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UNIT III – INCOME TAX
Lesson 2 –CORPORATION
Republic Act No. 11534 – “CREATE”
Revenue Regulations No. 5 – 2021
April 8, 2021
“Implementing the New Income tax Rates on the Regular Income of Corporations, on
Certain Passive Incomes, Including Additional Allowable Deductions from Gross Income of
Persons Engaged in Business or Practice of Profession Pursuant to Republic Act (RA) No.
11534 or the “Corporate Recovery and Tax Incentives for Enterprises Act” (CREATE), Which
Further Amended the National Internal Revenue Code (NIRC) of 1997. “
Definition of terms:
A. Corporation: includes - hence taxable:
 one-person corporations,
 partnership, no matter how created or organized
 joint stock companies
 joint accounts (cuentas en participacion
 associations or insurance companies
does not include - hence not taxable:
1. general professional partnerships
2. joint venture or consortium formed for the purpose of:
a) undertaking construction projects or
b) engaging in petroleum, coal, geothermal and other energy operations pursuant to an operating or
consortium agreement under a service contract with the Government.

One-person corporation - is a corporation with a single stockholder; Provided, that only a natural
person, trust or an estate may form a one-person corporation.

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.

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.

Joint account (cuentas en participation) – are constituted when one interest himself in the business
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.

