Jean May F. Fajilan
CBET 01-801E
CORPORATE TAXATION
A. DEFINITION
RA 11232, also known as the Revised Corporation
Code (RCC) of the Philippines defined
Corporation a as an artificial being created by
operation of law, having the right of succession
and the powers, attributes, and properties
expressly authorized by law or incidental to its
existence. For taxation purposes, Corporation is
defined under Section 22 of the Tax Code (RA
6424) as amended under RA 11534 or the
Corporate Recovery and Tax Incentives for
Enterprises Act (CREATE) and RR 5-2021 as
follows:
CORPORATION shall INCLUDE
1. One Person Corporations (OPCA);
2. Partnerships, no matter how created or
organized;
3. Joint stock companies;
4. Joint
accounts
(cuentas
en
participacion);
5. Associations, or
6. Insurance companies
A one-person corporation is a corporation with a
single stockholder; Provided, That only a natural
person, trust, or an estate may for a one-person
corporation
JOINT VENTURE OR CONSORTIUM
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.
IN GENERAL, a joint venture or consortium is
taxable as corporation unless it refers to joint
described above. Additional requirements for tax
exemption are as follows:
1. A joint venture or consortium formed for
the purpose of undertaking construction
projects is not considered as corporation
(RR 10-2012, effective June 2012)
provided:
a. The joint venture was formed for the
purpose
of
undertaking
a
construction project; and
b. Should involve joining/pooling of
resources by licensed local Foreign
Contractors Accreditation Board
(PCAB) of the Department of Trade
and Industry (DTI)
c. The local contractors are engaged in
construction business; and
d. The Joint Venture itself must
likewise be duly licensed as such by
the
Philippine
Contractors
Accreditation Board (PCAB) of the
Department of Trade and Industry
(DTI).
But does NOT INCLUDE
1. General professional partnerships; and
2. A joint ventures or consortiums formed
for the purpose of undertaking:
a. 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.
FOREIGN CONTRACTORS
Joint ventures involving foreign contractors may
also be treated as a non-taxable corporation
provided:
The member foreign contractor is
covered by a special license as contractor
by the PCAB of DTI.
The construction project is certified by
the appropriate Tendering Agency
(government office) that the project is a
foreign financed/ internationally-funded
project and that international bidding is
allowed under the Bilateral Agreement
Jean May F. Fajilan
CBET 01-801E
entered into by and between the
Philippine Government and the foreign
international
financing
institution
pursuant to the implementing rules and
regulations of Republic Act No. 4566
otherwise known as Contractor's License
Law.
2 A joint venture or consortium for engaging in
petroleum, coal, geothermal and other energy
operations pursuant to an operating consortium
agreement under a service contract with the
government.
TAX treatment of Co-venturer's share in the
Joint Venture Profit
TYPE OF JOINT
CO-VENTURER
VENTURE
CORPORATION
Taxable Joint
Venture
*Exempt
INDIVIDUAL
**Final
withholding
tax
Basic Tax
Non-taxable
RCIT***
Joint Venture
*Treated
an
inter-corporate
dividend
**Treated as dividend income which is generally
subject to FWT of 10% but may also be subject to
20% if received by NRAET and 25% FWT if
received by NRANET
***TRAIN 30%; CREATE: other 25% or 20%
except if derived by special corporation
❖ JOINT STOCK COMPANIES
Joint stock companies are constituted when a
group of individuals, acting jointly, establish and
operate 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 government
authority.
❖ JOINT ACCOUNT COMPANIES
Joint account (cuentas en participacion) is
constituted when one interests himself in the
business of 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.
The term "associations" includes all organizations
which have substantially the salient features of a
corporation to be taxable as a "corporation."
B. CLASSIFICATION OF CORPORATE TAXPAYERS
1. Domestic Corporation (DC)
o A corporation created or organized in
the Philippines or under its laws
2. Resident Foreign Corporation (RFC)
o A corporation created or organized in a
foreign country or under the laws of a
foreign country and engaged in
business in the Philippines
3. Nonresident Foreign Corporation (NRFC)
o A corporation created or organized in a
foreign country or under the laws of a
foreign country and is not engaged in
business in the Philippines.
CORPORATIONS MAY BE CLASSIFIED FURTHER
INTO:
1. Ordinary Corporations - corporations
subject to normal tax or basic tax or the
regular corporate Income tax (RCIT) rate
of 30% under TRAIN Law and either 25%
or 20% under CREATE Law.
