MODULE 6 pooling their resources in undertaking big

Income Taxes for Corporations construction projects.

 A joint venture or consortium for engaging in
INTRODUCTION
In the Philippines, domestic and foreign companies are liable to pay petroleum, coal, geothermal and other energy
corporate income tax (CIT). The tax liability for a corporation is determined by its operations pursuant to an operating
residency status and is based on the net income it obtains while carrying out its consortium agreement under a service
business activity, normally during one business year. contract with the government.
Beyond Corporate Income Tax, companies should also understand
withholding tax and some other taxes. Business owners who frequently study the JOINT VENTURE OR CONSORTIUM
country's corporate taxes and work with their local advisors find it easier to stay
compliant and exploit any beneficial changes, such as rate reductions or incentives.  a commercial undertaking by two or more persons, differing from a
partnership in that it relates to the disposition of a single lot of goods or the
CORPORATION DEFINED completion of a single project.
 As defined by the Corporation Code of the Philippines, “corporation” is an  taxable as corporation.
artificial being created by operation of law, having the right of succession  However, there are two types of tax exempt joint ventures described in the
and the powers, attributes and properties expressly authorized by law or preceding topic as provided for under Section 3 of RR 10-2012. A joint
incident to its existence. venture or consortium formed for the purpose of undertaking construction
 However, for purposes of income taxation, the Tax Code provides that the projects is not considered as corporation under Section 22 of the Tax Code
term “corporation” shall include the following: provided:
a. partnerships, no matter how created or organized, a. The joint venture was formed for the purpose of undertaking a
b. joint stock companies, construction project; and
c. joint accounts (ceuntas en participacion), b. Should involve joining/ pooling of resources by licensed local
d. associations, or insurance companies contracts; that is, licensed as general contractor by the Philippine
e. mutual fund companies, Contractors Accreditation Board (PCAB) of the Department of Trade
f. regional operating headquarters of multinational corporations, and and Industry (DTI)
g. joint accounts c. The local contractors are engaged in construction business; and
 But, it does not include the following: d. The Joint Venture itself must likewise be duly licensed as such by the
a. General professional partnership: Philippine Contractors Accreditation Board (PCAB) of the Department
of Trade and Industry (DTI).
 A partnership formed by persons for the  The tax-exempt joint venture shall not include those who are mere suppliers
sole purpose of exercising their common of goods, services or capital to a construction.
profession. The salient features and  If not all of the requirements are present, the joint venture or consortium
applicable taxes for general professional formed for the purpose of undertaking construction projects shall be
partnerships are discussed in Module 7. considered as taxable corporations.
b. Joint venture or consortium:  The members of a Joint Venture not taxable as a corporation shall each be
 Formed for the purpose of undertaking responsible in reporting and paying appropriate income taxes on their
respective share to the joint ventures profit.
construction projects pursuant to Presidential
 Joint ventures involving foreign contractors may also be treated as a non-
Decree (PD) No. 929 (dated 4 May 1976) taxable corporation provided:
to assist local contractors in achieving a. The member foreign contractor is covered by a special licenses as
competitiveness with foreign contractors by contractor by the PCAB.
 b. The construction project is certified by the appropriate Tendering d. Cemetery company owned and operated exclusively for the benefit
Agency (government office) that the project is a foreign financed/ of its members.
internationally-funded project and that international bidding is e. Non-stock corporation or association organized and operated
allowed under the Bilateral Agreement entered into by and between exclusively for religious, charitable, scientific, athletic, or cultural
the Philippine Government and the foreign/ international financing purposes, or for the rehabilitation of veterans, no part of its net
institution pursuant to the implementing rules and regulations of income or asset shall belong or inure to the benefit of any member,
Republic Act No. 4566 otherwise known as Contractor’s License Law. organizer, officer or any specific person.
f. business leagues, chambers of commerce, boards of trade not
JOINT STOCK COMPANIES and JOINT ACCOUNTS organized for profit and no part of the net income of which inures to
the benefit of any private stockholder or individual
Joint stock companies g. civic leagues or organization not organized for profit but operated
 constituted when a group of individuals acting jointly, establish and exclusively for the promotion of social welfare;
operate business enterprise under an artificial name, with an h. A non-stock and nonprofit educational institutions;
invested capital divided into transferable shares, an elected board i. government educational institutions;
of directors, and other corporate characteristics, but operating j. farmers’ or other mutual typhoon or fire insurance companies, mutual
without formal government authority. ditch or irrigation companies, mutual or cooperative telephone
companies, or like organizations of a purely local character, the
Joint accounts (cuentas en participacion) income of which consists solely of assessments, dues, and fees
 constituted when one interests himself in the business of another by collected from members for the sole purpose of meeting its expenses;
contributing capital thereto, and sharing in the profits or losses in the and
proportion agreed upon k. farmers’, fruit growers, or like association organized and operated
 They are not subject to any formality and may be privately as a sales agent for the purpose of marketing the products of its
contracted orally or in writing. The term “associations” includes all members and turning back them the proceeds of sales, less the
organizations which have substantially the salient features of a necessary selling on the basis of the quantity of produced finished
corporation to be taxable as a “corporation”. by them.
- Notwithstanding the provision in the preceding
TAX EXEMPT CORPORATIONS paragraphs, the income of whatever kind and character
Under Section 30 of the Tax Code, the following organizations shall not be of the foregoing organizations from any of their
taxed in respect to income received by them as such: properties, real or personal or from any of their activities
conducted for profit, regardless of the disposition made of
a. Labor, agricultural or horticultural organizations not organized such income shall be subject to tax imposed under the Tax
principally for profits. Code.
b. Mutual savings bank not having a capital stock represented by
shares, and cooperative bank without capital stock, organized and TYPES OF CORPORATIONS
operated for mutual purposes and without profit.
c. A beneficiary, society, order or association, operating for the Corporations, for tax purposes, are classified as follows:
exclusive benefit of the members such as a fraternal organization a) Domestic corporations (DC) - corporations created or
operating under the lodge system, or a mutual aid association or a organized in the Philippines or under its laws.
non-stock corporation organized by employees providing for the b) Foreign corporations - a corporation which is not domestic,
payment of life, sickness, accident, or other benefits exclusively to and may be:
the members of such society, order, or association, or nonstock ► resident foreign corporations (RFC) - engaged in
corporation or their dependents. business in the Philippines, or
 ► nonresident foreign corporations (NRFC) - not Entities with assets not exceeding P100 million are referred to as micro-,
engaged in business in the Philippines. small, and medium-sized enterprises (MSMEs). The domestic corporation must be an
c) Domestic and foreign corporations may also be classified as MSME by asset size. The MSMEs must also qualify the income test to avail of the
special corporations. lower corporate tax.

INCOME TAX RATE AND BASIS IN COMPUTING THE TAX DUE Domestic corporations are mandated to separately account in their Annual
Financial Statements (AFS) the cost of the land on which their office, plant and
The applicable income tax of a corporation depends on the type of the equipment are situated. They are prohibited to lump the same in one account or
corporation and the income subject to tax. consolidate its costs with other fixed asset accounts.

ILLUSTRATION A domestic corporation has the following partial detail of the costs
Income subject to tax Applicable Income Tax
and fair values of its assets in its AFS:
Regular or ordinary income Normal or Regular
Corporate Income Tax Book value Fair value
(RCIT) of 20% or 25% Land where the office building stands 30,000,000 35,000,000
Land where equipment warehouse stands 20,000,000 25,000,000
Vacant land (investment property) 10,000,000 12,000,000
Certain passive incomes derived from Final withholding taxes
Land held for sale (inventory) 30,000,000 40,000,000
Philippine sources
House and lots for sale (inventory) 20,000,000 27,000,000
Office building 10,000,000 11,000,000
Capital gains on sale of shares of non- Capital gains tax Factory building 15,000,000 14,000,000
listed domestic corporations and sale of Equipment 10,000,000 9,000,000
real properties located in the Philippines Other assets 5,000,000 7,000,000
classified as capital asset Total assets 150,000,000 180,000,000
GENERAL CLASSIFICATION AND TAXATION OF CORPORATIONS
The corporation also have the following analysis of its reported pre-tax
A. Domestic corporations – 20% or 25% regular corporate tax on income for the taxable year:
world taxable income
B. Resident foreign corporations – 25% regular corporate tax on Passive income subject to final taxes 1,000,000
Philippine taxable income Capital gains subject to capital gains tax 2,000,000
C. Non-resident foreign corporations – 25% final tax on Philippine Taxable income subject to regular tax 4,000,000
gross income Income exempt from income tax 3,000,000
Total pre-tax income 10,000,000
The CREATE Law reduced the regular corporate income tax from 30% to
25% of taxable income effective July 1, 2020. For purposes of the asset test, accounting book values as reflected in the AFS
are considered less the cost of lands used for office, plant and equipment:
Lower corporate tax for domestic corporations
Under the CREATE Law, domestic corporations are subject to a 20% regular Total assets per AFS 150,000,000
corporate income tax under the following conditions: Less: Land held for sale
- Asset test – total assets, excluding land on which their office, plant - Land used for the office building 30,000,000
and equipment are situated, does not exceed P100,000,000; and - Land used for the equipment warehouse 20,000,000 50,000,000
- Income test – taxable income does not exceed P5,000,000 Adjusted total assets 100,000,000
 For purposes of the income test, the domestic corporation is a MSME since its A nonresident foreign corporation is not subject to the regular corporate
total assets do not exceed P100 million. For purposes of the income test, only the income tax but to a 25% final tax based on gross income from all sources within.
taxable income subject to regular tax (i.e. P4 million) is considered. Since this is less Resident payors shall withhold the following:
than the P5M threshold, the corporation is a qualified MSME subject to 20% Gross revenues/receipts 1,800,000
corporate tax. Interest income from deposit 150,000
Total gross income within 1,950,000
SUMMARY OF REGULAR CORPORATE TAX RATES
Multiply by: Final tax rate 25%
Resident foreign Total final tax due 487,500
Taxpayer Domestic corporation corporation
MSME corporate taxpayers Note that for purposes of final tax, gross income on the sale of services
- With ≤ P5M taxable income 20% 25% means revenues or receipts without deduction for cost of services.
- With > P5M taxable income 25% 25%
THE REGULAR CORPORATE INCOME TAX
Large corporate taxpayers The regular corporate income tax applies to all corporations in general. It
- With ≤ P5M taxable income 25% 25% covers all taxable income of corporations that are not subject to final tax or capital
- With > P5M taxable income 25% 25% gains tax.

Income tax rules on regular corporations

ILLUSTRATION A corporation with P100M assets had the following income and Domestic 20% or 25% Regular Corporate income tax subject
expense for 2021: corporation to the Minimum Corporate Income Tax
Philippines Abroad Total Resident 25% Regular Corporate income tax subject to the
Gross revenue/receipts 1,800,000 1,200,000 3,000,000 corporation Minimum Corporate income tax
Less: Business expenses 1,200,000 800,000 2,000,000
Net income from operations 600,000 400,000 1,000,000 Minimum Corporate Income Tax
Add: Interest from deposit 150,000 50,000 200,000 The most peculiar feature of corporate income taxation is the Minimum
Net income 750,000 450,000 1,200,000 Corporate Income Tax (MCIT). Corporations are subject to a minimum corporate
income tax of 2% of gross income. During the pandemic, the MCIT is temporarily
The regular income tax of a domestic corporation shall be computed as reduced to 1% of gross income starting July 1, 2020 to June 30, 2023. It will revert
follows: back to 2% starting July 1, 2023.
Net income from operations (600,000 + 400,000) 1,000,000
Other income not subject to final tax 50,000 As a minimum tax, the MCIT is payable when:
Taxable net income 1,050,000 1. The corporation has zero or negative taxable income
Multiply by: Corporate tax rate 20% 2. MCIT is greater than the regular corporate income tax (RCIT).
Regular corporate income tax (RCIT) due 210,000
Scope of MCIT
The MCIT is applicable to every corporation taxable to the regular
Since foreign corporations are not allowed the lower 20% corporate tax, the corporate income tax (20% or 25%) including non-profit, exempt, and special
regular income tax of a resident foreign corporation shall be computed as follows: corporations with respect to their taxable income subject to regular corporate income
Taxable net income (Philippines only) 600,000 tax, but not to their income subject to special tax rates.
Multiply by: Corporate tax rate 25%
Regular corporate income tax (RCIT) due 150,000 MCIT exempt entities
1. Real Estate Investment Trusts or REIT under RA 9856
 2. Domestic corporations which opted to be taxed under the 15% manufacturing overhead, freight cost, insurance premiums, and other
corporate income tax (gross income tax) costs incurred to bring the raw materials to the factory or warehouse.
3. Domestic or resident corporations subject to special tax rates
a. Proprietary educational institutions, and non-profit hospitals Cost of services – shall mean all direct costs and expenses necessarily
b. FCDUs and EFCDUs incurred to provide the services required by the customers and clients including:
c. International carriers a. Salaries and employee benefits of personnel, consultants, and specialists
d. Firms subject to special income tax such as PEZA and BCDA directly rendering the service, and
locators b. Cost of facilities directly utilized in providing the service such as
4. All non-resident foreign corporations depreciation or rental of equipment used and cost of supplies.

