MODULE 5: INCOME TAX ON CORPORATION Classification and Taxability of Income of a Corporation

LEARNING OBJECTIVES CLASSIFICATION OF INCOME APPLICABLE TAX

At the end if this module you are expected you are expected to: Business Income Basic Corporate Tax
1. Define and classify corporate taxpayers; 2% or 30%
2. Identify the classification and taxability of income of a corporation; Passive Income Final Tax
3. Discuss the concept of Normal Corporate Income Tax (NCIT) and Capital Gain
Minimum Corporate Income Tax (MCIT);
4. Compute income taxes using the Normal Corporate Income Tax
(NCIT); CORPORATION
TAXABLE NON-TAXABLE
5. Compute income taxes using Minimum Corporate Income Tax
Subject to Subject to 1. Non-profit labor, agricultural or
(MCIT);
BASIC TAX FINAL TAX horticultural organizations
6. Discuss the treatment of a Special Corporation;
1. Business 1. Gains from 2. Non-stock and non-profit mutual
7. Compute income tax due of Special Corporate Taxpayers Income dealings in savings and cooperative banks
2. Rent Income property 3. Non-stock organizations
Corporate Taxpayers 3. Gains from 2. Passive operating for the exclusive
- Is an artificial being created by operation of law, having the right of dealings in Income benefits of the members like
succession and the powers, attributes and properties expressly property providing payment of life,
authorized by law or incident to its existence. 4. Passive sickness, and accident benefits
Income not 4. Non-stock corporations operating
Classification of Corporation: subject to exclusively for religious,
final tax charitable, scientific, athletic, or
1. Domestic
cultural purposes or for the
- Organized under the existing laws of the Philippines
Gross Taxable rehabilitation of veterans,
- Taxable on income earned within and without the Income provided that their assets or
Philippines Less: Allowable income shall not accrue to the
Deductions benefit of any member
2. Foreign Net Taxable 5. Non-profit business leagues,
- Organized under the laws of a foreign country Income chambers of commerce or boards
- Taxable on income earned within the Philippines only of trade
- Classification of foreign corporation: 6. Non-profit civic league or
a. Resident foreign corporations organizations organized for the
promotion of social welfare
b. Non-resident foreign corporation
7. Non-stock and non-profit
educational institutions
8. Government educational
institutions
9. Non-profit organizations such as
a. Cooperative telephone
companies
 b. Fire insurance companies Net
Taxa
c. Mutual ditch or irrigation 30
NCIT ble
companies %
Resident Inco Resident
d. Mutual typhoon Foreign me Foreign
Within
association with purely Corporat Gross Corporat
ion Taxa ion
local operation whose
MCIT ble 2% Within
income is derived only Inco
from assessment, dues, me
and fees collected from Non- Gross Non-
members to meet the resident Taxa resident
30
Foreign Within NCIT ble Foreign
needs and expenses of Corporat Inco
%
Corporat
the organization. ion me ion
10. Non-profit organizations of
 Farmers
 Fruit growers
 Any other similar Normal Corporate Income Tax (NCIT)
association for the
- 30% tax imposed on corporations, either domestic or foreign,
purpose of marketing
that are classified as ordinary
the products of their
members
ILLUSTRATION 1
ABC Corporation has the following data for the first year of business operations
Philippines Australia
Gross Sales 8,000,000 7,000,000
CLASSIFICATION of CORPORATE TAXPAYERS Cost of Sales 6,200,000 1,300,000
ORDINARY CORPORATE TAXPAYERS SPECIAL CORPORATE TAXPAYERS
Allowable business expenses 1,700,000 1,040,000
Ta Ta
Tax Tax Tax Required: Compute the amount of corporate tax liability under each of the following
Taxabil Tax x Taxabil x
Liabilit Liabil Ba cases:
ity Base Rat ity Rat
y ity se 1. Domestic corporation using itemized deduction
e e
Net 2. Domestic corporation using OSD
Taxa 3. Resident foreign corporation using itemized deduction
30 4. Resident foreign corporation using OSD
NCIT ble
% 5. Non-resident foreign corporations
Inco
me Answer:
Domesti MCIT Domesti 1. Domestic corporation using itemized deduction
Within Within Special Tax Base
c c
and and and Special Tax
Corporat Whiche Corporat PHILIPPINES AUSTRALIA TOTAL
Without Without Rate
ion ver is ion Gross Sales P 8,000,000 7,000,000 15,000,000
HIGHE Less: Cost of Sales 6,200,000 1,300,000 7,500,000
R Gross Profit 1,800,000 5,700,000 7,500,000
betwee Plus: Other Income 600,000 400,000 1,000,000
n NCIT Total Income 2,400,000 6,100,000 8,500,000
& MCIT Less: Allowable Deductions 1,700,000 1,040,000 2,740,000
Net Taxable Income P 700,000 5,060,000 5,760,000
 Net Income Tax Rate Income Tax Due
NCIT 1,728,000 NCIT 5,500,000 30% 1,650,000
MCIT 150,000

