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CORPORATION INCOME TAX

I. Definitions

(A) The term 'person' means an individual, a trust, estate or corporation.

(B) The term 'corporation' shall include partnerships, no matter how created or organized,
joint-stock companies, joint accounts (cuentas en participacion), association, or insurance
companies, but does not include general professional partnerships and a joint venture or
consortium formed for the purpose of undertaking construction projects or engaging in
petroleum, coal, geothermal and other energy operations pursuant to an operating consortium
agreement under a service contract with the Government. 'General professional partnerships' are
partnerships formed by persons for the sole purpose of exercising their common profession, no
part of the income of which is derived from engaging in any trade or business.

(C) The term 'domestic', when applied to a corporation, means created or organized in the
Philippines or under its laws.

(D) The term 'foreign', when applied to a corporation, means a corporation which is not
domestic

 Corporation includes:

1. Partnerships, no matter how created or organized

2. Joint-stock companies

3. Joint accounts

4. Associations

5. Insurance companies

 Corporations not considered as corporation for tax purposes:

1. General professional partnerships;

2. Joint venture or consortium 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.

Notes: The distributive share of each partner in a General professional


partnership shall form part of partner’s gross income in its individual tax returns subject
to graduated income tax rates.
II. General Principle of Income taxation in the Philippines

(A) A domestic corporation is taxable on all income derived from sources within and
without the Philippines; and

(B) A foreign corporation, whether engaged or not in trade or business in the


Philippines, is taxable only on income derived from sources within the Philippines.

Note: In sum, a domestic corporation is subject to tax on its worldwide income.


On the other hand, a foreign corporation is subject to tax only on income from Philippine
sources.

III. Kinds of corporation under the NIRC

1. Domestic Corporation (DC) – A corporation created or organized in the Philippines


or under its laws and is liable for income from sources within and without (Sec. 22 (C),
NIRC). 2.

2. Resident Foreign Corporation (RFC) –A corporation which is not domestic and


engaged in trade or business in the Philippines is liable for income from sources within
the Philippines.

NOTE: In order that a foreign corporation may be regarded as doing business


within a State there must be continuity of conduct and intention to establish a continuous
business, such as the appointment of a local agent and not one of a temporary character.

3. Non-resident Foreign Corporation (NRFC) - a corporation which is not domestic


and not engaged in trade or business or business in the Philippines is liable for income
from sources within(Sec. 22(I), NIRC).

4. Special Types of Corporation- those corporations subject to different tax rates.

1. Special Resident Foreign Corporation

a. Domestic depositary banks (foreign currency deposit units);

b. International carriers;

c. Offshore banking units;

d. Regional or Area Headquarters and Regional operating Headquarters of


multinational companies;

2. Special Non-resident Foreign Corporation


a. Non-resident cinematographic film owners, lessors or distributors;

b. Non-resident owners or lessors of vessels chartered by Philippine nationals

c. Non-resident lessors of aircraft, machinery and other equipments.

IV. Rates of Income tax on Domestic Corporations. (Amended by TRAIN law.)

A. In General

Except as otherwise provided in this Code, an income tax of thirty-five percent (35%)
is hereby imposed upon the taxable income derived during each taxable year from all sources
within and without the Philippines by every corporation, as defined in Section 22(B) of this Code
and taxable under this Title as a corporation, organized in, or existing under the laws of the
Philippines: Provided, That effective January 1, 2009, the rate of income tax shall be thirty
percent (30%).

In the case of corporations adopting the fiscal-year accounting period, the taxable income
shall be computed without regard to the specific date when specific sales, purchases and other
transactions occur. Their income and expenses for the fiscal year shall be deemed to have been
earned and spent equally for each month of the period.

The corporate income tax rate shall be applied on the amount computed by multiplying
the number of months covered by the new rate within the fiscal year by the taxable income of the
corporation for the period, divided by twelve.

B. Minimum Corporate Income Tax on Domestic Corporations. -

(1) Imposition of Tax. - A minimum corporate income tax of two percent (2%) of the gross
income as of the end of the taxable year, as defined herein, is hereby imposed on a corporation
taxable under this Title, beginning on the fourth taxable year immediately following the year in
which such corporation commenced its business operations, when the minimum income tax is
greater than the tax computed under Subsection (A) of this Section for the taxable year.