Timing of Imposition of MCIT In the case of banks, cost of services shall include interest expense.
MCIT is imposed beginning on the fourth taxable year immediately following It is submitted that the “gross income” referred to by NIRC is the gross
the year in which such corporation commenced its operations, when it is greater than income from operations.
the regular income tax computed for the taxable year. Simply stated, MCIT applies
on the X + 4th year of operations. MCIT Gross income under the regulations
RR 12-2007 included all other items of taxable income not subjected to final
For instance, a corporation which started operations on any day in 2017 will tax and capital gains tax as part of gross income.
be covered by MCIT in 2021. The rule is apparently intended to enable the business
to obtain competitive traction before being subjected to MCIT. While this may be questioned as an improper introduction of legislation, it is
an established rule in taxation that revenue regulations and rulings are presumed
MCIT Gross Income under the NIRC valid interpretations of the law unless challenged and reversed before the courts.
For corporations involved in: “Gross income” means
1. Sale of goods Gross sales less sales returns, discounts, Thus, MCIT shall be computed as 1% of the total gross income subject to
allowances, and cost of goods sold regular income tax. Needless to say, the MCIT concept of gross income is the same
2. Sale of services Gross receipts less sales returns, allowances, with the OSD concept of gross income.
discounts, and cost of services
ILLUSTRATION
Gross sales – means the total consideration agreed upon by the buyer and 1. MCIT of a trading concern
the seller for the sale of goods. Gross sales include cash (collected) sales and account A corporate taxpayer subject to MCIT reported the following for 2021:
(uncollected) sales. Gross sales 1,000,000.00
Sales discounts and allowances for defects 30,000.00
Gross receipts – means cash collections for services rendered or to be Sales returned by customers 20,000.00
rendered. Gross receipts include reimbursements by the client for out-of-pocket Interest income from bank deposits 20,000.00
expenses incurred by the service provider. Rental income from vacant premises 60,000.00
Inventory at the start of the year 220,000.00
Cost of goods sold – includes all business expenses directly incurred to
produce the merchandise and to bring them to their present location and use. Gross purchases of merchandise 700,000.00
a. For a trading or merchandising concern, COGS shall include the invoice Net freight on purchases during the year 25,000.00
cost of the goods sold, import duties, freight in transporting the goods to Purchase discounts and allowances on defective merchandise 40,000.00
the place where the goods are actually sold, and insurance while the Purchases returned to suppliers 50,000.00
goods are in transit Inventory at the end of the year 160,000.00
b. For a manufacturing concern, COGS shall include all costs of production
of finished goods such as raw materials used, direct labor and The cost of goods sold shall be computed as follows:
 Beginning inventory 220,000.00 Physical counts conducted at the start and end of the year revealed the
Add: Net Purchases following balances in inventory:
Gross Purchases 700,000.00 1-Jan 31-Dec
Add: Freight in 25,000.00
Raw materials 120,000.00 180,000.00
Less: Purchase discounts and allowances (40,000.00)
Purchase returns (50,000.00) 635,000.00 Work-in-process 230,000.00 170,000.00
Total goods available for sale 855,000.00 Finished goods 130,000.00 160,000.00
Less: Ending inventory (160,000.00)
Cost of goods sold 695,000.00 The cost of goods sold shall be determined as follows:
Raw materials, beginning 120,000.00
Net purchases of materials 980,000.00
The minimum corporate income tax shall be computed as follows: Less: Raw materials, end (180,000.00)
Gross sales 1,000,000.00 Raw materials used 920,000.00
Less: Sales discounts and allowances 30,000.00 Add: Conversion costs
Sales returns 20,000.00 50,000.00 Direct labor 350,000.00
Net Sales 950,000.00 Factory overhead 280,000.00 630,000.00
Less: Cost of goods sold 695,000.00 Total manufacturing costs incurred 1,550,000.00
Gross income from operations 255,000.00 Add: Work in process, beginning 230,000.00
Add: Other taxable income not subject to final tax Total manufacturing costs placed into process 1,780,000.00
Rental income from vacant premises 60,000.00 Less: Work in process, end (170,000.00)
Total gross income 315,000.00 Cost of goods manufactured or finished 1,610,000.00
Multiply by MCIT rate 1% Add: Finished goods, beginning 130,000.00
Minimum Corporate Income Tax (MCIT) 3,150.00 Total cost of goods available for sale 1,740,000.00
Less: Finished goods, end (160,000.00)
Note: the interest income from banks is excluded in total gross income because Cost of goods sold 1,580,000.00
it is subject to final tax.
The minimum corporate income tax shall be computed as follows:
2. MCIT of a manufacturing concern Sales, net of discounts and allowances 2,400,000.00
A foreign corporation had the following data in 2022, its fourth year of Less: Cost of goods sold (1,580,000.00)
operation:
Gross income from operations 820,000.00
Sales, net of discounts and allowances 2,400,000.00 Add: Other taxable income not subject to final tax
Gain on sale of machineries 100,000.00 Gain on sale of machineries 100,000.00
Dividend income from domestic corporations 20,000.00 Total gross income 920,000.00
Material purchased 980,000.00 Multiply by MCIT rate 1%
Conversion costs incurred: Minimum Corporate Income Tax (MCIT) 9,200.00
Direct labor used 350,000.00
Note: The dividend income from a domestic corporation is excluded in total
Factory overhead 280,000.00
gross income because it is exempt from tax.
 3. MCIT of a service provider Gross receipts 4,200,000.00
Lacoste Corporation provides consultancy services to various clients. It
reported the following in 2021, its fifth year of operation: Less: Cost of services (2,105,000.00)
Collections and billings Gross income from operations 2,095,000.00
Collections on services rendered net of discounts 3,200,000.00
Uncollected bills for services rendered 800,000.00 Add: Other gross income not subject to final tax -
Advanced collections for services to be provided 600,000.00 Total gross income 2,095,000.00
Client reimbursements for out-of-pocket expenses incurred by consulting staff 400,000.00
Client reimbursements for client expenses paid or advanced by Lacoste 150,000.00 Multiply by: MCIT Rate 1%
Royalties from a software developed by Lacoste 30,000.00 Minimum corporate income tax 20,950.00

Expenses MCIT AND RCIT: BASIC APPLICATION

Salaries of consulting staff 1,600,000.00 ILLUSTRATION 1 A big corporate taxpayer started operations in 2018. It
had the following results of operations in 2021 and 2022:
Salaries of administrative employees 700,000.00
2021 2022
Office rent and utilities expense 420,000.00
Total gross income 2,100,000.00 4,000,000.00
Office depreciation expense 50,000.00
Dividend income - domestic - 50,000.00
Office supplies expense 35,000.00 Business expenses (2,600,000.00) (3,400,000.00)
Interest expense 20,000.00 Net income (Net loss) (500,000.00) 650,000.00
Insurance expense 40,000.00
Local tax expense 14,000.00 The MCIT will commence in 2022 (i.e. 2018 + 4). Since there is no MCIT yet in 2011,
the tax payable for 2021 is nil.
The gross receipts of Lacoste shall be determined as follows: The 2022 income tax due of the corporation shall be determined as:
Net collections on services rendered 3,200,000.00 Total gross income 4,000,000.00
Collections on services to be provided (advances) 600,000.00 Less: Itemized deductions
Reimbursement for firm's out-of-pocket costs 400,000.00 Regular allowable deductions 3,400,000.00
Gross receipts 4,200,000.00 NOLCO - 2021 500,000.00 (3,900,000.00)
Taxable net income 100,000.00
The direct costs of services of Lacoste shall be as follows: Multiply by: Corporate income tax rate 25%
Consulting salaries expense 1,600,000.00 Regular corporate income tax - 2022 25,000.00
Office rent and utilities expense 420,000.00
Office depreciation expense 50,000.00 Total gross income 4,000,000.00
Office supplies expense 35,000.00 Multiply by: MCIT rate 1%
Direct cost of services 2,105,000.00 Minimum corporate income tax - 2022 40,000.00
The minimum corporate income tax shall be computed as follows: The P40,000 MCIT is the income tax due in 2022. Note that the dividend income is
exempt from tax. NOLCO is net operating loss carry over.
ILLUSTRATION 2 A corporation which started operations in 2017 reported the Total gross income 3,150,000.00
following: Less: Regular allowable deductions (3,100,000.00)
2021 2022 Taxable net income 50,000.00
Total gross income 3,000,000.00 3,200,000.00 Multiply by: Corporate income tax rate 20%
Regular corporate income tax 10,000.00
Less: Regular allowable deductions (1,600,000.00) (2,800,000.00)
Special allowable deductions (400,000.00) (500,000.00)
Total gross income 3,150,000.00
Taxable net income 1,000,000.00 (100,000.00) Multiply by: MCIT rate 1%
Minimum corporate income tax 31,500.00
The RCIT and MCIT are as follows:
2021 2022 The income tax payable of La-View Corp. shall be computed as follows:
RCIT (25% of taxable net income) 250,000.00 - Income tax due - MCIT (higher) 31,500.00
MCIT (1% of gross income) 30,000.00 32,000.00 Less: Tax credits
Creditable withholding tax withheld on gross income
The income tax due is (higher) 250,000.00 32,000.00
Sales (1% of 5,000,000) 50,000.00
ANNUAL RCIT AND MCIT: INTEGRATIVE ILLUSTRATION Rent income (5% of 100,000) 5,000.00
ILLUSTRATION 1 La-View Corp, a MSME, reported the following on its fifth Total creditable withholding tax 55,000.00
year of operations: Estimated quarterly tax payments 10,000.00 65,000.00
Sales, net of 1% withholding tax 4,950,000.00 Income tax payable/(refund) (33,500.00)
Cost of sales 2,000,000.00
ILLUSTRATION 2 PC Repair, a MSME business partnership providing computer
Interest from deposit, net of tax 75,000.00 repair services, reported the following on its sixth year of operation:
Gain on sale of domestic stocks directly to buyer 150,000.00 Service fees, net of P100,000 withholding tax 1,900,000.00
Casual rent income, net of 5% creditable withholding tax 95,000.00 Salaries of staff, supplies, and other direct costs 1,000,000.00
Interest income from advances to employees 50,000.00 Interest from bank deposits, net 50,000.00
Business expenses 3,100,000.00 Gain on sale of land classified as capital asset 400,000.00
Estimated quarterly tax payments 10,000.00 Gain on sale of used equipment 150,000.00
The regular income tax and minimum corporate income tax shall be computed as
Administrative business expenses 500,000.00
follows: Estimated quarterly income tax payments 25,000.00
Sales (4,950,000/99%) 5,000,000.00
Less: Cost of sales (2,000,000.00) The RCIT and MCIT are computed as follows:
Gross income from operations 3,000,000.00
Add: Other gross income not subject to final tax
Casual rent income (95,000/95%) 100,000.00
Interest from employee advances 50,000.00 150,000.00
Total gross income 3,150,000.00
 Service fees (1,900,000 +100,000) 2,000,000.00  Unused excess MCIT at the end of three-year period shall expire and
can no longer be used.
Less: Direct costs (1,000,000.00)
Gross income from operations 1,000,000.00 ILLUSTRATION 1 Excess MCIT – Basic Application
Add: Other gross income subject to final tax A corporation had the following MCIT and RCIT data since 2018:
Ordinary gain on sale of equipment 150,000.00 2018 2019 2020 2021
Total gross income 1,150,000.00 MCIT 80,000.00 95,000.00 20,000.00 60,000.00
RCIT 20,000.00 85,000.00 40,000.00 80,000.00
Less: Regular allowable deductions (500,000.00)
Income tax due 80,000.00 95,000.00 40,000.00 80,000.00
Taxable net income 650,000.00
Multiply by: Corporate income tax rate 20% MCIT Excess (MCIT less RCIT) 60,000.00 10,000.00
Regular corporate income tax 130,000.00 Required: Compute for the income tax payable, ignoring the effects of tax credits.