2. Special Corporation - corporations
subject to income tax rate which are
lower than the regular corporate income
tax (RCIT) rate of 30%, 25% or 20%, as the
case may be.
The Special Corporations under the Tax
Code, as amended, are as follows:
Jean May F. Fajilan
CBET 01-801E
C. EXEMPT CORPORATIONS
The following organizations shall not be subject
to income tax
[(Section 30 RA 9424) National Internal Revenue
Code:
A. Labor,
agricultural
or
horticultural
organization not organized principally for
profit;
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 a 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
Jean May F. Fajilan
CBET 01-801E
charitable, scientific, athletic, or cultural
purposes, or for the rehabilitation of veterans 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;
F. Business league, chamber of commerce, or board
of trade, not organized for profit and no part of
the net income of which inure 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 non-stock and nonprofit educational
institution;
1.
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 organization 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; and
I. 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 to them the proceeds
of sales, less the necessary selling expenses on
the basis of quantity of produce finished by them.
PROVIDED, that the income of whatever kind and
character of the foregoing organizations from any
of their properties real or personal or from any of
their activities conducted for profit regardless of
the disposition made of such income, shall be
subject to income tax.
GOVERNMENT-OWNED OR CONTROLLED
CORPORATIONS (GOCCS)
RR 5-2021, implementing the provisions
of CREATE law provides that GOCCs, agencies and
instrumentalities 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.
EXCEPT:
Government Service and Insurance
System (GSIS)
Social Security System (SSS)
Home Development Mutual Fund
(HDMF; also known as Pag-ibig)
Philippine Health Insurance Corporation
(PHIC)
Local Water Districts (RA 10026)
NOTE:
✓ PCSO is taxable beginning Jan 1, 2018 or
upon effectivity of the TRAIN Law.
✓ HDMF or Pag-ibig exempt only upon the
effectivity of CREATE Law (April 11,
2021).
D. INCOME TAXES OF CORPORATIONS
GENERAL PRINCIPLES
A. SOURCE OF INCOME SUBJECT TO TAX:
1. DC - World
2. RFC and NRFC - Within the
Philippines only
B. BASIS OF INCOME SUBJECT TO TAX:
1. DC and RFC - Net Income
2. NRFC - Gross Income
APPLICABLE TAXES,
Type of income
1. Regular or ordinary •
income
2. Passive income
3. Capital Gains on
• Sale of shares of
stock of domestic
corporation
sold
directly to a buyer;
and
• Sale of real property
in the Philippines
classified as capital
asset
Applicable Tax
DCs and RFCs:
Regular Corporate
Income Tax (RCIT)
• NRFC:
Final
Withholding Tax
(FWT)
• FWTS
•
Capital Gains Tax
(applicable to all
corporations
•
Capital Gains Tax
(applicable only
to
domestic
corporations)
Jean May F. Fajilan
CBET 01-801E
E. REGULAR CORPORATE INCOME TAX (RCIT)
NOTE:
• Effectivity of the BCIT rates under
CREATE: BR 5-2021
For DC and RFC-Beginning July 1,
2020
For NRFC-Beginning January 1,
2021.
•
•
•
CREATE law, which was published on
March 27, 2021, took effect on April 11,
2021. Although CREATE law took effect
only on April 11, 2021, there are certain
provisions in the law with specific
effectivity dates which are earlier Than
April 11, 2021, such as the revised RCIT
rates for DCS and RFCs as well as the
revised FWT rate for NRFCS.
**Being July 1, 2020, the applicable RCIT
rate domestic corporations with total
assets of P100 million and below AND net
taxable income of P million and below to
known as Micro Small and Medium
Enterprises MSMEs) was reduced to 20%
Total assets excludes the land on which
the particular business entity's office,
plant, and equipment are situated during
the table your for which the tax is
imposed
All other "domestic" corporations are
subject to RCIT rate of 25% beginning July
1, 2020.
•
•
RFC are subject to the revised RCIT rate
of 25% beginning July 1, 2020
***Revised FWT rate of 25% for NPCs
shall take effect beg. Jan 1, 2021
F. MINIMUM CORPORATE INCOME TAX (MCIT)
Section 27(E)(1) and Section 2802) [for DCs and
RFCS respectively, as amended, under CREATE
Lax, provide:
A Minimum Corporate Income Tax MCIT of one
two percent (2%) of the gross income as of the
end of the taxable year as imposed upon any
domestic corporations and resident foreign
corporations beginning on the 4th taxable year
immediately following the taxable year in which
such corporation commenced its business
operations when the MCIT as greater than RCIT,
Provided: That effective July 1, 2020 und June 30,
2023, the rate shall be one percent (1%).
