Chapter 3

INCOME TAXATION
Taxation of Corporations

Learning Objectives:
After studying this chapter, you should be able to:
1. Identify the income taxpayers other than individuals
Define corporation.
3. Identify the classification of corporate taxpayers.
4. State the sources of income of corporate taxpayers.
5. Recognize the categories of income and state the tax rates to be used by each type of corporate taxpayer.
6. List the sources of passive income and state the final tax rates to be used by each type of corporate taxpayer.
7. Show the pro-forma computation of the normal income tax of domestic, resident and non-resident foreign corporations,
in general.
8. Compute the income tax for micro, small and medium enterprises (MSMEs).
9 Identify the special corporations for tax purposes and be able to provide the relevant tax rates.
10. Define the allowable deductions, from gross income.
11. Define and compute taxable income and tax due for each type of corporate
taxpayer depending on income category.
12. List the corporate taxpayers exempt from income tax.
13. Outline the taxation for cooperatives, franchises and SBMA, CDA, PEZA-
registered enterprises.
14. Compute the quarterly corporate income tax.

The discussion on taxation of corporations is divided into two chapters-this chapter and the next. This chapter deals with
the normal tax liability and pássive income of corporations. Minimum corporate income tax (MCIT) is discussed in the
next chapter. "Normal income tax" shall mean the income tax rates prescribed under Sections 27(A) and 28(A) 1) of the
Code at 35% effective Jan. 1, 1997; 34% effective Jan. 1, 1998; 33% effective Jan. 1, 1999; and 32% effective Jan. 1,
2000, and thereafter. Under R.A. 9337 or the Expanded VAT Act of 2005, effective Nov. 1, 2005, the income tax rate was
35%. This rate was reduced to 30% effective Jan. 1, 2009. Per R.A. 11534 or CREATE Act, effective July 1, 2020, the
income tax rate of domestic corporations, in general, shall be 25% (or 206, see discussion in this Chapter).
CLASSIFICATION OF INCOME TAXPAYERS (Other than Individuals)
1. Corporations
a. Domestic. Those created or organized under and by virtue of Philippine laws
1. Domestic corporation, in general, including One Person Corporation
2. Government-owned and -controlled corporations
3. Taxable partnerships
4. Proprietary educational institutions
5. Non-profit hospitals
b. Foreign. Those organized in accordance with laws of their respective countries,
1. Resident. Those engaged in trade or business within the Philippines.
2. Non-resident. Those not engaged in trade or business within the Philippine.

2. General Professional Partnership. This is discussed in Chapter 6.

3 Estates and Trusts. This is discussed in Chapter 5.

Definition of Terms
1. Corporation. A corporation. is an artificial being created by operation of law, having the right of succession and the
powers, attributes and properties expressly authorized by law or incident to its existence (Revised Corporation Code of the
Philippines, Section 2).
Section 10 of the RCCP provides that any person, partnership, association or corporation, singly or jointly with others but
not more than fifteen (15) in number, may organize a corporation for any lawful purpose or purposes.
Corporation includes one person corporations, partnerships, no matter how created or organized, joint-stock companies,
joint accounts (cuentas en participacion), associations, or insurance companies, but does not include general professional
partnerships and a joint venture or consortium formed for the purpose of undertaking construction projects or engaging in
petroleum, coal, geothermal and other energy operations pursuant to an operating or consortium agreement under a
service contract with the Government.
The tax exemption of joint ventures formed for the purpose of construction projects was pursuant to Presidential Decree
929 (dated May 4, 1976) to assist local contractors in achieving competitiveness with foreign contractors by pooling thier
resources in undertaking big construction projects.

3-2| Income Taxation 2022 Edition by Prof. WIN Ballada and Susan Ballada

Section 3 of Revenue Regulations 10-2012 states that a-joint venture or consortium formed for the purpose of undertaking
construction projects not taxable as corporation under Sec. 22 of the NIRC of 1997 as amended, should be:
(1) for the undertaking of a construction project; and
(2) should involve joining or pooling of resources by licensed local contracts; that licensed as general contractor
by the Philippine Contractors Accreditation Board (PCAB of the Department of Trade and Industry (DTI);
 (3) these local contractors are engaged in construction business; and
(4) the Jint Venture itself must likewise be duly licensed as such by the Philippine Contractors Accreditation
Board (PCAB) of the Department of Trade and Industry (D

Joint ventures involving foreign contractors may also be treated as a non-taxable corporation only if the member foreign
contractor is covered by a special license as çontractor by the PCAB of the DTI; and the construction project is certified
by the appropriate Tendering Agency (government office) that the project is a foreign financed or internationally-funded
project and thaț international bidding is allowed under the Bilateral Agreement entered into by and between the Philippine
Government and the foreign or international financing institution pursuant to the IRR of Republic Act 4566, the
Contractor's License Law.

Absent any one the requirements, the joint venture or consortium formed for the purpose of undertaking construction
projects shall be considered as taxable corporations. In addition, the tax-exempt joint venture or consortium as defined
shall not include those who are mere suppliers of goods, services or capital to a construction project.

The member to a joint venture not taxable as corporation shall each be responsible in reporting and paying appropriate
income taxes on their respective share to the joint venture's profit.

llustration. Source: BIR Ruling 475-2014, Nov. 26, 2014

A joint venture or consortium formed for the purpose of undertaking construction projects pursuant to an operating or
consortium agreement is not subject, to the regular corporate income tax. The co-venturers are separately subject to the
regular corporate income tax under Section 27(A) of the Tax Code on their taxable income during each taxable year
respectively derived by them from the JV. The respective net income of the co-venturers derived from the JV is also
subject to CWT under Section 57 of the Tax Code. Before the JV distributes the net income of the co-venturers, it shall
withhold the tax due on such net income. The co-venturers are required to enroll themselves to the BIR's Electronic Filing
and Payment System (eFPS). The enrliment should be done at the Revenue District Office (RDO) where they are
registered as taxpayers.

2. Domestic. When applied to a corporation, means created or organized in the Philippines or under its laws.

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One Person Corporation (OPC) is a new type of corporation under the Revised Corporation Code of the Philippines
(effective March 8, 2019). OPC is a corporation (Sec, with a single stockholder, who may be a natural person, a trust or an
estate (S 116). One person may incorporate two or more OPCs.
3. Foreign. When applied to a corporation, means a corporation which is not domestic
4. Resident Foreign Corporation. Applies to a foreign corporation engaged in trade business within the Philippines.
5. Non-Resident Foreign Corporation. Applies to a foreign corporation not engaged in trade or business within the
Philippines.
Illustration. Source: Visayas Geothermal Power Company vs. CIR, CTA (First Division)
Case 8425, Nov. 17, 2014
Service fees payable by a Philippine company to a non-resident foreign corporation are exempt from the FWT if it can be
established that (a) the services are performed by a foreign corporation not engaged in trade or business in the Philippines,
and (b) the said income is derived from sources outside the Philippines
llustration. Source: Cargill, Inc. vs. Intra Strata Assurance Coporation,

Supreme Court (Second Division) G.R. 168266, Mar. 15, 2010 Under Section 123 of the Corporation Code, a foreign
corporation must obtain a license and a certificate from the appropriate government agency before it can transact business
in the Philippines. Where a foreign corporation does business in the Philippines without the proper license, Section 133 of
the Code provides that it cannot maintain any action or proceeding before Philippine courts.
The Corporation Code does not define the phrase "doing business." On the other hand, R.A. 7042 or the Foreign
Investments Act of 1991, states that "doing business" shall include "soliciting orders, service contracts, opening offices,
whether called liaison' offices or branches; appointing representatives or distributors domiciled in the Philippines or who
in any calendar year, stay in the country for a period or periods totaling 180 days or more; participating in the
management, supervision or control of any domestic business, firm, entity or corporation in the Philippines; and any other
act or acts that imply a continuity of commercial dealings or arrangements, and contemplate to that extent the performance
of acts or works, or the exercise of some of the functions normally incident to, and in progressive prosecution of,
commercial gain or of the purpose and object of the business organization.
However, the phrase doing business' shall not be deemed to include mere investment as a shareholder bya foreign entity in
domestic corporations duly registered to do business, and/or the exercise of rights as such investor; nor having a nominee
director or officer to represent its interests in such corporation; nor appointing a representative or distributor domiciled in
the Philippines which transacts business in its ow name and for its own account."
Activities within Philippine jurisdiction that do not create earnings or profits to the foreign corporation do not constitute
doing business in the Philippines. To be doing or "transacting business in the Philippines under the Corporation Code, the
foreign corporation must actually transact business in the Philippines, that is, perfornm specific business transactions
within the Philippine territory on a continuing basis in its own name and for its own account. Actual transaction of
business within the Philippine territory is an essential requisite for the Philippines to acquire jurisdiction over a foreign
corporation and to require the foreign corporation to secure a Philippine business license.

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Under the RP-US Tax Treaty, branches of companies that are residents of the U.S. shall be deemed residents of the U.S.
This treaty defines a U.S, resident as a US corporation. Hence, a Taiwanese branch of a U.S corporation is considered a
U.S. resident. As such, said branch shall be covered by the RP-US Tax Treaty with respect to income from Philippine
sources.
Similarly, the RP-Canada Tax Treaty states that branches of companies that are residents of Canada shall be deemed
residents of Canada. This treaty defines a resident of Canada as including any person who is liable to tax in Canada by
reason of his domicile, residence, place of management, or any other criterion of a similar nature. Thus, a Korean branch
of a Canadian company that is liable to tax in Canada shall be governed by the RP-Canada Tax Treaty with respect to its
(branch) income in the Philippines.
Illustration. Source: BIR Ruling ITAD-021-11, Jan. 21, 2011
Under the RP-Thailand Tax Treaty, the profits of a Thai enterprise shall be taxable only in Thailand unless
such enterprise carries on a business in the Philippines through a permanent establishment (PE). If the Thai
enterprise carries on business through a PE in the Philippines, the profits of such enterprise w
attributable to the PE may be taxed in the Philippines.
Article 5 of the RP:Thailand Tax Treaty provides that the furnishing of services for the same or a connectea
project in a Contracting State for a period or periods aggregating more than 183 days shall be cOnsiaer
PE. The 183-day period should be counted based on the total number of days that services are renderea
the Philippines, including all periods resulting from the automatic renewal of a service contract, wnicn
renewal shall be deemed the "same or a connected project."
lustration. Source: BIR Ruling ITAD 393-12, Dec. 11, 2012
A Co., a resident of Japan, rendered consultancy services for a fee to B Co., a PEZA-registered domestic
corporation. A Co. sent its personnel to the Philippines to provide the services for an aggregate period of 1/
days for the entire duration of the agreement.
Is the income derived by A Co. subject to Philippine income tax? No. Under the RP-Japan Tax Treaty, a
Japanese enterprise shall be subject to tax in the Philippines on business profits to the extent attributable to
a permanent establishment (PE) situated in the Philippines. Under the RP-Japan Tax Treaty, a Japanese
enterprise may be deemed to have a PE in the Philippines if it furnishes in the Philippines consultancy
services or supervisory services in connection with a contract for a building construction or installation
project, through employees or other personnel -other than an agent of independent status-provided that
such activities continue (for the same project or 2 or more connected projects) for a period or periods
aggregating more than 6 months within any taxable year.
Since the services performed by A Co. in the Philippines totaled an aggregate period of only 17 days, A Co. is
not deemed to have a PE in the Philippines. Hence, the income derived by A Co. from the consultancy
services shall not be subject to Philippine income tax.
lustration. Source: BIR Ruling ITAD 310-13, Nov. 18, 2013
A Co., arnon-resident foreign corporation based in China, entered into a Just-In-Time Inventory Agreement
with B Co., a domestic corporation. In the agreement, A Co. agreed to deliver magnetic heads to B Co.s
warehouse, for use by B Co. as raw materials in its production of hard disk drives. However, since the
arrangement is "just in time" A Co. will only recognize a sale upon B Co:s actual withdrawal of the
magnetic heads from the warehouse.
s A Co. deemed to have a permanent establishment (PE) in the Philippines by delivering goods to B Co.'s
Warehouse? No. Although A Co. agreed to deliver the goods to B Co.'s warehouse, the use of the
warehouse is considered to be for the benefit of B Co., and is not for the purpose of establishing A Co's

