Module 5

Income Taxes for Corporations

Introduction
In the Philippines, domestic and foreign companies are liable to pay corporate income tax (CIT).
The tax liability for a corporation is determined by its residency status and is based on the net
income it obtains while carrying out its business activity, normally during one business year.
Beyond Corporate Income Tax, companies should also understand withholding tax and some
other taxes. Business owners who frequently study the 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.

Learning Objectives
1. Define corporation.
2. Discuss concepts and procedures necessary for joint ventures or consortium
3. Identify tax exempt corporations
4. Enumerate different types of corporations
5. Identifying the tax rates and basis in computing the tax due
6. Explain the applicability of the minimum corporate income tax
7. Compute gross income of corporations
8. Compute minimum corporate income tax
9. Discuss the proper treatment of excess minimum corporate income tax or the MCIT carry over
10. Apply the final taxes on passive income
11. Apply income tax rates applicable to special corporations
12. Explain rationalization of income tax for international carriers
13. Differentiate Regional Operating Headquarters (ROHQ) and Regional Headquarters (RHQ)
14. Explain the manner of filing income tax returns for corporations

Corporation Defined
● As defined by the Corporation Code of the Philippines, “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.
● However, for purposes of income taxation, the Tax Code provides that the term “corporation” shall
include the following:○ partnerships, no matter how created or organized,
 ○ joint stock companies,
○ joint accounts (ceuntas en participacion),
○ associations, or insurance companies
○ mutual fund companies,
○ regional operating headquarters of multinational corporations, and
○ joint accounts
● But, it does not include the following:
○ General professional partnership. A partnership formed by persons for the sole purpose
of exercising their common profession. The salient features and applicable taxes for general
professional partnerships are discussed in Module 6.
○ Joint venture or consortium:
■ Formed for the purpose of undertaking construction projects pursuant to
Presidential Decree (PD) No. 929 (dated 4 May 1976) to assist local contractors in achieving
competitiveness with foreign contractors by pooling their resources in undertaking big
construction projects.
■ A joint venture or consortium for engaging in petroleum, coal, geothermal and other
energy operations pursuant to an operating consortium agreement under a service contract
with the government.

JOINT VENTURE OR CONSORTIUM

● 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 completion of a single project.
● taxable as corporation.
● However, there are two types of tax exempt joint ventures described in the preceding topic
as provided for under Section 3 of RR 10-2012. A joint venture or consortium formed for the
purpose of undertaking construction projects is not considered as corporation under Section
22 of the Tax Code provided:
a. The joint venture was formed for the purpose of undertaking a construction project; and
b. Should involve joining/ 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)
c. The local contractors are engaged in construction business; and
d. 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).
■ The tax-exempt joint venture shall not include those who are mere suppliers of goods, services or capital
to a construction.
● If not all of the requirements are present, the joint venture or consortium formed for the
purpose of undertaking construction projects shall be considered as taxable corporations.
● The members of a Joint Venture not taxable as a corporation shall each be responsible in
reporting and paying appropriate income taxes on their respective share to the joint ventures
profit.

● Joint ventures involving foreign contractors may also be treated as a non-taxable corporation
provided:
○ The member foreign contractor is covered by a special licenses as contractor by the PCAB.
○ The construction project is certified by the appropriate Tendering Agency (government
office) that the project is a foreign financed/ internationally-funded project and that international
bidding is allowed under the Bilateral Agreement entered into by and between the Philippine
Government and the foreign/ international financing institution pursuant to the implementing rules
and regulations of Republic Act No. 4566 otherwise known as Contractor’s License Law.

JOINT STOCK COMPANIES and JOINT ACCOUNTS

Joint stock companies

● constituted when a group of individuals acting jointly, establish and operate business enterprise under
an artificial name, with an invested capital divided into transferable shares, an elected board of
directors, and other corporate characteristics, but operating without formal government authority.

Joint accounts (cuentas en participacion)

● constituted when one interests himself in the business of another by contributing capital thereto, and
sharing in the profits or losses in the proportion agreed upon

They are not subject to any formality and may be privately contracted orally or in writing. The
term “associations” includes all organizations which have substantially the salient features of a
corporation to be taxable as a “corporation”.
Tax Exempt Corporations
Under Section 30 of the Tax Code, the following organizations shall not be taxed in respect
to income received by them as such:
a) Labor, agricultural or horticultural organizations not organized principally for profits.
b) Mutual savings bank not having a capital stock represented by shares, and cooperative bank without
capital stock, organized and operated for mutual purposes and without profit.
c) A beneficiary, society, order or association, operating for the exclusive benefit of the members such
as a fraternal organization operating under the lodge system, or a mutual aid association or a non-stock
corporation organized by employees providing for the payment of life, sickness, accident, or other
benefits exclusively to the members of such society, order, or association, or nonstock corporation or
their dependents.
d) Cemetery company owned and operated exclusively for the benefit of its members
e) Non-stock corporation or association organized and operated exclusively for religious, charitable,
scientific, athletic, or cultural purposes, or for the rehabilitation of veterans, no part of its net income or
asset shall belong or inure to the benefit of any member, organizer, officer or any specific person.
f) business leagues, chambers of commerce, boards of trade not organized for profit and no part of the
net income of which inures to the benefit of any private stockholder or individual
g) civic leagues or organization not organized for profit but operated exclusively for the promotion of
social welfare;
h) A non-stock and nonprofit educational institutions;
i) government educational institutions;
j) farmers’ or other mutual typhoon or fire insurance companies, mutual ditch or irrigation companies,
mutual or cooperative telephone companies, or like organizations of a purely local character, the
income of which consists solely of assessments, dues, and fees collected from members for the sole
purpose of meeting its expenses; and
k) farmers’, fruit growers, or like association organized and operated as a sales agent for the purpose of
marketing the products of its members and turning back them the proceeds of sales, less the necessary
selling on the basis of the quantity of produced finished by them.
Notwithstanding the provision in the preceding paragraphs, the income of whatever kind and
character of the foregoing organizations from any of their properties, real or personal or from any of their
activities conducted for profit, regardless of the disposition made of such income,shall be subject to tax
imposed under the Tax Code.
Types of Corporations
Corporations, for tax purposes, are classified as follows:
● Domestic corporations (DC) - corporations created or organized in the Philippines or
under its laws.
● Foreign corporations - a corporation which is not domestic, and may be
○ resident foreign corporations (RFC) - engaged in business in the Philippines, or
○ nonresident foreign corporations (NRFC) - not engaged in business in the Philippines.
● Domestic and foreign corporations may also be classified as special corporations

Income Tax Rate and Basis in Computing the Tax Due

The applicable income tax of a corporation depends on the type of the corporation and the
income subject to tax.

Income subject to tax Applicable income tax

Regular or ordinary income Normal or Regular Corporate Income

Tax (RCIT) of 30% (refer to table 5-1)

Certain passive incomes derived from Final withholding taxes (refer to Table
Philippine sources 5-2)

Capital gains on sale of shares of non-listed capital gains tax (refer to Table 5-3)
domestic corporations and sale of real
properties located in the Philippines classified
as capital asset

Type of Corporation Applicable income tax

Domestic taxable on their income derived from all sources (within and
corporations without the Philippines)

subject to 30% normal or regular corporate income tax (NCIT

or RCIT) based on “net income” during the taxable year.

A minimum corporate income tax (MCIT) of 2% on gross

 income is impose on the fourth (4th) taxable year immediately
following the taxable year in which such corporation
commenced its business operations.

The tax due should be the higher between the RCIT and MCIT.

Foreign corporations taxable on their income derived from sources within the
Philippines only

Resident Subject to 30% normal or regular corporate income tax (NCIT

foreign or RCIT) based on “net income” during the taxable year.
corporations
A minimum corporate income tax (MCIT) of 2% on gross
income is imposed on the fourth (4th) taxable year
immediately following the taxable year in which such
corporation commenced its business operations.