THE MCIT SHALL BE IMPOSED WHENEVER
• The corporation has zero taxable income;
or
• The corporation has negative taxable
income; or
• Whenever the amount of MCIT is greater
than the regular corporate income tax
(RCIT) due from such corporation. Hence,
MCIT is always computed and c
compared to RCIT starting on the fourth
year of operations.
Jean May F. Fajilan
CBET 01-801E
NOTE:
• RULES FOR DETERMINING THE PERIOD WHEN A
CORPORATION BECOMES SUBJECT TO MCIT (RR
2-98 as amended under RR 9-98)
Meaning of “….in the 4th taxable year
immediately following the taxable year in which
such corporation commenced its business
operations”
o In determining the 4 taxable year, the year
the Corporation was registered shall be
disregarded
•
Under RR 12-2007, MCIT shall be computed not
only on a yearly bass but also in the
computation of quarterly income tax due.
MCIT RATES:
Period
On or before June 30, 2020
July 1, 2020 to June 30, 2023
Beginning July 1, 2023
MCIT Rate
2%
1%
2%
CARRY FORWARD OF EXCESS MCIT (MCIT
CARRY-OVER)
Any excess of the MCTT over RCIT shall be carried
forward and credited against the RCIT for the
three (3) immediately succeeding taxable years.
Pxx
xx
xx
xx
Pxx
b. Manufacturing Concern
Raw materials used
Direct Labor
Manufacturing overhead
Freight cost
Insurance premiums
Other cost of production
Total
Pxx
xx
xx
xx
xx
xx
Pxx
2. Seller of Services
Gross Receipts
Sales Discounts and
allowances
Cost of Services
Gross Income
Add Other Income subject to
RCIT
Total Gross Income for MCIT
purposes
Pxx
xx
xx
xx
xx
Pxx
COST OF SERVICES
GROSS INCOME FOR MCIT PURPOSES:
1. Seller of Goods
Gross Sales
Sales Discounts
Sales Returns and
Allowances
Cost of Sales
Gross Income
Add: Other Income subject
to RCIT
Total Gross Income for
MCIT purposes
Cost of Goods Sold:
a. Trader or Merchandiser
Invoice cost of goods sold
Import duties
Freight
Insurance
Total
Pxx
(xx)
(xx)
(xx)
Pxx
Xx
Pxx
Salaries Employee benefits of
personnel, consultants and specialists
directly rendering the service
Cost of facilities directly utilized in
providing the service (e.g rentals and
cost of supplies)
Other direct costs and expenses
necessarily incurred to provide the
services
Total
o
Pxx
xx
xx
Pxx
In case of banks, "cost of services”
shall include interest expense
Jean May F. Fajilan
CBET 01-801E
RELIEF FROM THE MCIT
The Secretary of Finance is authorized to suspend
the imposition of the MCIT on any corporation
which suffers losses of account of:
Prolonged labor dispute
Force majeures
Legitimate business reverses
CORPORATIONS EXEMPT FROM MCIT:
1. Special Corporations such as:
✓ Proprietary educational institutions
and hospitals
✓ International carrier Regional
✓ Operating Headquarters (up to Dec.
31, 2021 only)
2. Nonresident Foreign Corporations (NRFCA)
3. Corporations that are tax exempt under the
law such as Regional or Area Headquarters
4. Firms that are taxed under special tax regime
(e.g. Covered by PEZA law & Bases Conversion
Development Act)
NET OPERATING LOSS CARRY-OVER (NOLCO)
"Net Operating Loss (NOL) means the excess of
allowable deduction over gross income of the
business in a taxable year.
The net operating loss of the business or
enterprise for any taxable year shall be carried
over as a deduction from gross income for the
next three (3) consecutive taxable years
immediately following the year of such loss.
