WHAT IS A CORPORATION?

 ARE JURIDICAL PERSONS CREATED BY OPERATION OF LAW…

 FOR TAX PURPOSES, IT INCLUDES
 PARTNERSHIPS NO MATTER HOW CREATED OR ORGANIZED
 JOINT STOCK COMPANIES
 JOINT ACCOUNTS
 ASSOCIATIONS
 INSURANCE COMPANIES
 MUTUAL FUNDS
FOR TAX PURPOSES, IT DOES NOT INCLUDE
 GENERAL PROFESSIONAL PARTNERSHIPS
 JOINT VENTURE OR CONSORTIUM FOR THE PURPOSE UNDERTAKING CONSTRUCTION PROJECT
 JOINT VENTURE OF CONSORTIUM FOR ENGAGING IN PETROLEUM, COAL, GEOTHERMAL AND OTHER ENERGY OPERATIONS
PURSUANT TO AN AGREEMENT UNDER A SERVICE CONTRACT WITH THE GOVERNMENT.
WHAT ARE THE CLASSIFICATIONS OF CORPORATE TAXPAYERS?
 DOMESTIC CORPORATION
- ORGANIZED AND EXISTING UNDER PHILIPPINE LAWS
- INCLUDES GOVERNMENT OWNED AND CONTROLLED CORPORATION OR INSTRUMENTALITIES ENGAGED IN A SIMILAR
BUSINESS INDUSTRY OR ACTIVITIES (EXAMPLE OF GOCC, NAPOCOR, PAGCOR, LBP)
- TAXABLE INCOME WITHIN AND WITHOUT

 FOREIGN CORPORATION
- ORGANIZED AND EXISTING UNDER THE LAWS OF FOREIGN COUNTRY IRRESPECTIVE OF NATIONALITY OF ITS STOCKHOLDERS
- BOTH RFC/NRFC ARE TAXABLE FOR INCOME WITHIN ONLY BASED ON TAXABLE INCOME AND GROSS INCOME RESPECTIVELY
- WHAT ARE THE TWO TYPES OF FOREIGN CORPORATION?
 RESIDENT FOREIGN CORPORATION
- FOREIGN CORPORATION THAT IS ENGAGED IN TRADE OR BUSINESS IN THE PHILIPPINES
- NORMALLY MAINTAIN A BUSINESS OFFICE OR A BRANCH
 NON-RESIDENT FOREIGN CORPORATION
- DOES NOT ENGAGED IN BUSINESS OR TRADE IN THE PHILIPPINES BUT DERIVES INCOME FROM SOURCES WITHIN THE PHILIPPINES
- INTEREST, DIVIDENDS, ROYALTIES, RENT, CAPITAL GAINS
ARE THERE CORPORATIONS EXEMPTED FROM TAXATION?
 GOVERNMENT EDUCATIONAL INSTITUTIONS
 UP, PLM, PUP

 NON-STOCK, NON-PROFIT EDUCATIONAL INSTITUTIONS

 UST, DLSU, ADMU, ADU

 NON-PROFIT LABOR, AGRICULTURAL, HORTICULTURAL ORGANIZATIONS

 TUCP

 ASSOCIATIONS OF FARMERS, FRUIT GROWERS AND THE LIKE

 ORGANIZATION WITH PURELY LOCAL OPERATION WHOSE INCOME IS DERIVED ONLY FROM FEES COLLECTED FROM MEMBERS
 NON-STOCK CORPORATION OR ASSOCIATION ORGANIZED AND OPERATED EXCLUSIVELY FOR RELIGIOUS, CHARITABLE, SCIENTIFIC, ATHLETIC, OR CULTURAL
PURPOSES
 FOUNDATIONS, K OF C, CFC, UAAP, BALLET PHILIPPINES, RED CROSS

 NON-STOCK, NON-PROFIT MUTUAL SAVINGS BANK, COOPERATIVE BANK

 NON-PROFIT CIVIC LEAGUE OPERATING EXCLUSIVELY FOR THE PROMOTION OF ITS MEMBERS
 CEMETERY COMPANY OWNED AND OPERATED EXCLUSIVELY FOR THE BENEFITS OF ITS MEMBERS
 NON-PROFIT BUSINESS LEAGUE, CHAMBER OF COMMERCE
 ASSOCIATIONS, ORDERS, BENEFICIARY SOCIETIES

* CORPORATIONS NOT MENTIONED ABOVE ARE TAXABLE

WHAT ARE THE INCOME TAX IMPOSED ON CORPORATION?