Chapter 3: Taxation of Corporations | 3-5

fied place of business. If any, the relation between the warehouse and A Ca
ultimate objectve of carrying out the Just-in-Time Inventory Agreement. . is merely to attain the
A Co. subject to Philippine income tox on its business profits? No. Under Article 7 in
the RP-China Tax Treaty, the business profits of A Co. shall be taxable in the Philippine tion to Ars
PE situated in the Philippines, and only so much as are attributable to the PE. Since ny if it ma
have a PE in the Philippines, it is exempt from tax on business prorts rom the sale of goode ot deem
med ta

6. General Professional Partnerships. Partnerships formed by persons for the sole purpose of exercising their common
profession, no part of the income of which is derived from engaging in any trade or business.
7. Government-Owned or Controlled Corporations (GOCCs), Agencies Instrumentalities. All corporations,
agencies, or instrumentalities owned or controlled by the Government.
8. Foreign-Sourced Dividends. Dividends received from non-resident foreign corporations.

SOURCES OF INCOME
Aside from knowing the classification of the taxpayer, the source of income is the next important thing to determine-
whether it is from within the Philippines or without. The following rules apply:
1. Domestic corporations are taxable on income from sources within and without the Philippines.
2. Foreign corporations whether resident or non-resident, are taxable only on income from Philippine sources.

A partnership other than a general professional partnership is considered a corporation and is taxable as such.

Source of Income
Corporation Within the Phil. Without the Phil.
1. Domestic √ √
2. Foreign √

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CATEGORIES OF INCOME AND TAX RATES

1. Business Income. Generally, business income earned by a corporation is taxed at the following rates (Sections 27(A),
28(A)(1) and 28(B)(1):
Year Tax Rate
1997 35%
1998 34%
1999 33%
2000 -Oct. 2005 32%
Nov. 2005-20081 35%
20092 30%
2020 (effective July 1) 25%

Republic Act 11534, Corporate Recovery and Tax Incentives for Enterprises (CREAIE) Act, was signed into law on
Mar. 26, 2021 and published on Mar. 27, 2021. CREATE Act took effect on Apr. 11, 2021. There are specific
provisions with earlier effectivity dates.

The table below shows the specific tax rates on business income of corporate taxpayers (domestic and resident foreign):

Description Tax Rate Tax Base

DOMESTIC CORPORATION
1.
a. In General 25% Taxable Income from All Sources
b. Minimum Corporate Income Tax 1% Gross Income
 (effective July 1, 2020 until June 30, 2023)
c. Improperly Accumulated Earnings 10% Improperly Åccum. Taxable Income
(Repealed by Sec. 8, CREATE Act)
2. Proprietary Educational Institution 1% Taxable Income from All Sources
(effective July 1, 2020 until June 30, 2023)
3. Proprietary Hospital 1% Taxable Income from All Sources
(effective July 1, 2020 until June 30, 2023)
4 GOCC, Agencies & Instrumentalities (see la-1b)
5. National Government & LGUs (see 1a-1b)
6. Taxable Partnership (see la-1b)
7. Exempt Corporation
a. On Exempt Activities 0% Taxable Income
b. On Taxable Activities (see 1a)
8. General Professional Partnerships Exempt
9. Corporation covered by Special Laws Rate specified under the respective special laws
10. Domestic corporations with net taxable 20% Taxable Income from All Sources
income not exceeding P5,000,000 AND (effective July 1, 2020)
total assets not exceeding P100,000,000,
excluding the land on which the
particular business entity's office, plant
and equipment are situated.

RESIDENT FOREIGN CORPORATION

a.
In General, 25% Taxable Income from within the Phils.
b. Minimum Corporate Income Tax 1% Gross Income

c. Improperly Accumulated Earnings 10% (effective July 1, 2020 until June 30, 2023)
Improperly Accum.1 Taxable Income 2023)
(Repealed by Sec. 8, CREATE Act)
2. International Carriers 2.50% Gross Philippine Billings
3. Regional Operating Headquarters 10% Taxable Income
25% Taxable Income (effective Jan. 1, 2022)
4. Corporation covered by Special Laws Rate specified under the respective special laws
2. Passive Income. Passive income is subject to a separate and final tax. These are taxed at fixed rates ranging from 6% to
20%. Passive income is not to be included in gross income computation.
ON PASSIVE INCOME Domestic Resident Foreign
Interests
Interest from deposits and yield or any other monetary
benefit from deposit substitutes and from trust funds
and similar arrangements. 20% 20%

Interest income from a depository bank under the

expanded foreign currency deposit system.
Before TRAIN Law 7.5% 7.5%
Under TRAIN Law 15% 7.5%
Under CREATE Act 15% 15%
Income derived by a depository bank under the
expanded foreign currency deposit system from
foreign currency transactions with local commercial
banks, including branches of foreign banks that may
be authorized by the Bangko Sentral ng Pilipinas (BSP),
including interest income from foreign currency loans. 10% 10%

Royalties 20% 20%

Dividends
Under TRAIN Law
Dividends received by a domestic/resident foreign
corporation from a domestic corporation Exempt Exempt

Under CREATE Act

Dividends received by a domestic/resident foreign
corporation from a domestic corporation Exempt Exempt

Dividends received. by a domestic corporation from a

resident foreign corporation
Sourced within the Philippines Exempt

Dividends received by a domestic corporation from a May be

non-resident foreign corporation exempt under
Sourced without the Philippines (Foreign-Sourced) certain conditions

Capital Gains
On the net capital gain from sale, exchange or other 15% 15%
disposition of shares of stock in a domestic corporation per TRAIN per CREATE
not traded in the stock exchange (formerly 5%, 10%) (formerly 5%, 10%)

On the capital gain presumed to have been realized on

the sale, exchange or disposition of lands and/or
buildings not actually used in the business and treated
as capital assets, the higher value between
Gross selling price, and
Fair market value as determined by the Commissioner 6%
Notes:

Note that the income tax treatments for domestic and resident foreign corporations are almost the same. But remember
that resident foreign corporations are taxed only on their income within the Philippines. Passive income of non-resident
corporations is discussed near the end of this chapter.

2. Interest income received by a domestic corporation or resident foreign corporation from long-term deposits not issued
by banks or investment certificates that are not considered deposit substitutes shall be subject to 20% Creditable WT and
reported as part of taxable income subject to regular corporate income tax of 30% (Sec. 3, Revenue Regulations 14- 2012,
Nov. 7, 2012).

3. Per Revenue Memorandum Circular 62-2021, the tax treatment of dividends received by domestic corporation from a
resident foreign corporation (RFC) will depend on the sources of income of the RFC. Under Section 42AN2]6) of the Tax
Code, as amended, "dividend received from a foreign corporation shall be treated as income derived from sources withi
the Philippines, unless less than 50% of the gross income of the foreign corporation for the three-year period ending with
the close of its taxable year preceding the declaration of such dividends (or for such part of the period as the corporation
has been in existence) was, derived from sources within the Philippines xxx xxx".
4. As defined in Section 2 of RR 5-2021, foreign-sourced dividends are dividends received from, non-resident foreign
corporations (NRFC).
5. Per Section 6 of CREATE Act, and Section 5 of RR 5-2021, in general, foreign-dividends received by domestic
corporations are subject to income tax. However, the same shall be exempt if ALL of the following conditions concur:
same
a. The dividends actually received or remitted into the Philippines are reinvested in business operations of the domestic
corporation within the next taxable year from time the foreign-source dividends were received or remitted;
b. The dividends received shall only be used to fund the working capital requirement capital expenditures, dividend
payments, investment in domestic subsidiaries, and infrastructure project; and
C. The domestic corporation holds directly at least 20% in value of the outstanding shares of the foreign corporation and
has held the shareholdings uninterruptedly for a minimum of 2 years at the time of the dividends distribution. n case the
foreign corporation has been in existence for less than 2 years at the time of dividends distribution, then the domestic
corporation must have continuously held directly at least 20% in value of the foreign corporation's outstanding shares
during the entire existence of the corporation.
Absent any one of the above conditions, the foreign-sourced dividends shall be considered as taxable income of the
domestic corporation in the year of actual receipt or remittance, subject to surcharges, interest, and penalties, as
applicable.
Ilustration. Source: Banco de Oro et. al. vs. Republic of the Philippines et. al., Supreme Court (En Banc), G.R.
198756, Jan. 13, 2015
In 2001, the Caucus of Development NGO Networks (CODE-NG0) requested the approval of the
Department of Finance for the issuance by the Bureau of Treasury (BTr) of 10-year zero-coupon Treasury
Certificates. Initially, these Treasury Certificates were to be purchased by a special purpose vehicle, on
behalf of CODE-NGO, repackaged, and sold at a premium to investors as 'Poverty Eradication and Alleviation
Certificates or the PEACe Bonds'.
On May 31, 2001, the BIR issued BIR Ruling 020-2001 in response to CODE-NGO's queries as to the tax
treatment of the proposed PEACe Bonds. The BIR confirmed that the PEACe Bonds would not be classified
as deposit substitutes and would therefore not be subject to the 20% final withholding tax (FWT), in light o
the representation that the PEACe bonds will be issued to only one entity, i.e. cODE-NG0. The tak
treatment of the PEACe Bonds was reiterated in BIR Rulings Nos. 035-2001 and DA-175-01, which held tha
to determine whether debt instruments and securities are deposit substitutes, the "20 or more individual or
corporate lenders" rule must apply. The BIR added that the determination of the phrase "at any one time
for purposes of determining the "20 or more lenders" is to be determined at the time of the origina
issuance.