However, under RA 11494, also known as the
Bayanihan Act II, the NOLCO of the business or
enterprise for taxable years 2020 and 2021 shall
be carried over as a deduction from gross income
for the next five (5) consecutive taxable years
immediately following the year of loss. The net
operating loss for said taxable years may be
carried over as a deduction even after the
expiration of RA No. 11494, provided the same
are claimed within the next five (5) consecutive
taxable years immediately following the year of
such loss (RR 25-2020)
GUIDE:
Taxable Year NOL was
incurred
Prior to 2020
2020 and 2021
Beginning 2022
o
Deductible as NOLCO
within
3 consecutive years
5 consecutive years
3 consecutive years
For corporations adopting Fiscal Year
period, taxable year 2020 and 2021 shall
include all those corporations with fiscal
years ending on or before June 30 2021, and
June 30, 2022 respectively (RR 25-2020)
REQUISITES FOR DEDUCTIBILITY
✓ At the time of incurring net loss, the
taxpayer must not be exempt from
income tax; and
✓ There is no substantial change in the
ownership of the business or enterprise
in that
a. Not less than severity-five (75%) in
nominal value of outstanding issued
shares, if the business is in the name
of a corporation, is held by or on
behalf of the same persons; or
b. Not less than seventy-five (75%) of
the paid-up capital of the
corporation, if the business is in the
name of a corporation, is held by or
on behalf of the same persons
Additional Requirements for NOLCO
incurred in 2020 and 2021 under Bayanihan
Act II and RR 25-2020
Jean May F. Fajilan
CBET 01-801E
Presentation of NOLCO in the Income Tax Return
(ITR) and Unused NOLCO in the Income
Statement
1. The NOLCO shall be separately shown in
the taxpayer's (also shown in the
Reconciliation Section of the Tax Return);
2. The Unused NOLCO shall be presented in
the Notes to Financial Statements
showing, in detail, the taxable year in
which the net operating loss was
sustained or incurred, and any amount
thereof claimed as NOLCO deduction
within five (5) consecutive years
immediately following the year of such
loss.
3. The NOLCO for taxable years 2020 and
2021 shall be presented in the Notes to
the Financial Statements separately from
the NOLCO for other taxable years:
G. CORPORATE INCOME TAX (15% Gross Income
Tax) Repealed / Deleted under CREATE Law
The provision pertaining to the 15%
Optional Corporate Income Tax, also known as
Gross Income Tax of 15%, was deleted under
CREATE Law. Consequently, this is no longer
allowed upon the effectivity of the CREATE Law.
The last paragraph of Sec. 27(A) of the Tax Code
PRIOR to amendment under CREATE Law,
provides:
“…..The
President,
upon
the
recommendation of the Secretary of Finance
may, effective January 1, 2000, allow domestic
and resident foreign corporations to be subjected
to optional corporation tax of 15% based on gross
income. Election of 15% tax shall be irrevocable
for the three (3) consecutive taxable years during
which the corporation is qualified under the
scheme.”
REQUISITES
All of the following conditions shall have to be
satisfied in the allowance of optional corporate
tax:
✓ A tax effort ratio of 20% of Gross National
Product (GNP);
✓ A ratio of 40% of income tax collection of
total tax revenue;
✓ A VAT effort of 4% of GNP; and
✓ A 0.9 ratio of the Consolidated Public
Sector Financial Position to GNP.
✓ The option to be taxed based on gross
income shall be available only to firms
whose ratio of cost of sales to gross sales
or receipts from all sources does not
exceed 55%.
FORMULA:
Sales Revenues
Cost of sales/ Cost of direct services
Gross income
Gross income tax rate
Income tax due
Less: Taxes withheld
Taxes paid-previous quarters
Foreign tax credits
Income tax payable
Pxx
(xx)
xx
15%
Pxx
(xx)
(xx)
(xx)
Pxx
Jean May F. Fajilan
CBET 01-801E
H. SUMMARY OF REVISED INCOME TAX RATES
UNDER CREATE; RR 5-2021
Jean May F. Fajilan
CBET 01-801E
FINAL WITHHOLDING TAX (FWT) ON "CERTAIN
PASSIVE INCOME derived from Philippine
sources
Jean May F. Fajilan
CBET 01-801E
➢ *One of the apparent inconsistencies
under the TRAIN Law and corrected
under CREATE
➢ Tax on interest income derived from
FCDS/FCDU deposit is not applicable to
nonresident taxpayers
➢ **Dividend income from DC to NRFC
TRAIN Law: Generally 30%. However, if
the country where the NRFC is domiciled
allows a credit for taxes deemed paid in
the Philippines equivalent to 15% (also
known as tax sparing) or does not impose
tax dividends, the tax rate shall be 15%
otherwise, 30% (without tax sparing).
