Tax on CorporationsRates of Income Tax on Domestic CorporationsIn GeneralRate of tax, in general 1997 35% 1998 34% 1999 33%2000onwards 32%Tax is imposed on taxable or net income.Optional 15% tax on gross incomeThe President, upon the recommendation of the Secretary of Finance, may, effective 01 January 2000, allow corporations the option to be taxed at fifteen percent (15%) of gross income, provided certain conditions are satisfied.This is available to firms whose ratio of cost of sales to gross sales or receipts from all sources does not exceed 55%.Once elected by the corporation, option shall be irrevocable for the three consecutive years.Conditions to be satisfied to avail of the 15% optional corporate tax1. A tax effort ratio of twenty percent (20%) of Gross National Product (GNP)2. A ratio of forty percent (40%) of income tax collection to total tax revenues3. A VAT tax effort of four percent (4%) of GNP4. A 0.9 percent (0.9%) ratio of the Consolidated Public Sector Financial Position to GNPSome definitions for this purposeGross incomederived from business shall be equivalent to gross sales less sales returns, discounts and allowances and cost of goods sold.For taxpayers engaged in sale of services,gross incomemeans gross receipts less sales returns, allowances and discounts.Cost of goods soldshall include all business expenses directly incurred to produce the merchandise to bring them to their present location and use.Trading ConcernManufacturing Concern

Cost of goods sold shall include the invoice cost of the goods sold, plus import duties, freight in transporting the goods to the place where the goods are actually sold, including insurance while the goods are in transit.Cost of goods manufactured and sold shall include all costs of production of finished goods, such as raw materials used, direct labor and manufacturing overhead, freight cost, insurance and other costs incurred to bring the raw materials to the factory or warehouse.

Tax rate for proprietary educational institutions and hospitals10% on taxable income, except on certain passive incomesThe ordinary rate imposed on corporations shall apply to proprietary educational institutions and hospitals when their gross income from unrelated trade, business or other activity exceeds 50% of their total gross income derived from all sources.Unrelated trade, business or other activityThis 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.Proprietary educational institutionA proprietary educational institution is any private school maintained and administered by private individuals or groups with an issued permit to operate from the DECS, or CHED, or TESDA, as the case may be.GOCCs, agencies or instrumentalitiesAll corporations, agencies, or instrumentalities owned and controlled by the government shall pay such rate of tax upon their taxable income as are imposed upon corporations or associations engaged in a similar business, industry, or activity.Exceptions: GOCCs and instrumentalities not subject to tax are the:1. Government Service Insurance System (GSIS) 2. Social Security System (SSS) 3. Philippine Health Insurance Corporation (PHIC) 4. Philippine Charity Sweepstakes Office (PCSO) 5. Philippine Amusement and Gaming Corporation (PAGCOR)Rates on certain passive income subject to final tax1. Interest from deposits and yield or any other monetary benefit from deposit substitutes and from trust funds and similar arrangements 20%2. Royalties 20%3. Interest income derived from a depository bank under the expanded foreign currency deposit system 7 %4. Capital gains from sale of shares of stock not traded in the stock exchangea. Not over P100,000 5%b. Over P100,000 10%5. Tax on income derived by a depository bank under the expanded foreign currency deposit system from foreign currency transactions 10%Note: This is different from the interest income. This pertains to the income derived by a depository bank itself.Note: Any income of non-residents, whether individuals or corporations, from transactions with depository banks under the expanded system is exempt from income tax.6. Intercorporate dividends exempt7. Capital gains realized from the sale, exchange or disposition of lands and/or buildings 6%Sale of corporate real property that has ceased to be used in trade or business subject to 6% capital gains tax ( No. 21-99 dated 2/25/99)A final tax of 6% is imposed on the gains presumed to have been realized in the sale, exchange or disposition of lands and/or buildings which are not actively used in the business of a corporation and which are treated as capital assets based on the gross selling price or fair market value, whichever is higher. However, since in the instant case the taxpayer claimed a depreciation deduction when the building and other improvements were not used in trade or business, the taxpayer must file and amend its income tax return and pay the deficiency income tax, if any, plus surcharge and interest, based on its adjusted taxable income resulting from the disallowance of the depreciation deduction.Minimum Corporate Income TaxMinimum corporate income taxA minimum corporate income tax of two percent (2%) of the gross income as of the end of the taxable year is hereby imposed on a corporation subject to income tax, 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 regular corporate income tax for the taxable year.Carry forward of excess minimum taxAny excess of the minimum corporate income tax over the normal income tax shall be carried forward and credited against the normal income tax payable for the next three years immediately succeeding the taxable year in which the minimum corporate income tax was paid.Relief from the minimum corporate income tax under certain conditionsThe Secretary of Finance may suspend the imposition of the minimum corporate income tax on any corporation which suffers losses on account of prolonged labor dispute, or because offorce majeure, or because of legitimate business reverses.Meaning of gross income and cost of goods sold under minimum corporate income tax compared with meaning of gross income and cost of goods sold under Section 27(A)