3-10 Income Taxation 2022 Edition by Prof. WIN Ballada and Susan Ballada
In comeIaxdhon

An auction was conducted and Rizal Commercial Banking Corporation (RCBC), on behalf of CODE-NG,
emerged as the winning bidder. CODE-NGO and RCBC Capital Corp. (RCBC Capital) entered into an
underwriting agreement whereby the latter was appointed the Issue Manager and Lead Underwriter for tne
offering of the PEACe Bonds. RCBC Capital sold the Government Bonds in the secondary market. ettioner
banks purchased the PEACe bonds on different dates.
Shortly before the maturity of the PEACe bonds, and in response to a query by the Department of Finance
the BIR iSsued Ruling 370-2011, which declared that the PEACe Bonds are deposit substitutes Subject to tne
20% FWT on the discount or interest earned, and directed the BTr to withhold said, FWT at matuy
Subsequently, the BlR clarified in Ruling DA-378-2011 that the liability for the FWT should be imposed not
only on RCBC/CODE-NGO, but also on all subsequent holders of the PEACe Bonds. The BIR held that a
treasury bonds, including the PEACe bonds, regardless of the number of purchasers/lenders at the time or
origination/issuance, are considered deposit substitutes, and that the interest on these deposit Substitures
are subject to the 20% FWT.
On Oct. 28, 2011, the Supreme Court issued a temporary restraining order enjoining the implementation or
BIR Ruling 370-2011 against the PEACe Bonds, subject to the condition that the 20% FWT on interest
income shall be withheld by the petitioner banks and placed in escrow pending resolution of the petion
Petitioner banks allege that on the same day the TRO was issued, the BTr paid to Petitioner banks and other
bondholders the amounts representing the face value of the bonds, net of the 20% FWT, and that the B
refused to release the amounts corresponding to the 20% FWT.
Are the PEACe Bonds considered deposit substitutes' subject to 20% FWT? Does the "20 lender rule" include
trading of the bonds in the secondary market?
The PEACe Bonds may or may not constitute 'deposit substitutes,' depending on the number of lenders "at
any one time." The "20 lender rule" applies to èvery tranisaction in the primary or secondary market.
Sections 24(B)(1), 27(D)(1) and 28(A)(7) of the Tax Code impose upon individuals, domestic and foreign
corporations, respectively, a 20% FWT on interest from deposit substitutes, which is defined in Sec. 22(Y) as
"an alternative form of obtaining funds from the public (the term 'public' means borrowing from twenty
(20) or more individual or corporate lenders at any one time) other than deposits, through the issuance,
endorsement, or acceptance of debt instruments for the borrower's own accountxx."
The number of lenders determines whether a debt instrument should be considered a deposit substitute
and consequently subject to the 20% FWT. The phrase 'at any one time,' for the purpose of determining
vhether the 20 lender rule applies, means every transaction executed in the primary or secondary market
connection with the purchase or sale of securities
here the financial assets involved are government securities like bonds, the reckoning of "20 or more
nders/investors' is made at any transaction in connection with the purchase or sale of the Government
onds, such as:
Sale and distribution by Government Securities Eligible Dealers (GSEDs) to various lenders/investors in the
secondary market;
Subsequent sale or trading by a bondholder to another lender/investor in the secondary market usually through a
broker or dealer; or
Sale by a financial intermediary-bondholder of its participation interests in the bonds to individual or
corporate lenders in the secondary market.
en, through any of the foregoing transactions, funds are simultaneously obtained from 20 or more
ers/investors, there is deemed to be public borrowing and the bonds, at that point, are deemed
sit substitutes. Consequently, the seller is required to withhold the 20% FWT on the imputed interest
me from the bonds.
Chapter 3: Taxation of Corporations | 3-11
The transactions executed for the sale of the PEACe Bonds are (a) the issuance of the bonds by the
BTr to RCBC/cODE-NGO, and (b) the sale and distribution by RCBC Capital on behalf of coDE-NGO
of the PEACe Bonds to undisclosed investors.

A reading of the underwriting agreement and RCBC term sheet reveals that the settlement dates for
the sale and distribution by RCBCc Capital to various undisclosed investors would fall on the same day
when the PEACe Bonds were supposedly issued to CODE-NGO/RCBC. In reality, therefore, the entire
borrowing received by the BTr in exchange for the PEACe Bonds was sourced directly from the
undisclosed number of investors to whom RCBC Capital/CODE-NGO distributed the PEACe Bonds, all
at the time of origination or issuance.
Snould there have been a simultaneous sale to 20 or more lenders/învestors, the PEACe Bonds are
deemed deposit substitutes and RCBC Capital/cODE-NGO would have been obliged to pay the 20%
FWT. The obligation to withhold the 20% FWT on the interest would likewise be required of any
lender/investor had the latter turned around and sold said PEACe Bonds, whether in whole or part,
simultaneously to 20 or more lenders or investors. However, interest income earned by individuals
from long-term deposits or investments that have a holding period of not less than 5 years, is exempt
from the FWT.

If the bonds are found to be deposit substitutes, the proper procedure is for the BTr to pay the face
value of the PEACe Bonds to the bondholders and for the BIR to collect the unpaid FWT from RCBC
Capital/ cODE-NGO as withholding agents.
The BTr is ordered to immediately release and pay to the bondholders the amount corresponding to the
20% FWT that it withheld on Oct. 1, 2011.
tf the PEACe Bonds are considered 'deposit substitutes,' is the BIR estopped from imposing and/or collecting
the 20% FWT?
The BIR is not estopped from. imposing and collecting the taxes. The three-year prescriptive period to
assess and collect internal revenue taxes is extended to 10 years in cases of (1) fraudulent returns; (2) false
returns with intent to evade tax; and (3) failure to file a return, to be counted from the time of the discovery
of the falsity, fraud or omission.
Should it be found that RCBC Capital/CODE-NGO sold the PEACe Bonds to 20 or more lenders/investors, the
BIR may still collect the unpaid tax from RCBC Capital/CODE-NGO within 10 years after discovery of the
omission.
Illustration. Source: BIR Ruling 443-2011, Nov. 11, 2011
s Savings and Loan Association (S-SLA) derives interest income from bank deposits and monetary benefit
from deposit substitutes. Is S-SLA exempt from the 20% FWT on interest income from bank deposit and
vield, or any monetary benefit from deposit substitutes imposed under Section 27(D)(1) of the Tax Code?
Yes. Under Section 5 of Republic Act 8367, otherwise known as the "Revised Non-Stock Savings and Loan
Associations Act of 1997," an association shall be exempt from payment of tax with respect to income it

tion 2022 Edition by Prof. WIN Ballada ond Susan Ballada

In come Taxaho n

Domestic and Resident Foreign Corporations, in General

Generally, the pro-forma computation of the normal income tax of domestic and resident foreign corporations follows:
Gross Income xxx
Less: Allowable Deductions xxx
Net Income xxx
Multiply by: Tax rate (effective July 1, 2020) 25%
Tax Due xxx
Domestic corporations classified as Micro, Small and Medium Enterprises (MSMES) with net taxable income not
exceeding P5,000,000 AND total assets not exceeding P100,000,000, excluding the land on which the particular business
entity's office, plant and equipment are situated, shall be taxed at 20% effective July 1, 2020.

Ilustration 1: ABC Corporation, a manufacturer, has a gross sale of P190,000,000 for CY2021, its 2nd year of operation.
Its total assets amounted to P5O, 000,000, net of the value of the land of P6,000,000 where its manufacturing plant and
business operations are situated. Its cost of sales and allowable operating expenses amounted to P100,000,000 and
P50,000,000, respectively. Compute for its income tax due for CY2021.

Gross Sales P190,000,000

Less: Cost of Sales 100,000,000
Gross Income P90,000,000
Less: Allowable Operating Expenses 50,000,000
Net Taxable Income P40,000,000
Multiply by: Tax Rate 25%
Tax Due P10,000,000

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

Illustration 2: Given the same facts as above, except for the allowable operating expenses, which amounted to
P85,000,000. The net taxable income will be P5,000,000. With this, the income tax rate shall be 20%, and the income tax
due shall be P1,000,000.

Gross Sales P190,000,000

Less: Cost of Sales 100,000,000
Gross Income P90,000,000
Less: Allowable Operating Expenses 85,000,000
Net Taxable Income P5,000,000
Multiply by: Tax Rate 20%
Tax Due P1,000,000

In both illustrations, the MCIT shall not be applied since ABC Corporation is only on its second year of operations.

For domestic and resident foreign corporations adopting the fiscal-year accounting period, the taxable income shall be
computed without regard to the specific date when specific sales, purchases and other transactions occur. Their income
and expenses for the fiscal year shall be deemed to have been earned and spent equally for each month of the period.

The corporate income tax rate shall be applied on the amount computed by multiplying the number of months covered by
the new rate within the fiscal year by the taxable income of the corporation for the period, divided by twelve.

The corporate income tax rate of 35% became effective beginning Nov. 1, 2005 (RA 9337). This law presented a scenario
where the months of January to October 2005 are under the rate of 32%. Regardless of the taxable year (calendar or fiscal)
followed, the formula for determining the total tax due for the year shall be as follows (RMC 16-06, Feb. 21, 2006):
Taxable Income x No. of months covered by 32% x 32% = P XX
12
Taxable Inćome x No. of months covered by 35% x 35% = XX
12
Total Tax Due per ITR PXX

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

April- Oct. 2005:

P600,000 x 7 mos. = P350,000 x .32 = P112,000

12

Nov. 2005 Mar. 2006:

P600,000 x 5 mos. = P250,000 x .35 = P 87,500

Total P199,500

During the transition period brought about by CREATE, Revenue Regulations 5-2021 provides the applicable income tax
rate, under the calendar year 2020 basis, as follows:
Domestic and Resident Foreign Corporations 27.50%
MSMEs 25%

Domestic and resident foreign corporations are subject to the minimum corporate income tax (MCIT). This is likewise
discussed in the next chapter

3-14 | Income Taxation 2022 Edition by Prof. WIN Ballada and Susan Ballada
Domestic Corporations, in Particular
Real Estate Investment Trust (REIT)
Per Republic Act 9856 and Revenue Regulations 13-2011, REIT is a stock corporation established in accordance with the
Corporation Code of the Philippines and the rules and regulations promulgated by the SEC, principally for the purpose of
owning income generating real estate assets. For tax purposes, a REIT is considered a taxpayer engaged in the real estate
business. Hence, real properties owned by a REIT are considered ordinary assets.
Income-generating real estate means real property which is held for the purpose of generating a regular stream of
income such as rentals, toll fees, user's fees and the like, as may be further defined and identified by the SEC.
Investor securities mean shares of stock issued by a REIT or derivatives thereof.
Overseas Filipino investor refers to an individual citizen of the Philippines who is working abroad, including one who
has retained or reacquired his Philippine citizenship under R.A. 9225.
Principal stockholder means a stockholder who is, directly or indirectly, the beneficial owner of more than 10% of any
class of investor securities of the REIT combined.
Public company means a company listed with the Exchange and which, upon and after listing, have at least 1,000 public
shareholders each owning at least 50 shares of any case and who, in the aggregate, own at least one-third (1/3) of the
outstanding capital stock of the REIT. (Rev. Reg. 3-2020 amending Rev. Reg. 11-2019).
Distributable income means net income earned for the taxable year, as adjusted for unrealized gains and losses/expenses
and impairment losses and other items in accordance with internationally accepted accounting standards. Distributable
income excludes proceeds from the sale of the REIT's assets that are re-invested in the REIT within 1 year from the date
of the sale.
A REIT's taxable net income means gross income less all allowable deductions (itemized or optional standard
deductions) and the dividends distributed by a REIT out of its distributable income as of the end of the taxable year as: (a)
dividends to owners of the common shares; and dividends to owners of the preferred shares pursuant to their rights and
limitations specified in the articles of incorporation of the REIT.