The tax due should be the higher between the RCIT and MCIT.

Nonresident 30% of “gross” income from all sources in the Philippines

foreign such as interests, rents, premiums (except reinsurance
corporation not premiums), annuities, emoluments, or other fixed or
engaged in trade determinable annuities, periodic or casual gains, profits and
or business in income and capital gains, except income subject to capital
the Philippines gains tax.

Government refer to all corporations, agencies, or instrumentalities owned

Owned and or controlled by the Government
Controlled
Corporations rate of tax on taxable income as are imposed upon
(GOCCs). corporations or associations engaged in similar business,
industry or activity, except the following tax exempt GOCCs as
provided by law:

● Government Service Insurance System (GSIS)

● Social Security System (SSS)
● Philippine Health Insurance Corporation (PHIC)
● Philippine Charity Sweepstakes Office (PCSO)
 ● Local Water Districts under RA10026

Section 27(C) of the Tax Code, as amended

Corporations taxed based on the provisions of the special law or charter

created by special creating them or applicable to them, supplemented by the
laws or charters provisions of the Tax Code, insofar as they are applicable.

TABLE 5-1 CORPORATE INCOME TAX RATES ON REGULAR INCOME

DC RFC NRFC

1.) RCIT

• Tax Rate 30% Net Income 30% Net Income 30% Gross
• Basis within & without within only Income within
only

MCIT** 2% of Gross 2% of Gross Not applicable

Income within Income within only
and without

OR

2) GIT 15% 15% Not applicable

(Optional)***

• Tax Rate Gross Income Gross

• Basis within and Income
without within only
** Starting on the 4th year of operations immediately following the taxable year in which
such corporation commenced its business (RR 2-98 as amended by RR 12-2007). The tax
dues is the higher between the RCIT and MCIT. *** Refer to discussions in

MINIMUM CORPORATE INCOME TAX

Revenue regulations 2-98 as amended by 12-2007 provides that a “Minimum

Corporate Income Tax (MCIT)” of two percent (2%) of the gross income as of the end of
the taxable year (whether calendar or fiscal), depending on the accounting period
employed is imposed upon
 any domestic corporations and resident foreign corporations beginning on the fourth (4th)
taxable year immediately following the taxable year in which such corporation commenced its
business operations. The MCIT shall be imposed whenever:
● The corporation has zero taxable income; or
● The corporation has negative taxable income; or
● Whenever the amount of MCIT is greater than the regular corporate income tax (RCIT) due
from such corporation. Hence, MCIT is always computed and compared to RCIT starting on
the fourth year of operations. The higher amount should be the tax due for the taxable
period.

RULES FOR DETERMINING THE PERIOD WHEN A CORPORATION BECOMES SUBJECT

TO MCIT (RR 2-98 as amended under RR 9-98)
For purposes of MCIT, the taxable year in which the business operations
commenced shall be the year in which the corporation registered with the BIR. For
example, a firm which was registered in May 1998 shall be covered by the MCIT strating in
2002.

COMPUTATION OF GROSS INCOME:

As stated in RR 12-2007, gross income for purposes of MCIT,

● In case of sale of goods,
○ means gross sales less sales returns, discounts, allowances, and cost of goods sold,
● In case of sale of services
○ means gross receipts less sales returns, discounts, and allowances, and cost of services/
direct cost
● will also include all items of gross income enumerated under Section 32(A) of the tax code or items
subject to normal or regular corporate tax.
● However, all income exempt from tax and income subject to final taxes shall be excluded
in the determination of gross income for MCIT purposes.

COMPUTATION OF MCIT

SELLER OF GOODS:
Gross Sales P xx
Sales Discounts (xx)
Sales Returns and allowances (xx)
Cost of Sales** (xx)
Gross Income xx
Add: Other income subject to Normal or Regular Corporate tax xx Gross
Income for MCIT Purposes xx
MCIT rate 2%
MCIT P xx

SELLER OF SERVICE:
Gross Receipts P xx
Sales Discounts (xx)
Sales Returns and allowances (xx)
Direct Cost of Services *** (xx)
Gross Income xx
Add: Other income subject to Normal or Regular Corporate tax xx
Gross Income for MCIT Purposes xx
MCIT rate 2%
MCIT P xx

**COST OF SALES (Seller of Goods):

Invoice Cost P xx
Import duties xx
Freight xx
Insurance xx
Total P xx
** COST OF SALES (Manufacturer):
Raw materials used P xx
Direct Labor xx
Factory Overhead xx
Freight Cost xx
Insurance premiums xx
Other production cost xx
Total P xx

***DIRECT COST OF SERVICES

Salaries and Employees benefits of personnel, consultants and P xx
specialists directly rendering the service
Cost of facilities directly utilized in providing the service (e.g.
xx
rentals and cost of supplies)
Other direct costs and expenses necessarily incurred to provide
the services xx

Total P
xx

EXCESS MCIT OR MCIT CARRY-OVER

Any excess of the minimum corporate income tax over the

normal corporate income tax shall be carried forward and
credited (deducted) against the regular income tax for the three
succeeding taxable years, provided, that the normal tax should
be higher than the minimum corporate tax in the year to which
the excess MCIT is forwarded.
QUARTERLY AND ANNUAL CORPORATE TAX DUE
Carry-Over of Excess MCIT from previous taxable year
The computation and the payment of MCIT shall likewise apply at the time of
filing the
“quarterly” corporate income tax as prescribed under Section 75 and Section 77 of the
Tax Code, as amended. Thus, in the computation of the tax due for the taxable quarter, if
the computed quarterly MCIT is higher than the quarterly normal income tax, the tax due
to be paid for such taxable quarter at the time of filing the quarterly corporate income tax
return shall be the MCIT which is two percent (2%) of the gross income as of the end of the
taxable quarter.

In the payment of said “quarterly” MCIT, excess MCIT from the previous taxable year(s)
shall not be allowed to be credited. However, the expanded withholding tax and quarterly
corporate income tax payments under the normal income tax and the MCIT paid in the
previous taxable quarter(s) are allowed to be applied against the quarterly MCIT due.

RELIEF FROM MCIT

The Secretary of Finance is authorized to suspend the imposition of minimum
corporate
income tax on any corporation due to:
1. Losses on account of prolonged labor disputes
2. Force majeure
3. Legitimate business reverses.

Substantial losses form a “prolonged labor dispute” means losses arising from a
strike
staged by the employees that lasted for more than six (6) months within a taxable period
and the strike resulted to temporary shutdown of business operations.

CORPORATIONS EXEMPT FROM MCIT

The following corporations shall not be subject to MCIT:
1) Domestic Corporations
a) Proprietary educational institutions
b) Non-profit hospitals
 c) Domestic corporations engaged in depository banks under the expanded foreign
currency deposit unit (FCDUs) on their income from foreign currency transactions
with local commercial banks and other depository banks under the foreign
currency deposit system.

2) Resident Foreign Corporations

a) International carriers
b) Offshore banking units (OBUs)
c) Regional operating headquarters (ROHQs)
3) Corporations registered under Philippine Economic Zone Authority (PEZA) and Bases
Conversion Development Authority (BCDA)

OPTIONAL CORPORATE INCOME TAX (15% Gross Income Tax)

The President, upon the recommendation of the Secretary of Finance, may,
effective
January 1, 2000, allow domestic and resident foreign corporations to be subjected to
optional
corporation tax of 15% based on gross income.

REQUISITES
All of the following conditions shall have to be satisfied in the allowance of
optional corporate tax:
1. A tax effort ration of 20% of Gross National Product (GNP);
2. A ratio of 40% of income tax collection of total tax revenue;
3. A VAT effort of 4% of GNP; and
4. A 0.9 ratio of the Consolidated Public Sector Financial Position to GNP
5. The option to be taxed based on gross income shall be available only to
firms whose ratio of cost of sales to gross sales or receipts from all sources
does not exceed 55%.