Total gross income 1,150,000.00 Solution:

In 2018, the income tax payable is P80,000 MCIT. The Excess P60,000 is a tax
Multiply by MCIT rate 1% credit referred as Excess MCIT-2018 and is valid until 2021.
Minimum corporate income tax 11,500.00
In 2019, the income tax payable is P95,000 MCIT. The P10,000 Excess MCIT
The income tax due and payable of PC Repair shall be computed as follows: referred to as Excess MCIT – 2019, is valid until 2022. No tax credit shall be made
since Excess MCIT cannot be credited against MCIT tax due.
Income tax due (higher) 130,000.00
Less: Tax credits In 2020, the income tax payable is zero.
Withholding tax on gross income 100,000.00 2018 2019 2020
Quarterly income tax payments 25,000.00 (125,000.00) Excess MCIT prior year 60,000.00 10,000.00
Income tax payable 5,000.00
Income tax due 40,000.00
Tax credit (40,000.00) (40,000.00)
EXCESS MCIT CARRY OVER Remaining excess MCIT 20,000.00 10,000.00 -
The excess of the MCIT over RCIT in any year is a tax credit that is
deductible against any RCIT tax due in the immediately succeeding three years. Note that full credit against the available RCIT tax due is taken. Since there are two
Excess MCITs, first in-first out crediting is employed.
Excess MCIT Carry-over Rules
 Excess MCIT can be used only as a tax credit against RCIT tax due in In 2021, the income tax payable is P50,000.
any of the three subsequent years. Excess MCIT cannot be deducted 2018 2019 2021
against MCIT tax due. Adjusted excess MCIT 20,000.00 10,000.00
 Credit for the excess MCIT from prior years can be taken up to the full RCIT tax due 80,000.00
amount of RCIT tax due in the next three years. This means that the
income tax payable when credit is made can get below the amount of Tax credit (20,000.00) (10,000.00) (30,000.00)
MCIT for that year. Remaining excess MCIT - - 50,000.00
 When there are several excess MCITs from prior years, tax crediting
shall be made in a first in-first out basis. ILLUSTRATION 2: Expired Excess MCIT
Iligan Inc., became subject to MCIT in 2017. MCIT and RCIT data through the years 2021 2022
were: Total gross income 300,000.00 500,000.00
2017 2018 2019 2020 2021 Less: Allowable deductions (420,000.00) (250,000.00)
MCIT 400.00 620.00 200.00 350.00 350.00 Net Income/(NOLCO) (120,000.00) 250,000.00
RCIT - 500.00 300.00 200.00 400.00 Less: NOLCO (2021) application (120,000.00)
Taxable income (120,000.00) 130,000.00
Income tax due 400.00 620.00 300.00 350.00 400.00
RCIT (Taxable income x 20%) 26,000.00
Excess MCIT 400.00 120.00 - 150.00 - MCIT (Gross income x 1%) 3,000.00 5,000.00

Required: Compute the income tax payable in each year. Income tax due (higher) 3,000.00 26,000.00
Excess MCIT 3,000.00 -
Solution:
The income tax payable in each year is computed as follows (answers are in bold
font):
2017 2018 2019 2020 2021 2021 2022
Income tax due (higher) 400.00 620.00 300.00 350.00 400.00 Income tax due 3,000.00 26,000.00
Less: Excess MCIT - 2021 (3,000.00)
Excess MCIT 400.00 120.00 150.00 Income tax payable 3,000.00 23,000.00
MCIT application (300.00) (300.00)
Remaining excess MCIT 100.00 120.00 Recall that net operating loss carried over (NOLCO) is a deduction over 3
MCIT application *expired for (120.00) (150.00) (270.00) years after its incurrence, except NOLCO between July 1, 2020 to June 23, 2023
year 2021 which will be carried over five years. Excess MCIT is creditable over a 3-year period.
Income tax payable 400.00 620.00 0 350.00 130.00

ILLUSTRATION 3: NOLCO and MCIT QUARTERLY FILING OF INCOME TAX RETURN

A small corporate enterprise which became subject to MCIT in 2021 had the Corporations shall file their quarterly income tax returns for the first three
following statement of income in 2021 and 2022: quarters of the year due on or before 60 days from the end of each quarter. The
annual income tax return shall be filed and paid on or before the 15th day of the
2021 2022 fourth month following the close of the taxable year.
Gross income 300,000.00 500,000.00
Business expenses 420,000.00 250,000.00 ILLUSTRATION Henry Inc., (in millions) 1st Qtr 2nd Qtr 3rd Qtr Annual a large
Net income (120,000.00) 250,000.00 scale enterprise, had the Gross income 200 250 220 280 following
quarterly gross income and Less: Itemized Deductions 100 130 120 140
deductions in million pesos Net income, this quarter 100 120 100 140
for year
Required: Compute the income tax payable in each year. 2022: Net income, prior quarters 100 220 320
Taxable income 100 220 320 460

Solution: (in millions) 1st QtrMultiply 2nd

by RCITQtrrate 3rd Qtr 25% 4th 25%
Qtr 25% 25%
Income tax due 25 55 80 115
Gross income 200
Less: Tax credits
250 220 280
Itemized deductions 100 1st Qtr CWT 130 120 22 140
22 22 22
Withholding tax 22 3rd Qtr CWT20
2nd Qtr CWT
18 20
31 20
18
20
18
4th Qtr CWT 31
The quarterly 1st Qtr Tax Payment 3 3 3
2nd Qtr Tax Payment 10 10
3rd Qtr Tax Payment 7
Total Tax credits 22 45 73 111
Income tax payable 3 10 7 4
estimated tax payable in million pesos shall be computed as follows:

RELIEF FROM THE MINIMUM CORPORATE INCOME TAX

Upon recommendation of the Commissioner of Internal Revenue, the
Secretary of Finance may suspend the imposition of MCIT upon submission of proof
that the corporation sustained losses on account if:
1. Prolonged labor dispute
2. Force majeure
3. Legitimate business reverses

REPORTING FOR CORPORATIONS SUBJECT TO REGULAR TAX

Regular corporations, domestic or resident foreign, may choose either
itemized deductions or optional standard deductions in reporting their income using
BIR Form 1702RT. If they also derive income subject to special tax rates, they shall
Quarterly MCIT report their income using BIR Form 1702MX.
Binorongan Inc., had the following quarterly RCIT and MCIT during 2021:
1st Qtr 2nd Qtr 3rd Qtr 4th Qtr SCHEDULES
Total OF EFFECTIVITY OF NEW TAX RATES
RCIT 80,000.00 50,000.00 80,000.00 60,000.00 270,000.00 Regular CIT Minimum CIT
MCIT 50,000.00 100,000.00 40,000.00 120,000.00 Domestic
310,000.00 Corporations Rate Effectivity Rate Effectivity
Excess MCIT prior year 10,000.00 July 1, 2020 to
Domestic corporation, in 1%
Creditable withholding tax 20,000.00 12,000.00 10,000.00 20,000.00 62,000.00 25% July 1, 2020 June 30, 2023
general
Excess withholding tax prior year 30,000.00
2% July 1, 2023
July 1, 2020 to
MSME with ≤ P5M taxable 1%
20% July 1, 2020 June 30, 2023
The cumulative balances of RCIT, MCIT, and prior quarter CWTs shall first be income
determined. 2% July 1, 2023
Special CIT Minimum CIT
1st Qtr 2nd Qtr 3rd Qtr Annual July 1, 2020 to
Income tax due 80,000.00 150,000.00 210,000.00 310,000.00 Proprietary Educational 1%
June 30, 2023 Not applicable
Institutions and Hospitals
Less: Tax credits 10% July 1, 2023
MCIT - prior year 10,000.00 10,000.00
Excess CWT - prior year 30,000.00 30,000.00 30,000.00 30,000.00 Regular CIT Minimum CIT
Foreign Corporations Rate Effectivity Rate Effectivity
1st Qtr CWT 20,000.00 20,000.00 20,000.00 20,000.00
July 1, 2020 to
2nd Qtr CWT 12,000.00 12,000.00 12,000.00 Resident foreign 1%
25% July 1, 2020 June 30, 2023
3rd Qtr CWT 10,000.00 10,000.00 corporations
2% July 1, 2023
4th Qtr CWT 20,000.00 Upon effectivity
Upon effectivity of CREATE Law
1st Qtr Tax Payment 20,000.00 20,000.00 20,000.00 of CREATE Law 1%
Offshore banking units 25% until June 30,
2nd Qtr Tax Payment 68,000.00 68,000.00 (April 11, 2023
3rd Qtr Tax Payment 40,000.00 2021)
2% July 1, 2023
Total Tax credits 60,000.00 82,000.00 170,000.00 220,000.00 Regional Operating January 1, January 1,
25% 1%
Income tax payable 20,000.00 68,000.00 40,000.00 90,000.00 Headquarters 2022 2022 to June
 30, 2023 Taxable Income 200,000.00
2% July 1, 2023 Multiply by: Transitory RCIT rate 27.50%
Special CIT Minimum CIT Tax due - RCIT 55,000.00

Non-resident foreign January 1, Alternately, MCIT can be computed using the transitory MCIT rate: (6/12 x
25% Not applicable
corporations 2021 2%) + (6/12 x 1%) = 1.50%.
Total Gross Income subject to MCIT 1,800,000.00
TRANSITIONAL TREATMENT FOR CORPORATE TAXES Multiply by: Transitory MCIT rate 1.50%
Be it for purposes of the RCIT, SCIT, or MCIT, RR 5-2021 employed the pro-
Tax due - MCIT 27,000.00
rata treatment in implementing transition to the new tax rates under the CREATE Law.

ILLUSTRATION 1 A domestic corporate enterprise had the following data in The income tax due is still, whichever is higher of the computed RCIT and
2020, its fourth taxable calendar year of operation: MCIT, in this case, P55,000.
Sales 2,500,000.00
ILLUSTRATION 2 Assume the following information for a corporate taxpayer:
Cost of sales (1,000,000.00)
Type of enterprise Large domestic enterprise
Gross income from operations 1,500,000.00
Type of accounting period Fiscal year
Add: Other gross income not subject to final tax 300,000.00
Current taxable year Fourth year ending April 30, 2021
Total gross income 1,800,000.00 Gross income P3,000,000
Less: Allowable deductions (1,600,000.00)
Taxable income P100,000
Taxable income 200,000.00

Distribution of transition months: Distribution of transition months:

Months covered by NIRC 6 (January to June 2020) Months covered by NIRC 2 (May to June 2020)
Months covered by CREATE 6 (July to December 2020) Months covered by CREATE 10 (July 2020 to April 30, 2021)
The RCIT shall be computed as follows: The RCIT shall be computed as follows:
Tax due - NIRC (200,000 x 6/12 x 30%) 30,000.00 Tax due - NIRC (100,000 x 2/12 x 30%) 5,000
Tax due - CREATE (200.000 x 6/12 x 25%) 25,000.00 Tax due - CREATE (100,000 x 10/12 x 25%) 20,833
Tax due - RCIT 55,000.00 Tax due - RCIT 25,833

The MCIT shall be computed as follows: The MCIT shall be computed as follows:
MCIT - NIRC (1,800,000 x 6/12 x 2%) 18,000.00 MCIT - NIRC (3,000,000 x 2/12 x 2%) 10,000
MCIT - CREATE (1,800.000 x 6/12 x 1%) 9,000.00 MCIT - CREATE (3,000,000 x 10/12 x 1%) 25,000
Tax due - MCIT 27,000.00 Tax due - MCIT 35,000

Alternately, RCIT can be computed using the transitory RCIT rate: (6/12 x The income tax due for this illustration is P35,000 (higher). The transitory rates are:
30%) + (6/12 x 25%) = 27.50%. RCIT – 25.83%; MCIT – 1.17%.
 Gross income from sale of goods 5,000,000.00
THE IMPROPERLY ACCUMULATED EARNINGS TAX Interest income, net of final tax 80,000.00
Upon effectivity of the CREATE Law on April 11, 2021, the Improperly
Accumulated Earnings Tax (IAET), previously imposed on undistributed earnings of Domestic dividends 120,000.00
domestic corporation without valid reasons for such retention is repealed by CREATE Less: Operating expenses 2,500,000.00
Law. The same shall no longer be imposed for all taxable years ending after April Corporate income tax 625,000.00 (3,125,000.00)
11, 2021. Net profit 2,075,000.00

