Overview of Corporations

Definition of a Corporation

 A corporation is an artificial being created by operation of law, possessing

rights of succession and powers expressly authorized by law or incident to its
existence.

Characteristics of Corporations

 Corporations are classified as domestic or foreign based on their creation:

o Domestic Corporations: Created under Philippine laws.

o Foreign Corporations: Organized under the laws of their respective

countries, not Philippine law.

Classification of Corporations

 Types of Corporations:

o One Person Corporation: A corporation with a single stockholder.

o Private Corporations: Formed for profit and can include various

business structures like partnerships.

Income Taxation for Corporations

Definition of Business Income

 Business income refers to income generated from regular activities

conducted for profit.

Types of Income

 Active Income: Income generated from business activities.

 Passive Income: Income earned from investments or other non-active

sources.

Important Concepts

 Legal Definition: Understanding the legal framework surrounding

corporations is crucial for taxation purposes. Corporations must adhere to
specific regulations and laws governing their formation and operation.

Key Points to Remember

 Corporations are classified based on their origin (domestic vs. foreign).

 The nature of income (active vs. passive) affects taxation.

  Familiarity with the legal definitions and classifications of corporations is
essential for understanding taxation.

Taxation for Corporation- Domestic Corporations

Definitions

 Domestic Corporations: Corporations organized or created under Philippine

laws. They are established using the law in the Philippines.

Types of Corporations for Taxation Purposes

1. One-Person Corporations (OPC): A single natural person can now form a

corporation, a change from the previous requirement of at least five people.

2. Partnerships: Considered corporations for taxation, regardless of how they

are created (verbal or written).

3. Joint Stock Companies: Similar to corporations, these have shareholders

and are managed by a board of directors.

4. Joint Accounts: Essentially partnerships where one party joins an existing

business.

5. Associations: Formed for the benefit of members and considered

corporations for taxation.

6. Insurance Companies: Companies that assume risk are included as

corporations.

Exclusions from Corporation Definition for Taxation

 General Professional Partnerships (GPPs): Not included in taxation as

they are created for professional practice rather than profit.

 Joint Ventures or Consortiums: Temporary collaborations for specific

projects and not considered corporations

Unless:

a. Formed for the purpose of undertaking construction projects

b. Engaging in petroleum, coal, geothermal and other energy operations
pursuant to an operating or consortium agreement under a service
contract with the government
NOTE: IF NOT QUALIFIED IN A&B,CONSIDERED AS CORPORATION

Taxation of Domestic Corporations

Domestic corporations are subject to income tax on their income within and without
the Philippines

1. Regular Corporate Income Tax (RCIT):

a. 25%
b. 20%
* 5m or less Taxable income
* 100m or less assets excluding land

2. Minimum Corporate Income Tax (MCIT): A minimum tax applied even if

there is no net income, currently at 2%

Key Concepts

 Active Income: Income from the corporation's normal operating activities.

 Passive Income: Income from investments or other sources that are not
related to the corporation's main business.

 Capital Gains: Income from the sale of assets, such as shares of stock.

 Gross Income: Income subject to income tax.

 Allowable Deductions: Expenses that can be deducted from gross income

to calculate taxable income.

 Optional Standard Deduction (OSD): A fixed deduction that corporations

can choose to use instead of actual expenses.

Important Notes

 The MCIT rate was temporarily lowered to 1% during the COVID-19 pandemic
but will return to 2% after July 1, 2023.

 Corporations may still be subject to income tax even if their net income is
zero or negative due to the MCIT 17.