 NORMAL CORPORATE INCOME TAX (NCIT)

 30% BASED ON NET INCOME
 MINIMUM CORPORATE INCOME TAX (MCIT)
 2% OF GROSS INCOME BEGINNING ON THE 4TH YEAR FROM START OF OPERATION WHICHEVER IS HIGHER WITH NCIT
 GROSS INCOME TAX (GIT)
 15% OF GROSS INCOME IF REQUIREMENTS ARE MET
 IMPROPERLY ACCUMULATED EARNINGS TAX (IAET)
 FINAL TAX ON CAPITAL GAINS
 SALE OF STOCKS NOT LISTED/TRADED THRU STOCK EXCHANGE (15%)
 SALE OF LAND AND/OR BUILDING HELD AS CAPITAL ASSET (6%)
 FINAL TAX ON PASSIVE INCOME
 15%, 20%, EXEMPT
WHAT ARE THE INCOME TAX IMPOSED ON CORPORATION?

FOR NRFC (FINAL TAX)

30% BASED ON GROSS INCOME FROM SOURCES WITHIN.
FINAL TAX ON CAPITAL GAINS
SALE OF SHARES OF STOCK NOT LISTED/TRADED THROUGH THE LOCAL
STOCK EXCHANGE, HELD AS CAPITAL ASSET (15%)
FINAL TAX ON PASSIVE INCOME
INTEREST ON FOREIGN LOANS (20%)
NORMAL CORPORATE INCOME TAX
NET SALES/REVENUES/RECEIPTS/FEES XX
LESS COST OF SALES XX
GROSS INCOME FROM OPERATION XX
ADD OTHER INCOME (NOT SUBJECT TO CGT/FT) XX
TOTAL GROSS INCOME XX
LESS ALLOWABLE DEDUCTIONS (ITEMIZED OR OSD) XX
NET TAXABLE INCOME XX
TAX RATE 30%
INCOME TAX XX

===
(BIR FORM 1702 LAYS OUT THE ABOVE FORMAT)
EXERCISES CAPITAL GAINS TAXES
P4,000,000 X 6% = P240,000
#1 P150,000 X 15% = 22,500 P262.500
FINAL TAX P50,000 X 20% = P10,000
NORMAL TAX
GROSS PROFIT FROM SALES P5,000,000
OTHER INCOME 1,000,000
TOTAL GROSS INCOME 6,000,000
EXPENSES 3,000,000
NET TAXABLE INCOME 3,000,000
TAX RATE 30%
NORMAL TAX (YEAR-END TAX) 900,000
TOTAL INCOME TAX EXPENSE FOR THE YEAR P1,172,000
 MINIMUM CORPORATE INCOME TAX
 MCIT IS 2% OF THE GROSS INCOME BEGINNING ON THE 4TH YEAR FROM COMMENCEMENT OF OPERATION,
INCURRED A NET LOSS OR ZERO TAXABLE INCOME OR A NORMAL INCOME TAX LOWER THAN THE MCIT
 ANY EXCESS MCIT IS CREDITABLE FOR THE NEXT THREE YEARS, ELSE FORFEITED.
 NET SALES – COST OF SALES (MERCHANDISING)
 NET SALES – COST OF GOODS MANUFACTURED AND SOLD (MFG.)
 GROSS RECEIPTS – COST OF SERVICES (DIRECT COST OF THE SERVICE: SALARIES, SUPPLIES, EXPENSES ON FACILITIES
USED IN PROVIDING THE SERVICE)
 OTHER INCOME NOT SUBJECT TO FINAL TAX AND CGT IS INCLUDED IN THE GROSS INCOME FOR MCIT
PER BIR FORM 1702 (MCIT FORMAT)

GROSS INCOME FROM OPERATION XX

ADD NON-OPERATING INCOME/OTHER INCOME NOT
SUBJECT TO FINAL/CAPITAL GAINS TAX XX
TOTAL GROSS INCOME SUBJECT TO MCIT XX
MCIT TAX RATE 2%
MINIMUM CORPORATE INCOME TAX XX
EXERCISE MCIT