CREATE Law; RR 2-2021: Dividend income
received by NRFC from DC:
In general, it is subject to 25% FWT. However, a
reduced rate of fifteen percent (15%) shall be
applied subject to the condition that the country
in which the NRFC is domiciled:
Shall allow a credit against the tax due from
the said NRFC which are equivalent to taxes
deemed to have been paid in the Philippines
equal to ten percent (10%) effective January
1, 2021, which represents the difference
between the regular income tax rate for
NRFC under Sec. 28(B)(1) / f) of the NIRC, as
amended, and the fifteen percent (15%) tax
on dividends as herein provided;
OR Does not impose any income tax on
dividends received from a domestic
corporation.
SITUS OF DIVIDEND INCOME FROM FOREIGN
CORPPORATIONS (RMC 62-2021: RR 5-2021:
Sec. 42 NIRC
➢ Dividend income received by DC from NRFCconsidered as foreign sourced dividend under
RR 5-2021.
➢ Dividend income received by DC from RFC
(RMC 62-2021) O The tax treatment of
dividends received by a domestic corporation
from RFC will depend on the sources of
income of the RFC.
Under Section 42(A)(2)(b) of the Tax Code, as
amended, dividend from a foreign
corporation shall be treated as income
derived from sources WITHIN THE
PHILIPPINES UNLESS less than 50% of the
gross income of the foreign corporation for
the three year period ending with the close of
its taxable year preceding the declaration of
such dividends for such part of the period as
the corporation has been in existence) was
derived from sources within the Philippines.
➢ ***May be exempt under Certain
Conditions follows:
FOREIGN-SOURCED DIVIDENDS (RR 5-2021 and
RMC 62*2021) ang sourced dividends if received
by a domestic corporation, are exempt under
CREATE law subject to the following conditions
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-sourced dividends
were received or remitted;
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
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.
Jean May F. Fajilan
CBET 01-801E
Absent any one of the above conditions, the
foreign-sourced dividends shall be considered as
taxable income of me domestic corporation in
the year of actual receipt or remittance, subject
to surcharges, interest, and penalties. as
applicable (RR-2021).
J. INCOME DERIVED BY DEPOSITORY BANKS
UNDER FCDS INCOME
NOTE:
• The taxes presented are applicable to
DCs and RFC under the following
provisions:
o Sec 27(3)-DCs; Sec 28(A)(6)(b) –
RFC’s; rearranged only
• The provisions were not amended under
CREATE
Jean May F. Fajilan
CBET 01-801E
•
•
•
The 6% CGT regardless of whether the sale
resulted to a gain or loss is imposed to
domestic corporations only. Moreover, the
option available to individual taxpayers to
subject the sale to either 6% CGT or Basic Tax,
if the buyer is the government, is not
applicable to domestic corporations.
**For purposes of computing the 6% CGT on
real properties, FMV shall pertain to the
higher amount between the valuation
provided by the Provincial or City assessors
(also known as “assessed value” or “Valuation
for real property” tax purposes) and the Zonal
Value provided by the BIR. The FMV
determined by independent parties is not
used for CGT purposes.
CGT de within 30 days from date of sale.
CAPITAL GAINS TAX
❖ Capital Gains Tax on Sale of Land and/or
Buildings
Requisites
✓ The land and/or building must be a
capital asset; and
✓ It must be located in the Philippines.
✓ Regardless of whether the transaction
resulted to a gain or loss
FORMULA
Tax Base
Rate
CGT
Pxxx
6%
Pxxx
Highest
TAX BASE
1. Selling Price
2. Fair Market Value
3. Zonal Value
❖ Capital Gains tax on Sale of Shares of
Stock of a Domestic Corporation
Requisites:
✓ The shares of stock sold, bartered,
exchanged or disposed must be from a
domestic corporation; and
✓ The transaction must be not through the
local stock exchange.
✓ The seller should not be a dealer in
securities (held as capital asset or
investment purposes only)
✓ The transaction should result to a capital
gain based on computation shown below:
FORMULA:
Selling Price
Cost
Cost Capital Gain
Rate
CGT
Pxx
(xx)
Pxx
%**
Pxx
Sale of shares of a domestic corporation
through the local stock exchange is not
subject to income tax but to a business tax
of 6/10 of 1% (also known as Stock
Transaction Tax) under Sec. 127 of the Tax
Code.
Sale of shares of stock by a dealer in
securities such as brokerage firms,
regardless of whether the shares were sold
directly to a buyer or through the local stock
exchange is subject to basic income tax and
value added tax.
Under RR 6-2013, the value of the shares of
stock at the time of sale shall be the fair
market value in determining the value of the
shares, the Adjusted Net Asset Method shall
be used whereby all assets and liabilities are
adjusted to market values. For purposes of
discussion in this review material, the selling
price is assumed to be the market value
computed using the aforementioned
method, assuming the latter is not provided.
