TAXATION

FAR EASTERN UNIVERSITY – MANILA

INCOME TAX (CORPORATION) (1701)

A. Corporation and Other Terms Defined

1. Corporation
For income tax purpose, the term “ Corporation” shall include partnership, no matter how created or organized,
joint stock companies, joint accounts (cuentas en participacion), associations, or insurance companies.

The term “corporation” includes also mutual fund companies, regional operating headquarters of multinational
corporation and joint accounts.

The Term Corporation INCLUDED:
1. Partnership, no matter how created or organized
2. Joint stock companies
3. Joint accounts (cuentas en partipacion)
4. Associations or insurance companies
The Term Corporation DOES NOT INCLUDED:
1. General professional partnership
2. Joint venture or consortium formed for the purpose
of undertaking construction projects
3. Joint venture or consortium for engaging in
petroleum, coal, geothermal and other energy
operations pursuant to an operating or consortium
agreement under a service contract with the
government

2. General Professional Partnership

A partnership formed by persons for the sole purpose of exercising their common profession, no part of the net
income of which is derived from engaging in any trade or business.

3. Joint Venture
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.

4. Joint Stock Companies

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.

5. Joint Accounts (cuentas en participacion)

Joint accounts are constituted when one interest 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.

6. Associations
The term association includes all organizations which have substantially the salient features of a corporation to
be taxable as corporation.

B. Classification of Corporations

1. Domestic Corporation – is one created or organized in the Philippines.

2. Foreign Corporation – is a corporation, which is not domestic, and it may be a resident and non-resident
corporations.

Resident Corporation – is a foreign corporation engaged in business in the Philippines.

Non-resident Corporation – is a foreign corporation not engaged in business in the Philippines but deriving
income from the Philippines.

C. Tax Base and Tax Rate

Income
Within Without
a. Domestic Corporation Yes Yes Taxable income x 30% = Normal income tax
b. Resident foreign Corporation Yes No Taxable income x 30% = Normal income tax
c. Non-resident foreign Corporation Yes No Gross income x 30% = Final tax
d. Taxable partnerships, joint ventures,
etc Yes Yes Taxable income x 30% = Normal income tax

D. Format of Computation (Annual Income Tax Return)

17. CORPORATION Page 1 of 23

 Sales/Revenues/Receipts/Fees Xxx
Less: Cost of sales/services (xxx)
Gross income from operations Xxx
Add: Non-operating and taxable other income Xxx
Total gross income Xxx
Less: Deductions (xxx)
Taxable income Xxx

Regular corporate income tax (taxable income x 30%) Xxx

Minimum corporate income tax (gross income x 2%) Xxx
Tax due (whichever is higher) Xxx
Less: Unexpired excess of prior year's MCIT over normal income tax rate Xxx
Balance
Add: Tax due to the BIR on transactions under special rate Xxx
Aggregated income tax due Xxx
Less: Tax credits/payments
Prior year's excess credit other than MCIT xxx
Tax payments for the first three quarters xxx
Creditable tax withheld for the first three quarters xxx
Creditable tax withheld for the fourth quarter xxx
Foreign tax credits, if applicable xxx
Tax paid in return previously filed, if this is an amended return xxx (xxx)
Tax payable (overpayment) xxx/(xxx)

BIR Form No. 1702- (Annual Income Tax Return for Corporations, Partnerships and Other Non-Individual
RT Taxpayers Subject Only to the REGULAR Income Tax Rate);
BIR Form No. 1702- (Annual Income Tax Return for Use Only by Corporations, Partnerships and Other Non-
EX Individual Taxpayers EXEMPT Under the Tax Code, as amended, [Sec. 30 and those
exempted in Sec. 27(C)] and Other Special Laws, with NO Other Taxable Income); and
BIR Form No. 1702- (Annual Income Tax Return for Corporations, Partnerships and Other Non-Individuals with
MX Mixed Income Subject to Multiple Income Tax Rates or with Income Subject to
Special/Preferential Rate)

E. Optional Standard Deductions for Corporations (OSD) (RR No. 16-2008 as amended by RR No. 2-2010)

Determination of the amount of OSD for:

1. DOMESTIC corporation and RESIDENT FOREIGN corporation

a. In the case of corporate taxpayers, the OSD allowed shall be in amount not exceeding forty percent (40%) of
their gross income

b. “Gross income” shall mean the gross sales less sales returns, discount and allowances and cost of goods
sold.
c. The items of gross income under Section 32 (A) of the Tax Code, as amended, which are required to be
declared in the income tax return of the taxpayer for the taxable year are part of gross income against which
the OSD may be deducted in arriving at taxable income. Passive income which have been subjected to a
final tax at source shall not form part of the gross income for purposes of computing the forty percent (40%)
optional standard deduction.

Exercise:

1. JoLa Corporation has the following income and expenses for the year 2016:

Philippines USA
Sales P4,000,000 P700,000
Cost of sales 3,000,000 400,000
Other income 600,000 100,000
Business expenses 600,000 250,000
Unallocated other business expenses (P230,000)
Payments, first three quarters (if applicable) 120,000

17. CORPORATION Page 2 of 23

 Required: Compute the tax payable assuming the above corporation is a:
a. Domestic corporation
b. Resident foreign corporation
c. Non-resident foreign corporation

F. Special Corporations
1. Kinds of special corporation
a. Special domestic corporation
b. Special resident foreign corporation
c. Special non-resident foreign corporation

G. Tax Base and Tax Rates of Special Domestic Corporations

Special domestic corporations Tax Base Tax Rate
1. Proprietary/Private educational Taxable income – 10% - income from unrelated business
institution and non-profit hospital World 50% and below
30% - income from unrelated business
exceeds 50% (pre-dominance test)
2. Government owned or controlled Taxable income – Same as those imposed upon corporation
corporations, agencies or instrumentalities World or association engaged in similar business,
or activity.

H. Special Domestic Corporations Explained

1. Proprietary Educational Institution

a. Summary of Tax Rules on Educational and Hospitals

Owner Educational institution Hospitals
Private 10% or 30% 30%
Non stock Non-profit Exempt 10% or 30%
Government Exempt Exempt

Any private school maintained and administered by private individuals or private groups with an issued permit to
operate from the Department of Educational Culture and Sports (DECS) or the Commission of Higher
Education (CHED) or the Technical Education and Skills Authority (TESDA)
Examples of related income (RMC 4-2013)

1. Income from tuition fees and miscellaneous school fees

2. Income from hospital where medical graduates are trained for residency
3. Income from canteen situated within the school campus
4. Income from bookstore situated within the school campus

2) Unrelated business Activity

The term unrelated trade, business, or other activity 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 (Section 27 B of the NIRC)

c) Treatment of capital outlays for expansion of school facilities

Capital outlays for expansion of school facilities may either be:
a. Deducted as expenditures or
b. Depreciated over the estimated life

d) Non-stock-non-profit hospital
A nonstock non-profit hospital that is operated for charitable and social welfare is exempt from income
tax under Section 30 (E) and (G) of the Tax Code.