 The tax payable is the higher of the RCIT or MCIT

TAX DUE COMPUTATION

RCIT

Net Sales xx

Less: Cost of sales (xx)

Gross Profit xxx

Add: Other income xx

 Gross income xxx

Less: deductions (xx)

Allowable

Optional Standard

TAXABLE INCOME xxx

Rcit Rate xx% (25% /20%)

TAX DUE-RCIT xxx

MCIT

Net Sales xx

Less: Cost of sales (xx)

Gross Profit xxx

Add: Other income xx

Gross income xxx

Mcit rate 2%

TAX DUE-MCIT XX

Taxation for Corporation- Foreign Corporations

Overview of Foreign Corporations

 Definition: Foreign corporations are those organized under the laws of

countries other than the Philippines. They do not operate under Philippine
law.

 Types:

o Resident Foreign Corporation: Engaged in trade or business in the

Philippines by establishing a branch or office.

o Non-Resident Foreign Corporation: Not engaged in trade or

business in the Philippines and has no office or branch, but may derive
income from sources within the Philippines (e.g., interest, dividends,
royalties).

Key Differences Between Resident and Non-Resident Foreign Corporations

Feature Resident Foreign Non-Resident Foreign

Corporation Corporation
Business Presence Has a branch/office in the No branch/office in the
 Philippines Philippines
Taxation Subject to regular Subject to final
corporate income tax withholding tax (25%)
(RCIT) or MCIT
Income Source WITHIN THE PHILIPPINES WITHIN THE PHILIPPINES
Tax Base Net income (includes Gross Income from
operating and non- passive sources (e.g.,
operating income). royalties, dividends).

Taxation Details

Resident Foreign Corporation

TAX DUE COMPUTATION

RCIT

Net Sales xx

Less: Cost of sales (xx)

Gross Profit xxx

Add: Other income xx

Gross income xxx

Less: deductions (xx)

Allowable

Optional Standard

TAXABLE INCOME xxx

Rcit Rate xx% (25% /20%)

TAX DUE-RCIT xxx

MCIT

Net Sales xx

Less: Cost of sales (xx)

Gross Profit xxx

Add: Other income xx

Gross income xxx

Mcit rate 2%

TAX DUE-MCIT XX
Non-Resident Foreign Corporation

TAX DUE COMPUTATION

Net sales xx

Less: cost of sales (xx)

Gross Income xx

Add: Passive income xx

Total taxable income xx

Final Rate 25%

Final Withholding Tax xx

Examples

 Non-Resident Foreign Corporation Example: The NBA, which does not

have an office in the Philippines but earns income through live-streaming
games, is considered a non-resident foreign corporation.

Important Concepts

 Final Withholding Tax: This tax is applied to passive income earned by non-
resident foreign corporations, simplifying tax administration since they lack a
physical presence in the Philippines.

 Tax Compliance: Non-resident foreign corporations pay taxes through

withholding agents instead of filing tax forms themselves due to their
absence in the country.

Taxation for Corporation- Government Owned and

Controlled Corporations (GOCCs)
Overview of GOCCs

GOCCs are corporations owned or controlled by the government that engage

in both commercial and non-commercial activities. The term "and/or" indicates that
they can be either owned and controlled or just one of them.
Reasons for Establishing GOCCs

1. Market Failure: The government intervenes when the market cannot be

trusted to provide essential services, ensuring that basic needs are met.

2. Mobilization of Assets: GOCCs serve as efficient vehicles to mobilize

government assets for public benefit.

3. Competition: They create competition in the market, preventing

monopolistic pricing by private entities.

Taxation of GOCCs

 Tax Obligations: GOCCs are subject to taxation similar to regular

corporations, based on their taxable income.

 Tax Rates:

o Regular Corporations: Tax rates can vary based on the nature of the
business:

 20% for micro, small, and medium enterprises (MSMEs) with

specific income and asset criteria.

 25% for larger corporations.

TAX DUE COMPUTATION

RCIT

Net Sales xx

Less: Cost of sales (xx)

Gross Profit xxx

Add: Other income xx

Gross income xxx

Less: deductions (xx)

Allowable

Optional Standard

TAXABLE INCOME xxx

Rcit Rate xx% (25% /20%)

TAX DUE-RCIT xxx

MCIT

Net Sales xx
 Less: Cost of sales (xx)

Gross Profit xxx

Add: Other income xx

Gross income xxx

Mcit rate 2%

TAX DUE-MCIT XX

Taxation for Corporations-Partnership Taxation

What is a Partnership?