Jean May F. Fajilan
CBET 01-801E
SPECIAL CORPORATIONS
Special Corporations are corporations subject to
lower RCIT rates of 30% (TRAIN Law) and either
20% or 25% under CREATE Law, as the case may
be, on their regular or ordinary income.
1. DOMESTIC CORPORATIONS (RR 5-2021; RMC
62-2021)
➢ Proprietary Educational Institutions (PEIs)
and Hospitals. The rules applicable to
ordinary corporations will also apply to
proprietary educational institutions and
hospitals which are nonprofit, except the
following:
A. Subject to special income tax rate as
provided under Section 27(B) of the Tax
Code as amended by RA 11534-CREATE
Law
Proprietary educational institutions and hospitals
which are nonprofit shall pay a tax of ten percent
(10%) on their taxable income: Provided that
beginning July 1, 2020 until June 30, 2023, the tax
rate herein imposed shall be one percent (1%):
Provided, further, that if the gross income from
'unrelated trade, business or other activity
exceeds fifty percent (50%) of the total gross
income derived by such educational institutions
or hospitals from all sources, the tax prescribed in
Subsection (A) hereof shall be imposed on the
entire taxable income.
SUMMARY
(provided unrelated income is not higher than
related income)
❖ TRAIN Law:
10%
❖ CREATE:
▪ From July 1, 2020 to June 30, 1%
2023
▪ Beginning July 1, 2023
10%
"Unrelated trade, business or other activity” is an
activity which is not substantially related to the
exercise or performance of the school or
hospital's primary purpose or function such as
but not limited to rental income from available
school spaces or facilities.
Examples of related income (RMC 4-2013)
▪ Income from tuition fees and
miscellaneous school lees
▪ Income from hospital where medical
graduates are trained for residency
▪ Income from canteen situated within the
school campus
▪ Income from bookstore situated within
the school campus
“Proprietary educational institution” refers any
private schools maintained and administered by
private individuals or groups with an issued
permit to operate from the Department of
Education, Culture and Sports (DECS), or the
Commission on Higher Education (CHED), or the
Technical Education and Skills Development
Authority (TESDA), as the case may be in
accordance with existing laws and regulations (RR
50-2021)
B. It is not subject to MCIT
C. CAPITAL EXPENDITURES for expansion of
school facilities may not be capitalized but
instead claimed as outright expense. This rule
shall not apply, however, to a non-profit
hospital.
Exemption from Real Property Tax
Section 234 of the Local Government Code (LGC)The following are exempted from payment of the
real property tax (b) Charitable institutions,
churches, parsonages or covenants appurtenant
thereto, mosques, nonprofit or religious
cemeteries and all lands, buildings, and
improvements actually, directly, and exclusively
used for religious, chartable or educational
purposes Real property tax, a local tax, is different
from CGT.
Jean May F. Fajilan
CBET 01-801E
APPLICABLE INCOME TAX OF EDUCATION
INSTITUTIONS IN THE PHILIPPINES
**On certain passive income derived from
Philippine sources.
APPLICABLE INCOME TAX OF HOSPITALS IN THE
PHILIPPINES
***On sale of shams of stock of a non-listed
domestic corporation and real properties located
in the Philippines classified as capital assets.
Jean May F. Fajilan
CBET 01-801E
DEFINITION OF TERMS UNDER RR 5-2021:
▪
▪
Proprietary Hospitals-refer to any private
hospitals, which are not maintained and
administered by private individuals or
groups.
Non-profit - as used in the definition of
Proprietary Educational Institutions and
Proprietary Hospitals, means that no net
income of asset 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
2. RESIDENT FOREIGN CORPORATIONS:
❖ INTERNATIONAL CARRIERS
Gross Philippine Billings
Rate
Income Tax
Pxxx
2.5%***
Pxxx
**International carriers may avail of a lower tax
rate (preferential rate) or exemption under
RA10378 on the basis of:
a. Tax Treaty
b. International agreement
c. Reciprocity - an International carrier,
whose home country grants income tax
exemption to Philippine carriers, shall
likewise be exempt from income tax
GROSS PHILIPPINE BILLINGS (GPB)
A. International Air Carrier - 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
of document
NOTE:
1. Tickets revalidated, exchanged and/or
indorsed to another international airline
form part of the GPB if a passenger
boards a plane in a port or point in the
Philippines
2. Flight which originates from the
Philippines, but transshipment 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
transshipment shall form part of the GPB
B. International Shipping - 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.
REGIONAL OPERATING HEADQUARTERS
(ROHOS)
The rules applicable to ordinary corporations will
also apply to Headquarters except the following:
▪ In computing basic income tax, the rate
is 10%.