The nonstock-non-profit hospital must satisfy the following requisites in order to be entitled to the exemption
from income tax:
1. It is a nonstock 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.

e). Government and Non-stock non-profit education institution

All revenue of non-stock, non-profit educational institutions used actually, directly and exclusively for
educational purposes shall be exempt from taxes. Likewise, government educational institutions,
universities and colleges are not subject to income tax.

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2. Government-Owned or -Controlled Corporation (GOCC)

a. Definition
Any agency organized as a stock or nonstock corporation, vested with functions relating to public needs
whether governmental or proprietary in nature, and owned by the Government of the Republic of
the Philippines directly or through its instrumentalities either wholly or where applicable as in the case of
stock corporations, to the extent of at least a majority of its outstanding capital stock.

b. Tax-exempt government-owned or controlled operations

The following are tax-exempt government-owned or controlled corporations:
1) Government Service Insurance System (GSIS)
2) Social Security System (SSS)
3) Philippine Health Insurance Corporation (PHIC)
4) Local Water Districts (LWD)

I. Special Resident Foreign Corporations

1. International carrier
2. Offshore banking units
3. Remitting Branches of Resident Foreign Corporation(except on activities registered with PEZA)
4. Regional or Area Headquarters of Multinational Companies
5. Regional Operating Headquarters of Multinational Companies

J. Tax Base and Tax Rate of International Carriers

Special Resident Foreign Tax Base Tax Rate

Corporation
1. International carrier
Gross Philippine Billings
Exclusion in Gross Philippine
Billings:
1. Non-revenue passengers – those
passengers qualifying under the
free mileage programs of the air
carriers.
2. Refunded tickets
2.5% or (may also be subject to
a preferential income tax rate
(lower 2.5%) or exempt from
income tax based on a tax
treaty or reciprocity (RA10378
and RR 15-2013)

Gross Philippine Billings for international air carrier

Gross Philippine Billings (for international air carrier) refers to the amount of gross revenue derived from carriage
of persons, excess baggage, cargo or mail originating from the Philippines in a continuous and uninterrupted flight,
irrespective of the place of sale or issue and the place of sale or issue and the place of payment of the ticket or
passage document.

Gross Philippine Billings for International shipping

Gross Philippine Billings (for 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 payment of the passage or
freight documents.

Rule on transshipments or interrupted flights or voyages

For 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 Gross Philippine Billings.

The “48-hour” rule on transient passengers

Same Flights or voyages of passengers, mails or excess baggage commencing from foreign
International countries which will be interconnected for continuance of flight or voyage to a foreign
Carrier destination by the same international carrier shall not be considered originating from the
Philippines if the actual departure is made within 48 hours from embarkation in the country,
except only when delayed by force majeure. As such, the portion of the ticket pertaining
to the outgoing flight or voyage shall excluded from the Gross Philippine Billings.

Notes: Fares for transient passengers staying herein for more than 48 hours are included
in Gross Philippine Billings.
Another If continuation of the flight or voyage to a foreign destination is made by another airline
International company or international sea carriers, the cost of the outgoing flight or voyage shall be
Carrier included in Gross Philippine Billing of the airline or carrier regardless of the intervening

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 period of time between the arrival and departure from the Philippines.

Foreign currency translation

In the computation of the Gross Philippine Billings, tickets in foreign currencies are translated at whichever is
higher of the following conversion rate:
1. Monthly average Airline Rate in the Bank Settlement Plan (BSP) Monthly sales report
2. Bankers Association of the Philippines (BAP) rate

Treatment of income Other Than Income from International Transport

The other income of international carriers other than from international transport is subject to the appropriate type
of income tax. Active income such as demurrage fees, which are in the nature of a rent for the use of property of
the carrier in the Philippines, detention fees and other charges relating to outbound and inbound cargoes as
charges for the use of property or rendition of services are subject to the regular corporate tax.

Off-line international carriers

Off-line international carriers are those without flights or voyage starting from or passing through any point in the
Philippines (i.e. no landing rights. The branch or sales agent in the Philippines of off-line international carriers
which sells passage documents for compensation or commission to cover off-line flights or voyages of its head
office or other airline or sea carriers covering flight or voyages originating from Philippine ports or off-line flights or
voyages is subject to the regular corporate income tax.

K. Offshore Banking Unit

1. Definition of terms
a. Offshore banking- shall refer to the conduct of banking transactions in foreign currencies involving the receipt
of funds from external sources and the utilization of such funds. (PD 1035)

b. Offshore banking unit – shall mean a branch subsidiary or affiliate of a foreign banking corporation which is
duly authorized by the Central Bank of the Philippines to transact offshore banking business in
the Philippines. (PD1035)

2. Distinction:
OBU – is a division of foreign bank which is authorized to conduct foreign currency denominated transactions.

FCDU – is a division of a domestic corporation bank. (Limited to short term foreign currency transactions)

EFCDU – may be a division of a domestic bank or a resident foreign bank to conduct banking under the
expanded foreign currency deposit system.(Allowed to both short term and long term
foreign currency denominated transactions)

2. Offshore banking units Tax Base Tax Rate

a. Income derived from :

1. Foreign currency transaction with Income exempt from tax
non-residents
2. Foreign currency transactions with
local commercial banks
3. Foreign currency transactions
with branches of foreign banks
authorized by the BSP
4. Foreign currency transactions
with OBUs in the Philippines

b. Interest income from foreign 10% FWT

currency loans granted to residents
other than OBUs or local
commercial bank

c. Any income of non-resident Exempt

(individual or corporation) from
OBUS

3. Summary of Tax Rules on FCDUs/EFCDUs/OBUs

DOMESTIC BANK
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 Received From
Nature of Residents Other Residents Non-residents
income (E)FCDUs or
OBUs
Income from forex transactions
Interest income
from:
-Forex loans and Exempt 10% final tax Exempt
receivables
- Forex deposits Exempt - Exempt
Other forex Exempt 30% regular corporate Exempt
income income tax
Income from 30% regular 30% regular corporate 30% regular corporate income tax
non-forex corporate income income tax
transactions tax

If the interest income is not subjected to final tax by the borrower, the FCDU, EFCDU or OBU shall report the
same in its gross income in the income tax return and shall be subject to the same 10% tax. It shall be
separately presented from other income subject to the 30% regular corporate tax.

RESIDENT FOREIGN BANK

Received From
Nature of Residents Other Residents Non-residents
income (E)FCDUs or
OBUs
Income from forex transactions
Interest income
from:
-Forex loans and Exempt 10% final tax Exempt
receivables
- Forex deposits Exempt - Exempt
Other forex Exempt 30% regular corporate Exempt
income income tax
Income from 30% regular 30% regular corporate Exempt**
non-forex corporate income income tax
transactions tax
** foreign corporation are taxable only from income within the Philippines

L. Tax on Branch Profit Remittance

1. Tax base and tax rate
Tax on branch profit Tax Base Tax Rate
remittance (except on
activities registered with
PEZA)
Total profits applied or earmarked 15%
for remittance without deduction for
the tax component

2. Differentiation of foreign profit remittance:

Remitting entity to its head office Tax Rate
Branch of resident foreign corporation 15% of branch remittance
Subsidiary of a foreign corporation-through dividend declaration 30% final tax, 15% if the tax sparing
rule applies
Branch of domestic corporation Not subject to tax

To be effectively connected it is not necessary that the income be derived from the actual operation
of the branch’s trade or business. It is sufficient that the income arises from business activity in which the
branch is engaged.

