Income Tax

For
Corporation

Mr. Mario M. Castro, Cpa, Mba

 Income Tax for Corporation

Shall include partnership, no matter how created or organized, joint

stocks companies, joint accounts, associations, or insurance
companies. It also include mutual funds companies, regional
operating headquarters of multinational corporation, and joint
accounts but does not include the following:

General professional partnership

Formed by persons for the sole purpose of exercising their common profession

Joint venture or consortium

Formed for the purpose of undertaking construction projects per PD#929

Joint venture or consortium for engaging in petroleum

Operating consortium agreement under a service contract with the gov’t.

 Types of Corporation

DC – Domestic Corporation

Created or organized in the Philippines or under the laws

RFC – Residence Foreign Corporation

Created under foreign laws, engaged in business in the Philippines

NRFC – Non-residence Foreign Corporation

Created under foreign laws, not engaged in business in the Philippines

Income Tax Rate and Basis in Computing Tax Due

The applicable income tax of a corporation depends on the type of the

corporation and the income subject to tax. Regular or ordinary income are
generally subject to Normal or Regular Corporate Income Tax. (RCIT) of 30%
while a certain passive income and capital gains are subject to final withholding
taxes and capital gain taxes, respectively. Generally domestic corporation are
taxable on their income within and outside the Philippines, Foreign resident
corporation are taxable on their income within the Philippines only. Both of them
are subject to 30% normal or regular corporate income tax (NCIT or RCIT)
based on “Net Income” during the taxable year. However, a minimum corporate
income tax (MCIT) of 2% on gross income is imposed upon domestic and
resident foreign corporation beginning on the “4th taxable year” immediately
following the taxable year in which such corporation commenced its business
operations. The tax due should be the higher between the RCIT and MCIT.
Non-resident foreign corporation not engaged in business in the
Philippines shall pay taxes equal to 30% of “Gross Income” from all sources in
the Philippines such as: interest , rents, premiums (except insurance premium),
annuities, periodic or casual gains, profits and income and capital gains, except
income subject to capital gains tax.
 (GOCCs) refer to all corporations, agencies, or instrumentalities
owned or controlled by the government. They shall pay taxes upon their
taxable income as are imposed upon corporation in similar business, industry
or activities, except the following:
*GSIS
*SSS
*PHIC
*Local water district under RA10026

Corporation created by special laws or charters shall be taxed

based on the provisions of the special law or charter creating them or
applicable to them, supplemented by the provisions of the Tax Code insofar
as they are applicable.
Table C-1 Corporate Income Tax rate on Regular Income

1. RCIT DC RFC NRFC

Tax Rate 30% Net Income 30% Net Income 30% Gross income
Basis within & without within only within only

MCIT 2% of gross income 2% of gross income Not applicable

within & without within only
OR
2.
GIT(optional) 15% 15% Not applicable
Tax rate Gross income Gross income
Basis within & without within only
Illustration:

Assume the following available data for ABC Corporation for the current
year:
Gross income, Philippines P975,000
Gross income, Malaysia 770,000
Expense, Philippines 750,000
Expenses, Malaysia 630,000
Interest on bank deposits 25,000
Required:
Determine the following tax due assuming the corporation is:
1. Domestic corporation (DC)
2. Resident foreign corporation (RFC)
3. Non-resident foreign corporation (NRFC)
 Solution:

Domestic Corporation(DC):
Gross income, Philippines P975,000 DC are subject to 30% income tax on regular net
Gross income, Malaysia 770,000 income from sources within and outside the
Expenses, Philippines (750,000) Philippines. The interest income on the deposit is not
Expenses Malaysia (630,000) a regular income it is passive income subject to final
Taxable income P365,000 tax of 20%.
Tax rate 30%
Income tax due P109,500

Resident Corporation (RFC):

Gross income, Philippines P975,000 RFC are subject to 30% income tax on regular
Expenses, Philippines (750,000) income within the Philippines only.
Taxable income P225,000
Tax rate 30%
Income tax due P67,500