▪ It is not subject to MCIT.
CREATE LAW
The 10% preferential tax on regional operating
headquarters (ROHQ) shall continue up to 31
December 2021. Beginning January 1, 2022,
ROHOs' shall no longer be considered special
corporations and shall be subjected to regular
corporate income tax just like an ordinary
resident foreign corporation.
REGIONAL OR AREA HEADQUARTERS (RHQS)
RHQs shall not be subject to income tax. RHQs are
not included in the definition of corporation for
income tax purposes. Hence, RHQs are neither
ordinary nor special corporations
Jean May F. Fajilan
CBET 01-801E
3. NON-RESIDENT FOREIGN CORPORATIONS:
OFFSHORE BANKING UNITS (OBU)
Sec. 28(A)(4) of the Tax Code
Repealed/Deleted under CREATE LAW
An OBU is a branch, subsidiary or affiliate or a
foreign banking corporation located in a/an
Offshore Financial Center (OFC) which is duly
authorized by the BSP to transact offshore
banking business in the Philippines (PD1034, BSP
Circular No. 1389) OBUS are allowed to provide
all traditional banking services to non-residents in
any currency other than Philippine national
currency. Offshore banking units are forbidden to
make any transactions in Philippine Peso. Banking
transactions to residents are limited and
restricted OBUS are not special corporations.
BRANCH PROFIT REMITTANCES TAX (BPRT) OF
RFCS
FORMULA:
Profit Remittance
Pxxx
Rate
15%
BPRT
Pxxx
Under the CREATE Law, OBUs are now taxable
just like an ordinary resident foreign corporation.
They are now subject to the revised RCIT rate of
25% as well as final tax on certain passive income
and capital gains tax on gain on sale of shares of
a closely-held domestic corporation.
The income tax Liabilities of OBUs are
summarized as follows:
EXEMPT ENTITIES
Activities registered with the following shall be
exempt from BPRT:
1. Philippine Economic Zone Authority
(PEZA)
2. Subic Bay Metropolitan Authority (SBMA)
3. Clark Development Authority (CDA)
Jean May F. Fajilan
CBET 01-801E
Sec. 28(A)(5) of the Tax Code
This provision was not amended under CREATE
Law but transferred to Sec. 28(A)(4)
Tax on Branch Profits Remittances-any profit
remitted by a branch to its head office shall be
subject to a tax of fifteen percent (15%) which
shall be based on the total profits applied or
earmarked for remittance without any deduction
for the tax component thereof (except those
activities which are registered with the Philippine
Economic Zone Authority) The tax shall be
collected and paid in the same manner as
provided in Sections of the Tax Code Provided.
That interests dividends rents royalties including
remuneration for technical services, salaries,
wages primus annuities emoluments or other
fixed or determinable annual, periodic or casual
gains profits income and capital gains received by
a foreign corporation during each taxable your
from all sources within the Philippines shall not
be treated as branch profits unless the same are
effectively connected with the conduct of its
trade or business in the Philippines.
Jean May F. Fajilan
CBET 01-801E
PARTNERSHIP
Art. 1767 of the New Civil Code defined
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. Two or more persons may also form
a partnership for the exercise of profession”.
Partnership has a juridical personality separate
and distinct from that of each of the partners. It
may be constituted in any form, except where
immovable property of real rights are
contributed thereto, in which case a public
instrument shall be necessary.
For taxation purposes, Partnership is generally
taxable as a corporation under Section 22 of the
Tax Code, as amended.
Sec 22 of the Tax Code, as amended provides:
CORPORATION SHALL INCLUDE
One Person Corporations (OPC)
Partnerships, no matter how created or
organized;
Joint stock companies
Joint accounts (cuentas en participacion
Associations, or
Insurance companies
But does NOT INCLUDE
General professional partnerships; and
A joint ventures or consortiums formed
for the purpose of undertaking:
❖ Construction projects; or
❖ Engaging in petroleum, coal,
geothermal and other energy
operations pursuant to an operating
or consortium agreement under a
service contract with the government.