Associations – includes all organizations which have substantially the salient features of a corporation
to be taxable as a “corporation”.
B. General Professional partnership are partnerships formed by persons for the sole purpose of exercising
their common profession, no part of the income of which is derived from engaging in any trade or business.
C. Proprietary Educational Institutions - refer to any private educational institution, which are non-profit for the
purpose of this Regulations (RR 5 -2021), maintained and administered by private individuals or groups,
with an issued permit to operate from the Department of Education (DepEd) or the CHED or the TESDA,
as the case may be, under existing laws and regulations.
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D. Proprietary Hospitals – refer to any private hospitals, which are non-profit for the purpose of these
Regulations, maintained and administered by private individuals or groups.
E. Non-Profit - as used in the definition of Proprietary Educational Institution and Proprietary Hospitals, means
that no net income or assets accrues to or benefits any member or specific person, with all the net
income or assets devoted to the institution’s purposes and all its activities conducted not for profit.
F. Government Owned and Controlled Corporations (GOCC’s), Agencies and Instrumentalities - all
corporations, agencies or instrumentalities owned or controlled by the Government.
G. Resident Foreign Corporation - a corporation organized, authorized or existing under the laws of any foreign
country, engaged in trade or business within the Philippines.
H. Non-Resident Foreign Corporation –a corporation organized, authorized or existing under the laws of any
foreign country, not engaged in trade or business within the Philippines.
I. Reorganization – shall mean any of the following instances:
a. A corporation which a party to a merger or consolidation, exchanges property solely for stock in a
corporation, which is a party to the merger or consolidation.
b. The acquisition by one (1) corporation in exchange solely for all or part of its voting stock, or in exchange
solely for all or part of the voting stock of a corporation which is in control of the acquiring corporation, of
stock of another corporation if, immediately after the acquisition , the acquiring corporation has control of
such other corporation, whether or not such acquiring corporation had control immediately before the
acquisition; or
c.
The acquisition by one (l) corporation, in exchange solely for all or a palt of its voting stock or in exchange
solely for all or part of the voting stock of a corporation which is in control of the acquiring corporation, of
substantially all of the properties of another corporation. In determining whether the exchange is solely for
stock, the assumption by the acquiring corporation of a liability of the others shall be disregarded; or
d. A recapitalization which shall mean an arrangement whereby the stock and bonds of a corporation are
readjusted as to amount, income, or priority or an agreement of all stockholders and creditors to change
and increase or decrease the capitalization or debts of the corporation or both; or
e. A reincorporation, which shall mean the formation of the same corporate business with the same assets
and the same stockholders surviving under a new charter.
J. Control - shall mean ownership of stocks in a corporation after the transfer of property possessing at least fiftyone percent (5 1 0/0) of the total voting power of all classes of stocks entitled to vote: Provided, that the
collective and not the individual ownership of all classes of stocks entitled to vote of the transferor or
transferors shall be used in determining the presence of control.
K. Unrelated Trade, Business or Other Activity of Proprietary Educational Institutions and Hospitals - means
any trade, business, or other activity, the conduct of which is not substantially related to the exercise or
performance by such educational institution or hospital of its primary purpose or function.
L. Foreign-sourced dividends — are dividends received from non-resident foreign corporations.
M. Related party/ies — are those which are identified under Section 36 (B) of the Tax Code, as amended.
(Source: (RR 5-2021 – CREATE)
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Foreign Currency Deposit Unit (FCDU) and Expanded FCDU (EFCDU)– refer to a unit or department of a
local bank and are limited to short term foreign currency denominated transactions
Expanded Foreign Currency Deposit Unit - a branch or division of domestic bank or a resident foreign bank
authorized by BSP to engage in foreign currency deposit denominated transaction pursuant to RA6426
amended and allowed to both short term and long term foreign currency denominated transactions.
Offshore Banking Unit (OBU) – is a division of a foreign bank which authorized to conduct foreign currency
denominated transactions.
Accredited Printers are duly constituted agents of the BIR in the printing of principal and supplementary receipts/
invoices and included in the List of Accredited Printers of Principal and Supplementary Receipts/Invoices
published in the BIR website.
Accredited Tax Agents (ATAs) are also known as accredited tax practitioners, who are engage in tax practice
included in the List of Accredited Tax Practitioners are published in the BIR website. The designation of ATA
by the taxpayer may at any time be cancelled or revoked upon execution of “Removal of Tax Agent” within the
online eBIR Forms System and the aforementioned action shall be completed upon the submission of a duly
notarized Notice of Termination to the taxpayer’s registered RDO.
Offline – is a technical term generally used when the user’s workstation is not connected to the internet.
Online is the most common technical term used wherein the user connects his workstation to the internet to access
various information through the world wide web.
No Payment Returns refers to the tax return that is not accompanied by any payment where the same is filed with
any authorized BIR receiving office (e.g. breakeven, no transaction, refundable or second instalment tax return).
Classification of corporation:
a) Domestic corporation - created or organized in the Philippines or under its laws.
b) Foreign corporation - a corporation which is not domestic.
1. Resident foreign corporation - a foreign corporation engaged in trade or business in the Philippines.
2. Non-resident foreign corporation - a foreign corporation not engaged in trade or business in the
Philippines.
Sources of Income and Tax Base
Corporation
Sources of Income
Tax Base
a. Domestic corporation (DC)
Within & without Phil.
Net income
b. Resident foreign corporation (RFC)
Within the Phil. only
Net income
c. Non-resident foreign corporation (NRFC)
Within the Phil. only
Gross income
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Corporate Income Tax rates: (source: RR 5-2021)
SECTION 3. CORPORATE INCOME TAX RATES. The matrix below shows the new income tax rates
applicable to the regular taxable income of corporations:
Type of Corporation
The higher between the "Regular" or
"Minimum Corporate Income Tax (MCIT "
rates
Regular
MCIT
Effectivity
Effectivity
Rate
Rate
Domestic Corporation:
Domestic corporations, in general
For corporations with net taxable
income not exceeding Five Million
Pesos
AND total assets
not exceeding One Hundred Million (P
excluding the land on
which the particular business entity's
office, plant and equipment are
situated
Proprietary Educational Institutions and
Hospitals
25%
20%
July l , 2020
1%
July l , 2020 to
June 30, 2023
2%
July 1, 2023
1%
July l , 2020 to
June 30, 2023
2%
July l , 2023
July l , 2020
1%
July l , 2020 to
June 30, 2023
10%
July l , 2023
Not Applicable
Foreign Corporation [on taxable income (e.g., net or gross income, as applicable
derived from all sources within the Philippines .
Resident Foreign Corporation
Offshore Banking Unit (OBUs) (Note:
OBUs shall now be taxed as resident
foreign corporation upon effectivity of
the CREATE)
Regional Operating Headquarters
(ROHQ)
Non-Resident Foreign Corporation
25%
25%
25%
25%
July l , 2020
Upon the
effectivity of the
CREATE
1%
July l , 2020 to
June 30, 2023
2%
July l , 2023
1%
Upon the effectivity
of the CREATE
until June 30, 2023
2%
July 1, 2023
1%
January l , 2022 to
June 30, 2023
2%
July l , 2023
January l , 2022
January l , 2021
Not applicable
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The MCIT is imposed beginning on the fourth taxable year immediately following the year in which such
corporation commenced its business operations, when it is greater than the regular income tax computed for the
taxable year.
Domestic corporations shall account separately in their Annual Financial Statements (AFS) the cost of the land on
which the particular business entity's office, plant and equipment are situated, and shall not lump the same in one
account title nor consolidate its cost with other fixed asset accounts.
In the case of proprietary educational institutions or hospitals, if the gross income from "unrelated trade, business
or other activity" (as defined under Section 2 hereof) exceeds fifty percent (50%) of the total gross income derived
by such educational institutions or hospitals from all sources, the tax prescribed for domestic corporations shall be
imposed on the entire taxable income.
GOCCs, agencies and instrumentalities, except the Government Service Insurance System (GSIS), the Social
Security System (SSS), the Ilomc Development Mutual Fund (IIDMF), the Philippine Health Insurance Corporation
(PHIC), and the local water districts, shall pay such rate of tax upon their taxable income as are imposed upon
corporations or associations engaged in a similar business, industry, or activity.
ILLUSTRATIONS: (Source: RR 5 – 2021)
A. DOMESTIC CORPORATION
A. I LMB Corporation, a retailer, has a gross sales of P 1,400,000,000.00 with a cost of sales of
and allowable deductions of 150,000,000.00 for the calendar year 2021. Its total assets of PI 80,000,000.00
as of December 31, 2021 per Audited Financial Statements includes the land costing P 50,000,000.00 and
the building of P25,000,000.00 in which the business entity is situated, with an aggregate amount of
P75,000,000.00 as Fixed Assets. Assuming CY 2021 is the 5 th year of operation of LMB Corporation,
computation of income tax (Income Tax — whichever is higher between Regular Rate and MCIT) shall be
as follows:
REGULAR RATE:
Gross Sales
Less: Cost of Sales
Gross Income
Less: Allowable Deductions
Net Taxable Income
REGULAR RATE
TAX DUE
MINIMUM CORPORATE INCOME TAX (MCIT)
Gross Income
MINIMUM CORPORATE INCOME TAX (MCIT) RATE
TAX DUE
* INCOME TAX DUE shall be: (whichever is higher)
1%
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A.2. JPL Corporation, a manufacturer, has a gross sales of P 190,000,000 for CY 2021, its 2 nd year of operation.
Its total assets amounted to P 50,000,000, net of the value of the land of P 6,000,000 where its manufacturing
plant and business operations are situated. Its cost of sales and allowable operating expenses amounted to
P 100,000,000 and P 50,000,000, respectively. Compute for its income tax due for CY 2021.
INCOME TAX DUE SHALL BE THE REGULAR INCOME TAX RATE OF 25%
Gross Sales
Less: Cost of Sales
Gross Income
Less: Allowable Deductions
Net Taxable Income
REGULAR RATE
TAX DUE
25%
Although the total assets, net of the value of the land, is less than P 100,000,000.00, its net taxable
income is above P 5,000,000.00. Hence, the income tax rate is 25%. Not subject to MCIT since it is in
its 2nd year of operation.
A.3. Given the same facts under Illustration A.2, except for the allowable operating expenses, which amounted to
P 85,000,000.00. The net taxable income will be P 5,000,000.00. With this, the income tax rate shall be 20%,
and the income tax due shall be P 1,000,000.00.
INCOME TAX DUE SHALL BE THE REGULAR INCOME TAX RATE OF 20%
Gross Sales
Less: Cost of Sales
Gross Income
Less: Allowable Deductions
Net Taxable Income
REGULAR RATE
TAX DUE
85,000,000.00
5,000,000.00
20%
1,000,000.00
Note: 1. MCIT shall not be applied because it is only the second year of operation.
2. For corporations with net taxable income not exceeding Five Million Pesos (
AND total
assets not exceeding One Hundred Million (P
excluding the land on which the
particular business entity's office, plant and equipment are situated - tax rate is 20%
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B. PROPRIETARY EDUCATIONAL INSTITUTIONS
Rosa Private School of Values or RPSV is a non-profit private educational institution with an issued permit to operate
from the Commission on Higher Education (CHED). It is maintained and administered by MCGJ Inc., a private domestic
corporation registered under the Securities and Exchange Commission.
RPSV uses a fiscal year accounting ending July 31 st of each year. On July 31, 2021, it recorded total
gross receipts amounting to P 18,000,000.00, of which P 10,000,000.00 came from education-related
activities, while
from other unrelated business activities. Also, RPSV recorded cost of
service and operating expenses from related activities amounting to P2,000,000.00 and
P 1,000,000.00, respectively, and from unrelated business activities amounting to P 3,000,000.00 and
P2,000,000.00, respectively.
Related
activities
Unrelated
Activities
Total
Gross Receipts/Sales
Less: Cost of Service/Sales
Gross Income
Less: Allowable Deductions
NET TAXABLE INCOME
REGULAR RATE
TAX DUE
1%
Note: The educational institution – RPSV - is subject to income tax rate of 1% since its gross income
from unrelated activities did not exceed 50% of the total gross income.
C. PROPRIETARY HOSPITAL
ILR Hospital, a private non-profit hospital, has gross receipts of P 15,000,000.00 with a cost of P 6,000,000.00
and allowable deductions of P 3,250,000.00 from related activities , while from its unrelated activities, it incurred
P 5,000,000.00 and P 2,000,000.00 as cost of sales and allowable deductions, respectively, with a gross
income of P 18,000,000.00, for calendar year 2021.
Computation of tax shall be as follows:
Related
activities
Gross Sales
Less: Cost of Sales
Gross Income
Less: Allowable Deductions
NET TAXABLE INCOME
REGULAR RATE
TAX DUE
15,000,000.00
6,000,000.00
9,000,000.00
3,250,000.00
5,750,000.00
Unrelated
Activities
18,000,000.00
5,000,000.00
13,000,000.00
2,000,000.00
11,000,000.00
Total
33,000,000.00
11,000,000.00
22,000,000.00
5,250,000.00
16,750,000.00
25%
4,187,500.00
Note: ILR Hospital is subject to the regular rate of 25% since its gross income from non-related activities is
more than 50% of its total gross income. ( 13,000,000/22,000,000)
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D. REGIONAL OPERATING HEADQUARTERS
EBQ Corporation is registered as a Regional Operating Head Quarter (ROHQ) since 2015. For taxable years
2020 to 2023, its operation showed the financial results:
TY 2020
Annual Income
75,000,000.00
Cost of Services
41,250,000.00
Gross Income
33,750,000.00
Allowable
Deductions
33,625,000.00
Net Income (loss)
TY 2021
TY 2022
TY 2023
71500,000.00
41250,000.00
41200,000.00
125,000.00
Computation of Income Tax Due
Net Taxable
Income/Gross
Income
Multiply by
Income Tax Due
MCIT:
125,000.00
10%
15,950,000.00
10%
25%
25%
12,500.00
N/A
0.00
N/A
Gross Income
MCIT Rate
1%
MCIT
585,000.00
506,250.00
3,987,500.00
506,250.00
Income Tax Due
1.5%*
The regular rate of 25% shall be effective on January l , 2022 for ROHQ. It will also be subject to MCIT beginning
on the said date, since EBQ Corp. started its operations way back in 2015.
MCIT rate of 1.5% was used since the rate from January I to June 30, 2023 is 1% and for July I to December 31,
2023, the rate is 2%; thus, the average rate is 1 .5 % the income tax rate to be used by EBQ Corporation in
computing the income tax due/payable for TY 2023.
SECTION 4. INCOME TAX RATES ON CERTAIN PASSIVE INCOMES. The matrix below shows the new income
tax rates applicable to certain passive incomes of individuals and corporations.
Type of Individual/
Corporation
Non-Resident
Alien Individual
Nature of Income
Winnings from Philippine
Charity Sweepstake
Office (PCSO) games
amounting to more than
P 10,000.00
Winnings from PCSO
games amounting to
P 10,000.00 and below
Rate
Effectivity
20%
Upon the effectivity
of the CREATE
Exempt
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Type of Individual/
Corporation
Domestic
Corporation
Nature of Income
Rate
Intercorporate Dividends (domestic
and foreign source dividends)
From another
domestic
corporation Exempt
Effectivity
For foreign source
dividends, these will
be exempt from
income tax upon the
effectivity of the
From nonresident CREATE, subject to
foreign corporation The conditions imposed
underSection 5 of these
25% or 20%, as RR 5-2021
the case may be
Resident
Foreign Interest income from a depositary
bank under the expanded foreign
Corporation
currency deposit system
15%
Upon the effectivity of the
CREATE
Capital gains from sale of shares of
stock not traded in the stock
exchange
15%
Upon the effectivity
of the CREATE
25%
January l , 2021
25%
January l, 2021
Non-resident
Foreign
Corporation
Gross income received from all
sources within the Philippines, such
as interests, dividends, rents,
royalties,
salaries,
premiums
(except reinsurance premiums),
annuities, emoluments or other
fixed or determinable annual,
periodic or casual gains, profits and
income, and capital gains, except
capital gains from sale of shares of