Non-resident foreign Corporation (NRFC):

Gross income, Philippines P975,000
Interest on bank deposit 25,000 Non-resident foreign corporation are subject to 30%
Total gross income P1,000,000 income tax on the gross income from the Philippine
Tax rate 30% sources only. (except income subject to CGT and tax
Income tax due P300,000 exempt income).
 Minimum Corporate Income Tax (MCIT)

2% of gross income as of the end of the taxable year (whether

calendar or fiscal) depending on the accounting period employed is imposed upon
any Domestic(DC) and Resident Foreign Corporation(RFC) beginning on
the 4th taxable year immediately following the taxable year in which such
corporation commenced its business operations. The MCIT shall imposed
whenever:
*The corporation has zero taxable income, or
*The corporation has negative taxable income, or
*Whenever the amount of MCIT is greater than RCIT due from such
corporation. Hence, MCIT is always computed and compared to
RCIT starting on the fourth year of operations. The higher
amount should be the tax due for the taxable year.
Computation of MCIT:
Seller of Goods:
Gross sales
Less: Sales discounts
Sales returns and allowances
Net Sales
Add: Other income subject to Normal
or Regular corporate tax
Gross income for MCIT purposes
MCIT rate
MCIT

Seller of Service:
Gross receipts
Sales discounts
Sales returns and allowance
Direct cost of Services
Gross income
Add: Other income subject to normal
or regular corporate tax
Gross income for MCIT purposes
MCIT rate
MCIT
COST OF SALES

Seller of Goods:
Invoice cost
Import duties
Freight DIRECT COST OF SERVICES
Insurance
TOTAL Salaries & employee benefits of
personnel, consultants & specialists
directly rendering the services
Manufacturer:
Cost of facilities directly utilized in providing
Raw materials used
the service
Direct labor
Other direct costs and expenses necessarily
Factory overhead
incurred to provide the services
Freight cost
TOTAL
Insurance premium
Other production cost
TOTAL
Illustration:

Assume the following data for MMC Corporation for the current year
(6th year of business operations):
Gross income, Philippines P975,000
Expenses, Philippines 950,000
Gross income, Malaysia 700,000
Expenses, Malaysia 720,000
Interest on bank deposits 25,000
Required:
Determine the income tax due if the corporation is:
1. Domestic corporation (DC)
2. Resident foreign corporation (RFC)
3. Non-resident foreign corporation (NRFC)
Solutions:
1. Domestic corporation (DC): P33,500
Gross income, Phils. & Malaysia P1,675,000 MCIT is higher, the excess of P32,000 (P33,500-
Expenses, Phils. & Malaysia ( 1,670,000) P1,500) known as “Excess MCIT” will be carried
Taxable income P 5,000 forward and credited (deducted) against RCIT for
RCIT 30% three(3) succeeding taxable year
RCIT/Basic Tax P 1,500
versus
MCIT:
Gross income, Phils & Malaysia P1,675,000
MCIT Rate 2%
MCIT P33,500

2. Resident foreign corporation (RFC): P19,500

Gross income, Philippines P 975,000
Expenses, Philippines ( 950,000)
Taxable income P25,000
RCIT 30%
RCIT/Basic Tax P 7,500
versus
MCIT:
Gross income, Philippines P 975,000
MCIT Rate 2%
MCIT P19,500

3. Non-resident foreign corporation – P300,000 (1,000,000 x 30%)

MCIT are not applicable.
 Excess RCIT Or MCIT Carry-Over

Any excess of the MCIT over RCIT shall be carried forward and
deducted against the RCIT for the (3) three succeeding taxable
years, provided, that the RCIT should be higher than the MCIT in
the year to which the excess MCIT is forwarded.