#2 GROSS PROFIT FROM SALES P4,000,000

MCIT RATE 2%
MCIT P 80,000

NT GROSS PROFIT FROM SALES P4,000,000

ALLOWABLE DEDUCTION (EXPENSE) 3,000,000
NET TAXABLE INCOME 1,000,000
TAX RATE 30%
NCIT P 300,000

INCOME TAX FOR THE YEAR (HIGHER) P 300,000

COMPREHENSIVE PROBLEM

KLIN CORPORATION HAS BEEN OPERATING SINCE JANUARY 2014. DATA PERTINENT TO ITS OPERATION FOLLOWS:
2016 2017 2018
GROSS SALES 3,080,000 4,100,000 5,200,000
SALES RETURNS 80,000 100,000 200,000
COST OF SALES 1,500,000 2,000,000 2,500,000
OPERATING EXPENSE 1,450,000 1,900,000 2,100,000
COMPUTE THE TAX DUE AND PAYABLE FOR THE YEARS 2016-2018
 2016 2017 2018
SOLUTION
GROSS SALES 3,080,000 4,100,000 5,200,000
SALES RETURNS 80,000 100,000 200,000
NET SALES 3,000,000 4,000,000 5,000,000
COST OF SALES 1,500,000 2,000,000 2,500,000
GROSS INCOME 1,500,000 2,000,000 2,500,000
OPERATING EXPENSE 1,450,000 1,900,000 2,100,000
NET TAXABLE INCOME 50,O00 100,000 400,000
NORMAL TAX RATE 30% 30% 30%
NCIT 15,000 30,000 120,000
MCIT (2% X GROSS INCOME) 30,000 40,000 50,000

TAX DUE 15,000 40,000 120,000

EXCESS MCIT ( 10,000)
TAX STILL DUE AND PAYABLE 15,000 40,000 110,000
GROSS INCOME TAXATION
THE PRESIDENT UPON THE RECOMMENDATION OF THE SECRETARY OF FINANCE MAY ALLOW DOMESTIC AND
RESIDENT CORPORATION TO BE TAXED AT 15% BASED ON GROSS INCOME IF THE FOLLOWING CONDITIONS ARE
MET:
• A TAX RATIO OF 20% OF GNP
• A RATIO OF 40% OF INCOME TAX COLLECTION TO TOTAL TAX REVENUE
• A VAT TAX EFFORT OF 4% OF GNP
• A RATIO OF .9% OF CONSOLIDATED PUBLIC SECTOR FINANCIAL POSITION (CPSFP) TO GNP
THE OPTION TO BE TAXED BASED ON GROSS INCOME IS AVAILABLE ONLY TO THOSE CORPORATIONS WHOSE RATIO
OF THE COST OF SALES TO GROSS SALES OR RECEIPTS FROM ALL SOURCES DO NOT EXCEED 55%.
ONCE THE CORPORATION OPT FOR THE GIT, IT SHALL BE IRREVOCABLE FOR 3 YEARS.