Remittance from prior year earnings is still taxable. The NIRC used the phrase “any profit remitted”
without limiting the same to current year profit remittance. The branch profit remittance tax therefore applies
to remittance of prior year earnings.
This tax only applies to a RFC which is a branch of a NRFC.

The taxable income event is not the generation of income but the remittance of income to the head office.

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 Therefore, BPRT can be imposed together with other income taxes applicable on direct duplicate taxation.

Profit Remittance PXXX

Rate 15% Final Tax
BPRT PXXX

EXCEPTION: (Not Treated as Branch Profit)

Profits from activities which are registered with the Philippine Economic Zone Authority;
a) Interest
b) Dividends
c) Rents
d) Royalties
e) Remuneration from technical services
f) Salaries, wages, premiums, annuities, emoluments
g) Other fixed or determinable annual, periodic or casual gains, income and capital gains

If the above enumerated incomes are effectively connected with the conduct of its trade or business in the
Philippines, they will be treated as branch profits subject to BPRT upon remittance.
• For purposes of branch profit remittance, income items which are not effectively connected with the
conduct of its trade or business in the Philippines are not considered branch profits.

Petroleum subcontractor is not exempted from 15% BPRT

According to the BIR, while a foreign subcontractor providing maintenance and engineering services to a
service contractor engaged in petroleum operation is entitled to the 8% preferential final
withholding tax (instead of the 30% regular tax) in lieu of any and all taxes, it is not exempt from the 15%
BPRT. The 8% final tax in lieu of any and all taxes as provided under PD No. 1354 applies only to a
subcontractor’s gross income derived from contracts with a service contractor engaged in petroleum operations
in the Philippines. On the other hand, the BPRT is a tax on profit realized for remittance abroad. (BIR Ruling No.
122-2015 dated 17 April 2015)

M. Regional or Area Headquarters

Regional or area headquarters is a branch established in the Philippines by multinational companies and which
headquarters do not earn or derive income from 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.
Tax base Tax rate
Exempt from tax -

N. Regional Operating Headquarters

Regional operating headquarters is a branch established in the Philippines by multinational companies which are
engaged in different services (e.g. general administration and planning, business planning and coordination,
marketing control and sales promotion, etc.)
Tax base Tax rate
Taxable income 10%

Exercises:
a. (Adapted): Singapore Airlines, an international carrier doing business in the Philippines provided you the following
data:
Gross ticket sales(passengers) in the Philippines (Manila to Macau flight) P2,000,000
Gross ticket sales(cargoes) in China (Manila to Beijing flight) 2,000,000
Gross ticket sales(passengers) in the Philippines (Macau to Manila flight) 1,000,000
Gross ticket sales(cargoes) in China (Beijing to Manila flight) 1,000,000
Value of fares on non-revenue passenger (Outbound flights) *150,000
Fares cancelled and refunded (Outbound flights) 200,000
Value of fares on non-revenue passenger (Inbound flights) 50,000
Fares cancelled and refunded (Inbound flights) 50,000
Rental income(earned in the Philippines), net of withholding tax 950,000
Expenses connected to rental income 500,000

Required:
1. How much was the total Philippine income tax due?

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 2. Assuming subject to a preferential income tax rate of 1.5% based on a tax treaty, how much was the Philippine
income tax due?

b. Foreign International Carrier (Rule on transhipments or interrupted flights or voyages)

Jacky Lipad is a resident foreign international carrier. Its records of income and expenses are as follows:
(a) Continuous flight from Manila to Beijing = 2,000 tickets at P5,000 per ticket.
(b) Ticket sold for flight from Manila to Hongkong: Transfer flight from Hongkong to Beijing = 4,000 tickets at
P6,000 per ticket.
(c) Direct flight from Manila to Hongkong= 2,000 tickets at P3,000 per ticket.
(d) Total operating expenses is P10,000,000.

What is the amount of Jacky Lipad’s income tax payable in the Philippines?

c. Profit Branch Remittances

During year 200A, Abbott Laboratories, branch of a foreign company doing business in the Philippines, reported the
following income and expense within as follows:
Gross income P100,000,000
Less: Operating expenses ___60,000,000
Net taxable income P 40,000,000
Less: Income tax (P40,000,000x30%) ___12,000,000
Net income after tax P 28,000,000
Add: Dividend income from Pharma Co. (domestic) ____7,000,000
Total net income P 35,000,000

In year 200B, Abbott earmarked for remittance to its head office in North Carolina, USA some of its income as
follows:

Operating net income after tax P24,000,000

Dividend income from Pharma Co. ___-
7,000,000
Total branch profit remittance P31,000,000

Required:
1. How much is the branch profit remittance tax and the total amount to be remitted after tax?
2. Assuming all activities registered with PEZA. How much is the tax on the branch profit remittances, if any?

d. Tax on Capital Assets

Star Corporation has the following capital asset transactions 200A:
a. Sold 12,000 investment in common shares of stock not traded in the local stock exchange for P1,600,000. The
cost per stock in P110 per share.
b. Sold 5,000 investment in preferred stock traded in the local stock exchange for P1,800,000. The cost per
stock is P300.
c. Sold land located in Japan for P3,000,000. The related cost and expenses on sale of land amounted to
P2,500,000.
d. Sold land located in the Philippines for P1,000,000. The cost of land is P900,000 with a fair market value of
P1,200,000.

Star Diamond Corporation’s taxes payable (income tax and percentage tax) on sales of capital assets assuming the
taxpayer is a:
1. Domestic corporation (DC).
2. Resident foreign corporation (RFC).
3. Non-resident foreign corporation (NRFC).

e. Final and Normal Income Taxes

A Philippine Commercial Bank has been authorized to operate a Foreign Currency Deposit Unit by the BSP and
had the following revenue and expenses:
(a) Dividend income from Magnolia, a domestic corporation at P1,000,000.
(b) Interest income on US dollar loans from resident borrowers at $3,000. ($1.00 = P50.00)
(c) Interest on Philippine peso loans from borrowers at P2,000,000.
(d) Operating expenses of P900,000.

1. What is the total amount of final income taxes of Philippine Commercial Bank?
2. What is the total amount of normal corporate income tax of Philippine Commercial Bank?

O. Special Non-Resident Foreign Corporation

1. Kinds of Special Nonresident Foreign Corporation

a. Cinematographic Film Owner , Lessor, or Distributor

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 b. Owner of Lessor of Vessels Chartered by Philippine Nationals
c. Owner of Lessor of Aircraft, Machineries, and Other Equipment

Cinematographic film includes motion picture films, films, tapes, discs and such other similar or related products
(RR 6-2001).

