Chapter 15-A

REGULAR INCOME TAXATION: Special Corporations

CORPORATE INCOME TAXATION

The regular income tax of corporations covers any income not subject to the final tax l or capital
gains tax for corporations.

What are corporations?

The term corporation shall include partnerships, no matter how created or organized, joint stock
companies, joint accounts, associations, or insurance companies.

It excludes:
GPP and a joint ventures or consortium 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.

GENERAL CLASSIFICATION AND TAXATION OF CORPORATIONS

Domestic Corporation----------------------------25% regular corporate tax on WORLD TAXABLE INCOME

Resident foreign Corporation-------------------25% regular corporate tax on PHILIPPINE TAXABLE INCOME
Non-resident foreign Corporation--------------25% final tax on PHILIPPINE GROSS INCOME

Create Law: from 30% to 25% effective July 1, 2020

Lower corporate tax for domestic corporations

Under CREATE law:

DOMESTIC CORPORATIONS are subject to 20% regular corporate income tax under:
o Asset test- total assets (excluding land on which their office, plant and
equipment are situated, DOES NOT EXCEED P100M
o Income test- taxable income DOES NOT EXCEED P5M

Entities with assets not exceeding P100M- (MSME) micro, small, and medium sized enterprises
The domestic corporation must be MSME by asset size.

Summary of Regular Corporate Tax Rates DC RFC

MSME corporate taxpayers
less than 5M taxable income 20% 25%
more than 5M taxable income 25% 25%
Large corporate taxpayers
less than 5M taxable income 25% 25%
more than 5M taxable income 25% 25%
Regular income tax of a domestic corporation

Net income from operations xxx

Other income not subject to final tax xxx
Taxable NI xxx
Multiply by: Corporate tax rate 20%
RCIT xxx

(For purposes of final tax; gross income on sales of services means revenue or receipts WITHOUT
deduction for cost of services)

SPECIAL CORPORATIONS

Special corporations - are corporations subject to special tax treatments or preferential tax rates lower than
the 25% RCIT

SUBCLASSIFICATIONS OF CORPORATE INCOME TAXPAYERS

1. Domestic Corporations

a. Exempt Domestic Corporations

• Exempt non-profit corporations under the NIRC
• Government agencies and instrumentalities
• Certain GOCC
• Cooperatives

b. Special Domestic Corporations

• Proprietary educational institutions and nonprofit hospitals
• FCDUs and Expanded FCDUs
• PEZA or BOU registered enterprises

c. Regular Domestic Corporations

2. Resident Foreign Corporations

a. Special Resident Foreign Corporation

• Expanded FCDUs
• Regional area headquarters and regional operating headquarters of multinational companies
• International carrier
• BOI or PESA registered enterprises

b. Regular resident foreign corporations

3. Non-Resident Foreign Corporations

a. Special non-resident foreign corporations

• Nonresident cinematographic film owner, lessor or distributor
 • Non-resident lessor of vessels, chartered by philippine nationals
• Non-resident owner or lessor of aircraft, machineries and other equipment

b. Regular non-resident foreign corporation

EXEMPT DOMESTIC CORPORATION-

- exempt from the regular corporate tax

Qualification of tax exemption

Income from related activitie- EXEMPT
Incomes from unrelated activities are subject to regular income tax
The Classification Rule
Since exemption applies only to income from related activities, the income of exempt corporations
are classified into income from related activities and income from unrelated activities. The income from
unrelated activities is subjected to regular income tax.

Exempt corporations under the NIRC

1) Labor, Agricultural, or horticultural organizations not organized principally for profit.

2) Mutual savings banks nothaving a capital stock represented by shares, and cooperative bank without capital stock
organized and operated for mutual purposes and without profit
3) 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 non-stock corporation organized by
employees providing for the payment of life, sickness, accident, or other benefits exclusively to the members of such
society, order, or association, or non-stock corporation or their dependents
4) Cemetery company owned and operated exclusively for the benefit of its members
5) Non-stock 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 inures to
the benefit of any member, organizer, officer or any specific person;
6) 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
7) Civic league or organization not organized for profit but operated exclusively for the promotion of social welfare
8) A non-stock and nonprofit educational institution
9) Government educational institution
10) 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
11) 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 following tests:
a. Organizational test - limit its purposes to the following: religious, charitable, scientific,
athletic or cultural purposes, or for the rehabilitation of veterans.
b. Operational test - The regular activities of the corporation or association must be
exclusively devoted to the accomplishment of the aforementioned purposes.
3. All net income or assets of the corporation or association must be devoted to its purposes and no part
of its net income or asset accrues to or benefits any member or specific person.
4. It must not be a branch of a foreign non-stock, non-profit corporation.