The election of the gross income option by the corporation shall be irrevocable
for the three (3) consecutive taxable years during which the corporation qualified
under the scheme. Presented below is a sample computation of income tax
payable based on 15% gross income tax.
 Sales/ Revenues P xx
Cost of Sales/ Cost of direct services** (xx)
Gross Income xx
Gross income tax rate 15%
Income tax due P xx
Less: Taxes withheld (xx)
Taxes paid - previous quarters (xx)
Foreign tax credits (xx)
Income tax payable P xx

For purposes of the gross income tax, “Gross Income” derived from the business shall be
equivalent to Gross Sales less sales returns, discounts and allowances and cost of goods sold. “Cost of
Goods Sold” shall include all business expenses directly incurred to produce the merchandise to bring
them to their present location. For trading concern, Cost of Goods Sold shall include the invoice cost of
the goods sold, plus import duties, freight in transporting the goods to the place where the goods are
actually sold including insurance while goods are in transit.

FINAL TAXES on Passive Income and Capital Gains Tax

In addition to regular corporate income tax or minimum corporate income tax, a corporation may
be subjected to:
1) Final tax on passive income;
2) Capital gains tax (CGT); and
3) Improperly accumulated earnings tax (IAET)

TABLE 5.2: CERTAIN INCOMES SUBJECT TO FINAL TAXES

A. Certain PASSIVE Income Derived From DC RFC NRFC

Philippine Sources subject to Final Tax

1) Interest in any currency bank deposit 20% 20% 30%

2) Yield/ monetary benefit from deposit substitute 20% 20% 30%

3) Yield/ monetary benefit from trust fund and 20% 20% 30%
other similar arrangements

4) Royalties 20% 20% 30%

 5) Interest income derived from depository bank 15% 7.5 Exem
under expanded foreign currency deposit % pt
system (Beginning Jan. 1, 2018)

6) Inter-corporate dividends received from Exemp Exem *15%

domestic corporation received by t pt /
30%

Income derived under expanded foreign currency deposit

system BY DEPOSITORY BANKs

● From foreign currency transactions with Exemp

nonresidents, OBUs in the Philippines, local t
commercial bank including branches of foreign
banks
● From foreign currency loans granted to 10%
residents other than OBUs in the Philippines
and other depository bank

TABLE 5.3: Capital Gains subject to CAPITAL GAINS TAX (CGT)

1) CAPITAL gains from sale of shares of stock

not traded in the local stock exchange

DC RFC NRFC

UNDER TRAIN LAW, beginning Jan. 1, 2018

Tax Base: Net Capital gain
Tax Rate: 15% NC** NC**
* *
Prior to Jan. 1, 2018

First P 100,000 capital gain 5% 5% 5%

Amount in excess of P 100,000 capital gain 10% 10% 10%

2) CAPITAL gains realized from sale or exchange or 6% NA NA

disposition of Land or buildings (Basis: Selling
Price or Fair Market Value**, whichever is higher)

* With tax sparing; 15% - If the country where the NRFC is domiciled allows a credit against the tax
due from the NRFC representing deemed paid in the Philippines equivalent to 15%.
* Without tax sparing; 30%
** The Higher between FMV as provided by City/ Provincial Assessors and Zonal Value
*** NC (No Changes); apply the old rates; 5% on the 1st P 100k gain + 10% in excessof P 100k gain

TAble 5-4:
Tax Treatment of Co-Venturer’s share in the net income of a Joint Venture

Joint Venture By a Corporate Co-Venturer By an Individual Co-Venturer

Taxable The respective share in the The respective share in the joint
Joint joint venture profit is venture profit is considered as
Venture considered as dividend dividend income received by an
income received by a individual taxpayer from a
domestic corporation from domestic corporation
a domestic corporation.
Hence, it shall be treated
as inter-corporate dividend
which is tax exempt (Refer
to Table 5-2)
Tax-Exempt The respective share in the The respective share in the joint
Joint Venture joint venture profit shall be venture profit shall be subject
included in the to basic tax. Consequently, the
computation of the same shall be included in the
corporate venturer’s computation of the individual
taxable income subject to taxpayer’s taxable income.
normal corporate income
tax of 30%

Tax Treatment of Income derived by a depository bank under expanded foreign currency deposit
system.

Transactions with:

❖ Nonresidents As a rule, income derived by a depository

❖ OBUs in the Philippines bank under FCDU from foreign currency
❖ Local commercial banks transactions with nonresidents, OBUs in the
❖ Branches of foreign banks Philippines, local commercial bank including
branches of foreign banks that may be authorized
by the BSP to transact business with foreign
currency deposit system units and other
depository banks under the expanded FCDS shall
be exempt from all taxes, except net income from
such transactions as may be specified by the
 Secretary of the Department of Finance, upon
recommendation by the Monetary Board to be
subject to the regular income tax payable by
banks.
Interest income from loans Interest income from foreign currency
granted to residents other loans granted by such depository banks under
than OBUs or other said expanded system to residents other tan
depository banks offshore banking units in the Philippines or other
depository banks under the expanded system
shall be subject to a final tax at the rate of ten
percent (10%)
Tax Treatment of Interest Income Derived from Government Debt Instruments and Securities
As discussed in Chapter 2, the Tax Code, as amended, defined “Deposit Substitutes” as an
alternative form of obtaining funds “from the public” other than deposits, through the issuance,
endorsement, or acceptance of debt instruments for the borrower’s own account, for the purpose of re-
lending or purchasing of receivables and other obligations, or financing their own needs or the needs of
their agent or dealer.

“Public” is defined as borrowing from twenty (20) or more individual or corporate lenders at any
one time. Interest income derived therefrom is subject to final tax payable upon the original issuance of
the deposit substitutes. Government Debt Instruments and Securities, including Bureau of Treasury
(BTr) issued instruments and securities such as Treasury bonds (T-bonds), Treasury bills (T-bills) and
Treasury notes, shall be considered as deposit substitutes irrespective of the number of lenders at the
time of origination if such debt instruments and securities are to be traded or exchanged in the
secondary market. The mere issuance of government debt instruments and securities is deemed as
falling within the coverage of depository substitutes irrespective of the number of lenders at the time of
origination and therefore interest income derived therefrom shall be subject to the applicable final
withholding tax rate imposed on deposit substitutes as prescribed under the Tax Code.

Tax on Branch Profit Remittance

Any profit remitted by a branch office of a multinational corporation to its head office is subject to 15%
final tax based on total profits applied or earmarked for remittance without deduction for the tax
component. A branch is classified as a resident foreign corporation. Assuch, it is subject to income tax
at the rate of 30% on its net income derived within the Philippines. Such income items include interests,
dividends, rents, royalties, including remuneration for technical services, salaries, wages, premiums,
annuities, emoluments or other fixed or determinable annual, periodic or casual gains, profits, income
and capital gains received during each taxable year from all sources within the Philippines.