TAX
KINDS TAX BASE RATES
Cinematographic
FOLD* Gross Income from Philippine Sources 25%
Lessor or Owner of Gross Rentals, lease or charter fees from leases or charters to Filipino Citizen
Vessels** or Corporations as approved by Maritime Industry Authority 4.5%
Owner or Lessor of
AMO*** Gross Rentals or fees derived within the Philippines 7.5%

*Film, Owner, Lessor or Distributor

**LOVe chartered by Philippine Nationals
***Owner or Lessor of Aircraft, Machineries, and Other Equipment

Differentiation:
Lessor Lease or charter of
Cinema films Vessels Aircraft Other equipments
Domestic 30% world 30% world taxable 30% world taxable 30% world taxable income
taxable income income
income
Resident 30% world2.5% Gross 2.5% Gross 30% Philippine taxable
foreign taxable Philippine Billings Philippine Billings income
income OR OR
Preferential rate Preferential rate
Non-resident 25% 4.5% Philippine 7.5% Philippine 7.5% Philippine gross rental,
foreign Philippine gross rental, lease gross rental, or fees or fees (Philippine Gross
gross income or charter fees (Philippine Gross Income)
(Philippine Gross Income)
Income)
Note: The Gross Income is gross receipts less the direct cost of services while the Gross Philippine Billings
relates to gross receipts.

P. Tax Exempt Corporations –

Under section 30 of the Tax Code, the following organizations shall not be taxed in respect to income received by
them as such:
(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 mutual aid association or a nonstock 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 nonstock corporation or their dependents;
(D) Cemetery company owned and operated exclusively for the benefit of its members;
(E) Nonstock corporation or association organized and operated exclusively for religious, charitable, scientific,
athletic, or cultural purposes, or for the rehabilitation of veterans, no part of its net income or asset shall
belong to or inures 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 inures to the benefit of any private stock-holder, or individual;
(G) Civic league or organization not organized for profit but operated exclusively for the promotion of social
welfare;
(H) A nonstock and non-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 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
(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 to them the proceeds of sales, less the necessary
selling expenses on the basis of the quantity of produce finished by them.
Note: Notwithstanding the provisions in Section 30, 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 corporation tax.

17. CORPORATION Page 9 of 23

Exercises:

a. (Educational Institution-Capital Expenditures vs. Revenue Expenditure) The XYZ University, a private
educational institution, provided the following income and expenses for the year 2016:
Tuition and miscellaneous fee P14,000,000
Sales of canteen 700,000
Sales of bookstore 300,000
Non-educational income: Rent income, net of CWT 4,940,000
Sale of scrap materials 60,000
Cost and expenses:
Cost of services – canteen 400,000
Cost of books sold 240,000
Operating expenses 2,000,000
Purchase of library books 1,000,000
Cost of classroom construction 500,000
Purchase of school furniture 200,000

The operating expenses do not yet include the cost of capital expenditures. The fixed assets are estimated to be
useful for 10 years.
Required:
1. What would be the 2016 income tax still due and payable per ITR of University of XYZ (Capital outlays for
expansion of school facilities deducted as expenditures)?

2. What would be the 2016 income tax still due and payable per ITR of University of XYZ (Capital outlays for
expansion of school facilities depreciated over the estimated life)?

b. (Non-stock Non-profit Hospital) A non-stock, non-profit hospital has presented the following data for the
calendar year 2016:
Income, related activities P5,000,000
Income, unrelated activities (including P2,000,000 rent from
commercial spaces, gross of 5% withholding tax) 7,000,000

Expenses, related activities 2,000,000

Expenses, unrelated activities 3,000,000
Dividend from a domestic corporation 100,000
Payments, first three (3) quarters 1,000,000

Required: How much is the tax payable?

c. (GOCC - Tax Exempt) A corporation has the following income and expenses for the year 20X1:
Sales P4,000,000
Cost and expenses 3,000,000
Required: Compute the normal income tax, assuming the corporation is:
1. Government Service Insurance System (GSIS)
2. Social Security System (SSS)
3. Philippine Health Insurance Corporation (PHIC)
4. Philippine Charity Sweepstakes Office (PCSO)
5. Local Water District

d. (Government Educational Institution) A government owned and controlled educational institution reported an
educational related income of P1,000,000. Its operating expenses amounted to P3,000,000.

Required: How much is its income tax payable for the period?

Q. Income Tax Rates

Domestic Resident Foreign Non-resident Foreign
Corporation Corporation Corporation
1. In general Sec. 27 (A) Sec. 28 (A) (1) Resident FC Sec. 28 (B) (1) Non-
Domestic resident FC
Tax rate 30% 30% 30%
Tax base Net income within and Net income within Gross income within
without
2. Optional corporate Sec. 27 (A) Sec. 28 (A) (1) Resident FC Sec. 28 (B) (1) Non-
tax Domestic resident FC
Tax rate 15% 15% -

17. CORPORATION Page 10 of 23

 Domestic Resident Foreign Non-resident Foreign
Corporation Corporation Corporation
Tax base Gross income Gross income -
3. Capital gains from sale of shares of stock not traded in the local stock exchange
Tax base Net capital gain Net capital gain Net capital gain
Tax rate 15% 15% 15%
Capital gains realized Capital asset – on Not applicable
from sale or exchange gross selling price or Capital Gain Tax on sale or disposition of real properties is
or disposition of land fair market value not applicable. (RR 7-2003)
and/or building whichever is higher - Notes:
6% final tax Domestic 6% CGT for land and building only,
Corporations otherwise the same shall be subject to
the ordinary income tax or MCIT,
whichever is applicable
Resident Foreign Subject to creditable withholding
Corporations tax and consequently, the ordinary
income tax or MCIT, whichever is
applicable
Non-Resident 30% Final Tax
foreign
Corporations
Sale, barter, transfer 15% 15% 15%
and/or assignment of
shares of stock of
publicly-listed
companies not
compliant with
mandatory minimum
public ownership (10%
of the publicly-listed
companies’ issued and
outstanding shares,
exclusive of any
treasury shares) (RR
No. 16-2012)
4. On certain passive income derived from Philippine sources
a. Interest in any 20% final tax 20% final tax 30% final tax
currency bank deposit
b. Yield or any monetary 20% final tax 20% final tax 30% final tax
benefit from deposit
substitute, trust funds
and similar
arrangement
c. Royalties 20% final tax 20% final tax 30% final tax
d. Interest income 15%% final tax 15% final tax Exempt
derived from
depository bank under
expanded foreign
currency deposit
system
5. Income derived under expanded foreign currency deposit system by depository banks
a. From foreign currency Exempt from all taxes Exempt from all taxes except Exempt
transactions with non- except net income net income from transactions
residents, OBUs in the from transactions specified by Sec. Of Finance
Philippines, local specified by Sec. Of
commercial bank Finance
including branches of
foreign banks
b. From foreign currency 10% 10% Exempt
loans granted to
residents other than
OBUs in the Philippines
and other depository
bank
6. Inter-corporate dividends received from domestic corporation
a. Inter-corporate Not subject to tax Not subject to tax *15% or 30%
dividends received * if the country where the
from domestic NRFC is domiciled allows a
corporation credit for taxes deemed paid

17. CORPORATION Page 11 of 23

 Domestic Resident Foreign Non-resident Foreign
Corporation Corporation Corporation
in the Philippines equivalent
to 15% (known as tax
sparing), the tax rate is 15%,
otherwise, 30% (without tax
sparing)

7. Interest on foreign Not applicable Not applicable 20% final tax

loans contracted on
or after Aug. 1,
1986
8. Minimum corporate 2% of gross income 2% of gross income within Not applicable
income tax within and without

Offshore Banking Units – a branch, subsidiary or affiliate or a foreign baking corporation authorized by the Bangko
Sentral ng Pilipinas (BSP) to transact offshore banking business in the Philippines as a separate accounting unit.