Section 27(A)Section 27(E) MCIT

Gross Incomeequivalent to gross sales less sales returns, discounts and allowances and cost of goods sold.

Cost of goods soldshall include all business expenses directly incurred to produce the merchandise to bring them to their present location and use.

Cost of goods sold for a trading or merchandising concernshall include the invoice cost of the goods sold, plus import duties, freight in transporting the goods to the place where the goods are actually sold, including insurance while the goods are in transit.

Cost of goods manufactured and sold for a manufacturing concernshall include all costs of production of finished goods, such as raw materials used, direct labor and manufacturing overhead, freight cost, insurance and other costs incurred to bring the raw materials to the factory or warehouse.

Gross Income for taxpayers engaged in sale of servicegross receipts less sales returns, allowances and discounts.gross receipts less sales returns, allowances and discountsand cost of services

Cost of servicesAll direct costs and expenses necessarily incurred to provide the services required by the customers and clients including (A) salaries and employee benefits of personnel, consultants and specialists directly rendering the service and (B) cost of facilities directly utilized in providing the service such as depreciation or rental of equipment used and cost of supplies.For banks, it includes interest expense.

Note: Definition of gross income for taxpayers engaged in the sale of service includes cost of services in MCIT but not in the case of the optional 15% tax on gross income [Section 27(A), NIRC].Tax on Resident Foreign CorporationsResident foreign corporationA resident foreign corporation is one organized, authorized, or existing under the laws of any foreign country, engaged in trade or business within the Philippines.Income tax rate, in generalRates of tax, in general 1997 35% 1998 34% 1999 33%2001onwards 32%Tax is imposed on taxable or net income.Optional: 15% of Gross IncomeThe option to be taxed at fifteen percent (15%) on gross income shall also be available to resident foreign corporations, subject to the same conditions.Available to firms whose ratio of cost of sales to gross sales or receipts from all sources does not exceed 55%.Once elected by the corporation, option shall be irrevocable for the three consecutive years.Minimum corporate income tax on resident foreign corporationsAll conditions of the MCIT on domestic corporations also apply to resident foreign corporations.Tax rates on specific resident foreign corporations1. International Carrier 2 % of Gross Philippine Billings2. Offshore Banking Units 10% of income derived from foreign currency transactions with local commercial banks, including branches of foreign banks that may be authorized by the BSP to transact business with offshore banking units, including any interest income derived from foreign currency loans granted to residents Any income of non-residents, whether individuals or corporations, from transactions with said offshore banking units shall be exempt from income tax.3. Tax on Branch Profits Remittances 15% of total profits applied or earmarked for remittance without deduction for the tax component thereof4. Regional or area headquarters shall not be subject to income tax5. Regional operating headquarters shall be subject to a tax of 10% of their taxable incomeGross Philippine Billings for international air carrierGross Philippine Billingsrefers to the amount of gross revenue derived from carriage of persons, excess baggage, cargo and mail originating from the Philippines in a continuous and uninterrupted flight, irrespective of the place of sale or issue and the place of payment of the ticket or passage document.Tickets revalidated, exchanged and/or endorsed to another international airline form part of the Gross Philippine Billings if the passenger boards a plane in a port or point in the Philippines.For a flight which originates from the Philippines, but transshipment of passenger takes place at any port outside the Philippines on another airline, only the aliquot portion of the cost of the ticket corresponding to the leg flown from the Philippines to the point of transshipment shall form part of the Gross Philippine Billing.Gross Philippine Billings for international shippingGross Philippine Billingsmeans gross revenue whether for passenger, cargo or mail originating from the Philippines up to final destination, regardless of the place of sale or payments of the passage or freight documents.Tax on branch profits remittancesAny profit remitted by a branch to its head office shall be subject to a tax of fifteen percent (15%) which shall be based on the total profits applied or earmarked for remittance without any deduction for the tax component thereof (except those activities which are registered