For purposes of branch profit remittance, income items which are not effectively connected with the
conduct of its trade or business in the Philippines are not considered branch profits. To be “effectively
connected”, it is not necessary that the income be derived from the actual operation of the branch’s
trade or business. It is sufficient that the income arises from the business activity in which the branch is
engaged. The 15% final tax should exclude profits on activities registered with Philippine Economic
Zone Authority (PEZA)

SPECIAL CORPORATIONS

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 30%. These corporations are classified as special
corporations. However, certain passive incomes and capital gains on sale of shares of closely held
domestic corporations and real properties situated in the Philippines are still subject to applicable final
withholding taxes and capital gains tax, as the case may be. The following are classified as Special
Corporations:

TABLE 4-4: INCOME TAX RATES OF SPECIAL CORPORATIONS

DOMESTIC CORPORATIONS:

● Proprietary educational institutions; and 10%

● Non-proft hospitals 10%

RESIDENT FOREIGN CORPORATIONS

● International carriers **2.5%

● Regional operating headquarters (ROHQ) of multinational 10%

corporations

NONRESIDENT FOREIGN CORPORATIONS

● Nonresident owner or lessor of vessel 4.5%

● Nonresident cinematographic film owner, lessor or distributor 25%

 ● Nonresident lessor of aircraft, machinery and other equipment 7.5%

**may also be subject to a preferential income tax rate (lower than 2.5%) or exempt from income tax
based on a tax treaty or reciprocity (RA 10378 and RR 15-2013)

Proprietary Educational Institutions (PEIs) and Hospitals which are non-profit

RMC 4-2013 provides that Proprietary educational institutions and hospital which are non-profit
are subject to ten percent (10%) income tax based on net income from sources within and without the
Philippines. However, if the gross income from unrelated trade, business, or other activity exceeds 50%
of the total gross income derived from all sources, such educational institution or non-profit hospital will
be subject to normal corporate income tax rate of 30% on its net taxable income.

“Proprietary educational institution” is any private school maintained and administered by private
individuals or groups with an issued permit to operate from the Department of Education (DepEd), or
the Commission on Higher Education (CHED), or the Technical Education and Skills Development
Authority (TESDA), as the case may be, in accordance with existing laws and regulations.

“Unrelated trade, business or other activity” is an activity which is not substantially related to the
exercise or performance of the school or hospital’s primary purpose or function such as but not limited
to rental income from available school spaces or facilities.

Examples of Related Income of PEIs (RMC 4-2013)

1) Income from tuition fees and miscellaneous school fees
2) Income from hospital where medical graduates are trained for residency
3) Income from canteen situated within the school campus
4) Income from bookstore situated within the school campus

Special rules on Capital Expenditures of Proprietary Educational Institutions

The taxable income of a proprietary educational institution is computed in the same manner as an
ordinary domestic corporation. However, in addition to allowable business expenses under the tax
code, a private educational institution, may, at its option elect either:
● To deduct expenditures otherwise considered as capital outlays of depreciable assets incurred during
the taxable year such as capital expenditures for the expansion of school facilities; or
● To capitalize such expenditure and claim deduction from gross income for an allowance for
depreciation thereof.

Applicable Income Tax of Educational Institutions in the Philippines

EDUCATIONAL ORDINARY INCOME PASSIVE CAPITAL

INSTITUTION INCOME GAINS
Proprietary educational Generally 10% of net income; FWT CGT****
institutions (PEIs) *** 30% if unrelated income > related income
Non-stock non-profit ● Philippine Constitution, Art. XIV, Sec. 4(3):
educational institutions ALL REVENUES and ASSETS of non-stock, non-profit educational
(NSEIs) institutions used actually, directly and exclusively for educational
purposes shall be exempt from taxes and duties; and
●Exempt under Section 30, NIRC: FWT CGT****
The following shall not be taxed in respect
to income received by them as such :
(H) A non-stock non-profit educational
institution
Government educational ● Exempt under Section 30, NIRC - FWT CGT
institutions the following shall not be taxed in
respect to income received by
them as such:
(I) Government educational institution;
and
● As provided for in the law or
charter creating the GEI

* On certain passive income derived from Philippne sources.

** On sale of shares of stock of non-listed domestic corporation and real properties located in the
Philippines classified as capital assets.
*** Only PEIs are classified as special corporations unless its Unrelated Income (UI) is higher than
Related Income (RI). Hence, the discussions regarding PEIs in the preceding pages shall not be
applied to NSEIs and GEIs.
**** Section 234 of the Local Government Code (LGC) - The following are exempted from payment of
the real property tax: (b) Charitable institutions, churches, pesonages or covenants appurtenant
thereto, mosques, nonprofit or religious cemeteries and all lands, buildings, andimprovements actually,
directly, and exclusively used for religious, charitable or educational purposes.

NON-STOCK NON-PROFIT HOSPITALS

A nonstock nonprofit hospital that is operated for charitable and social welfare purposes is
exempt from income tax under Section 30 of the Tax Code. However, as provided in the case of St.
Luke’s Medical Center, INc. (SLMCI) vs. Commissioner of Internal Revenue (CIR) in a CTA Case No.
7857 date June 3, 2011, the nonstock-nonprofit hospital must satisfy the following requisites in order to
be entitled to the exemption from income tax:
● It is a non-stock corporation
● It is operated exclusively for charitable purposes; and
● No part of its net income or asset shall belong to or inure to the benefit of any member, organizer,
officer or any specific person.

“Non-profit”means no net income or asset accrues to or benefits any member or specific person,
with all the net income or asset devoted to the institutions” and all its activities conducted not for profit.
“Non-profit” does not necessarily mean “charitable”. The Court defined “charity” in the case of Lung
Center of the Philippines vs. Quezon City as a “gift, to be applied consistently with existing laws, for the
benefit of an indefinite number of persons, either by bringing their minds and hearts under the influence
of education or religion, by assisting them to establish themselves in life or by otherwise lessening the
burden of government”. In other words, charitable institutions provide for free goods and services to the
public which would otherwise fall on the shoulders of the government. Charitable institutions, however,
are not ipso facto entitled to tax exemption. The requirements for a tax exemption are strictly construed
against the taxpayer because an exemption restricts the collection of taxes necessary for the existence
of the government.

SLMCI vs. CIR

“Petitioner” is a non-stock, non-profit corporation duly organized and existing under and by virtue of the
laws of the Republic of the Philippines. “Respondent” is the duly appointed Commissioner of the
Bureau of Internal Revenue (CIR) vested with authority to exercise the functions of said office,
including, inter alia, the power to abate or cancel a tax liability when the tax or any portion thereof
appears to be unjustly or excessively assessed.

CIR assessed SLMCI for deficiency income tax mainly due to the finding of the former that petitioner is
allegedly a non-profit hospital that is liable to pay ten percent (10%) tax on its net income pursuant to
Section 27 (B) of the National Internal RevenueCode (NIRC) of 1997. SMLCI, on the other hand,
maintains that it is exempt from income tax as provided for under Section 30 of the Tax Code.

The Court provides that to qualify for exemption under Section 30 of the Tax Code, the following
requirements must be complied with:
1. It must be a non-stock corporation or association;
2. Organized exclusively for charitable purposes;
3. Operated exclusively for charitable purposes; and
4. No part of its net income or asset shall belong to or inure to the benefit of any member, organizer,
officer or any specific person.

The Court further provides that though “there is no dispute that St. Luke’s is organized as a non-
stock and non-profit charitable institution, this does not automatically exempt St. Luke’s from paying
taxes. This only refers to the organization of St. Luke’s. Even if St. Luke’s meets the test of charity, a
charitable institution is not ipso facto tax exempt.

“St. Luke’s fails to meet the requirements under Section 30(E) and (G) of the NIRC to be
completely tax exempt from all its income. However, it remains a proprietary non-profit hospital under
section 27(8) of the NIRC as long as it does not distribute any of its profits to its members and such
profits are reinvested pursuant to its corporate purposes. St. Luke’s, as a proprietary non-profit hospital,
is entitled to the preferential tax rate of 10% on its net income from its for-profit activities.

Applicable Income Tax of Hospitals in the Philippines

HOSPITAL ORDINARY INCOME PASSIVE CAPITAL
INCOME* GAINS**
 Proprietary Hospital (higher): 30% RCIT; 2% MCIT FWT CGT

Non-stock Non-profit 10% of net income, however, 30% if FWT CGT****

Hospitals (Special Corp.) *** unrelated income> related income
Non-stock Non-profit May be exempt if all the FWT CGT****
Hospitals requirements for exemptions as
provided for under the law as in the
case of St. Luke’s Medical Center
vs. CIR are complied

* On certain passive income derived from Philippine sources.

