CHAPTER IV TAX ON CORPORATIONS 

SOURCE: CHAPTER IV NIRC

  
Rates of Income Tax on Domestic Corporations 

A. In General – Effective January 1, 2009, the rate of IT imposed from all sources within and
without the Philippines by every corporation shall be 30%. (From 35%)
In the case of corporations adopting the fiscal-year accounting period: 
 Taxable income shall be computed without regard to the specific date when transactions occur.  
 Income and expenses for the fiscal year shall be deemed to have been earned and spent equally
for each month of the period. 
 IT = ITR (Taxable Income X num. of mos. covered/12) 

President, upon the recommendation of the Secretary of Finance may allow corporations the option to
be taxed at 15% GI after the ff. conditions have been satisfied: 
1. A tax effort ratio of 20% of Gross National Product (GNP) 
2. A ratio of 40% of income tax collection to total tax revenues 
3. A VAT tax effort of 4% of GNP 
4. A 0.9% ratio of the Consolidated Public Sector Financial Position (CPSFP) to GNP. 

The option to be taxed based on GI shall be available to firms whose ratio of cost of sales to gross sales
or receipts from all sources is 55% or less. The election of this option shall be irrevocable for 3
consecutive taxable years during which the corporation is qualified under the scheme. 

 GI = GROSS SALES – SALES RETURNS, ALLOWANCES, DISCOUNTS, COGS (for merchandising), COGM (for
manufacturing) 
COGS - all business expenses directly incurred to produce the merchandise to bring them to their
present location and use 

B. Proprietary Educational Institutions and Hospitals 

Unrelated trade/business/other activity - the conduct of any trade/business/other activity which is not
substantially related to the exercise/performance by such educational institution/hospital of its primary
purpose or function. 

Proprietary educational institution - any private school maintained and administered by private
individuals/groups with an issued permit to operate from the DECS/CHED/TESDA, as the case may be, in
accordance with existing laws and regulations. 

If non-profit shall pay a tax of 10% on their taxable income except those covered by Subsection (D)
hereof. If the GI from unrelated trade/business/other activity exceeds 50% of the total gross income
from all sources, the tax prescribed in Subsection (A) hereof shall be imposed on the entire taxable
income. 
  
C.  Government-owned or -Controlled Corporations, Agencies or Instrumentalities  
  
Except the GSIS, SSS, PHIC, and the LWDs shall pay such rate of tax upon their taxable income. 
D.  Rates of Tax on Certain Passive Incomes. 
1. Interest from Deposits and Yield/Monetary Benefit from Deposit Substitutes and from Trust
Funds and Similar Arrangements, and Royalties. 
 If derived from a currency bank deposit/ from sources within the Philippines – 20% 
 If derived from a depository bank under the expanded foreign currency deposit system – 15% 

2. Capital Gains from the Sale of Shares of Stock Not Traded in the Stock Exchange. - 15% on net
capital gains realized 

3. Tax on Income Derived under the Expanded Foreign Currency Deposit System. 
 Non-residents, offshore banking units in the Philippines, local commercial banks, including
branches of foreign banks authorized by the BSP to transact business with foreign currency deposit
system units and other depository banks under the expanded foreign currency deposit system –
Exempt 
 Residents - 10% 

3. Intercorporate Dividends 
 Dividends received from another domestic corporation – not subject to tax 

5. Capital Gains Realized from the Sale, Exchange or Disposition of Lands and/or Buildings. - 6% on
the gain realized on the sale, exchange or disposition of capital assets based on the gross selling
price or fair market value whichever is higher 

Chapter 7 STANDARD CORPORATE INCOME TAXES

Most corporations are classified as either:

a. Domestic corporations
b. Foreign corporations – further classified as either a:
1. Resident foreign corporation (RFC) – engaged in trade/business in PH by
establishing a branch/office therein
2. Non-resident foreign corporation (NRFC) – not engaged in
trade/business in PH; had no branch/office therein but derives
fixed/determinable income from PH (interest income, dividends, rents,
royalties, etc.)
The place of incorporation/organization determines its nationality.