Foreign currency deposit unit – an accounting unit or department in a local bank or in an existing local branch of a
foreign bank, authorized by the BSP to operate under the expanded foreign currency deposit system.

Notes: Dividend from foreign corporation: (***Predominance Test)

If ratio is:
(< 50%) Less than 50%, the entire dividend purely without the Philippines
From foreign ( > 50%) At least 50%, the dividend income partly within and partly without the
company Philippines

From foreign corporation (based on the ratio of the gross income of the foreign corporation for the preceding 3 years
prior to declaration of dividends derived from Philippine sources):
Philippine Gross income (3 years) x Dividend
***Income within = Total Gross income (3 years)

R. Summary of applicable income tax on the regular income of corporations:

Corporate Income Tax Rates on Regular Income
DC RFC NRFC
1. NCIT
Tax Rate 30% Net income 30% Net income 30% Gross income (Final tax)
Basis Within and without Within only Within only
MCIT*** 2% Gross income –Within 2% Gross income – Not applicable
and without Within only
OR
2. GIT (Optional)
Tax Rate 15% 15% Not applicable
Basis Gross income –Within Gross income – Within
and without only
*** Starting on the 4th year of operations immediately following the taxable year in which such corporation
commenced its business. The tax due is the higher between the NIT and MCIT

S. OPTIONAL CORPORATE INCOME TAX

1. Gross Income Tax (GIT)/ Optional Corporate Income Tax (also known as 15% gross income tax)
The President, upon the recommendation of the Secretary of Finance may, effective January 1, 2000, allow
corporation to be subjected to optional corporate tax.

Allow only to Domestic Corporations and Resident Foreign Corporation the option to be taxed on gross
income, as follows:
• 15% tax rate (based on the gross income)
• Irrevocable for 3 consecutive years during which the corporation is qualified under the scheme.

Sales xxx
Sales return and allowance (xxx)
Sales discount (xxx) xxx
Cost of sales/Cost of direct services (xxx)
Gross income from operation xxx
Other income xxx
Gross income xxx
Gross income tax rate 15%

17. CORPORATION Page 12 of 23

 Income tax due
Less: Taxes withheld (xxx)
Tax paid - previous quarters (xxx)
Foreign tax credits (xxx)
Income tax payable xxx

2. Conditions shall have to be satisfied in the allowance of optional corporate tax:

a. A tax effort of ratio of 20% of GNP
b. A ratio of 40% of income tax collection of total tax revenue
c. A VAT tax effort of 4% of GNP
d. A 0.9% ratio of Consolidated Public Sector Financial Position to GNP
e. Available only to firms whose ratio of cost of sales to gross sales or receipts from all sources does not exceed
55%

T. Minimum Corporate Income Tax (MCIT)

1. Corporate subject to MCIT

a. Domestic corporation
b. Resident foreign corporation

2. Corporations not subject to MCIT

a. Domestic corporations:
1) Proprietary educational institution subject to 10% tax
2) Non-profit hospital subject to 10% tax
3) Domestic corporation engaged in business as a depository bank under EFCDS
b. Special Resident foreign corporations:
1) International carriers
2) Offshore banking units (OBUs)
3) Regional operating headquarters (ROHQs)
c. Firms taxed under a special income tax regime (PEZA Law and the Bases Conversion Development
Act)
d. Non-resident foreign corporation

3. Tax based and tax rate

The tax rate is 2% based on:
1) Gross income within and without – Domestic Corporation
2) Gross income within – Resident Foreign Corporation

4. Gross income defined (RR 12-2007)

1) For the purpose of the MCIT, the term “gross income” means gross sales less sales returns, discounts, and
allowances and cost of goods sold, in case of sale of goods, or gross revenue less sales returns, discount
and allowances and cost of services/direct cost, in the case of sale of services.
2) The term “gross income” will also include all items of gross income enumerated under Sec. 32 (A) of the
Tax Code, as amended, except income exempt from income tax and income subject to final withholding
tax.

Amount of Tax for Seller of Goods:

Gross Sales PXXX
Sales Returns and Allowances and
Discounts (XXX)
Cost of Goods Sold (XXX)
Gross income from operation XXX
Other income XXX
Gross Income PXXX
Rate 2%
MCIT PXXX

Cost of Goods Sold (CGS):

1. Trader or Merchandiser:
Invoice Cost PXXX
Import Duties XXX
Freight XXX
Insurance XXX
COS PXXX

17. CORPORATION Page 13 of 23

 2. Manufacturer:
Raw Materials Used PXXX
Direct Labor XXX
Manufacturing Overhead XXX
Freight Cost XXX
Insurance Premiums XXX
Other Costs* XXX
Cost of Goods Manufactured and Sold PXXX

NOTE*: Other costs must be incurred in bringing the raw materials to the factory or warehouse.

Amount of Tax for Seller of Services:

Gross Receipts PXXX
Sales Discounts (XXX)
Cost of Services (XXX)
Gross Income from operation XXX
Other income XXX
Gross Income PXXX
Rate 2%
MCIT PXXX

Cost of Services (COS) in General:

Salaries and employee benefits of personnel,
consultants and specialists directly rendering
the services. PXXX
Cost of facilities directly utilized in providing
the service such as depreciation or rental of
equipment used and cost of supplies. XXX
Other direct cost and expenses necessarily incurred
to provide the services XXX
COS PXXX

NOTE: In case of BANKS, other than the items enumerated above, it shall also include Interest expense.

5. MCIT imposed on the 4th taxable year

The tax is imposed beginning on the fourth taxable year immediately following the year in which such corporation
commenced its business operation.

Simply stated, MCIT applies on the X+4th year of operations. For instance, a corporation which started operations at
any day in 20X2 will be covered by MCIT in 20X6.

6. Tax due
The tax due is the higher between the minimum corporate income tax and normal or regular corporate income tax.

7. Quarterly computation of MCIT (RR 12-2007)

1) The computation and the payment of MCIT, shall likewise apply at the time of filing of the quarterly corporate
income tax.
2) In the computation of the tax due for the taxable quarter, if the computed quarterly MCIT is higher than the
quarterly normal income tax, the tax due to be paid for such taxable quarter at the time of filing the quarterly
corporate income tax return shall be the MCIT.
3) In the payment of the quarterly MCIT (MCIT is greater than normal corporate income tax), excess MCIT from the
previous taxable year/s shall not be allowed to be credited.
4) Any excess of the minimum corporate income tax, payments under the normal income and the MCIT paid in the
previous taxable quarter/s are allowed to be applied against the quarterly MCIT due.

8. Excess MCIT as carry forward

Any excess of the minimum corporate income tax over the normal corporate income tax shall be carried forward and
credited against the normal income tax for the three succeeding taxable years.

