7.

Taxation of resident foreign corporations

a) General rule A Resident Foreign Corporation is a corporation organized under the laws of a foreign country, which is engaged in trade or business in the Philippines. b) Tax Liability of a Corporation 1. Normal or Basic Corporate Income Tax 30% of net taxable income from sources within the Philippines. 2. Minimum Corporate Income Tax 2% of MCIT Gross Income from sources within the Philippines. The MCIT is imposed on RFCs under the same conditions as domestic corporations. 3. Optional Gross Income Tax The President, upon the recommendation of the Secretary of Finance, allows resident foreign corporations the option to be taxed at fifteen percent (15%) of gross income within the Philippines, under the same conditions as domestic corporations. c) With respect to their income from sources within the Philippines Situs of Taxable income Income Without Yes No No

Within a. Domestic Corporation Yes b. Resident Foreign Corporation Yes c. Nonresident foreign Corporation Yes

Tax Base Taxable Income Taxable Income Gross Income

Resident Foreign Corporation is subject to income within the Philippines: 1. Capital Gains Tax 2. Final tax 3. Normal Corporate Income Tax or Minimum Corporate Income Tax 4. Branch Profit Remttance d) Minimum corporate income tax A minimum corporate income tax of 2% of the gross income as of the end of the taxable year shall be imposed on both the domestic and the resident foreign corporation. The MCIT is imposed on RFCs under the same conditions as domestic corporations. e) Tax on certain income (i) Interest from deposits and yield or any other monetary benefit from Deposit substitutes, trust funds and similar arrangements and royalties Interest from any currency bank deposit and yield or any other monetary benefit from deposit substitutes and from trust funds and similar arrangements and

royalties derived from sources within the Philippines shall be subject to a final income tax at the rate of 20% (ii) Income derived under the expanded foreign currency deposit system The tax rate for Interest Income under the Expanded Foreign Currency Deposit (FCDS) is 7.5% (iii) Capital gain from sale of shares of stock not traded in the stock exchange Sale, barter or exchange of shares of stock outside the local stock exchange is subject to final tax at the following rates: Capital gain not exceeding P100,000 Capital gain on any amount in excess of P100,000 (iv) Intercorporate dividends If the dividend is received from a domestic corporation, and received by a resident foreign corporation, the dividend received is exempt from tax. Dividend received from a resident foreign corporation is subject to tax based on the scheduler tax rate. Foreign Special Corporations 1. International Carrier 2 % of gross Philippine Billings Gross Philippine Billings gross revenue derived from carriage of persons, excess baggage, cargo and mail originating from the Philippines in a continuous and uninterrupted flight, irrespective of place of sale or issue and place of payment of the ticket. 2. Regional Operating Headquarters 10% of Taxable Income 3. Regional Area Headquarters Exempted from Income tax 4. Offshore Banking Unit 10% of Gross Income 5. Branch Remittances 15% of remittances 5% 10%

8. Taxation of non-resident foreign corporations

a) General rule A foreign corporation not engaged in trade or business in the Philippines shall pay a tax equal to thirty-five percent (35%) of the gross income received during each taxable year from all sources within the Philippines. The principle on MCIT is not applicable. b) Tax on certain income (i) Interest on foreign loans

Interest on foreign loans is imposed with final withholding tax at the rate of 20% Interest under the expanded foreign currency deposit system (EFCDS) is tax Exempt (ii) Intercorporate dividends If the dividend is received from a domestic corporation, and received by a non resident foreign corporation. Generally, the dividend is subject to a tax rate of 30%. However, under the rule of reciprocity, it is subject to a final tax of 15%. The dividend earned from a non-resident foreign corporation shall be included in the computation of gross taxable income and subject to scheduler tax rate.

(iii) Capital gains from sale of shares of stock not traded in the stock exchange Sale, barter or exchange of shares of stock outside the local stock exchange is subject to final tax at the following rates: Capital gain not exceeding P100,000 Capital gain on any amount in excess of P100,000 5% 10%

Foreign Special Corporations 1. Nonresident Cinematographic Film Owner, Lessor or Distributor 25% of Gross Income from within the Philippines 2. Nonresident Owner or Lessor of Vessels Chartered by Philippine Nationals 4 %of Gross Income 3. Nonresident Owner or Lessor of Aircraft, Machineries and Other Equipment 7 % of Gross Rentals

References Aduana, Nick L. Income Taxation. Quezon City: 2009 UP Taxation Law 2011 Bar Reviewer Ampongan, Omar G. CPA Reviewer in Taxation. Philippines: 2011 Tax Code (Section 28)