Income Tax Computation

Corporate Taxpayer

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What is a corporation?What is a corporation?

Corporation – is an artificial being created by law, having the rights of succession and the powers, attributes and properties authorized by law or incident to its existence.

For taxation purposes, corporation shall include – Partnerships

Joint-stock companies

Joint accounts

Associations

Insurance companies

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A corporation does not include –

•General Professional Partnership

•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

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Classification of CorporationClassification of Corporation

Domestic corporation Foreign corporation

Resident Foreign – engaged in trade or business within the Phil. Generally, it establishes branch or an office for the purpose of doing business or trade.

Non-Resident Foreign – not engaged in trade or business within the Philippines.

Tax Rate Effectivity Basis

34%

33%

32%

35%

30%

Jan 1, 1998

Jan 1, 1999

Jan 1, 2000

Nov 1, 2005

Jan 1, 2009

RA 8424

RA 8424

RA 8424

RA 9337

RA 9337

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Evolution of Corporate Income Tax RateEvolution of Corporate Income Tax Rate

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Taxability of Corporations (RA 9337)

Income In General Domestic Resident Foreign

Non-Res. Foreign

All income derived from sources within or outside the Phils.

30% (Net

Taxable Income)

-- --

All income derived from sources within the Phils.

30%(Net Taxable

Income)

30%(Gross

Income)

Optional Corporate Tax Rate

15%(Gross

Income)

15%(Gross

Income) ---

Minimum Corporate Income Tax (MCIT)

2%(Gross

Income)

2%(Gross

Income)--

Taxability of Corporations

Domestic corporationsIn general

Taxable on all incomeDerived from sourcesWithin and without the Phil. 30%

Optional corporate tax rate(based on gross income) 15%

Minimum Corporate Income Tax(MCIT) 2%

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Taxability of Corporations

Domestic corporationsProprietary educational institutions

& hospitals (non-profit) 10%GOCCs (except GSIS, SSS, PHIC

and PCSO) 30%Improperly accumulated earnings 10% Passive income

Interest 20%Interest income from FCDU 7.5%Royalties 20%

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Taxability of Corporations

Domestic corporationsCapital gains from sale of shares of

Stocks not traded in the SE -Not over P100,000 5%- In excess of P100,000 10%

Income from foreign currency loansGranted by depository bank under FCDU 10%

Intercorporate dividends exempt Capital gains from sale of land

and building 6%9

Taxability of Corporations

Resident Foreign corporationsIn general

Taxable on all income derivedfrom sources within the Phil. 30%

Optional corporate tax rate(based on gross income) 15%

Minimum Corporate Income Tax(MCIT) 2%

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Taxability of Corporations

Resident Foreign corporationsGross Philippine Billings

International air carrier2.5%

International shipping2.5%

Interest income on foreign currencyLoans granted by OBU 10%

Branch profit remittance 15% Regional or area headquarters exempt Regional operating headquarters 10%

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Taxability of CorporationsResident Foreign corporationsPassive income

Interest 20% Interest income from FCDU 7.5% Royalties 20%

Income from foreign currency loansGranted by depository bank under FCDU 10%

Capital gains from sale of shares ofStocks not trade in the SE Not over P100,000 5% In excess of P100,000 10%

Intercorporate dividends exempt

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Taxability of Corporations

Non-resident Foreign corporationsIn general

On gross income received from all

sources within the Phils. 30%Cinematographic film owner, lessor,

or distributor 25%Owner/lessor of vessels chartered by

Phil. Nationals 4.5%Owner/lessor of aircraft, machineries

& other equipment 7.5%

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Taxability of Corporations

Non-resident Foreign corporationsInterest on foreign loans 20%Intercorporate dividends 15%Capital gains from sale of shares of

stocks not traded in the SE Not over P100,000 5%In excess of P100,000 10%

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The Normal Corporate Income Tax BIR Form 1702 (General Format for Income tax computation on business income)

Sales/ Revenues/ Fees from within and without P xxx

Less: Sales returns, allow., and disc. (if any) P xxx

Cost of Sales xxx xxx

Gross Income from operation P xxx

Add: Non-operating and other income not subjected to final tax or capital gains tax

xxx

Gross Income xxx

Less: Allowable itemized business deductions/ OSD xxx

Net Taxable Income xxx

Multiply by Normal Corporate Income Tax Rate 30%

Normal Corporate Income Tax xxx ===

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MINIMUM CORPORATE INCOME TAX

(MCIT)RR No. 9-98, as amended by RR no. 12-07

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Sec. 27(E) and 28 (A)(2) of the NIRCImposed on:

Domestic & Resident Foreign

2% on Gross Income

if: - in the 4th year of operation - net loss/zero taxable income/ MCIT is greater than NCIT

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Gross income

Include all items of gross income enumerated under Section 32(A) of the Tax Code, as amended, except income exempt from income tax and income subject to final. withholding tax.

