B. Corporations

I. Domestic Corporations S27a. 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 law 2 . A domestic corporation is taxable on all income derived from sources within and without the Philippines 3 .

Taxation Of Domestic Corporations

Except for certain passive incomes and incomes of domestic non-profit proprietary educational institutions and hospitals 1 1, 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 ConcernCost 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 ½ % 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) – MCITGross 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 trading or merchandising concern

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 for a manufacturing concern

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.

Gross Income for taxpayers engaged in sale of service

gross receipts less sales returns, allowances and discounts.

gross receipts less sales returns, allowances and 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].