Tax on Corporations

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TAX ON CORPORATIONS

Frian Johannes D. Alday, CPAInstructorUniversity of Batangas – Lipa City

Corporations, defined (Tax Code)

• For income tax purposes, the term “corporation” shall include partnerships, no matter how created or organized, joint stock companies, joint accounts (cuentas en participacion), associations or insurance companies.


Corporations, defined (Tax Code)

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


Not to be treated as corporations

1. A general professional partnership

2. A joint venture or consortium formed for the purpose of undertaking construction projects


Not to be treated as corporations

3. A 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


Types of Corporations, defined

• Domestic corporation – a corporation created or organized in the Philippines or under its laws

• Foreign corporation – a corporation which is not domestic

• Resident corporation – a foreign corporation engaged in business in the Philippines


Types of Corporations, defined

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


Tax on Domestic Corporations

• Capital gain tax• Final tax on passive income• Normal tax (NT or RCIT)• Minimum corporate income tax (MCIT)• Gross income tax (GIT)• Improperly accumulated earnings tax

(IAET)



(a) On sale of shares of stock of a domestic corporation not listed and traded thru a local stock exchange held as capital assets

On the net capital gain Not over P100,000 On any amount in excess of

P100,000

Final tax of 5%

Final tax of 10%



(b) On sale of land and building held as capital asset

On the gross selling price, or the current fair market value at the time of the sale, whichever is higher Final tax of 6%



• Income Tax Rules - Corporations.docx


Minimum Corporate Income Tax

• 2% of the minimum corporate income tax gross income


Minimum Corporate Income Tax Gross Income (Merchandising)

Net Sales

Less: Cost of Sales

Equals: Gross Profit from sales subject to MCIT


Minimum Corporate Income Tax Gross Income (Manufacturing)

Net Sales

Less: Cost of goods sold

Equals: Gross Profit from sales subject to MCIT


Minimum Corporate Income Tax Gross Income (Service)

Gross receipts or revenues

Less: Direct costs of the services **

Equals: Gross income subject to the MCIT

* * Direct cost of services Examples are: Salaries of personnel directly rendering the services; expenses on the facilities directly utilized and cost of supplies


Quarterly Tax on Corporations

• Within sixty (60) days after the end of each of the first three quarters of the year, a corporation files an income tax return.

• On or before the fifteenth day of the fourth month following the close of the taxable year, a final or annual income tax return is filed.



• The normal income tax and the minimum corporate income tax are computed on the quarterly and final tax returns, and whichever is higher is paid.

• The tax computed on the quarterly or year-end taxable income is decreased by the amount of tax paid for the preceding quarter or quarters.



• There may be an income tax payable (but not refundable) in a quarterly return.

• Passive income with final tax and capital gains with capital gain tax are not included in the quarterly and year-end computations.


Excess MCIT carry-forward

• Any excess of the minimum corporate income tax over the normal tax of a year will be carried forward and credited against the normal tax for the three immediately succeeding taxable years. In the year to which carried forward, the normal tax should be higher than the minimum corporate income tax.


The gross income tax

• The President of the Philippines, upon recommendation of the Secretary of Finance, may, effective 2000, allow domestic and resident corporations the option to be taxed on gross income, as follows:



a. The tax is 15%;

b. Available only to firms whose cost of sales to gross sales or receipts from all sources does not exceed 55%;

c. Shall be irrevocable for 3 consecutive years during which the corporation is qualified under the scheme.



• Gross income for purposes of the GIT is (a) For trading or manufacturing concerns, gross profit from sales and (b) For service concerns, gross receipts less sales allowances and discounts.



• To date, the President of the Philippines had not made available the optional Gross Income Tax.


The income tax expense

• The income tax expense for a year of a corporation would be the total of the three taxes of:– Capital gain tax– Final tax on passive income– Normal income tax


Tax on Resident Corporations



Tax on Non-resident corporations



Special Corporations

Taxpayer Tax Base Rate

Proprietary educational institution and non-profit hospital

Taxable income from all sources

10%

Resident international carrier Gross Philippines billings 2 ½ %

Non-resident owner or lessor of vessel

Gross rentals, lease and charter fess from the Philippines 4 ½ %

Non-resident cinematographic film owner, lessor or distributor

Gross income from the Philippines 25%



Taxpayer Tax Base Rate

Non-resident lessor of aircraft, machinery and other equipment

Gross receipts, charges and other fees from Philippine sources 7 ½ %

Regional operating headquarters of a multinational corporation

Philippine taxable income 10%



• All revenues of non-stock, non-profit educational institutions used actually, directly and exclusively for educational purposes shall be exempt from taxes.