Exception to the classification rule: nonprofit educational institutions

-all revenues and assets used actually, directly and exclusively for educational purpos shall be
EXEMPT from taxes and duties.

(Income from unrelated operations but for education purposes is still exempt)

Government agencies and instrumentalities

Departments and bureaus are nonprofit because of their public service function- EXEMPT
Income fromtheir unrelated activities - subj to income tax

GOCC Government Owned and Controlled Operations- subject to regular corporate income tax except:
• GSIS
• SSS
• PHIC
• HDMF
• Local water districts

Classification Of Registered Cooperatives

a. Cooperatives with transact business only with members

(These are not subj to any taxes and fees under NIRC)
1. Income tax
2. Vat and percentage tax
3. Donor’s tax
4. Excise tax
5. Documentary Stamp Tax
6. Annual Registration Fee

Cooperatives with transact business with both members and non-members

1. Those with not more than 10M accumulated reserve and undivided net savings –Exempt
2. Those with more than 10M accumulated reserve and undivided net savings are subject to:
o Income tax on the full amount allocated for interest on capital
o VAT on transactions with non-members
o Percentage tax on sales of goods and services to non-members
o All other internal revenue unless otherwise stated by law

Under RA 9520.

1. Reserve Fund- at least 10% of net surplus but must not be less than 50% of the net surplus in the
firs 5 years of operation
2. Education and training fund- not more than 10% of net surplus
3. Community and development fund- not less than 3% of net surplus
4. Optional land and building fund- not to exceed 7% of net surplus
5. Interest,- must not be less than 30% of the net surplus after deducting statutory reserves
 6. Any excess to reserves fund

ALLOCATION OF COMMON EXOENSES OF EXEMPT CORPORATIONS

-common expenses of exempt corporation not directly traceable related and unrelated activities are
allocated based on GROSS INCOME

PRIVATE EDUCATIONAL INSTITUTION AND NON-PROFIT HOSPITAL

Subject to 10% tax on world taxable income subject to pre-dominance test

Due to pandemic, rate was lowered from 10% to 1% starting july 1, 2020- june 30. 2023

What is private or proprietary educational institution?

Any private school with an issued permit to operate from: DepEd, CHED, and TESDA

The pre-dominance test

If the gross income from unrelated trade, business or other activity exceeds 50%, the 25% regular
corporate income tax applies.

Summary of tax rules on educational institutions and hospitals

Owner Educational institutions Hospitals
Private 10% (1%) of taxable 25% (20%) of taxable
income income
Non-profit Exempt 10% (1%) of taxable
income
Government Exempt Exempt

FOREIGN/ EXPANDED CURRENCY DEPOSIT UNIT

Distinction of FCDU. OBU, and EFCDU

FCDUs
limited to short-term foreign currency transactions
division of domestic local bank
EFCDUs
allowed both short-term and longer term
may be a division of a domestic bank or a foreign abnk
OBU
division of a foreign bank

Tax on EFCDUs

Income of EFCDUs from foreign currency transactions:

a. Non-residents (offshore income) – EXEMPT from income tax
b. Residents
1. Banks under foreign currency deposit system
a. Offshore banking units
b. Local commercial banks and branches of foreign banks authorized by BSP to transact
business with FCDUs
 (Exempt from income tax)
2. Other Residents ( onshore income)
a. Interest income only- 10% final tax
b. Other income ( commissions and gains)- RCIT

Taxation of FCDUs
taxed the same way as EFCDUs

Tax On Income Of Depositors Under The EFCDs

Non-residents- income from transactions with depository banks under expanded system shall be EXEMPT
Residents- subject to 15% final tax
Tax on Regular Banking Units or RBUs
25% regular corporate income tax