For Sale of goods

“Gross sales” Include only sales contributory to income taxable under Sec. 27(A) of the Code.

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

Gross sales – (cost of goods sold + sales returns + discounts+ allowances)

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For sale of services

“Gross Revenues” Include income from sale of services, likewise, taxable under Sec. 27(A)

“Cost of services or Direct cost of Services”Include all business expenses directly incurred or related to the gross revenue from rendition of services.

Gross revenue – (cost of services/direct cost + sales returns + discounts + allowances)

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Illustration

Gross sales/ revenues 1,000,000.00 Less: Sales Ret., Disc & Allow. 25,000.00 Cost of Goods Sold/ services 500,000.00 Gross Income from operation 475,000.00 Add: Other Income not subject to Final Tax or Capital Gains Tax 100,000.00 Total Gross Income subject to MCIT 575,000.00 ========

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• Excess of MCIT over normal income tax shall be carried forward on an annual basis and credited against the normal income tax for the 3 immediately succeeding taxable years.

• Excess MCIT can only be credited against the income tax due if the normal income tax is higher than the MCIT

Carry forward of Excess MCIT

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• Excess MCIT which has not or cannot be so credited against the normal income tax due for the 3-year period shall lose its credibility.

• Excess MCIT cannot be claimed as a credit against the MCIT itself or against any other losses

Carry forward of Excess MCIT

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Carry forward of Excess MCIT

• The final comparison between the normal income tax payable and the MCIT shall be made at the end of the taxable year.

• The payable or excess payment in the Annual Income Tax Return shall be computed taking into consideration income tax payment made at the time of filing of quarterly income tax returns whether this be MCIT or normal income tax

NIT is higher than MCIT

MCIT is higher than Normal

Income Tax

Excess MCIT from prior year can be deducted from the NIT due

Excess withholding tax from prior year can be deducted from the NIT due

Excess MCIT from prior years cannot be deducted from the MCIT due

Excess withholding tax from prior year can be deducted from the MCIT due

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Rules on crediting of tax payments & taxes withheldAnnual Computation

NIT is higher than MCIT

MCIT is higher than Normal Income Tax

Quarterly taxes withheld can be credited from the NIT due

Quarterly income tax payments whether Normal Income Tax or MCIT can be deducted from the NIT due

Quarterly taxes withheld can be credited from the MCIT due

Quarterly income tax payments whether MCIT or Normal Income Tax can be deducted from the MCIT due

25Note: The final comparison between the NIT and MCIT shall be made at the end of te taxable year

Rules on crediting of tax payments & taxes withheldAnnual Computation

NITis higher than MCIT

MCIT is higher than Normal Income Tax

Excess MCIT from prior year can be deducted from the quarterly NIT due

Excess withholding tax from prior year can be deducted from the quarterly NIT due

MCIT from prior year cannot be deducted from the quarterly MCIT due

Excess withholding tax from prior year can be deducted from the quarterly MCIT due

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Rules on crediting of tax payments & taxes withheldAnnual Computation

NITis higher than MCIT

MCIT is higher than Normal Income Tax

Quarterly taxes withheld can be credited from the quarterly NIT due

Payment from previous quarters of the taxable year can be deducted from the cumulative tax due

Quarterly taxes withheld can be credited from the quarterly MCIT due

Payment from previous quarters of the taxable year can be deducted from the cumulative tax due

27Note: Quarterly comparison to determine whichever is higher between the NIT and MCIT shall be done on a cumulative basis

Rules on crediting of tax payments & taxes withheldAnnual Computation

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Suspension of MCIT

• Instances when MCIT may be suspended Substantial losses on account of –

Prolonged labor dispute Force majeure Legitimate business reverses

• Who may suspend Secretary of Finance upon recommendation of the CIR

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• Required documentation Submission of proof by the corporation Duly verified by the CIR’s duly authorized representative

