TAXATION OF CORPORATION

Chapter 3 - Ballada

DEFINITION OF TERMS

CORPORATION – it includes 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 partneships and a joint venture or consortium formed for the purpose of undetaking 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.

DEFINITION OF TERMS

DOMESTIC CORPORATION – means created or organized in the Philippines or under its laws.

FOREIGN CORPORATION – means a coporation which is not domestic.RESIDENT FOREIGN CORPORATION – applies to a foreign corporation engaged in

trade or business within the Philippines.NON-RESIDENT FOREIGN CORPORATION – applies to a foreign corporation not

engaged in trade or business within the Philippines.

SOURCES OF INCOME

Corporation Sources of Income

Within the Phils. Without the Phils.

1. Domestic √ √

2. Foreign √

CATEGORIES OF INCOME AND TAX RATES

1. Business Income – generally, business income earned by a corporation is taxd at the following rates (Sections 27(A), 28(A)(1) and 28(B)(1)):

Year Tax Rate1997 35%1998 34%1999 33% 2000-Oct. 2005 32%Nov. 2005-2008 35%2009 30%

2. Passive Income – passive income is subject to separate and final tax. These are taxed at fixed rates ranging from 5% to 20%. Passive income is not to be included in the gross income computation.

DOMESTIC AND RESIDENT FOREIGN CORPORATIONS

PRO-FORMA COMPUTATION OF NORMAL INCOME TAX: Gross Income P xxxLess: Allowable Deductions xxxNet income P xxxMultiply by tax rate (2009) 30%Tax Due P xxx

DOMESTIC CORPORATION,IN PARTICULAR

PROPRIETARY EDUCATIONAL INSTITUTIONS AND NON-PROFIT HOSPITALS - The 10% tax on the taxable income is subject to limitation. If the gross income from unrelated trade, business or other activity exceeds fifty percent (50%) of the total gross income derived from all sources, the tax prescribed under Section 27(A) shall be imposed on the entire taxable income.

Unrelated trade, business or other activity – means any activity which are not subtantially related to the exercise or performance by such educational institution or hosital of its primary purpose or function.

ILLUSTRATIONS 1:

SGB University, a proprietary educational institution, has a gross income for the taxable year 2009 of P15M. Of the gross income, P5 million was derived from unrelated trade or business. Total deductions amount to P3million.

Gross Income 15,000,000Less: Deductions 3,000,000Net Income 12,000,000Multiply by tax rate 10%Tax Due 1,200,000

ILLUSTRATIONS 2:

SGB University, a proprietary educational institution, has a gross income for the taxable year 2009 of P15M. Of the gross income, P9 million was derived from unrelated trade or business. Total deductions amount to P3million.

Gross Income 15,000,000Less: Deductions 3,000,000Net Income 12,000,000Multiply by tax rate 30%Tax Due 3,600,000

GOVERNMENT-OWNED OR –CONTROLLED CORPORATIONS, AGENCIES OR INSTRUMENTALITIES

Subject to the provisions of existing special laws or general laws, all corporations, agencies, or instrumentalities owned or controlled by the Government shall pay such rate of tax upon their taxable income as are imposed by the Code upon corporations or associations engaged in a similar business, industry or activity. The following are exempted:

1. GSIS2. SSS3. PHIC4. LWD5. PCSO

MUTUAL LIFE INSURANCE COMPANIES

These Companies are now subject to the regular corporate income tax rates.

RESIDENT FOREIGN CORPORATIONS, IN PARTICULAR

INTERNATIONAL SHIPPING -Gross Philippine Billings – 2.50%

OBUs – income authorized by BSP from foreign currency transactions rest income derived from with local commercial banks, including branches of foreign banks that may may be authorized by BSP, including any interest from foreign currency loans granted to residents, shall be subject to a final income tax at ten percent (10%) of such income.

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 remittances without deduction for the tax component thereof (except those activities which are registered with PEZA).

RESIDENT FOREIGN CORPORATIONS, IN PARTICULAR

REGIONAL OPERATING HEADQUARTERS –shall mean a branch established in the Philippines by multinational comanies which are engaged in various services.

TEN PERCENT (10%) OF TAXABLE INCOME

REGIONAL OR AREA HEADQUARTERS –shall mean a branch established in the Philippines by multinational companies and which headquarters do not earn or derive income from the Philippines and which act as supervisory, communications and coordinating center for their affiliates, subsidiaries, or branches in the Asia-Pacific Region and other foreign markets. EXEMPT FROM INCOME TAX

RESIDENT FOREIGN CORPORATIONS, IN PARTICULAR

INTERNATIONAL AIR CARRIERrefer to a foreign airline corporation doing business in the Philippines having been granted landing rights in any Philippine port to perform international air transportation services/ activities or flight operations anywhere in the world.