Income Taxation of REIT

A REIT shall be taxable on all income derived from sources Within and without the Philippines at applicable income tax
rate of 30% as provided under Section 27(A) of the NIRC on its taxable income as defined in these Regulations. Provided,
that in no case shall a REIT be subject to amum corporate income tax, as provided under Section 27 (E) of the NIRC.
(Rev. Reg. 3-202 amending Rev. Reg. 11-2019).
Chapter 3: Taxation of Corporations | 3-15

Tax Incentives
To qualify for the tax incentives under Section 5 of RR 13-2011, a RET must:
a. be a public company and maintain its status as a public company;
b. for the DST incentive on transfer of real property provided for under Section 6 of RR 13-2011 enlist with an
Exchange within 2 years from the date of initial availment of DST incentive and maintain the listed status of the
investor securities on the Exchange and the registration of the investor securities by the SEC;
c. distribute at least 90% of its distributable income as required under the Act and its IRR, as revised; and comply
with its Reinvestment Plan, as certified by the Commission. The Certification from the Commission that the REIT
is compliant with its Reinvestment Plan must be submitted by the REIT as an attachment to its annual income tax
return and audited financial statements on or before April 15 (or on the 15th day of the 4th month following the
close of the fiscal year). (Rev. Reg. 3-2020 amending Rev. Reg. 11-2019).

To be deductible, the dividends distributed should be at least 90% of a REITs distributable income for the taxable year,
and actually paid to the shareholders not later than the last day of the 5th month from the close of the taxable year.
Dividends distributed by a REIT from its distributable income after the close of a taxable year and on or before the last
day of the such month following the close of the taxable year shall be considered as paid on the last day of such taxable
year.
Sec. 10 of RR 13-2011 mandates that the income tax collectible from the dividends deducted from gross income should be
placed in escrow in favor of the BIR with an authorized agent bank. By the end of the 3rd year from its listing, at the latest
and thereafter, the REIT shall maintain the 67% minimum public ownership. Otherwise, dividend payment shall not be
allowed as a deduction from its taxable income.
In general, cash or property dividends paid by a REIT shall be subject to a final tax of 10%, unless (a) the dividends are
received by a non-resident alien individual or a non-resident foreign corporation entitled to claim a preferential
withholding tax rate of less than 10% pursuant to an applicable tax treaty; or (b) the dividends are received by a domestic
corporation or resident foreign corporation, or an overseas Filipino investor in which case, they are exempt from income
tax or any withholding tax. In the case of overseas Filipino investors, they are exempt from the dividends tax for seven (7)
years from the effectivity of the RR 13-2011.
All income payments to a REIT shall be subject to a lower creditable withholding tax of 1%. REITS shall not be subject to
the minimum corporate income tax. Other incentives include reduced documentary stamp tax (DST) for transfers of real
property and shares of stock to the REIT and exemption of REIT securities from the initial public offering (IPO) tax.

Proprietary Non-Profit Educational Institutions and Hospitals

The 10% tax on the taxable income except those passive income subject to final tax. Provided, that beginning July 1,
2020 until June 30, 2023, the tax rate shall be 1%. Provided, further, that if the gross income from "unrelated trade,
business or other activity" exceeds 50% of the total gross income derived from all sources, the tax prescribed for domestic
corporations shall be imposed on the entire taxable income (Section 6 of CREATE; RR 5-2021, Apr. 8, 2021).

Proprietary Educational Institutions. Refer to any private schools, which are non-profit 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, under existing lass and regulations.

Proprietary Hospitals. Refer to any private hospitals, which are non-profit for the purpose of these Regulations,
maintained and administered by private individuals or groups.
Non-Profit. As used in the definition of Proprietary Educational Institutions and Proprietary hospitals, means that no net
income or asset accrues to or benefits any member or specific person, with all the net income or assets devoted to the
institution's purposes and all activities conducted not for profit.

Unrelated Trade, Business or Other Activity of Proprietary Educational Institutions and Hospitals. Means any
trade, business, or other activity, the conduct of which is not substantially elated to the exercise or performance by such
educational institution or hospital of its primary purpose or function.

Illustration 1: SGB University, a proprietary educational institution, has a gross income or the taxable year 2019 of P15
million. Of the total gross income, P5 million was derived from unrelated trade or business. Total deductions amount to
P3 million.
Gross Income P15,000,000
Less: Deductions 3,000,000
Net Income P12,000,000
Multiply by: Tax rate 10%
Tax Due P 1,200,000

The 10% tax rate applies because the gross income from unrelated trade or business did not exceed the 50% limit of the
total gross income (only 33.33% or P5M/P15M).
Illustration 2: In the preceding illustration, maintain all assumptions except that the institution's gross income derived
from unrelated trade or business is P9 million. How much tax is due?

Gross Income P15,000,000

Less: Deductions 3,000,000
Net Income P12,000,000
Multiply by: Tax rate (2019) 30%
Tax Due P 3,600,000

The gross income from unrelated trade or business is more than 50% of the total gross income. It is actually 60%
(P9M/P15M). Hence, the tax rate that applies is the tax rate prescribed in Section 27(A).

Note that non-stock and non-profit educational institutions, and government educational institutions are both exempt from
income tax (Section 30 of NIRC). These are discussed later in the chapter.

llustration. Source: Commissioner of Internal Revenue vs. St. Luke's Medical Center, Inc., Supreme Court
(Second Division) G.R. 195909 & 195960, Sept. 26, 2012; RMC 67-2012, Oct. 31, 2012; RMC 4-2013, Jan. 11,
2013

The BIR assessed Respondent St. Luke's Medical Center, Inc. (SLMC), a hospital organized as a'non-stock and
non-profit corporation, deficiency income tax for the year 1998. For failure to act on its protest, SLMC fled
a Petition for Review with the CTA.
The BIR claimed that SLMC was actually operating for profit and that its charitable services amount to only
13% of its total revenue. Hence, SLMC is liable for the 10% income tax on proprietary hospitals under
Section 27(B) of the Tax Code, which provides that "Proprietary educational institutions and hospitals which
are non-profit shall pay a tax of 10% on their taxable income" except for passive income, which shall be
subject to final taxes.

On the other hand, SLMC argued that it is exempt from income tax as an institution for charitable and social
welfare purposes under Sections 30 (E) and (G) of the Tax Code. Thus, the Tax Code exempts from income
tax a "non-stock corporation or association organized and operated exclusively for xx charitable xx purposes
xx, 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" and a "Civic league or organization not organized for profit but operated
exclusively for the promotion of social welfare."
The CTA ruled that SLMC is exempt from income tax as it is covered by Section 30(E) and (G) of the Tax
Code, as evidenced by the primary purposes stated in its Articles of Incorporation and various documents
identifying SLMC as a charitable institution. The CTA ruled that the generation of income does not per se
destroy the charitable nature of SLMC.
Is SLMC exempt from income tax under, Section 30 (E) and (G) of the Tax Code? No. SLMC is not exempt
from income tax under Section 30(E) and (G) of the Tax Code. Instead, it is subject to the 10% income tax
on proprietary hospitals
To be tax exempt under Section 30 (E) of the Tax Code, a charitable institution must meet the following
requirements: 1) it must be a non-stock corporation or association; 2) it must be organized exclusively for
charitable purposes; 3) it must be operated exclusively for charitable purposes; and 4) no part of its net
income or asset shall belong or inure to the benefit of any member, organizer, officer or any specific person.
Section 30(G) of the Tax Code requires that, in order to be exempt from income tax, an institution must be
"operated exclusively" for social welfare.
Although SLMC is organized as a non-stock and non-profit charitable institution as shown by its Articles of
Incorporation, by-laws and other constitutive documents, it does not operate exclusively for charitable
purposes. Hence, SLMC is liable for income tax at the rate of 10%, pursuant to Section 27 (B) of the Tax
Code. However, it is not liable for surcharge and interest on such deficiency income tax since it had good
reasons to rely on the 1990 letter of the BIR, which opined that SLMC is a corporation for "purely charitable
and social welfare purposes."
Notwithstanding the income tax exemption of charitable and social welfare institutions in Section 30(E) and
(6) of the Tax Code on their operations (i.e, their regular activities), the last paragraph of Section 30
provides that their income of whatever kind and character from any of their properties, real or personal, or

3-18 | Income Taxation 2022 Edition by Prof. WIN Ballada and Susan Ballada

In come Tayahon
any of their activities conducted for profit regardless of the disposition made of such income, snai De
cilbiect to income tax. Rather than the 30% regular corporate income tax, however, the 10% preferentia
from
rate under Section 27(B) shall apply.

Government-Owned or -Controlled Corporations, Agencies or Instrumentalities (GOCCs)

Subject to the provisions of existing special laws or general laws, all corporations, agencies, or instrumentalities owned or
controlled by the Government shall pay such rate of tax upon their taxable income as are imposed by the Code upon
corporations or associations engaged in a similar business, industry or activity. The following are exempt:
1. Government Service Insurance System (GSIS),
2. Social Security System (SSs),
3. Philippine Health and Insurance Corporation (PHIC),
4. Home Development Mutual Fund (HDMF) (effective Apr. 11, 2021),
5. Local Water Districts (LWD).

Republic Act 10026 granted. income tax exemption to local water districts (LWD). The law mandates that the amount
saved due to the exemption shall be used by the local water districts. for capital equipment expenditure that will result to
an expanded water services coverage and improved water quality in the provinces, cities, and municipalities. t also
required the water districts to adopt internal control reforms that would bring about their economic and financial viability.
The act further directed the water districts not to increase by more than 20% a year its appropriation for personal services,
as well as for travel, transportation or representation expenses and purchase of motor vehicles.
Philippine Charity Sweepstakes Office (PCso) is no longer exempt from income tax under TRAIN.

Illustration. Source: Philippine Amusement and Gaming Corporation vs. Bureau of Internal Revenue,
Supreme Court (En Banc), G.R. 215427, Dec. 10, 2014
On Mar. 15, 2011, the Supreme Court (PAGCOR vs. BIR, G.R. 172087) ruled that R.A. 9337 is valid and
nstitutional insofar as it amends Sec. 27(c) of the Tax Code of 1997 by excluding petitioner PAGCOR from
enumeration of government-owned and -controlled corporations (GOCCs) that are exempt from
orate income tax. The Supreme Court declared that PAGCOR is liable for corporate income tax without
any distinction as to the nature of the income subject to tax.
ne basis of this decision, the BIR issued Revenue Memorandum Circular 33-2013, Apr. 17, 2013, which
On t
odes that PAGCOR is no longer exempt from corporate income tax, and that itS income from operations
and censing of gambling casinos, gaming clubs and other similar recreation or amusement places, gaming
licen
S and other related operations, and other income not connected With the foregoing operations are
Sd to the corporate income tax under the Tax Code. RMC 33-2013 also prescribes that PAGcOR is
franchise tax pursuant to its Charter, Presidential Decree (PD) 1869, on gross revenue or
Subject to the 5%1
Es it derives from its operations and licensing of gambling casinos, gaming club and other similar
earnings
n or amusement places, gaming pools and from other related operations.