Tax to be paid is the NCIT, since it is higher than the calculated MCIT 1,728,000 Gross Profit Tax Rate Income Tax Due
MCIT 7,500,000 2% 150,000
Domestic corporations are taxable for income earned both in the Philippines and
abroad and are subject to either normal corporate income tax (NCIT) of 30% of net
income or minimum corporate income tax (MCIT) of 2% of gross profit, whichever is 3. Resident foreign corporation using itemized deduction
higher.
PHILIPPINES
Net Income Tax Rate Income Tax Due Gross Sales P 8,000,000
NCIT 5,760,000 30% 1,728,000 Less: Cost of Sales 6,200,000
Gross Profit 1,800,000
Plus: Other Income 600,000
Gross Profit Tax Rate Income Tax Due Total Income 2,400,000
MCIT 7,500,000 2% 150,000 Less: Allowable Deductions 1,700,000
Net Taxable Income P 700,000

2. Domestic corporation using OSD NCIT 210,000

MCIT 36,000
PHILIPPINES AUSTRALIA TOTAL
Tax to be paid is the NCIT 210,000
Gross Sales P 8,000,000 7,000,000 15,000,000
Less: Cost of Sales 6,200,000 1,300,000 7,500,000
Gross Profit 1,800,000 5,700,000 7,500,000 Foreign corporations, whether resident or nonresident, are taxable for income
Plus: Other Income 600,000 400,000 1,000,000 earned in the Philippines only.
Total Income 2,400,000 6,100,000 8,500,000
Less: Allowable Deductions 720,000 2,280,000 3,000,000 Net Income Tax Rate Income Tax Due
Net Taxable Income P 1,680,000 3,820,000 5,500,000
NCIT 700,000 30% 210,000
NCIT 1,650,000
MCIT 150,000 Gross Profit Tax Rate Income Tax Due
MCIT 1,800,000 2% 36,000
Tax to be paid is the NCIT, since it is higher than the calculated MCIT 1,650,000

If a corporation opted to use optional standard deduction (OSD), such corporation 4. Resident foreign corporation using OSD
are no longer allowed to claim the line by line item of expenses it incurred. The
deductions to total income earned will be based on a fixed rate of 40% of gross PHILIPPINES
taxable income (gross profit, as the case maybe). Gross Sales P 8,000,000
Less: Cost of Sales 6,200,000
Philippines Australia Total Gross Profit 1,800,000
Gross Profit 1,800,000 5,700,000.00 7,500,000 Plus: Other Income 600,000
OSD Rate 40% 40% 40% Total Income 2,400,000
Allowable Deductions 720,000 2,280,000 3,000,000 Less: Allowable Deductions 720,000
Net Taxable Income P 1,680,000