9. Suspension of imposition of MCIT

The secretary of finance is authorized to suspend the imposition of MCIT on any corporation, which suffers losses on
account of:
1) Prolonged labor disputes
2) Force majeure

17. CORPORATION Page 14 of 23

 3) Legitimate business reverses

Exercises:

a. (Corporation) The following information are presented to you by a taxpayer who seeks your assistance in
computing the correct taxes:
DC RFC NRFC
Interest from Philippine peso bank
Yield from deposit substitute in the Philippines
Interest from bank deposit in Chase J.P Morgan Bank, USA
Prizes (P90,000), Philippines
Prizes (P10,000), Philippines
Winnings (P90,000), Philippines
Winnings (P10,000), Philippines
Royalty – all kinds
Interest from Philippines depository bank under EFCDS
Interest income from long term deposit, Philippines
Dividend from domestic corporation
Dividend from foreign corporation

Required: Based on the above data identify the final tax rate on passive income assuming the taxpayer is:
1. Domestic corporation
2. Resident foreign corporation
3. Non-resident foreign corporation

b. (Domestic Corporation) ABC Corporation was created in accordance with Philippine Laws. During the calendar
year 20X1, it has the following data on income and expenses:
Philippines USA
Gross income (Gross sales, P15,000,000- Phils) (Gross sales P10,000,000 P5,000,000
P8,000,000 – USA)
Business expenses 2,000,000 1,500,000
Interest income from bank deposit 300,000 100,000
Dividend from a domestic corporation 150,000
Interest income from domestic depository bank under EFCDS 120,000
Prizes 200,000
Rent income from equipment, gross of applicable withholding tax 1,000,000
Payment, first three (3) quarters 500,000
Required:
1. How much is the Philippine income tax payable?
2. How much is the total final withholding tax?
3. How much is the Philippine income tax payable using OSD?
4. Assuming the above corporation is a foreign corporation engaged in trade or business in the
Philippines, how much is the Philippine income tax payable?
5. Disregard certain information which are not applicable and assuming the corporation is not engaged in business
in the Philippines, how much is the final withholding taxes in the Philippines?

c. (Final Tax and Capital Gain Tax) A Corporation has the following income:
Interest income derived from depository bank under Expanded Foreign Currency
Deposit System (EFCDS) P100,000
Capital gain from sale of shares of stock not traded in the local stock exchange 200,000
Dividend from a domestic corporation 300,000
Dividend from a foreign corporation 400,000
Stock dividend 100,000
Required: (Assuming with tax sparing, if applicable)
1. How much is the final tax on the passive income and the capital gain tax, assuming the corporation is a
domestic corporation?
2. How much is the final tax on the passive income and the capital gain tax, assuming the corporation is a
resident foreign corporation?
3. How much is the final tax on the passive income and the capital gain tax, assuming the corporation is a non-
resident foreign corporation?

17. CORPORATION Page 15 of 23

U. Corporate Returns
1. Filing of quarterly and final or adjustment return
Every corporation subject to tax shall render, in duplicate a true and accurate quarterly return and final or
adjustment return

2. Non-resident foreign corporations

Corporation not engaged in trade or business in the Philippines (NRFC) shall not be required to file income tax
return

3. Who shall file the corporate return

a. President
b. Vice President
c. Other Principal Officers

Note: The return shall be sworn to by above officer and by the Treasurer or Assistant Treasurer

4. Corporate declarations and returns

Declaration of quarterly corporate income tax
a. On a cumulative basis
b. Required :
1) Manually
2) Electronic Filing and Payment System (EFPS)
3) Electronic BIR forms

SEC. 52. Corporation Returns. –

(A) Requirements. – Every corporation subject to the tax herein imposed, except foreign corporations not engaged in
trade or business in the Philippines, shall render, in duplicate, a true and accurate quarterly income tax return and final or
adjustment return in accordance with the provisions of Chapter XII of this Title. The income tax return shall consist of a
maximum of four (4) pages in paper form or electronic form, be filed by the president, vice- president or other principal
officer, shall be sworn to by such officer and by the treasurer or assistant treasurer, and shall only contain the following
information:
“(1) Corporate profile and information;
“(2) Gross sales, receipts or income from services rendered, or conduct of trade or business, except income subject to
final tax as provided under this Code;
“(3) Allowable deductions under this Code;
“(4) Taxable income as defined in Section 31 of this Code; and
“(5) Income tax due and payable.
“Provided, That the foregoing provisions shall not affect the implementation of Republic Act No. 10708 or TIMTA.

5. Manual Filing
Every corporation subject to tax shall render, in duplicate a true and accurate quarterly return and final or
adjustment except corporations not engaged in trade or business in the Philippines (NRFC).

Manual Filing of Quarterly Income Tax Return

Quarterly return 60 days after end of the quarter
Final Adjusted 15th day of the fourth month of following (i.e. April 15 applying calendar
(annual) return year)

• Not later than 60 days from the close of each of the first three quarters of the taxable year, whether calendar
or fiscal year.

Note : The tax so computed shall be decreased by the amount of tax previously paid or assessed during the
preceding quarters.

Final adjustment return

a. Covers the total taxable income for the preceding calendar or fiscal year
b. Filed on or before
1) In case corporation uses calendar year - 15th day of April
2) In case corporation uses fiscal year - on or before the 15th day of the 4th month following the
close of the fiscal year

Sum of quarterly payment not equal to the total tax due for the year

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

17. CORPORATION Page 16 of 23

 b. carry over the excess credit or be credited or refunded with the excess amount paid

Corporation is entitled to tax refund or credit

a. In case the corporation is entitled to tax refund or credit of the excess estimated quarterly income taxes
paid, the excess amount shown on its final adjustment return may be carried over and credited against the
estimated quarterly income tax liabilities for the taxable quarters of the succeeding taxable years

b. Once the option to carry-over has been made, such option shall be considered irrevocable for that taxable
period

Time of payment of the income tax

The income tax due shall be paid at the time the declaration or return is filed

Place of filing of return

a. The quarterly income tax declaration and the final adjustment shall be filed with:
1) Authorized agents banks
2) Revenue District office
3) Collection Agent
4) Duly authorized Treasurer of the city or municipality having jurisdiction over the location of the principal
office of the corporation filing the return of placed where the main books of accounts and other data from
which the return is prepared are kept

6. Electronic Filing and Payment System

EFPS Authorized Agent Banks refer to a BIR authorized agent bank (AAB) that has passed the accreditation
criteria for EFPS AAB such as being an internet-ready bank, indorsed by Bureau of Treasury for EFPS
accreditation, certified by the Information Systems Group of the BIR that the applicant bank’s system is
acceptable and compatible with the EFPS of the BIR.

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 filed following
the “pay as you file system”. Unless otherwise notified by the Commissioner of Internal Revenue, for all
returns that will be filed starting August 1, 2002, e-payment of the taxes due thereon thru EFPS shall become
mandatory (RR 9-2002).

For 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 receipt of a notification letter duly signed by
the Commissioner of Internal 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 as you file”
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
procedure 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.

• RR 9-2001 defines EFPS as the system developed and maintained by the BIR for electronically filing tax
returns, including attachments, if any, and paying taxes due thereon, specifically through the internet.
• Upon filing, a Filing Reference Number is issued by EFPS as a control number to acknowledge that a tax
return, including attachments, has been successfully filed electronically. This shall serve as evidence of filing
and the date of filing of the return.
• Upon payment of the tax due to an authorized agent bank (AAB) under EFPS, the AAB shall issue
Acknowledgement Number 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 (internal revenue tax collection) by the Bureau of
Treasury.
• Likewise, a Confirmation Number shall be issued by the 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 shall serve as evidence of the fact of payment of the taxpayer’s liability to the extent of the
amount reflected in the confirmation number and the date of payment by the taxpayer.