BRANCH PROFIT REMITTANCE TAX Required: Assuming that the corporation earmarked the entire profits for remittance
Any profit remitted by a branch to its head office abroad shall be subject to abroad, compute the branch profit remittance tax.
a tax of 15% based on the total profits applied or earmarked for remittance
without any deduction for the tax component thereof.
Net profit 2,075,000.00
The 15% branch profit remittance tax is a final tax which is required to be Less: Investment income
withheld at source by the branch of a foreign corporation. Interest income 80,000.00
Dividend income 120,000.00 (200,000.00)
Interest, dividends, rents, royalties, remuneration for technical services, Taxable profit 1,875,000.00
salaries, wages, premiums, annuities, emoluments or other fixed or determinable Multiply by: portion remitted 100%
annual, periodic, or casual gains, profits, income, and capital gains received by a
foreign corporation during each taxable year from all sources within the Philippines Actual profit remittance 1,875,000.00
shall not be treated as branch profit unless the same are effectively connected with Multiply by: Branch profit remittance tax rate 15%
the conduct of the taxpayer’s trade of business in the Philippines. Branch profit remittance tax due 281,250.00

The term “effectively connected with the conduct of the taxpayer’s trade, or ILLUSTRATION 2 A branch of a foreign corporation engaged in servicing
business” does not necessarily mean that the income must be derived from the actual reported the following income statement in 2021:
operation of the taxpayer-corporation’s trade or business, it is sufficient that the
Service fees 4,000,000.00
income arises from the business activity in which the corporation is engaged (RMC 55-
80). Gain on sale of fully depreciated properties 400,000.00
Dividend income 50,000.00
The income should be an active income or an income from sources that are Capital gain on the sale of stocks, net of tax 90,000.00
effectively connected with the conduct of the taxpayer’s trade or business of the Less: Business expenses (3,600,000.00)
resident foreign corporation to be subjected to the branch profit remittance tax. Profits before income tax 940,000.00
Passive investment income and gains are excluded.
Less: income tax due - RCIT (200,000.00)
Scope of the Branch Profit Remittance Tax Net profits 740,000.00
The tax covers the remittance of all resident foreign corporations including
ROHQs of multinational companies, FCDUs, or OBUs of foreign banks, and The branch earmarked 40% of the entire profits for remittance to the home office
international carriers, except PEZA-registered entities. abroad. The branch profit remittance tax shall be determined as follows:

ILLUSTRATION 1 A large scale resident foreign enterprise engaged in

wholesale of imported goods had the following profit statement for 2022:
 Net profit 740,000.00 a. Special non-resident foreign corporations
Less: Investment income i. Non-resident cinematographic film owner, lessor or
distributor
Dividend income 50,000.00 ii. Non-resident lessor of vessels, chartered by Philippine
Capital gain on the sale of stocks 90,000.00 (140,000.00) nationals
Taxable profit 600,000.00 iii. Non-resident owner or lessor of aircraft, machineries,
Multiply by: portion remitted 40% and other equipment
Actual profit remittance 240,000.00 b. Regular non-resident foreign corporations
Multiply by: Branch profit remittance tax rate 15%
Branch profit remittance tax due 36,000.00 INCOME TAX COMPUTATION FOR EXEMPT CORPORATIONS
Qualification of Tax Exemption
Income tax exemption relates only to income from related activities. Income
SPECIAL CORPORATIONS from activities unrelated to the purposes for which an exempt corporation is
Certain corporations are subject to a special tax treatments or preferential organized and income from activities conducted for profit including income from
tax rates lower than 25% regular corporate income tax. These are generally properties are taxable regardless of the disposition made of such income.
referred to as “special corporations.”
The Classification Rule
Sub-classification of Corporate Income Taxpayers Since exemption applies only to income from related activities, the income of
A. Domestic corporations exempt corporations are classified into income from related activities and income
a. Exempt domestic corporations from unrelated activities. The income from unrelated activities is subjected to regular
i. Exempt non-profit corporations under the NIRC income tax.
ii. Government agencies and instrumentalities
iii. Certain government-owned and controlled corporations ILLUSTRATION 1 Bahay Kalinga, a social welfare charitable non-profit
iv. Cooperatives corporation, reported the following statement of income and expenses:
b. Special domestic corporations Related Unrelated
i. Proprietary educational institutions and non-profit
hospitals activites activities Total
ii. Foreign currency deposit units (FCDUs) and Expanded Gross receipts 1,200,000.00 800,000.00 2,000,000.00
FCDUs Less: Cost of services (400,000.00) (400,000.00) (800,000.00)
iii. PEZA or BOI-registered enterprises Gross income 800,000.00 400,000.00 1,200,000.00
c. Regular domestic corporations Less: Expenses (400,000.00) (150,000.00) (550,000.00)
Net surplus 400,000.00 250,000.00 650,000.00
B. Resident foreign corporations
a. Special resident foreign corporations
i. Expanded FCDUs The income tax due of the corporation shall be:
ii. Regional Area Headquarters and Regional Operating Net income or surplus from unrelated activities 250,000.00
Headquarters of Multinational Companies Multiply by: Corporate tax rate 25%
iii. International Carriers Regular corporate income tax 62,500.00
iv. PEZA or BOI-registered enterprises
b. Regular resident foreign corporations
Requisites for exemption of non-stock, non-profit corporations
C. Non-resident foreign corporations
 1. It must be a non-stock corporation or association organized and subject to regular income tax because it is not used for an educational
operated exclusively for religious, charitable, scientific, athletic, or purpose.
cultural purposes or for rehabilitation of veterans.
2. It should meet the following test: Certificate of Tax Exemption Ruling
a. Organizational test – its constitutive documents exclusively limits Non-profit corporations or associations must secure a Tax Exemption Ruling
its purposes to one or more of the following: religious, charitable, from the BIR to enjoy the tax exemption. The ruling shall be valid for a period of 3
scientific, athletic, or cultural purposes or for rehabilitation of years unless sooner revoked or cancelled.
veterans
b. Operational test – The regular activities of the regular The Tax Exemption Ruling shall be deemed revoked on the date there are
corporation or association must be exclusively devoted to the material changes in the character, purpose, or method of operation of the
accomplishment of the aforementioned purposes. A corporation corporation or association which are inconsistent with the basis of the income tax
fails this test if a substantial part of its operations is considered exemption. In addition, it shall be revoked also on the basis of non-renewal of the
“activities conducted for profit.” tax exemption ruling or non-revalidation of previously issued rulings. Failure to file
3. All net income or assets of the corporation or association must be an income tax return shall also result in the loss of the tax exempt status.
devoted to its purposes and no part of its net income or asset accrues to
or benefits any member or specific person. Government agencies and instrumentalities
4. It must not be a branch of a foreign non-stock, non-profit corporation. Government agencies and instrumentalities such as departments and bureaus
are inherently non-profit because their public service functions; hence they are
A non-profit organization is still allowed to engage in activities conducted for exempt from income tax.
profit without losing its tax exemption but the consequence is being subject to tax
only on income conducted for profit, regardless of the disposition made of such However, the income of government agencies and instrumentalities from
income. unrelated activities or from their properties is subject to income tax.

Exception to the Classification Rule: Non-profit educational institution Government-Owned and Controlled Corporations (GOCCs)
Under the Constitution, all revenues and assets of non-stock non-profit GOCCs are generally proprietary or commercial in nature and are subject
purposes shall be exempt from taxes and duties. Hence, the income from unrelated to the regular corporate income tax except the following exempt GOCCs:
operations of these institutions is still exempt from income tax if used for educational 1. Government Service Insurance System (GSIS)
purposes. 2. Social Security System (SSS)
3. Philippine Health and Insurance Corporation (PHIC)
ILLUSTRATION 1 4. Home Development Mutual Fund (HDMF) – RA 11534
Sutherland University, a non-profit educational institution, collected P4,000,000 5. Local Water Districts – RA 10026
school fees and assessments from its students. It also earned P200,000 from the rent - PCSO was removed from the NIRC list by the effectivity of TRAIN Law
of its properties and realized P400,000 in the sale of its properties. on January 1, 2018.

Sutherland University utilized the P200,000 rentals to fund an undergraduate ALLOCATION OF COMMON EXPENSES OF EXEMPT CORPORATIONS
scholarship program and invested the P400,000 for the retirement benefits of Expenses of an exempt corporation that are not directly traceable to either
university directors. related or unrelated activities are allocated based on gross income.

- In this case, the P4M is an income from related activities. The ILLUSTRATION A non-profit entity presented the following analysis of its net surplus:
P200,000 rentals and P400,000 gain on sale of properties are
income from unrelated activities. The P4M income is exempt. The
P200,000, even if arising from unrelated activities, is still exempt
because it is diverted to an educational purpose. The P400,000 is
 Related Unrelated
What is a private or proprietary educational institution?
activites activities Total A proprietary educational institution is any private school maintained and
Gross receipts 1,200,000.00 800,000.00 2,000,000.00 administered by private individuals or groups with an issued permit to operate from
Less: Cost of services (400,000.00) (400,000.00) (800,000.00) any of the following:
Gross income 800,000.00 400,000.00 1,200,000.00 1. Department of Education (DepEd)
Less: Direct Expenses (280,000.00) (70,000.00) (350,000.00) 2. Commission on Higher Education (CHED)
Common Expenses (180,000.00) 3. Technical Education and Skills Development Authority (TESDA)
Net surplus 670,000.00 The Predominance Test
If the gross income from unrelated trade, business or other activity exceeds
The taxable income from unrelated activities will be computed as follows: 50% of the total gross income derived by such educational institutions or hospitals
Gross income from unrelated activities 400,000.00 from all sources, the 25% regular corporate income tax applies.
Less:
Unrelated trade, business or activity
Direct expenses 70,000.00 Unrelated trade, business or other activity means any trade, business, or
Allocated common expenses other activity, the conduct of which is not substantially related to the exercise or
(P400k/(P400/+P800k)) x P180K 60,000.00 (130,000.00) performance by such educational institution or hospital from its primary purpose or
Taxable net income 270,000.00 function.

ILLUSTRATION 1 A private educational institution reported the following

Note: This common expense allocation procedure is also applicable to
during the year 2021:
corporations with income subject to special tax regimes or to preferential rates.
Related Unrelated
Reporting Requirements for Exempt Corporations Activities Activities Total
Exempt corporations with no taxable income shall file BIR Form 1702EX using
itemized deductions only. If they are not delinquent in filing their return or have no Gross receipts 1,100,000.00 900,000.00 2,000,000.00
violations on withholding taxes, they will not pay any tax. The information furnished Less: Cost of services (400,000.00) (400,000.00) (800,000.00)
by BIR Form 1702EX is essential to the BIR’s tax mapping effort and a test of Gross income 700,000.00 500,000.00 1,200,000.00
compliance of the corporation to the withholding tax regulations on income payments.
Less: Deductions (400,000.00) (100,000.00) (500,000.00)
Exempt corporations with taxable income subject to regular tax shall file BIR Net income 300,000.00 400,000.00 700,000.00
Form 1702RT. If they also earn income subject to special tax rates, they must file BIR
Form 1702MX. The gross income from related activities (700k/1200k = 58%) passes the
predominance test. The income tax due shall be computed as follows:
SPECIAL DOMESTIC CORPORATIONS
Taxable net income 700,000.00
PRIVATE EDUCATIONAL INSTITUTION and NON-PROFIT HOSPITAL Multiply by: Corporate tax rate 1%
Private or proprietary educational institution and non-profit hospitals are Income tax due 7,000.00
subject to 10% tax on world taxable income subject to the pre-dominance test.