NCIT 504,000
 MCIT 36,000 - However, the Secretary of Finance is authorized
Tax to be paid is the NCIT 504,000
to suspend the imposition of MCIT on any
corporation which suffers losses because of:
Philippines  Prolonged labor dispute
Gross Profit 1,800,000
OSD Rate 40%  Force majeure
Allowable Deductions 720,000 4. Applicable only to ordinary domestic and resident foreign
corporations
Net Income Tax Rate Income Tax Due
5. NOT applicable to the following domestic corporations since
NCIT 1,680,000 30% 504,000
these groups are not subject to MCIT:
Gross Profit Tax Rate Income Tax Due
a. Proprietary educational institutions
MCIT 1,800,000 2% 36,000 b. Non-profit hospital
c. Banking institutions under the expanded foreign
currency deposit system
5. Non-resident foreign corporations d. Corporations under a special income tax regime
such as PEZA law and the Bases Conversion
Less: Allowable Deductions 720,000
Gross Taxable Income P 1,680,000 Development Act
6. Tax liability is being calculated at 2% based on gross
Tax to be calculated is only the income
NCIT 504,000
7. Starting on the fourth year of operation, the corporate
Non-resident foreign corporations are not subject to 2% minimum corporate income income tax liability shall be based on
tax. Hence, such corporate taxpayer will only be liable to the Philippine government o NCIT of 30%
for the 30% normal corporate income tax. or whichever is HIGHER
o MCIT of 2%
Net Income Tax Rate Income Tax Due
8. Excess of MCIT over NCIT is creditable
NCIT 1,680,000 30% 504,000
- Any excess of the MCIT over NCIT shall be
carried forward and credited (deducted) against
the NCIT for the three succeeding taxable years,
Minimum Corporate Income Tax provided that, the NCIT should be higher than
- 2% tax on gross income imposed on corporations, either domestic MCIT in the year to which the excess MCIT is
or foreign, that are classified as ordinary forwarded.
- Guidelines in MCIT:
1. Applicable beginning on the fourth year of business
operation QUARTERLY AND ANNUAL CORPORATE TAX DUE
1. The computation and the payment of MCIT shall also be applied at the time of filing
2. Applicable even if a corporation has zero taxable income the quarterly corporate income tax
3. Applicable even if a corporation incurs a loss 2. If in the computations of the tax due for the taxable quarter, MCIT is higher than the
quarterly NCIT, the amount of tax to be paid at the time of filing the quarterly
corporate income tax return shall be MCIT
 3. In the payment of said quarterly MCIT, the following guidelines shall apply Net Loss Tax Rate Income Tax Due
Allowed to be credited?
NCIT - 30% -
excess MCIT from the previous taxable years No
excess MCIT from the previous quarters Yes
expanded withholding tax Yes Gross Income Tax Rate Income Tax Due
Quarterly NCIT payment Yes MCIT 17,000,000 2% 340,000

On 2016, the corporation suffered from a net loss, hence, the company is not subject
to the NCIT 30%. However, as provided in the tax code, a minimum corporate
ILLUSTRATION 2 income tax of 2% still applies even if a corporation incurs a loss.
The records of a domestic corporation which commenced operation in 2010 are as
follows: 2017
2015 2016 2017 Net Taxable
Gross Income P15,000,000 P17,000,000 P19,000,000 Income/ (Net Loss) 1,200,000
Allowable Deductions (14,500,000) (17,200,000) (17,800,000)
Required: Determine the income tax payable for 2015, 2016 and 2017 Net Income Tax Rate Income Tax Due
Answer: NCIT 1,200,000 30% 360,000

2015 2016 2017 Gross Income Tax Rate Income Tax Due
Gross Income P 15,000,000 P 17,000,000 P 19,000,000
MCIT 19,000,000 2% 380,000
Less: Allowable Deductions 14,500,000 17,200,000 17,800,000
Net Taxable Income P 500,000 P (200,000) P 1,200,000
On 2017, the corporation is liable for P380,000, since the MCIT is higher than the
NCIT 150,000 - 360,000 NCIT.
MCIT 300,000 340,000 380,000
ILLUSTRATION 3
Income Tax Payable P 300,000 P 340,000 P 380,000
XYZ Corporation’s normal corporate income tax, minimum corporate income tax,
income taxes withheld from 1st to 4th quarter including excess MCIT and excess
2015
withholding taxes from prior years are as follows:
Net Taxable
Income/ (Net Loss) 500,000 Quarter NCIT MCIT Taxes Excess Excess
withheld MCIT prior Withholdin
Net Income Tax Rate Income Tax Due during year g tax prior
the year year
NCIT 500,000 30% 150,000
1st P250,000 P210,000 P90,000 P110,000 P20,000
2nd 290,000 550,000 110,000
Gross Income Tax Rate Income Tax Due 3rd 550,000 250,000 130,000
MCIT 15,000,000 2% 300,000 4th 450,000 250,000 120,000
Required: Determine the following:
on 2015, the corporation is liable for P300,000, since the MCIT is higher than the 1. Income tax payable for the first quarter
NCIT. 2. Income tax payable for the second quarter
3. Income tax payable for the third quarter
2016 4. Annual income tax payable
Net Taxable
Income/ (Net Loss) (200,000.00)
Answer:
1. Income tax payable for the first quarter
 Excess MCIT-Prior Year -
Q1 Tax Paid-Previous Quarter (30,000) (30,000)
MCIT 210,000
NCIT 250,000 Income Tax Still Payable P 510,000

