B.

Corporations

I. Domestic Corporations S27

a. In general S27(A)
b. Special Corporations S27(B), (C)
c. Passive Income
i. Interest, Royalties S27(D)(1) & (3)
ii. Dividends S27(4)
iii. Capital gains S27(D)(2) & (5)

Under the Philippine's National Internal Revenue Code of 1997 (the "Tax Code"), the
term "corporation" includes partnerships, no matter how created or organized,
joint-stock companies, joint accounts (cuentas en participation), associations,
or insurance companies, but excluding 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 or consortium agreement under a
service contract with the Government 1 Under the Tax Code, there are three (3)
types of taxable corporations - a domestic corporation, a resident foreign corporation
and a non-resident foreign corporation.

A domestic corporation is a corporation created or organized under Philippine

law2. A domestic corporation is taxable on all income derived from sources
within and without the Philippines3.

Taxation Of Domestic Corporations

Except for certain passive incomes and incomes of domestic non-profit proprietary
educational institutions and hospitals11, a domestic corporation is taxed at thirty two
per cent (32%) of its taxable income; that is, its gross income from all sources
within and without the Philippines less allowable deductions.12 These allowable
deductions are13:

1. Ordinary and necessary trade or business expenses;

2. Interests paid or incurred within a taxable year on indebtedness in

connection with the taxpayer's trade or business;

3. Taxes except income tax, estate and donor's taxes, and taxes assessed
against local benefits of a kind tending to increase the value of the
property assessed.

Income tax imposed by authority of any foreign country is allowed either as a

deduction or tax credit. However, a foreign corporation shall not be allowed a tax
credit for the taxes imposed by foreign countries;

4. Losses actually sustained during the taxable year and not compensated
for by insurance or other forms of indemnity and incurred in trade or
business, including casualty losses;
 5. The excess of allowable deductions over gross income of the business
or enterprise for any taxable year immediately preceding the current
taxable year, which had not been previously offset as deduction from
gross income shall be carried over as a deduction from gross income
for the next three (3) consecutive taxable years immediately following
the year of such loss, provided, that there has been no substantial
change in the ownership of the corporation;

6. Bad Debts except those sustained in certain transactions entered into

between related parties;

7. Depreciation ;

8. Charitable and Other Contributions or gifts actually paid or made within

the taxable year to, or for the use of the Government of the Philippines
or any of its agencies or any political subdivision thereof exclusively for
public purposes, or to accredited domestic corporations or associations
organized and operated exclusively for religious, charitable, scientific,
youth and sports development, cultural or educational purposes or for
the rehabilitation of veterans, or to social welfare institutions, or to
nongovernment organizations;

9. Research and Development expenditures;

10. Amounts transferred or paid to Pension Trusts (in addition to the

contributions to such trusts during the taxable year which contributions
are deductible as ordinary expenses).

However, beginning the fourth taxable year immediately following the taxable
year in which a corporation commenced its business operations, a minimum
corporate income tax ("MCIT") of two per cent (2%) of the gross income as of the
end of said taxable year shall be imposed instead of the foregoing "normal
corporate tax" if such MCIT is greater than the normal income tax. Any excess
of the MCIT over the normal income tax shall be carried forward and credited
against the normal income tax for the three (3) immediately succeeding taxable
year. The Secretary of the Department of Finance may suspend the imposition of the
MCIT on any corporation which suffers losses on account of prolonged labor dispute,
or because of force majuere, or because of legitimate business reverses.14

The following passive incomes of domestic corporations are subject to a final

tax as follows:15:

1. Twenty per cent (20%) on interest on 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. However, interest income from a depository bank
under the expanded foreign currency deposit system shall be subject to
a final income tax of seven and one-half per cent (7 1/2%) of such
interest income;

2. On the net capital gains realized during the taxable year from the sale,
exchange or other disposition of shares of stock in a domestic
corporation except shares sold or disposed of through the stock
exchange, at the rate of five per cent (5%) for the 1st P 100,000 and ten
per cent (10%) in excess of P 100,000; and,

3. On the sale, exchange or disposition of lands and/or buildings which

are not actually used in the business of a corporation and are treated as
 capital assets, six per cent (6%) based on the gross selling price or fair
market value of said land and/or building.

Dividends received by a domestic corporation from another domestic

corporation shall not be subject to tax16.

In addition to the foregoing taxes, an improperly accumulated earnings tax

("IAET") shall be imposed which tax is equivalent to ten per cent (10%) of the
improperly accumulated taxable income17. The IAET, however, shall not apply to
publicly-held corporations, banks and other nonbank financial intermediaries,
and insurance companies.

TAX ON CORPORATIONS

RATES OF INCOME TAX ON DOMESTIC CORPORATIONS

II. In General

Rate of tax, in general

1997 35%
1998 34%
1999 33%
2000 onwards 32%

Tax is imposed on taxable or net income.

III. Optional 15% tax on gross income

The 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.

IV. Conditions to be satisfied to avail of the 15% optional corporate tax

1. 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 revenues

3. A VAT tax effort of four percent (4%) of GNP

4. A 0.9 percent (0.9%) ratio of the Consolidated Public Sector Financial Position
to GNP

V. Some definitions for this purpose

Gross income derived 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 income means gross

receipts less sales returns, allowances and discounts.

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

Trading Concern Manufacturing 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.

VI. Tax rate for proprietary educational institutions and hospitals

10% on taxable income, except on certain passive incomes

The 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.

VII. Unrelated trade, business or other activity

This 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.

VIII. Proprietary educational institution

A 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.
IX. GOCCs, agencies or instrumentalities

All 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)

X. Rates on certain passive income subject to final tax

1. 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 exchange

a. 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 exempt

7. 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 TAX

XI. Minimum corporate income tax

A 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.

XII. Carry forward of excess minimum tax

Any 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.

XIII. Relief from the minimum corporate income tax under certain
conditions

The 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 of force 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 Income equivalent to gross sales less sales returns, discounts and
allowances and cost of goods sold.
Cost of goods sold shall 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 shall include the invoice cost of the goods sold, plus
trading or merchandising import duties, freight in transporting the goods to the
concern place where the goods are actually sold, including
insurance while the goods are in transit.
Cost of goods shall include all costs of production of finished goods,
manufactured and sold for such as raw materials used, direct labor and
a manufacturing concern manufacturing overhead, freight cost, insurance and
other costs incurred to bring the raw materials to the
factory or warehouse.
Gross Income for taxpayers gross receipts less sales gross receipts less sales
engaged in sale of service returns, allowances and returns, allowances and
discounts. discounts and cost of
services
Cost of services All direct costs and expenses
necessarily incurred to
provide the services required
by the customers and clients
including (A) salaries and
employee benefits of
personnt6el, 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].