To alleviate the impact of the pandemic, the 10% tax rate is temporarily ILLUSTRATION 2 A non-profit hospital with more than P200M in total assets,
lowered to 1% starting July 1, 2020 to June 30, 2023. The same shall revert back to net of cost of landholdings, reported the following during a year:
10% effective July 1, 2023.
 - has stopped its operations as an offshore banking unit in the
Related Unrelated Philippines. The BSP noted the cessation of operations on
Activities Activities Total February 22, 2018.
Gross receipts 1,000,000.00 1,100,000.00 2,100,000.00
OBUs are allowed to provide all traditional banking services to non-residents
Less: Cost of services (500,000.00) (400,000.00) (900,000.00) in any currency other than Philippine national currency. Banking transactions to
Gross income 500,000.00 700,000.00 1,200,000.00 residents are limited and restricted.
Less: Deductions (100,000.00) (400,000.00) (500,000.00)
 Upon effectivity of CREATE Law, OBUs are now treated as regular foreign
Net income 400,000.00 300,000.00 700,000.00 corporations subject to 25% regular corporate income tax and other taxes.
The gross income failed the pre-dominance test (500k/1200k = 42%), hence
the non-profit hospital shall be taxable as a regular corporation:
Taxable net income 700,000.00
Multiply by: Corporate tax rate 25% ROHQ vs RHQ
Income tax due 175,000.00 Income tax rate of Regional Operating Headquarters (ROHQ) is 10% of net
income. Effective January 1, 2022, ROHQs will be subjected to the 25% regular
Summary of Tax Rules on Educational Institutions and Hospitals corporate income tax pursuant to the CREATE Law. ROHQ is a branch established in
the Philippines which is engaged in any of the following qualifying services:
Owner Educational Institution Hospitals
● General administration and planning
Private 10% (1%) of taxable income 25% (20%) of taxable income ● Business planning, coordination and business development
Non-profit Exempt 10% (1%) of taxable income ● Sourcing/ procurement of raw materials and components
Government Exempt Exempt ● Corporate finance advisory services
● Marketing control and sales promotion
● Training and personnel management
OFFSHORE BANKING UNITS (OBUS)
“Offshore Banking Unit (OBU)” is a branch, subsidiary or affiliate or a ● Logistic services
foreign banking corporation located in an Offshore Financial Center (OFC) which is ● Research and development services and project development
duly authorized by the BSP to transact offshore banking business in the Philippines in ● Technical support and maintenance
accordance with the provisions of P.D. 1034 as implemented by BSP Circular No. ● Data processing and communication
1389. They do foreign-currency banking transactions primarily with foreign banks,
non-residents, other OBUs and corporate and institutional clients. They can lend to Regional or Area Headquarters (RHQ or RAH) is defined in Section 22 (DD)
resident importers and exporters as long as the funds are remitted from abroad of the Tax Code as a branch established in the Philippines by a multinational
through the banking system. company, which branch does not earn or derived income from the Philippines and
which acts as a supervisory, communications, and coordinating center for its affiliates,
The following are examples of reported OBUs in the Philippines: subsidiaries, or branches in the Asia-Pacific region and other foreign markets. RHQ is
1) BNP Paribas with office address at Philamlife Tower, Makati City; and a tax exempt entity. However, an RHQ is constituted as a withholding agent of the
2) Taiwan Cooperative Bank with office address at Citi Bank Tower, government if it acts as an employer and its employees receive compensation income
Makati City subject to withholding tax, or if it makes income payments to individuals or
3) JP Morgan International Finance, Ltd. (formerly located at Zuellig corporations subject to the expanded withholding tax (EWT).
Building, Makati City)
What constitute an RHQ and an ROHQ? are sold in the Philippines shall be the actual amount derived for transportation
An RHQ is an office whose purpose is to act as an administrative branch of a services, for a first class, business class, or economy class passage, as the case may
multinational company engaged in international trade which principally serves as a be, on its continuous and uninterrupted flight from any port or point in the Philippines
supervision, communications and coordination center for its subsidiaries, branches, or to its final destination in any port or point of a foreign country”, as reflected in the
affiliates in the Asia-Pacific Region and other foreign markets, and which does not remittance area of the tax coupon forming an integral part of the plane ticket. For
earn or derive income in the Philippines. An ROHQ refers to a foreign business entity this purpose, the Gross Philippine Billings shall be determined by computing the
which is allowed to derive income in the Philippines by performing qualifying services monthly average net fare of all the tax coupons of plane tickets issued for the month
to its affiliates, subsidiaries or branches in the Philippines, in the Asia-Pacific Region per point of final destination, per class of passage (i.e., first class, business class, or
and in other foreign markets. Such services are general administration and planning, economy class) and per classification of passenger (i.e., adult, child or infant), and
business planning and coordination, sourcing and procurement of raw materials and multiplied by the corresponding total number of passengers flown for the month as
components, corporate governance advisory services, marketing control and sales declared in the flight manifest.
promotion, training and personnel management, logistic services, research and
development services and product development, technical support and maintenance, The gross revenue for passengers whose tickets sold outside the Philippines,
data processing and communication, and business development. the gross revenue for passengers for first class, business class or economy class
passage, as the case may be, on a continuous and uninterrupted flight form any port
or point in the Philippines to final destination in any port or point of a foreign country
INTERNATIONAL CARRIERS shall be determined using the locally available net fares applicable to such flight
International carriers (resident foreign corporations) are subject to income taking into consideration the seasonal fare rate established at the time of the flight,
tax rate of 2.5% on its Gross Philippine Billings (GPB) unless it subject to a the class of passage, the classification of passenger, the date of embarkation, and
preferential rate (a tax rate lower than 2.5%) or exempt on the basis of applicable the place of final destination.
tax treaty to which the Philippines is a signatory or on the basis of reciprocity, such
that an international carrier, whose home country grants income tax exemption to Non-revenue passengers as well as refunded tickets shall not be included in
Philippine carriers, shall likewise be exempt from income tax imposed under the tax the computation of Gross Philippine Billings.
code (RA 10378; RR 15-2013).
Gross Philippine Billings of International Sea Carriers
Reciprocity may be invoked by an international carrier as basis for “Gross In computing for “Gross Philippine Billings” of international sea carriers, there
Philippine Billings Tax exemption” when its Home Country grants income tax shall be included the total amount of gross revenue whether for passenger, cargo,
exemption to Philippine carriers. The domestic law of the Home Country granting and/or mail originating from the Philippines up to final destination, regardless of the
exemption shall cover income taxes and shall not refer to other types of taxes that place of sale or payments of the passage or freight documents.
may be imposed by the relevant taxing jurisdiction. The fact that the tax laws of the
Home Country provide for exemption from business tax, such as gross sales tax, in “ORIGINATING FROM THE PHILIPPINES” shall include the following:
respect of the operations of Philippine carriers shall not be considered as valid and a. Where passengers, their excess baggage, cargo and/or mail
sufficient basis for exempting an international carrier from Philippine income tax on originally commence their flight or voyage from any Philippine
account of reciprocity. Reciprocity requires that Philippine carriers operating in the port to any other port or point outside the Philippines
Home Country of an international carrier are actually enjoying the income tax b. Chartered flights or voyages of passengers, their excess baggage,
exemption. cargo and/or mail originally commencing their flights or voyages
from any foreign port and whose stay in the Philippines is for more
Gross Philippine Billings of International Air Carriers than forty-eight (48) hours prior to embarkation, save in cases
In computing for “Gross Philippine Billings” of international air carriers, there where the flight of the airplane belonging to the same airline
shall be included the total amount of gross revenue derived from passage of persons, company or the voyage of the vessel belonging to the same
excess baggage, cargo and/or mail, originating from the Philippines in a continuous international sea carrier failed to depart within 48 hours by
and uninterrupted flight, irrespective of the place of sale or issue and the place of reason of force majeure;
payment of the passage documents. The gross revenue for passengers whose tickets
 c. Chartered flights of passengers, their excess baggage, cargo b. Monthly reports prepared by the airline themselves or by their
and/or mail originally commencing their flights or voyages from general sales agents for direct issues made.
any Philippine port to any foreign port; and  The amount realized for mail shall, on the other hand, be determined
d. Where a passenger, his excess baggage, cargo and/or mail based on the amount reflected in the cargo manifest of the carrier
originally commencing his flight or voyage from a foreign port
alights or is discharged in any Philippine port and thereafter Return trip and transshipment
boards or is loaded on another airplane owned by the same In case of the passenger’s passage documents or flights from any port or
airline company or vessel owned by the same international sea point in the Philippines and back, that portion of revenue pertaining to the return trip
carrier, the flight or voyage from the Philippines to any foreign to the Philippines shall not be included as part of GPB.
port shall not be considered originating from the Philippines, unless
the time intervening between arrival and departure of said In case of a flight that originates from the Philippines, but transshipment of
passenger, his excess baggage, cargo and/or mail from the passenger, excess baggage, cargo and/or mail takes place elsewhere in another
Philippines exceeds 48 hours, except, however, when the failure to aircraft belonging to a different airline company, the GPB shall be determined
depart within 48 hours is due to reasons beyond his control, such as, based on that portion of the revenue corresponding to the leg flown from any point
when the only next available flight or voyage leaves beyond 48 in the Philippines to the point of transshipment.
hours or by force majeure. Provided, however, that if the second
aircraft belongs to a different airline company, or the second In cases where a flight is interrupted by force majeure resulting in the
vessel belongs to a different international sea carrier, the flight or transshipment of the passengers, their excess baggage, freight, cargo and/or mail to
voyage from the Philippines to any foreign port shall be another airplane operated by another airline company and transshipment takes
considered originating from the Philippines regardless of the place in another country, the GPB shall be determined based on that portion of flight
intervening period between the arrival and departure from the from the Philippines up to the point of said transshipment.
Philippines by said passenger, his excess baggage, cargo and/or
mail. RATIONALIZATION OF TAXES ON INTERNATIONAL CARRIERS
The policy behind the rationalization of taxes on international carriers as
Passage documents or tickets revalidated, exchanged and/or endorsed to provided for in RA 10378 and RR 15-2013 is to improve the competitiveness of the
another on-line international airline shall be included in the taxable base of the Philippine Tourism Industry by encouraging more international carriers to maintain
carrying airline and shall be subject to GPB tax if the passenger is lifted/boarded flight and shipping operations in the country and by the eventual reduction of
on an aircraft from any port or point in the Philippines towards a foreign destination. international plane and ship fares. There are intended to facilitate the movement of
goods and services and to attract more foreign tourists and investments.
The gross revenue on excess baggage which originated from any port or
point in the Philippines and destined for any part of a foreign country shall be
computed based on the actual revenue derived, as appearing on the official receipt
or any similar document for the said transaction.

The gross revenue for freight or cargo and mail shall be determined based
on the revenue realized from the carriage thereof.
 The amount realized for freight or cargo shall be based on the amount
appearing on the airway bill after deducting the amount of discounts
granted, which shall be validated using the following:
a. Monthly cargo sales reports generated by the IATA Cargo
Accounts Settlement System (IATA CASS) for airway bills issued
through cargo agents; or
Applicable Income Tax of Common Carriers (Summary

Common Carrier ORDINARY PASSIVE CAPITAL

INCOME INCOME* GAINS**
Domestic Common (Higher): 25% RCIT FWT CGT
Carriers (local or 1% MCIT
companies)
 International Carriers GR: 2.5% GPB; or FWT CGT
MODULE 7
(RFCs) Income Taxes for Partnerships
Preferential % or
Exempt on the INTRODUCTION
basis of a treaty or In general, partnerships are considered corporations and taxable as such at
reciprocity 25% on taxable income. The following are exempt from income tax:
 General professional partnerships
 Joint venture or consortium formed for undertaking construction projects
SPECIAL CORPORATIONS (NON-RESIDENT FOREIGN CORPORATIONS)  Joint venture or consortium engaged in petroleum, coal, geothermal and
other energy operations
Under the Tax Code, certain corporations are subject to lower tax rates on
their regular income instead of the normal or regular corporate tax of 25%. These Partnership
corporations are classified as special corporations. However, certain passive incomes A partnership is defined as a contract whereby two or more persons bind
and capital gains on sale of shares of closely held domestic corporations and real themselves to contribute money, property, or industry to a common fund to engage in
properties situated in the Philippines are still subject to applicable final withholding profitable activities with the intention of dividing the profits among themselves.
taxes and capital gains tax, as the case may be.
Classification of Partnership
NONRESIDENT FOREIGN CORPORATIONS
● Nonresident owner or lessor of vessel 4.5%
● Nonresident cinematographic film owner, lessor or 25%
distributor
● Nonresident lessor of aircraft, machinery and other 7.5%
equipment

A differentiation:
Lease or charter of:
Lessor Other
Cinema films Vessels Aircraft
equipment
Domestic 25% WTI 25% WTI 25% WTI 25% WTI GENERAL PROFESSIONAL PARTNERSHIP (GPP)
Resident foreign 25% PTI 2.5% GPB 2.5% GPB 25% PTI A GPP is one formed by two or several persons for the sole purpose of
exercising their common profession of which no part of income is derived from
Non-resident
25% PGI 4.5% PGI 7.5% PGI 7.5% PGI engaging in any trade or business. A GPP is exempt from income tax but required to
foreign
WTI – World taxable income; PTI – Philippine taxable income; PGI – Philippine Gross income; GPB – Gross file a tax return.
Philippine billings
Examples: CPA Firms, Law Firms, Medical Partnerships, etc.