Chapter 3: Taxation of Corporations | 3-19

PAGCOR sought clarification from the Supreme Court and alleged that the RMC is an erroneous
interpretation and application of the Mar. 15, 2011 Supreme Court decision.
Is the income earned by PAGCOR from gaming operations and other related services subject to both income
tax under the Tax Code and the 5% franchise tax under its Charter?

No. PAGCOR's income from gaming operations is subiect to the 5% franchise tax, in lieu of all national and
local taxes, pursuant to its Charter. On the other hand, its income from other related services is subiect to
the corporate income tax under the Tax Code.

PAGCOR's exemption in Sec. 27(¢) of the Tax Code, before its amendment by RA. 9337, only pertains to
income tax on revenues from other related services and not on the revenues from gaming operations. This
s because the tax exemption for the income from gaming operations is granted in PAGCOR's Charter, which
imposes a 5% franchise tax on the gross revenues derived from its operations conducted under the
franchise, in lieu of all taxes of any kind, which necessarily includes corporate income tax. The exemption
attached to the income from gaming operations existed even before the enactment of the Tax Code
There is no conflict between P.D. 1869 and R.A. 9337 because the former imposes the 5% franchise tax on
the gross revenues derived from PAGCOR's operations conducted under its franchise, in lieu of all taxes of
any kind, while the latter merely reinstates the income tax imposed by RA. 8424 on PAGCORs income from
other necessary and related services, shows, and entertainment.

A special law, i.e., PAGCOR's Charter, prevails over à general law, ie., RA. 9337, regardless of their dates of
passage, and the special law will be considered as án exception to the general law. Without any categorical
repeal or amendment in R.A. 9337 of the income tax exemption of PAGCOR, its income tax exemption
remains.

Hence, PAGCOR's income derived from gaming operations is subject only to 5% franchise tax in accordance
with its Charter. With respect to PAGCOR's income from operation of other related services, the same is
subject to income tax only, pursuant to its Charter which provides that any income from other related
services shall not be included as income subject to the franchise tax, but should be considered as a separate
income subject to income tax.

Power Sector Assets and Liabilities Management Corporation (PSALM)

Revenue Memorandum Circular 11-2012 clarifies the income tax consequences of transactions of the PSALM, they are as
follows:
1. No income and WT are due from the sale of the National Power Corporation (NPC) generation assets and other real
properties to winning bidders.
2. The rental income of PSALM from the NPC generation assets and other real properties, prior to its sale to winning
bidders, is subject to income tax.
3. Any income to be derived by PSALM from the operation of the generation facilities is subject to income tax and
withholding tax.
Prior to privatization of the NPC assets transferred to PSALM, PSALM shall administer and operate the same. PSALM
will be selling electric power from the transferred generation assets and, thus, PSALM will be treated as a generation
company with respect to its sale or generated electric power. Since PSALM is not one of the four GOCCs exempt from
income tax under Section 27 (C) of the Tax Code, any income derived from such is subject to income tax.
4. Other income or receipts from miscellaneous activities, such as forfeiture of performance bonds, interest income from
persons other than the winning bidders, and from other activities not related to PSALM's mandate are subject to all
applicable taxes under the Tax Code
Mutual Life Insurance Companies
These Companies are now subject to the regular corporate income tax rates.
Homeowners' Association
Association or condominium dues, membership fees and other assessments or charges which are held in trust by the
condominium corporation to be used solely for administrative expenses, are excluded from the condominium
corporation's gross income, hence, not subject to income and withholding tax (Office metro Philippines, in Vs.
Commissioner of Internal Revenue, Court of Tax Appeals (Third Division) Case 8384, June 3, 2014).
Earlier, the BIR, in Revenue Memorandum Circular 9-2013, stated that the amounts paid as dues or fees by members of a
homeowners' association form part of the gross income of the latter and is subject to income tax, considering that a
homeowners' association furnishes its members with benefits, advantages, and privileges in return for such payments.

Pursuant to Section 18 of R.A. 9904, association dues and income derived from rentals of the homeowners' associations'
properties may be exempted from income tax, VAT and percentage tax subject to the following conditions:
1.The homeowners' association must be a duly constituted "association" as defined under Section 3(b) of R.A. 9904;
2. The local government unit having jurisdiction over the homeowners' association must issue a certification identifying
the basic services being rendered by the homeowners' association, and stating in the said certification its lack of resources
to render such services despite its clear mandate under applicable laws, rules and regulations;
3. Such services must fall within the purview of the term "basic community services and facilities", which is defined
under Section 3(d) of R.A 9904 as referring to services and facilities that redound to the benefit of all homeowners and
from which, by reason of practicality, no homeowner may be excluded such as, out not limited to: security, street and
vicinity lights, maintenance, repairs and cleaning or streets, garbage collection and disposal, and other similar services and
facilities,
4. The homeowners' association must present proof (i.e., Financial statements) that the income and dues are used for the
cleanliness, safety, sec na other basic services needed by the members, including the maintenance of the rduls or their
respective subdivisions or villages.

Chapter 3: Taxation of Corporations | 3-2

Recreational Clubs
Revenue Memorandum Circular 35-2012 clarifies the taxability of clubs organized and operated exclusively for pleasure,
recreation, and other non-profit purposes. Income from whatever source, including but not limited to membership fees,
assessment dues, rental income and service fees, of clubs organized and operated exclusively for pleasure recreation, and
other non-profit purposes, are subject to income tax.
Resident Foreign Corporations, In Particular
International Carrier
Per Republic Act 10378 (passed into law on Mar. 7, 2013 and took effect on Mar. 29, 2013) and Revenue Regulations 15-
2013 (issued Sept. 30, 2013), an international carrier doing business in the Philippines shall pay a tax of 2.50% on its
Gross Philippine Billings (GPB) as follows:
1. International Air Carriers- Gross Philippine Billings refers to the amount of gross revenue derived from passage of
persons, excess baggage, carg0, and 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: Provided, That 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 the Gross Philippine Billings tax if the passenger is
lifted/boarded on an aircraft from any port or point in the Philippines towards a foreign destination: Provided, further,
That for a flight which 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.

2. International Shipping - Gross Philippine Billings means gross revenue whether for passenger, cargo or mail
originating from the Philippines up to final destinationregardless of the place of sale or payments of the passage or freight
documents.

*An International Air Carrier refers to a foreign airline corporation doing business in the Philippines what has been
granted landing rights in any Philippine port to perform international air transportation services/activities or flight
operations anywhere in the world. n-line carriers refer to international carriers having or maintaining flight operations to
and from the Philippines. Off-line carriers refer international air carriers having no flight operations to and from the
Philippines.
*An International Sea Carrier refers to a foreign shipping corporation doing business in the Philippine having touched or
with the intention of touching any Philippine port, to perform international transportation services/activities from the
Philippines to anywhere in the world and vice versa, in the he of on-line carriers; or having maintained business
establishments, agents or representative offices in the Philippines for the sale of owned tickets/passage documents or
tickets/passage documents of other shipping companies, which shipping companies operate without touching any
Philippine port, in the case off-line carriers.

3-22 | Income Taxation 2022 Edition by Prof. WIN Ballada and Susan Ballada

Provided, That international carriers doing business in the Philippines may avail of a preferential rate or exemption from
the tax herein imposed on their gross revenue derived from the carriage of persons and their excess baggage on the basis
or an applicable tax treaty or international agreement 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 the tax imposed under this provision.

Illustration. Source: BIR TTAD Ruling 212-11, Aug. 15, 2011

The gross Philippine Dilings ofa Korean corporation providing air transportation services are subject to the
5% preferential Philippine income tax rate under the RP-Korea Tax Treaty.
lustration. Source: BIR.ITAD Ruling 071-11, Mar. 2, 2011
Article 9 of the RP-US Tax Treaty provides that the Philippines may tax the profits derived by a resident or
the US from the operation of aircrafts in international traffic in the Philippines, but the rate of income tax
that may be imposed on such profits shall not exceed the lesser of 1.5% of the gross amount thereof, or the
lowest rate of income tax imposed by the Philippines on such profits derived by a resident of a third state
under similar circumstances. Since the Philippines has not yet granted a most-favored nation treatment on
profits from the operation of aircrafts in international traffic, the rate of income tax that applies to the GPB
of a US company is 1.5%.

Offshore Banking Units (OBUs)

Repealed under CREATE Act and shall now be taxed at 25% as a resident foreign corporation effective Apr. 11, 2021.
Before CREATE, income derived by offshore banking units authorized by the BSP, from foreign currency transactions
with local commercial banks, including branches of foreign banks that may be authorized by the BSP to transact business
with offshore banking units, including any interest income derived from foreign currency loans granted to residents, shall
be subject to a final income tax at 10% of such income.
Branch Profits Remittances
Any profit remitted by a branch to its head office shall be subject to a tax of 15% which shall be based on the total profits
applied or earmarked for remittance without deduction for the tax component thereof (except those activities which are
registered with the Philippine Economic Zone Authority).
Regional Operating Headquarters (ROHQs)
Shall mean a branch established in the Philippines by multinational companies which are engaged in a plan any of the
following services: general administration and planning; business planning and coordination; sourcing and 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 product development; technical support
and maintenance: data processing and communication; and business development. Regional operating headquarters shall
pay a tax of 10% of their taxable income. Per CREATE Act, effective Jan. 1, 2022, ROHQs shall be taxed at 25% of their
taxable income.

Regional or Area Headquarters (RHQs)

Shall mean a branch established in the Philippines by multinational companies and which headquarters do not earn or
derive income from the Philippines and which act as Supervisory, communications and coordinating center for their
affiliates, subsidiaries, or branches in the Asia-Pacific Region and other foreign markets. Regional or area headquarters as
such shall not be subject to income tax.

llustration. Source: BIR Ruling 047-01, Sept. 28, 2001

The regional headquarters to be established by Catex (Asia) Limited (CAL) will be exempt from income tax
as long as its billing to Caltex Operating Companies (Cocs) will not include any fees or compensation paid to
RHO for services rendered or performed, but more of reimbursement of their share in the allocated RHQ
expenses, provided further that there would be no excess of the amount received from the cOCs for the
costs of operating the RHQ as its costs will be shared among the COCs and therefore should not result to
any income.

Non-Resident Foreign Corporation, in General

The basis of tax for non-resident foreign corporations is gross income from sources within the Philippines, such as
interests, dividends, rents, royalties, salaries, premiums (except reinsurance premiums), annuities, emoluments or other
fixed or determinable annual, periodic or casual gains, profits and income, and capital gains.