** On sale of shares of stock of a non-listed domestic corporation and real properties located in the
Philippines classified as capital assets.
*** Generally, non-stock non-profit hospitals are classified as special corporations. Therefore, generally
taxable at 10% unless its Unrelated Income (UI) is higher than Related INcome (RI).
**** Under Section 234 of the Local Government Code (LGC) - The following are exempted from
payment of the real property tax: (b) Charitable Institutions, churches, parsonages, or covenants
appurtenant thereto, mosques, nonprofit or religious cemeteries and all lands, buildings, and
improvements actually, directly, and exclusively used for religious, charitable or educational purposes

International carriers
International carriers (resident foreign corporations) are subject to income tax rate of 2.5% on its
Gross Philippne Billings (GPB) unless it subject to a preferential rate (a tax rate lower than2.5%) or
exempt on the basis of applicable 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
Philippine carriers, shall likewise be exempt from income tax imposed under the tax code (RA 10378;
RR 15-2013).
Reciprocity may be invoked by an international carrier as basis for “Gross Philippine Billings Tax
exemption” when its Home Country grants income tax exemption to Philippine carriers. The domestic
law of the Home Country granting exemption shall cover income taxes and shall not refer to other types
of taxes that 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 respect of the operations
of Philippne carriers shall not be considered as valid and sufficient basis for exempting an international
carrier from Philippine income tax on account of reciprocity. Reciprocity requires that Philippine carriers
operating in the Home Country of an international carrier are actually enjoying the income tax
exemption.

Gross Philippine Billings of International Air Carriers

In computing for “Gross Philippine Billings” of international air carriers, there shall be included
the total amount of gross revenue derived from passage of persons, excess baggage, cargo and/or
mail, originating from the Philippines in a continuous and uninterrupted flight, irrespective of the place of
sale or issue and the place of payment of the passage documents.
The gross revenue for passengers whose tickets are sold in the Philippines shall be the actual amount
derived for transportation services, for a first class, business class, or economy class passage, as the
case may be, on its continuous and uninterrupted flight from any port or point in the Philippines to its
final destination in any port or point of a foreign country”, as reflected in the remittance area of the tax
coupon forming an integral part of the plane ticket. For this purpose, the Gross Philippine Billings shall
be determined by computing the monthly average net fare of all the tax coupons of plane tickets issued
for the month per point of final destination, per class of passage (i.e., first class, business class, or
economy class) and per classification of passenger (i.e., adult, child or infant), and multiplied by the
corresponding total number of passengers flown for the month as declared in the flight manifest.
The gross revenue for passengers whose tickets sold outside the Philippines, 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 shall be determined using the locally available net fares applicable to
such flight taking into consideration the seasonal fare rate established at the time of the flight, the class
of passage, the classification of passenger, the date of embarkation, and the place of final destination.
Non-revenue passengers as well as refunded tickets shall not be included in the computation of Gross
Philippine Billings.

Gross Philippine Billings of International Sea Carriers

In computing for “Gross Philippine Billings” of international sea carriers, there shall be
included the total amount of gross revenue whether for passenger, cargo, and/or mail
originating from the Philippines up to final destination, regardless of the place of sale or
payments of the passage or freight documents.

“ORIGINATING FROM THE PHILIPPINES” shall include the following:

 a) Where passengers, their excess baggage, cargo and/or mail originally commence their flight or
voyage from any Philippine port to any other port or point outside the Philippines
b) Chartered flights or voyages of passengers, their excess baggage, cargo and/or mail originally
commencing their flights or voyages from any foreign port and whose stay in the Philippines is for
more than forty-eight (48) hours prior to embarkation, save in cases where the flight of the airplane
belonging to the same airline company or the voyage of the vessel belonging to the same
international sea carrier failed to depart within 48 hours by reason of force majeure;
c) Chartered flights of passengers, their excess baggage, cargo and/or mail originally commencing
their flights or voyages from any Philippine port to any foreign port; and
d) Where a passenger, his excess baggage, cargo and/or mail originally commencing his flight or
voyage from a foreign port alights or is discharged in any Philippine port and thereafter boards or is
loaded on another airplane owned by the same airline company or vessel owned by the same
international sea carrier, the flight or voyage from the Philippines to any foreign port shall not be
considered originating from the Philippines, unless the time intervening between arrival and
departure of said passenger, his excess baggage, cargo and/or mail from the Philippines exceeds
48 hours, except, however, when the failure to depart within 48 hours is due to reasons beyond his
control, such as, when the only next available flight or voyage leaves beyond 48 hours or by force
majeure. Provided, however, that if the second aircraft belongs to a different airline company, or the
second vessel belongs to a different international sea carrier, the flight or voyage from the
Philippines to any foreign port shall be considered originating from the Philippines regardless of the
intervening period between the arrival and departure from the Philippines by said passenger, his
excess baggage, cargo and/or mail.

Passage documents or tickets revalidated, exchanged and/or endorsed to another

on-line international airline shall be included in the taxable base of the carrying airline and shall
be subject to GPB tax if the passenger is lifted/boarded on an aircraft from any port or point in
the Philippines towards a foreign destination.

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.
a) 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:
● Monthly cargo sales reports generated by the IATA Cargo Accounts Settlement
System (IATA CASS) for airway bills issued through cargo agents; or
● Monthly reports prepared by the airline themselves or by their general sales
agents for direct issues made.
b) The amount realized for mail shall, on the other hand, be determined based on the
amount reflected in the cargo manifest of the carrier

Return trip and transshipment

In case of the passenger’s passage documents or flights from any port or point in the
Philippines and back, that portion of revenue pertaining to the return trip to the Philippines shall
not be included as part of GPB.
In case of a flight that originates from the Philippines, but transshipment of passenger,
excess baggage, cargo and/or mail takes place elsewhere in another aircraft belonging to a
different airline company, the GPB shall be determined based on that portion of the revenue
corresponding to the leg flown from any point in the Philippines to the point of transshipment.
In cases where a flight is interrupted by force majeure resulting in the transshipment of
the passengers, their excess baggage, freight, cargo and/or mail to another airplane operated
by another airline company and transshipment takes place in another country, the GPB shall be
determined based on that portion of flight from the Philippines up to the point of said
transshipment.

RATIONALIZATION OF TAXES ON INTERNATIONAL CARRIERS

The policy behind the rationalization of taxes on international carriers as provided for in
RA 10378 and RR 15-2013 is to improve the competitiveness of the Philippine Tourism Industry
by encouraging more international carriers to maintain flight and shipping operations in the
country and by the eventual reduction of international plane and ship fares. There are intended
to facilitate the movement of goods and services and to attract more foreign tourists and
investments.

Applicable Income Tax of Common Carriers (Summary)

 Common Carrier ORDINARY INCOME PASSIVE CAPITAL
INCOME* GAINS**
Domestic Common Carriers (Higher): 30% RCIT or 2% MCIT FWT CGT
(local companies)
International Carriers (RFCs) GR: 2.5% GPB; or FWT CGT***

Preferential % or Exempt on the

basis of a treaty or reciprocity

*** Generally, non-stock non-profit hospitals are classified as special corporations. Therefore,
generally taxable at 10% unless its Unrelated Income (UI) is higher than Related Income (RI).

Offshore Banking Units (OBUs)

“Offshore Banking Unit (OBU)” is a branch, subsidiary or affiliate or a foreign banking
corporation located in an Offshore Financial Center (OFC) which is duly authorized by the BSP
to transact offshore banking business in the Philippines in accordance with the provisions of
P.D. 1034 as implemented by BSP Circular No. 1389. They do foreign-currency banking
transactions primarily with foreign banks, non-residents, other OBUs and corporate and
institutional clients. They can lend to resident importers and exporters as long as the funds are
remitted from abroad through the banking system.
The following are examples of reported OBUs in the Philippines:
1) BNP Paribas with office address at Philamlife Tower, Makati City; and
2) Taiwan Cooperative Bank with office address at Citi Bank Tower, Makati City
3) JP Morgan International Finance, Ltd. (formerly located at Zuellig Building, Makati City)
- has stopped its operations as an offshore banking unit in the Philippines. The BSP noted the
cessation of operations on February 22, 2018.