Filing of Returns under EFPS

• For purposes of filing returns under the EFPS, the taxpayers classified under the following business industries
shall be required to file monthly withholding tax returns, except withholding of VAT; monthly VAT
declarations; and monthly percentage tax returns on or before the dates prescribed and presented below:
Group Monthly Withholding Tax Returns Monthly VAT declarations and Monthly

17. CORPORATION Page 17 of 23

 except Withholding of VAT Percentage Tax Return
Group A 15 days following the end of the month 25 days following end of the month
Group B 14 days following the end of the month 24 days following end of the month
Group C 13 days following the end of the month 23 days following end of the month
Group D 12 days following the end of the month 22 days following end of the month
Group E 11 days following the end of the month 21 days following end of the month

Persons Required to File and Pay under EFPS

Those mandated are the following:
• Taxpayer Account Management Program (TAMP) Taxpayers (RR No. 10-2014)
• Accredited Importer and Prospective Importer required to secure the BIR-ICC & BIR-BCC (RR No. 10-2014)
• National Government Agencies (NGAs) (RR No. 1-2013)
• All Licensed Local Contractors (RR No. 10-2012)
• Enterprises Enjoying Fiscal Incentives (PEZA, BOI, Various Zone Authorities, Etc.) (RR No. 1-2010)
• Top 5,000 Individual Taxpayers (RR No. 6-2009)
• Corporations with Paid-Up Capital Stock of P10 Million and above (RR No. 10-2007)
• Corporations with Complete Computerized Accounting System (CAS) (RR No. 10-2007)
• Procuring Government Agencies with respect to Withholding of VAT and Percentage Taxes (RR No. 3-
2005)
• Government Bidders (RR No. 3-2005)
• Insurance companies and Stock brokers (RMC No. 71-2004)
• Top 20,000 Private Corporation (RR No 2-98 as amended)
• Large Taxpayers (RR No. 2-2002, as amended, as amended under RR 17-2010)

Large taxpayers (RR No. 2-2002, as amended under RR 17-2010):

1. As to tax payments
Percentage tax P200,000 per quarter
VAT P200,000 per quarter
Excise Tax P1,000,000 per year
Income tax P1,000,000 per year
Documentary stamp tax P1,000,000 per year
Withholding taxes (all types) P1,000,000 per year

2. As to financial condition
Gross sales/receipts P1,000,000,000 per year
Net worth P300,000,000 at the close of each calendar or fiscal year
Gross purchases P800,000,000
Per S.E.C lists Top corporations as listed and published by the Securities and
Exchange Commission

Non-Large Taxpayers
• Volunteering 200 or more Non-Large Taxpayers
• Top 20,000 private corporations (starting April, 2009)

Other Taxpayers:
• Corporation 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:
• PEZA (Philippine Economic Zone Authority)
• BOI (Board of Investments)
• 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.

7. Use of Electronic BIR Forms

17. CORPORATION Page 18 of 23

 The eBIR Forms is an application covering thirty-six (36) BIR Forms Comprised of the following:
a. Income tax returns
b. VAT forms
c. Excise tax forms
d. Withholding tax forms
e. Donor’s tax forms
f. Estate tax forms
g. Documentary stamp tax forms
h. ONNET forms
i. Other forms as provided under RR 6-2014

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 System (ITS) database of the BIR.
b. Prompt concerned revenue officials or employees on any discrepancies between registration 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.
• The eBIRForms, 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. The use of eBIRForms will improve the BIR’s tax return data capture and storage thereby
enhancing efficiency and accuracy in the filing of tax returns.
• eBIR Forms refers 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
1. eBIR Forms System for Online Filing
2. 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.

eBIRForms Software Package (also known as Offline eBIRForms Package) — is a tax preparation
software 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 eBIRForms 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 enrollment 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 returns data filed using
certified TSP's tax preparation software.

Mandatory eBIR Forms and Mandatory e-FIling

Only those non-EFPS filers are covered RR 6-2014, particularly the following :
• ACCREDITED TAX AGENTS/ PRACTITIONERS & all its client-taxpayers who authorized them to file in
their behalf
• ACCREDITED PRINTERS of Principal and Supplementary Receipts/Invoices
• One-Time Transaction (ONETT) taxpayers
• Those engaged in business, or those with mix income (both compensation and business income) who
shall file a “NO PAYMENT” Return (exception under RMC No. 12-2015)
• Government-Owned or Controlled Corporations (GOCCs)
• Local Government Units (LGUs), except barangays
• Cooperatives, registered with National Electrification Administration (NEA) and Local Water Utilities
Administrations (LWUA)

Taxpayers who are not covered by the regulation may opt to file their returns using the manual
filing or eBIR forms

Those exempted and may file manually

Under Sec. 4(3) of RR 6-2014 and RR 5-2015 mandating the use of eBIRForms and electronically filing “No
Payment Returns”, the following can file manually their “No Payment Returns”:
• Senior Citizen (SC) or Persons with Disabilities (PWDs) filing for their own return
• Employees deriving purely compensation income whether from one or more employers, whether or not
they have any tax due that need to be paid

17. CORPORATION Page 19 of 23

 • 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, scholarship, foreign
travel requirements, etc.

Other Terms:
• 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 known as accredited tax practitioners, who are engaged in tax
practice included in the List of Accredited Tax Practitioner as 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 aforementioned action shall be completed upon
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 worldwide 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 installment tax return).

Exercise:

a. (MCIT and Quarterly Corporate Income Tax)ABC Corporation under fiscal year starting July 1, 20X5 and
ending June 30,20X6 computed normal income tax and MCIT, and creditable income taxes withheld from first
quarter to fourth quarter including excess MCIT and excess withholding taxes from prior year’s are as follows:
First Q Second Q Third Q Fourth Q
Normal income tax P100,000 P120,000 P250,000 P200,000
Minimum corporate income 80,000 250,000 100,000 100,000
tax
Taxes withheld 20,000 30,000 40,000 35,000
Additional information: Excess MCIT, prior year, P30,000; Excess withholding tax prior year, P10,000; Date of
registration with BIR July 1,20X0.

Required:
1. Compute the income tax payable for the first three (3) quarters and the year end and the due dates.
2. What is the BIR Form Return to be filed?
3. When is the last day for the filing of income tax return?

17. CORPORATION Page 20 of 23

V. Improperly Accumulated Earning Tax (For Closely Held Corporations)

1. Improperly Accumulated Earning Tax

a. Objective: To force corporations to distribute dividends to shareholders in order that related tax in
dividends will be collected.

b. 10% of improperly accumulated taxable income (In addition to other taxes imposed, there is imposed
for each year on the improperly accumulated taxable income of each corporation an improperly accumulated
earning tax equal to 10% of the improperly accumulated taxable)

c. Only Domestic Corporations not public listed are covered by the IAET.