A. Net Income Tax on Ordinary Income

Corporate Taxpayer Source of Taxable Tax Base Tax Rates

Income
Domestic Within and without PH Net income 30%
RFC Within PH Net income 30%
NRFC Within PH Gross income 30% FWT
enumerated by law

Gross income from sources within PH of NRFC which is subject to FWT:

a. Interests, dividends, rents, royalties, salaries
 b. Premiums except reinsurance premiums
c. Annuities, emoluments or other fixed or determinable annual, periodic or casual gains, profits
and income
d. Capital gains except capital gains from the sale of shares of stock in a domestic corporation not
traded in stock exchange (P100, 000 or less – 5%, otherwise – 10%)

B. Final tax on Passive Income

Passive Income DC and RFC NRFC

Interest on currency bank 20% 30%
deposit
Yield or any other benefit from: 20% 30%
1. Deposit substitutes
2. Trust funds, and similar
arrangements
Royalties 20% 30%
Interest from a depository bank 7.5% (RFC) Exempt
under the expanded foreign 15% (DC)
currency deposit system

NOTES:
a. Above items are subject to FWTs only if derived from sources within PH
b. Payor of income must withhold the tax
c. Government/Bureau of Treasury debt instruments and securities are considered deposit
substitutes irrespective of the number of lenders at the time of origination if such are traded in
the secondary market

Interest income derived from such shall be subject to FWT payable:

1. Upon original issuance – zero-coupon instruments
2. Upon payment of interest – interest-bearing instruments and securities
d. Asset-backed securities (ABS) are not considered deposit substitutes but the yield for such shall
be subject to 20% FWT
e. In a repurchase transaction under the Government Securities Repo Program, the Repo rate/dif.
bet. original price and repurchase price and other interest income – 20% FWT
f. Interest income derived by a DC/RFC from long-term deposits not issued by banks or any other
debt instrument not within the coverage of deposit substitutes except asset-backed securities –
not subject to FWT. (20% CWT)
g. Interest income from savings/time deposit by a member of a cooperative – not subject to 20%
FWT
 It is neither a currency bank deposit nor a deposit substitute.

GENERAL RULE: If it is not a currency bank deposit nor a deposit substitute (except ABS) it is not subject
to 20% FWT.

Intercorporate Dividends 

 Dividend received by one corporation from another domestic corporation

  The payor of dividend is a domestic company liable to tax while the payee/recipient may be a
domestic/foreign corporation

Payor Recipient Tax

DC DC Not taxable
DC RFC Not taxable
DC NRFC 15% FWT (special rate)
NOTES:
1. The 15% is imposed on NRFC subject to the condition that the country of its domicile
allows a tax credit not only for the tax actually paid (15%) in the PH but also the tax
“deemed paid” which is the difference between the normal and final tax rate
 If the foreign country does not allow tax credits for the tax deemed paid – 30%
2. Dividends received by a NRFC from a REIT (Domestic) – subject to 15% FWT unless such
is entitled to claim a preferential WT
3. In availing of the reduced 15%, the NRFC shall file a separate application with the
International Tax Affairs Division (ITAD) of the BIR with the ff. docs:
a. Application letter
b. Authenticated proof of residency
c. A consularized copy of the law of the country in which it is domiciled.
d. Certification from the Corporate Secretary of the DC stating the important
details of the dividend declaration
e. Special power of attorney if applicable

NOTE: Regardless of the changes in tax rate, tax credit is equal regardless.
C. CGT on Capital Gains
1. Sale, exchange, or other disposition of domestic shares of stock.
a. Not traded at the stock exchange:
 Domestic corporations – 15% of net capital gains
 Foreign corporations – net capital gain
o P100,000 or less – 5%
o Excess of P100,000 – 10%
b. Shares listed and traded at the stock exchange – 6/10 of 1% of GSP (percentage
tax)

NOTES:
1. FT on capital gains on the sale of shares of stock applies to all corporate
taxpayers, except:
a. Dealers in securities
b. Investors in shares of stock in a mutual fund company
c. All other judicial persons specifically exempt from national internal
revenue taxes
2. When preferred shares are redeemed when the issuing corporation is still in
its going-concern
 Capital gain/loss – difference between the amount or value received at the time
of redemption and the cost of preferred shares (seller)
- Subject to regular corporate income tax
Where a corporation buys back its own shares in which they become treasury shares
  If bought in the local stock exchange - stock transaction tax
 If not – net capital gains tax
3. The net capital gains realized during the taxable year from the sale of shares
not traded in the stock exchange shall be computed in a cumulative manner by filing BIR
Form No. 1707-A
4. The ff. sales of shares of publicly-traded corporations in the local exchange –
subject to FT on net capital gains
a. Non-compliant with the mandatory MPO level
b. Block sales – prearranged sale
5. Stock options – treated as a sale, barter, or exchange of shares of stock not
listed on the stock exchange
- If option is granted without any consideration, cost base is zero.
6. No sale of shares of stock shall be registered in the books of the corporation
unless the receipts of the payment of tax imposed is filed and recorded by stock transfer
agent/secretary of the corporation and CAR (Certificate Authorizing Registration) and
TCL (Tax Clearance Certificate) are secured
2. Sale of Real Property Classified as Capital Asset
 Expropriation of private properties by the government is embraced within the meaning
of “sale”.