Income Tax Payable P 250,000 On the second quarter, the corporation is liable to pay the MCIT. On this case, such
excess MCIT that has been carried over from the previous quarter cannot be offset
NCIT 250,000 or deducted against MCIT itself. Remember that any excess of the MCIT shall be
Withholding tax-Prior Year (20,000) carried forward and credited (Deducted) against the NCIT only. Hence, the NCIY
Withholding tax-Current Year (90,000) should be higher than MCIT in the year or quarter to which the excess MCIT is
Excess MCIT-Prior Year (110,000) forwarded.
Tax Paid-Previous Quarter -

Income Tax Still Payable P 30,000 3. Income tax payable for the third quarter

the total tax liability of a corporation is either the NCIT or MCIT, whichever is higher. Q1 Q2 Q3 TOTAL
However, there are already payments made to the government that can be deducted MCIT 210,000 550,000 250,000 1,010,000
to the total amount of tax liability to arrive at the amount still payable to the NCIT 250,000 290,000 550,000 1,090,000
government. These amounts are called “tax credits”.
Income Tax Payable P 1,090,000
These tax credits are the:
 Withholding tax – a government requirement for the payer of an item of NCIT 1,090,000
income to withhold or deduct tax from the payment and pay that tax to the Withholding tax-Prior Year (20,000)
government. Withholding tax-Current Year 90,000 110,000 130,000 (330,000)
 Excess MCIT – this amount is the difference between the NCIT and MCIT. Excess MCIT-Prior Year (110,000)
This excess arises when during the taxable year, a corporation has become Tax Paid-Previous Quarter 30,000 510,000 (540,000)
liable for MCIT instead of NCIT. In this case, such excess is only deductible
to total income tax liability if the corporation is liable for NCIT. If the Income Tax Still Payable P 90,000
corporation is liable to pay an MCIT, then such excess could not be
deducted.
 Tax payments made on the previous quarters 4. Annual income tax payable

Q1 Q2 Q3 Q4 TOTAL
2. Income tax payable for the second quarter MCIT 210,000 550,000 250,000 250,000 1,260,000
NCIT 250,000 290,000 550,000 450,000 1,540,000
Q1 Q2 TOTAL
MCIT 210,000 550,000 760,000 Income Tax
P 1,540,000
NCIT 250,000 290,000 540,000 Payable

Income Tax Payable P 760,000 MCIT 1,540,000

Withholding tax-
(20,000)
MCIT 760,000 Prior Year
Withholding tax-Prior Year (20,000) Withholding tax-
90,000 110,000 130,000 120,000 (450,000)
Withholding tax-Current Year 90,000 110,000 (200,000) Current Year
 Excess MCIT-Prior Corporat Inco Corporat
(110,000) ion me ion
Year
Tax Paid-Previous
30,000 510,000 90,000 (630,000)
Quarter

