TAXATION ON

CORPORATION
 The discussion on taxation of corporations is divided into two
chapters—this chapter and the next. This chapter deals with the
normal tax liability and passive income of corporations. Minimum
corporate income tax (MCIT) is discussed in the next chapter.
“Normal income tax” shall mean the income tax rates prescribed
under Sections 27(A) and 28(A)(1) of the Code at 35% effective Jan. 1,
1997; 34% effective Jan. 1, 1998; 33% effective Jan. 1, 1999; and 32%
effective Jan. 1, 2000, and thereafter. Under R.A. 9337 or the
Expanded VAT Act of 2005, effective Nov. 1, 2005, the income tax
rate was 35%. This rate was reduced to 30% effective Jan. 1, 2009.
Per R.A. 11534 or CREATE Act, effective _ July 1, 2020, the income tax
rate of domestic corporations, in general, shall be 25% (or 20%, see
discussion in this Chapter).
CLASSIFICATION OF INCOME TAXPAYERS
(Other than Individuals)
1. Corporations

a. Domestic. Those created or organized under and by virtue of

Philippine laws.
1. Domestic corporation, in general, including One Person
Corporation
2. Government-owned and -controlled corporations
3. Taxable partnerships
4. Proprietary educational institutions
5. Non-profit hospitals
CLASSIFICATION OF INCOME TAXPAYERS
(Other than Individuals)
b. Foreign. Those organized in accordance with laws of their
respective countries.
1. Resident. Those engaged in trade or business within the
Philippines.
2. Non-resident. Those not engaged in trade or business within the
Philippines.
CLASSIFICATION OF INCOME TAXPAYERS
(Other than Individuals)

2. General Professional Partnership. This is discussed

in Chapter 6.
3. Estates and Trusts. This is discussed in Chapter 5.
Definition of Terms
1. Corporation. A corporation is an artificial being. created by
operation of law, having the right of succession and the powers,
attributes and properties expressly authorized by law or incident
to its existence (Revised Corporation Code of the Philippines,
Section 2).

Section 10 of the RCCP provides that any person, partnership,

association or corporation, singly or jointly with others but not
more than fifteen (15) in number, may organize a corporation for
any lawful purpose or purposes.
 Corporation includes one person corporations,
partnerships, no matter how created or organized, joint-
stock companies, joint accounts (cuentas en
participacion), associations, or insurance companies, but
does not include general professional partnerships and a
joint venture or consortium formed for the purpose of
undertaking construction projects or engaging in
petroleum, coal, geothermal and other energy operations
pursuant to an operating or consortium agreement under a
service contract with the Government.
The tax exemption of joint ventures formed for the purpose
of construction projects was pursuant to Presidential Decree
929 (dated May 4, 1976) to assist local contractors in
achieving competitiveness with foreign contractors by
pooling their resources in undertaking big construction
projects.
Section 3 of Revenue Regulations 10-2012 states that a joint
venture or consortium formed for the purpose of undertaking
construction projects not taxable as corporation under Sec. 22
of the NIRC of 1997 as amended, should be:
(1) for the undertaking of a construction project; and
(2) should involve joining or pooling of resources by licensed local
contracts; that is, - licensed as general contractor by the Philippine
Contractors Accreditation Board (PCAB) of the Department of Trade
and Industry (DTI);
(3) these local contractors are engaged in construction business; and
(4) the Joint Venture itself must likewise be duly licensed as such by
the Philippine Contractors Accreditation Board (PCAB) of the
Department of Trade and Industry (DTI).
Joint ventures involving foreign contractors may also be treated as a
non-taxable corporation only if the member foreign contractor is
covered by a special license as contractor by the PCAB of the DTI;
and the construction project is certified by the appropriate
Tendering Agency (government office) that the project is a foreign-
financed or internationally-funded project and that international
bidding is allowed under the Bilateral Agreement entered into by and
between the Philippine Government and the foreign or international
financing institution pursuant to the IRR of Republic Act 4566, the
Contractor s License Law.
Absent any one the requirements, the joint venture or consortium
formed for the purpose of undertaking construction .projects shall
be considered as taxable corporations. In addition, the tax-exempt
joint venture or consortium as defined shall not include those who
are mere suppliers of goods, services or capital to a construction
project.

The member to a joint venture not taxable as corporation shall each

be responsible in reporting and paying appropriate income taxes on
their respective share to the joint venture’ s profit.
2. Domestic. When Applied to a corporation, means created
or organized in the Philippines under its laws.