with the Philippine Economic Zone Authority).The following shallnotbe treated as branch profitsunlessthe same are effectively connected with the conduct of its trade or business in the Philippines:1. interests2. dividends3. rents4. royalties5. remuneration for technical services6. salaries7. wages8. premiums9. annuities10. emoluments11. other fixed or determinable annual, periodic or casual gains, profits, income and capital gainsInMarubeni v. Commissioner, Marubeni-Japan invested directly in AG & P Manila. Since Marubeni has a branch in the Philippines, AG & P withheld 15% as branch profits remittance tax from the cash dividends. SC held that the dividends remitted were not subject to the 15% branch profit remittance tax as they were not income earned by a Philippine branch of Marubeni-Japan.In the 15% remittance tax, the law specifies its own tax base to be on theprofit remitted abroad.There is absolutely nothing equivocal or uncertain about the language of the provision. The tax is imposed on the amount sent abroad, and the law calls for nothing further. [Bank of America NT v. Court of Appeals, 234 SCRA 302]Marubeni v. Commissioner, 177 SCRA 500Marubeni Corporation is a resident foreign corporation.A resident foreign corporation is one that is incorporated under the laws of a foreign country and is engaged in trade or business in the Philippines. Marubeni Corporation is a foreign corporation duly organized under the laws of Japan and it is duly licensed to engage in business under Philippine laws. Marubeni Corporation maintains a branch office to carry out its business in the country.The equity investments of MC in AG&P are investments of the mother corporation and not of its branch office.The investment was in the name of the Marubeni Corporation and therefore, the stockholder in AG&P is the mother corporation, Marubeni Corporation, and not its branch office in the Philippines. Marubeni Corporation, therefore, and not its branch office, is liable for taxes on dividends earned on its investments.Branch profit remittance does not include dividends on investments received from other domestic corporations.Only profits remitted abroad by a branch office to its head office which are effectively connected with its trade or business in the Philippines are subject to the 15% profit remittance tax.To beeffectively connected,it is not necessary that the income be derived from the actual operation of taxpayer-corporations trade or business; it is sufficient that the income arises from the business activity in which the corporation is engaged.The dividends received by Marubeni from AG&P are not income arising from the business activity in which Marubeni is involved. Accordingly, said dividends if remitted abroad, are not considered branch profits for purposes of the 15% profit remittance tax.Note: Test of whether remittance of profit by a branch to its head office comes under the purview of the profit remittance tax, the branch itself should have made the remittance. In this case, it was not Marubenis branch in the Philippines, but the investee corporation, AG&P, which directly remitted the dividends to Marubeni of Japan.Also, only the branch office is the authorized withholding agent for the profit remittance tax. AG&P, being an investee of Marubeni, erred in withholding the profit remittance tax from the dividends it remitted to Marubeni.Interest received by a foreign corporation from Philippine sources not effectively connected with the conduct of its business not considered branch profits. (Hongkong-Shanghai Hotels, Ltd. v. CIR, CTA Case No. 5243 dated 4/29/99)Interest received by a foreign corporation during each taxable year from all sources within the Philippines is not considered branch profits except when the same is effectively connected with the conduct of its business. In the instant case, the interest income from bank placements is not effectively connected with the business of hotel management, thus, it is excluded form profits subject to the 15% branch profit remittance tax.Regional or area headquarters of multinational companiesRegional or area headquarters shall not be subject to income tax.Regional operating headquarters of multinational companiesRegional operating headquarters shall pay a tax of ten percent (10%) on their taxable income.Tax on certain incomes received by a resident foreign corporation1. Interest from deposits and yield or any other monetary benefit from deposit substitutes, trust funds and similar arrangements and royaltiesInterest income from any currency bank deposit and yield or any other monetary benefit from deposit substitutes and from trust funds and similar arrangements and royalties derived from sources within the Philippines shall be subject to a final income tax at the rate of twenty percent (20%) of such interest.However, interest income derived by a resident foreign corporation