stock not traded in the stock
exchange
Intercorporate dividend received
from a domestic corporation, in
general
However, if the country in which
the non-resident foreign
corporation domiciled, allows a
tax credit equivalent to the
difference between the
regular income tax rate of under
Section of the Tax Code (25%)
and the fifteen percent (15%) tax
on intercorporate dividends or
does not impose tax on dividends,
the rate to be imposed shall be
15%
Capital gains from sale of shares of
stock not traded in the stock
exchange
15%
15%
January l , 2021
Upon the effectivity
ofthe CREATE
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FOREIGN-SOURCED DIVIDENDS RECEIVED BY DOMESTIC CORPORATIONS.
SECTION 5.(RR 5-2021) EXEMPTION FROM INCOME TAX OF FOREIGN-SOURCED DIVIDENDS
RECEIVED BY DOMESTIC CORPORATIONS.
In general, foreign sourced dividends received by domestic corporations are subject to income tax. However, the
same shall be exempt if all of the following conditions concur:
A. The dividends actually received or remitted into the Philippines are reinvested in the business
operations of the domestic corporation within the next taxable year from the time the foreign-source
dividends were received or remitted;
B. The dividends received shall only be used to fund the working capital requirements, capital
expenditures, dividend payments, investment in domestic subsidiaries, and infrastructure project; and
C. The domestic corporation holds directly at least twenty percent (20%) in value of the outstanding shares
of the foreign corporation and has held the shareholdings uninterruptedly for a minimum of two (2)
years at the time of the dividends distribution. In case the foreign corporation has been in existence for
less than two (2) years at the time of dividends distribution, then the domestic corporation must have
continuously held directly at least twenty percent (20%) in value of the foreign corporation's outstanding
shares during the entire existence of the corporation.
Absent any one of the above conditions, the foreign-sourced dividends shall be considered as taxable
income of the domestic corporation in the year of actual receipt or remittance, subject to surcharges, interest, and
penalties, as applicable.
For this purpose, to avail of the exemption, the domestic colporation shall:
l. Submit, thru the responsible corporate officers, to the concerned BIR office within thirty (30) calendar days from
actual receipt of the remitted dividends a Sworn Statement/Affidavit containing (i) the fact of actual receipt of
such dividends, (ii) the amount and the source (non-resident foreign corporation [NRFC]) of such dividends,
including their shareholdings in that NRFC and the holding period at the time of the dividends distribution, and
(iii) a statement that they shall fully comply with the conditions of the exemptions above stated;
2. In the year of receipt of dividend , attach to the Audited Financial Statements (AFS) an Independent Auditor
Sworn Certification as to (i) the fact of actual receipt of the remitted dividends, (ii) the amount and the source
(NRFC) of such dividends, including their shareholdings in that NRFC and the holding period at the time of the
dividends distribution, (iii) the fact that the domestic corporation, thru its Board, has appropriated or has a plan
to reinvest the dividends in its business operations to fund its working capital requirements, capital expenditures,
dividend payments, investment in domestic subsidiaries, or infrastructure project, and (iv) if any amount has
been disbursed, a statement that said disbursement complies with the above requirements.
The Sworn Statement/Affidavit in item (l) hereof and the Independent Auditor Sworn Certification shall be
deemed as substantial compliance with the aboveconditions for exemption without the need of securing a written
tax exemption ruling/certificate from the BIR. In addition, a disclosure of the dividends in the said AFS which
shall be attached to the Annual Income Tax Return (AITR) to be filed in the year of receipt, as well as the amount
of dividend deemed exempt from income tax shall be declared in reconciliation part of the said Al TR.
3. In the immediately following taxable year, attach to the AlTR a Sworn Certification prepared and executed by an
Independent Auditor on the utilization or nonutilization of the dividends received by the corporation. The Sworn
Certification on the utilization of the dividends received shall confirm the taxpayer's full compliance with the
conditions for its exemption. However, if the Certification will state nonutilization of the dividends received, the
corresponding tax due on the unutilized dividends shall be declared as taxable income, subject to surcharges,
interest, and penalty, if any.
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Further, no credit or deduction under Section 34(C) of the Tax Code shall be allowed for any taxes of foreign
countries paid or incurred by the domestic corporation in relation to the exempt foreign-sourced dividends. Finally,
any taxes of foreign countries paid or incurred by the domestic corporation in relation to the exempt foreign-sourced
dividends shall be disregarded in computing the limitations provided under Section
of the Tax Code.
ILLUSTRATIONS:
a. RLI Corporation, a domestic corporation, owns twenty percent (20%) of the outstanding shares of USA
Corporation, a non-resident foreign corporation (NRFC), since August l , 2015. On June 30, 2021 it received
dividends amounting to P 1,000,000.00 from the said NRFC. The said dividend has not been used until January
13, 2023. In this case, the P 1,000,000.00 shall be declared as taxable income for calendar year 2021, subject
to surcharge, interest, and penalty, since it was not utilized within the next taxable year, which is in 2022.
b. RSDV Corporation, a domestic corporation, owns twenty percent (20%) of the outstanding shares of UK
Corporation, a non-resident foreign corporation (NRFC), since August I 2015. On May l, 2021, it received
dividends amounting to P 1,000,000.00 from the said NRFC. On September l , 2022, RSDV Corporation utilized
P800,000.00 for its dividend payments. On January I , 2023, it utilized the remaining P 200,000.00 for its
working capital requirements. In this case, P800,000.00 shall be treated as tax-exempt since this was properly
utilized within 2022. On the other hand, P200,000.00 shall be declared as taxable income for the taxable year
2021, subject to surcharge, interest, and penalty, since the utilization is not within the following taxable year,
which is in 2022.
c. BKTD Corporation, a domestic corporation, holds 20% of the stocks of EU Corporation, a non-resident foreign
corporation. BKTD is a wholly-owned subsidiary of GKCM Corporation, a non-resident foreign corporation.
BKTD's holding in EU Corporation started in 2018, and the holding period is uninterrupted. On July l, 2021,
BKTD Corporation received dividends from EU Corporation amounting to P2,000,000 and subsequently paid
out dividends on December 3 1, 2022, in the amount of P 1,500,000. The remaining amount of P 500,000 has
not been used in any qualified activity for exempt foreign-sourced dividends. In this situation, BKTD Corporation
shall be subject to income tax on the unused amount in the taxable period 2021, subject to surcharge, interest,
and penalty.
IMPROPERLY ACCUMULATED EARNINGS TAX
SECTION 6. IMPROPERLY ACCUMULATED EARNINGS TAX.- The improperly accumulated earnings tax shall
no longer be imposed on corporations upon the effectivity of the CREATE onwards. This shall apply to the entire
taxable year for all fiscal years/taxable years ending after the effectivity of CREATE.
ILLUSTRATION:
JDS Corporation, a domestic corporation, has unappropriated retained earnings in excess of its paid-up capital
stock amounting to P 20,000,000 and P 50,000,000 as of the fiscal years ending June 30, 2020 and June 30, 2021,
respectively. JDS Corporation shall be subject to the 10% improperly accumulated earnings tax as of June 30,
2020. However, JDS Corporation shall no longer be subject to improperly accumulated earnings tax for the entire
fiscal year ending June 30, 2021, which is after the effectivity of CREATE.
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On certain passive income
(Philippine sources) Final Tax
1. Interest, yields, etc.
a. interest in any currency bank deposit
b) yield or any monetary benefit from
deposit substitutes
c) yield or any monetary benefit from fund
and other similar arrangements
d. Interest income derived from depository
bank under expanded foreign currency
deposit system (EFCDS)
2.Royalties
3. Dividends received from domestic corp.
DC
RFC
NRFC
20%
20%
25%
20%
20%
25%
20%
20%
25%
15%
15%
Exempt
20%
20%
25%
Exempt
Exempt
15%** or 25%
** with tax spring – 15% if the counNRFC is domiciled allows a credit against the tax due from the NRFC
representing deemed paid in the Philippines equivalent to 15%.
Without spring - 25%
Capital Gains subject to Capital Gain Tax
a. Capital gain from sale of shares of not
traded in the local stock exchange
a) Tax base
b) Tax rate
3. Capital gains realized from sale or
exchange or disposition of land and/or
building ( Basis = selling price or fair
market value whichever is higher)
DC
RFC
NRFC
Net capital gain
15%
Net capital
gain
15%
Nat capital
gain
15%
6%
Not applicable
Not applicable
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Tax on income derived under expanded foreign currency deposit system by depository bank
From foreign currency transaction with:
a. non-residents,
b. OBU’s in the Philippines,
c. Local commercial bank
d. branches of foreign banks
Exempt
From foreign currency loans granted to residents other than enumerated above and
other depository banks.
Any income of non-resident, whether individuals or corporations, from transactions
with a depository bank under the expanded system
Illustration 1:
TRADE Corporation reported the following gross income and expenses in 2021:
Philippines
Gross income
P 4,000,000
Business expenses
2,000,000
10%
Exempt
Abroad
P 3,000,000
1,500,000
Compute the income tax due if the corporation is a/an:
a) Domestic corporation
b) resident foreign corporation
c) non-resident foreign corporation
Solution:
a. Domestic corporation:
Gross income- Philippines
Less: expenses – Philippines
Net income – Philippines
Gross income – abroad
Less: Expenses – abroad
Net income – abroad
Taxable income
4,000,000
2,000,000
2,000,000
3,000,000
1,500,000
1,500,000
3,500,000
Income tax due: (20%)
b. Resident foreign corporation
Gross income- Philippines
Less: expenses – Philippines
Taxable income
Income tax due (30%)
c. Nonresident foreign corporation:
Taxable income (Gross Income – Phil.
Tax due (30%)
1,050,000
4,000,000
2,000,000
2,000,000
600,000
4,000,000
1,200,000
Illustration 2
BREAK Corporation, a domestic trading corporation organized in 2015, has the following data in its operation:
2018
2019
2020
81
Gross sales
P 2,040,000
P 2,500,000
P 2,100,200
Cost of Sales
430,000
310,000
510,100
Operating expenses
1,540,200
2,100,000
1,300,400
Interest on bank deposit, Philippines
10,000
20,000
30,000
Dividend income from domestic corp.
20,000
20,000
25,000
Dividend income form RFC
30,000
20,000
40,000
REQ: Compute the following:
a) Regular corporate income tax for 2018, 2019 and 2020.
b) Compute the minimum corporate income tax for 2018, 2019 and 2020.
c) Compute the tax payable for 2018, 2019 and 2020.
Solution:
a) Regular corporate income tax:
Gross sales
Cost of Sales
Operating expenses
Dividend income – resident foreign corp
Taxable income
Regular corporate income tax (30%)
2018
P 2,040,000
(430,000)
(1,540,200)
30,000
99,800
29,940
P
2019
2,500,000
(310,000)
(2,100,000)
20,000
110,000
33,000
2020
P 2,100,200
(510,100)
(1,300,400)
40,000
329,500
98,850
2019
2,500,000
(310,000)
2,190,000
20,000
2,210,000
44,200
2020
P 2,100,200
(510,100)
1,590,100
40,000
1,630,000
32,600
2019
33,000
44,200
44,200
--44,200
2020
98,850
32,600
98,850
(11,200)
87,650
b) Minimum Corporate income tax:
Gross sales
Cost of Sales
Gross income
Dividend income – resident foreign corp
Total
Minimum corporate income tax (MCIT)
2018
P 2,040,000
(430,000)
1,610,000
30,000
1,640,000
---
P
c. Income tax payable
Regular corporate income tax (30%)
Minimum corporate income tax (MCIT)
Income tax due
Less: Excess of MCIT
Income tax payable
2018
29,940
--22,940
--22,940
Note: 1. In 2018, the corporation is in its 4th year of operation, tax due is equal to RCIT.
2. In 2019, MCIT is greater than RCIT, so tax payable is MCIT and the excess MCIT
2019 is deductible form taxable year 2020 because RCIT is greater than MCIT.
Final tax on passive income:
Interest on bank deposit, Philippines (20%)
Dividend income from domestic corp.
2018
2,000
Exempt
2019
4,000
Exempt
2020
6,000
Exempt
Illustration 3:
PARE Corp., a domestic corporation organized in 2005, has the following data in the following years:
2018
2019
2020
Minimum Corporate
income tax
Normal Corporate income
tax
P 70,000
98,000
130,000
P 48,000
50,000
160,000
82
Tax due and payable:
2018:
P 70,000
2019:
P 98,000
2020 :
4.
P 90,000
( whichever is higher between MCIT & normal tax )
( Excess of MCIT over Normal tax = 70,000 - 48,000 = 22,000)
( whichever is higher between MCIT & normal tax )
( Excess of MCIT over Normal tax = 98,000 - 50, 000 = 48,000)
( Normal tax is higher than MCIT = Normal tax less Excess of MCIT – 2018 & 2019)
( 160,000 – 22,000 – 48,000 = P 90,000)
Journal entry to record income tax due and payable for 2019
2019
Income tax expense
Excess MCIT
Income tax payable
Income ta payable
50,000
48,000
98,000
5. Journal entry to record income tax due and payable for 2020.
2020
Income tax expense
Excess MCIT 2018/2019
Income tax payable
Income tax payable
160,000
70,000
90,000
Quarterly and annual corporate tax due:
1. The computation and the payment of MCIT shall be applied at the time of filing the quarterly return. If MCIT
is higher that RCIT, the tax due shall be the MCIT.
2. In case there is an excess MCIT of the previous taxable year, it shall be allowed as deduction if the
quarterly MCIT is greater than RCIT.
3. The creditable withholding taxes and the income tax paid in the previous quarter(s) are allowed as
deduction against quarterly MCIT or RCIT.
4. Quarterly returns (1st to 3rd quarters) are on a cumulative basis.
5. Annual income tax return is to be filed for the taxable year.
Illustration 4; (source: Income Taxation by Enrico D. Tabag & Earl Jimson R. Garcia)
Case 1:
A Corporation’s computed Regular Corporate Income Tax 9RCIT) , MCIT and income taxes withheld from 1 st
to
4th quarters including excess MCIT and excess withholding taxes from prior year(s) are as follows:
Quarter
RCIT
MCIT
1st
200,000
240,000
500,000
400,000
160,000
500,000
200,000
200,000
2nd
3rd
4th
Taxes w/held
during the year
40,000
60,000
80,000
70,000
Excess MCIT
Prior year
60,000
-
Excess w/holding
tax prior year
20,000
-
REQUIRED: compute for income tax payable for the 1st to 3rd quarters and annual income tax payable.
To compute for income tax payable 1st to 3rd quarters and annual return:
1st Quarter
2nd Quarter
3rd Quarter
RCIT
200,000
440,000
940,000
MCIT
160,000
660,000
860,000
Tax due (higher = (RCIT200,000
660,000
940,000
MCIT)
Excess MCIT
(60,000)
(60,000)
Excess withholding tax
(20,000)
(20,000)
(20,000)
Taxes withheld
(40,000)
(100,000)
(180,000)
Annual return
1,340,000
1,060,000
1,340,000
(60,000)
(20,000)
(250,000)
83
Income tax paid
1st quarter
2nd quarter
3rd quarter
Income tax payable
(80,000)
_______
80,000
_______
460,000
(80,000)
(460,000)
________
140,000
(80,000)
(460,000)
(140,000)
330,000
Note: 1. The Excess MCIT prior year is not allowed as deduction in the 2 nd quarter return because tax due is
the MCIT ( MCIT is higher than RCIT).
2. Quarterly returns should be on a cumulative basis.
Government - owned or controlled corporations, agencies or instrumentalities. –
a) Tax Base Net income
b) Tax rate : Tax imposed upon corporations or associations engaged in a similar business, industry
activity.
c) Tax - exempt government-owned or controlled corporations:
1. Government Service Insurance System (GSIS)
2. Social Security Services (SSS)
3. Philippine Health Insurance Corporation (PHIC)
4. Local Water Districts
Income derived under Expanded Foreign Currency Deposit Units (EFCDUs) by Depository Banks
-
Refer to a unit or department of a local bank or a local branch of a foreign bank authorized by the
BSP to engage in foreign currency-denominated transactions pursuant to RA-6426, as amended.
a) 10% Final tax - Interest income from foreign currency loans granted to Philippine residents (
other
than OBUs in the Philippines or other depository banks
b) Exempt - Income from foreign currency transactions with non-residents, OBUs in the Philippines,
local commercial banks and
branches of foreign banks authorized to transact
business
under the FCDS
Note: income from foreign currency transactions shall include interest income from lending
operations, including bank charges, commissions, service fees and net foreign exchange
transaction gains.
Special Corporations a) Special Domestic Corporations
1. Proprietary educational institution and proprietary non-profit hospitals
a) Tax Base: - Net income within and without the Philippines
b) Tax rate:
a) 10% on their taxable income if income from unrelated business activities do not exceed 50%
of
total gross income from all sources. (predominance test)
b) 30% of the taxable income if income from unrelated business activities exceeds 50% of total
gross income.