FOR PURPOSES OF THE GIT, GROSS INCOME SHALL BE THE SAME AS THAT OF MCIT
EXAMPLE ASSUME THAT A COMPANY HAD THE FOLLOWING INFORMATION IN 2009:
GROSS SALES P3,700,000
COST OF SALES 2,000,000
OPERATING EXPENSES 1,000,000
NCIT MCIT GIT
GROSS SALES 3,700,000 3,700,000 3,700,.000
COST OF SALES (2,000,000) (2,000,000) (2,000,000)
GROSS INCOME 1,700,000 1,700,000 1 ,700,000
OPERATING EXPENSES 1,000,000
NET INCOME 800,000
TAX RATE 30% 2% 15%
INCOME TAX 240,000 34,000 255,000
SINCE THE RATIO OF COST OVER SALES IS 54% (2,000,000/3,700,000) THE ABOVE COMPANY
MAY OPT TO PAY GIT INSTEAD OF THE NCIT IF THERE IS DECLARATION BY THE PRESIDENT.
IMPROPERLY ACCUMULATED EARNINGS TAX
ON FAMILY OR CLOSELY HELD CORPORATION
• IN GENERAL, ACCUMULATION OF EARNINGS WOULD BE IMPROPER IF SUCH
ACCUMULATION WERE NOT WITHIN THE REASONABLE NEEDS OF THE BUSINESS
• THERE ARE 3 CASES WHEN IN THE ABSENCE OF PROOF TO THE CONTRARY, A
CORPORATION WOULD BE IMPROPERLY ACCUMULATING PROFITS
• WHEN THE CORPORATION IS A MERE HOLDING COMPANY
• WHEN THE CORPORATION IS AN INVESTMENT COMPANY
• WHEN THE CORPORATION PERMITS ITS PROFITS TO ACCUMULATE BEYOND THE
REASONABLE NEEDS OF THE BUSINESS
IMPROPERLY ACCUMULATED EARNINGS TAX
ON FAMILY OR CLOSELY HELD CORPORATION
• IN GENERAL, ACCUMULATION OF EARNINGS WOULD BE IMPROPER IF SUCH ACCUMULATION WERE NOT
WITHIN THE REASONABLE NEEDS OF THE BUSINESS
• THERE ARE 3 CASES WHEN IN THE ABSENCE OF PROOF TO THE CONTRARY, A CORPORATION WOULD BE
IMPROPERLY ACCUMULATING PROFITS
• WHEN THE CORPORATION IS A MERE HOLDING COMPANY
- A CORPORATION WITH PRACTICALLY NO ACTIVITIES EXCEPT
HOLDING PROPERTY AND COLLECTING THE INCOME THEREFROM
• WHEN THE CORPORATION IS AN INVESTMENT COMPANY
- INCLUDE ACTIVITIES SUCH AS BUYING AND SELLING STOCKS, SECURITIES, REAL ESTATE
AND OTHER INVESTMENT PROPERTIES
• WHEN THE CORPORATION PERMITS ITS PROFITS TO ACCUMULATE BEYOND THE REASONABLE
NEEDS OF THE BUSINESS
IMPROPERLY ACCUMULATED EARNINGS TAX
ON FAMILY OR CLOSELY HELD CORPORATION
• REASONABLE NEEDS OF BUSINESS (SUBJECT TO IMMEDIACY TEST)
• ALLOWANCE FOR THE INCREASE IN WORKING CAPITAL UP TO 100% OF THE PAID-UP CAPITAL
• ALLOWANCE FOR EXPANSION, IMPROVEMENT AND REPAIRS AS APPROVED BY BOD
• ALLOWANCE FOR RETIREMENT OF LONG-TERM DEBTS
• ALLOWANCE FOR THE ACQUISITION OF RELATED BUSINESS WHERE A SUBSIDIARY RELATIONSHIP IS ESTABLISHED
• ALLOWANCE FOR ANTICIPATED LOSSES OR REVERSES IN BUSINESS
• BEYOND REASONABLE NEEDS OF BUSINESS
• INVESTMENT OF SUBSTANTIAL EARNINGS IN UNRELATED BUSINESS OR IN STOCK OR SECURITIES OF UNRELATED
BUSINESS
• INVESTMENT IN BONDS AND OTHER LONG-TERM SECURITIES
• ACCUMULATION OF EARNINGS IN EXCESS OF 100% OF PAID-UP CAPITAL
IMPROPERLY ACCUMULATED EARNINGS TAX
ON FAMILY OR CLOSELY HELD CORPORATION

• PERIOD OF PAYMENT OF DIVIDEND

THE DIVIDEND MUST BE DECLARED AND PAID OR ISSUED NOT LATER THAN ONE YEAR FOLLOWING THE CLOSE OF THE
TAXABLE YEAR; OTHERWISE, THE IAET SHALL BE PAID WITHIN 15 DAYS THEREAFTER.
• CORPORATIONS EXEMPT FROM THE IAET
• PUBLICLY-OWNED CORPORATIONS
• BANKS AND OTHER NON-BANK FINANCIAL INTERMEDIARIES
• INSURANCE COMPANIES
MP TAXABLE INCOME
UTA +INCOME EXEMPT FROM TAX
TIO INCOME EXCLUDED FROM GROSS INCOME
N OF INCOME SUBJECT TO FINAL TAX
IAET NOLCO

- INCOME TAX PAID/PAYABLE DURING THE YEAR

DIVIDEND ACTUALLY/CONSTRUCTIVELY PAID
AMOUNT LEGALLY RESERVED FOR THE REASONABLE NEEDS OF THE BUSINESS EMANATING FROM
THE COVERED YEAR’S TAXABLE INCOME
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IAE
X 10%
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IAET