from a depositary bank under the expanded foreign currency deposit system shall be subject to a final income tax at the rate of seven and one-half percent (71/2%) of such interest income.2. Income derived under the expanded foreign currency deposit systemThis refers to income derived by a depositary bank under the expanded foreign currency deposit system from foreign currency transactions with local commercial banks including branches of foreign banks that may be authorized by the Bangko Sentral ng Pilipinas to transact business with foreign currency deposit system units and other depositary banks under the expanded foreign currency deposit system, including interest income from foreign currency loans granted by such depositary banks under said expanded foreign currency deposit system to residents.A final income tax at the rate of ten percent (10%) is imposed on such income.3. Capital gains from sale of shares of stock not traded in the stock exchangea. Not over P100,000 5%b. Over P100,000 10%4. Intercorporate dividendsDividends received by a resident foreign corporation from a domestic corporation liable to tax under the NIRC shall not be subject to income tax.Tax on Non-resident Foreign CorporationTaxation of a non-resident foreign corporation, in generalRates of tax, in general1997 - 35%1998 - 34%1999 - 33%2000 - 32%However, the tax is imposed on gross income, not on taxable or net income.Such gross income may include interests, dividends, rents, royalties, salaries, premiums (except reinsurance premiums), annuities, emoluments or other fixed or determinable annual, periodic or casual gains, profits and income, and capital gains, except capital gains from the sale of shares of stock not traded in the stock exchange.Taxation of certain non-resident foreign corporations1. Non-resident cinematographic film owner, lessor or distributor 25% of gross income2. Non-resident owner or lessor of vessels chartered by Philippine nationals 4% of gross rentals, lease or charter fees3. Non-resident owner or lessor of aircraft, machineries and other equipment 7% of gross rentals or feesNon-resident cinematographic film owner, lessor or distributorA cinematographic film owner, lessor, or distributor shall pay a tax of twenty five percent (25%) of its gross income from all sources within the Philippines.Non-resident owner or lessor of vessels chartered by Philippine nationalsA non-resident owner or lessor of vessels shall be subject to a tax of four and one-half percent (4% ) of gross rentals, lease or charter fees from leases or charters to Filipino citizens or corporations, as approved by the Maritime Industry Authority.Non-resident owner or lessor of aircraft, machineries and other equipmentRentals, charters and other fees derived by a non-resident lessor of aircraft, machineries and other equipment shall be subject to a tax of seven and one-half percent (7%) of gross rentals or fees.Tax on certain incomes received by a non-resident foreign corporation1. Interest on foreign loansA final withholding tax at the rate of twenty percent (20%) is hereby imposed on the amount of interest on foreign loans contracted on or after 01 August 1986.2. Intercorporate dividendsA final withholding tax at the rate of fifteen percent (15%) is hereby imposed on the amount of cash and/or property dividends received by a non-resident foreign corporation from a domestic corporation, subject to 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 deemed to have been paid in the Philippines equivalent to thirty two percent (32%) in the year 2000. This is the so-called tax sparing rule.3. Capital gains from sale of shares of stock not traded in the stock exchangea. Not over P100,000 5%b. Over P100,000 10%Tax sparing ruleInvolves intercorporate dividends received by anon-resident foreign corporationfrom a domestic corporationOnly 15% final withholding tax on cash and/or property dividends is imposedProvided 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 deemed to have been paid in the Philippines, which is 32% by 2000 [Sec. 28, (B) (5) (b)]Tax on Improperly Accumulated EarningsImposition of the taxIn addition to the other income taxes, there is hereby imposed for each taxable year on the improperly accumulated taxable income of each corporation an improperly accumulated earnings tax equal to ten percent (10%) of the improperly accumulated taxable income. [Section 29, NIRC]Corporations subject to improperly accumulated earnings taxThe improperly accumulated earnings tax shall apply to every corporation formed or availed for the purpose of avoiding the income tax with respect to shareholders or the shareholders of any other corporation, by permitting earnings and profits to accumulate instead of being divided or distributed.Exceptions to improperly accumulated earnings taxThe improperly accumulated earnings tax shall not apply to:1. Publicly-held