GORDON COLLEGE

OLONGAPO CITY
COLLEGE OF BUSINESS AND ACCOUNTANCY

Module – 3

Corporation and Other Terms Defined

Corporation Code of the Philippines

"Section 2. Corporation defined. - A corporation is an artificial being created by operation of law, having the
rights of succession and the powers, attributes and properties expressly authorized by law or incident to its
existence.

National Internal Revenue Code (NIRC), as amended

"Section 22(B). The term "corporation" shall include partnerships, no matter how created or organized, joint-
stock companies, joint accounts (cuentas en participation), association, or insurance companies, but does not
include general professional partnerships and joint venture 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."

1. Corporation
For income tax purpose, the term “Corporation” shall include partnership, no matter how
created or organized, joint stock companies, joint accounts (cuentas en participacion),
associations, or insurance companies.

The term “corporation” includes also mutual fund companies, regional operating headquarters of
Multinational Corporation and joint accounts.

The Term Corporation INCLUDED:
1. Partnership, no matter how created or
organized
2. Joint stock companies
3. Joint accounts (cuentas en partipacion)
4. Associations or insurance companies
The Term Corporation DOES NOT INCLUDED:
1. General professional partnership
2. Joint venture or consortium formed for the
purpose of undertaking construction projects
3. Joint venture or consortium for engaging in
petroleum, coal, geothermal and other energy
operations pursuant to an operating or
consortium agreement under a service
contract with the government

2. General Professional Partnership

A partnership formed by persons for the sole purpose of exercising their common profession, no
part of the net income of which is derived from engaging in any trade or business.

3. Joint Venture
Joint venture is a commercial undertaking by two or more persons, differing from a partnership
in that it relates to the disposition of a single lot of goods or the completion of a single project.

4. Joint Stock Companies

Joint stock companies - are constituted when a group of individuals, acting jointly, establish
and operate a business enterprise under an artificial name, with an invested capital divided into
transferable shares, an elected board of directors, and other corporate characteristics, but
operating without formal governmental authority.

5. Joint Accounts (cuentas en participacion)

Joint accounts are constituted when one interest himself in the business of another by
contributing capital thereto, and sharing in the profits or losses in the proportion agreed upon.
They are not subject to any formality and may be privately contracted orally or in writing.

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OLONGAPO CITY
COLLEGE OF BUSINESS AND ACCOUNTANCY

6. Associations
The term association includes all organizations which have substantially the salient features of a
corporation to be taxable as corporation.

Classification of Corporations

For income tax purposes, a corporation is further classified as follows:

1. Domestic corporation (DC) means a corporation created or organized in the Philippines or under its
laws. Securities and Exchange Commission (SEC) issues a Certificate of Registration to domestic
corporations and its legal personality commence upon the date of approval of its Articles of
Incorporation.
walang non resident corp kasi di nmn paaalis alis ang corp ng bansa
2. Resident foreign corporation (RFC) applies to a foreign corporation engaged in trade or business
within the Philippines. SEC normally issues a License to do Business in the Philippines to authorize
their engagement in trade or business in the Philippines. Examples of this are Philippine branch of
foreign corporation, regional operating headquarters of multinational companies, regional or area
headquarters of multinational companies, representative offices.
created under foreign law but allowed to engage in ph business
3. Non-resident foreign corporation (NRFC) applies to a foreign corporation not engaged in trade or
business within the Philippines. No need for License to do business as they do not normally have
presence in the Philippines but allowed to earn income in a way or another or deriving income from
the Philippines.

Tax Base and Tax Rat

Income
Classification of Corporation Within Without Tax Base x Tax Rate = Tax Due
a. Domestic Corporation / RC Yes Yes Taxable income x 25% / 20% = RCIT
SUBJECT TO MCIT
b. Resident foreign Corporation / RA Yes No Taxable income x 25% or 20% = RCIT
SUBJECT TO MCIT
c. Non-resident foreign Corporation / Yes No Gross income x 25% = Final tax
NRA-NETB
d. Taxable partnerships, joint Yes Yes Taxable income x 25% / 20% = RCIT
ventures, etc SUBJECT TO MCIT

The regular corporate income tax (RCIT) applies to all corporation in general. It covers all taxable income of
corporation that are not subject to final tax and capital gains tax. The regular corporate income tax / normal
income tax (NIT) is 25% / 20% of Taxable Income.