Illustration:
A domestic corporation which commenced operation in 2012 provide the
following data:
2016 2017 2018
Gross income P10,000,000 P12,000,000 P14,000,000
Allowable deductions ( 9,500,000) ( 12,200,000) ( 12.800,000)
Net income (Loss) 500,000 ( 200,000) 1,200,000
Determine the income tax payable for 2016, 2017 and 2018.
Answers

2016 2017
RCIT (P500t x 30%) P150,000 RCIT P 0
MCIT (P10m X 2%) P200,000 MCIT(P12m x 2%) P 240,000
Tax due (higher amt) P200,000 Tax due (higher amt) P240,000
Excess MCIT 2016 P50,000 Excess MCIT 2017 P 240,000
2018

GI, 2018 P14,000,000

Allowable deductions 2018 12,800,000
Net Income 1,200,000
Less: 2017 NOLCO (200,000)
Taxable income -2018 P1,000,000
RCIT rate 30%
RCIT or basic tax P 300,000
MCIT (P14m x 2%) P280,000
Tax due (higher amt) P300,000
Less: Excess MCIT- 2016 (50,000)
- 2017 (240,000)
Income tax Payable - 2018 P10,000
 Quarterly and Annual Corporate Tax Due
Carry-over of Excess MCIT from previous
taxable year

Illustration:

A corporation RCIT, MCIT and tax withheld from 1st to 4th quarters
including excess MCIT and Excess withholding taxes from prior years are as follows:

Quarter RCIT MCIT Taxes withheld Excess MCIT Excess

during the year Prior year withholding
tax prior yr
1st P200,000 P160,000 P40,000 P60,000 P20,000
2nd 240,000 500,000 60,000
3rd 500,000 200,000 80,000
4th 400,000 200,000 70,000

Determine the following:

1. Income tax payable for the first quarter
2. Income tax payable for the second quarter
3. Income tax payable for the third quarter
4. Annual income tax payable
 Solutions:

Requirement 1: P80,000 Computed as follows:Requirement 3: P140,000 Computed as follows:

Quarterly Tax due (Higher-RCIT) P200,000 Quarterly tax due (Higher-RCIT) P 940,000
Less: Excess withholding tax previous year ( 20,000) Less: Excess w/holding tax previous year ( 20,000)
Tax withheld this year ( 40,000) Tax w/held – 1 , 2 & 3 quarters
st nd rd (180,000)
Excess MCIT previous year ( 60,000) Income tax paid 1 & 2 quarters
st nd (540,000)
Income tax paid/payable P 80,000 Excess MCIT previous year ( 60,000)
Income tax payable P140,000
**The carry-over of excess MCIT from
previous year is allowed if the tax due for
**Refer to the explanation in requirement #1.
the quarter is based on RCIT.

Requirement 2: P460,000 computed a follows:

Quarterly tax due (Higher MCIT) P660,000
Less: Excess w/holding tax previous year ( 20,000)
Tax w/held 1st & 2nd quarters (100,000)
Requirement 4: P330,000 Computed as follows:
Income tax paid 1 quarter
st ( 80,000)
Quarterly tax due (Higher –RCIT) P1,340,000
Income tax paid/payable P460,000
Less: Excess w/holding tax-previous year ( 20,000)
Taxes w/held for the year(total) ( 250,000)
*The carry-over of excess MCIT from previous
Income tax paid-1 , 2 & 3 qtrs (680,000)
st nd rd
year is not allowed if the tax due for the
Excess MCIT-previous year ( 60,000)
quarter is based on MCIT.
Income tax payable P330,000
*The P600,000 tax due was computed by
adding the MCIT of the 1st & 2nd quarters. The
amount is higher compared to the total of the
RCIT for the 1st & 2nd quarters.
Corporations Exempt from MCIT

The following corporation should not be subject to MCIT:

1. Domestic corporations:
a. Proprietary educational institutions
b. Non-profit hospitals
c. Domestic corporations engaged in depository bank under the
expended foreign currency deposit unit(FCDUs) on their
income from foreign currency transactions with local
commercial banks and other depository banks under the
foreign currency deposit system.
2. Resident Foreign corporations:
a. International carriers
b. Offshore banking units (OBUs)
c. Regional Operating Headquarters (ROHQs)
3. Corporation registered under Philippine Economic Zone Authority (PEZA)
and Bases conversion Development Authority (BCDA)
 Optional Corporate Income Tax (15% Gross income tax)