(2) Carry Froward of Excess Minimum Tax. - Any excess of the minimum corporate income
tax over the normal income tax as computed under Subsection (A) of this Section shall be carried
forward and credited against the normal income tax for the three (3) immediately succeeding
taxable years.
ILLUSTRATION (table 1):

VI. Tax on Resident Foreign Corporations. -

(A) In General. - Except as otherwise provided in this Code, a corporation organized,


authorized, or existing under the laws of any foreign country, engaged in trade or business within
the Philippines, shall be subject to an income tax equivalent to thirty-five percent (35%) of the
taxable income derived in the preceding taxable year from all sources within the Philippines:
Provided, That effective January 1, 2009, the rate of income tax shall be thirty percent (30%).

In the case of corporations adopting the fiscal-year accounting period, the taxable income shall
be computed without regard to the specific date when sales, purchases and other transactions
occur. Their income and expenses for the fiscal year shall be deemed to have been earned and
spent equally for each month of the period.

The corporate income tax rate shall be applied on the amount computed by multiplying the
number of months covered by the new rate within the fiscal year by the taxable income of the
corporation for the period, divided by twelve.

Provided, however, That a resident foreign corporation shall be granted the option to be taxed at
fifteen percent (15%) on gross income under the same conditions, as provided in Section 27 (A).
(B) Minimum Corporate Income Tax on Resident Foreign Corporations. - A minimum
corporate income tax of two percent (2%) of gross income, as prescribed under Section 27 (E) of
this Code, shall be imposed, under the same conditions, on a resident foreign corporation taxable
under paragraph (1) of this Subsection.

VII. Tax on Nonresident Foreign Corporation. -

(A) In General. - Except as otherwise provided in this Code, a foreign corporation not engaged
in trade or business in the Philippines shall pay a tax equal to thirty-five percent (35%) of the
gross income received during each taxable year from all sources within the Philippines, such as
interests, dividends, rents, royalties, salaries, premiums (except reinsurance premiums),
annuities, emoluments or other fixed or determinable annual, periodic or casual gains, profits and
income, and capital gains, except capital gains subject to tax under subparagraph 5 ( c ):
Provided, That effective January 1, 2009, the rate of income tax shall be thirty percent (30%).

ILLUSTRATION (table 2)

1) a. In General – on taxable income derived from sources 30%


within the Philippines

b. Minimum Corporate Income Tax – on gross income 2%

c. Improperly Accumulated Earnings – on improperly 10%


accumulated taxable income

2) International Carriers – on gross Philippine billings 2½%

3) Regional Operating Headquarters of Multinational 10%


Companies– on taxable income

4.) Regional or Area Headquarters of Multinational Companies exempt

5) Corporation Covered by Special Laws Rate specified


under the
respective special
laws

6) Offshore Banking Units (OBUs) 10%

In general – Income derived by OBUs from foreign currency Exempt


transactions with non-residents, other OBUs, local commercial
banks and branches of foreign banks authorized by BSP
On interest income derived from foreign currency loans 10%
granted to residents other than offshore banking units or local
commercial banks, local branches of foreign banks authorized
by BSP to transact business with OBUs

7) Income derived under the Expanded Foreign Currency


Deposit System

Interest income derived by a depository bank under the 7½%


expanded foreign currency deposit system.

On Income derived by depository banks under the expanded exempt


foreign currency deposit systems from foreign currency
transactions with non-residents, OBUs in the Philippines, local
commercial banks including branches of foreign banks that
may be authorized by BSP

On interest income derived from foreign currency loans 10%


granted by depository banks under the expanded foreign
currency deposit systems to residents other than offshore
banking units in the Philippines or other depository banks
under the expanded system

8.) Branch Profit Remittances – on total profits applied or 15%


earmarked for remittance without any deduction for the tax
component thereof (except those activities which are registered
with the Philippines Economic Zone Authority)

9.) Interest from currency deposits, trust funds, deposit 20%


substitutes and similar arrangements

10. Royalties derived from sources within the Philippines 20%

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