• If the gross income of a proprietary educational institution or hospital from unrelated trade, business or other activity exceeds fifty percent (50%) of the total gross income derived from all sources, will be taxes as an ordinary corporation (predominance test).


Regional headquarters vs. regional operating headquarters• A regional headquarters of a multinational

company will not be subject to income tax. A regional headquarters is a branch established in the Philippines by a multinational company and which headquarters do not earn or derive income from the Philippines and which act as supervisory, communications and coordinating center for its affiliates, subsidiaries or branches in the Asia-Pacific region and other foreign markets.


Regional headquarters vs. regional operating headquarters• A regional operating headquarters of a

multinational company will pay a tax of ten percent (10%) of its net income. A ROHQ is a branch established in the Philippines by a multinational company which is engaged in any of the following qualifying services: general administration and planning, business planning and coordination, sourcing/procurement of raw materials and components, corporate finance advisory services,


Regional headquarters vs. regional operating headquarters• marketing control and sales promotion, training

and personnel management, logistic services, research development services and project development, technical support and maintenance, data processing and communication and business development.


Improperly accumulated earnings tax

• Presumptions of improper accumulation:1. When the corporation is a mere holding

company

2. When the corporation is an investment company

3. When the corporation permits is profits to accumulate beyond the reasonable needs of the business



• Under the Income Tax Regulations, an accumulation of profits (including undistributed profits of prior years) is unreasonable if its is not required fro legitimate business purposes, considering all the circumstances of the case.

• The law would not prohibit an accumulation for:



1. Additional working capital

2. Expansion, improvement and repairs

3. Debt retirement

4. Acquisition of a related business, or the purchase of stock of a related business where a subsidiary relationship is established

5. Anticipated losses or reserves in business



• Under the Corporation Code of the Philippines, a corporation can retain profits not exceeding 100% of its paid-in capital.

• The improperly accumulated profits tax is not computed and applied by the corporation itself. The BIR makes the computation on its allegation of improper accumulation of profits by the corporation.


Exempt from the IAET

1. Publicly-owned corporations

2. Banks and other nonbank financial intermediaries

3. Insurance companies



• 10% if the improperly accumulated earnings


Profits remittance tax

• Any profit remitted by a branch to its head office shall be subject to a final tax at 15% which shall be based on the total profit 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 (PEZA).


Government Owned or Controlled Corporation (GOCC)• All corporations, agencies or

instrumentalities owned or 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, except the following:


Government Owned or Controlled Corporation (GOCC)1. Government Service Insurance System

(GSIS)

2. Social Security System (SSS)

3. Philippine Health Insurance Corporation (PHIC)

4. Philippine Charity Sweepstakes (PCSO)


Exempt Associations

• Not subject to income tax on received by them from undertakings which are essential to or necessarily connected with the purposes for which they were organized and operated, but

• Subject to income tax on income of whatever kind and character 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:


Exempt Associations

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;


Exempt Associations

c. Beneficiary society, order or association operating for the exclusive benefit of the members, such as fraternal organization operating under the lodge system, or 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, association or non-stock corporation, or their dependents


Exempt Association

d. Cemetery company owned and operated exclusively for its members

e. 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 the net income or assets of which shall belong to or inure to the benefit of any member, organizer, officer or a specified person


Exempt Association

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 stockholder or individual

g. Civic league or organization not organized for profit but operated exclusively for the promotion of social welfare

h. A non-stock and non-profit and educational institution


Exempt Association

i. Government educational institution

j. Farmers and 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, duties and fees collected from members for the sole purpose of meeting its expenses


Exempt Association

k. Farmers, fruit growers, or like association organized and operated as a sales agent, for the purpose of marketing the product 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 furnished by them

Documents

Tax on Corporations