Tax rate and base

1. Seller is a DC – 6% FT on GSP/FMV whichever is higher
2. Seller is an RFC – 30% normal tax rate on Gain on sale
3. Seller is an NRFC – 30% FT on capital gain

Exemptions from the CGT

1. Sale of raw lands to be used for “socialized housing” projects – sale of a commercial
lot by NHA is not exempted
2. Properties sold under the CMP (Community Mortgage Program) – CMP is a
mortgage financing program of NHMFC which assists legally organized associations
of underprivileged and homeless citizens
3. Properties identified as APDs and slum improvement and resettlement program
sites
4. Land transfers under Comprehensive Agrarian Reform Law of 1988 (RA No. 6657)
5. Transfer of assets by dacion en pago by an obligor in favor of a SPE (Special Purpose
Entity) – SPE is a vehicle created solely for the purpose of securitization of financial
assets
6. The ff. transactions:
o Transfer of NPAs (non-performing assets) from a FI to a SPV
o Transfer of NPAs from an SPV to a third party
o Dation in payment of a NPL (non-performing loan) by a borrower in favor of an
FI/SPV
o Dation in payment of a NPL by a third party on behalf of a borrower in favor of
an FI/SPV
7. Philippine Postal Corporation is exempt
8. Civil Aviation Authority of the Philippines is exempt
 Transaction Tax Base Tax Rates
I. Sales of shares of stock of a
DC
A. If not traded in the local Net Capital Gain Seller is a DC – 15%
stock exchange Seller is FC
Gain not over P100,000 – 5%
Over P100,000 – 10%
B. If traded in the local stock Gross selling price 6/10 of 1%
exchange
II Sale of a capital asset
Seller is a DC Highest of GSP/FMV 6%
Seller is a RFC Gain on sale (included in ITR) 30%
Seller is a NRFC Gain on sale (subject to FT) 30%

GENERAL RULE: All income of an NRFC from sources within the PH are subject to FWT.

INCOME SUBJECT TO CWT

1. DC and RFC are required.

2. Tax withheld by payor may be claimed as tax credit by the recipient.

3. Obligation to withhold arises at the time the income payment is paid/payable or the income payment
is accrued/recorded as an expense/asset whichever comes first.

4. WTR shall be filed with the authorized agent bank located within the jurisdiction of RDO where the
principal place of business is located.

5. WTR shall be filed and paid within 10 days after the end of each month. (Except for December, which
shall be paid on or before January 15 of the ff. year)

6. For expanded WT, filing of quarterly return shall be made not later than the last day of the month
following the close of the quarter. To ensure sufficient cash inflow to the National Treasury, WTH agents
are required to file a BIR Monthly Remittance within 10 days after the end of each month for 2 months.
Such shall be credited in the quarterly return.

7. Income payments for contractors (messengerial, janitorial, private detector and/or security agencies,
credit and/or collection agencies, and other business agencies) – subject to 2% CWT.

DOMESTIC COMPANIES SUBJECT TO SPECIAL TAX RATES

1. Proprietary educational institutions – 10% of NI. Provided, GI from unrelated trade does not exceed
50% of the total GI.

Proprietary educational institution – private school with an issued permit from DECS, CHED, and TESDA
2. Hospitals which are non-profit/non-stock – 10% of NI. Provided, GI from unrelated trade does not
exceed 50% of the total GI.
NOTE: Always determine first the percentage of unrelated income. (All income must be accounted for
including those which are not taxable)

3. FT on Income (Interest income, bank charges, commissions, service fees, and net foreign exchange
transaction gains) of Depository Banks under the Expanded Foreign Currency Deposit System
 Residents – 10%
 Non-residents, OBUs, local commercial banks, and branches of foreign banks - Exempt
NOTES:
 A bank with FCDU/EFCDU must file 2 ITR with 2 different types of income: FCDU income and
RBU income.
4. Subcontractors of service contractors engaged in petroleum operations – 8% FT of gross income
derived from contract

5. ECOZONE Enterprises (except ECOZONE service enterprises) – no taxes shall be imposed on

establishments registered with the PEZA and operating within the ECOZONE. In lieu, 5% of GI earned
within the ECOZONE shall be paid and remitted as follows:
A. 3% to the national government
 Tax credit equivalent to ½ of the value of training expenses incurred can
be deducted.
B. 2% to the Treasurer of the city/municipality where the enterprise is located

NOTES:
1.
Under the ITH Regime Under the 5% regime
Sale of registered products Exempt from regular Subject to the 5% GIT
internal revenue taxes
Non-registered products Subject to RIRT Subject to RIRT