corporations2. Banks and other non-bank financial intermediaries3. Insurance companiesEvidence of purpose to avoid income taxPrima Facie Evidence: The fact that any corporation is a mere holding company or investment company shall beprima facieevidence of a purpose to avoid the tax upon its shareholders or members.Evidence Determinative of Purpose: The fact that the earnings or profits of a corporation are permitted to accumulate beyond the reasonable needs of the 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.The termreasonable needs of the businessincludes the reasonably anticipated needs of the business.Computation of improperly accumulated taxable incomeTaxable income adjusted by:1. Income exempt from tax;2. Income excluded from gross income;3. Income subject to final tax; and4. Amount of net operating loss carry-over deducted;And reduced by the sum of:1. Dividends actually or constructively paid; and2. Income tax paid for the taxable year.CoverageFor corporations using the calendar basis, the accumulated earnings tax shall not apply on improperly accumulated income as of 31 December 1997.For corporations adopting the fiscal year accounting period, the improperly accumulated income not subject to this tax shall be reckoned as of the end of the month comprising the 12-month period of fiscal year 1997-1998.Exemption of certain organizationsExemption from tax on corporationsThe following organizations shall not be taxed in respect to income received by them as such:1. Labor, agricultural or horticultural organization not organized principally for profit;2. 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;3. A beneficiary society, order or association, operating for the exclusive benefit of the members such as a fraternal organization operating under the lodge system, or a mutual aid association or a non-stock corporation organized by employees providing for the payment of life, sickness, accident, or other benefits exclusively to the members of such society, order, or association, or non-stock corporation or their dependents;4. Cemetery company owned and operated exclusively for the benefit of its members;5. Non-stock 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 inure to the benefit of any member, organizers, officer or any specific person;6. Business league, chamber of commerce, or board of trade not organized for profit and no part of the net income of which inures to the benefit of any private stockholder or individual;7. Civic league or organization not organized for profit but operated exclusively for the promotion of social welfare;8. A non-stock, non-profit educational institution;9. Government educational institution;10. 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 meetings its expenses; and11. 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 products finished by them. [Section 30, NIRC]Income by exempted corporations which are not exemptedNotwithstanding the provisions in the preceding paragraphs, 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 tax imposed under this Code.[2ndpargraph, Section 30, NIRC]Thus, the following income of the exempted organizations shall not be exempted:1. Income of whatever kind and character from any of their properties, real or personal2. Income from any of their activities conducted for profitSeeCommissioner v. CAre. YMCA case in General Principles of TaxationCommissioner v. CA, CTA & Ateneo de Manila University, 271 SCRA 605 In conducting researches and studies of social organizations and cultural values thru its IPC, is Ateneo performing the work of an independent contractor and thus taxable for the contractors tax? NO. An academic institution conducting researches pursuant to its commitments to education and ultimately to public service cannot be considered as an independent contractor when it accepts sponsorships for its research activities from international organizations, private foundations and government agencies. The research activity of the IPC is done in pursuance of maintaining Ateneo's university status and not in the course of an independent business of selling such research with profit in mind.It is error to apply the principles of tax exemption without first applying the well-settled doctrine of strict interpretation in the imposition of taxes it is obviously both illogical and impractical to determine who are exempted without first determining who are covered by a provision of the NIRC.Hornbook doctrine in the interpretation of tax laws:Statute will not be construed as imposing a tax unless it does so clearly, expressly, and unambiguously. A tax cannot be imposed without clear and express words for that purpose. Accordingly, the general rule of requiring adherence to the letter in construing statutes applies with peculiar strictness to tax laws and the provisions of a taxing act are not to be extended by implication.