A domestic corporation is subject to tax on its worldwide income. On the other hand, a foreign corporation is
subject to tax only on income from Philippine source.
50 years legal life corp, 5 years b4 expiration renew
Optional Tax Schemes for Domestic Corporation (DC)

Under the NIRC, domestic corporation my opt to be taxed at either:

1. The regular corporate income tax subject to the minimum corporate income tax (MCIT); or
2. The Corporate Gross income tax

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OLONGAPO CITY
COLLEGE OF BUSINESS AND ACCOUNTANCY

Domestic corporations

1. The regular corporate income tax subject to the minimum corporate income tax (MCIT)

The following corporate income tax (CIT) rates apply to domestic corporations:

Income CIT rate (%)

In general, on net income from all sources. 25 / 20

Minimum corporate income tax (MCIT) on gross income, beginning in

the fourth taxable year following the year of commencement of business
1
operations. MCIT is imposed where the CIT at 25% / 20% is less than
1% MCIT on gross income.

Proprietary educational institutions and non-profit hospitals, on net

income if gross income from unrelated trade, business, and other 1
activities does not exceed 50% of the total gross income from all sources.

Non-stock, non-profit educational institutions (all assets and revenues

used actually, directly, and exclusively for educational purposes) and Exempt
other non-profit organizations.

Certain passive income from domestic sources is subject to final tax rather than ordinary income tax.

Taxability of income of corporations would depend on the nature of income and the type of corporation.
Income as to nature of income may be classified as follows:

Exempt income where the law, treaty or the regulations expressly provides that the same is exempt from
income. Examples of this would be inter-corporate dividend from a DC to another DC or RFC, income from a
time deposit of more than five (5) years. While not subject to income tax, the details of this income are
required to be declared in BIR Form No.1702

Final Income subject to final withholding taxes of varying rates corresponding tax required upon their
payment of such income. Examples of income subject to final taxes are interest income on Philippine bank
deposits, royalties, and others. The amount withheld constitutes the final payment of the tax and no
additional amount shall be due but the details of income are required to be declared in BIR Form No. 1702

Capital gains subject to capital gains tax of 6% based on fair market value of the real property sold, or
5%/10% of the net capital gains on sales of shares of a domestic corporation not thru the local stock
exchange. Again, details of income are required to be declared in BIR Form No. 1702.

Ordinary income or those incomes not falling under any of the above classifications that is subject to the
normal corporate income tax of 25% or 20% starting July 01, 2020 to June 30, 2023. (30% on January 01,

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OLONGAPO CITY
COLLEGE OF BUSINESS AND ACCOUNTANCY

2009 up to June 30, 2020 ,35% from Nov. 1, 2005 until Dec. 31, 2008).

Format of Computation (Annual Income Tax Return)

Sales/Revenues/Receipts/Fees Xxx
Less: Cost of sales/services (xxx)
Gross income from operations Xxx
Add: Non-operating and taxable other income Xxx
Total gross income Xxx
Less: Deductions (xxx)
Taxable income Xxx

Regular corporate income tax (taxable income x 25% / 20%) Xxx

Minimum corporate income tax (gross income x 1%) Xxx
Tax due (whichever is higher) Xxx
Less: Unexpired excess of prior year's MCIT over normal income tax Xxx
rate
Balance
Add: Tax due to the BIR on transactions under special rate Xxx
Aggregated income tax due Xxx
Less: Tax credits/payments
Prior year's excess credit other than MCIT xxx
Tax payments for the first three quarters xxx
Creditable tax withheld for the first three quarters xxx
Creditable tax withheld for the fourth quarter xxx
Foreign tax credits, if applicable xxx
Tax paid in return previously filed, if this is an amended return xxx (xxx)
Tax payable (overpayment) xxx/(xxx)

2. The Corporate Gross income tax

That the President, upon the recommendation of the Secretary of Finance, may, effective January 1, 2000,
allow corporations the option to be taxed at fifteen percent (15%) of gross income as defined herein, after the
following conditions have been satisfied:

“(1) A tax effort ratio of twenty percent (20%) of Gross National Product (GNP);
“(2) A ratio of forty percent (40%) of income tax collection to total tax revenues;
“(3) A VAT tax effort of four percent (4%) of GNP; and
“(4) A 0.9 percent (0.9%) ratio of the Consolidated Public Sector Financial Position (CPSFP) to GNP.

“The option to be taxed based on gross income shall be available only to firms whose ratio of cost of sales to
gross sales or receipts from all sources does not exceed fifty-five percent (55%).

“The election of the gross income tax option by the corporation shall be irrevocable for three (3) consecutive
taxable years during which the corporation is qualified under the scheme.

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OLONGAPO CITY
COLLEGE OF BUSINESS AND ACCOUNTANCY

“For purposes of this Section, the term ‘gross income’ derived from business shall be equivalent to gross sales
less sales returns, discounts and allowances and cost of goods sold. ‘Cost of goods sold’ shall include all
business expenses directly incurred to produce the merchandise to bring them to their present location and
use.