2. ECOZONE enterprises that want to be taxed under the 5% GIT regime may generate
income from sources outside the ECOZONE but shall not exceed 30% of its total
income from all sources. However, such shall not be included in the computation of
the special 5% GIT. If it exceeds the 30% threshold, all income shall be subject to
RIRT.
3. ECOZONE service enterprises shall not enjoy any of the tax incentives but shall be
subject to national and local taxes
6. Tourism enterprises registered with the TIEZA – may in lieu of all national internal revenue taxes
except real estate taxes and fees imposed by TIEZA, pay 5% FT on GI earned from registered activities.
Such shall be remitted as follows:
A. 1/3 to affected cities/municipalities based on the area of the RTE
B. 1/3 to national government
C. 1/3 to TIEZA
7. Microfinance NGOs – 2% on gross receipts from microfinance operations in lieu of all national taxes
Provided that:
A. NGO’s primary purpose is to microfinance to the poor and low-income
individuals to alleviate poverty
 B. Microfinance NGOs shall have obtained either:
1. Certificate of accreditation from the Microfinance NGO
Regulatory Council
2. Certificate of No Derogatory Information issued by SEC
8. National Grid Corporation of the Philippines (NGCP) – including its successors/assigns, shall pay a 3%
franchise tax on gross receipt in lieu of the income tax and any all taxes except taxes on their real estate,
buildings, and personal property, exclusive of its franchise. Also, payment of concession fees due to the
PSALM shall not be subject to IT.
9. Power Sector Assets and Liabilities Management (PSALM) – shall manage the orderly sale, disposition
and privatization of National Power Corporation (NPC) generation assets, and other real properties with
the objective of liquidating all NPC’s financial obligations
 The ff. are the income tax consequences of its activities:
a. Sale of NPC’s generation assets to winning bidders – not subject to IT
and WT
b. Concession fees paid by NGCP – not subject to IT
c. Rental income from NPC’s generation assets prior to sale – subject to IT
and VAT
d. Income derived from sale of electric power from NPC’s generation
assets, prior to its privatization – subject to RCIT
e. Other income/receipts derived from miscellaneous activities – subject
to all applicable taxes under the Tax Code

SUMMARY
Proprietary educational Net income 10%
institutions & Hospital that are
non-profit
Depository Banks under the Income (Interest income, bank Residents – 10%
Expanded Foreign Currency charges, commissions, service Non-residents, OBUs, local
Deposit System fees, and net foreign exchange commercial banks, and
transaction gains) branches of foreign banks -
Exempt

Subcontractors of service Gross income 8%

contractors engaged in
petroleum operations
ECOZONE Enterprises & Gross income 5%
Tourism Enterprises
Microfinance NGOs Gross receipts 2%
NGCP Gross receipts 3%
PSALM

RESIDENT FOREIGN CORPORATIONS SUBJECT TO SPECIAL TAX RATES

1. International carriers - 2 ½ % of Gross Philippine Billings

Gross Philippine Billings – gross revenue derived from carriage of persons, excess baggage, cargo and
mail from the PH in a continuous and uninterrupted flight irrespective of the place of sale/payment of
ticket
Provided that:
1. Tickets revalidated to another international airline if the passenger boards in a port in PH – shall form
part of GPB
2. Flight which originates from PH but transshipment of passenger takes place outside PH on another
airline – only the aliquot portion of the cost of the ticket corresponding to the leg flown from PH to point
of transshipment shall form part of GPB
Definitions
 International air carrier – foreign airline corporation granted landing rights in any
Philippine port to perform international air transportation services
 International sea carrier - foreign shipping corporation having touched any Philippine
port to perform international sea transportation services
 On-line carriers – maintaining transportation operations to and from PH
 Off-line carriers – having no transportation operations to and from PH
o GENERAL RULE: Without flights starting from/passing through any point in PH –
not subject to 2 ½% but subject to RIT
 Chartered flights/voyages – flight/voyage operations which include block charter placed
under the custody of a charter for rent/hire relating to a particular airplane/vessel
Preferential rates
 If not subject to 2 ½%, it is subject to preferential rate/exemption on basis of an
applicable tax treaty to which the PH is a signatory or on the basis of reciprocity.
NOTES:
 If a passenger originally commencing flight from a foreign port is discharged in PH port
and thereafter boards on another airplane/vessel owned by the same internal carrier,
the flight/voyage from PH to any foreign part is considered “originating from PH” if the
time intervening between arrival to and departure from PH exceeds 48 hours
1. If failure to depart within 48 hours is due to reasons
beyond passenger’s control – not considered
“originating from PH”
 2. If 2nd aircraft/vessel belongs to a different international
carrier – considered “originating from PH” regardless
(applicable only in this case)