A partnership is a contract where two or more people agree to contribute money,

property, or industry to a common fund with the intention of dividing profits
among themselves.

Types of Partnerships

 General Professional Partnership: This type of partnership is formed by

professionals for the sole purpose of exercising their common profession. No
part of their income is derived from engaging in any trade.

 General Co Partnership (compania colectiva): This is a partnership that

is not a professional partnership.

Taxation for General Partnerships: General partnerships are taxed as if they

were corporations.

TAX DUE COMPUTATION

RCIT

Net Sales xx

Less: Cost of sales (xx)

Gross Profit xxx

Add: Other income xx

Gross income xxx

Less: deductions (xx)

Allowable

Optional Standard
 TAXABLE INCOME xxx

Rcit Rate xx% (25% /20%)

TAX DUE-RCIT xxx

INDIVIDUAL (Partners) LEVEL

It will be a FINAL TAX (PASSIVE INCOME)

Taxation for General Professional Partnerships: These partnerships are taxed

as if they were regular partnerships.

TAX DUE COMPUTATION

Net Receipts xx

Less: Cost of Receipts xx

Gross Income xx

Less: Deductions xx

Net Income for xx

distribution to Partners

INDIVIDUAL (Partners) LEVEL

It will become an INCOME TAX

Share in net Income xx

Tax Due (Sec. 24(A)) xx

Taxation for Corporations - Proprietary Educational

Institutions
What is a Proprietary Educational Institution (PEI)?

 A PEI is any private school maintained and administered by private

individuals or a group with a permit to operate from the Department of
Education, the Commission on Higher Education, or the Technical Education
and Skills Development Authority.
  It's important to distinguish PEIs from other types of educational institutions,
like non-profit educational institutions.

 You can determine the type of school by looking at its registration with the
Securities and Exchange Commission (SEC).

TYPES OF SCHOOLS

TYPE OF SCHOOL TAX RATES

Proprietary Educational Institution 10%
Non-Stock, Non profit Educational Inc. EXEMPT
Government Educational Institutions EXEMPT
Without permit Educational Ins. (review centers) 25% or 20%

Examples of PEIs

 STI, UE, and FEU are examples of PEIs.

Related vs. Unrelated Income

 Related income is income directly related to the educational activities of the

school. This includes tuition fees, miscellaneous fees, and income from the
canteen, cafeteria, and bookstore.

 Unrelated income is income from activities not directly related to the

educational activities of the school.

NOTE : If unrelated income exceeds 50% of the total gross income, the tax rate
will be 25% or 20% (for MSMEs).

TAX DUE COMPUTATION

Related Revenue xx ?

Unrelated Revenue xx ?

Gross Income xx 100%

Less: Expenses xx

Taxable Income xx

Tax Rate xx%

Tax Due xx

Capital Expenditures

 PEIs have the option to capitalize or expense outright their capital

expenditures.
  Capitalizing the expenditure will result in depreciation expense, which can be
deducted from the account.

 Expensing the expenditure outright will directly reduce the income for the
current year.

Taxation for Corporation- Non-Profit Hospitals

Overview of Non-Profit Entities

A non-profit organization is one where no income or assets accrue to any member

or specific person. All net income is devoted to the institution's purposes, and
activities are conducted not for profit

TYPE OF HOSPITAL TAX RATES

Non Profit Hospitals 10%
Non Profit Hospitals- Charitable EXEMPT
Hospitals with share of stocks 25% or 20%

Tax Exemptions

 Charitable non-profit hospitals may be exempt from taxes if they meet

specific criteria:

o Organized and operated exclusively for charitable purposes

o No part of income or assets benefits any member or specific person

Organizational and Operational Tests

 Organizational Test: Must apply to the SEC as a non-profit entity with clear
charitable purposes.

