INCOME TAXATION CHAPTER 4

Income Taxes for Corporations

DEFINITION

Corporations - shall be defined to include

● Partnerships (no matter how created/organized)
● Joint stock companies
● Joint accounts
● Associations
● Insurance companies

However, Corporations do ​NOT​ include

● A General Professional Partnership formed for the sole purpose of exercising their common
profession
● A joint venture or consortium formed for the purpose of undertaking construction projects ​pursuant to
Presidential Decree (PD) No. 929 (dated 4 May 1976) to assist local contractors in achieving competitiveness with foreign contractors by pooling their resources in undertaking big
construction projects

● A joint venture or consortium for engaging in petroleum, coal, geothermal, and other energy
operations ​pursuant to an operating consortium agreement under a service contract with the government.

TYPES OF CORPORATIONS

Corporations for tax purposes are classified into three groups

1. DOMESTIC CORPORATION (DC)
○ Created or organized in the Philippines or under PH laws
2. RESIDENT FOREIGN CORPORATION (RFC)
○ Not domestic, engaged in business in the PH
3. NONRESIDENT FOREIGN CORPORATION (NRFC)
○ Not domestic, not engaged in business in the PH

GOVERNMENT OWNED AND CONTROLLED CORPORATIONS (GOCC)

● Refer to all corporations, agencies, and instrumentalities owned or controlled by the Gov’t
● Shall pay such tax rate of tax upon their taxable income as imposed upon other corporations of
similar business
● The following GOCC’s are tax exempt as provided by the law
○ GSIS
○ SSS
○ PHIC
○ PCSO
○ Local Water Districts under RA10026
TAX RATE AND BASIS IN COMPUTING THE TAX DUE
Domestic corporations - Taxable on income from ALL sources (within & without the Philippines)
Foreign corporations - Taxable on income derived from sources within the Philippines only

DC/RFC -
● Normal Corporate Income tax (NCIT)
○ Based on 30% net income for the taxable year
● Starting on the fourth year of operations, tax due becomes the higher value of either NCIT or the
Minimum Corporate Income Tax (MCIT)
○ 2% of Gross Income
● If qualified, may opt to be taxed at 15% Gross income instead (GIT)

NRFC -
● 30% of Gross Income from ALL sources in the PH EXCEPT income subject to Capital Gains Tax

TAX RATES DC RFC NRFC

NCIT 30% Net within/out 30% Net within only 30% Net within

*MCIT 2% Gross within/out 2% Gross within only Not applicable

GIT 15% Gross within/out 15% Gross within only Not applicable
*Starting on the ​fourth year of operations​ immediately following the taxable year such corporation
commenced its business, Tax due will be higher between NCIT or MCIT

MINIMUM CORPORATE INCOME TAX

Revenue Regulations provide that a MCIT of 2% of gross income at the end of the taxable year,
whether calendar or fiscal, is imposed upon DC’s and RFC’s beginning the fourth taxable year of
operations

Shall be imposed whenever a corporation has

● Zero taxable income
● Negative taxable income
● An amount of MCIT greater than NCIT due from such corporation
○ As such, MCIT is always computed and compared to NCIT

TREATMENT OF EXCESS MCIT (MCIT CARRYOVER)

Any excess of the MCIT over NCIT shall be carried forward and credited (deducted) against the
NCIT for the 3 succeeding taxable years, so long as NCIT exceeds MCIT in the year the excess shall be
credited
QUARTERLY AND ANNUAL CORPORATE TAX DUE
(CARRYOVER OF EXCESS MCIT)

Computation of excess MCIT shall apply to quarterly filing of corporate income tax

If computed quarterly NCIT is higher than quarterly MCIT,

● NCIT less
○ Excess MCIT from prior year
○ Excess withholding tax from prior year
○ Withheld taxes during the year
○ Quarterly corporate income tax payments

If computed quarterly MCIT is higher than quarterly NCIT,

● MCIT less
○ Excess withholding tax from prior year
○ Withheld taxes during the year
○ Quarterly corporate income tax payments

RELIEF FROM MCIT

The Secretary of Finance is authorized to suspend the imposition of MCIT on any corporation under the
following circumstances:
1. Losses on account of prolonged labor disbute
a. Losses arising from a strike staged by the employees that lasted for more than six months
within a taxable period and the strike led to temporary shutdown of operations
2. Force majeure
3. Legitimate business reverses

CORPORATIONS EXEMPT FROM MCIT

The following corporations are exempt from MCIT
1. Domestic Corporations
a. For profit, private, educational institutions
b. Non profit hospitals
c. Domestic corporations engaged in depository banks under the expanded foreign currency
deposit unit (FCDU) on their income from foreign currency transactions with local
commercial banks and other depository banks under the foreign currency deposit system.
2. Resident Foreign Corporations
a. International carries
b. Offshore Banking Units (OBU)
c. Regional Operating Headquarters (ROHQ)
 3. Corporations registered under the Philippine Economic Zone Authority or Bases Conversion
Development Authority
OPTIONAL CORPORATE INCOME TAX (15% GROSS INCOME TAX)

RFCs and DCs may opt to have ​15% gross income tax​ provided all the following conditions have been
met

1. A tax effort ration of 20% of GNP

2. A ration of 40% income tax collection of total tax revenxue
3. A vat effort of 4% GNP
4. A 0.9 ratio of the Consolidated Public Sector Financial Position to GNP
5. Ratio of cost of sales to gross sales/receipts from all sources does not exceed 55%

Opting for the gross income option shall be irrevocable for three consecutive taxable years during which
the corporation is qualified under the scheme

JOINT VENTURE OR CONSORTIUM

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. In general it is taxable as a
corporation.