OBUs are allowed to provide all traditional banking services to non-residents in any
currency other than Philippine national currency. Banking transactions to residents are limited
and restricted.
❖ Income Subject to 10% Final Tax: Interest income derived from foreign currency loans
 granted to residents other than OBUs or local commercial banks.

ROHQ vs RHQ
Income tax rate of ROHQ is 10% of net income. ROHQ is a branch established in the
Philippines which is engaged in any of the following qualifying services:
● General administration and planning
● Business planning, coordination and business development
● Sourcing/ procurement of raw materials and components
● Corporate finance advisory services
● Marketing control and sales promotion
● Training and personnel management
● Logistic services
● Research and development services and project development
● Technical support and maintenance
● Data processing and communication
RHQ is defined in Section 22 (DD) of the Tax Code as a branch established in the
Philippines by a multinational 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, subsidiaries, or branches in the Asia-Pacific region and other foreign markets. RHQ is
a tax exempt entity. However, an RHQ is constituted as a withholding agent of the government if
it acts as an employer and its employees receive compensation income subject to withholding
tax, or if it makes income payments to individuals or corporations subject to the expanded
withholding tax (EWT).

What constitute an RHQ and an ROHQ?

An RHQ is an office whose purpose is to act as an administrative branch of a
multinational company engaged in international trade which principally serves as a supervision,
communications and coordination center for its subsidiaries, branches, or affiliates in the
Asia-Pacific Region and other foreign markets, and which does not earn or derive income in the
Philippines. An ROHQ refers to a foreign business entity which is allowed to derive income in
the Philippines by performing qualifying services to its affiliates, subsidiaries or branches in the
Philippines, in the Asia-Pacific Region and in other foreign markets. Such services are general
administration and planning, business planning and coordination, sourcing and procurement ofraw
materials and components, corporate governance advisory services, marketing control and
sales promotion, training and personnel management, logistic services, research and
development services and product development, technical support and maintenance, data
processing and communication, and business development.

IMPROPERLY ACCUMULATED EARNINGS TAX

(For Closely held Corporations)
Objective: To force corporations to distribute dividends to shareholders in order that related tax
in dividends will be collected.

In addition to other taxes, a tax of 10% is imposed on the improperly accumulated

taxable income of corporations formed or availed of for the purpose of avoiding the income tax
with respect to its shareholders or the shareholders of any other corporation, by permitting the
earnings and profits of the corporation to accumulate instead of dividing them among or
distributing them to the shareholders (Section 29 NIRC).

The rationale is that if the earnings and profits were distributed, the shareholders would
then be liable to income tax thereon, whereas if the distribution were not made to them, they
would incur no tax in respect to the undistributed earnings and profits of the corporation.
Nature of Improperly accumulated earnings tax

Improperly accumulated earnings tax is being imposed in the nature of a penalty to the
corporation for the improper accumulation of its earnings, and as a form of deterrent to the
avoidance of tax upon shareholders who are supposed to pay dividends tax on the earnings
distributed to them by the corporation (RR 2-2001 as amended by RMC 35-2011).

The test of the liability is the purpose behind the accumulation of the income and not the
consequences of the accumulation. Thus, if the failure to pay dividends is due to some other
causes, such as the use of undistributed earnings and profits for the reasonable needs of the
business, such purpose would not generally make the accumulated or undistributed earnings
subject to the tax. However, if there is a determination that a corporation has accumulated
income beyond the reasonable needs of the business, the 10% improperly accumulated
earnings tax shall be imposed

Improperly accumulated earnings tax (IAET) is imposed on improperly accumulated

taxable income earned starting January 1, 1998 by domestic corporations as defined under the
Tax Code and which are classified as “closely held corporations”.

IAET shall not apply to:

● Publicly held corporation;
● Banks and other non-bank financial intermediaries● Insurance companies
● Taxable partnerships;
● General professional partnerships
● Non-taxable joint venture
● Enterprises registered with PEZA and under Bases Conversion and Development
Act (BCDA) and special economic zones

Closely-held corporations
The ownership of a corporation for the purpose of determining whether it is a closely
held corporation or a publicly held corporation is ultimately traced to the individual shareholders
of the parent company. Where at least 50% of the outstanding capital stock or at least 50% of
the total combined voting power of all classes of stock entitled to vote is owned directly or
indirectly by or for not more than 21 or more individuals, the corporation is a publicly held
corporation. Domestic corporations not falling under the aforementioned definition are,
therefore, closely-held corporations (BIR Ruling 025-02)

Rules in determining whether or not a corporation is a closely held corporation:

❖ Stock not owned by individuals:
Stock owned directly or indirectly by or for a corporation, partnership,estate or trust shall
be considered as being owned proportionately by its shareholders, partners, or
beneficiaries.

❖ Family and Partnership ownership

An individual shall be considered as owning the stock owned, directly or indirectly, by or
for his family, or by or for his partner. “Family of an individual” includes his brothers or
sisters (whether by whole or half-blood), spouse, ancestors and lineal descendants.
❖ Option to acquire stocks
If any person has an option to acquire stock, such stock shall be considered as owned
by such person.
Circumstances indicating improper accumulation of profits:

❖ Substantial changes to corporate officers who are stockholders at the same

time/Personal loans.

❖ Radical change in the nature of business after a considerable surplus has been
accumulated.

❖ Investment is unrelated business or activity.

❖ Substantial expenditures of corporations for the personal benefit of stockholder only.

PRESUMPTIONS of Improper Accumulation

❖ The fact that a corporation is a mere holding company or investment company shall be
prima facie evidence of a purpose to avoid the tax upon its shareholders or members.
“Holding or Investment Company” shall refer to a corporation having practically no activities except
holding property, and collecting the income therefrom or investing the
same.

❖ The fact that the earnings or profits of a corporation are permitted to accumulate beyond
the “reasonable needs” of a business shall be determinable of the purpose to avoid the
tax upon its shareholders or members, unless the corporation, by clear preponderance
of evidence, shall prove to the contrary. Accumulation of profit is considered
“unreasonable” if it is not required for legitimate business purposes, considering, all
circumstances of the case

REASONABLE NEEDs of the Business

Reasonable needs of the business include the reasonably anticipated needs of the
business. The Supreme Court held that “if the corporation did not prove an immediate need for
the accumulation of the earnings and profits, the accumulation was not for the reasonable
needs of the business and the penalty tax (IAET) would apply (Cyanamid Philippines, Inc. v.
Court of Appeals, et. al., G.R. No. 108067). Section 3 of Revenue regulations No. 2-2001
provides that the following shall constitute accumulation of earnings for “reasonable needs” of
the business:

a) Allowance for the increase in the accumulation of earnings up to 100% of the

paid-up capital of the corporation as of Balance Sheet date, inclusive of
accumulations taken from other years. Under RMC 35-2011, paid up capital shall
refer to the par value of the shares.
b) Earnings reserved for definite corporate expansion projects or programs requiring
considerable capital expenditure as approved by the Board of Directors or
equivalent body;
c) Earnings reserved for building, plants or equipment acquisition as approved by
the Board of Directors or equivalent body;
d) Earnings reserved for compliance with any loan covenant or pre-existing
obligation established under a legitimate business agreement;
e) Earnings required by law or applicable regulations to be retained by the
corporation or in respect of which there is legal prohibition against its distribution;
f) In the case of subsidiaries of foreign corporations in the Philippines, all
undistributed earnings intended or reserved for investments within the Philippines
as can be proven by corporate records and/or relevant documentary evidence.