Generally, subject to GROSS PHILIPPINE BILLING TAX of 2.50% unless subject to a different tax rate under the applicable treaty to which the Philippines is a signatory.

DETERMINATION OF GROSS PHILIPPINE BILLINGS

In computing for gross Philippine billings, the following should be included:a. Gross revenue deerived from passage of personsb. Excess baggagec. Cargo and/or 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 passage documents.

NON-RESIDENT FOREIGN CORPORATION, IN GENERAL

The basis of tax for non-resident foreign corporations is gross income from sources within the Philippines, such as interests, dividends, rents, royalties, salaries, premiums (except reinsurance premiums), annuities, emoluments or othe fixed or determinable annual, periodic or casual gains, profits and income, and capital gains.

Gross Income P xxxMultiply by tax rate 2009 30%Tax Due P xxx

NON-RESIDENT FOREIGN CORPORATION, IN PARTICULAR

CINEMATOGRAPHIC FILM OWNER, LESSOR OR DISTRIBUTOR – 25% of GROSS INCOME

OWNER OR LESSOR OF VESSELS CHARTERED BY PHILIPPINE NATIONS - 4.5% of GOSS RENTALS, LEASE OR CHARTER FEES FROM LEASES OR CHARTERS TO FILIPINO CITIZENS OR CORPORATIONS, AS APPROVED BY THE MARTIME INDUSTRY AUTHORITY.

OWNER OR LESSOR OF AIRCRAFT, MACHINERY AND OTHER EQUIPMENT – 7.5% OF GROSS RENTALS, CHARTERS AND OTHER FEES.

PASSIVE INCOME OF NON-RESIDENT FOREIGN CORPORATIONS

1. Interest on foreign loans contracted on or after August 1, 1986 are taxed at 20%.2. Income derived by a depository bank under the exanded foreign currency

deposit system from foreign currency transaction with local commercial banks, including branches of foreign that may be authorized by the BSP, incuding interest income from foreign currency loans are EXEMPT.

3. Dividends received from a domestic corporation – final withholding tax at 15% on the condition that the country in which the non-resident foreign corporation is domiciled, shall allow a credit against the tax due from the non-resident foreign corporation taxes deemded to have been paid in the Philippines equivalent to:

2009 – 15%

PASSIVE INCOME OF NON-RESIDENT FOREIGN CORPORATIONS

4. CAPITAL GAINS from sale of shares of stock not traded in the stock exchange. A final taxt at the rates prescribed below is imposed upon the net caita gains realized during the taxable year from the sale, barter, exchange or other disposition of shares of stock in a domestic corporation, except shares sold, or disposed of through the stock exchange:

Not over P100,000 5%On any amount in excess of P100,00 10%

ALLOWABLE DEDUCTIONS

Allowable deductions are items or amounts which the law allows to be deducted from gross income in order to arrive at the taxable income. A domestic or resident foreign corporation may dduct from its business income, itemized deductions under the Tax Code, or, these corporations may elect a standard deduction in an amount not exceeding forty percent (40%) of its gross income (RA 9504). Non-resident foreign corporations are not allowed deductions from gross income.

TAXABLE INCOME AND TAX DUE

In case of corporations, TAXABLE INCOME is th pertinent items of gross income less the deductions authorized for such types of income. Taxable income is the amount or tax base uon which tax rate is applied to arrive at the tax due. Depending on the taxpayer involved and for purposes of computing the income tax liability of a cororation, taxable income may refer to either one of the following:

1. NET INCOME – the income arrived at after subtracting from the gross income the deductions of the taxayer. For domestic and resident foreign corporations, in genera; and other corporations from whose gross income deductions are allowed:

PRO-FORMA COMPUTATION

Sales/Revenues/Receipts/Fees xxxLess: Cost of Sales/services xxxGross Income from Operation xxxAdd: Non-Operating and Taxable Other Income xxx

Total Gross Income xxxLess: Deductions

Optional Standard Deduction orItemized Deduction xxx

Taxable Income xxxMultiply by: Tax Rate % Tax Due xxx

TAXABLE INCOME AND TAX DUE

2. GROSS INCOME – the entire or gross income from business without any deductions for either optional standard deduction or itemized deduction.

For domestic and resident foreign corporations subject to the MCIT; and non-resident foreign corporation not subject to the normal income tax rate (section 28(B)(1)).