Effective January 1, 2000, allow domestic and resident foreign corporations to

be subject to optional corporation tax at 15% based on gross income.
Requisites:
All of the following conditions shall have to be satisfied in the allowance of
optional corporate tax:
1. A tax effort ratio of 20% of Gross National Product (GNP)
2. A rate of 40% of income tax collection of total tax revenue.
3. A VAT effort of 4% of GNP, and
4. A 0.9 ratio of the Consolidated Public section Financial Position to
GNP.
5. The option to be tax based on gross income shall be available only
to firms whose ratio of cost of sales or receipts from all sources does not
exceed 55%`
The election of the gross income option by the corporation shall be
irrevocable for (3) three consecutive taxable years during which the corporation
is qualified under the scheme.
Sample Computation of income tax payable on 15% gross income tax

Sales/Revenues Pxxx
Cost of sales/Cost of direct services xxx
Gross income Pxxx
Gross income tax rate 15%
Income tax due Pxxx
Less: Taxes withheld (xxx)
Taxes paid-previous quarters (xxx)
Foreign tax credit (xxx)
Income tax payable Pxxx

Gross income = gross sales less sales returns, discounts and allowances and
cost of goods sold.
Cost of goods sold = all business expenditures directly incurred to produce the
merchandise to bring them to their present location. For trading
concern, Cost of goods sold shall include invoice cost of the
goods sold, plus import duties, freight in transporting the goods
to the place where the good are actually sold including
insurance while goods are in transit.
Final Taxes on Passive Income and Capital Gains Tax

In addition to regular corporate income tax or minimum

corporate income tax, a corporation may be subject to:

1. Final tax on passive income

2. Capital gains tax (CGT), and
3. Improper accumulated earnings tax (IAET)
TABLE C-2 Certain Income Subject to Final Taxes
A. Certain Passive Income Derive from Philippine Sources
DC RFC NRFC
1. Interest in any currency bank deposits 20% 20% 30%
2. Yield/monetary benefits from deposit 20% 20% 30%
3. Yield/monetary benefits from trust fund 20% 20% 30%
4. Royalties 20% 20% 30%
5. Interest income from depositary bank 15% 7.5% Exempt
6. Inter-corporate dividends by DC Exempt 15%,30%

Table C- 3 Capital Gain subject to (CGT) capital Gain Tax

Capital gain from sales of shares of stock not traded in the local stock exchange
DC RFC NRFC
Tax base: Net Capital gain
Tax rate 15%
First P100,000 capital gain 5% 5%
Amount in excess of P100,000 10% 10%
Capital gain realized from sale or exchange or
disposition of land or/building (Basis: Selling
Price or FMV whichever is higher 6% NA NA
*With tax sparing; 15% - If the country where the NRFC is domiciled allows a credit against the tax due
from the NRFC representing deemed paid in the Philippines equivalent to 15%.
*Without tax sparing; 30%.
 Income derived under expanded foreign currency
deposit system BY DEPOSITARY BANKs
* From foreign currency transactions with
non-residents, OBUs in the Philippines, Exempt
local commercial bank including branches
of foreign banks
* From foreign currency loans granted to
residents other than OBUs in the 10%
Philippines and other depository bank

Capital gains subject to Capital Gains Tax (CGT)

1. Capital gains from sale of shares of stock not traded in the DC RFC NRFC
local stock exchange
Domestic corporation (beg. Jan.1,2018)
Tax based: Net capital gains
Tax rate: 15%
Foreign Corporation:
First P100,000 5% 5%
Amount in excess of P100,000 capital gain 10% 10%
2. CAPITAL gains realized from sale or exchange or disposition
of Land or Buildings (Basis:SP or FMV whichever is higher) 6% na na
**The higher between FMV as provided by city/provincial
assessors and zonal value.
Special Corporations

