Lecture 3: INCOME TAXATION CORPORATION

I. Pro-Forma Computation
For CORPORATIONS, including business partnerships, domestic corporations, resident foreign
corporations, joint ventures, and associations, except non-resident foreign corporations (which is taxable at
gross income):
Gross receipts/sales
xx
Less: Cost of service/sales
(xx)
Gross income from business or profession
xx
Add:
Passive Incomes, not subjected to final tax
xx
Capital Gains, not subjected to CGT
xx
Total Gross Income
xx
Less: Deductions for:
Itemized Deductions or OSD
(xx)
Net Operating Loss Carry-Over (NOLCO)
(xx)
Taxable Income
xx
*NCLCO is not applicable since the holding period is also not applicable.
II. Overview
The term corporation includes partnerships, no matter how created or organized, joint-stock companies,
joint accounts (cuentas en participacion), associations, or insurance companies, but does not include
general professional partnerships (GPPs) and joint venture or consortium formed for the purpose of
undertaking construction porjects or engaging in petroleum operation, coal, geothermal and other energy
operations pursuant to an operating or consortium agreement under a service contract with the
Government.
III. Classes of Corporate Taxpayer
1. Domestic corporations are taxed on worldwide income, at 30% of the taxable income.
2. Resident foreign corporations are taxed on incomes from the Philippines only, at 30% of the taxable income.
3. Non- Resident foreign corporations are taxed on incomes from the Philippines only, at 30% of the gross
income.
Note:
a. GPPs 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.
IV. Components of Gross Income
1. Business and/or Professional Income
2. Passive Income
3. Capital Gains

The components of gross income for individuals are also the same in the case of corporate taxpayers . (See
discussions on Gross Income for individuals, Lecture 2)

V. Deductions from Gross Income

1. Optional Standard Deduction
2. Itemized Deductions
(See discussions on Deductions and Dealing in Property.)
VI. Corporate Tax
1. Gross Income Tax (GIT)
It is an optional income tax given to corporate earners equivalent to 15% of its gross income instead of the
30% net income tax.
Only domestic corporations and resident foreign corporations may avail such GIT.
Requirements:

Lecture 3: INCOME TAXATION CORPORATION

a.
b.
c.
d.
e.
f.
g.
h.

A tax ratio of 20% of Gross National Products

A ratio of 40% income tax collection of total tax revenues
A VAT tax effort of 4% of GNP
A 0.9% ratio of consolidated public sector financial position to GNP
Available only to firms whose ratio of cost of sales to gross sales or receipts from all sources is 55%.
The election shall be irrevocable for three (3) consecutive year
Recommendation from the Secretary of Finance
Subject to approval of the Office of the President

2. Normal Corporate Income Tax (NCIT)

Period
January 1 to October 31, 2005
November 1, 2005 to December 31, 2008
January 1, 2009 and onwards

Corporate Income
Tax Rate
32%
35%
30%

3. Minimum Corporate Income Tax (MCIT)

The following are liable to MCIT beginning the 4th taxable year in which such corporation commenced its
business operations:
a. Domestic Corporations
b. Resident foreign corporations

The 2% of gross income is imposed whenever a company:

a. Has no taxable inocome; or
b. Has taxable income but the amount of MCIT is greater than the NCIT (30%)
Excess MCIT can be carried forwards for 3 succeeding years and credited againts the normal corporate
income tax only when the NCIT is greater than MCIT
MCIT can be claimed as a credit against the MCIT itself or against any other losses

The following are exempt from MCIT (these are special corporations):
a. Domestic corporations operating as proprietary (private) educational institutions subject to tax at 10% on
their taxable income;
b. Domestic corporations engaged in hospital operations which are nonprofit subject to tax at 10% on their
taxable income;
c. Domestic corporations engaged in business as depository banks under the expanded foreign currency
deposit system on their income from foreign currency transactions which has been subjected to final tax
at 10%;
d. Resident foreign corporations engaged in business as international carrier subject to tax at 2 % of their
Gross Philippine Billings;
e. Resident foreign corporations engaged in busines as Offshore Banking Units (OBUs) on their income
from foreign currency transactions which has been subjected to a final income tax at 10% of such income;
f. Resident foreign corporations engaged in business as regional area headquarters subject to tax at 10% of
their taxable income; and
g. Firms that are taxed under a special income tax system

VII.