“Unrelated trade, business or other activity” is not substantially related to the exercise
performance of the school of hospital’s primary purpose or function.

Examples of related income of proprietary education institutions
1. Income from tuition fees and miscellaneous schools fees
2. Income from hospital where medical graduates are trained for residency
3. Income from canteen situated within the school campus
or
84
4. Income from bookstore situated within the school campus.

A proprietary educational institution is any private school maintained and administered by private
individuals or groups with an issued permit to operate from DECS, or CHED, or the Technical
Education and Skills Development Authority (TESDA), is the case may be, in accordance with existing
laws and regulations. ( proprietary means private)

Capital outlays for expansion of school facilities: May either be:
a) deducted as expenditures
b) depreciated over the life
c) A nonstock and nonprofit educational institution shall not be taxed in respect to income received
by it, if all revenues and assets of the non-stock, non-profit educational institution are used
actually, directly and exclusively for educational purposes.
d) Non-profit hospital – means no net income or asset accrues to or benefits the member or specific
Person, with all the net income or asset devoted to the institution’s purposes and all its activities
conducted for non-profit.
d) Private hospital organized as nonstock, non-profit – operated for charitable and social welfare
purposes is exempted form income tax (Sec.30 of Tax Code) and must satisfy the following
requisites in order to be entitled to the exemption from income tax:
1. It is a non-stock corporation
2. It is operated exclusively for charitable purposes
3. No part of its net income or asset shall belong to or inure to the benefit of any member,
organizer, officer or any specific person.
Illustration 5:
1. ABC Corporation reported the following:
Gross income
Business expenses
Compute the tax due if the corporation is a/an:
a) Proprietary educational institution
Related
P 4,000,000
2,000,000
Unrelated
P 3,000,000
1,500,000
2) non-stock & non-profit education institution
Solution:
a) Proprietary educational institution
Gross income
Related activities
Unrelated activities
Total
Business expenses
Taxable income
Tax due (10%)
4,000,000
3,000,000
7,000,000
(3,500,000)
3,500,000
350,000
Note: income from unrelated activities is less than 50% of the total gross income: (3/7=41.86%)
b) Non-stock & non-profit educational institution = exempt
2. DEF Corporation reported the following:
Related
Unrelated
85
Gross income
Business expenses
P 4,000,000
2,000,000
Compute the tax due if the corporation is a non-profit hospital.
Solution:
Gross income
Related activities
Unrelated activities
Total
Business expenses
Taxable income
Tax due (30%)
( 45/9 = 55.55%)
P 5,000,000
3,500,000
4,000,000
5,000,000
9,000,000
(5,500,000)
3,500,000
1,050,000
b) Special resident foreign corporations
1. International carrier
 Tax rate : 2 ½% on its “Gross Philippine Billings”
 Gross Philippine Billings (GPB) defined :
1. International air carrier
a. GPB refers to the amount of gross revenue derived from carriage of persons, excess
baggage, cargo and mail originating from the Philippines in a continuous and uninterrupted
flight, irrespective of the place of sale or issue and the place of payment of the ticket or
passage document.
Notes:
a. Tickets revalidated, exchanged and/or indorsed to another international airline form part
of the GPB if the passenger boards a plane in a port or point in the Philippines.
b. For a flight which originates from the Philippines, but transhipment of passenger takes
place at any port outside the Philippines on another airline, only the aliquot portion
of the cost of the ticket corresponding to the leg flown from the Philippines to
the point of transhipment shall form part of GPB.
2. International shipping
a. GPB means gross revenue whether for passenger, cargo, or mail originating from the
Philippines up to final destination regardless of the place of sale or payments of the
passage or freight documents.

International carriers doing business in the Philippines may avail of the preferential rate or
exemptionon the gross revenue derived from the carriage of persons and their excess baggage on
the basis of an:
a. Applicable tax treaty or international agreement to which the Philippines is a signatory, or
b. On the basis of reciprocity such that international carrier whose home country grants income
tax exemption to Philippine carriers (Sec.1(3)RA10378).

Illustration 1:
Singapore Airlines , an international carrier provided the following data fort the taxable year 2020:
Gross receipts – transport of passenger
15,000,000
Gross receipts – transport of cargoes
6,000,000
Operating expenses
12,000,000
The income tax due is ___21,000,000 x 2.5% = 525,000____________

Illustration 2: (source: Income Taxation by Enrico D. Tabag & Earl Jimson R. Garcia)
The following were provided by China Airlines, an international carrier doing business in the
Philippines:
Gross ticket sales in the Philippines (Manila to Macau flight)
10,000,000
Gross ticket sales in China ( Manila to Beijing flight)
5,000,000
Gross ticket sales in Japan (Tokyo – Manila flight)
3,000,000
Gross ticket sales in the Philippines ( Manila to LA)
8,000,000
86
* Passengers were transported in Tokyo to LA by another airline
* Estimated hours during flight
Manila to Tokyo - 5 hours
Tokyo to LA
- 15 hours
Gross ticket sales in LA, USA ( Manila to LA)
* Passengers were transported in Tokyo to LA by different
plane of the same airline company.
* Estimated hours duringflight:
Manila to Tokyo - 5 hours
Tokyo to LA
- 15 hours
Expenses – Philippines
8,000,000
5,000,000
The income tax due is ______625,000_____________
Solution:
Gross ticket sales in the Philippines (Manila to Macau flight)
Gross ticket sales in China ( Manila to Beijing flight)
Gross ticket sales in the Philippines:
Manila to Tokyo = 5/20 x 8,000,000
Gross ticket sales in LA, USA ( Manila to LA)
Total Gross Philippine Billings
Multiply by tax rate
Income tax due
10,000,000
5,000,000
2,000,000
8,000,000
25,000,000
2.5%
625,000
2. On Offshore banking units

Offshore banking units is a branch, subsidiary or affiliate of a foreign bank located in an Offshore
Financial Center which is duly authorized by the BSP to transact offshore banking business in the
Philippines in accordance with the provisions of PD1034 as implemented by BSP Circular No. 1389.

10% final income tax on foreign currency transactions with local commercial bank, including branches
foreign currency transaction with local commercial bank, including branches of foreign banks that may
be authorized by BSP to transact business with offshore banking units, interest income derived from
currency loans granted to residents.
Summary of Tax Rules on FCDUs/EFCDUs/OBUs
Residents
Nature of Income
E(FCDU
Other residents
Income from forex transactions:
Interest income from:
- Forex loans & receivables
Exempt
10%
- Forex deposits
Exempt
Other forex income
Exempt
RCIT
Income
from
non-forex
RCIT
RCIT
transactions
Non residents
Exempt
Exempt
Exempt
RCIT
3. Tax on branch profit remittances
a) Tax rate: 15% on the total profits applied or earmarked for remittance without any deduction
for the tax component.
Exempt remittance: On activities which are registered with the Philippine Economic Zone
Authority.
b) Income from all sources within the Philippines shall not be treated as branch profits unless the
same are effectively connected with the conduct of trade or business in the Philippines.
4. Regional or area headquarters of multinationals
a) exempt from tax
b) Regional or area headquarter is a branch established in the Philippines:
(1) which does not derive income from Philippines and
87
(2) which acts as supervisory, communications and coordinating center for their affiliates,
subsidiaries or branches in the Asia Pacific and other foreign countries.
5. Regional operating headquarters of multinationals
a) Tax rate: 10% of their taxable income.
b) Regional operating headquarter is a branch established in the Philippine which is engaged in
different services (e.g. general administration and planning, business planning and
coordination, marketing control and sales promotion, etc. )
c. Special non-resident foreign corporations
1. Non-resident cinematographic film owner, lesson or distributor
a) Tax base: Gross income from all sources within the Philippines
b) Tax rate: 25%
2.
3.
Non-resident owner or lessor of vessels chartered by Philippine nationals
a) Tax base: Gross rentals, lease or charter fees from leases or charters to Filipino citizens or
corporations, as approved by the Maritime industry Authority.
b) Tax rate : 4 ½%
Non-resident owner or lessor of aircraft, machineries and other equipment
a) Tax base : Gross rentals or fees derived within the Philippines
b) Tax rate : 7 ½%
Illustration:
A corporation has the following data for the current year :
Gross income, Phils.
P 800,000
Expenses, Phils.
300,000
Gross income, USA
500,000
Expenses, USA
200,000
REQ. Compute the tax payable assuming the above corporation is :
a. Resident international carrier.
b. Non-resident owner of vessels chartered by Philippine nationals.
c. Non-resident cinematographic film owner, lessor or distributor.
d. Non-resident lessor of equipment.
Solution:
a) Resident international carrier (Gross Philippine Billings) tax rate = 2 ½%:
Tax due and payable = Gross Income = 800,000 x 2 ½%
20,000
b) Non resident owner of vessels chartered by Philippine nationals:
Tax base = Gross Income; Tax rate = 4 ½%
Tax due and payable = Gross Income =
800,000 x 4.5%
36,000
c). Non-resident cinematographic film owner, lessor or distributor:
Tax base = Gross Income; Tax rate = 25%
Tax due and payable = Gross Income =
800,000 x 25%
200,000
d) Non-resident owner or lessor of aircraft, machineries and other equipment
Tax base : Gross rentals or fees derived within thePhilippines ; Tax rate : 7 ½%
Tax due and payable = Gross Income =
800,000 x 7.5%
60,000
88
Tax Exempt Corporations under NIRC
a. Labor, agricultural or horticultural organizations not organized principally for profits.
b. Mutual savings bank not having a capital stock represented by shares and cooperative bank without capital
stock, organized and operated for mutual purposes and without profit.
c.
A beneficiary, society, order or association, operating for the exclusive benefit of the members such as fraternal
organization operating under the lodge system, or a mutual aid association or a non stock corporation
organized by employees providing for the payment of life, sickness, accident or other benefits exclusively to
the members of such society, order or association, or non-stock corporation or their dependents.
d. Cemetery company owned and operated exclusively for the benefit of its members.
e. Non-stock corporation or association organized and operated exclusively for religious, charitable, scientific,
athletic or cultural purposes or rehabilitation of veterans, no part of its net income or asset shall belong or
inure to the benefit of any member, organizer, or officer or any specific person.
f.
Business league, chamber of commerce or board of trade, not organized for profit and no part of the net income
of which inures to the benefit of any private stockholder or individual.
g. Civic league or organization not organized for profit but operated exclusively for the promotion of social welfare.
h. A nonstock no-profit educational institution.
i.
Government educational institution
j.
Farmers or other mutual typhoon or fire insurance company, mutual ditch or irrigation company, mutual or
cooperative telephone company , or like organizations of a purely local character , the income of which
consists solely of assessments, dues and fees collected from members for the sole purpose of meeting its
expenses.
k.
Farmers, fruit growers or like association organized and operated as a sales agent for the purpose of marketing
the products of its members and turning back them to proceeds of sales, less the necessary selling on the
basis of the quantity of produced finished by them.
Exempt domestic corporation
The following corporations are exempt from RCIT:
1.
2.
3.
4.
Exempt non-profit corporations under the NIRC
Government agencies and instrumentalities
Exempt government-owned and controlled corporations
Cooperatives
Non-profit corporations or associations:
1. The exemption relates only to income from related activities. Income from unrelated activities and income
from activities conducted for profit including income from properties are taxable regardless of the
disposition made of such income.
2. Non-profit educational institutions – all revenues and assets of non-stock, non-profit educational institution
used actually, directly and exclusively for educational purposes shall be exempt from taxes and
duties. The income from unrelated activities is exempt from tax if used for education purposes.
3. Requisites for exemption of non-stock, non-profit corporations:
a. Must be non-stock corporation or association organized and operated exclusively for religious,
charitable, scientific, athletic or cultural purposes or for rehabilitation of veterans;
b. Should meet the following tests:
1. Organizational tests - limit the purposes to one or more of the following religious, charitable,
scientific, athletic or cultural purposes or for rehabilitation of veterans;
89
2. Operational tests – regular activities must be foe exclusively to the accomplishment of the purposes.
A corporation fails this test if a substantial part of its operation is considered “ activities conducted
for profit”.
c. All net income or assets of the corporation or association must be devoted to its purposes and no part
of its income or asset accrues to or benefits any member or specific person.
d. Must not be a branch of a foreign non-stock, non-profit corporation.
Note: 1.
A non-profit organization is still allowed to engage in activities conducted for profit without
losing its tax exemption but the income conducted for profit is subject to tax regardless of the
disposition made of such income.
2. The non-profit corp. must secure a Tax-exemption ruling from the BIR. The ruling shall be valid
for 3 years unless sooner revoked or cancelled.
Government Agencies and instrumentalities
- Departments and bureaus are inherently non-profit because of their public service functions – they are
exempt from tax. The income from unrelated activities or from their properties is subject to income tax.
Government-Owned and Controlled Corporations (GOCCs)
GOCCs are generally proprietary or commercial in nature and are taxable to the RCIT, except the following:
1. Government Service Insurance System (GSIS)
2. Social Security Services (SSS)
3. Philippine Health Insurance Corporation (PHIC)
4. Local Water Districts
Cooperatives –
- An autonomous association of persons who voluntarily joined together to achieve their social, economic
and cultural needs and aspirations by making equitable contributions to the capital required, patronizing
their products and services and accepting a fair share of risks and benefits of the undertaking.
Classification of registered cooperatives for taxation purposes:
1. Cooperatives which transact business only with members
- Not subject to any taxes and fees under NIRC and other tax laws such as:
a. income tax on related regular income
b. VAT and percentage tax,
c. Donor’s tax,
d. Excise tax,
e. documentary stamp tax
f. annual registration fee
2. Cooperatives which transact business with both members and non-members:
a. Those with not more than P 10M accumulated reserve and undivided net savings are exempt from taxes,
similar to cooperatives transacting business only with members.
b. Those with more than P 10M accumulated reserve and undivided net savings are subject to he following
tax at full rate:
1) Income tax on the full amount allocated for interest on capital
2) VAT on transactions with non-members
3) Percentage tax on all sales of goods or services rendered to non-members
4) All other internal revenue taxes unless otherwise provided by law.
3. Taxability of Cooperatives to Internal Revenue Tax
All cooperatives regardless of classification are subject to the following:
1. Applicable income tax on unrelated income
2. Capital gain tax
3. Documentary stamp tax
4. VAT on purchases of goods or services except VAT exempt importation
5. Withholding tax on wages except for minimu wage employee
6. All other taxes for which cooperatives are directly liable and not otherwise expressly exempted by law.
90
IMPROPERLY ACCUMULATED EARNINGS TAX (IAET)
a. 10% tax is imposed on the improper accumulation of corporate earnings beyond the needs of the
business.
b. The objective or purpose is to force corporation to distribute dividends to shareholders in order to collect the
related final tax on dividends.
c.
The tax is imposed as a penalty to the corporation for improper accumulation of earnings for the purpose of
avoiding the tax upon shareholders who are supposed to received dividends and pay the tax applicable to
the dividends received.
d. The imposition is not automatic. It is due upon the formal assessment by the BIR upon determination of an
improper accumulation of earnings by the corporation.
e. The tax is imposed on improperly accumulated taxable income earned starting January 1, 1998 by domestic
corporations which are classified as closely-held corporation. Closely –held corporation are corporations
where at 50% in value of the outstanding capital stock or at least 50% of the total combined voting power
of all classes of stock entitled to vote is owned directly or indirectly by or for not more than 20 individuals.
f.
Corporations not subject to IAET:
a. Publicly held corporation
b. Finance companies
c. Banks and other non-bank financial intermediaries
d. Insurance companie
e. Taxable partnership
f. General professional partnership
g. Taxable and non-taxable joint venture
h. Enterprises registered with PEZA and other Bases Conversion and Development Act (BCDA)
and special economic zone.
g.
Reasonable accumulation or appropriation of profits 
reasonable needs include the reasonably anticipated needs of the business.