 Operating expenses are not deducted

NOTE:
 Gross receipts from sale of tickets covering on-line flights of other carriers is not subject
to 2 ½ % tax on GPB. Such carriers may earn compensation/commission from the sale of
passage documents to cover off-line and on-line flights/voyages subject to RIT.
2. Offshore banking units
a. Income from currency loans granted to residents – 10% of such income
b. Non-residents, other OBUs, local commercial banks, and branches of foreign banks authorized by BSP
to transact business with OBUs – Exempt
c. Income from activities other than foreign currency transactions – subject to pertinent taxes

3. Regional/Area Headquarters & Regional Operating Headquarters of Multinationals

a. RHQs – not subject to IT
b. ROHQs – 10% of TI
 Income derived from PH sources by a ROHQs when remitted to a parent company –
subject to BPRT
 Incentives given to both RHQs and ROHQs is exemption from all kinds of local
taxes/fees/charges except real property tax

4. Subcontractors of service contractors engaged in petroleum operations – 8% FT of gross income

derived from contract (in lieu of all taxes)

5. ECOZONE Enterprises (except ECOZONE service enterprises) – no taxes shall be imposed on

establishments registered with the PEZA, SBMA, and CDA and operating within the ECOZONE. In lieu, 5%
preferential of GI earned within the ECOZONE shall be paid and remitted as follows:
A. 3% to the national government
 Tax credit equivalent to ½ of the value of training expenses incurred can
be deducted.
B. 2% to the Treasurer of the city/municipality where the enterprise is located
NOTES:
 Income payments made by a registered enterprise to an entity in the Customs Territory
(national territory of the PH outside the ECOZONE boundaries) – not subject to preferential tax
rates/tax exemption enjoyed by the registered enterprise

6. Tourism enterprises registered with the TIEZA – may in lieu of all national internal revenue taxes
except real estate taxes and fees imposed by TIEZA, pay 5% FT on GI earned from registered activities.
Such shall be remitted as follows:
A. 1/3 to affected cities/municipalities based on the area of the RTE
B. 1/3 to national government
C. 1/3 to TIEZA
NON-RESIDENT FOREIGN CORPORATIONS SUBJECT TO SPECIAL TAX RATES

Cinematographic film owner, lessor, or 25% of GI

distributor
Owner/lessor of vessels chartered by PH 4 ½ % of gross rentals/charter fees
nationals
Owner/lessor of aircraft, machineries, and other 7 ½ % of gross rentals/fees
equipment
Interest on foreign loans contracted on or after 20% of the interest
Aug. 1, 1986
Income from transactions with depository banks Exempt
under the expanded foreign currency deposit
system

EXEMPT CORPORATIONS

 Non-stock and non-profit corporations are exempt from IT.

 Mere registration with the SEC does not automatically exempt it.

Section 30 Organizations and Corporations

A. Labor, agricultural, or horticultural organizations not organized principally for profit
B. Mutual savings bank not having capital stock represented by shares; and cooperative banks
without capital stock organized and operated for mutual purposes and without profit
 Earning less expenses are distributed wholly to depositors
C. A beneficiary society, order, or association operating for the exclusive benefit of the members
(fraternal organization operating under the lodge system/mutual aid association)
D. Cemetery company owned and operated exclusively for the benefit of its members
E. Non-stock corporations/association organized and operated exclusively for religious, charitable,
scientific, athletic, or cultural purposes, or for rehabilitation of veterans
F. Business league, chamber of commerce, or board of trade not organized for profit
G. Civic league or organization not organized for profit but operated exclusively
H. A non-stock and non-profit educational institution – registered by DepEd, CHED, and TESDA
I. Government educational institutions
J. Farmers’ or other mutual typhoon or fire insurance company, mutual ditch or irrigation
company, mutual/cooperative telephone company, the income of which consists solely of
assessments, dues, and fees collected from members

Chapter 8 PENALTY TAXES IMPOSED ON CORPORATIONS

Corporations are subject to 2 types of penalty taxes:

1. Minimum Corporate Income Tax (MCIT)
2. Improperly Accumulated Earnings Tax (IAET)

I. Minimum Corporate Income Tax on Domestic Corporations.

GENERAL RULE: MCIT shall only apply to domestic corporations subject to RCIT
1. Subject
a. DC
 b. RFC

2. Rate and base – 2% of GI. The taxpayer shall pay whichever is higher bet. the MCIT and the RCIT
(30%)

3. Effectivity – The 4th taxable year following the year of commencement of business operations

4. Carry Forward of Excess Minimum Tax. – Excess of the MCIT over the RCIT shall be credited
against the normal income tax for the 3 immediately succeeding taxable years.