Allocation of Cost and Expenses of Banks

Specific identification- expenses directly traceable to an income are allocated to that income
Pro-rata Allocation- Expenses not directly traceable to an income are allocated pro-rata on the ration of all
income

(non-forex income of FCDU is subject to regular tax)

(the expense allocable to the exempt income and income subject to FT shall not be deductible against gross income
subject to regular tax)

Expanded FCDUs
- EFCDUs of a resident foreign bank- subject to same tax rules applicable to FCDUs/EFCDUs of
domestic local banks, except that all of their offshore income is exempt
Taxation of OBUs
Under Create Law: OBUs are now treated as regular foreign corporation – 25% RCIT

REGIONAL HEADQUARTERS AND REGIONAL OPERATING HEADQUARTERS OF MULTINATIONAL

COMPANIES

Taxation of RHQs and ROHQs

RHQs – exempt from income tax. They do not earn income.
ROHQs- 10% of taxable income
Under Create Law- ROHQs will be subjected to the 25% RCIT effective January 1,2022

RHQ and ROHQ are exempt from all kinds of local taxes, fees charged by LGU, except real property tax on
land improvements and equipment.

INTERNATIONAL CARRIER

Income tax rates to international carriers

General rule: 2.5% of the Gross Philippine billings
Exception rule: preferential rate or exemption on the basis of reciprocity applicable tax treaty or reciprocity

Philippine carrier- a domestic carrier subject to 25 % world taxable income

Rule on revalidated, exchanged, or endorsed tickets
- Tickets revalidated, exchanged, or endorsed tickets form part of the Gross Philippine Billing of the
- carrying airline if the passenger boards a plane or a port or point in the Philippines

Exclusion in Gross Philippine Billings

1. Non-revenue passengers- those qualifying under free mileage programs of the air carriers
- They are not billed.
- Value of fares on non revenue passengers is not deducted from gross Philippine billings.
2. Refunded tickets

Gross Philippine billings

- Total receipts from outbound flights
- Gross Philippine Billings is the total billings less refunded tickets

Rule on transshipments or interrupted flights or voyages

- For a flight which originates from the Philippines, but transshipment takes place at any port outside the
Philippines on another airline, 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 Gross Philippine Billings.

Treatment Of Income Other Than Income From International Transport- RCIT

Off-line International carriers- RCIT

REPORTING OF SPECIAL CORPORATIONS ON TAXABLE INCOME

Special corporations, domestic or resident foreign, subject to tax on net income are mandatorily required to use
the itemized deduction. They are not allowed the optional standard deduction

SPECIAL NON RESIDENT FOREIGN CORPORATION

- Generally subject to 25% final tax

NON-RESIDENT CINEMATOGRAPHIC FILM OWNER, LESSOR OR DISTRIBUTOR

- Subject to 25% final tax on their gross income from all sources within the Philippines.

NON RESIDENT LESSOR OF VESSELS CHARTERED BY PHILIPPINE NATIONAL

- Subject to 4.5% final tax on gross rentals, lease or charter fees

NON-RESIDENT OWNER OR LESSOR OF AIRCRAFT, MACHINERIES, AND OTHER EQUIPMENT

- Subject to 7.5% final tax on rentals, charters and other fees
lease or charter of
Lessor other
cinema films vessels aircraft equipments
domestic 25% WTI 25% WTI 25%WTI 25%WTI
2.5% 2.5%
resident foreign 25% PTI GPB GPB 25% PTI
non-resident foreign 25% PGI 4.5% PGI 7.5% PGI 7.5% PGI

LEGEND:
WTI- world taxable income PGI- Philippine Gross incoeme
PTI- Philippine taxable income GPB- Gross philippine billings
Chapter 15-B
REGULAR INCOME TAXATION: Regular corporations

The Regular Corporate income tax

It applies to all corporations in general that are not subject to final tax and capital gains tax

Income tax rules on regular corporations

Domestic corporation 20% or 25% Regular corporate income tax subject to
the Minimum corporate income tax
Resident Corporation 25% Regular Corporate Income tax subject to the
Minimum corporate income tax

THE MINIMUM CORPORATE INCOME TAX (MCIT)

Corporations are subject to a minimum corporate income tax of 2% gross income.
During pandemic, it lowered to 1% starting July 1, 2020 to June 20, 2023

MCIT is payable when:

a. The corporation has zero or negative taxable income
b. MCIT is greater than the regular corporate income tax
Scope of the Minimum Corporate Income Tax

Applicable to every corporation taxable to the RCIT (25% or 20%) including non profit, exempt and
special corporations with respect to their taxable income subject to RCIT, but not to their income subject to
special tax rates.