One Person Corporation (OPC) is a new type of corporation

under the Revised Corporation Code of the Philippines
(effective March 8, 2019). OPC is a corporation with a single
stockholder, who may be a natural person, a trust or an
estate (Sec. 116). One person may incorporate two or more
OPCs.
3. Foreign. When applied to a corporation, means a
corporation which is not domestic.
4. Resident Foreign Corporation. Applies to a foreign
corporation engaged in trade or business within the
Philippines.
5. Non-Resident Foreign Corporation. Applies to a foreign
corporation not engaged in trade or business within the
Philippines.
6. General Professional Partnerships. Partnerships formed
by persons for the sole purpose of exercising their common
profession, no part of the income of which is derived from
engaging in any trade or business.
7. Government-Owned or Controlled Corporations (GOCCs),
Agencies or Instrumentalities. All corporations, agencies, or
instrumentalities owned or controlled by the Government.
8. Foreign-Sourced Dividends. Dividends received from non-
resident foreign corporations.
SOURCES OF INCOME
Aside from knowing the classification of the taxpayer, the
source of income is the next important thing to determine
—whether it is from within the Philippines or without. The
following rules apply:
1. Domestic corporations are taxable on income from
sources within and without the Philippines.
2. Foreign corporations whether resident or non-resident,
are taxable only on income from Philippine sources.
SOURCES OF INCOME

A partnership other than a general professional partnership is

considered a corporation and is taxable as such.

Sources of Income
Corporation Within the Phil. Without the Phil.
1. Domestic
2. Foreign
 DOMESTIC AND RESIDENT FOREIGN
CORPORATIONS, IN GENERAL
Generally, the pro forma computation of the normal income tax of
domestic and foreign corporations follows:

Gross Income xxx

Less: Allowable Deductions xxx
Net Income: xxx
Multiply by: Tax Rate (effective July 1, 2020) 25%
Tax Due xxx
 DOMESTIC AND RESIDENT FOREIGN
CORPORATIONS, IN GENERAL

Domestic corporations classified as Micro, Small and Medium

Enterprises with net taxable income not exceeding P5,000,000
and total assets not exceeding P100,000,000, excluding land on
which the particular business entity’s office, plant and equipment
are situated, shall be taxed at 20% effective July 1, 2020.
Illustration 1: ABC Corporation, a manufacturer, has a gross
sales of P190,000,000 for CY2021, its 2nd year of operation. Its
total assets amounted to P50,000,000, net of the value of the
land of P6,000,000 where its manufacturing plant and business
operations are situated. Its cost of sales and allowable operating
expenses amounted to P100,000,000 and P50,000,000,
respectively. Compute for its income tax due for CY2021.
Illustration 2: Given the same facts as above, except for the
allowable operating expenses, which amounted to P85,000,000.
The net taxable income will be P5,000,000.
 Illustration 1 Answer

Gross Sales P190,000,000

Less: Cost of Sales 100,000,000
Gross Income 90,000,000
Less: Allowable Deductions 50,000,000
Net Income: P40,000,000
Multiply by: Tax Rate (effective July 1, 2020) 25%
Tax Due P10,000,000

Although the total assets, net of the value of the land, is less than
P100,000,000, its net taxable income is above P5,000,000. Hence, the
income tax rate is 25%
Illustration 2 Answer

Gross Sales P190,000,000

Less: Cost of Sales 100,000,000
Gross Income 90,000,000
Less: Allowable Deductions 85,000,000
Net Income: P5,000,000
Multiply by: Tax Rate (effective July 1, 2020) 20%
Tax Due P1,000,000
For domestic and resident foreign corporations adopting the
fiscal-year accounting period, the taxable income shall be
computed without regard to the specific date when specific
sales, purchases and other transactions occur. Their income and
expenses for the fiscal year shall be deemed to have been
earned and spent equally for each month of the period.
The corporate income tax rate shall be applied on the amount
computed by multiplying the number of months covered by the
new rate within the fiscal year by the taxable income of the
corporation for the period, divided by twelve.
The corporate income tax rate of 35% became effective
beginning Nov. 1, 2005 (R.A. 9337). This law presented a scenario
where the months of January to October 2005 are under the
rate of 32%. Regardless of the taxable year (calendar or fiscal)
followed, the formula for determining the total tax due for the
year shall be as follows (RMC 16-06, Feb. 21, 2006).
 COMPUTATION

Taxable Income x No. of months covered by 32%

x 32% = P xx
12

Taxable Income x No. of months covered by 35%

x 35% = xx
12

Total Tax Due per ITR P xx .

ILLUSTRATION: Warranty Corporation’s fiscal year ended Mar.
31, 2006. It has a taxable income of P600,000 for the fiscal year,
its second year of operations. The income tax payable for the
fiscal year ended Mar. 31, 2006 is computed below

P600,000 x 7 mos.
= P 350,000 x 32% = P112,000
12

P600,000 x 5 mos.
= P 250,000 x 35% = P87,500
12

Total Tax Due per ITR P199,500