Suspension of MCIT

IMPROPERLY ACCUMULATED

EARNINGS TAX (IAET)RA 8424/ RR No. 2-2001/RMC 35-2011

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CONCEPT OF IAETCONCEPT OF IAET

• Taxpayer is a corporation• Improper accumulation of taxable income beyond

the reasonable needs of the business• Non-distribution of earnings/profits to stockholders• The purpose of accumulation is to avoid the

payment of the income tax• Imposition of tax equivalent to 10% of the

improperly accumulated taxable income• The tax imposed is in the nature of penalty to a

corporation for improper accumulation of earnings beyond the reasonable needs of the business

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EVIDENCE OF PURPOSE TO AVOID EVIDENCE OF PURPOSE TO AVOID THE TAXTHE TAX

• The corporation is a mere holding or investment company

• Earnings or profits are permitted to accumulate beyond the reasonable needs of the business

Reasonable vs. Unreasonable Accumulation

Reasonable Needs of Business: Immediate needs of business, including

reasonably anticipated needs (Immediacy Test)

Unreasonable Accumulation Not necessary for the purpose of the

business considering all circumstances of the case

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Reasonable Needs of Business

100% of the paid up capital or the amount contributed to the corporation representing the par value of the shares of stock, hence, any excess capital over & above the par shall be excluded (RMC 35-2011).

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Reasonable Needs of Business

Earnings Reserved for definite corporate expansion projects for building, plant or equipment acquisition for compliance with loan covenant or pre-

existing obligation established under a legitimate business agreement.

Required by law to be retained or with legal prohibition

In case of foreign corporation subsidiaries, intended for investments within the Philippines

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Unreasonable accumulation of Profits

Investment of substantial earnings and profits of the corporation in unrelated business or in stock or securities of unrelated business;

Investment in bonds and other long term securities; and

Accumulation of earnings in excess of 100% of paid-up capital or contribution representing the par value of the shares of stock.

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Corporation Exempt from IAET

Banks and non-bank financial intermediaries Insurance companies Publicly held corporations Taxable partnerships GPP Non-taxable joint ventures Firms registered under RA 7916, 7227, and other

special ecozones

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IMPOSITION OF IAETIMPOSITION OF IAET

Tax rate 10%

Corporations liable Closely-held domesticcorporations

Deadline 15th day after the end of he year following the close of the taxable year

Closely-held corporations:

are corporations at least 50% in value of the outstanding capital stock or at least 50% of the total combined voting power of all classes of stocks entitled to vote is owned directly or indirectly by or for not more than 20 individuals

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TAX BASE OF IAET TAX BASE OF IAET (Improperly Accumulated Taxable Income)(Improperly Accumulated Taxable Income)

Taxable income P xxxAdd: (a)Income subject to final tax Pxxx(b)NOLCO xxx(c)Income exempt from tax xxx(d)Income excluded from gross income xxx xxxTotal P xxxLess: Income tax paid for the year xxx

Div. actually or const. paid/issued xxx xxxTotal xxxLess : Amount that can be retained xxx

IATI Pxxx ===

Payment of IAET

Dividend must be declared and paid not later than one year following the close of the taxable year

Otherwise, IAET should be paid within 15 days thereafter

Once the profit has been subjected to IAET, the same shall no longer be subjected to IAET in later years, even if not declared as dividend.

Once the profit has been subjected to IAET, the same shall no longer be subjected to IAET in later years, even if not declared as dividend.

Profits subjected to IAET, when finally declared as dividends, shall be nevertheless be subject to 10% final withholding taxProfits subjected to IAET, when finally declared as dividends, shall be nevertheless be subject to 10% final withholding tax

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Proprietary Educational Institution

Any private school created and organized as domestic corporation and which is maintained and administered by private individuals or groups with an issued permit to operated from DECS, CHED or the TESDA, as the case may be, in accordance with existing laws and regulations.

TaxabilityIn general 10%

If gross income from unrelated trade,business or other activity exceeds 50%of the total gross income 30%

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Non-Profit Hospital

A non-stock and non-profit domestic corporation organized and created to maintain and administer a hospital without a capital stock divided into shares, and no part of the income of which is distributable as dividends to its members, trustees or officers, but are used only for the furtherance of the said purpose. Hospital means an institution for the reception and care of sick, wounded, infirm or aged persons. It does not include hospitals for the care of animals.