Guidelines to be followed for GPP

1. The partners in a general professional partnership shall be liable for income
tax only in their separate and individual capacities.

2. Each partner shall report his distributive share, actually or constructively

received in the net income of the partnership as gross income. The share of a
partners shall be subject to 10% creditable withholding tax.
 If the income payments to the partner for the current year exceeds
P720,000, the withholding tax is 15%.

3. The partner is deemed to have elected the itemized deductions unless he

declares his distributive share undiminished by his share of the itemized
deductions.

A forty percent (40%) OSD is deductible from the distributive share of the
gross income if such gross income was not previously reduced by the
partnership’s itemized deduction.

4. For purposes of computing the distributive share of the partners, the net Notes:
income of the partnership shall be computed in the same manner as that of a 1. The Tax Code (RA 8424) provides that the partner’s distributive share from the
corporation net income of the general professional partnership be included as a part of
individual taxpayer’s gross income.
ILLUSTRATION 1 2. P.D. 1773 allows OSD if the reported income of the individual partner as share
Atty. Liu is one of the partners of B&J Partnership. The partnership is form the general professional partnership is not previously reduced by the
engaged in rendering professional services (the sole source of income of the partnership’s business expenses.
partnership) with a net income before tax of P2,000,000. Atty. Liu has 60% shares 3. If the share received by an individual taxpayer from a professional partnership
on the profit or loss of the partnership. The other income of Atty. Liu is a buy and sell is based on net income of the partnership (gross income minus allowable
business with a gross income of P200,000 and related expenses of P80,000. itemized deductions), it shall no longer be allowed to deduct 40% OSD;
otherwise, there will be a double deduction.
Compute the following:
1. How much is the income tax of B&J?
2. How much is the net income tax payable of Atty. Liu if the partnership GENERAL CO-PARTNERSHIP (GCP)
withheld a 10% withholding income tax? A GCP (compania-colectiva) is a partnership wherein part or all of its income
3. What is the income tax due of Atty. Liu? is derived from the conduct of trade or business.

Answers: For taxation purposes, the general co-partnership is considered as a

1. How much is the income tax of B&J? corporation and therefore liable to corporate tax of 20% or 25%. A general
- B&J Partnership’s income is tax-exempt because it is engaged in purely commercial partnership is also subject to MCIT in the same manner as a corporation.
professional services.
In a commercial partnership, the partners are considered as stockholders. The
2. How much is the net income tax payable of Atty. Liu if the partnership profits distributed to them by the partnership are considered dividends and subject
withheld a 10% withholding income tax? to a final tax of 10%.
- Atty. Liu, being engaged in business, is liable for income tax only in his
separate and individual capacity and should not in any way the tax status of ILLUSTRATION
B&J partnership as a general professional partnership. J and B are partners of JB’s Enterprises, sharing 60% and 40% profit and
loss, respectively. The partnerships net income before tax during the year amounts to
3. The income tax due of Atty. Liu is computed as follows: P2,000,000.

Determine the following:

 1. Income tax due of JB’s Enterprises JB partnership is liable to pay income tax, because it earned business income.
2. Final income taxes on the share of J and B partners. It is a clear indication that the partnership is engaged in activities other than
professional services. Hence, it is considered and treated as a corporation which is
Answers: liable to corporate income tax of 25% or MCIT.
1. Income tax due of JB’s Enterprises
Net income 2,000,000.00 The income tax payable of JB Partnership would be:
Multiply by: Corporate income tax rate 25% Revenues
Income tax due 500,000.00 Professional Fee 100,000.00
Business Income – trading 200,000.00 300,000.00
2. Final income taxes on the share of J and B partners. Expenses
Net income after tax (2M less 500k) 1,500,000.00 Professional Fee 60,000.00
Business expenses – trading 120,000.00 (180,000.00)
Partner A (60%) Partner B (40%) Net taxable Income 120,000.00
Distribution of net income 900,000.00 600,000.00
Multiply by tax rate 25%
Multiply by: Final tax rate 10% 10%
Income tax Payable 30,000.00
Final income tax 90,000.00 60,000.00

Assume that the partners agreed to divide the net income equally, the tax
GENERAL PROFESSIONAL PARTNERSHIP ENGAGED IN COMMERCIAL ACTIVITY
pertinent to the shares of James and Benjie would be:
To be nontaxable, a GPP should be for the sole purpose of exercising the
partners’ common profession.
Net taxable income 120,000.00
If the GPP is engaged in trade or business other than the practice of the Less: income tax (30,000.00)
partners’ common profession GPP becomes taxable as a corporation.
Net income for distribution 90,000.00
A taxable partnership is subject to regular corporate income tax (20% or
25% based on the net taxable income) or minimum corporate income tax (1% based
on the gross income) starting from the 4th year of its business operation. PR OF IT DIS T R IBUT ION J ames Benjie
Net taxable Income 45,000 45,000
ILLUSTRATION
JB Partnership of James and Benjie reported the following earnings: Multiply by FT rate on Dividends 10% 10%
Professional fee P100,000 Final tax withheld by the partnership 4,500 4,500
Professional expenses 60,000
Business income – trading 200,000
Business expenses – trading 120,000 It must be observed that the taxable income of the co-partnership, less
Question: corporate income tax, shall be taxable to partners, whether actually distributed or
Will JB partnership be liable to income tax? not.

Answer:
 MODULE 8 b. Professional income
Gross Income c. Business income
d. Other income
INTRODUCTION
This module tackles the concept of gross income that is considered in 2. Income as to territorial source
computing the income tax. It discusses how we should identify gross. income as a. Income within the Philippines
taxable or not. This also includes the classification of income based on the concept of b. Mixed income (partly within and outside)
taxation.
3. As to taxability
a. Taxable income
Gross Income  ordinary or regular income subject to basic or normal tax
Income Defined. Gross income (also known as gross taxable income) means scheduler tax under Section 24(A) of the tax code.
total income of a taxpayer subject to tax. It means, in its broad sense, all income  Passive income subject to final tax
from whatever source, derived within or outside the Philippines, legal or illegal. The  Capital gains subject to capital gains taxes
tax code does not distinguish legal and illegal income. Proceeds of embezzlement or
swindling, for instance, are income because embezzler or swindler already has  Special income subject to special rates
complete dominion over them and can use such for his economic benefit.
b. Tax exempt income
Income means all wealth which flows into the taxpayer, other than return of  By constitutional mandate
capital. It imports something distinct from principal or capital. On the other hand,  By statute (general or special)
“capital” constitutes the investment which is the source of income. Therefore, capital is  By international comity
fund while income is the flow. Capital is wealth, while income is the service of wealth.
Taxable income
Form of income Taxable income means the pertinent items of gross income specified in the
Income may be realized in any form, whether in money, property, services, Tax Code, less the deductions authorized for such types of income by the tax codes
or indirect economic benefit. Items indirectly benefiting taxpayers are excluded from or other special laws. It does not include income excluded by law, or which are
gross income. Income includes the forms of income specifically described as gains exempt from income tax as well as income subject to final taxes. Hence it pertains to
derived from sale or other disposition of capital. all income subject to basic and creditable withholding taxes. It includes the gains,
profits and income derived from whatever sources, whether legal or illegal.
Valuation of income.
The amount of income recognized is generally the value received or which Requisites for income to taxable
the taxpayer has a right to receive. If the services were rendered at a stipulated 1. There must be gain
price, in the absence of any evidence to the contrary, such price shall be presumed to The gain need not be in cash derived from sale of assets. It may occur as
be the fair market value of the compensation received. Transfer of land made by a a result of exchange of property, payment, assumption, reduction or
person, the another in payment of services rendered in the form of attorney’s fees cancellation of the taxpayer’s indebtedness or other profit realized from
shall be considered as part of gross income of the latter value at either the fair the completion of a transaction.
market value or zonal valuation, whichever is higher, in the taxable year received.
2. The gain must be realized or received.
Classification of Income A mere increase in the value of property without actual realization,
1. Income as to source either through sale or other disposition, is not taxable. The realization of
a. Compensation income income need not take the form of actual receipt or property by the
 taxpayer as it may occur where there is a constructive receipt of the 2. Gross income vs net income taxation.
income by the taxpayer.

3. The gain must not be excluded by law from taxation.

Incomes that are exempt from tax by law or treaty are not considered in
determining gross income. Income is recognized in the year it is actually
or constructively received in cash or cash equivalents.

Characteristics of Philippine Income Tax

1. National tax - imposed and collected by the National Government
throughout the country
2. General tax - levied with specific or predetermined purpose
3. Excise tax - imposed on the right or privilege of a person to receive or
earn an income
4. Direct tax - payable by the person upon whom it is directly imposed by
law.
5. Progressive tax - based upon one’ ability to pay. The rate of income tax
increases as the tax base increases.
Basic Features of Philippine Income Taxation
1. It has adopted a comprehensive tax situs by using the nationality,
Income Tax System
residence, and source rules. This makes citizens and resident aliens
1. Schedular tax system vs Global Tax System
taxable on their income derived from all sources while non-resident
Under a schedular system, the various types/items of income are
aliens are taxed only on their income derived from within the Philippines.
classified accordingly and are accorded different tax treatments, in
accordance with schedules characterized by graduated tax rate.
2. The individual income tax system is mainly progressive in nature in that it
provides a graduated rate of income tax. Corporations in general are
Under the Global System, all income received by the taxpayer
taxed at a flat rate of income tax. Corporations in general are taxed at
are grouped together, without any distinction as to the type or nature of
25% of net income.
the income and after deducting therefrom expense and other allowable
deductions, are after deducting, are subjected to tax.
3. It has retained more scheduler than global features with respect to
individual taxpayers but has maintained a more global treatment of
corporations.

Situs (Source / Place) of Income

Gross income may be derived entirely from sources within the Philippines,
entirely from sources outside the Philippines. For income tax purposes, “sources”
refers to the activity, or property, or labor that gave rise or produced the income.
Sources, therefore, is the origin of the income. Situs means the place of taxation of
the income or the country which the jurisdiction to impose the tax. The state where the
subject to be taxed has a situs may rightfully levy and collect the tax. The situs is
necessarily in the state which has jurisdiction or which exercises dominion over the Situs of Dividend Income
subject in question. Source of Dividend Source of Income
Domestic Corporation Income purely from Philippines sources
Factors affecting Situs of income are as follows: Foreign Corporations If ratio is:
1. Residence or domicile - Based on the ration of the gross income a. < 50%; income is treated as entirely derived from
2. Nationality (GI) of the foreign corporation for the sources outside the Philippines
3. Source of income preceding 3 years prior to declaration of b. >= 50%: Income is derived partly from sources within
dividends derived from Philippine Sources and partly outside the Philippines
- GI (Phil) / GI (World) x Dividend
Rules in determining the situs of income
1. Interest
- residence of the debtor 7. Mining
- Place where mine is located
2. Income from services
- Place or performance of the services rendered. When services are 8. Farming
performed partly within the Philippines and partly outside the - Place where farm is located
Philippines, the allocation should be based on the time rendered
within and outside the Philippines. 9. Manufacturing Business
Production Source of Income
3. Rentals and royalties Produced and sold within Within
- Location of the property or place where the intangible is used
Produced and sold outside Outside
4. Gain on sale of real property Produced in whole/ part within and sold outside Partly within and outside
- Location of the real property Produced in whole/ part outside and sold within Partly within and outside