“For a trading or merchandising concern, ‘cost of goods sold’ shall include the invoice cost of the goods
sold, plus import duties, freight in transporting the goods to the place where the goods are actually sold,
including insurance while the goods are in transit.

“For a manufacturing concern, ‘cost of goods manufactured and sold’ shall include all costs of production of
finished goods, such as raw materials used, direct labor and manufacturing overhead, freight cost, insurance
premiums and other costs incurred to bring the raw materials to the factory or warehouse.

“In the case of taxpayers engaged in the sale of service, ‘gross income’ means gross receipts less sales
returns, allowances and discounts.

BIR FORM

BIR Form No. 1702- (Annual Income Tax Return for Corporations, Partnerships and Other Non-Individual
RT Taxpayers Subject Only to the REGULAR Income Tax Rate);
BIR Form No. 1702- (Annual Income Tax Return for Use Only by Corporations, Partnerships and Other
EX Non- Individual Taxpayers EXEMPT Under the Tax Code, as amended, [Sec. 30 and
those exempted in Sec. 27(C)] and Other Special Laws, with NO Other Taxable
Income); and
BIR Form No. 1702- (Annual Income Tax Return for Corporations, Partnerships and Other Non-Individuals
MX with Mixed Income Subject to Multiple Income Tax Rates or with Income Subject to
Special/Preferential Rate)

Illustration:

A Corporation recorded the following income and expenses during the year:

Philippines Abroad Total

Gross Income 1,800,000 1,200,000 3,000,000
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 750,000 450,000 1,200,000

Required: Compute the tax payable assuming the above corporation is a: 20%
a. Domestic corporation – 20%
b. Resident foreign corporation – 20%
c. Non-resident foreign corporation – 25%

The regular income tax of a domestic corporation shall be computed as follows:

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OLONGAPO CITY
COLLEGE OF BUSINESS AND ACCOUNTANCY

PH AB TOTAL
GI 1,800,000.00 1,200,000.00 3,000,000.00
BE 1,200,000.00 800,000.00 2,000,000.00
TI 600,000.00 400,000.00 1,000,000.00
Tax Rate 20%
Income Tax Payble 200,000.00

The regular income tax of a resident foreign corporation shall be computed as follows:
PH AB TOTAL
GI 1,800,000.00 - 1,800,000.00
BE 1,200,000.00 - 1,200,000.00
TI 600,000.00 - 600,000.00
Tax Rate 20%
Income Tax Payble 120,000.00

A non-resident foreign corporation is not subject to regular corporate income tax but to 25% final tax
based on gross income from all sources within.

PH AB TOTAL
GI 1,800,000.00 - 1,800,000.00
Tax Rate 25%
Income Tax Payble 450,000.00

Total Collection 1,800,000.00

Tax in PH 450,000.00
Net Collection 1,350,000.00
Resident payors of the 1,800,000 gross income shall withhold P450,000 and remit the same to the BIR.

Optional Standard Deductions for Corporations (OSD) (RR No. 16-2008 as amended by RR No. 2-2010)

Determination of the amount of OSD for: DOMESTIC corporation and RESIDENT FOREIGN corporation

a. In the case of corporate taxpayers, the OSD allowed shall be in amount not exceeding forty percent
(40%) of their gross income (For Individual 40% of Net Sales (GS – Allow-SR – SD)

b. “Gross income” shall mean the gross sales less sales returns, discount and allowances and cost of
goods sold.

The items of gross income under Section 32 (A) of the Tax Code, as amended, which are required to be
declared in the income tax return of the taxpayer for the taxable year are part of gross income against which

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OLONGAPO CITY
COLLEGE OF BUSINESS AND ACCOUNTANCY

the OSD may be deducted in arriving at taxable income. Passive incomes which have been subjected to a final
tax at source shall not form part of the gross income for purposes of computing the forty percent (40%)
optional standard deduction.

MINIMUM CORPORATE INCOME TAX (MCIT) – (Next Meeting)

The MCIT is applicable to every corporation taxable to the 25% / 20% regular corporate income tax including
non-profit, exempt and Special Corporation with respect to their taxable income subject to regular corporate
income tax, but not to their income subject to special tax rates.

“(1) Imposition of Tax.–A minimum corporate income tax of two percent (2%) of the gross income as of the
end of the taxable year, as defined herein, is hereby imposed on a corporation taxable under this Title,
beginning on the fourth taxable year immediately following the year in which such corporation commenced its
business operations, when the minimum income tax is greater than the tax computed under RCIT for the
taxable year.

