CHAPTER 12 INCOME TAX OF CORPORATION - REVIEW QUESTIONS
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For taxation purposes, what does a corporation comprise?
Distinguish a domestic corporation from a foreign corporation
Enumerate the corporations that are exempt from taxation
What are the different kinds of taxes that may be imposed on the income of a corporation?
Differentiate normal corporate income tax (NCIT) from minimum corporate income tax (MCIT).
State the tax rules regarding the excess of MCIT over NCIT
Can the related expanded withholding tax be allowed as tax credit from MCIT?
State the rules when gross income tax can be applied to corporate income
What are the different taxes applicable to capital gains earned by corporate within the
Philippines?
Enumerate the several passive incomes that could be earned within and their respective
applicable income tax rates
State the instances of inter-corporate dividends and their respective tax treatments
Enumerate those which are included as special domestic corporations and their respective
preferential income tax rates
State the applicable special income tax rates of special resident foreign corporations which are
exempt from normal corporate tax rate.
Enumerate the special nonresident foreign corporations which are exempt from normal
corporate tax rate and their applicable income tax rates.
What is the prescribed date for filing of the corporate income tax returns?
What are the allowable tax credits from tax due in the annual ITR of a domestic corporation
State the instances when accumulation of earnings is beyond the reasonable needs
What are the items required to be added to income reported in ITR in computing the tax base of
IAET
When should the payment of dividend be made in order that this will not be considered as
improper accumulation of earnings?
Concept of Taxation
A corporation includes joint stock companies, joint accounts, associations, insurance companies or
partnerships no matter how they were created or organized
A domestic corporation is one organized and existing under Philippine laws. In general, it includes
government owned and controlled corporations or instrumentalities engaged in a similar business
industry or activity. It is taxable on all income form sources within and outside the Philippines
A foreign corporation is a corporation organized and existing under the laws of foreign country
irrespective of the nationality of its stockholders. It is taxable only on income from sources within the
Philippines. It may either be a resident foreign corporation or Nonresident foreign corporation.
Resident foreign corporation refers to a foreign corporation that is engaged in business or trade in the
Philippines. Generally, it establishes a branch or an office for the purpose of doing business or trade.
A Nonresident foreign corporation does not engage in business or trade in the Philippines. Its earnings
are derived from fixed determinable income form sources within the Philippines that are enumerated in
the Tax Code as follows:
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Interest, dividends, royalties
Rents, salaries
Premiums, except reinsurance premiums
Annuities, emoluments or other fixes determinable annual periodic or casual gains, profits and
income; and
5. Capital gains, except capital gains from the sale of shares of stock not traded in the stock
exchange of a domestic corporation
Tax exempt corporations
1. Government educational institutions
2. Non-stock and nonprofit educational institutions
3. Association of farmers, fruit growers, and like whose primary function is to market the product
of their members
4. Association of farmers, fruit growers, and the like whose income is derived only from
assessments
5. Organizations with a purely local operation whose income is derived only from assessments,
dues, and fees collected from their members to meet operational expenses such as fire
insurance company, farmers’ or other mutual typhoon associations, mutual ditch or irrigation
company and mutual or cooperative telephone company.
6. Non-stock Corporation or association organized and operated exclusively for religious,
charitable, scientific, athletic or cultural purposes or for rehabilitation of veterans; provided that
no individual person owns its assets or no individual person receives benefit on its earnings
7. Non-stock/nonprofit mutual savings bank or non-stock/nonprofit cooperative bank
8. Nonprofit civic league or organization operating exclusively for the benefit of its members
9. Cemetery Company owned and operated exclusively for the benefit of its members.
10. Nonprofit business league, chamber of commerce or board of trade
11. Associations, orders, beneficiary societies operating for the exclusive benefits of their members
Income Taxes of Corporations
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Normal Corporate Income Tax (NCIT) - 30% based on net taxable income
Minimum Corporate Income Tax (MCIT) - 2% of gross income.
Optional Gross Income Tax (OCIT) - 15% based on the gross income.
Capital Gains Tax - on sale of real property or on sale of shares of stocks; and
Final Tax on passive income.
The Normal Corporate Income Tax
NCIT refers to the use of regular domestic income tax rates on the corporate taxable income which is
30%.
Minimum Corporate Income Tax (MCIT)
Pursuant to Section 27€ and Sec. 28 (A2) of the NIRC, domestic and resident foreign corporation shall be
taxed with 2% based on gross income and not on taxable income after operating expenses if they have:
1. Been in their fourth year of operation, and
2. Incurred a net loss or zero taxable income, or a normal income tax that is lesser than minimum
income tax.
Carry forward of the Excess MCIT
Any excess of the minimum corporate income tax (MCIT) over the normal tax shall be carried forward
and credited against the normal tax immediately for three (3) succeeding taxable years.
Expanded Withholding Tax as Deduction from MCIT
A taxpayer who is liable to MCIT and at the same time has an expanded withholding tax (EWT) may
deduct the EWT from MCIT and if there is still an excess EWT, he may request for tax credit or refund of
tax withheld.
Optional Gross Income Tax
The rules for the application of this tax are as follows:
1. “…The president , upon the recommendation of the Secretary, may allow a corporation the
option to be taxed at fifteen percent (15%) of gross income as defined therein, after the
following conditions have been satisfied:
a. A tax ratio if twenty percent (20%) of Gross National Prduct (GNP):
b. A ratio of forty percent (40%) of income tax collection to total tax revenues
c. A VAT tax effort of four percent (4%) of GNP; and
d. A 0.9 percent (0.9%) ratio of the Consolidated Public Sector Financial Position (CPSFP) to
GNP.”