Generally, the pro-forma computation of the income tax of non-resident foreign corporations follows:
 Gross Income XXX
Multiply by: Tax rate (effective Jan. 1, 2021) 25%
Tax Due XXX

Under Section 42(A)(3) of the Tax Code, income from services is considered derived from sources within the Philippines
only if the services are performed in the Philippines
Hence, income from services performed by a non-resident foreign corporation entirely outside the Philippines is exempt
from Philippine income tax (BIR Ruling 458-2012, July 10, 2012).

3-24 | Income Taxation 2022 Edition by Prof. WIN Ballada and Susan Ballada

Illustration Source: Aces Philippines Cellular Satellite Corporation vs. Commissioner of Internal Revenue
CTA (2nd Division) Case 8567, July 23, 2014

Satellite airtime service fees paid to a non-resident foreign corporation (NRFC) are considered income from sources
within the Philippines that are subject to 30% FWT.
The important factor that determines the source of income of personal services is not the residence of the payor, or the
place where the contract for service is entered into, or the place of payment, but the place where the services were actually
rendered. The source or origin of income is determined by the situs where the activity or service was performed.
The activity that produces the income is the undertaking of providing satellite communication time to be delivered by the
NRFC and utilized by Aces and its subscribers in the Philippines. Services include the use of satellite airtime for voice or
data calls but exclude satellite utilization time for call setup, unanswered calls and incomplete call. Thus, the activity that
produced the income took place in the Philippines. The evidence presented by Aces is insufficient to support its claim that
the service fees paid to the NRFC should be considered as income from sources outside the Philippines.
Moreover, the 7.5% FWT under Sec. 28(B)(4) of the Tax Code will not apply since Aces failed to present evidence to
prove that the fee paid to the NRFC is for the use of equipment. The agreement presented did not stipulate that the
payment of satellite airtime fees is for the rental or use of the satellite equipment of the NRFC.

illustration. Source: BIR Ruling DA-ITAD-13-05, Feb. 16, 2005

A Japanese company performs maintenance services in Japan for its client Philippine company and transmits the same
electronically through recorded media. The following maintenance services shall not be subject to income tax and VAT in
the Philippines:
1. provision of updated versions;
2. technical consultation via telephone, fax or e-mail;
3. technical training; and
4. annual platform changes.

Non-resident foreign corporations are liable to income tax imposed in the Philippines only on income from services
performed in the Philippines.
lustration. Source: BIR Ruling 09-2005, July 28, 2005

A domain name service company that merely renders administrative functions that do not involve any transfer of
technology, equipment or property to its subscribers is classified as engaged in the sale of services, not of goods.

A non-resident foreign corporation performing domain name services outside of the Philippines shall not be subject to
Philippine taxation even on fees collected in the Philippines from Philippine-based clients. The Philippine company,
acting as agent for and on behalf of the non-resident foreign domain name service shall not be subject to Philippine
income tax on service fees collected for its principal. However, the Philippine company’s gross commission earned for
collecting such fees shall be subject to the regular corporate income tax and the 10% VAT (now 12%).
Chapter 3: Taxation of Corporations | 3-255
Non-Resident Foreign Corporation, in Particular
Non-Resident Cinematographic Film Owner, Lessor or Distributor is taxed at 25% of
gross income.
Non-Resident Owner or Lessor of Vessels Chartered by Philippine Nationals is taxed at 4.50% of gross rentals, lease
or charter fees from leases or charters to Filipino citizens or corporations, as approved by the Maritime Industry
Authority.
Non-Resident Owner or Lessor of Aircraft, Machinery and Other Equipment is taxed at 7.5% of gross rentals,
charters and other fees.

Illustration. Source: BIR Ruling.337-2011, Sept. 7, 2011

Rental payments to a nonresident foreign corporation, for the lease of electronic gaming equipment, are subject to the 7.5% FWT
pursuant to Section 28(B)(4) of the Tax Code.

Passive Income of Non-Resident Foreign Corporation

1. Interest on foreign loans contracted on or after Aug. 1, 1986 are taxed at 20%.

Interest arising from a loan extended by a US corporation to a domestic corporation, which is guaranteed by the US
Eximbank, is exempt from Philippine income tax pursuant to the RP-US Tax Treaty.
Interest on a loan paid by a domestic corporation to the Export-Import Bank of Korea is exempt from Philippine income
tax pursuant to the RP-Korea Tax Treaty.
Under the RP-Japan Tax Treaty, interest on foreign loans will qualify for the 10% preferential tax rate if the recipient of
such interest is also the beneficial owner
Interest payments made by a domestic corporation to a Belgian corporation are subject to the 10% preferential WT rate
under the RP-Belgium Tax Treaty.
Under Article 11(2) of the RP-Singapore Tax Treaty, interest payments arising in the Philippines and paid to a resident of
Singapore are entitled to the preferential tax rate of 15% of the gross amount of interest, provided the debt-claim in
respect of which the interest is paid is not effectively connected with a permanent establishment (PE) which the recipient
has in the Philippines.

Interest payments arising in the Philippines and paid to a resident of Thailand are entitled to the 15% preferential tax rate
pursuant to Article 12(2)(b) of the Thailand Tax Treaty.
2. Dividends received by a NRFC from a Domestic Corporation (Section 7, CREATE Act RR 2-2021). In general, it is
subject to 25% FWT., However, a reduced rate of 15% FWT shall be applied, subject to the condition that the country in
which the NRFC is domiciled:
a. shall allow a credit against the tax due from the said NRFC which are equivalent to taxes deemed to have been paid in
the Philippines equal to 10% effective Jan. 1, 2021, which represents the difference between the regular income tax for
NRFC under section 28(B)(1) of the NIRC of 1997, as amended, and the 15% tax on dividends as herein provided; or
b. does not impose any income tax on dividends received from a domestic corporation.

Article 10 of the RP-Netherlands Tax Treaty provides that dividends paid by a Philippine company to the beneficial
owner of the dividends, which is a resident of Netherlands, may be taxed at a rate not exceeding 10% of the gross amount
of the dividends if the recipient is a company which holds directly at least 10% of the capital of the company (excluding
cooperatives) paying the dividends. In all other cases, the rate shall not exceed 15%.
Under the RP-Germany Tax Treaty, the Philippines may tax dividends paid by a Philippine company to a German
company at a rate not exceeding 10%, if the German company directly holds at least 25% of the voting shares of the
Philippine company.
Under the RP-Korea Tax Treaty, dividends paid by a domestic corporation to a resident of Korea are subject to the tax
rate of 10% on the gross amount of dividends if the resident of Korea is a company (other than a partnership) directly
holding at least 25% of the capital of the domestic company.
Under Article 10(2)(a) of the RP-Switzerland Tax Treaty, dividends arising in the Philippines and paid to a resident of
Switzerland may be taxed in the Philippines at a rate not to exceed 10% of the gross amount of the dividends, if the
recipient of the dividends is a company (excluding partnerships) which directly holds at least 10% of the capital of the
paying company.
Under the RP-Singapore Tax Treaty, the Philippines may tax dividends paid by a Philippine company to a Singaporean
company at a rate not exceeding 15%, if the Singaporean company is the beneficial owner of at least 15% of the
outstanding shares of the voting stock of the Philippine company.
Dividends paid by a Philippine company to an Australian and a Hong Kong company shall be subject to the 15% FWT.
Dividends paid by a domestic corporation to a resident of the Bermuda and Cayman Islands are subject to the 15% FWT
under Section 28(B)(5{b) of the Tax Code.
Dividends paid by domestic corporations to a Swiss foundation are subject to 15% FWT
Under the RP-US Tax Treaty, dividends paid by a Philippine corporation to a US resident are subject to the 20%
preferential tax rate if during the part of the Philippine corporation's taxable year which precedes the date of payment of
the dividend and during the whole of its prior taxable year, if any, the US corporation owns at least 10% of the
outstanding shares of the voting stock of the Philippine Corporation.
3. Capital gains from sale of shares of stock not traded in the stock exchange. A final tax at 15% (Section 7, CREATE
Act) is imposed upon the net capital gains realized during the taxable year from the sale, barter, exchange or other
disposition of shares of stock in a domestic corporation, except shares sold, or disposed of through the stock exchange.
4. Income derived by a bank from its FCDUs/EFCDUs or OBUs with respect to foreign currency transactions with non-
residents, OBUs in the Philippines, and local commercial banks, including branches of foreign banks authorized to
transact business with FCDUs/EFCDUs, are exempt from income taxes.
5. Royalty payments made by a PEZA-registered enterprise to a non-resident Japanese corporation are subject to the
preferential tax rate on the gross amount of the royalties under the RP-Japan Tax Treaty Under Article 10 of the RP-Japan
Tax Treaty, royalty income derived in the Philippines by a corporation which is a resident of Japan shall be taxed at either
one of the following preferential rates:
a. 10% if the payor-company is an entity registered with the Board of Investments (BOI);
b. 15% if the payments are with respect to the use or the right to use cinematographic films and films or tapes for
radio or television broadcasting; and
c. 25% in all other cases.

However, the Protocol amending the RP-Japan Tax Treaty reduced the 25% tax rate to 10% effective Jan. 1, 2009.
Payments for the use of a patent, trademark, design or model, plan, secret formula or process are subject to 10%
preferential tax rate on royalties under Article 12(2)(b) of the RP-Japan Tax Treaty.
Royalties paid by a domestic corporation to a US corporation are subject to the 10% preferential tax rate pursuant to the
most-favored nation clause of the RP-US Tax Treaty in relation to the RP-UAE Tax Treaty.
Royalties paid by a Philippine company to a non-resident foreign corporation existing under the laws of the Netherlands
are subject to the 10% preferential tax rate if the Philippine company is registered and engaged in preferred areas
activities, or to the 15% preferential tax rate in all other cases, pursuant to Article 12(2) of the RP-Netherlands Tax Treaty.
Royalties paid by a domestic corporation to a French corporation are entitled to the 15% preferential tax rate under the
RP-France Tax Treaty.
Article 11 of the RP-UK Tax Treaty provides that royalties arising in the Philippine and paid to a resident of the UK may
be taxed in the Philippines, but the tax and may be imposed should not exceed: (a) 15% of the gross amount of the
royalties the royalties are paid by an enterprise registered with the BOI and engaged in preferred areas of activity, or if the
royalties are paid with respect to cinematographic films or tapes for television or radio broadcasting, and (6) 25% In all
other cases.
The prior filing of a tax treaty relief applications (TTRA) under RMO 1-2000 is not mandatory before a taxpayer can avail
of the benefits under the treaty, provided the conditions for availment as prescribed in the treaty are complied with.
The Bureau of Internal Revenue (BIR) has previously required that a tax treaty relief must first be procured (at, least 15
days before the intended transaction) with the International Tax Affairs Division (ITAD) before applying the preferential
tax rates under the different tax treaties. Failure to make such an application with the BIR-ITAD shall subject the NRFC's
income to the usual tax rates.

llustration. Source: Deutsche Bank AG Manila Branch vs. Commissioner of Internal Revenue, Supreme Court
G.R. 188550, Aug. 19, 2013 and Lindberg Subic, Inc. vs. Commissioner of Internal Revenue,
CTA (First Division) Case 8524, Feb. 11, 2014
Our Constitution adheres to the general principles of international law as part of the law of the land. The time-honored
international principle of pacta sunt servanda demands the performance in good faith of treaty obligations on the part of
the States that enter into the agreement. Every treaty in force is binding upon the parties, and obligations under the treaty
must be performed by them in good faith. More importantly, treaties have the force and effect of law in the Philippines.
A State that has contracted valid international obligations is bound to make in its legislations those modifications that may
be necessary to ensure fulfillment of the obligations undertaken. Thus, laws and issuances must ensure that the reliefs
granted under tax treaties are accorded to the parties entitled thereto. The BIR must not impose additional requirements
that would negate the availment of the reliefs provided for under international agreements.
The 15-day period for filing the TTRA under RMO 1-2000 should not operate to divest entitlement to the tax treaty
provision/benefit, since to do so would constitute a violation of the duty required by good faith' in complying with a tax
treaty. The denial of the tax treaty availment for failure to apply within the 15-dav

Pn WOuld impair the value of the tax treaty. At most, the TTRA should merely operate to confirm the
ent of the taxpayer to the relief under the treaty. The obligation to comply with a tax treaty must
take
imnPecedence over the objective of RMO 1-2000. Non-compliance with tax treaties has negative
nplicatio
Ons on international relations, and unduly discourages foreign investors.