“(2) Carry Forward of Excess Minimum Tax.–Any excess of the minimum corporate income tax over the
normal income tax as computed shall be carried forward and credited against the normal income tax for the
three (3) immediately succeeding taxable years.

“(3) Relief from the Minimum Corporate Income Tax Under Certain Conditions.–The Secretary of Finance
is hereby authorized to suspend the imposition of the minimum corporate income tax on any corporation
which suffers losses on account of prolonged labor dispute, or because of force majeure, or because of
legitimate business reverses.

“(4) Gross Income Defined.–For purposes of applying the minimum corporate income tax provided, the term
‘gross income’ shall mean gross sales less sales returns, discounts and allowances and cost of goods sold.
‘Cost of goods sold’ shall include all business expenses directly incurred to produce the merchandise to bring
them to their present location and use.

“For a trading or merchandising concern, ‘cost of goods sold’ shall include the invoice cost of the goods
sold, plus import duties, freight in transporting the goods to the place where the goods are actually sold
including insurance while the goods are in transit.

“For a manufacturing concern, ‘cost of goods manufactured and sold’ shall include all costs of production of

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OLONGAPO CITY
COLLEGE OF BUSINESS AND ACCOUNTANCY

finished goods, such as raw materials used, direct labor and manufacturing overhead, freight cost, insurance
premiums and other costs incurred to bring the raw materials to the factory or warehouse.

“In the case of taxpayers engaged in the sale of service, ‘gross income’ means gross receipts less sales
returns, allowances, discounts and cost of services. ‘Cost of services’ shall mean all direct costs and expenses
necessarily incurred to provide the services required by the customers and clients including (A) salaries and
employee benefits of personnel, consultants and specialists directly rendering the service and (B) cost of
facilities directly utilized in providing the service such as depreciation or rental of equipment used and cost of
supplies: Provided, however, That in the case of banks, ‘cost of services’ shall include interest expense.”

Exemptions from MCIT.

The MCIT is imposed on Corporations that are subject to regular corporate tax. Hence, it is not imposed on
the following:

 proprietary educational institutions and nonprofit hospitals as they are subject to ten percent (10%)
on their taxable income;
 the Foreign Currency Deposit Units (FCDU) as their income from foreign currency transactions with
local commercial banks and foreign banks and their interest income from foreign currency loans
granted to residents of the Philippines are subject to final tax at ten percent (10%) of such income; and
 firms that are taxed under a special income tax regime such as those in accordance with the
Philippine Economic Zone Authority Law and the Bases Conversion Development Act.
 "international carrier" as they are subject to a tax of two and one-half percent (2 ½%) of their Gross
Philippine Billings
 Offshore Banking Units (OBUs) as their income from foreign currency transactions with local
commercial bank and foreign banks and interest income from currency loans granted to residents of
the Philippines are subject to a final income tax of ten percent (10%) of gross income
 Regional operating headquarters since they are subject to a ten- percent (10%) of their taxable income

The Minimum Corporate Income Tax is not an additional tax to normal corporate income tax. It is a tax
imposed in line of normal corporate income tax cases where the normal income tax is questionably low. The
computed minimum corporate income tax is being compared to the normal income tax, whichever is the
higher amount less any excess of MCIT over RCIT / NCIT serves as the tax payable of the corporation for the
period.

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OLONGAPO CITY
COLLEGE OF BUSINESS AND ACCOUNTANCY

Higher of NCIT or MCIT P 96,000 P 51,000 P 54,000 P 19,400 P 72,000

Excess of MCIT over NCIT *(5,900)

Income Tax Due/Payable P 96,000 P 51,000 P 54,000 P 19,400 P 66,100

Any excess of MCIT over NCIT/RCIT can be carried forward as deduction to the normal income tax for three
(3) immediately succeeding taxable years.

Any excess MCIT shall be recorded in the books of the corporation as “Deferred Charges-MCIT” under the
Asset section. The journal entry in the above example would be as follows:

Year 4

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OLONGAPO CITY
COLLEGE OF BUSINESS AND ACCOUNTANCY

Income Tax Expense P 13,500

Deferred Charges-MCIT 5,900
Income Tax Payable P 19,400

Year 5

Income Tax Expense P 72,000

Deferred Charges-MCIT 5,900
Income Tax Payable 66,100

Any amount of excess MCIT which has not or cannot be credited against normal income tax within the 3-year
allowed period shall be closed to Retained Earnings and can no longer be used as a charge against normal
income tax. The journal entry would be as follows:

Retained Earnings XX
Deferred Charges-MCIT XX

The MCIT is paid on an annual and quarterly basis, same with the manner of paying the normal corporate
income tax.

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