The computation and payment of MCIT, shall likewise apply at the time of filing the quarterly corporate
income tax.
In the computation of the tax due for the taxable quarter, if the 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.

Improperly Accumulated Earnings Tax

It is a tax imposed on improper accumulation of earnings. Improperly accumulated earnings (IAE) are the
profits of a corporation that are permitted to accumulate instead of being distributed by a corporation to its

Lecture 3: INCOME TAXATION CORPORATION

shareholders for the purpose of avoiding the income tax with respect to its shareholders or the shareholders of
another corporation.

The rate of 10% of the Improperly Accumulated Taxable Income, computed as follows:
Taxable Income for the Year
xx
Add:
Income exempt from tax
xx
Income excluded from gross income
xx
Income subject to final tax, net
xx
NOLCO
xx
Less:
Income tax paid for the taxable year
(xx)
Dividends actually or constructively paid/issued
from the applicable years taxable income (xx)
Amount reserved for the reasonable needs
(xx)
Tax Base for IAET
xx
Note: Earnings for the reasonable needs are enumerated as follows [Revenue Regulation No. 22001]:
1. Allowance for the increase in the accumulation of earnings up to 100% of the paid-up capital of
the corporation as of the balance sheet date, inclusive of accumulation taken from other years;
2. Earnings reserved for definite corporate expansion or projects as approved by the board;
3. Earnings reserved for building, plants or equipment acquisition as approved by the board;
4. Earnings reserved for compliance with any loan covenant or pre-existing obligation established
under a legitimate business agreement;
5. Earnings required by law or applicable regulations to be retained by the corporation;
6. In case of subsidiaries of foreign corporations in the Philippines, all undistributed earnings
intended or reserved investments within the Philippines as can be proven by corporate records.

VIII.

Applicability:
a. Shall apply to every corporation formed or availed for the purpose of avoiding the income tax with
respect to its shareholders or shareholders of any other corporation, by permitting earnings and profits to
accumulate instead of being divided or distributed. These are:
i.
Domestic corporations
ii.
Closely-held corporations

Exceptions:
a. Publicly-held corporations
b. Banks and other non-banks financial intermediaries
c. Insurance companies
d. Taxable (business) partnerships (deemed to have actually or constructively received the taxable income
under Sec. 73D)
e. General professional partnerships
f. Non-taxable joint ventures
g. Enterprises duly registered with the Philippine Economic Zone Authority under R.A. 7916 and enterprises
registered pursuant to the Bases, Conversion and Development Act of 1992 under R.A. 7227

Income Tax Return Filing and Payment of Income Tax

Income Tax Return (BIR Form)
Annual Income Tax Return Corporate
(BIR Form 1702)

Deadline for Filing and Payment

On or before the 15th day of the 4th month of the
following the close of the taxable year

Lecture 3: INCOME TAXATION CORPORATION

Annual Income Tax Return Self-Employed
Individual (BIR Form 1701)
Quarterly Income Tax Return (BIR Form 1702Q)

On or before the 15th day of the 4th month of the

following the close of the taxable year
Within 60 days after the end of each first 3
quarters of the taxable year

IX. BIR Issuances and Court Decisions Related to Income Tax

1. Valuation of Contributions or Gifts Actually Paid or Made in Computing Taxable Income
Revenue Memorandum Circular (RMC) No. 86-2014 dated December 5, 2014
- This circular is issued to clarify the valuation of contributions or gifts actually paid or made in
computing taxable income as part of the substantiation requirement under Revenue Regulations No.
13-98:
Information Required in Certificate
Donation (BIR Form No. 2322)

of

Allowable income tax deduction (on the part

of the donor)

Actual receipt by the accredited NSNP/ NGO

of the donation or contribution
Date of the receipt of donation, and
Amount of donation
a. Amount of donation or contribution if
cash
b. Acquisition cost if real or personal
property
Net book value of the property donated as
reflected in the financial statements of the donor.