 Operational Test: Actual operations must align with the stated charitable
purposes. If a hospital engages in unrelated profit-making activities, it may
lose its non-profit status .

Examples and Case Studies

 St. Luke's Hospital: Initially organized as a charitable institution, it faced

taxation due to high revenue from paying patients, demonstrating the
importance of adhering to both organizational and operational tests

TAX DUE COMPUTATION

Related Revenue xx ?

Unrelated Revenue xx ?
 Gross Income xx 100%

Less: Expenses xx

Taxable Income xx

Tax Rate xx%

Tax Due xx

Taxation Rates and Conditions

If a hospital's unrelated income exceeds 50% of total gross income, it may be

subject to the regular corporate income tax rate of 25% or 20% for small
enterprises .

Corporate Taxation-Special Corporation

Types of Corporate Taxpayers

 Domestic Corporations:

o Subject to a regular corporate income tax rate of 25% or 20% for

MSMEs (micro, small, or medium enterprises) if their net income is ≤ 5
million and net assets ≤ 100 million, excluding land.

o Can be classified into regular, special, and exempt corporations.

 Resident Foreign Corporations:

o Taxed at a regular rate of 25%, without the option for the lower MSME
rate.

 Non-Resident Foreign Corporations:

o Taxed at 25% under final withholding tax, as they do not have a

business presence in the Philippines.

Exempt Corporations

 Non-Profit Corporations:

o Exempt under NIRC Section 30 Act 1.

 Government Agencies and Instrumentalities:

o Generally exempt from taxation.

 Certain Government-Owned and Controlled Corporations (GOCCs):

 o Examples include GSIS, SSS, Pag-ibig, PhilHealth, and Local Water
Districts.

 Cooperatives:

o Created for the benefit of their members and may also be exempt.

Special Corporations

Defined as corporations subject to special tax treatments or preferential tax rates

lower than the regular corporate income tax rate.

Examples and Tax Rates:

o Non-Profit Hospitals and Proprietary Educational Institutions:

 Tax rate of 10%, temporarily reduced to 1% due to the CREATE

law from July 1, 2020, to June 30, 2023.

o Foreign Currency Deposit Units (FCDUs):

 Tax rates vary based on transactions.

o PESA/BOI Registered Enterprises:

 Taxed at 5% of gross income.

o Regional Area Headquarters (RAH):

 Not taxed as they do not conduct transactions.

o Regional Operating Headquarters (ROH):

 Taxed at 10%, but will be subject to regular corporate income

tax starting January 1, 2022.

o International Carriers:

 Taxed at 2.5% of gross Philippine billings, which includes all

collected billings for travel from the Philippines to other
countries.

 Non-Resident Foreign Corporations:

o Cinematographic Film Owners: Taxed at 25%.

o Lessors of Vessels: Taxed at 4.5%.

o Lessors of Aircraft and Equipment: Taxed at 7%

Taxation for Corporations-Exempt Corporation
Concept of Tax Exemption

 Tax exemption refers to the status where certain corporations do not have to
pay income tax. This can seem contradictory to the purpose of taxation,
which is to collect revenue for government operations.

 The burden of proof for claiming tax exemption lies with the corporation, not
the government. Corporations must demonstrate their eligibility through
specific tests .

Tests for Tax Exemption

1. Organizational Test:

o Corporations must demonstrate their purpose aligns with the criteria

for exemption as outlined in Section 30 of the National Internal
Revenue Code (NIRC).

o Documentation such as Articles of Incorporation must clearly state the

organization's purpose.

2. Operational Test:

o The actual activities of the organization must reflect its stated purpose.
For example, a charitable organization must engage in charitable
activities exclusively.

o Activities that generate profit, such as selling merchandise, may

disqualify an organization from exemption if they are not aligned with
its stated purpose

Types of Exempt Corporations

 Labor, Agricultural, or Horticultural Organizations: These are not

organized for profit and aim to improve the working conditions or agricultural
practices of their members.