NOTE:
 Interest expense – not included in the COGS/COGM/COS except in the case of banks and
other financial institutions.
 Items of gross income derived apart from core business which are subject to the RCIT -
included as part of the taxpayer’s GI for computing MCIT.
 GI will include all items enumerated under Section 32(A) of the Tax Code except:
 Income exempt from IT
 Income subject to FWT
 DC’s operations are partly covered by regular and special income tax system, the MCIT
shall apply on operations covered by the regular income tax system.

5. DC not subject to MCIT:

a. Proprietary educational institutions
b. Hospitals which are non-profit
c. FCDUs
d. Firms taxed under the special income tax regimes
e. REITs

6. RFCs not subject to MCIT:

a. International carrier
b. OBUs
c. Regional operating headquarter
d. Firms taxed under the special income tax regimes

7. Relief from the Minimum Corporate Income Tax Under Certain Conditions. - The Secretary of
Finance is authorized to:
 Suspend the imposition upon submission of proof that the corporation sustained substantial
losses on account of:
o A prolonged labor dispute – losses arising from a strike staged by the employees
which lasted more than 6 mos. within the taxable period which caused temporary
shutdown of operations
o Because of force majeure – irresistible force as by an “Act of God”; natural
calamities; war or insurgency
o Because of legitimate business reverses – substantial losses sustained due to fire,
robbery, theft, embezzlement, or for other economic reasons
  Promulgate (upon the Commissioner’s recommendation), the necessary rules and
regulations that shall define the terms and conditions under which he may suspend the
imposition of the MCIT in a meritorious case.

8. Gross Income Defined.

 GI = GROSS SALES – SALES RETURNS, ALLOWANCES, DISCOUNTS, COGS (for merchandising),
COGM (for manufacturing), COS (for services)
o COS include:
a) salaries and employee benefits of personnel/consultants/specialists directly
rendering the service
b) cost of facilities directly utilized in providing the service such as
depreciation/rental of equipment used and cost of supplies;
In the case of banks, ‘cost of services’ shall include interest expense.
o Direct costs and expenses – without such costs, no revenue can be generated; Costs
not within this definition are excluded in COS.
 COGS - all business expenses directly incurred to produce the merchandise to bring them to
their present location and use 

NOTES:
1. Gross income will also include all items of gross income derived apart from the taxpayer’s core
business activities except:
c. Income exempt from income tax
d. Income subject to FWT
2. MCIT shall only apply on operations covered by the regular income tax system and not under a
special income tax system.

9. Domestic corporations not subject to MCIT

GENERAL RULE: MCIT shall only apply to domestic corporations subject to RCIT.

a. Proprietary educational institutions – 10% of TI

b. Non-profit hospitals - 10% of TI
c. Depository banks under the expanded foreign currency deposit system/FCDUs on their:
1. Income from foreign currency transactions with non-residents, OBUs in
the Philippines, local commercial banks, including branches of foreign
banks, and other depository banks - EXEMPT
2. Interest income from foreign currency loans granted to residents of the
PH under the expanded foreign currency deposit system – 10% FTW
d. Firms taxed under special income tax regimes
e. Real estate investment trusts (REIT)

10. Resident foreign corporations not subject to MCIT

GENERAL RULE: MCIT shall apply only to resident foreign corporations subject to RCIT

a. International carrier – 2 ½ % of Gross Philippine Billings (GPB)

b. Offshore Banking Units (OBUs) on their:
1. Income from foreign currency transactions with non-residents, other
offshore banking units, local commercial banks, including branches of
foreign banks - EXEMPT
 2. Interest income from foreign currency loans granted to residents of the
PH – 10% FTW
c. Regional operating headquarters – 10% of TI
d. Firms that are taxed under special income tax regimes
11. Manner of Filing and Payment
The computation and payment of the MCIT shall likewise apply at the time of filing the quarterly
corporate income tax. If the computed quarterly MCIT is higher than the quarterly RCIT, the tax
due for such taxable quarter shall be the quarterly MCIT.

In the payment of said quarterly MCIT, excess MCIT from previous taxable year/s shall not be
allowed to be credited. However,
a. The expanded withholding tax
b. Quarterly income tax payments under the RCIT
c. MCIT paid in the previous taxable quarter/s
Are allowed to be applied against the quarterly MCIT due

In the payment of the quarterly RCIT, all items mentioned above + excess MCIT from previous
taxable year/s shall be allowed to be credited.
12. Accounting treatment of the excess MCIT
a. When an annual (4th quarter) MCIT is due and paid in a taxable year, the excess MCIT
shall be recorded in the books as an asset under the account title “Deferred-Charges,
MCIT.” – shall be carried forward and may be credited against the RCIT due for a period
not exceeding 3 years immediately succeeding the taxable year the MCIT was paid. If it
remains after the 3-year period, it shall be removed from the Deferred-Charges, MCIT by
a CR entry to such account and a DR entry to Retained Earnings. It cannot be debited
against GI since the MCIT is an IT which is non-deductible.