-appropriation – means setting aside profits for a particular purpose.

To establish the reasonable needs of business of an appropriation of profits, the corporation must
prove:
1. an immediate need of business , including reasonably anticipated needs. ( Immediacy Test).
2. the direct correlation of such business needs to the accumulation or appropriation of profits
(Correlation Test)

the following constitute accumulation of earnings for the reasonable needs of the business:
1. if retained for working capital needed by the business
2. allowance for the increase in the accumulation of earnings up to 100% of the paid-up capital of the
corporation as of the balance sheet date, inclusive of accumulations taken from other years.
3. Earnings reserved for definite corporate expansion projects or programs requiring considerable
capital expenditure as approved by the Board of Directors or equivalent body.
4. Earnings reserved for buildings, plants or equipment acquisition as approved by the Board of
Directors or equivalent body.
5. Earnings required by law or applicable regulations to be retained by the corporation or in respect of
which there is a legal prohibition against its distribution.
6. In the case of subsidiaries of subsidiaries of foreign corporations in the Philippines, all undistributed
earnings intended or reserved for investments within the Philippines as can be proven by corporate
records and/or relevant documentary evidence.
h. Circumstances indicating improper accumulation of profits
1. substantial changes to corporate officers who are stockholders at the same time/personal loans.
2. radical change in the nature of business after a considerable surplus has been accumulatyed.
3. investment in unrelated business or activity
4. substantial expenditures or corporations for personal benefit of stockholders only.
91
i. Tax Base – Improperly accumulated taxable income
 Formula: improperly accumulated taxable income for each taxable year.
Current Year’s taxable income
Add: 1. income exempt from tax
2. income excluded from gross income
3. income subject to final tax
4. amount of NOLCO deducted
Total
Less: 1. dividends actually or constructively paid from applicable year’s taxable income
2. income tax paid or payable for the taxable year.
3. amount reserved for the reasonable needs of the business from the applicable year’s
taxable income.
Improperly accumulated taxable income
Note: 1. Once the profit has been subjected to IAET, the same shall no longer be subjected to IAET in
later years even if not declared as dividend.
2. Notwithstanding the imposition of IAET, profits which have been subjected to IAET, when
finally declared as dividends, shall nevertheless be subjected to tax on dividends under the
Tax Code except in circumstances where the recipient is not subject thereto.
OR:
Current Year’s taxable income
Add: 1. income exempt from tax
2. income excluded from gross income
3. income subject to final tax
4. amount of NOLCO deducted
Total
Less: 1. dividends actually or constructively paid from applicable year’s taxable income
2. income tax paid or payable for the taxable year.
3. amount reserved for the reasonable needs of the business from the applicable year’s
taxable income.
Total
Add: Retained Earnings prior years
Accumulated earnings as of the end of current year
Total
Less: amount that may be retained ( 100% of paid-up capital as of year end)
Excess – considered improperly accumulated earnings
Multiply by rate ( 10%)
Improperly accumulated earnings tax
Note: the amount that may be retained of within the reasonable needs of the business shall be 100%
of the paid up capital (RMC 35 – 2011).
j. Period of Payment of Dividend/Payment of IAET
The dividends must be declared and paid or issued not later than within 1 year following the close of the
taxable year. Otherwise, the IAET, if any, should be paid within 15 days thereafter.
Illustration 1: (source: Income Taxation by Omar Erasmo G. Ampongan)
The 2019 records of Alpine Corporation, show the following:
Gross sales, net of 1% withholding tax
Cost of goods sold
Expenses
Taxes paid for the first three quarters
Royalties, net of 20% final withholding tax
Dividend from domestic company
Gain on sale of business asset
4,950,000
2,575,000
350,000
25,000
52,000
75,000
37,500
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The corporation suffered a net operating loss carry over of P 125,000 in 2018 which was carried over as a
deduction from gross income in 2019.
Out of the earnings during the year P 500,000 was paid as dividends to its shareholders, while P 700,000
was reserve for construction of new building and acquisition of new equipment.
REQUIRED: Compute the following
1. regular income tax for 2019
2. the additional tax on improperly accumulated earnings
Solution:
1. Income tax payable
Gross sales ( 4,950,000/ 99%)
Less: cost of goods sold
Gross profit
Add: gain sale of business asset
Total
Less: expenses
NOLCO
Taxable income
Multiply tax rate
Income tax due
Less: tax credits
Withholding tax ( 1% x 5,000,000)
Taxes paid for the first three quarters
Income tax payable
2. Improperly Accumulated Earnings Tax
Taxable income
Add: royalties ( 52,000/80%)
Dividend from domestic company
NOLCO
Total
Less: dividends paid
Income tax due 2019
Tax on royalties ( 65,000 – 52,000)
Reserved for building and equipment
Improperly accumulated earnings
Multiply tax rate
Improperly accumulated earnings tax
5,000,000
2,575,000
2,425,000
37,500
2,462,500
350,000
125,000
50,000
25,000
475,000
1,987,500
30%
596,250
75,000
521,250
1,987,500
65,000
75,000
125,000
500,000
596,250
13,000
700,000
265,000
2,252,500
1,809,250
443,250
10%
44,325
Illustration 1: (source: Income Taxation by Enrico D. Tabag & Earl Jimson R. Garcia)
The records of a closely-held corporation, show the following for the calendar years 2018 and 2019:
2019:
Gross income
5,000,000
Expenses
3,000,000
Other income:
Rent, net of 5% withholding tax
475,000
Interest in money market placement, net
80,000
Inter-corporate dividends
500,000
Additional information:
Dividends paid
1,500,000
Taxes paid for the first three quarters
50,000
Ordinary shares
700,000
Share premium
200,000
2018:
Gross income
3,000,000
Expenses
2,800,000
Net income
200,000
Retaine earnings
500,000
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Solution: Improperly Accumulated Earnings Tax for 2019:
Gross income
Add: rent income ( 475,000/95%)
Total
Less: Expenses
Taxable income
Add: Interest in money market placement, ( 80,000/80%)
Inter-corporate dividends
Total
Less:
Dividends paid
Final tax – final on interest in money market placement
Tax due for the year (RCIT- 750,000/ MCIT – 110,000)
Total
Add: retained earnings prior year ( 2018)
Retained earnings December 31, 2019
Less amount that may be retained ( par value of shares)
Excess earnings – Improperly accumulated earnings
Multiply by tax rate
Improperly accumulated earnings tax 2019
5,000,000
500,000
5,500,000
3,000,000
2,500,000
100,000
500,000
1,500,000
20,000
750,000
600,000
3,100,000
2,270,000
830,000
500,000
1,330,000
700,000
630,000
10%
63,000
Income Tax on Partnership
Partnership - Art. 1767 of Civil Code define partnership as “ a contract whereby two or more persons bind
themselves to contribute money, property or industry to a common fund , with the intention of dividing the
profits among themselves.
For purpose of the income tax, partnership are classified into:
a. Partnership not subject to tax
b. Partnership subject to income tax
A. Partnership not subject to income tax:
1. General Professional Partnership (GPP’s)

A partnership formed for the sole purpose of exercising their common profession, no part of the income
of which is derived from engaging in trade or business.

Because of the exemption from income tax, income payments to them by their clients are exempt from
creditable withholding tax.
2. Joint venture or consortium for the purpose of:
a. undertaking construction projects;
b. engaging in petroleum , coal geothermal and other energy operations pursuant to an operating or
consortium agreement under a service contract with the government.
Filing of Return