2. Requirements for Deductibility of Certain Income Tax Payments

Revenue Regulation No. 12- 2013 dated July 12, 2013
- Requirements for deductibility: Any income payment which is otherwise deductible under the Code
shall be allowed as a deduction from the payors gross income only if it is shown that the income tax
required to be withheld has been paid to the Bureau in accordance with Sections 57 and 58 of the
Code.
- No deduction will also be allowed notwithstanding payments of withholding tax at the time of audit
investigation or reinvestigation/reconsideration in cases where no withholding of tax was made in
accordance with Sections 57 and 58 of the Code.
3. Validity of Principal and Supplementary Receipts/Invoices
Revenue Regulations No. 18- 2012 dated October 22, 2012
- All taxapyers are mandated by the BIR to make new sets of ORs and Sales invoices wuth special
security marking features printed by BIR Accredited printers only.
- All ORs and Sales invoices shall be valid only until full usage of the approved serial numbers or five
years from its issuance whichever comes first.
- This should be effective starting January 18, 2013
4. Taxability of Associations Dues, Membership Fees Received by Condominium Corporations
Revenue Memorandum Circular (RMC) No. 65-2012 dated October 31, 2012
- Amounts paid in as dues or fees by members or tenants of a condominium corporation form part of
the gross income of such corporation subject to income tax. This is because the condominium
corporation furnishes its members and tenants with benefits, advantages, and privileges in return for
such payments.
- For tax purposes, the following constitute income tax payment or compensation which are subject to
income tax:
a. Association dues
b. Membership fees
c. Other assessments/charges
- The previous interpretation that the assessment dues are funds which are merely held in trust by a
condominium corporation lacks legal basis and is hereby abandoned.

Lecture 3: INCOME TAXATION CORPORATION

Note: The same rule applies to homeowners association per RMC No. 9-2013 dated January 9,
2013
5. Rules on Deductibility of Depreciation Expenses on Vehicles
Revenue Regulation No. 12 2012 dated October 12, 2012
- Limitations on deductions:
a. Only one (1) vehicle for land transportation is allowed for the use of an official or employee, the
value of which should not exceed P2.4 million
b. No depreciation shall be allowed for yachts, helicopters, airplanes and/or aircrafts, and land
vehicles which exceed the said threshold.
c. All related maintenance expenses on account of a non-depreciable vehicle for taxation
purposes are also disallowed in its entirety.
d. Loss to be incurred from sale of non-depreciable vehicle shall not be allowed as deduction from
gross income [Revenue Memorandum Circular (RMC) No. 2 -2013 dated December 8, 2012]
-

Exception:
a. Unless the taxpayers mainline of business is transport operations or lease of transportation
equipment and the vehicles purchased are used in the said operations.
This regulation shall take effect immediately. (Published in October 17, 2012)

6. Clarifying the Taxability of Clubs Organized and Operated Exclusively for Pleasure, Recreation and
Other Non-Profit Purposes
Revenue Memorandum Circular (RMC) No. 35 2012 dated August 3, 2012
- Clubs which are organized and operated exclusively for pleasure, recreation and other non-profit
purposes are subject to income tax under the Tax Code, as amended.
- Background:
The provision in the NIRC of 1977 which granted income tax exemption to such recreational
clubs were omitted in the current of tax exempt corporations under NIRC of 1997, as
amended.
HENCE, the income of recreational clubs from whatever source, including but not limited to
membership fees, assessment dues, rental income, and service fees are subject to income
tax.

STRAIGHT PROBLEMS:
1. A Corporation has the following data for the year 2011:
Gross Income, Philippines
P 1,000,000
Gross Income, USA
500,000
Gross Income, Japan
500,000
Expenses, Philippines
300,000
Expenses, USA
200,000
Expenses, Japan
100,000
Other Income:
Dividend from San Miguel Corp.
70,000
Dividend from Ford Motors, USA
120,000
Gain, sale of San Miguel Shares directly to buyer 150,000
Royalties, Philippines
50,000
Royalties, USA
100,000
Interest from trade receivables
60,000
Rent, land in USA
250,000
Other rent income within the Philippines
100,000
Prize, contest in Manila
200,000

Lecture 3: INCOME TAXATION CORPORATION

a. The total tax liability as a domestic corporation is
___________________
b. The total tax liability as a resident corporation is
___________________
c. The total tax liability as a non-resident corporation is ___________________
2. ABC, is a domestic corporation engaged in merchandising business. For the calendar year 2014, it had a net
income per books of P 500,000, after considering, among others, the following:
a. Dividend received from a domestic corporation
P 30,000
b. Provision for doubtful accounts
10,000
c. Dividend received from a foreign corporation
20,000
d. Portion of P150,000 advance rental already earned
100,000
e. Recovery of receivables previously written off included as part of net income above:
Allowed by the BIR as deduction
10,000
Disallowed by the BIR as deduction
30,000
f. Refund of taxes (included as part of the net income above):
Allowed by the BIR as deduction
25,000
Disallowed by the BIR as deduction
15,000
g. Bank Interest income:
Philippine National Bank
80,000
USA Bank
100,000
The taxable net income is