MCIT Exempt Entities:

1. Real Estate Investment Trusts or TEITs under 9856
2. Domestic corporations which opted to be taxed under the 15% corporate income ax
3. Domestic or Resident corporations subject to special tax rates
a. Proprietary Educational institutions and nonprofit hospitals
b. FCDUs and EFCDUs
c. International Carriers
d. Firms subject to special income tax such as PEZA and BCDA locators
4. All nonresident foreign corporations

Timing of Imposition of MCIT

MCIT applies on the X+4th year of operations

MCIT Gross income under the NIRC

For corporation involved in: Gross income means
1. Sale of goods Gross Sales less sales returns, discounts, allowances
and cost of goods sold
2. Sale of service Gross Receipts less sales returns, allowances,
discounts and cost of services
MCIT Gross income under the Regulations
MCIT shall be computed as 1% of the total gross income subject to regular income tax.

EXEESS 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 years.

Excess MCIT carry over rules

o Excess MCIT can be used only as a tax credit against RCIT tax due in any of the 3 subsequent years.
Excess MCIT cannot be deducted against MCIT tax due.
o Credit for the Excess MCIT from prior years can be taken up to the full amount of RCIT tax due in the
next three years. This means that the income tax payable when credit is made can get below the
amount of MCIT for that year.
o When there are several Excess MCITS from prior years, tax crediting shall be made in a first in-first out
basis.
o Unused Excess MCIT at the end of the three-year period shall expire and can no longer be used.

SCHEDULES OF EFFECTIVITY OF NEW TAX RATES

Regular CIT MCIT
DOMESTIC CORPORATIONS Rate Effectivity Rate Effectivity
July 1,2020 to June
Domestic corporation, in general 25% July 1,2020 1% 30,2023
2% July 1,2023

MSME with less than P5M taxable July 1,2020 to June

20% July 1,2020 1% 30,2023
income
2% July 1,2023
Special CIT MCIT

Proprietary Educational institutions and July 1, 2020 to

1% June 20, 2023 Not Applicable
hospitals
10% July 1,,2023

Regular CIT MCIT

FOREIGN CORPORATIONS Rate Effectivity Rate Effectivity
July 1,2020 to June
resident Foreign Corporations 25% July 1,2020 1% 30,2023
2% July 1,2023

Create Law: April Create law: June

Offshore Banking Units 25% 11, 2023 1% 20, 2023
2% July 1,2023
January 1,2022 to
Regional Operating Headquarters 1% June 20, 2023
25% January 1,,2021
(ROHQ)
2% 1-Jul-23
Final Income Tax MCIT
Non Resident Foregin Corporations 25% January 1,,2021
Not Applicable
TRANSITIONAL TREATMENT FOR CORPORATE TAXES
RCIT, SCIT or MCIT, RR5-2021 employed the pro-rata treatment in implementing transition to the new
tax rates under the CREATE law.

QUARTERLY FILING OF INCOME TAX RETURN

Corporations shall file their quarterly income tax returns for the first three quarters of the year
due on or before 60days from the end of each quarter.

RELIEF FROM THE MINIMUN CORPORATE INCOME TAX

Upon submission of proof that corporation sustained substantial loisses on account of:
a. Prolonged labor dispute
b. Force majeure
c. Legitimate business reserves

BRANCH PROFIT REMITTANCE TAX

Any profit remitted by a branch to its head office abroad shall be subject to a tax of 15% based
on the total profits applied.
The 15% branch profit remittance tax is a final tax which is required to be withheld at source by
the branch of a foreign corporation.
The income should be an active income or an income from sources that are effectively
connected with the conduct of the taxpayer’s trade or business of the resident foreign corporation to be
subjected to the branch profit remittance tax.
Passive investment income and gains are excluded.

Scope of the Branch Profit Remittance tax

Remittance of all resident foreign corporations including ROHQ of multinational companies,
FCUDs or OBUs of foreign banks, and international carriers, except PEZA registered entities

Remittance from Prior Year earnings is still taxable

The branch profit remittance tax therefore is understood to apply to remittance of prior year earnings.