Exempt partnership are required to file an “ annual information return”, Form 1702 Ex . The purpose is
to furnish information as to share each partner shall report and include in his personal income tax
return.
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Tax Liability of Partners in Exempt Partnership
a. Persons engaging in business partners in general professional partnership shall be liable for income tax
only in their separate and individual capacities.
b. Each partner shall report as gross income his distributive share actually or constructively received, in the
net income of the partnership. The share of a partner in the net profits of a partnership shall be taxable to
the partner, whether distributed or not.
c.
The share of a partner shall be subject to creditable withholding tax of 10% if the current year’s income
payments to the partner total P 720,000 or below, or 15% if the same exceeds P 720,000.
d. For the purpose of computing the distributive share of the partners, the net income of the partnership
shall be computed in the same manner as in corporation.
Note: Co-venturers in a joint venture or consortium which is not subject to income tax have the same tax
liability as partners in an exempt partnership.
B. Partnerships Subject to Income Tax
General partnership or commercial partnership
All other partnerships, except general professional partnership and joint venture mentioned
above (item A), no matter how created or organized, are considered corporations subject to
corporate income tax (Sec. 22(B), NIRC).
Filling of Tax Return
Taxable partnerships, like ordinary corporations, are required to file quarterly income tax returns for the
first, second, and third quarters, and an annual return based on their accounting periods.
Tax Liability of Partners in a Taxable Partnership
Partner
Citizen or
Resident
Alien
NRAETB
NRANETB
Final Tax
Rate
10%
20%
25%
Tax Base
Dividend or Share in the distributable after tax net income
of the partnership
Dividend or Share in the distributable after tax net income
of the partnership
Dividend or Share in the distributable after tax net income
of the partnership
Note: the share of an individual in the net income after tax of an association, a joint account, or a joint venture
or consortium taxable as a corporation, of which he is a member or co-venturer, is also subject to this final
tax.
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Tax Liability of Corporate Co-Venturers is a Taxable Joint Venture (JV)
Co-Venturer
Final Tax
Rate
Tax Base
DC
Exempt
Dividend or Share in the distributable after tax net
income of the JV
RFC
Exempt
Dividend or Share in the distributable after tax net
income of the JV
NRFC
15%
Dividend or Share in the distributable after tax net
income of the JV
Illustration:
DITO Partnership with Dino and Tino as partners had a net professional income amounting to P 500,000 for
2020. It other income includes bank interest income, P 8,000, net of final tax, and royalty income of P 10,000,
net of final tax . Dino has net income of P 200,000. The partners share profits and losses equally.
Q1: the income tax liability of DITO Partnership is ____exempt Gen. Prof. partnerschip________
Q2: the net taxable income of Dino is
Q3: The net share of Tino is :
P 459,000 ( 500,000/ 2 = 250,000 + 200,000 + 9,000)
250,000 + 9,000 = 259,000
Q4: the creditable withholding tax from Tino is
25,900 ( 10%)
Q4: Using the same data, except that the partnership is a General co-partnership, the taxable income of the
partnership is
P 500,000.
Q5: Refer to Q/ 4: the net distributable share of Tino (net of final tax) (resident citizen) is:
Solution:
Net income
Less: tax due ( 30% x 500,000)
Net income after tax
500,000
150,000
350,000
Share of Tino ( 350,000/2)
Interest ( 8,000/2)
Royalty ( 10,000/ 2)
Total
Less; withholding tax ( 10%)
Net
175,000
4,000
5,000
184,000
18,400
165,000
165, 600
CO-OWNERSHIP
For income tax purposes, co-ownership may arise in the following cases:
1. When two or more heirs or beneficiaries inherit an undivided property from a decedent; or
2. When a donor makes a gift of an undivided property in favor of two or more donees.
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When Co-Ownership is not Subject to Income Tax
Generally, the activities of the co-owners are usually limited to the preservation of the co-ownership
property and the collection of the income therefrom. In such a case, the co-ownership, as such entity, is
not subject to income tax.
Tax Liability of Co-owners in Exempt Co-ownership
The co-owners in an exempt co-ownership shall be liable for income tax only in their separate
and individual capacities. The co-owners shall report and include in their respective personal income tax
returns their shares of the net income of the co-ownership.
When Co-ownership is Subject to Income Tax
1) When a co-ownership is formed or established voluntarily, or upon agreement of the parties, what
was likely constituted is a business partnership.
OR
2) When the income of the co-ownership is invested by the co-owners in the business or other
income-producing properties, the co-owners in effect constituted themselves into a business
partnership.
Note: In either case, the co-ownership will be subject to income tax as a corporation.
Illustration:
Ace and Dina are co-owners of a property given to them by their father. The co-ownership had a gross rental
income of P 500,000 (gross of 5% CWT) and expenses related to rental activity of P 300,000 but 10% is not
deductible for the year 2020. Ace and Dina share profits as 75% and 25%, respectively. Ace withdrew
P50,000 from the co-ownership net for the year. Dina did not withdraw any amount. Ace and Dina are both
single .
Q1: The income tax liability of the co-ownership is: ______exempt____________
Q2: the tax liability of Ace is ______172,500_( 500,000 – 270,000 = 230,000 x 75%)
Q3: Suppose Ace and Dina did not divide the net profit but instead invested the entire profit in another
business venture where they earned a net income after deductions of P 450,000, the tax due of the coownership is:
P 135,000 ( 450,000 x 30%)
Corporation Income tax returns

Who shall file the return?
1) President
2) Vice-president or
3) Other principal officer
The return shall be sworn to by such officer and by the treasurer or assistant treasurer.

Declaration of corporate quarterly income on a cumulative basis is required manually, through Electronic
Filing and Payment System (EPS) or through electronic BIR Forms.
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
Manual Filing
a) Every corporation subject to tax shall render, in duplicate,
(a) a true and accurate quarterly return and
(b) final or adjustment return.
b) Corporations not engaged in trade or business in the Philippines (non-resident foreign corporations)
are not required to file income tax return.
c) Corporation returns
1) Declaration of quarterly corporate income tax.
(a) On a cumulative basis
(b) Not later than 60 days from the close of each of the first 3 quarters of the taxable year,
whether, calendar or fiscal year, summarized as follows:
 Quarterly return
- 60 days after the end of the quarter

First Quarter
- Calendar year : May 15
- Fiscal year : 15th day of the 5th month of the fiscal year
Note : The tax so computed shall be decreased by the amount of tax previously paid or
assessed during the preceding quarters.
2) Final adjustment return (annual return)
(a) Covers the total taxable income for the preceding calendar or fiscal year
(b) Filed on or before, in case corporation uses:
Calendar year - 15th day of April, of the following year, or
Fiscal year - on or before the 15th day of the 4th month following the close of the
fiscal year.
3) If the sum of the quarterly tax payments made during the taxable year is not equal to the total
tax due on the entire taxable income of that year, the corporation shall either:
(a) Pay the balance of tax still due; or
(b) Carry-over the excess credit; or
(c) Be credited or refunded with the excess amount paid
4) In case the corporation is entitled to a tax refund or refund of the excess estimated quarterly
income taxes paid,
(a) the excess amount shown on its final adjustment return
(b) may be carried over and credited
(c) against the estimated quarterly income tax liabilities for the taxable quarters
(d) of the succeeding taxable years
5) Once the option to carry over has been made, such option shall be considered irrevocable for
that taxable period.

Place of filing - The quarterly income tax declaration and the final adjustment return shall be filed with the :
1) authorized agent banks or
2) Revenue District Office or
3) Collection Agent or
4) Duly authorized Treasurer of the city or municipality having jurisdiction over the location of the
(a) principal office of the corporation filing the return or
(b) place where the main book s of accounts and other data from which the return is
prepared are kept.

Time of payment of the income tax. - The income tax due shall be paid at the time the
return is filed.
declaration or
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
Electronic Filing and Payment System (EFPS)
 EFPS – (RR 9-2001) as the system developed and maintained by the BIR for electronically filing tax
returns, including attachments, specifically through internet.
 Filing Reference Number – upon filing, this is issued by the EFPS as a control number to acknowledge
that a tax return, including attachments, has been successfully filed electronically. This will aserve as
evidence of filing and the date of filing of the return.
 Acknowledgment Number – upon payment of the tax to Authorized Agent Bank (ABB), this is to be
issued by ABB as a control number to the BIR to confirm that tax payment has been credited to the
account of the government or recognized as revenue by the Bureau of Treasury.
 Confirmation Number shall be issued by AAB as a control number to the taxpayer and BIR to
acknowledge that the taxpayer’s account has been successfully debited electronically in payment of
his tax liability. This will serve as evidence of payment of the taxpayer’s liability to the extent of the
amount shown in the confirmation number and the date of payment by the taxpayer.
 Persons required to file and pay under EFPS
1. Taxpayer Account Management Program (TAMP) taxpayers (RR No. 10-2014)
2. Accredited Importer and Prospective Importer required to secure the BIR-ICC & BIR-BCC ( RR
No. 10-2014)
3. National Government Agencies (NGAs) ( RR No. 10-2013)
4. All Licensed Local Contractors ( RR No. 10-2012)
5. Enterprises enjoying Fiscal Incentives (PEZA, BOI, Various Zone Authorities, etc. ( RR No. 12010)
6. Top 5,000 Individual Taxpayers
7. Corporations with Paid-Up Capital Stock of P 10M and above. ( RR No. 10-2007)
8. Procuring Government Agencies with respect to Withholding of VAT and Percentages Taxes
9. Government Bidders ( RR No. 3-2005)
10. Insurance Companies and Stock Brokers ( RMC No. 71-2004)
11. Top 20,000 Private Corporation ( RR No. 2- 98 as amended)
12. Large Taxpayers ( RR No. 2-2002 as amended under RR 17-2010)
 Large Taxpayers
 As to tax payment
Percentage tax
VAT
Excise Tax
Income tax
Documentary stamp tax
Withholding
taxes
(all
types)
 As to financial condition
Gross sales/ receipts
Net worth
Gross Purchases
Per SEC list
P 200,000 per quarter
P 200,000 per quarter
P 1,000,000 per year
P 1,000,000 per year
P 1,000,000 per year`
P 1,000,000 per year
P 1,000,000,000 per year
P 300,000,000 at the close of the each
calendar of fiscal year.
P 800,000
Top corporations as listed
and
published by SEC.
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 Large Taxpayers who will e-pay shall enroll with any EFPS AAB authorized to serve them and who
are capable to accept e-payments. E-payments shall be made within the day the return was
electronically filled following the “pay-as-you-file system”. Unless otherwise notified by the
Commissioner of International Revenue (CIR), for all returns that will be filled starting August 1,
2002, e-payment of the taxes due thereon thru EFPS shall become mandatory (RR No. 9-2002).

Non – Large Taxpayers
 Volunteering 2000 or more Non-Large Taxpayers
 Top 20,0000 private corporations (starting April 2009)
 For the Non-Large Taxpayers who intend to e-pay, electronic payment shall be made through the
internet banking facilities of any AAB. The volunteering two hundred (200) or more Non-Large
Taxpayers previously identified by the BIR to have availed of the option to file their return under
EFPS shall nevertheless continue to file their returns under such method. (RR No. 10-2007).
However, upon their receipt of a notification letter duly signed by the Commissioner of International
Revenue, it becomes mandatory for them, including their branches located in the computerized
revenue district offices, to file their returns and pay their taxes thru EFPS (RR No. 10-2007). The
filing of the return ahead of the payment of the tax due thereon is still in accordance with “pay-asyou-file system” as long as the payment of the tax is made on or before the due date of the applicable
tax.
 Non-large taxpayers shall have the option to file a consolidated return in the head office following
the procedures in RR No. 1-98 or to file returns on a per branch or facility basis. Provided, however,
that they shall update their registration with the affected or concerned revenue district officers by
filing BIR Registration Update Form (BIR Form 1905) before they change their manner of filing
returns.


Other Taxpayers:
 Corporations with paid-up capital of P10,000,000 and above
 Corporation with complete computerized system
 Taxpayers joining public bidding pursuant to E.O. No. 398 as implemented by RR 3-2005

Enterprises enjoying fiscal incentives granted by other government agencies such as those registered
with:
 Philippine Economic Zone Authority (PEZA)
 Board of Investments (BOI)
 Various zone authorities
 Cagayan Special Economic Zone Authority
 Export Development Council
 Tourism Infrastructure and Enterprise Zone Authority; and
 PHIVIDEC Industrial Authority.

Failure to comply with the provisions on e-filing and e-payment shall be penalized under Section 275
of the Tax Code. However, only the first and second offenses may be compromised. For the third and
subsequent offenses, no compromise shall be entertained or allowed.
Use of Electronic BIR Forms
 The eBIR Forms, as provided in RR 6-2014 and RMC 61-2012, was developed to provide taxpayers
particularly the non-eFPS filers with accessible and convenient service through easy preparation of tax
returns. According to the aformentioned revenue regulations, the use of eBIR Forms will improve the
BIR’s tax return data capture and storage thereby enhancing efficiency and accuracy in the filing of tax
returns.
100
 eBIR Forms refer to the two (2) types of electronic services provided by the BIR relative to the
preparation, generation and submission of tax returns, which are the:
a) eBIR Forms System for Online Filing; and
b) eBIR Forms Package to fill-up forms offline
 The “eBIR Forms” Package can be downloaded through the BIR website or a copy of the software
package may be requested from the taxpayer’s registered RDO particularly in the designated BIR
e-Lounge.
 “eBIR Forms Software Package” (also known as Offline eBIR Forms Package) is a tax
preparation that allows the taxpayer and Accredited Tax Agent (ATA) to accomplish or fill up tax
forms offline. It is an alternative mode of preparing tax returns which deviates from the conventional
manual process of filling-up tax returns on pre-printed forms that is highly susceptible to human
error. Taxpayers/ATAs can directly encode data, validate, edit, save, delete, view and print the tax
returns. The form package has automatic computations and has the capability to validate
information inputted by the taxpayers/ATAs.
 “Online eBIR Forms System” is a filing infrastructure that accepts tax returns submitted online and
automatically computes penalties for tax returns submitted beyond due date. The System creates
secured user accounts thru enrolment for use of the online System, and allows ATAs to file on
behalf of their clients. The System also has a facility for Tax Software Providers (TSPs) to test and
certify the data generated by their tax preparation software (certification is by form). It is capable of
accepting eturns data filed using certified TSP’s tax preparation software.
 MANDATORY eBIR FORMS and MANDATORY e-FILING
Only those non-EFPS filers are covered by RR 6-2014 (as amended by RR 9-2016), particularly
the following:
a) Accredited Tax Agents/Practitioners and all its client-taxpayers
Per RR 11-2015 dated March 27, 2015, “client-taxpayers” shall mean those taxpayers who are
otherwise authorizing their tax agents/practitioners to file on their behalf. Thus, client taxpayers
whose tax agents/practitioners only sign the audit certificate but have no authority to file the
returns in their behalf are not covered under this provision. The linking module of authorization
of authorization by the client-practitioner or his/her tax agent/practitioner is available online via
eBIR FORMS. It shall be noted, however, that the taxpayer may cancel anytime his/her
authorization prior to the termination of their client-agent relationship.
b) Accredited Printer of Principal and Supplementary Receipts/Invoices
c) One-Time Transaction (ONETT) taxpayers who are classified as real estate
dealers/developers; those who are considered as habitually engaged in the sale of real
property and regular taxpayers already covered by eBIR Forms. Thus. Taxpayers who are filing
BIR Form No. 1706, 1707, 1800, 1801 and 200-OT (For BIR Form 1706 only) are excluded in
the mandatory coverage from using the eBIR Forms.
d) Those who shall file a “No Payment” Return
Under RR 12-2015, however, the following taxpayers may file manually “no payment returns”
to
the Revenue District office (RDO) where registered using officially printed forms/photocopied
or
electronic/computer-generated returns:

Senior Citizen (SC) or Persons With Disability (PWD) filing for their own returns;

Employees deriving purely compensation income and the income tax of which has been
withheld correctly showing tax due is equal to the tax withheld whether single or multiple
employers (with two or more employers concurrently and successively at anytime during
the taxable year);
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
Employees qualified for substituted filing under RR 2-98 Sec. 2.83.4, as amended, but
opted to file for an Income Tax Return (ITR) and are filing for purposes of promotion
(PNP/AFP), loans, scholarships, foreign travel requirements, etc.
The above taxpayers are encouraged to use offline eBIR Forms for ease and convenience
in the preparation, validation, computation rules and efficiency check for completeness and
correctness of taxpayer input. However, they are encouraged as much as possible to file
their returns electronically to avoid the crowd and long lines.
It is further clarified, under this revenue regulation, that all business taxpayers with no
payment returns mandated to use eBIR Forms/EFPS must electronically file return.
e) Government-Owned or –Controlled Corporations (GOCCs)
f)
Local Government Units (LGUs), except barangays; and
g) Cooperatives register with National Electrification Administration (NEA) and Local Water
Utilities Administration (LWUA)
Taxpayers who are not covered by the regulation may opt to file their returns using the manual
Filing or eBIR Forms.

ADVANTAGES OF THE USE OF eBIR FORMS (RMO 24-2013)
a) Validate automatically the registration information indicated on the tax returns submitted by the
taxpayers in the Integrated Tax Systems (ITS) database of the BIR.
b) Prompt concerned revenue officials or employees on any discrepancies between the registration
information submitted by the taxpayer and its ITS database.
c) Encourage concerned taxpayers to update their registration information with the BIR upon validation of
tax returns submitted.
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Unit III – Income Tax
Lesson 2 – Corporation
Activity – Theory
I - Modified True or False: On your answer sheet write “True” if the statement is true and if the statement is
false, write the word or group of words that makes the statement false.
1. Domestic corporation refers to all kinds of corporation operating within the Philippines.
2. Domestic and resident foreign corporations are taxed based on their net income within and without
the Philippines.
3. Nonstock and non-profit educational institutions are exempt from income tax
4. In general regular corporate income tax is 30%.
5. The MCIT is applicable only to domestic corporation.
6. Passive income which have been subjected to a final tax shall not form part of the gross income for
MCIT purposes.
7. Dividends received from domestic corporation by a domestic corporation is tax exempt.
8. Dividends received by a domestic corporation from a resident foreign corporation is subject to final
tax.
9. Philhealth Corporation is subject to 30% corporate tax rate.
10. Nonresident cinematographic film owners/lessors/ or distributors is taxable on income within and
without the Phil.
11. The MCIT is applicable to resident foreign corporation such as “international carrier”
12. Nonresident foreign corporations are taxed based on their net income within the Philippines.
13. Domestic non-profit private educational institutions and hospitals shall pay the tax of 10% on their net
taxable income if their business income from unrelated activities does not exceed 50% of the total
gross income from all sources.
14. Intercorporate dividend received by a nonresident foreign corporation from a domestic corporation is
tax exempt.
15. General professional partnership is subject to regular corporate tax rate of 30%.
16. A domestic corporation may employ, as a basis for filling its annual corporate income tax return the
either calendar or fiscal year
17. General partnership does not fall under the definition of a “corporation” for income tax purposes:
18. A gain from sale of shares of a foreign corporation shall be considered derived from the country where
the Corporation was created or organized
19. When the estate is under judicial administration, the income of the state shall be taxable to the heirs
or beneficiaries.
20. Intercorporate dividends are tax-exempt if the recipient is a foreign corporation.
21. With the imposition of MCIT, a corporation with a net loss shall still pay tax.
22. The term “gross income “ for MCIT purposes will also include income exempt from income tax and
income subject to final withholding tax .
23. The tax due shall be lower between the regular corporate income tax and the minimum corporate
income tax.
24. Corporations except non resident foreign corporation can avail of the optional standard deduction.
25. Corporations that can avail OSD are allowed to deduct the cost of sales or cost of services.
26. In the case of corporate taxpayers, the OSD allowed shall be in an amount not exceeding forty percent
of their gross income.
27. Prior to the effectivity of the Train Law, the income from the estate is allowed personal exemption of
P 20,000.
28. The final adjusted return covering the total taxable income from the preceding calendar year or fiscal
shall be filed on or before the 15% of the 3rd month following the close of the taxable year.
29. All joint ventures are subject to corporate tax.
30. International carriers are taxed at 2 ½ of their Gross Philippine Billings.
103
31. All partnership no matter how created or organized are considered corporation subject to corporate tax
income tax.
32. As regards to general professional partnership, the partners’ share will be included in their respective
ITR whether distribute or not.
33. A CPA and a lawyer may form a general professional partnership to sell law and accounting books.
34. A professional partnership engaged in the practice of profession and trading of goods is tax exempt.
35. Partners of a taxable partnership are considered as stockholders and profits distributed to them by
by the partnership are considered as dividends.
II – Multiple Choice: Write the letter of the correct answer on your answer sheet.
1. A corporation whose income within and without the Philippines is taxable:
a) Domestic corporation
c) Foreign corporation
b) Resident foreign corporation
d) Non-resident foreign corporation
2. A corporation is taxable on business income after deducting business expenses except::
a) Domestic corporation
c) Foreign corporation
b) Resident foreign corporation
d) Non-resident foreign corporation
3. For income taxation purposes, the term “corporation” excludes one of the following:
a) Ordinary partnership
c) An incorporated business org.
b) General professional partnership
d) Business Partnership
4. The following are subject to final tax, except:
a) Royalty income received by a domestic corporation from a domestic corporation.
b) Cash dividend received by a non-resident foreign corporation from a domestic corporation.
c) Cash dividend received by a domestic corporation from a foreign corporation.
d) Interest income received by a resident foreign corporation from a Philippine Bank.
5. A corporation organized and created under the laws of a foreign country and is authorized to do business
under the Philippines is:
a) Domestic corp.
c) Resident foreign corp.
b) Non-resident foreign corporation
d) General co-partnership
6. One of the general principles of income taxation:
a) A foreign corporation engaged in business in the Philippines is taxable on all income derived from
sources within and without the Philippines.
b) A foreign corporation engaged in business in the Philippines is taxable on all income derived from
sources within the Philippines only.
c) A domestic corporation is taxable on income derived from sources within the Philippines only.
d) A domestic corporation is taxable on income derived from sources without the Philippines only.
7. One of the following does not fall under the definition of a “corporation” for income tax purposes:
a) General partnership
c) Insurance company
b) Joint stock company
d) Sole proprietorship
8. Which of the following is classified as special corporation subject to preferential corporate income tax rate?
a) Social Security System
c) Proprietary educational institution
b) Phil. Charity Sweepstakes Office
d) GSIS
9. A corporation which may be classified as either a resident corporation or a non-resident corporation is:
a) Domestic corporation
c) Government owned and controlled corporation
b) Foreign corporation
d) Non-profit hospital
10. The tax imposed on inter-corporate dividends received by a domestic corporation from a resident foreign
corporation is:
a) tax-exempt
c) subject to 15% final tax
b) subject to 10% final tax
d) subject to 30% basic tax
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11. The improperly accumulated earnings tax shall apply to:
a) Publicly held corporation
b) Banks and other non-bank financial intermediaries
c) Insurance companies
d) Private corporations
12. The tax rate on improperly accumulated earnings?
a) 2%
b) 10%
c) 15%
d) 32%
13. Which is not a characteristic of corporate income tax:
a. Progressive tax
b. Direct tax
c. General tax
d. National tax
14. A non-resident lessor of aircraft is subject to:
a) 7.5% tax on Phil. gross income
b) 4.5% tax on global taxation
c) 25% tax on global taxable income
d) 30% tax on Philippine gross income
15. One of the following statements is incorrect. Which is it? The minimum corporate income tax of a
corporation is
a) Computed in the quarterly returns of the corporations;
b) Computed in the annual income tax return of the corporation
c) Computed in all the taxable years of operations of the corporation
d) 2% of gross income of a domestic or resident trading corporation
16. It is a test used in determining the reasonable needs of a business to justify the accumulation of earning
which will exempt the corporation from paying IAE:
a. Urgency test
b. Reasonable needs test
c. Immediacy test
d. Control test
17. Which of the following is subject to the corporate income tax?
a) A non-stock and non-profit educational institution
b) Public educational institution
c) Private cemeteries
d) Civic league or organization not organized for profit and operated exclusively for the promotion of
social welfare.
18. The MCIT shall not apply to the following resident foreign corporations, except:
a) RFC engaged in business as international carrier subject to 21/2% of their Gross Philippine Billings.
b) RFC engaged in business as Offshore banking unit on their income from foreign currency transactions
with local commercial banks.
c) RFC engaged in business as regional operating headquarters.
d) RFC engaged in hotel, motel and resort operations.
19. Which of the following is not correct? The gross income tax
a) Is optional to a qualified corporation
b) Is available if the ratio of cost of sales to gross sales or receipts from all sources does not exceed
55%.
c) Shall be irrevocable for three consecutive taxable years that the corporation is qualified under the
scheme.
d) Is compared with the normal income tax and minimum corporate income tax.
20. Any income from transactions with depository banks under the expanded foreign currency deposit system
shall be exempt from income tax if derived by a:
a) domestic corporation
c) resident foreign corporation
b) non-resident foreign corporation
d) resident alien
21. Statement 1: A domestic corporation subjected to normal corporate income tax is exempt from Improperly
Accumulated Earnings Tax.
Statement 2 : Both domestic and resident foreign corporations are subjected to improperly accumulated
earnings tax.
a) Only statement 1 is correct
c) Both statements are correct
b) Only statement 2 is correct
d) Both statements are incorrect
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22. If the gross income from unrelated activity exceeds 50% of the total gross income derived by any private
educational institution, the rate shall be for ordinary corporation based on the entire taxable income. This
principle is knows as:
a) constructive receipt
b) end result doctrine
c) tax benefit rule d) predominance test
23. The MCIT is only effective in the 5th year following the year in which the corporation commenced its
business:
Non-resident corporations are also covered by MCIT.
a. TRUE; TRUE
b. FALSE; FALSE
c. FALSE; TRUE
d. TRUE; FALSE
24. A corporation files a quarterly return within:
a) 30 days after the end of the first 3 quarters.
b) 30 days after the end of the first 4 quarters
c) 60 days after the end of the first 3 quarters
d) 60 days after the end of the first 4 quarters
25. A final or annual return is filed:
a) On or before the 15th day of the month following the close of the taxable year.
b) On or before the 15th day of the 2nd month following the close of the taxable year.