5. Gain on sale of personal property

- Place of sale except sale of shares of stocks of a domestic
corporation. Gains, profits and income derived from the purchase
of personal property within and its sale outside the Philippines, or INCLUSIONS AND EXCLUSIONS FROM THE GROSS INCOME
from purchase of personal property outside and its sale within the
Philippines shall be treated as derived from sources within the Inclusions
country in which it is sold.
Section 32(A) of the Tax Code provides that unless specifically excluded
6. Dividend income under the code, gross income includes but not limited to the following:
1. Compensation for services, "in whatever form paid", including but not
- Dividend income may be considered as purely income within or
limited to fees, salaries, wages, commissions and similar item
purely income outside the Philippines or partly income within and
2. Gross income derived from the conduct of trade or business or the
outside. The following rules shall be observed:
exercise of profession (business income)
3. Gains derived from dealings in property
4. Interest
5. Rents
6. Royalties
7. Dividends
 8. Annuities also as to the details and means by which such results are accomplished. No
9. Prizes and winnings distinction is made between classes or grades of employees. Thus, superintendents,
10. Pensions managers and officers are considered as employees.
11. Partner's distributive share from the net income of the general.
professional partnerships Classification of Compensation Income (RR 10-2008)
1. Regular compensation - includes basic salary, fixed allowances for
1. COMPENSATION INCOME representation, transportation and others paid to an employee per
Compensation income is income arising out of an employer - employee payroll period (RR 10-2008)
relationship. It encompassed all remuneration for services performed by an employee
for his employer whether paid in cash or in kind (RR2-98). 2. Supplemental compensation - includes payments to an employee in
addition to the regular compensation such as but not limited to the
Compensation income includes salaries, honoraria, and wages, emoluments, following: overtime pay, fees, including director's fees, commission, profit
taxable bonuses, allowances (such as and transportation, entertainment, sharing, monetized vacation and sick leave, fringe benefits received by
representation and the like), fringe benefits, fees (including directors' fees if the rank & file employees’ hazard pay, taxable 13th month pay and other
director is at the same time an employee of the employer), taxable pay, commission, benefits, other remunerations received from an employee-employer
compensation for services on the basis of a percentage of profits, commissions on relationship, with or without regard to payroll period.
insurance premiums, tips, marriage fees, baptismal offerings, sums paid for saying
masses for the dead, and other contributions received by a clergyman, evangelists, The rules on compensation income are applicable only to individual
or religious worker for services rendered, and other income pensions and retirement taxpayers, except nonresident aliens not engaged in trade or business. Corporations,
of a similar nature. estate, and trusts are not also covered by the on compensation due to lack of
employer-employee relationship.
The basis upon which the remuneration is paid is immaterial in determining
whether the remuneration constitutes compensation. Thus, it may be paid on the basis Compensation Income Received after Termination of Employee-Employer
of piece-work, or a percentage of profits, and may be paid hourly, daily, weekly, Relationship
monthly or annually. Remuneration for services constitutes compensation income even if the
relationship of employer and employee does not exist any longer at the time when
Forms / Measurement of Compensation payment is made between the person in whose employ the services had been
Compensation may be paid in money or in some medium other than money performed and the individual who performed them. Obviously, the related
such as stocks, bonds or other forms of property. If compensation is paid in cash, the compensation income was earned at the time the employer-employee relationship
full amount received is the measure of compensation income. If the services are paid was not yet terminated. Hence, the income was derived out of an employer-
in a medium other than money, the fair market value of the thing taken in payment is employee relationship.
the amount of compensation. If compensation is paid in kind, such as stocks of the
employer, the fair market value of the stock at the time the services were rendered is Fringe Benefits and 13th Month Pay
the measure of compensation. Likewise, income tax of the employee assumed or paid A fringe benefit is any goods, service or other benefit furnished or granted
by the employer in consideration of the latter's services is considered compensation by an employer in cash or in kind, in addition to basic salaries, to individual
income of the latter. employees. Fringe benefits subject to fringe benefit tax cover only those fringe
benefits given or furnished to a managerial or supervisory employee. On the other
RR 2-98 defined "employee" as an individual performing services under an hand, fringe benefits furnished to rank and file employees are subject to basic tax
employer-employee relationship. An employer-employee relationship exists when the and consequently to withholding tax on compensation in accordance with RR 2-98 (as
person for whom the services were performed has the right to control and direct the amended).
individual who performs the services, not only as to the result to be accomplished, but
Fixed or Variable Allowances subject to withholding for the reason that tips are not accounted for by the employee
In general, fixed or variable allowances which are received by a public to the employer (RR 2-98).
officer or employee or officer or employee of a private entity, in addition to the
regular compensation, fixed for his position or office, is compensation subject to Vacation and Sick Leave Allowances
income tax and consequently, creditable withholding tax on compensation income Vacation and sick leave allowances are amounts of "vacation allowances or
[Section 2.78.1 (A) of RR 2-98 as amended by RR 10-2008). Examples of fixed or sick leave credits" which are paid to an employee treated as compensation income.
variable allowances are transportation allowance, representation allowance, Thus, the salary of an employee on vacation or on sick leave, which are paid
communication allowance, living away from home allowance (LAFHA), and the like. notwithstanding his absence from work, constitutes compensation. However, the
monetized value of unutilized vacation leave credits of ten (10) days or less' which
Advances and Reimbursements for Traveling and Entertainment Expenses were paid to the employee during the year, being de minimis benefits are not subject
Reasonable amounts of reimbursements/advances for travelling ana to income tax and to withholding tax.
entertainment expenses which are pre-computed on a daily basis and are paid to an
employee while he is on an assignment or duty need not be subject to the Representation and Transportation Allowances (RATA)
requirement of substantiation and to withholding. On the other hand, any amount Representation and Transportation Allowances (RATA) granted under Section
paid specifically, either as advances or reimbursements for travelling, representation 34 of the General Appropriations Act to certain officials and employees of the
and other bona fide ordinary and necessary expenses incurred or reasonably government are considered reimbursements for the expenses incurred in the
expected to be incurred by the employee in the performance of his duties are not performance of one's duties rather than as additional compensation. However, the
compensation subject to withholding; if the following conditions are satisfied: excess of RATA, if not returned to the employer, constitutes taxable compensation
income of the employee.
1. It is tor ordinary and necessary travelling and representation or
entertainment expenses paid or incurred by the employee in the pursuit Stipends of Resident Physicians
of the trade, business or profession; and The stipends received by resident physicians during their intensive training in
the residency program of a hospital are subject to creditable withholding tax (CWT),
2. The employee is required to account/liquidate for the foregoing imposed at the rate of 10% if the gross income of the resident physicians for the
expenses in accordance with the specific requirements of substantiation current year exceeds P3,000,000, and 5% if otherwise, pursuant to Revenue
for each category of expenses pursuant to Sec. 34 of the Tax Code. Regulation 11-2018, as implemented under the TRAIN Law. The amount subject to
CWT shall include not only fees, but also per diems, allowances, and any other form
Premiums on Life Insurance of income payments not subject to withholding tax on compensation [BIR Ruling No.
Premiums on life insurance covering the.life.of.an employee paid by the DA (C-004) 024-2010, February 4, 2010].
employer is taxable income to the employee, where the insured employee. directly
or indirectly is the beneficiary under the policy. Service Fees And Royalties, Distinguished
To distinguish between compensation for service and royalty payments, the
Deductible Expense of the Employer taxpayer must inquire on whether the payee has proprietary interest, in the property
Any amount given by the employer as benefits to its employees, whether that gave rise to the income. If the payee has none, the payment constitutes
classified as de minimis benefits or fringe benefits shall constitute as deductible compensation for personal services. If the payee has proprietary interest, the
expense upon such employer payment constitutes royalty income, (B|IR Ruling No. DAITAD 139-05 dated
November 15, 2005, citing Philippine Refining Company v. CIR, CTA Case No. 2872
Tips and Gratuities dated January 15, 1986).
Tips or gratuities paid directly to an employee by a customer of the
employer that are not accounted for by the employee to the employer are Cost of Living Allowance (COLA)
considered as taxable income subject to basic tax. However, the same shall not be
 COLA of minimum wage earners is exempt from income tax. The COLA forms of realized taxable income but a mere recovery or return of capital which is not
part of the new wage rates or statutory minimum wage Hence, it is covered by the taxable.
income tax exemption of MWES under RA 9504, as implemented by Revenue
Regulations No. 10-08, which covers the statutory minimum wage (inclusive of COLA Tax Refund
under NCR Wage Order No. NCR-16), including holiday pay, overtime pay, night The “Tax Benefit Rule" also applies with respect to refund or credit for taxes.
shift differential pay and hazard pay. Thus, tax refunds are taxable if the tax, when paid, was deducted from gross income
(i.e., local taxes and fringe benefit tax). Taxes which were not previously allowed as
Income or Gain from the Exercise of Stock Option Plans deductions from the gross income should not form part of taxable income when
The BIR-ruled under BIR Ruling 119-2012 dated February 22, 2012 that any refunded. The following tax refunds are not taxable:
income or gain derived by an employee from the exercise or stock option is 1. Income tax (except fringe benefit tax)
considered as additional compensation subject to income tax and consequently, to 2. Estate Tax
withholding tax on compensation (WTC). 3. Donor's tax
4. Special assessment
5. Stock transaction tax
2. BUSINESS INCOME 6. Income tax paid to a foreign country if the taxpayer claimed a credit for
Gross income derived from the conduct of trade or business or the exercise such tax in the year it was paid.
of profession is known as business income. They may arise from the sale of products
or 'services. For example, fees received by a professional person are considered Tax refunds shall be reported as income in the year it was received if the
business income. Rents received by a person in the real estate business are business accounting method employed by the taxpayer is the cash method. Otherwise, if the
income. accounting method used is the accrual basis, the tax refund must be reported in the
year the refund was ordered.
Business income is taxed at progressive rates on net business income, or
income from the practice of a profession (net income after deduction of certain Cancellation or Condonation of Debts
specified expenses and any excess of personal and additional exemptions over
compensation income). In the case of manufacturing, merchandising, or mining business, Income can come in many forms, including the cancellation or condonation of
"gross income" means total sales, less the cost of goods sold plus any income from debts. The following tax rules shall be observed with respect to
investments and from incidental or outside operations or sources. cancellation/condonation of debts:

Bad Debt Recovery

Subsequent recovery of a bad debt previously written off in the books is a
taxable income provided that the write-off of the account resulted in a lower
taxable income at the time of write-off. This rule is known as "Tax Benefit Rule. The
aforementioned rule states that the taxpayer is obliged to declare as taxable
income is subsequent recovery of bad debts in the year they were collected to the
extent of the tax benefit enjoyed by the taxpayer when the bad debts were written-
off and claimed as a deduction from income. Thus, if the taxpayer realizes a
reduction of the income tax due him on account of a deduction for bad debts, his
subsequent recovery of the same from the debtor shall be treated as a receipt of
taxable income. However, if the taxpayer did not benefit from the deduction of the
said bad debt written off because it did not result in any reduction of his income tax
in the year of such deduction, the subsequent recovery shall not be treated as receipt
 3. Advance payment, which may be:
3. GAINS DERIVED FROM DEALINGS IN PROPERTY a. Prepaid rent
Gross income derived from dealings (sale, barter or exchange) in property b. A security deposit that is applied to rental is a taxable
includes all income derived from the disposition of property (real or personal, for income of the lessor
sale or in exchange of other property, or both) which results in gain or loss The gain
from the transaction shall be taxable gain and the loss shall be deductible if incurred Non-Taxable Rent
in trade, profession, or business. Advance rentals representing option money for the property as well as
security deposits to insure faithful performance of certain obligations of the lessee
Gains arising from expropriation of properties or other dispositions of are not considered as income on the part of the lessor.
properties to the government of real properties are taxable. It includes taking by the
government through condemnation proceedings (Gonzales v. Court of Tax Appeals. Leasehold Improvement
G.R. No. L-14532). The transfer of property through condemnation proceedings, and A leasehold improvement is an improvement made to a leased asset.
the payment of just compensation is a sale or exchange and profit from the Buildings erected or improvements made by the lessee on the leased premises are
transaction constitutes capital gain". taxable only if the same were made pursuant to an agreement with the lessor and
the buildings erected or improvements made are not subject to removal by the lessee.
4. INTEREST INCOME However, the lessor does not realize taxable gain from leasehold improvements
Generally, interests are taxable income, unless exempted by law, whether or turned over by the lessee at the end of the lease where leasehold improvements are
not usurious. Gross income derived from interest should only refer to such interest as considered fully depreciated and where the condition of said property is such that
arising from indebtedness (whether business or non-business, legal or illegal), that is, necessary renovations and extraordinary repairs have to be undertaken to restore
Compensation for the loan or forbearance of money, goods, or credits For instance, the same to useful condition. On the other hand, the lessee may claim depreciation of
interest derived from lending money, goods, or credits from one person to another or the improvements as deduction from the lessee's gross income over the remaining
interest earned in the normal conduct of trade or business are subject to basic tax. term of the lease or the life of the improvements, whichever is shorter.