Chapter 3: Taxation of Corporations | 3-29

ALLOWABLE DEDUCTIONS
Allowable deductions are items or amounts which the law allows to be deducted from gross income in order to arrive at
the taxable income. A domestic or resident foreign corporation may deduct from its business income, itemized deductions
under the Tax Code. Or, these corporations may elect a standard deduction in an amount not exceeding 40% of its gross
income. (R.A. 9504'). Non-resident foreign corporations are not allowed deductions from gross income. Discussions in
another chapter.
TAXABLE INCOME AND TAX DUE
In case of corporations, taxable income is the pertinent items of gross income less the deductions authorized for such
types of income. Taxable income is the amount or tax base upon which tax rate is applied to arrive at the tax due.
Depending on the taxpayer Involved and for purposes of computing the income tax liability of a corporation, taxable
income may refer to either one of the following:
1. Net income. The income arrived at after subtracting from the gross income the deductions of the taxpayer. For
domestic and resident foreign corporations, in general; and other corporations from whose gross income deductions are
allowed.

Sales/Revenues/Receipts/Fees XXX
Less: Cost of Sales/Services XXX
Gross Income from Operation XXX
Add: Non-Operating and Taxable Other Income XXX
Total Gross Income
Less: Deductions
Optional Standard Deduction (OSD) or
Itemized Deduction XXX
Taxable Income XXX
Multiply by: Tax Rate x%
Tax Due XXX
2. Gross income. The entire or gross income from business without any deductions for either optional standard deduction
or itemized deduction.
For domestic and resident foreign corporations subject to the MCIT; and non-resident foreign corporations not subject to
the normal income tax rate (Section 28(B)(1)).
Gross Income XXX
Multiply by: Tax Rate x%
Tax Due xxxx

Amends certain sections of RA 8424 or the NIRC of 1997.

3-30 Income Taxation 2022 Edition by Prof. WIN Ballada and Susan Ballada

CORPORATION AVAILING OF OSD8

Illustration. The gross sales of TEBD Corporation for 2018 amounted to P6,500,000, with cost of sales amounting to
P4,300,00o. It incurred operating expenses amounting to P1,500,000, and on the filing of its First Quarter Income Tax
Return, it signified its intention to avail of the OSD. Computation of OSD and Tax Due follows:

Gross Sales P6,500,000

Less: Cost of Sales 4,300,000
Gross Income P2,200,000
Less: OSD (P2,200,000 x 40%) 880,000
Taxable Income P1,320,000
Tax Due:
30% x P1,320,000 P396,000

 OSD for corporation is based on gross income.

 Income tax rate of corporation is 30% in 2018.

CORPORATIONS EXEMPT FROM INCOME TAX (Section 30, NIRRC)

1. Labor, agricultural or horticultural organization not organized principally for profit;

2. 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;
3. A beneficiary society, order or association, operating for the exclusive benefit of the members such as 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 non-stock corporation or their dependents;
4. Cemetery company owned and operated exclusively for the benefit of its members;
5. 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 to or inure to the
benefit of any member, organizer, officer or any specific person (Sec. 30 (E);
Revenue Memorandum Circular 51-2014, issued June 6, 2014, clarifies the inurement prohibition on tax-exempt non-
stock sand/or non-profit organizations (NSNPs) under Sec. 30 of the Tax Code:

Per Rev. Reg. 8-2018 Implementing TRAIN.

Chapter 3: Taxation of Corporations | 3-31

"Non-stock” means no part of its income is distributable as dividends to its members, trustees or officers, and that any
profit obtained as an incident to its operations shall, whenever necessary or proper, be used for the purpose or purposes for
which the NSNP was organized.

"Non-profit” means that no net income or asset accrues to, or benefits, any member or specific person, with all the net
income or assets devoted to the NSNP's purposes and all its activities are conducted not for profit.

Therefore, for an entity to qualify as an NSNP exempt from income tax under Sec. 30 of the Tax Code its earnings or
assets shall not inure to the benefit of any of its trustees, organizers, officers, members or any specific person. The
following are considered "inurements" of such nature:

1. Payment of compensation, salaries, or honorarium to its trustees or organizers;

2. Payment of exorbitant or unreasonable compensation to its employees;
3. Provision of welfare aid and financial assistance to members. An organization is not exempt from income tax if its
principal activity is to receive and manage funds associated with savings or investment programs, including pension or
retirement programs. This does not cover a society order, association, or non-stock corporation under Sec. 30(C) of the
Tax Code providing for the payment of life, sickness, accident and other benefits exclusively to its members or their
dependents;
4. Donation to any person or entity (except donations made to other entities formed for a purpose/purposes similar to its
own);
5. Purchase of goods or services for amounts in excess of the fair market value of such goods or value of such services
from an entity in which one or more of its trustees, officers or fiduciaries has an interest; and
6. When, upon dissolution and satisfaction of all liabilities, its remaining assets are distributed to its trustees, organizers,
officers or members. Its assets must be dedicated to its exempt purpose.

Organizations enumerated under Section 30 of the Tax Code are exempt from the payment of income tax on income
received by them as such organization. However, they are subject to the corresponding internal revenue taxes on their
income derived from any of their properties, real or personal, or from any activity conducted for profit regardless of the
disposition thereof, e.g. rental payment from their building/premises (RMC 76-2003, Nov. 14, 2003).

Illustration. Source: BIR Ruling DA-069-05, Mar. 2, 2005

A non-stock nonprofit corporation (NSNP) shall be subject to the 32% income tax (30% effective 2009) withholding
tax, value added tax (VAT), and documentary stamp tax (DST) on the sale of its share of condominium units and parking
slots from its joint venture project with a developer even if the proceeds of the sale will be used exclusively in furtherance
of its purpose as an NSNP organization.
Income derived by an NSNP from any of its properties, real or personal, or any activity conducted for profit shall be
subject to taxes regardless of the disposition of such income.
3-32 | Income Taxation 2022 Edition by Prof. WiIN Ballada and Susan Ballada

They are also liable for the following final WT (RMC 76-2003, Nov. 14, 2003)
ON PASSIVE INCOME
Interests
Interest income from currency bank deposits
and yield or any other monetary benefit
from deposit substitute instruments and
from trust funds and similar arrangements. 20%

Interest income from a depository bank under 15%

the expanded foreign currency deposit per TRAIN
system. (formerly 7.5%)

Royalties 20%

llustration. Source: BIR Ruling 14-99, Feb. 1, 1999

In BIR Ruling 064-98 dated May 21, 1998, the BIR reiterated its previous ruling dated Feb. 27, 1996
(Ruling 26-96). The two rulings opined that the Philippine National Red Cross (PNRC) is subject to the
10% VAT (now 12%) on its importations of goods and.on its procurement of materials and services for
its exclusive use (Sections 106, 107 and 108 of the Tax Code of 1997). Also, interest income derived by
PNRC from currency bank deposits and yield from currency bank deposits or any other monetary
benefit from deposit substitutes and from trust funds and similar arrangements shall be subject to the
20% final tax based on Section 27(D)(1) of the Tax Code of 1997.
On Jan. 18, 1999, the PNRC requested for recornsideration. Hence, in its Ruling 14-99 dated Feb. 1,
1999, the BIR revoked the two previous rulings. It cited Section 4(b) of P.D. 1264 otherwise known as
"An Act to Incorporate the PNRC": "In furtherance of the purposes mentioned in the preceding sub-
paragraphs, the PNRC shall be exempt from payment of all duties, taxes, fees, and other charges of all
kinds on all importations and purchases for its exclusive use; on donations for its disaster relief work
and other Red Cross services; and in its benefits and fund raising drives, all provisions of law to the
contrary notwithstanding."
PNRC's tax exemption has not been withdrawn by Executive Order 93 which took effect on Mar. 10,
1997. The withdrawal of all tax and duty incentives granted to private entities refers to private entities
which are engaged in trade or business or in an economic activity. It does not, therefore, apply to
PNRC which is a non-profit and charitable institution.

6. Business league, chamber of commerce, or board 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;
7. Civic league or organization not organized for profit but operated exclusively for the promotion of social welfare (Sec.
30 (G);
8. A non-stock and non-profit educational institution;
 The exemption of non-stock, non-profit educational institutions refers to internal revenue taxes imposed by the
National Government on all revenues and assets used actually, directly, and exclusively for educational purposes
(Paragraph 3, Section 4, Article XIV of the Constitution).

A BIR Certificate of Tax Exemption is not required for a non-stock, non-profit educational institution to enjoy the income
tax exemption provided under Section 4 Article XIV of the Constitution and Sec. 30(H) of the Tax Code. The BIR cannot
prescribe a condition for tax exemption that is not provided for by law (The Abbas’ Orchard School, Inc. vs.
Commissioner of Internal Revenue, CTA (Third Division) Case 8377, Nov. 4, 2014).

Illustration. Source: Ateneo de Manila University (ADMU) vs. Commissioner of Internal Revenue (CIR),Court of Tax
Appeals (Special First Division) Case 7246 and 7293, Mar. 11, 2010

In order to come within the ambit of the Constitutional exemption, the following conditions must be met: (1) the
institution must be a non-stock, non-profit educational institution; and (2) the income must be used actually, directly, and
exclusively for educational purposes.

ADMU clearly met the first requisite as it is a non-stock, non-profit educational institution.