KINDS OF PARTNERSHIP
1. General Professional Partnership (GPP)
A General Professional Partnership is a
partnership formed by person for the purpose of
exercising their common profession, no part of
income of which derived from engaging in trade
or business. A GPP is also known as a General
Professional Partnership. A GPP is not a taxable
entity for income tax purposes since it is only
acting as a "passed through entity where its
income is ultimately faced to the partners
comprising it (RR 8-2018).
Under Section 26 of the Tax Code and pertinent
revenue regulations, a GPP is not subject to
income tax and consequently to creditable
withholding tax. However, a GPP is required to
file income tax return for the purpose of
furnishing information as to the share of each
partners in the net income of the partnership
which each partner shall include in his individual
income tax return. For this Purpose, the net
income of a GPP shall be computed in the same
manner as a corporation. It shall be noted,
however, that the tax exemption of GPPs shall
pertain only to its ordinary income. Thus, a GPP is
subject to final withholding taxes on its passive
incomes as well as capital gains tax, if applicable.
PARTNERS OF GPP
The Partners shall be liable for income tax only on
their separate and individual capacities. Each
partner shall report as gross income his or her
distributive share (actual or constructive) in the
net income of the partnership. Income payments
made periodically or at the end of the taxable
year made by a GPP to the partners, such as
drawings, advances, sharings, allowances,
stipends, etc., is subject to creditable withholding
tax as follows:
Jean May F. Fajilan
CBET 01-801E
DISTRIBUTIVE SHARE OF THE PARTNERS
Gross income for the
current year
Not more than P720,000
More than P720,000
CWT Rate
(RR-11-2018)
10%
15%
For purposes of computing the distributive share
of the partners, the net income of the partnership
shall be computed in the same manner as a
corporation. (Section 26 of the Tax Code)
*Part
of
returnable
income of the
partners
**Nonreturnable
income of the
partners
The GPP and the Partners may claim the
following types of deductions from gross
income, at their option:
1. Itemized Deduction); or
2. Optional Standard Deduction (OSD)
SAMPLE COMPUTATION OF A PARTNER'S
DISTRIBUTIVE SHARE IN THE NET INCOME OF A
GPP
Jean May F. Fajilan
CBET 01-801E
NOTE: The other incomes (passive incomes
subject to FWT and capital gains subject to CGT)
of GPP as shown above are not included in the
computation of a Partner's taxable net income
because those incomes were already subjected
to either final withholding tax on passive income
or capital gain tax. Only the P300,000 share in the
GPP's income from operations shall be included
in the income tax return of a partner.
❖ A GPP may claim either the itemized
deductions allowed under Section 34 of the
Tax Code, as amended, or IN LIEU thereof, it
can opt to avail of the OSD allowed to
corporations in claiming the deductions in
an amount not exceeding forty percent
(40%) of its gross income.
In computing taxable income defined under
Section 31 of the Tax code, as amended, the
following may be allowed as deductions:
2. Taxable Partnerships
Partnerships (other than general professional
partnerships, whether registered or not), for
income taxation purposes, are considered as
corporations and are therefore taxed as such.
Consequently,
partners
are
considered
shareholders, and therefore, profits distributed
to them are considered as dividends subject to
final withholding tax. Being a final tax, the share
of a partner in the net income of a partnership
subject to tax is not returnable in the partner's
personal income tax return. Distributive Share is
equal to each partner's distributive share of the
net income declared by the partnership for a
taxable year net of tax
a. Itemized expenses which are ordinary
and necessary, incurred or paid for the
practice of Profession; or
b. Optional Standard Deduction (OSD).
❖ The share in the net income of the
partnership, actually or constructively
received, shall be reported as taxable
income of each partner. The partners
comprising the GPP can no longer claim
further deduction from their distributive
share in the net income of the GPP and
are not allowed to avail of the 8% income
tax rate option since their distributive
share from the GPP is already net of cost
and expenses.
TYPES:
General
Co-Partnerships
are
partnerships, which by law are
assimilated within the context of, and so
legally contemplated as corporations.
Unregistered business partnerships
Unregistered joint ventures
ALLOWED DEDUCTIONS TO PARTNERS of a GPP
FROM THEIR DISTRIBUTIVE SHARE IN ARRIVING
AT NET TAXABLE INCOME
The following rules shall govern the claim of the
partners of deductions from their share in the net
income of the partnership (RR No. 8-2018).
❖ If the partner also derives other income
from trade, business or practice of
profession apart and distinct from the
share in the net income of the GPP, the
deduction that can be claimed from the
other income would either be the
itemized deductions or OSD.