Indirect Remittance
Even without actual remittance of profits abroad, indirect remittance such as the following are still
subject to branch profit remittance tax:
1. Remittance of profits to a resident affiliate or to a Philippine regional operating headquarters
of the home office
2. Transfer of net profits to increase the branch assigned capital account (BIR Ruling No. 039-
2005).

Branch Capital Accounts

In accounting, the capital or equity of a branch is commonly referred to as the "home office"
account. This account has two components:

a. Assigned capital account - represents the net investment (capital) of the home office to the
branch

c. Accumulated profits (losses) - contains the net balance of unremitted, retained, or accumulated
profits or losses of the branch since inception of operation.
Change in assigned capital account
This account increases by additional investment of the home office to the branch and decreases by
capital withdrawal of the home office.
Change in accumulated profits account
This account increases by the amount of profits and decreases when the branch incurs a net
loss or when profit is remitted by the branch to home office.

Mere existence of income does not automatically mean there is branch profit remittance tax.
There must be an actual transfer to the assigned capital account or actual earmarking of profits or
remittance before branch profit remittance tax is imposable.

A differentiation on foreign profit remittance:

Remitting entity to its head office Tax Rate

Branch of resident foreign corporation 15% of branch remittance
Subsidiary of a foreign corporation through dividend 25% final tax, 15% if the tax sparing rule applies
declaration
Branch of domestic corporation Not subject to tax
Summary of regular corporate tax

Summary of Regular Corporate Tax Rates DC RFC

MSME corporate taxpayers
less than 5M taxable income 20% 25%
more than 5M taxable income 25% 25%
Large corporate taxpayers
less than 5M taxable income 25% 25%
more than 5M taxable income 25% 25%

Summary of tax rules on educational institutions and hospitals

Owner Educational institutions Hospitals

Private 10% (1%) of taxable 25% (20%) of taxable
income income
Non-profit Exempt 10% (1%) of taxable
income
Government Exempt Exempt

lease or charter of
Lessor other
cinema films vessels aircraft equipments
domestic 25% WTI 25% WTI 25%WTI 25%WTI
2.5% 2.5%
resident foreign 25% PTI GPB GPB 25% PTI
non-resident foreign 25% PGI 4.5% PGI 7.5% PGI 7.5% PGI

LEGEND:
WTI- world taxable income PGI- Philippine Gross incoeme
PTI- Philippine taxable income GPB- Gross philippine billings
Chapter 15B

Domestic corporation 20% or 25% Regular corporate income tax subject to

the Minimum corporate income tax
Resident Corporation 25% Regular Corporate Income tax subject to the
Minimum corporate income tax

SCHEDULES OF EFFECTIVITY OF NEW TAX RATES

Regular CIT MCIT
DOMESTIC CORPORATIONS Rate Effectivity Rate Effectivity
July 1,2020 to June
Domestic corporation, in general 25% July 1,2020 1% 30,2023
2% July 1,2023

MSME with less than P5M taxable July 1,2020 to June

20% July 1,2020 1% 30,2023
income
2% July 1,2023
Special CIT MCIT

Proprietary Educational institutions and July 1, 2020 to

1% June 20, 2023 Not Applicable
hospitals
10% July 1,,2023

Regular CIT MCIT

FOREIGN CORPORATIONS Rate Effectivity Rate Effectivity
July 1,2020 to June
resident Foreign Corporations 25% July 1,2020 1% 30,2023
2% July 1,2023

Create Law: April Create law: June

Offshore Banking Units 25% 11, 2023 1% 20, 2023
2% July 1,2023
January 1,2022 to
Regional Operating Headquarters 1% June 20, 2023
25% January 1,,2021
(ROHQ)
2% 1-Jul-23
Final Income Tax MCIT
Non Resident Foregin Corporations 25% January 1,,2021
Not Applicable

A differentiation on foreign profit remittance:

Remitting entity to its head office Tax Rate
Branch of resident foreign corporation 15% of branch remittance
Subsidiary of a foreign corporation through dividend 25% final tax, 15% if the tax sparing rule applies
declaration
Branch of domestic corporation Not subject to tax