2. 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 do not exceed fifty-five percent (55%)
3. The election of the gross income tax option by the corporation shall be irrevocable for three (3)
consecutive taxable year during which the corporation is qualified under the scheme
Capital Gains Tax
CAPITAL GAINS WITHIN
1. Capital gains on sale of
shares of stock not traded
in the local sotck
exchange. Net Capital
gains:
Not over P100,000
Excess of P100,000
2. Percentage tax on sale of
shares of stock traded in
the local stock exchange.
Based on selling price
3. Capital gains on sale or
exchange or disposition of
lands and or buildings
located in the Philippines
4. Net Capital gains on sales
or exchange or disposition
of lands and/or buildings
located outside the
Philippines
Domestic
CORPORATIONS
Resident Foreign
Nonresident Foreign
5%
10%
5%
10%
5%
10%
½ of 1%
½ of 1%
½ of 1%
6% Selling Price or
FMV, whichever is
higher
Not Applicable
Not Applicable
30%
Not Taxable
Not Taxable
Passive Income Tax
CORPORATIONS
Domestic and
Nonresident Foreign
Resident Foreign
PASSIVE INCOME WITHIN
1. Interest from depository bank under the expanded
foreign currency deposit system
2. Royalties, Yield or monetary substitutes from
deposits substitutes, trust funds and similar
arrangements
3. Interest on currency bank deposit
7.5%
Tax Exempt
20%
Normal Corporate
Income Tax
20%
Normal Corporate
Income Tax
Other Passive Income of Domestic and Resident Foreign Corporations
1. The Income of domestic banks under the Expanded Foreign Currency Deposit System is subject
to a final tax of 10%
a. Income derived by a depository bank from foreign currency transactions with local
commercial banks including branches of foreign banks, other depository banks and
residents.
b. Interest income from foreign currency loans granted to residents
2. Inter-corporate dividends
a. Received by a domestic corporation from another domestic corporation = tax exempt.
b. Received by a resident foreign corporation from a corporation liable to tax under
Philippine Tax Code = tax exempt
c. Received by resident foreign corporation from another foreign corporation = taxable at
30% on the portion which is earned in the Philippines which should be 50% or more of
the total income earnings for the past 3 years.
Other Passive Income of Nonresident Foreign Corporation
1. Interest on foreign loans contracted on or after August 1, 1986 is subject to 20% Final
Withholding Tax
2. Inter-corporate dividend received by a nonresident foreign corporation from a domestic
corporation is subject to 15% Final Withholding Tax provided that foreign law allows taxpayer
clause; otherwise, it will be subject to the normal domestic rate of 30%.
The tax rate of 15% shall be applicable if the foreign country does not impose any income tax on
dividends received by the nonresident foreign corporation from a domestic corporation from a
domestic corporation.
Special Corporations
SPECIAL DOMESTIC CORPORATIONS
CLASSIFICATIONS
APPLICABLE TAX
1. Proprietory educational institutions
(Except those whose gross income from
10% of net taxable income
unrelated source exceeds 50% of their
total gross income)
2. Nonprofit hospitals
10% of net taxable income
3. Government owned and controlled
Normal Corporate Income Tax
corporations
4. Exempt government organizations (GSIS,
Tax Exempt
SSS, PHIC, PCSO)
Special Resident Foreign Corporation
SPECIAL RESIDENT FOREIGN CORPORATIONS
CLASSIFICATIONS
APPLICABLE TAX for Income Within
1. International Carrier
2 ½% of the Philippine gross billings
2. Offshore banking units
10% of gross income
3. Branch remittances
15% of remittances
4. Regional area headquarters
Tax Exempt
5. Regional operating headquarters
10% of taxable income
Special Nonresident Foreign Corporations
SPECIAL NONRESIDENT FOREIGN CORPORATIONS
CLASSIFICATIONS
APPLICABLE TAX for Income Within
1. Cinematographic film owner,
2 ½% of the Philippine gross billings
Lessor/Distributor
2. Lessor of machinery, equipment, aircraft
10% of gross income
and others
3. Lessor of vessels chartered by Philippine
15% of remittances
Nationals
Annual Income Tax Return
The corporate annual income tax return contains the accumulated report of sales, cost of sales and
allowable deductions from the first quarter to the fourth quarter during the taxable year.
This annual income tax return is adjusted income tax return and is to be filed on or before April 15 of the
succeeding year.
Accumulated Profits Beyond Reasonable Needs
1. Investment of substantial earnings and profits of the corporation in unrelated business or in
stock or securities of unrelated business
2. Investment in bonds and other long-term securities; and
3. Accumulation of earnings in excess of 100% of paid-up capital, not otherwise intended for the
reasonable needs of the business as defined
Tax Base of Improperly Accumulated Earnings Tax (IAET)
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Income exempt from tax;
Income excluded from gross income;
Income subject to final tax; and
NOLCO deducted
The sum of the above amounts shall be reduced by the sum of:
1. income tax paid or payable for the taxable year;
2. dividends actually or constructively paid/issued from the applicable year’s taxable income; and
3. amount reserved for the reasonable needs of the business as defined, emanating from the
covered year’s taxable income.
Period of Payment of Dividend
The dividends must be declared and paid or issued not later than one year following the close of the
taxable year; otherwise, the IAET, if any, should be paid 15 days within thereafter.