Gross Income xxxMultiply by: Tax Rate x%Tax Due xxx

CORPORATIONS EXEMPT FROM INCOME TAX (Sec. 30, NIRC)

GENERALLY , CORPORATIONS ESTABLISHED NOT FOR PROFIT ARE EXEMPTED FROM INCOME TAX. PLEASE REFER TO PAGE 3-14 – 3-17

TAXATION FOR COOPERATIVES

Cooperatives with accumulated reserves and undivided net savings of not more than TEN MILLION PESOS (P10M) – EXEMPT FROM ALL NATIONAL INTERNAL REVENUE TAXES FOR HICH THESE COOPRATIVES ARE LIABLE.

Cooperatives with accumulated reserves and undivided net savings of more than TEN MILLION PESOS (P10M) – please refer to page 3-19-20

DECLARATION OF QUARTERLY INCOME TAX

Every corporation shall file in duplicate a quarterly summary declaration of its gross income and deductions on a cumulative basis for the preceding quarter or quarters upon which the income tax shall be levied, collected and paid. The income tax computed decreased by the amount of tax previously paid or assessed during the preceding quarters shall be paid and the return filed not later than sixty (60) days from the close of each of the first three (3) quarters of the taxable year, whether calendar or fiscal .

A return showing the cumulative income and deductions shall still be filed even if the operations for the quarter and the preceding quarters yielded no tax due.

DECLARATION OF QUARTERLY INCOME TAX (cont’d)

Every taxable corporation is likewise required to file a final adjustment return covering the total taxable income of the corporation for the preceding calendar or fiscal year, which is required to be filed and paid on or before April 15, or on or before the 15th day of the 4th month following the close of the fiscal year, as the case may be. If the sum of the quarterly tax payments made during the said taxable year is not equal to the total tax due on the entire taxable income of that year, the corporation shall either:

1. Pay the balance of tax still due; or2. Carry over the excess credit; or3. Be credited or refunded with the excess amount paid.

ILLUSTRATION

Gross Income Deductions Net Income

1st Quarter (Jan-March) 500,000.00 300,000.00 200,000.00 2nd Quarter (April-June) 600,000.00 350,000.00 250,000.00 3rd Quarter (July-Sept.) 700,000.00 400,000.00 300,000.00 4th Quarter (Oct.-Dec.) 800,000.00 450,000.00 350,000.00

2,600,000.00 1,500,000.00 1,100,000.00

Tax credit for overpaid income tax for the preceding year is P50,000.

The result of operations of a corporation for 2010 whose taxable year in on a calendar basis is as follows:

1st Quarter 2nd Quarter 3rd Quarter 4th Quarter TOTAL

Gross Incomethis quarter 500,000.00 600,000.00 700,000.00 800,000.00 2,600,000.00 previous quarter/s 500,000.00 1,100,000.00 1,800,000.00

Total Gross Income 500,000.00 1,100,000.00 1,800,000.00 2,600,000.00 2,600,000.00 Less: Deductions

this quarter 300,000.00 350,000.00 400,000.00 450,000.00 previous quarter/s 300,000.00 650,000.00 1,050,000.00

Total Deductions 300,000.00 650,000.00 1,050,000.00 1,500,000.00 1,500,000.00 Taxable Income 200,000.00 450,000.00 750,000.00 1,100,000.00 1,100,000.00 Tax Rate 30% 30% 30% 30% 30%Tax Due 60,000.00 135,000.00 225,000.00 330,000.00 330,000.00 Less: Previous Tax Payments/Credits 50,000.00 60,000.00 135,000.00 225,000.00 225,000.00 Tax Still Due 10,000.00 75,000.00 90,000.00 105,000.00 105,000.00

CHAPTER IV – MINIMUM CORPORATE INCOME TAX, IAET AND GIT

MINIMUM CORPORATE INCOME TAX (MCIT)Two percent (2%) of the gross income as of the end of the taxable year is imposed upon any domestic corporation beginning the fourth (4th) taxable year (whether calendar or fiscal yea, depending on the accounting periodemployed) immediately following the taxable year in which such corporation commenced its business operations. The MCIT shall be imposed whenever:

a. Such corporation has zero or negative taxable income; orb. The amount of minimum corporateincome taxis greater than the normal income tax due from such

corporation.

Relief from MCIT under Certain ConditionsThe Secretary of Finance, upon recommendation of the Commissioner,may suspend the imposition of MCIT

upon submission of proof by the applicant-corporation, duly verified by the Commissioner’s authorized representative, that the corporation sustained substantial losses on account of a prolonged labor dispute or because of “force majeure” or because of legitimate business reverses.