Income Tax Still

P 330,000
Payable
Special Corporation

SPECIAL DOMESTIC CORPORATION

CLASSIFICATION APPLICABLE TAX
1. Proprietary educational
10% of net taxable income
institutions
CLASSIFICATION of CORPORATE TAXPAYERS 2. Non-profit hospitals 10% of net taxable income
ORDINARY CORPORATE TAXPAYERS SPECIAL CORPORATE TAXPAYERS 3. Government Service
Ta Ta
Tax Tax Tax Insurance System (GSIS)
Taxabil Tax x Taxabil x
Liabilit Liabil Ba 4. Social Security System (SSS)
ity Base Rat ity Rat
y ity se
e e 5. Philippine Health Insurance Tax Exempt
Net Corporation (PHIC)
Taxa
NCIT ble
30 6. Philippine Charity
% Sweepstakes Office (PCSO)
Inco
me SPECIAL RESIDENT FOREIGN CORPORATION
Domesti MCIT Domesti CLASSIFICATION APPLICABLE TAX
Within Within
c c
and and 1. International carrier 25% of the Philippine Gross
Corporat Whiche Corporat
Without Without
ion ver is ion Billings
HIGHE  Philippine Gross Billings
R
- Gross revenue from:
betwee
n NCIT Special Tax Base  Carriage
& MCIT and Special Tax  Persons
Net Rate  Excess
Taxa
30 baggage
NCIT ble
Resident Inco
%
Resident  Cargo
Foreign me Foreign  Mail
Within
Corporat Gross Corporat originating from the
ion Taxa ion Within Philippines under the
MCIT ble 2%
Inco
following conditions:
me o In a continuous
Non- Gross
30
Non- flight and
resident Within NCIT Taxa resident uninterrupted flight
%
Foreign ble Foreign
o In case of
transshipment:
 portion of the Case 2 The Air Europe, an international carrier doing business in the
Philippines, provided the following data during the current
cost of the
taxable year:
ticket Gross receipts for flight Manila to Paris P12,500,000
corresponding (tickets sold in the Philippines)
to the leg Gross receipts for flight Manila to
flown from the Switzerland 6,500,000
(tickets sold in Switzerland)
Philippines to Gross receipts for flight Paris to Manila 4,500,000
the point of (tickets sold in Paris)
transshipment Gross receipts for flight Rome to Manila 3,500,000
(tickets sold in the Philippines)
2. Offshore banking units 10% of Gross Income
Gross receipts for flight Manila to England 5,500,000
3. Branch remittances 15% of Remittances (tickets sold in the Philippines)
4. Regional area headquarters Tax Exempt The passengers were transshipped
5. Regional operating in Germany to England by another
10% Taxable Income airline.
headquarters Flight from Manila to Germany is
SPECIAL NON-RESIDENT FOREIGN CORPORATION nine hours and flight from Germany
CLASSIFICATION APPLICABLE TAX to England is three hours
Operating expenses in Philippines 2,500,000
1. Owner, Lessor, or Distributor
25% of the Gross Income Answer (CASE 2)
of Cinematographic film Gross receipts for
P 12,500,000
2. Lessor of machinery, flight Manila to Paris
7.5% of the Gross Income Gross receipts for
equipment, aircraft and others
flight Manila to 6,500,000
3. Lessor of vessels chartered
4.5% of the Gross Income Switzerland
by Philippines Nationals Gross receipts for
flight Manila to 4,125,000
ILLUSTRATION England
Case 1 The following data were reported for 20xx Total 23,125,000
business activities of Students University, Tax Rate 3%
a private educational institution: Income Tax
P 578,125
Tuition fees 525,000 Payable
School business related expenses 325,000
Answer (CASE 1) For an international carrier, only those
Tuition Fees P 525,000 gross revenue from carriage, persons,
School business excess baggage, cargo and mail
(325,000) originating from the Philippines are
related expenses
Net Taxable Income 200,000 subject to tax. Thus, only receipts for flight
Tax rate 10% from Manila will be included in the
Income Tax computation of tax.
P 20,000
Payable
And, on the case of transshipment from
Manila to Germany for flight of Manila to
A proprietary educational institution is
England, only the portion of the cost of the
classified as a special corporation, hence
ticket corresponding to the leg flown from
a special tax rate should be used.
the Philippines to the point of
transshipment will be considered on tax
A 10% tax on net taxable income is being
computation. Hence, calculated as follows:
imposed to this group of taxpayer.
 Gross receipts for flight Manila to
England
P5,500,000*(9hrs/12hrs) = P4,125,000

• End of Module 7 •

Links to Supplemental Readings

1. http://www.chanrobles.com/legal6nircmain.htm#.WW14qR
UrLIU
2. http://www.bir.gov.ph/index.php/tax-code.html#title1
3. http://www.bir.gov.ph/index.php/tax-code.html#title2

Links to Other Video Lectures

1. https://www.youtube.com/watch?v=MHlR_SiyVME
2. https://www.youtube.com/watch?v=LwesvsAwctY
3. https://www.youtube.com/watch?v=nEkSZtKuRjQ

References
National Internal Revenue Code of 1997 . (n.d.). Retrieved from
http://www.bir.gov.ph/index.php/tax-code.html.
Aduana, N. L. (2012). Simplified and procedural handbook on income
taxation (2nd Edition ed.). Quezon City: C & E Publishing Inc.
Garcia, E. R., & Tabag, E. D. (2014). Income Taxation (3rd Edition ed.).
Quezon City: Good Dreams Publishing
Valencia, E. G. (2016). Income Taxation (7th Edition ed.). Baguio City:
Valencia Educational Supply.