A joint venture or consortium formed for the purpose of undertaking construction projects is not
considered a corporation provided
● The consortium was formed for the undertaking of a construction project
● It involves joining/pooling of resources by licensed local contracts
○ Licensed as general contractor by Philippine Contractors Accreditation Board of
the DTI
● The local contractors are engaged in construction business
● The joint venture itself must be duly licensed as such by the PCAB

If any of the aforementioned requirements is absent, the joint venture is considered as a taxable
corporation.

The members of a joint venture that is not taxable shall each be responsible in paying and reporting the
appropriate income taxes on their respective share to the consortiums profit.

FOREIGN CONTRACTORS IN CONSORTIUM

Joint Ventures involving foreign contractors may also be treated as non-taxable provided
● The member foreign contractor is covered by a special license as contractor by PCAB
● The construction project is certified by the appropriate Tendering Agency (government office)
that the project is a foreign financed/internationally funded project and that international bidding
 is allowed under the Bilateral Agreement entered into by and between the PH gov’t. And the
foreign / international financing institution​ pursuant to the implementing rules and regulations of Contractors License Law​.
Tax treatment of the co-venturers share in the joint venture profit
Joint Venture Corporate co-venturer Individual

Taxable Joint Venture Share in joint venture profit is
dividend income received by a
domestic corporation from a
domestic corporation. Hence it
is ​inter-corporate dividends
which is tax exempt.
Dividend income received by an
indiviudal taxpayer from a
domestic corporation. Thus it
shall be subject to ​10% final
withholding tax.

Non-taxable joint venture
The respective share in the joint
venture profit shall be included
in the ​corporations taxable
income subject to 30%
The shares in the venture shall
be subject to ​creditable
withholding tax.​ The same shall
be included in the individual’s
taxable income.

JOINT STOCK COMPANIES AND JOINT ACCOUNT COMPANIES

1. Joint stock companies

○ Group of individuals acting jointly, establish and operate business entrprise under
an artificial name, with an invested capital dividend into transferable shares, an
elected board of directors and other corporate characteristics but operating
without formal government authority.
2. Joint account companies
○ When an individual interests himself in the business of another by contributing
capital thereto, and sharing in the profits and losses in an agreed proportion.
○ They are NOT subject to any formality and may be privately contracted orally or
in writing.

The term associations includes all organizations which have the salient features of a corporation to be
taxable as a corporation.

ADDITIONAL INCOME TAXES

In addition to NCIT/MCIT/GIT, a corporation may be subjected to the following Final Tax

1. On passive income
2. On capital gains (Capital Gains Tax)
3. Improperly accumulated earnings tax (IAET)
 A. Certain Passive Income Derived from Philippines Sources subject to Final Tax
DC RFC NRFC

Interest in any currency 20% 20% 30%

bank deposit

Yield/monetary benefit 20% 20% 30%

from deposit substitute

Yield/monetary benefit 20% 20% 30%

from trust fund and
other similar
arrangements

Royalties 20% 20% 30%

Interest Income derived 7.5% 7.5% Tax Exempt

from depository bank
under expanded
Foreign Currency
Deposit System

Income Derived under ● Exempt ● Exempt ● Exempt

expanded foreign ● 10% ● 10% ● Exempt
currency deposit system
by ​DEPOSITORY
BANKS​.
● From foreign
currency
transactions with
nonresidents,
OBUs in the
Philippines, local
commercial banks
including foreign
banks.
● From foreign
currency loans
granted to
residents​ other
than OBUS in the
Philippines and
other depository
bank

OTHERS ● Tax Exempt ● Tax Exempt ● *15% OR 30%

● Inter-corporate ● - ● - ● 20%
dividends received
from domestic
corporations
● Interest on foreign
loans contracted on
or after August 1,
1996
B. Capital Gains Tax

Capital gain from ● 5% ● 5% ● 5%

shares of stocks not ● 105 ● 10% ● 10%
traded in the local stock
exchange.
● First P100,000
● Amounts in
excess of
P100,000
*Tax is due within 30
days form the date of
sale

Capital gains realized 6% N/A N/A

from sale or exchange
or disposition of Land/
Buildings (Selling price
or Fair Market Value,
whichever is higher is
the basis)
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