1. Provision for income tax

Income tax payable
To record the RCIT
2. Deferred charges – MCIT
Income tax payable
To record excess MCIT
3. Income tax payable
Cash
To record payment of the tax due
When excess MCIT is applied against the RCIT:
1. Provision for income tax
Income tax payable
To record the RCIT
2. Income tax payable
Deferred charges – MCIT
II. Improperly Accumulated Earnings Tax (IAET)

Concept of the Tax

In order to compel corporations to distribute/pay dividends to stockholders, the retention/accumulation
of earnings/profits beyond the reasonable needs of the business is subject to tax. Thus, IAET is being
imposed.

The touchstone of the liability is the purpose behind the accumulation of the income rather than the
consequences of the accumulation.

If the failure to pay dividends is due to the use of corporate earnings/profits for reasonable needs, it is
not subject to tax.

If accumulated income beyond reasonable needs of the business, it is subject to tax.

Nature of the Tax

 Old name – additional tax for improper accumulation of profits

 Applies to domestic corporations classified as closely-held corporations
 Tax rate – 10% of improperly accumulated TI
 Additional tax to the RCIT
 Also called or regarded as a corporate penalty tax

Background

 TI is subject to RCIT. After payment of RCIT, the remaining net income/disposable income is
normally expected to be distributed in the form of dividends.
 The retention of corporate earnings is an old-tax-saving device usually resorted by closely-held
corporations/family corporations. Stockholders of such generally can withdraw corporate funds
under the guise of loans, advances, allowances or salaries. Such withdrawals may be in the
nature of a distribution of profits/dividends.

Improper Accumulation of Profits Not Likely

ITR
 Individuals – from 5% to 35%
 Corporations – from 34% to 32% (30% in 2009)
 Tax on dividends – 6% (1998), 8% (1999), and 10% (2000)

IAET seeks to prevent corporations from accumulating and retaining corporate profits for the purpose of
avoiding the personal IT upon its stockholders.

Corporations subject to IAET

Domestic corporations classified as closely-held corporations

 Closely-held corporations – at least 50% in the value of the outstanding capital stock/total
combined voting power of all classes of stock entitled to vote is owned directly or indirectly by
20 individuals or less
o Determination of closely-held corporation based on stock ownership:
 1. Stock not owned by individuals – owned
directly/indirectly by a corporation, partnership, estate,
or trust shall be considered as being owned
proportionately by its shareholders, partners, or
beneficiaries
2. Family and partnership ownership – an individual shall
be considered as owning the stock owned by his
family/partner (brothers/sisters, spouse, ancestors, and
lineal descendants)
3. Option to acquire stocks – if a person has an option to
acquire stock (or other series of options) such stock
shall be considered as owned by such person
4. Constructive ownership as actual ownership –
 Stock constructively owned by reason of the application
of paragraph 1 or 3 for the purposes of applying
paragraph 1 or 2 is treated as owned by such person
 Stock constructively owned by the individual by reason
of the application of paragraph 2 shall not be treated as
owned by him
 Publicly-held corporations – domestic corporations not falling under the aforesaid definition of a
closely-held corporation

Corporations not subject to IAET

 Banks and other non-bank financial intermediaries

 Insurance companies
 Publicly-held corporations
 Taxable partnerships
 GPP
 Non-taxable joint ventures
 Enterprises duly registered with PEZA/Bases Conversion and Development Act of 1992/under
special economic zones which enjoy payment of special taxes
 Branches of foreign corporations/RFC

Evidence of Purpose to Avoid Income Tax

1. Prima Facie Evidence. – Corporation is a mere holding company or investment company

 Holding company – have no activities except holding properties and collecting the
income therefrom
 Investment company – activities include buying and selling stocks, securities, real estate,
or other investment property so that income is derived not only from the investment
yield but also from profits upon market fluctuations
 Another ex. Investment in bonds/other long-term securities
2. Evidence Determinative of Purpose. - That the earnings or profits of a corporation are
permitted to accumulate beyond the reasonable needs of the business unless the corporation,
by the clear preponderance of evidence, shall prove to the contrary.
The mere fact that the corporation distributed a large part of its earnings does not necessarily prove
earnings were not accumulated beyond reasonable needs.

The fact that a corporation is a mere holding/investment company or has an accumulation of earnings is
not absolutely conclusive against if there’s clear evidence it was not formed for tax avoidance on
shareholders.