Effect of Improperly accumulated earnings tax (IAET)

Once the profit has been subjected to IAET, the same shall no longer be subjected to
IAET in later years, even if not declared as dividends. Notwithstanding the imposition of the
IAET, profits which have been subjected to IAET, when finally declared as dividends, shall
nevertheless be subject to tax on dividends under the Tax Code, except in those circumstances
where the recipient is not subject thereto.

PROFORMA COMPUTATION OF IMPROPERLY ACCUMULATED INCOME

(REVISED UNDER RMC 35-2011)
Taxable Income for the year P xxx
Add: Income exempt from tax P xxx
Income excluded from gross income xxx
Income subject to final taxes xxx
Net Operating loss carry over (NOLCO) xxx
Less: Dividends (actually or constructively paid) (xxx)
*Income tax paid/payable for the whole year (xxx) (xxx)
Total P xxx
ADD: Retained earnings prior years xxx
Accumulated earnings as of the end of the current year xxx
LESS: AMOUNT THAT MAY BE RETAINED
(100% of paid up capital as of year-end) (xxx)
EXCESS is considered Improperly accumulated earnings xxx
x IAET rate 10%
Improperly accumulated earnings tax (IAET) P xxx

Amount that may be retained for Reasonable Needs **

For purpose of RMC 35-2011 (revised), the amount that may be retained, taking into
consideration the accumulated earnings within the “reasonable needs of the business” as
determined under Section 3 of the said RR, shall be 100% of the paid-up capital or the amount
contributed to the corporation representing the par value of the shares of stock. Hence, any
excess capital over and above the par shall be excluded which is in contrast with the principle of
“immediacy test” derived from one of the decisions of the Supreme Court (Cyanamid
Philippines, INc. v. Court of Appeals, et al., G.R. No. 108067).

The IAET is not computed and applied by the corporation on itself in its income tax
return for a taxable year. The BIR makes the computation on its allegation of improper
accumulation of profits by the corporation. The BIR makes a computation a year or years after
the improper accumulation shall have taken place.

The net operating loss carry over (NOLCO) shown in the formula refers to the negative
results of the operations (net operating loss) for the previous taxable year(s) allowed as part
ofdeductions from the gross income of the current year. Since NOLCO refers to a previous
taxable year(s) but were allowed as deduction in computing the taxable income of the “current
year”, the aforementioned item should be added back to the gross income for purposes of
computing the improperly accumulated earnings for the current taxable year.
FILING OF INCOME TAX RETURNS
The filing of income tax shall be made by the President, Vice-President or other principal
officers in behalf the company. The return shall be sworn to by the above officer and by the
Treasurer or Assistant Treasurer. Declaration of quarterly corporate income tax on a cumulative
basis is required manually, through Electronic Filing and Payment System (EFPS), or through
electronic BIR forms.

1.) Manual Filing

Every corporation subject to tax shall render, in duplicate a true and accurate quarterly
return and final or adjustment return except corporations not engaged in trade or business in the
Philippines (NRFC). For manual filing, the filing of quarterly return should be made not later than
60 days from the close of each of the first three quarters of the taxable year, whether, calendar
or fiscal year summarized as follows:

Manual Filing of Quarterly Income Tax Return

· Quarterly return 60 days after end of the quarter
· Final adjusted (annual) return 15 th day of the 4 th month following the end of the
taxable year (i.e.; Ap. 15 applying calendar year)

The tax so computed shall be decreased by the amount of tax previously paid or
assessed during the preceding quarters. Final adjustment Return covers the total taxable
income for the preceding calendar/fiscal year filed on or before 15 th day of the 4 th month
following the close of the taxable year (April 15 of the following year using calendar period). If
the sum of the quarterly tax payments made during the taxable year is not equal to the total tax
due on the entire taxable income of that year, the corporation shall either pay the balance of tax
still due, or carry over the excess credit, or be credited or refunded with the excess amount
paid. In case the corporation is entitled to tax refund or credit of the excess estimated quarterly
income taxes paid, the excess amount shown on its final adjustment return may be carried over
and credited against the succeeding taxable years. Once the option to carry-over has been
made, such option shall be considered irrevocable for that taxable period.

The quarterly income tax declaration and the final adjustment shall be filed with (1)
Authorized agent banks, or (2) Revenue District Office, or Collection Agent, or Duly authorized
Treasurer of the city or municipality having jurisdiction over the location of the principal office of
the corporation filing the return or place where the main books of accounts and other data from
which the return is prepared are kept.

2.) Electronic Filing and Payment System (EFPS)

RR 9-2001 defines EFPS as the system developed and maintained by the BIR for
electronically filing tax returns, including attachments, if any, and paying taxes due thereon,
specifically through the internet. Upon filing, a “Filing Reference Number” is issued by the EFPS
as a control number to acknowledge that a tax return, including attachments, has been
successfully filed electronically. This shall serve as evidence of filing and the date of filing of the
return.

Upon payment of the tax due to an Authorized Agent Bank (AAB) under EFPS, the ABB
shall issue “Acknowledgment Number” as a control number to the BIR to confirm that tax
payment has been credited to the account of the government or recognized as revenue (internal
revenue tax collection) by the Bureau of Treasury. Likewise, a “Confirmation Number” shall be
issued by the AAB as a control number to the tax payer and BIR to acknowledge that the
taxpayer’s account has been successfully debited electronically in payment of his tax liability.
This shall serve as evidence of the fact of payment of the taxpayer’s liability to the extent of the
amount reflected in the Confirmation Number, and the date of payment by the taxpayer.

PERSONS REQUIRED TO FILE AND PAY UNDER EFPS

a) Taxpayer Account Management Program (TAMP) Taxpayers (RR No. 10-2014)
b) Accredited Importer and Prospective Importer required to secure the BIR-ICC & BIR-BCC
(RR No. 10-2014)
c) National Government Agencies (NGAs) (RR No. 1-2013)
d) All licensed Local contractors (RR No. 10-2012)
e) Enterprise Enjoying Fiscal Incentives 9PEZA, BOI, Various Zone Authorities, Etc.) (RR No.
1-2010)f) Top 5,000 Individuals Taxpayers (RR No. 6-2009)
g) Corporations with Paid-Up Capital Stock of P 10 million pesos and above (RR No. 10-2007)
h) Corporations with complete computerized Accounting System (CAS) (RR No. 10-2007)
i) Procuring Government Agencies with respect to withholding of VAT and percentage taxes
(RR No. 3-2005)
j) Government Bidders (RR No. 3-2005)
k) Insurance companies and Stock brokers (RMC No. 71-2004)
l) Top 20,000 Private Corporation (RR No. 2-98, as amended
m) Large Taxpayers (RR No. 2-2002, as amended under RR 17-2010)

A. LARGE TAXPAYERS
v As to tax payments:
Percentage tax P200,000 per quarter
VAT P200,000 per quarter
Excise Tax P 1,000,000 per year
Income Tax P 1,000,000 per year
Documentary Stamp Tax P 1,000,000 per year
Withholding Tax (all type) P 1,000,000 per year
v As to financial condition:
Gross sales/receipts P 1,000,000 per year
Net worth P300,000,000 at the close of each calendar or
fiscal year
Gross purchase P800,000
Per S.E.C. list Top corporations as listed and published by
the Securities and exchange commission

Large taxpayers who will e-pay shall enroll with any EFPS ABB authorized to
serve them and who are capable to accept e-payments. E-payments shall be made
within the day the return was electronically filed following the “pay-as-you-file system”.
Unless otherwise notified by the Commissioner of Internal Revenue (CIR), for all returns
that will be filed starting August 1, 2002, e-payment of taxes due thereon thru EFPS
shall become mandatory (RR No. 9-2002)

B. NON-LARGE TAXPAYERS
❖ Volunteering 200 or more Non-large Taxpayers
❖ Top 20,0000 private corporations (starting April 2009)

For Non-large Taxpayers who intend to e-pay, electronic payment shall be made through
the internet banking facilities of any AAB. The volunteering two hundred (200) or more
Non-Large Taxpayers previously identified by the BIR to have availed of the option to file their
return under EFPS shall nevertheless continue to file their return under such method. (RR No.
10-2007). However, upon their receipt of a notification letter duly signed by the Commissioner of
Internal Revenue, it becomes mandatory for them, including their branches located in the
computerized revenue district officers, to file their returns and pay their taxes thru EFPS (RR
No. 10-2007). The filing of the return ahead of the payment of the tax due thereon is still in
accordance with “pay-as-you-file-system” as long as the payment of the tax is made on or
before the due date of the applicable tax.