TaxabilityIn general 10%

If gross income from unrelated trade,business or other activity exceeds 50%of the total gross income 30%

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Exempted Corporations (Sec. 30)

Labor, agricultural or horticultural organizations not organized principally for profit

Mutual savings bank without capital stock represented by shares and cooperative bank without capital stock organized and operated for mutual purposes and without profit

Beneficiary society, order or association, operating for the exclusive benefit of the members

Cemetery company owned and operated exclusively for the benefit of its members

Non-stock corporation or association organized and operated exclusively for religious, charitable, scientific, athletic, or cultural purposes, or for the rehabilitation of veterans.

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Exempted Corporations (Sec. 30)

Business league, chamber of commerce, or board of trade, not organized for profit

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

Non-stock, non-profit educational institution Government educational institution Farmer’s or other mutual typhoon or fire insurance co., mutual

ditch or irrigation co., mutual or cooperative telephone co. or like organization of local character

Farmers, fruit growers or like association organized and operated as sales agents of its members and turning back to them the proceeds of sales less the necessary expenses

Income from any of their properties or from any activity conducted for profit shall be subject to tax regardless of disposition.

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Partnership

By the contract of partnership, two (2) or more persons bind themselves to contribute money, property or industry to a common fund with the intention of dividing the profits among themselves.

Types of Partnership

General partnership (Partnership)General Professional partnership (GPP)General Co-ownership

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General Partnership

A partnership other than GPP

It is considered as a corporation for tax purposes

Partners are considered as stockholders thus, profits distributed are considered as dividends

Partners distributive share in the profits of the partnership is not subject to normal income tax

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General Professional Partnership

Partnership 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

Not considered as a corporation

GPP is not subject to income tax

Individual partners shall be liable to income tax on his share in the distributable net income of the GPP

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General Co-Ownership

Activities of the co-owners are limited to the preservation ofthe property and the collection of the income therefrom

Co-ownership is not subject to tax

Co-owner is taxed individually on his distributive share

Co-owners invest the income of the co-ownership in any income producing properties

Will constitute a partnership subject to tax as a corporation

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Income Tax Forms and Due Dates

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Individual

Form No.

Form Name Deadline for Filing No. of Copies

1701Q

Quarterly Income Tax Return

1st – April 152nd – August 153rd – November 15

3 copies

1701 Annual Income Tax Return

Calendar – April 15Fiscal – 15th day of the 4th month ff. the close of the year

3 copies

Form No.

Form Name Deadline for Filing No. of Copies

1702 Annual Income Tax Return(For Corporations, Partnerships and Other Non-individual Taxpayers)

On or before April 15

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

3 copies

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Corporations

Form No.

Form Name Deadline for Filing No. of Copies

1702Q Quarterly Income Tax Return

(For Corporations, Partnerships and Other Non-individual Taxpayers)

60 days following the close of the first 3 taxable quarters

3 copies

1704 Improperly Accumulated Earnings Tax Return

On or before the 15th day of the following year following the taxable year

3 copies

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Attachments Required

Account Information Form (AIF) BIR Form 1702-AIF and the Certificate of the Independent CPA (The CPA Cert. is req’d. if the Gross sales, earnings, receipts exceed P150,000.00);

Certificate of income payments not subjected to withholding tax (BIR Form 2304), if applicable;

Certificate of Creditable withholding tax withheld at source (BIR Form 2307, if applicable);

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Summary Alphalist of W/T (SAWT) per RR 2-2006; Duly approved Tax Debit Memo, if applicable; Proof of prior year’s excess credits, if applicable; Proof of Foreign Tax credits, if applicable; For amended return, proof of tax payment and the

return previously filed; For those availing of fiscal incentives, see RMC No.

21-2007

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Deductions from the Income Tax DueDeductions from the Income Tax Due

• Taxes withheld from current year’s income

• Tax credits for foreign taxes paid

• Tax credits (tax credit memo)

• Taxes paid in the first 3 quarters (NIT or MCIT)

• Excess tax payments in the preceding year

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NOTE:

Installment Payments•Applicable to individual taxpayer only and NOT TO CORPORATION

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“Knowing is not enough; we must apply. Willing is not enough; we must do.”

Johann Wolfgang von Goethe

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