2. The Improperly Accumulated Earning Tax shall not apply to:

a. Publicly held corporation

b. Banks and other non-bank financial intermediaries
c. Insurance Companies
d. Taxable partnership
e. General professional partnership
f. Non-taxable joint ventures
g. Enterprise registered with PEZA and under Bases Conversion and Development Act (BCDA) and special
economic zones

3. Prima facie evidence to avoid the tax upon the shareholders

The fact that any corporation is a mere holding company or investment company shall be prima facie evidence
of a purpose to a avoid the tax upon its shareholders or members.

4. Holding company or Investment company

A corporation having practically no activities except holding property, and collecting the income therefrom or
investing the same.

5. Closely-held corporations
The ownership of a corporation for the purpose of determining whether it is a closely held corporation or a
publicly held corporation is ultimately traced to the individual shareholders of the parent company. Where at
least 50% 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 or more individuals, the
corporation is a publicly held corporation. Domestic corporation not falling under the aforementioned definition
are, therefore, closely-held corporations (BIR Ruling 25-02).

6. Rules in determining whether or not a corporation is a closely held corporation:

• Stock not owned by individuals: Stock owned directly or indirectly by or for a corporation,
partnership, estate or trust shall be considered as being owned proportionately by its shareholders,
partners or beneficiaries.
• Family and Partnership ownership: An individual shall be considered as owning the stock owned,
directly or indirectly, by or for his family, or by or for his partner. “ Family of an individual” includes his
brothers or sisters (whether by whole or half-blood), spouse, ancestors and lineal descendants.
• Option to acquire stocks: If any person has an option to acquire stock, such stock shall be considered
as owned by such person.

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 7. Circumstances indicating improper accumulation of profits
• Substantial changes to corporate officers who are shareholders at the same time/Personal loans.
• Radical changes in the nature of business after a considerable surplus has been accumulated.
• Investment is unrelated business or activity.
• Substantial expenditures of corporations for the personal benefit of stockholders only.

8. Earning or profits of a corporation are permitted to accumulate beyond the reasonable needs
The fact that the earning or profits of a corporation are permitted to accumulate beyond the reasonable needs
of a business shall be determinative of the purpose to avoid the tax upon its shareholders or members, unless
the corporation, by clear preponderance of evidence, shall prove to the contrary.

9. Law would not prohibit an Accumulated Earning

a. Additional working capital
b. Expansion, Improvement and Repairs
c. Debt Retirement
d. Acquisition of business
e. Anticipated losses (Business Reverses)

10. Reasonable need of the business

Immediacy Test - under this test of determining justified accumulation, "Reasonable needs of the business"
means the immediate needs of the business. If the corporation does not prove an immediate need for the
accumulation of the earnings and profits, then the accumulation is not for the reasonable needs of the business
and the penalty tax would apply.
Reasonable needs of the business include the reasonably anticipated needs of the business. (immediacy
test)

(RMC 35-2011) The amount that may be retained, taking into consideration the accumulated earnings within
the “reasonable needs of the business” shall be 100% of the paid-up capital or the amount contributed to the
corporation representing the par value of the shares of stock, hence, any excess capital over and above the
par shall be excluded and therefore must be part of the income declared as dividends. (Additional paid in
capital is now removed from the equation). Any excess capital over and above the par shall be excluded which
is in contrast with the principle of “immediacy test”

Section 3 of RR No. 2-2001 provides that the following shall constitute accumulation of earnings of
“reasonable needs” of the business:

- Reasonable needs of the business is determined by the “immediacy test” (immediate needs of the business,
including reasonably anticipated needs
- There should be PROOF of immediacy or direct correlation of anticipated needs

a) (Up to 100% of the paid up capital of the corporation for reserve purposes) Allowance for the
increase in the accumulation of earnings up to 100% of the paid-up capital of the corporation as of balance
sheet date, inclusive of accumulations taken from other years, under RMC 35-2011 paid up capital shall refer to
the par value of the shares.

b) (For definite corporate expansion projects as approved by the BOD) Earnings reserved for the
definite corporate expansion project or programs requiring considerable capital expenditure as approved by
the board of directors or equivalent body.

c) (For building, plants or equipment acquisition as approved by the BOD) Earnings reserved for
building, plants or equipment acquisition as approved by the board of directors or equivalent body.

d) (For compliance with any loan covenant or pre-existing obligation established under a legitimate
business agreement) Earnings reserved for compliance with any loan covenant or pre-existing obligation
established under a legitimate business agreement.

e) (Required by law or applicable regulations to be retained by the corporation or in respect of

which there is legal prohibition against its distribution) Earnings required by law or applicable
regulations to be retained by the corporation or in respect of which there is legal prohibition against its
distribution.

f) (SUBSIDIARIES OF FC: investments in the Philippines as proven by corporate records) In the

case of subsidiaries of foreign corporations in the Philippines, all undistributed earnings intended or reserved
for the investments within the Philippines as can be proven by corporate records and/or relevant
documentary evidence.

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 11. Profits subjected to IAET no longer subject to same tax in later years
Once the profits have been subjected to IAET, the same shall no longer be subject to IAET in later years even
if not declared as dividends. (Not cumulative but yearly)

12. Profits subjected to IAET still subject to tax on dividends

The imposition of the IAET, profits which have been subjected to IAET, when finally declared as dividends,
shall nevertheless be subject to tax on dividends under the Tax Code, except in those circumstances where
the recipient in not subject thereto.

13. Declaration of dividend to avoid IAET

The dividend must be declared and paid or issued not later than one (1) year following the close of the taxable
year

14. Tax Form

BIR Form 1704

15. Payment of IAET

Improperly accumulated earnings tax shall be paid within 15days after one year following the close of
the taxable year if dividends are not declared and paid or issued
16. Computation for Improperly Accumulated Earning Tax:
Taxable income Pxxx
Less: Corporate income tax due (xxx)
Add: Net operating loss carry- over Pxxx
Earnings from regular income , net of tax Pxxx
Passive income, net of final tax xxx
Capital gains, net of capital gain tax xxx
Exempt or excluded income xxx
Total earnings Pxxx
Less: Dividends declared (xxx)
Add: Retained earnings from prior years xxx
Less: Amount that may be retained
(100% of paid up capital as of year end) (xxx)
Improperly accumulated earnings xxx
Multiply by IAET rate 10%
Improperly accumulated earnings tax xxx

Exercise:

a. (Adapted) The record of a closely held corporation, registered with BIR in 2009, reveals the following:
2015: Gross income P3,000,000
Less: Expenses 3,800,000
Net operating loss (P800,000)

Accumulated retained earnings, end of 20X7 P6,000,000

2016: Gross income P5,000,000

Expenses 3,000,000
Rent income, net of 5% withholding tax 475,000
Interest on money market placement, net of 20% withholding tax 80,000
Capital gain on shares of stock, net of capital gain tax 230,000
Inter-corporate dividends received 500,000
Dividends paid by the corporation 1,500,000

It had a capital stock of P5,000,000 and share premium of P700,000 as of December 31, 2016. Upon examination of
the 2016 return, the BIR concludes that there is an improper accumulation of profit. The corporation fails to show
proof to prove the contrary.
Required:
1. How much is the tax payable of the corporation per return in the year 2016?
2. How much is the tax on the improper accumulated income in 2016?

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