______________________

The total tax liability is

______________________

3. A domestic corporation organized in 1998, provided the following information:

Net Sales
Cost of Sales
Business Expenses

2006
P 4,000,000
2,000,000
1,900,000

Compute the income tax due for:

a. 2006
____________________
b. 2007
____________________
c. 2008
____________________

2007
P 5,000,000
3,500,000
1,550,000

2008
P 6,000,000
4,200,000
1,820,000

2009
P 7,000,000
5,000,000
2,100,000

d. 2009
e. 2010

___________________
___________________

2010
P 9,000,000
5,200,000
2,300,000

Assuming the company elects to claim OSD on the year 2006, 2007 and 2008, but claims itemized deduction
for the year 2009 and 2010, compute the income tax due for:
a. 2006
b. 2007
c. 2008

____________________
____________________
____________________

d. 2009
e. 2010

___________________
___________________

4. JAMBY Co. is a domestic corporation and has been in business for six our years. For the year 2013, JAMBY
has the following cumulative information:
Q1
Gross Sales
Sales Returns
Cost of Goods Sold
Capital Gain on Sale directly to buyer of
shares of domestic corporation

Q2

Q3

Q4

1,500,000.00
50,000.00
650,000.00

2,560,000.00
70,000.00
890,000.00

3,450,000.00
115,000.00
935,000.00

4,500,000.00
115,000.00
1,285,000.00

50,000.00

50,000.00

70,000.00

100,000.00

Lecture 3: INCOME TAXATION CORPORATION

Dividend from a Domestic Corporation

Interest in Philippine Currency Bank
Deposit
Allowable Business Expense
Income tax paid to paid
a.
b.
c.
d.

10,000.00

10,000.00

20,000.00

20,000.00

5,000.00

10,000.00

15,000.00

20,000.00

600,000.00
15,650.00

1,200,000.00
48,776.00

1,700,000.00
78,909.00

2,100,000.00
118,765.00

The income tax still due at the end of the first quarter
The income tax still due at the end of the second quarter
The income tax still due at the end of the third quarter
The income tax still due (refundable) at the end of the year

___________________.
___________________.
___________________.
___________________.

5. The records of a closely held corporation show the following data for 2012:
Gross Income
Business Expenses
Gain on Sale of Business Asset
Interest on deposits with Metrobank, net of tax
Sale of shares of stocks, not listed and traded:
Selling Price
Cost
Dividends from Victory Corporation, domestic
Dividends paid during the year
Reserved for Building Acquisition

1,500,000.00
600,000.00
60,000.00
5,000.00
150,000.00
115,000.00
35,000.00
120,000.00
300,000.00

In 2011, the corporation suffered an operating loss of P130, 000. This amount was carried over and claimed
as deduction from gross income in 2012.
a. The income tax due in 2012 is
__________________.
b. If the corporation opted to claim OSD, the income tax due in 2012 is __________________.
c. If the corporation has improperly accumulated its earnings and considering that itemized deduction is
claimed by the corporation, the IAET payable is
__________________.
6. RM, a general professional partnership, with Ms. Robyn, with seven dependent children, and Ms. Mena,
participatin equally in the partnership net income or loss. The data in their operation for 2013 are as follow:
RM Partnership
Ms. Robyn
Ms. Mena
Gross Income
P700,000
P200,000
P600,000
Expenses related to the income
500,000
90,000
500,000
Drawings by the partner from 2013 income
24,000
0
Income tax was withheld by the partnership at 10%.
a. The income tax still due or refundable of Ms. Mena. _________________
b. The income tax still due or refundable of Ms. Robyn. _________________
7. Claudia and Amor, sisters, inherited an income producing property from their father. They have their own
separate practice of their profession and their interest on the property is only to preserve the property and
collect the income from the property. Claudia, the elder sister, was in charge of the property. In 2013, the
sisters had given you the following data:
Gross Income from property
P500,000
Expenses related to the property
100,000
Withholding income tax by the co-ownership
on income distributed to sisters
10%
Separate data for Amor:
Gross income from profession, net of CWT
P522,000
Expenses on her practice of profession
150,000

Lecture 3: INCOME TAXATION CORPORATION

a. The income tax of the co-ownership.

b. The income tax of Amor.

________________
________________