Table C-4 Income Tax Rates of Special Corporations

Domestic Corporations:

Proprietary educational institution 10%

Non-profit hospitals 10%
Resident Foreign Corporations

International carriers 2.5%

Regional operating headquarters (ROHQ) of
multinational corporation 10%

Non-resident Foreign Corporation

Non-resident owner or lessor of vessel 4.5%

Non-resident cinematographic film owner, lessor
or distributor 25%
Non-resident lessor of aircraft, machinery and
other equipment 7.5%
Proprietary educational institution and non-profit hospitals

Net income from within and without the Philippines, if the gross
income from unrelated trade, business, or other activity exceeds 50%
of the total gross income derived from all sources, such
educational institution or non-profit hospital will be subject to normal
corporate income tax rate of 30% on its net taxable income.
Illustration:
A private institutional education provide the following data.
Gross income from
Tuition fees P4,000,000
Rental income 1,000,000
Operating expenses 1,500,000

1. Determine the tax

(10% x P5m-1.5m)= P350,000

2. Determine the tax, assume the Rental income is P7,500,000

(30% x 4m+7.5m-1.5m) = P3,000,000

 International Carrier

Gross Philippine billing 2.5%

means – total gross revenue derive from passage 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.

Illustration:
Cathay Air, an international air carrier provide the following data:
Gross receipts – transport of passengers P10,000,000
Gross receipts – transport cargoes 5,000,000
Operating expenses 6,000,000
Question1: Determine the income tax due.

Income tax due (P15m x 2.5%)= P375,000

Question 2: How much is the income tax due assuming the international
carrier is subject to preferential tax rate of 1.5% on gross
Philippine billings under the existing tax treaty or
international agreement?`

Answer: P225,000 (P15m x 1.5%)

Question 3: How much is the income tax due assuming the international
carrier is exempt from income tax based on reciprocity?

Answer: none
 Improperly Accumulated Earnings Tax

A tax of 10% is imposed on the improperly accumulated taxable

income of corporation formed or availed of for the purpose of avoiding the
income tax with respect to the shareholders or the shareholders of any
other corporation, by permitting the earnings and profits of the corporation
to accumulate instead of dividing them among or distributing them to the
shareholders. It is applicable to closely held DC . Not applied to Publicly
held corporation, Banks and Insurance companies, taxable partnership, GPP,
non taxable JV, and enterprises registered with PEZA.

A closely held corporation – at least 50% of the outstanding capital

stock or at least 50% of the total combined voting power of all classes of
stock entitled to vote is owned directly or indirectly by or for not more than
21 or more individuals, the corporation is a publicly held corporation.
Rules in determining whether or not the corporation is a closely held corporation

*Stock not own by the individuals

Stock owned directly or indirectly by or for a corporation,
partnership, estate or trust shall be considered as being owned
proportionately by the shareholders, partners or beneficiaries.

*Family and Partnership ownership

An individual shall be considered as owning the stock owned,
directly or indirectly, by or for his family, or by or for his partner.
“Family of an individual” includes his brothers or sisters(whether
by whole or half-blood), spouses, ancestors and lineal
descendants.

*Option to acquire stocks

If any person has an option to acquire stock, such stock shall be
considered as owned by such person.
Circumstances indicating improper accumulation of profits

*Substantial changes to corporate officers who are stockholders at the

same time/personal loans
*Radical change in the nature of business after a considerable surplus have
been accumulated.
*Investment is unrelated business or activity.
*Substantial expenditures of corporations for the personal benefits of
stockholders only.