On the other hand, interest income on deposits made in banking institutions as Pretermination of Lease
well as interest income on deposit substitutes are passive Income subject to 20% final If for any reason other than a bona fide purchase from the lessee by the
withholding tax. Interest income derived from investments in 9overnment securities are lessor, the lease is terminated, the lessor realizes additional income for the year to
also subject to 20% final tax. the extent that the value of such improvement exceeds the amount already reported
as income on account of such improvement.
5. RENTAL INCOME
Section 32(A)5) of the Tax Code provides that "rent" paid by the lessee for 6. ROYALTY INCOME
the use or lease of property is taxable income to the lessor. Rent is the amount paid Royalty was not defined under the Tax Code, nonetheless, Webster
for the use or enjoyment of a thing (real or personal) or right Dictionary defined the same as a share of the earnings as from invention, book or
play, paid to the inventor, writer, etc. for the right to make, use or publish the same.
RENT INCOME may be in the FORM of:
1. Cash, at stipulated price
2. Obligations of the lessor to third persons paid or assumed by the
lessee in consideration of the contract of lease such as real
property taxes assumed by the lessee on the property being
leased, insurance or other fixed charges. Such payments shall be
considered rental payments to be reported by the lessor as part
of its taxable income.
 10. ANNUITY INCOME
Annuity income refers to specified income payable at stated intervals for a
fixed or a contingent period, often for the recipient's life, in Consideration of a
stipulated premium paid either in prior installment payments or in a single payment.
Annuity payments received by a taxpayer represent a part which is taxable and not
taxable. The amount received representing return of premium is considered return of
capital, hence, should be excluded in the determination of taxable income.. In
contrast, the annuity received representing interest or amounts over the premiums
paid are considered return on capital, thus, should form part of the recipient's
taxable income.

INFORMER'S AWARD
Income derived as an informer's reward to persons instrumental in the
7. DIVIDEND INCOME discovery of violations of the NIRC and in the discovery and seizure of smuggled
Dividends are payments made by a corporation to its shareholder members. goods is subject to 10% final tax.
It is the portion of corporate profits paid out to stockholders, direct or indirect Direct
dividend is one where the paying corporation acknowledges the distribution of The following rewards shall be subject to a 10% final withholding tax:
dividend through a resolution of the Board of Directors declaring such distribution as 1. Those given to persons, except an Internal Revenue official or employee,
distribution of dividend. Indirect Dividend is a distribution of Profits disguised as or other public official or employee or his relative within the 6" degree
payment of services, properties, etc. Direct and indirect dividends are subject to tax. of consanguinity, who voluntarily give definite and sworn information not
yet in the possession of the BIR, leading to the discovery of frauds upon
8. PRIZES AND OTHER WINNINGS the internal revenue laws or violations of any of the provisions thereof,
A prize is an award to be given to a person or a group of people to thereby resulting in the recovery of revenues, surcharges and fees
recognize and reward actions or achievements. Prizes are also given to publicize and/or the conviction of the guilty party and/or imposition of any fine or
noteworthy or exemplary behavior, and to provide incentives for improved outcomes penalty.
and competitive efforts. Winnings, on the other hand, for tax purposes, should refer
to rewards/income by virtue of chance or bets. As a rule, prizes and winnings are 2. Those given to an informer where the offender has offered to
taxable unless exempt. compromise the violation of law committed by him and his offer has been
accepted by the Commissioner and collected from the offender
9. PENSIONS & PARTNERS' DISTRIBUTIVE SHARES FROM THE INCOME OF A
GPP
Pensions, like retirement benefits, are generally taxable unless exempt under Exclusions
the law.
Exclusions from the gross income refer to flow of wealth to the taxpayers
The partners in a general professional partnership shall be liable for income which are not considered part of gross income for purposes of computing the
tax only in their separate and individual capacities. Each partner shall report his taxpayers' taxable income due to the following:
distributive share, actually or constructively received in the net income of the 1. It is exempted by the fundamental law or by statute
partnership as gross income. The share of a partners shall be subject to 10% 2. It does not come within the definition of income
creditable withholding tax. If the income payments to the partner for the current year
exceeds P720,000, the withholding tax is 15%. The exclusion of income should not be confused with the reduction of gross
income by the application of allowable deductions. Exclusions are not taken into
account in determining gross income, however, deductions are subtracted from the 2. Based on some ground of public policy such as to encourage direct foreign
gross income. investments, encourage new industries, or foster charitable institutions, and
the like.
Nature of Exemptions from Taxation a. Tax holidays granted by the Bureau of Investments (BOI) to foreign
Exemptions from taxation is a grant of immunity to particular persons or investors and pioneer companies in new industries
corporations or to persons or corporations of a particular class from a tax which b. Tax exemptions granted to companies incurring heavy losses due to
persons and corporations generally within the same jurisdiction are obliged to pay It legitimate business reverses such as exemption from MCIT
is an immunity or a mere "privilege which may be revoked by the government unless
the exemption is founded on a contract which is protected from impairment. It is 3. Based on grounds of reciprocity or to lessen the rigors of international
freedom from a financial charge or burden to which others are subjected. double or multiple taxation
a. Exemptions granted to nonresident aliens engaged in trade or
The fundamental theory is that all taxable property should bear its share in business .
the cost and expense of the government. Consequently, he who claims exemption
must be able to justify his claim or right thereto by a grant express in terms "too plain TAX EXEMPTION, TAX AMNESTY and TAX CONDONATION
to be mistaken and too categorical to be misinterpreted." If not expressly mentioned Tax exemption, as discussed in the foregoing paragraphs, refers to a grant
in the law, it must be at least within its purview by clear legislative intent. In the case of immunity to particular persons or corporations or to persons or corporations of a
of Davao Gulf v. Commissioner, 293 SCRA 76 (1998), the Supreme Court held that: particular class from a tax which persons and corporations generally within the same
"A tax cannot be imposed unless it is supported by the clear and express language state or taxing district are obliged to pay. Tax exemptions are not favored and are
of a statute; on the other hand, once the tax is unquestionably imposed, a claim of construed strictissimi juris (strictly) against the taxpayer.
exemption from tax payments must be clearly shown and based on language in the
law too plain to be mistaken. A tax amnesty is a general pardon or intentional overlooking by the State of
its authority to impose penalties on persons otherwise guilty of evasion or violation of
GROUNDS FOR GRANTING TAX EXEMPTIONS a revenue or tax law/partakes of an absolute forgiveness or waiver by the
1. Based on contract, law or treaty. Government of its right to collect what otherwise would be due it and, in this sense,
Based on Law prejudicial thereto, particularly to tax evaders who wish to relent and are willing to
a. Tax exemptions granted to cooperatives registered under the reform are given a chance to do so and therefore become a part of the society with
Cooperative Development Authority a clean slate [Republic v. Intermediate Appellate Court, 196 SCRA 335].
b. Travel tax exemption as provided for by Presidential Decree (PD)
1183 Like a tax exemption, a tax amnesty is never favored nor presumed in law,
and is granted by statute. The terms of the amnesty must be strictly construed against
Based on Treaty the taxpayer and liberally in favor of the government. Unlike a tax exemption,
a. Salaries of officials of the United Nations assigned in the Philippines. however, a tax amnesty has limited applicability as to cover a particular taxing
b. Citizens of the United States working in consular offices in the period or transaction only. On the other hand, there is tax condonation or remission
Philippines are exempt from payment of all taxes (national or local, when the State desists or refrains from exacting, inflicting or enforcing something as
salaries, allowances, fees, or wages). well as to restore what has already been taken. The condonation of a tax liability is
c. Salaries of diplomatic officials and agents equivalent to and is in the nature of a tax exemption. Thus, it should be sustained
only when expressed in the law. [Surigao Consolidated Mining V. Commissioner of
Income of any kind, to the extent required by treaty. obligations binding Internal Revenue, 9 SCRA 728]
upon the Government of the Philippines, shall be exempt from income tax.
This exclusion is based on the principle of international comity National government
 It is inherent in the exercise of the power to tax that the sovereign state be
free to select the subjects of taxation and to grant exemptions therefrom. Unless 4. Compensation for Injuries or sickness. Amounts received, through Accident
restricted by the Constitution, the legislative power to exempt is as broad as its or Health Insurance or under Workmen's Compensation ACIs, as
power to tax. compensation for personal injuries or sickness, plus the amounts of any
damages received, whether by suit or agreement, on account of such
Local governments injuries or sickness.
Municipal corporations are clothed with no inherent power to tax or to grant
tax exemptions. But the moment the power to impose a particular tax is granted, 5. Income exempt under treaty
they also have the power to grant exemption therefrom unless forbidden by some
provision of the Constitution or the law. The legislature may delegate its power to 6. Retirement benefits, pensions, gratuities, etc.
grant tax exemptions to the same extent that it may exercise the power to exempt. In
the case of Basco v. PAGCOR (196 SCRA 52), the Supreme Court held that: "The 7. Miscellaneous items
power to tax municipal corporations must always yield to a legislative act which is a. Income derived by foreign governments
superior, having been passed by the State itself. Municipal corporations are mere b. Income derived by the government political subdivisions
creatures of Congress which has the power to create and abolish municipal c. Prizes and awards
corporations due to its general legislative powers. Congress can grant the power to d. Prizes and awards in sports competition
tax, it can also provide for exemptions or even take back the power. e. 13th month pay and other benefits. Gross benefits received
by officials and officials of public and private entities;
provided, however. that the exclusion under this item shall
ITEMS OF INCOME OR PROCEEDS EXCLUDED FROM THE GROSS INCOME: not exceed P90,000 (beginning January 1, 2018 or upon
the effectivity of TRAIN Law) which shall cover
Under Section 32(B) of the Tax Code as amended under RR 10963 (TRAIN  Benefits received by officials and employees of the national
Law; RR &-2018), the following are exclusions from the gross income: and local government pursuant to RA 6686 (An Act
1. Life Insurance - the proceeds of life insurance policies paid to the heirs or Authorizing Annual Christmas Bonus to National and Local
beneficiaries upon the death of the insured, whether in a single Sum or Government Officials and Employees);
otherwise, but if such amounts are held by the insure under an agreement  Benefits received by employees pursuant to PD 851 (13
to pay interest thereon, the interest payments shall be included in gross Month Pay Law) as amended by Memorandum Order No. 28
income. dated August 13, 1986
 Benefits received by officials and employees not covered by
2. Amount received by the insured as a return of premium. The amount PD 851 as amended by Memorandum Order No. 28 dated
received by the insured, as a return of premiums paid by him under life August 13, 1986;
insurance, endowment, or annuity contracts, either during the term or at  Other benefits such as productivity and incentives and
the maturity of the term mentioned in the contract or upon surrender of Christmas bonus
the contract.
f. GSIS, SSS, Medicare and Other contributions, and union
3. Value of property acquired by gratuitous transfer (gifts, bequests, and dues of individuals
devises) but not the income from such property. The value of the  The BIR held in Revenue Memorandum Circular
property acquired by gift, bequest, devise, or descent: Provided, (RMC}No.27-2011 (issued on July 1, 2011) that
however, that income from such property, as well as gift, bequest, devise only the mandatory/compulsory contributions made
or descent of income from any property, in cases of transfers of dividend by employees to the GSIS, SSS, PHIC and HDMF are
interest, shall be included in the gross income. excludable from the gross income of the taxpayer and
 therefore exempt from income tax and withholding
tax. Amounts in excess of mandatory/compulsory
contributions shall be subject to income tax.

g. Gains from sale of bonds debentures, and other certificates

of indebtedness with maturity of more than five (5) years;
and

h. Gains from redemption of shares in mutual funds. Gains

realized by the investor upon redemption of shares of stock
in a mutual fund company as defined under Section 22(BB)
of the Tax Code as follows.
 Section 22(BB) NIRC The term "mutual fund company'
shall mean an open-end and closed-end investment
company as defined under the Investment Company
Act.

i. Statutory minimum wage earners

j. Income of nonresidents from transactions with offshore

banking units and depository banks under the expanded
foreign currency depository system

k. Incomes and gains subject to final withholding taxes