c) On or before the 15th day of the 3rd month following the close of the taxable year.
d) On or before the 15th day of the 4th month following the close of the taxable year.
26. A corporation on a fiscal year ending March 31, should file its annual return:
a) On or before April 15 of the same year
c) On or before July 15 of the same year
b) On or before April 15 of the following year
d) On or before July 15 of the following year
27. The excess minimum corporate income tax over the normal income tax is deductible from normal tax for
the succeeding :
a) 1 year
b) 2 years
c) 3 years
d) 5 years
28. Royalty income earned within the Philippines by a non-resident foreign corporation is:
a) tax-exempt
b) subject to 10% final tax c) subject to 15% final tax d) subject to 30% final tax
29. The net taxable income of regional operating headquarters by multinational companies engaged in
administrative services is:
a) tax-exempt
c) subject to 10% final tax
b) subject to 15% final tax
d) subject to 30% final tax
30. CDA registered cooperatives are income tax exempt, except on :
a) income from business transacted with non members
b) income from business transacted with members
c) interest income from depository bank
d) interest income earned from member’s plan
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Unit III – Income Tax
Lesson 2 – Corporation
Name: _________________
Section _________________
Score: ___________
Date: ____________
Assignment 2 – Practice
1. A corporation, organized in 2017, has the following data for the taxable year 2020:
Gross income, Philippines
Gross income, Hongkong
Gross income, Singapore
Expenses, Philippines
Expenses, Hongkong
Expenses, Singapore
Dividend from San Miguel Corporation
Dividend from Ford Motors, USA
Royalties, Philippines
Royalties , Hongkong
Interest on bank deposit, BDO Philippines
Interest on bank deposit, BDO, Hongkong
Rent income, Building in Hongkong
Gain on sale of shares of San Miguel Corp. direct to the buyer (S.P 500,000)
Gain on sale of share of Ford Motors, USA (S.P. 600,000)
Interest income (other than from banks) Singapore
1,500,000
1,300,000
1,200,000
900,000
800,000
750,000
100,000
120,000
300,000
500,000
50,000
40,000
250,000
150,000
100,000
60,000
REQUIRED. Compute the income tax payable and total final tax on passive and capital gains assuming
the
corporation is:
a. Domestic corporation
b. Resident foreign corporation
c. Non-resident foreign corporation
2. PTR Corporation’s computed normal income tax and MCIT and creditable income taxes withheld from first
to fourth quarter including excess MCIT and excess withholding taxes from prior year/s are as follows:
First Qtr
Second Qtr
Third Qtr
Forth Qtr
Normal income tax
P 100,000
P 120,000
P 250,000
P 200,000
Minimum corporate income tax
80,000
250,000
100,000
100,000
Taxes withheld
20,000
30,000
40,000
35,000
Additional information: Excess MCIT, prior year, P 30,000; Excess withholding tax prior year, P 10,000.
REQUIRED: Compute the income tax payable for the first three quarters and the year end.
3. Using the same data in number 2, except that the normal income tax and the MCIT for the quarters are as
follows:
First Qtr
Second Qtr
Third Qtr
Forth Qtr
Normal income tax
P 100,000
P 120,000
P 250,000
P 50,000
Minimum corporate income tax
80,000
250,000
100,000
120,000
REQUIRED: Compute the annual income tax payable of the corporation for the year end.
4. Assume that ABC Corp. commenced business operation in calendar year 2008 It is already more than 4
years
in operation as of calendar year 2014 hence subject to the minimum corporate income tax beginning taxable
year 2014. Assume further that its income taxes during the years 2014 to 2020are as follows:
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Year
2014
2015
2016
2017
2018
2019
2020
Normal
Income Tax
P 25,000
130,000
200,000
100,000
35,000
28,000
40,000
Minimum Corporate
Income Tax (MCIT)
100,000
150,000
190,000
300,000
60,000
40,000
50,000
Excess of MCIT
over Normal Tax
P 75,000
20,000
-200,000
25,000
12,000
10,000
Question 1: Can ABC Corp. carry forward and credit the 2014 excess MCIT against income tax liability for
2015?
Question 2: When can ABC Corp. carry forward the excess MCIT in 2014 and 2015?
Question 3: When can ABC Corp. carry forward the excess MCIT in 2017?
Question 4: What shall be done with the excess MCIT in 2017 which cannot be absorbed because the normal
tax liabilities for the succeeding years are lesser that the respective MCITs?
Question 5: What journal entries shall be made for the years 2014 – 2020?
5. A domestic corporation organized in 2011, provided the following information:
2016
2017
2018
Gross Sales
P 2,040,000
P 2,800,000 P 3,000,000
Sales returns
40,000
100,000
Cost of goods sold
1,000,000
700,000
1,500,000
Business Expenses
950,000
2,100,000
1,200,000
2019
P 4,000,000
1,500,000
1,200,000
The income tax due after tax credit if there is any for the taxable year 2019 is:__________
The TRADE Corp. organized in 2020, provided the following data for calendar year ending December 2020:
($1-P50)
PHILIPPINE
US
GROSS INCOME
P 6,000,000
$50,000
DEDUCTIONS
P 3,500,000
$30,000
6. If it is a resident international carrier, it income tax is _____________________
7. If it is a non–resident cinematographic film owner/lessor, its income tax is:_______________
8. If it is a non-resident lessor of vessel its income tax is:___________________
9. If it is a non-resident lessor of aircraft machineries and equipment, its income tax is:______________
In the 2019, a domestic corporation was in its 4th year of the operations. The following data are for the years
2019 and 2020:
2019
2020
Gross profit for sales
P3,600,000
P4,700,000
Business expenses
2,380,000
3,050,000
Dividend from PRG Corp, a domestic corp.
40,000
65,000
Dividend from RFC Corp, Australia
40,000
108
Royalties, Philippines
Interest on current account with BDO, Manila
Interest on notes receivable
Gain on sale of equipment
150,000
15,000
10,000
10,000
300,000
25,000
20,000
10. The income tax for 2019 is: _______________
11. the income tax due for 2020 is: _____________
12 . A proprietary educational institution has presented the following data for the year 2019:
Gross income – related activities
P
Gross income – unrelated activities ( including P 2,000,000 rent from
commercial space, gross of 5% withholding tax)
Expenses – related activities
Expenses – unrelated activities
Dividend from a domestic corporation
How much is the tax still due and payable?
a) P 2,100,000
b) P 2,000,000
c) p 700,000
5,000,000
7.000,000
2,000,000
3,000,000
100,000
d) P 600,000
13. The following information were from the records of the Central Area Colleges, Inc. a proprietary educational
institution for the fiscal year ended May 31, 2020:
Income:
Miscellaneous fees
362,600
Tuition fees
2,843,100
Rent income
60,000
Net income – school canteen
36,200
Net income – bookstore
24,800
Dividends
15,000
Interest on time deposit
45,000
Expenses:
Payroll and administrative salary
1,424,420
Other operating expenses
844,430
Depreciation – new three room building
37,500
In the first month of the fiscal year, the school built a new-three room building costing P 750,000. The
new
building would be depreciated for 10 years.
How much is the income tax due from Central Area Colleges, for the fiscal year ended, May 31, 2020?
_____________________
14. Refer to no. 13, except that the institution opted to claim the cost of the new three room building as an
outright expense, the income tax payable is ________________
15. AFT corporation, a domestic corporation was determined to have improperly accumulated earnings for the
taxable year 2020 based on its records as follows:
Taxable income at normal tax rate
P 900,000
Dividend a paid
150,000
Income tax paid for the year
200,000
Income subject to final tax
60,000
Income exempt from tax
50,000
Income excluded from gross income
10,000
Amount of NOLCO deducted
50,000
The tax on improperly accumulated earnings: ______________________________
16. CPA Airlines, a resident foreign international carrier has the following records of income for the period.
(The income represents gross Philippine billings)
1) Continuous flight from Manila to Tokyo = 2,000 tickets at P 3,000 per ticket.
2) Flight from Manila to Singapore; transfer flight from Singapore to Tokyo = 3,000 tickets at P 3,000 per
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ticket.
3) Continuous flight from manila to Singapore = 3,000 tickets at P 1,500 per ticket.
The income tax due is:______________________________
17. A non-profit hospitals has the following data during the year 2019:
Gross income from hospital operation
Operating expenses (excluding depreciation for the new hospital building
Rent income of commercial space, hospital ground floor, net of 5% CWT
Interest bank deposit, net of final tax
Dividend income from domestic corporation
2,000,000
500,000
190,000
40,000
100,000
Additional hospital building was built and finished on June 30, 2019 at a cost of P 4,000,000 with depreciable
life of 25 years.
The income tax payable is ____________________
18. Refer to no. 17, assume the hospital was organized for profit, the income tax due and payable is;________
19. Pride Learning School, a proprietary educational institution provided the following data for the taxable year
2020:
Gross income related activities
6,000,000
Gross income unrelated activities excluding rental
5,000,000
Rental income, gross of CWT
2,000,000
Expenses, related activities
3,000,000
Expenses, unrelated activities
4,000,000
Dividend income from domestic corporation
50,000
Interest income from bank deposit
10,000
Quarterly payments for the first 3 quarters
600,000
The income tax payable _______________
20. Asia Airlines, an international air carried showed the following data for the taxable year 2020:
Passengers airfare from Japan to Philippines
Passengers airfare from Philippines to Japan
Passengers airfare from Japan to USA
Airfare of cargoes from Japan to Philippines
Airfare of cargoes from Philippines to Japan
Airfare of cargoes from Japan to USA
3,000,000
4,000,000
6,000,000
1,000,000
1,200,000
3,000,000
The income tax payable ____________________
21. A depository bank under FCDS has the following income from foreign currency transactions.
(Exchange rate = $1 = 50)
From nonresidents
$ 5,000
From residents
$3,000
From Philippine National Bank
$2,000
The final withholding tax is _________________
22. A foreign branch remitted the following profits to its head office:
taxable year 2020:
Taxable income, net of the RCIT
Dividend income
Net capital gain on sale of domestic shares
2,000,000
100,000
125,000
The tax on the branch remittance is _____________________
23. A domestic corporation on its 6th year of operation was assessed for improperly accumulated earnings tax:
110
Gross income
Allowable deduction including P 600,000 NOLCO
Exempt income
Interest income, net of tax
Gain on sale of domestic shares, net of tax
Dividend declared
4,000,000
3,800,000
240,000
40,000
60,000
600,000
The improperly accumulated earnings tax is _______________
24. A private educational institution has a gross income of P 4,000,000, only 40% of this were contributed by
related activities, and total expenses of P 3,000,000, 50% incurred in connection with non-related activities.
The income tax payable is:
a) 300,000
b) 270,000
c) 100,000
d) not given (specify)______
25. refer to no. 24, except that the school is a nonstock, non-profit educational institution, the income tax
payable
is:
a) 300,000
b) 270,000
c) 100,000
d) not given
26.
AD Construction Company and EF Constructions, both in construction business formed a joint venture to
build houses for the poor, a government project, with an agreed equal sharing ratio in net income. Data on
income and expenses for the year show:
Joint Venture
A Co.
B Co.
Gross Income
P 80,000,000
P 2,000,000
P 3,000,000
Expenses
60,000,000
1,200,000
2,000,000
The income tax liability of the joint venture.
a) P6,000,000
b) P20,000,000
c) P1,800,000
d) P 0
X and Y are partners (both resident citizens) in the following partnerships:
General co-partnership
General Professional Partnership
Gross Income
P 500,000
P 400,000
Deductible expenses
300,000
180,000
Personal Income and Expenses
Gross Income
Deductible expenses
Dividend from domestic corporation
Dividend from foreign corporation
Prize, supermarket raffle
Royalty, books
X
P 400,000
250,000
20,000
10,000
15,000
10,000
Y
P 280,000
120,000
30,000
8,000
8,000
12,000
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Partners agree to share partnership income and losses as follows: X = 40%; Y = 60%
27. The tax payable by
general co- partnership : __________________
28. The tax payable by the general professional partnership: _____________________
29. the taxable income and final tax on passive of X : _____________________
30. the taxable income and final tax on passive of Y _________________________
End