Presumptions of improper Accumulation

*The fact that a corporation is a mere holding company shall be prima facie
evidence of a purpose to avoid the tax upon its shareholders or
members. Holding company shall refer to a corporation having
practically no activities except holding property, and collecting the
income there from or investing the same.
*The fact that the earnings or profits of the corporation are permitted accumulate
beyond the “reasonable needs” of the business shall be determinable of
the purpose to avoid the tax upon its shareholders or members, unless the
corporation by clear evidence, shall prove to the contrary accumulation of
profits is considered “unreasonable” if it is not required for legitimate
business purposes considering all circumstances of the case.
Reasonable Needs of the Business

The following are constitute accumulation of earnings for “reasonable needs”

of the business:

a. Allowance for the increase in the accumulation of earnings up to 100% of

the paid-up capital of the corporation as of balance sheet date,
inclusive of accumulations taken from other years. (paid-up capital
refer to par value of the shares)
b. Earning reserved for definite corporate expansion projects or programs
requiring consolidated capital expenditures as approved by the
board of directors or equivalent body.
c. Earnings reserved for building, plants or equipment acquisition as
approved by the board of directors or equivalent body.
d. Earnings reserved for compliance with any loan covenant or pre-existing
obligations established under a legitimate business agreement.
e. Earnings required by law or applicable regulation to be retained by the
corporation or in respect of which there is legal prohibition against
the distribution.
f. In the case of subsidiaries of a foreign corporation in the Philippines, all
undistributed earnings intended or reserved for investment within
the Philippines as can be proven by the corporate records.
Improper Accumulated Earnings Tax

Pro forma Computation

Taxable income tax for the year Pxxx

Add: Income exempt from tax Pxxx
Income excluded from gross income xxx
Income subject to final tax xxx
Net Operating loss carry over (NOLCO) xxx
Less: Dividends (actually or constructively paid) (xxx) xxx

Total P xxx
Add: Retained earnings prior years xxx
Accumulated earnings as of the end of current year xxx
Less: Amount that may be retained
(100% of paid up capital as of year-end) (xxx)
EXCESS is considered Improperly accumulated earnings P xxx
Multiply by IAET rate 10%

Improperly accumulated earnings tax (IAET) P xxx

Illustration:

The records of a closely held corporation shows for the following

calendar years:
2018:
Gross income P5,000,000
Expenses 3,000,000
Other income:
Rent, net of 5% withholding tax P 475,000
Interest on money market placement, net 80,000
Inter-corporate dividends 500,000
Additional information:
Dividend paid 1,500,000
Payments 1st to 3rd quarters 50,000
Ordinary shares 700,000
Shares premium 200,000
2019:
Gross income P 3,000,000
Expenses 2,800,000
Net income 200,000
Retained earnings 500,000
Required:
How much is the improperly accumulated earnings tax in 2018?
Answer: P63,000

2018:
Gross income P5,000,000
Other income – rent income, gross 500,000 P5,500,000
Less: Expenses 3,000,000
Taxable income P2,500,000
Add: Income subject to FWT (P80,000/80%) 100,000
Tax exempt income (inter-corporate dividend) 500,000 600,000
Total P3,100,000
Less: Tax due for the year
Corporate tax (RCIT>MCIT)
(RCIT=2.5mx30%, MCIT=5.5mx2%) 750,000
Final tax – money market placement 20,000
Dividend paid 1,500,000 2,270,000
Total P 830,000
Retained earnings prior years(2018) 500,000
Retained earnings Dec. 31, 2019 P1,330,000
Less: Amount that may be retained (Par Value) 700,000
Excess Earnings (improperly accumulated) P 630,000
X tax rate 10%

IMPROPERLY ACCUMULATED EARNINGS TAX – 2018 P 63,000

Filing of income tax Returns

The filing of ITR shall be made by the President Vice President or

other principal officers in behalf of the company. The return
shall be sworn to by the above office and by the Treasurer or
Assistant Treasurer. Declaration of quarterly corporate income
tax on a cumulative basis required manually, through Electronic
Filing Payment System (EFPS) or through electronic BIR forms.

Manual Filing –
Quarterly return 60days after the end of the quarter
First quarter Calendar year: May 15
Fiscal year: 15th day of the 5th month of FY

Final adjustment 15th day of the 4th month following the end of
(annual) return the taxable year (April 15 applying for corp.
using the calendar year)