 Mutual Savings Banks: Operate without capital stock and benefit their
depositors rather than individual owners .

 Fraternal Organizations: Provide benefits to members and their

dependents, often through mutual aid systems.

 Cemetery Companies: Operate exclusively for the benefit of their

members, providing burial services.

 Religious, Charitable, Scientific, Athletic, or Cultural Organizations:

Must not benefit any specific individual and should operate for public
purposes.
Specific Exemptions Under NIRC Section 30

1. Philippine National Red Cross: Provides humanitarian aid and is exempt

due to its charitable purpose.

2. Child Caring Institutions: Licensed by the DSWD to provide foster care.

3. Banko Central ng Pilipinas: Exempt for activities related to supervising

banks and maintaining price stability.

4. Small-Scale Gold Miners: Exempt from tax when selling gold to accredited
traders or the Banko Central.

Minimum Corporate Income Tax (MCIT)

A tax imposed on corporations that have been in operation for four years and have
either a net loss, zero taxable income, or a normal income tax that is lower than the
minimum income tax .

Key Points

 Applicability: Only domestic corporations and resident foreign corporations

are subject to MCIT. Special corporations are exempt.

 Tax Rates: The MCIT rate is currently 1% (from July 1, 2020, to June 30,
2023), reverting to 2% afterward.

 Tax Base: The base for MCIT is gross income, which is the total income
subject to tax.

Gross Income Calculation

 Sale of Goods: Gross income is calculated as gross sales minus returns,

allowances, and discounts .

 Sale of Services: Gross receipts are used, with similar deductions applied.

Comparison with Regular Corporate Income Tax (RCIT)

 Corporations must pay whichever is higher between MCIT and RCIT.

 MCIT serves as a penalty tax, ensuring that corporations contribute even

when they report losses.

Excess MCIT Carryover

 If MCIT exceeds RCIT, the excess can be carried over to offset future RCIT
payments within the next three years.

Relief from MCIT

  Situations that may provide relief from MCIT include prolonged labor disputes,
force majeure events, or economic downturns, but these require application
and approval .

Effective Date

 MCIT applies starting in the fourth taxable year after a corporation begins
operations.

BIR Tax Forms for Corporations

Overview of Annual Income Tax Returns

In the lecture, different types of annual income tax returns for corporations were
discussed. Understanding these forms is essential for compliance with tax
regulations.

Types of Annual Income Tax Returns

1. 1702 RT:

o Purpose: This form is for corporations and partnerships that are

subject to regular corporate income tax rates.

o Key Point: It is specifically used by non-individual taxpayers who do

not qualify for any exemptions.

2. 1702 EX:

o Purpose: This form is designated for corporations and partnerships

that are exempt from taxation under specific sections of the tax code.

o Key Point: It applies to entities with no taxable income as defined by

the law, such as general professional partnerships.

3. 1702 MX:

o Purpose: This form is for corporations and partnerships with mixed

income that are subject to multiple tax rates.

o Key Point: It is used by special corporations, like not-for-profit

hospitals and proprietary educational institutions, where income may
be taxed at different rates.

Quarterly Income Tax Return

 1702 Q:

o Purpose: This form is used for quarterly income tax returns by all
types of corporations.
 o Key Point: Unlike the annual forms, which vary based on tax status,
this form is uniform across all corporations. It includes schedules that
depend on the corporation's tax classification.

Important Considerations

 Filing Dates: Corporations can have different fiscal years, which affects their
filing dates for quarterly returns. This is different from individuals, who
typically use a calendar year for their accounting period.

 Updates: The forms discussed are based on regulations from January 2018.
Changes may occur due to new laws, such as the CREATE law, which could
necessitate updates to the forms.