If the corporation is a mere holding company, the laws give further weight to the presumption of
correctness by providing an additional presumption of the existence of a purpose to avoid the tax on
dividends.

Circumstances Indicative of Purpose to Avoid the Tax

 Dealings between the corporation and its shareholders (withdrawals as personal loans)
 Expenditure of funds by the corporation for the personal benefit of the shareholders
 The investment of undistributed earnings in assets having no connection with the business
 Advance in substantial sums made yearly to corporate officers at the same time stockholders

Meaning of Reasonable Needs of the Business

 Internal revenue regulations adhere to “Immediacy Test” – reasonable needs means the
immediate needs of the business including reasonably anticipated needs

Improper Accumulation of Profits

 A radical change of business when a considerable surplus has been accumulated may afford
evidence of a purpose to avoid the tax.
 If 1 corporation owns the stock of another corporation in the same line of business and operates
it, the business of the latter may be considered in substance (not in legal form) the business of
the first corporation.

Tax Base
 10% of the improperly accumulated taxable income
 First, add the ff.
o Income exempt from tax
o Income excluded from gross income
o Income subject to final tax
o Amount of NOLCO deducted
o Accumulated earnings as of the end of the taxable year
 Deduct from the total above:
o Dividends actually/constructively paid/issued from the applicable year’s taxable income
o Income tax paid/payable
o Amount that may be retained for the reasonable needs
 The RE from prior years added should be those which have been improperly accumulated and
no IAET had been paid thereon.
 The amount that may be retained shall be 100% of the paid-up capital/amount contributed to
the corporation representing the par value of the shares of stock. If in excess, it is merely a
prima facie evidence presumption that the corporation is improperly accumulating profits.
NOTES:
 In computing for the RCIT, the net operating loss from the previous year is deductible to current
year.
 In computing for IAET, the net operating loss is not deductible.
 The gross amount of passive income is included and its tax withheld is deducted.
 The income tax due including the CWT is deducted.
 Once the profit has been subjected to IAET, the same shall no longer be subjected to IAET in
later years even if not declared as dividend.
 Profits which have been subjected to IAET, when finally declared as dividends, shall be subject to
tax on dividends
 The dividends shall be deemed to have been paid out of the most recently accumulated
profits/surplus.

Period for payment of dividend/IAET

 Dividends must be declared and paid/issued not later than 1 year following the close of the
taxable year.
 Otherwise, IAET if any should be paid within 15 days thereafter.

Summary Rules of Corporate Penalty Taxes

MCIT IAET
Corporations subject DC and RFC which are subject to DC classified as closely-held
RCIT of 30% corporations
Corporations not subject DC and RFC which are not  Banks and other non-
subject to RCIT of 30% bank financial
intermediaries
 Insurance companies
 Publicly-held
corporations
 Taxable partnerships
 GPP
 Non-taxable joint
ventures
 Enterprises duly
registered with PEZA
and other special
economic zones
 RCF

Tax Base Gross income Improperly accumulated taxable

income
Tax Rate 2% 10%
Effectivity Beginning 4th taxable year Starting 1998
following the commencement
of the business

CHAPTER 9 TAXATION OF CORPORATIONS: SPECIAL INCOME TAXES

2 Types of Special Income Taxes

I. Branch Profits Remittance Tax (BPRT)

a. Transaction subject – profit remitted by a branch of a foreign corporation to its head
office
b. Rate and base – 15% of the total profits applied/earmarked for remittance
 If there’s no evidence of profits applied/earmarked for remittance to head
office, BPRT cannot be imposed
c. Income not treated as branch profits – not connected with the conduct of its
trade/business in the PH
i. Interests/dividends/rents/royalties/remuneration for technical services
ii. Salaries/wages/premiums/annuities/emoluments
iii. Fixed/determinable annual, periodic, or casual gains, profits, income
iv. Capital gains
d. Tax treaties -15% may be reduced under applicable provisions of the various
international tax treaties (PH is a signatory)

NOTE:

 The mere fact that accumulated earnings was booked under the Head Office
account doesn’t automatically mean that said accumulated earnings were
already applied/earmarked for remittance to the head office.
II. Gross Income Tax (GIT)
The President, upon the recommendation of the Secretary of Finance, may allow
corporations to the option to be taxed at 15% of GI instead of 30% of NI.
a. Corporations given the option – DC & RFC
b. Requisite conditions:
1. Tax ratio effort of 20% of GNP
2. A ratio of 40% of IT collection to total tax revenues
3. VAT tax effort of 4% of GNP
4. 0.9% ratio of CPSFP to GNP
c. Additional requisite – ratio of COS to GS from all sources does not exceed 55%
d. Period of irrevocability – 3 consecutive taxable years

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