Non-large taxpayers shall have the option to file consolidated return in the head office
following the procedures in RR No. 1-98 or to file returns on a per branch or facility basis.
Provided, however, that they shall update their registration with the affected or concerned
revenue district officers by filing BIR Registration Update Form (BIR Form 1905) before they
change their manner of filing returns.

C. Other Taxpayers:
❖ Corporations with paid-up capital of P10,000,000 and above
❖ Corporation with complete computerized system
❖ Taxpayers joining public bidding pursuant to E.O. No. 398 as implemented by RR
3-2005

D. Enterprises enjoying fiscal incentives granted by other government agencies such as those
registered with:
❖ Philippine Economic Zone Authority (PEZA)
❖ Board of Investments (BOI)
❖ Various zone authorities
❖ Cagayan Special Economic Zone Authority
❖ Export Development Council
❖ Tourism Infrastructure and Enterprise Zone Authority; and
❖ PHIVIDEC Industrial Authority.
Failure to comply with the provisions on e-filing and e-payment shall be penalized under Section
275 of the Tax Code. However, only the first and second offenses may be compromised. For
the third and subsequent offenses, no compromise shall be entertained or allowed.

3.) Use of Electronic BIR Forms

 The eBIR Forms, as provided in RR 6-2014 and RMC 61-2012, was developed to
provide taxpayers particularly the non-eFPS filers with accessible and convenient service
through easy preparation of tax returns. According to the aforementioned revenue regulations,
the use if eBIR Forms will improve the BIR’s tax return data capture and storage therby
enhancing efficiency and accuracy in the filing of tax returns.

eBIR Forms refer to the (2) types of electronic services provided by the BIR relative to
the preparation, generation and submission of tax returns, which are the:
a) eBIR Forms System for Online Filing; and
b) eBIR Forms Package to fill-up forms offline
The “eBIR Forms” Package can be downloaded through the BIR website or a copy of the
software package may be requested from the taxpayer’s registered RDO particularly in the
designated BIR 3-lounge.

“eBIR FORMS SOFTWARE PACKAGE” (also known as Offline eBIR Forms Package) is
a tax preparation software that allows the taxpayer and Accredited Tax Agent (ATA) to
accomplish or fill-up tax forms offline. It is an alternative mode of preparing tax returns which
deviates from the conventional manual process of filing-up tax returns on pre-printed forms that
is highly susceptible to human error. Taxpayers/ATAs can directly encode data, validate, edit,
save, delete, view and print the tax returns. The form package has automatic computations and
has the capability to validate information inputted by the taxpayers/ATAs.

Online e BIRForms System” is a filing infrastructure that accepts tax returns submitted
online and automatically computes penalties for tax return submitted beyond due date. The
System creates secured user accounts thru enrollment for use of the online System, and allows
ATAs to file on behalf of their clients. The System also has a facility for Tax Software Providers
(TSPs) to test and certify the data generated by their tax preparation software (certification is by
form). It is capable of accepting returns data file using certified TSP’s tax preparation software.

MANDATORY eBIR FORMS and MANDATORY e-FILING

Only those non-EFPS filers are covered by RR 6-2014 (as amended by RR 9-2016), particularly
the following:
a) Accredited Tax Agents/Practitioners and all its client-taxpayers
Per RR 11-2015 dated March 27, 2015, “client-taxpayers” shall mean those taxpayers
who are otherwise authorizing their tax agents/practitioners to file on their behalf. Thus, client
taxpayers whose tax agents/practitioners only sign the audit certificate but have no authority to
file the returns in their behalf are not covered under this provision. The linking module of
authorization of authorization by the client-practitioner to his/her tax agent/practitioner is
available online via eBIRFORMS. It shall be noted, however, that the taxpayer may cancel
anytime his/her authorization prior to the termination of their client-agent relationship.
b) Accredited Printers of Principal and Supplementary Receipts/Invoices
c) One-Time Transaction (ONETT) taxpayers who are classified as real estate
dealers/developers; those who are considered as habitually engaged in the sale of real property
and regular taxpayers already covered by eBIR Forms. Thus, Taxpayers who are filing BIR Form No.
1706, 1707, 1800, 1801 and 200-OT (For BIR Form 1706 only) are excluded in the
mandatory coverage from using the eBIR Forms.
d) Those who shall file a “No payment” Return
Under RR 12-2015, however, the following taxpayers may file manually “no payment returns” to
the Revenue District office (RDO) where registered using officially printed forms/photocopied or
electronic/computer-generated returns:
❖ Senior Citizen (SC) or Persons with Disability (PWD) filing for their own returns;
❖ Employees deriving purely compensation income and the income tax of which has been
withheld correctly showing tax due is equal to the tax withheld whether single or
multiple employees (with two or more employers concurrently and successively at
anytime during the taxable year);
❖ Employees qualified for substituted filing under RR 2-98 Sec. 2.83.4, as amended, but
opted to file for an Income Tax Return (ITR) and are filing for purposes of promotion
(PNP/AFP), loans, scholarships, foreign travel requirements, etc.
The above taxpayers are encouraged to use offline eBIRForms for ease
and convenience in the preparation, validation, computation rules and efficiency
check for completeness and correctness of taxpayer input. However, they are
encouraged as much as possible to file their returns electronically to avoid the
crowd and long lines.
It is further clarified, under this revenue regulation, that all business
taxpayers with no payment returns mandated to use eBIRForms/EFPS must
electronically file return.
e) Government-Owned or Controlled Corporations (GOCCs)
f) Local Government Units (LGUs), except barangays; and
g) Cooperatives registered with National Electrification Administration (NEA) and Local E Water
Utilities Administration (LWUA)
Taxpayers who are not covered by the regulation may opt to file their returns using the manual
filing or eBIR Forms.
ADVANATAGES OF THE USE of eBIR FORMS (RMO 24-2013)
a) Validate automatically the registration information indicated on the tax returns submitted by
the taxpayers in the Integrated Tax System (ITS) database of the BIR.b)
Prompt concerned revenue officials or employees on any discrepancies between the
registration information submitted by the taxpayer and its ITS database,
c) Encourage concerned taxpayers to update their registration information with the BIR upon
validation of tax returns submitted.

OTHER TERMS:
❖ Accredited Printers are duly constituted agents of the BIR in the printing of principal and
supplementary receipts/invoices and included in the List of Accredited Printers of
Principal and Supplementary Receipts/Invoices published in the BIR website.
❖ Accredited Tax Agents (ATAs) are also known as accredited tax practitioners, who are
engaged in tax practice included in the List of Accredited tax Practitioners as published
in the BIR website. The designation of ATA by the taxpayer may at any time be
cancelled or revoked upon execution of “Removal of Tax Agent” within the online eBIR
Forms System and the aforementioned action shall be completed upon submission of a
duly notarized Notice of Termination to the taxpayer’s registered RDO.
❖ Offline- is a technical term generally used when the user’s workstation is not connected
to the internet.
❖ Online is the most common technical term used wherein the user connects his
workstation to the internet to access various information through the worldwide web.
❖ No payment Returns refers to the tax return that is not accompanied by any payment
where the same is filed with any authorized BIR receiving office (e/g. breakeven, no
transaction, refundable or second installment tax return)