporations 25% 1/1/2021 Not Applicable

Improperly Accumulated Earnings Tax

-previously imposed on undistributed earnings of domestic corporations without valid reasons
for such retention.
- The same shall no longer be imposed for all taxable years ending after April 11, 2021.

Branch Profit Remittance Tax

- 15% branch profit remittance tax is imposed on any profit remitted by a branch to its
head office based on total profit applied or earmarked for remittance without any
deduction for the tax component thereof except those activities which are registered with
the Philippines Economic Zone Authority.
- interests, dividends, rents, royalties, including remuneration for technical services,
salaries, wages premiums, annuities, emoluments or other fixed or determinable annual,
periodic or casual gains, profits, income and capital gains received by a foreign
corporation during each taxable year from all sources within the Philippines shall not be
treated as branch profits unless the same are effectively connected with the conduct of
its trade or business in the Philippines
- The income should be an active
- The NIRC used the phrase “any profit remitted” without limiting the same to current year
profit remittance. The branch profit remittance tax therefore is understood to apply to
remittance of prior year earnings.

Rationale of BPRT: To equalize the tax burden on foreign corporations maintaining, on the one
hand, subsidiary domestic corporations. Prior to the imposition of the BPRT, local branches of
foreign corporations were made to pay only the RCIT applicable to resident foreign corporations
doing business in the Philippines. While Philippine subsidiaries of foreign corporations were
subject to the (a) RCIT on their net income and dividend payments; and (b) were additionally
subjected to a withholding tax. In order to avert what would otherwise appear to be an unequal
tax treatment on such subsidiaries vis-a-vis local branch offices, a BPRT was imposed. (Bank of
America NT & SA v. Court of Appeals., G.R. Nos. 103092 & 1031106)
Tax Rate: 15%(RFC)
Tax Base: Total profit applied or earmarked for remittance without any deduction for the tax
component thereof.

Scope of the Branch Profit Remittance Tax

-covers the remittance of all resident foreign corporations including ROHQs of Multinational
companies, FCDUs or OBUs of foreign banks and international carriers except PEZA registered
entities.
References: Philippine Tax Code; CREATE Law; TRAIN Law; Income Taxation, Banggawan; RR8-2018; RR14-2001 ;
RR12-2007; RA 9520
Tax 3. Unit 2. Chapter 4

Illustration:
A branch of a foreign corporation engaged in servicing reported the following income statement
in 2021:

Service fees 4,000,000

Gain on sale of fully
depreciated properties 400,000
Dividend income 50,000
Capital gain on sale of
stocks, net of tax 90,000
Less: Business expenses 3,600,000
Profits before income tax 940,000
Less: Income tax due
-RCIT 200,000
Net Profits 740,000
The branch earmarked 40% of the entire profits for remittance to the home office abroad

The branch profit remittance tax shall be determined as follows:

Net Profits 740,000

Less: Investment income
Dividend income 50,000
Capital gain on the sale of stocks 90,000 140,000
Taxable profit 600,000
Multiply by: portion remitted 40%
Profit Remittance 240000
Multiply by: tax rate 15%
Branch profit Remittance tax 36000

Note:
1. The gain on sale of equipment is included in the base of the branch profit remittance tax
because it is an income effectively connected with the business of the taxpayer.
2. The portion of the branch remittance representing capital gains and dividend income is
excluded from the branch profit remittance tax base.

References: Philippine Tax Code; CREATE Law; TRAIN Law; Income Taxation, Banggawan; RR8-2018; RR14-2001 ;
RR12-2007; RA 9520