On the second requisite, ADMU's witnesses testified, among others, that the Grade School canteen is
used as a medium for teaching preparatory level and grade school students since it links the students
classroom lesson with practical applications.
Income from cafeteria concession fees is commingled with the other funds that make up ADMUs
"other educational income" and this income is made available for school operations. The documents
submitted by ADMU established that ADMU's expenses or disbursements from the general fund were
for educational purposes as these consisted of salaries, employee benefits, utilities, scholarship and
financial aid, faculty development, program development, other educational expenses allocated to
school units, and provision for doubtful accounts. Hence, ADMU has proven that the concession fes
for the fiscal years ending Mar. 31, 2001 to 2003 were actually, directly, and exclusively used for
educational purposes. The CIR's argument that the canteen must be owned and operated by tne
educational institution, and not by concessionaires, is without basis.
llustration. Source: BIR Ruling 17-2005, Aug. 30, 2005
Revenues from a school bus service operated by a non-stock, non-profit educational institut
exclusively to transport its students are exempt from taxes. A non-stock, non-profit educato
institution is exempt from taxes on all revenues derived in pursuance of its purpose as an educat
institution and used actualy, directly and exclusively for educational purposes. Transport 0
students is deemed directly and exclusively for the schooľ's educational purposes and functions.

However, they shall be subject to internal revenue taxes on income from trade business or other activity, the conduct of
which is not related to the exercise or performance of their educational purposes or functions (Sec. 2, Finance Departme
Order 137-1987 as amended by FDO 92-1988).

3-34 I Income Taxation 2022 Edition by Prof. WIN Ballada and Susan Ballada

To be exempt from income tax and VAT under Section 4(3), Article XIV of the 1987 Constitution, a non-stock, nonprofit
educational institution must prove with sufficient documents that the income for which exemption is sought is actually,
directly and exclusively used for educational purposes.
Illustration. Source: De La Sale University, Incorporated (DLSU) Vs. Commissioner of Internal Revenue,Court of Tax
Appeals (First Division) Case 7303, Jan. 5, 2010
While DLSU clearly met the first requirement (being a non-stock, non-profit educational institution). It failed to
sufficiently prove that the rent income it had earned was actually, directly and exclusively used for educational purposes.

Thus, while DLSU utilized its rent income to finance the loan payments to Philippine Trust Company, the proceeds of the
loan were not accounted for, nor reported as an addition to the PE Sports Complex Fund. Thus, the claimed use of the loan
proceeds for construction of the PE Sports Complex was not sufficiently proven.

With respect to the contributions to St. Yon's (an institution that operates a dormitory for DLSU'S visiting professors)
which also came from the rent income, while DLSU submitted the Articles of Incorporation of St. Yon's, it did not submit
its contract with St. Yon's for the operation of a dormitory for DLSU's visiting professors. Hence, the nature of DLSU's
transactions and the basis of the amounts paid to St. Yon's cannot be ascertained.

With respect to DLSU's other disbursements, a discrepancy was noted between the amount of expenditures recorded in the
subsidiary ledgers and the amount reflected in the disbursement vouchers. DLSU explained that the discrepancy refers to
disbursements made for renovations, although the supporting documents were inadvertently misplaced. In the absence of
documents, DLSU was not able to fully account for and substantiate all disbursements; hence, the court was unable to
ascertain that the rent income was indeed used for educational purposes.

Subject to compliance requirements, their interest income when used actually, directly, and exclusively in pursuance of
their purposes as an educational institution are exempt from final withholding taxes (FWT):

ON PASSIVE INCOME
Interests
Interest income from currency bank deposits
and yield or any other monetary benefit
from deposit substitute instruments and Exempt from
from trust funds and similar arrangements. 20% FWT

Interest income from a depository bank under Exempt from

the expanded foreign currency deposit 15% FWT
system. (formerly 7.5%)

9. Government educational institution;

10. Farmers' or other mutual typhoon or fire insurance company, mutual ditch or irrigation company, mutual or
cooperative telephone company, or like organization or 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
11. Farmers', fruit growers', or like association organized and operated as a sale agent for the purpose of marketing the
products of its members and turning back to them the proceeds of sales, less the necessary selling expenses on the basis of
the quantity of produce finished by them.
12. Per Sec. 5 of R.A. 10072, the Philippine National Red Cross, to be known as the Philippine Red Cross, shall be
exempt from payment of all direct and indirect taxes all provisions of law to the contrary notwithstanding, including
value-added tax fees and other charges of all kinds on all income from its operations, including the use lease or sale of its
real property, and provision of services.
13. Per Rule 24 of the IRR of R.A. 10165, any child-caring or child-placing institution licensed and accredited by the
DSWD to implement the Foster Care Program shall be exempt from income tax on income derived by it as such
organization pursuant to Section 30 of the NIRC as implemented by Revenue Regulation 13-98.
14. The Bangko Sentral ng Pilipinas (BSP) shall be exempt from all national internal revenue taxes on income derived
from its governmental functions, specifically:
a. income from its activities or transactions in the exercise of its supervision over the operations of banks and its
regulatory and examination powers over non-bank financial institutions performing quasi-banking functions, money
service businesses, credit granting businesses and payment system operators; and
b. income in pursuit of its primary objective to maintain price stability conducive to a balanced and sustainable growth of
the economy, and the promotion and maintenance of monetary and financial stability and the convertibility of the peso.

All other incomes not included in the above enumeration shall be considered a proprietary income and shall be subject to
applicable national internal revenue taxes. (Rev. Reg. 2-2020 Implementing RA 11211, Otherwise Known as "An Act
Amending RA 7653, Otherwise Known as "The New Central Bank Act," and for Other Purposes.")

15. Sale of Gold. Income derived from the following sale of gold are excluded in the gross income and shall be exempt
from income tax, and consequently from withholding taxes:
a. The sale of gold to the BSP by registered SSMs and accredited traders; and
b. The sale of gold by registered Small-Scale Miners (SSMs) to accredited trade for eventual sale to the BSP. (Rev. Reg.
4-2020 Implementing RA 112 Otherwise Known as "An Act to Strengthen the Country's Gross International Reserves,
Amending for the Purpose Sections 32 and 151 of the NIRC, As Amended and For Other Purposes.")
3-36 Income Taxation 2022 Edition by Prof. WIN Ballada and Susan Ballada
Corporations may also be declared exempt from come tax or any other tax under special laws.

TAXATION FOR COOPERATIVES

Cooperative refers to an autonomous and duly registered association of persons, with a common bond of interest, who
have voluntarily joined together - to achieve their social, economic, and cultural needs and aspirations by making
equitable contributions to the capital required, patronizing their products and services and accepting a fair share or the
risks and benefits, of the undertaking in accordance with universally accepted cooperative principles. The following
discussion came from the Joint Rules and
Regulations implementing Articles 60, 61 and 144 of Republic Act 9520, the Philippine Cooperative Code of the 2008 in
relation to the NIRC, as amended, which was signed by the Department of Finance, Bureau of Internal Revenue and
Cooperative Development Authority last Feb. 5, 2010.

Definition of Terms
1. Accumulated Reserves refers to the accumulated amount of money annually deducted from the net surplus, which
shall be less than fifty (50%) for the first five years of operation after registration and at least ten per centum (10%) of the
net surplus thereafter, intended not for-the allocation or distribution to the members but for the protection and stability of
the cooperative, commonly referred to as the Reserve Fund.
2. Business Transaction - refers to any business activity or livelihood engaged in by the cooperative where such
cooperative generates savings.
3. Capital Assets refers to the property held by the taxpayer (whether or not connected with trade or business), but does
not include stock in trade of the taxpayer or other property of a kind which would properly be included in inventory of the
taxpayer if on hand at the close of the taxable year, or property held by the taxpayer primarily for sale to customers in the
ordinary course of his trade or business, or property, used in the trade or business, of a character which is subject to the
allowance for depreciation.
4. Certificate of Good Standing refers to the certificate issued annually by the CDA to cooperatives which comply with
the requirements provided in CDA-Memorandum Circular 2008-03, and any subsequent amendments thereto. For internal
revenue tax purposes, said Certificate of Good Standing is one of the essential requirements for the grant of the Certificate
of Tax Exemption/Ruling.
5. Certificate of Tax Exemption/Ruling refers to the certificate/ruling issued by BIR granting exemption to a
cooperative, which is valid for a period of five (5) years from the date of issue.
6. Cooperative Development Authority (CDA) - refers to the government agency created under R.A. 6939 mandated to
register, regulate and develop cooperatives.
7. Interest on Share Capital - refers to the interest earned by the member's paid-up to the capitalization of the
cooperative. It is based on the average share capital contribution of members computed on a per month basis against the
preset amount earmarked by the board of directors for interest on share capital
8. Patronage Refund refers to the refund or return to the members of net savings generated from the operations of the
cooperative
9. Registration refers to, the operative act granting juridical personality to a proposed cooperative as evidenced by a
Certificate of Registration issued by the CDA.
10. Related operations/transactions- refers to transactions of cooperatives which are part of the objectives and purposes,
as enumerated in the Articles of Cooperation.
11. Transaction with members refers to the cooperative activity that provides goods and services to members where the
cooperative generates net savings/surplus,
12. Transaction with non-members - refers to the cooperative activity that provides goods and services to non-members
where the cooperative generates net savings/surplus.
13. Undivided Net Surplus/ Undivided Net Savings refers to the net amount arising from the operations of the
cooperative after deducting the operational expenses from revenue generated, not construed as profits, but as excess of
payments made by the members for the loans borrowed or the goods and services bought- from the cooperative including
other inflows of assets resulting from its other operating activities and which shall be deemed to have been returned to
them if the same is distributed as prescribed in accordance with Article 86 of R.A. 9520 and the by-laws of the
cooperative
14. Unrelated Transactions refers to transactions of cooperatives which are not part of the objectives and purposes as
enumerated in the Articles of Cooperation.

Classification of Cooperatives According to the Extent of the Tax Exemptions Granted

1. Those duly registered cooperatives which transact business with members only; and
2. Those duly registered cooperative which transact business with both members and non-members which are further sub-
classified according to the following:
a. Cooperatives with accumulated reserves and undivided net savings of not more than P10 million; and
b. Cooperatives with accumulated reserves and undivided net savings of more than P10 million.

Tax Exemptions of Duly Registered Cooperatives Which Transact Business with Members Only
Duly registered cooperatives dealing/transacting business with members only shall be exempt from paying any taxes and
fees, including but not limited to:

1. Income Tax imposed by Title II of the NIRC, as amended;

2. Value-Added Tax (VAT) imposed under Title IV of the NIRC, as amended;
3. Percentage Tax imposed under Title V of the NIRC, as amended
4. Donor's Tax imposed under Title l of the NIRC, as amended, on donations to duly accredited charitable research and
educational institutions and reinvestment to socio-economic projects within the area of operation of the cooperatives;
5. Excise Tax under Title VI of the NIRC, as amended, for which it is directly liable;
6. Documentary Stamp Tax imposed under Title VI of the NIRC, as amended, provided. however, that the other party to
the taxable document/transaction who is not exempt shall be the one directly liable for the tax;
7. Annual Registration Fee of P500 under Sec. 236(B) of the NIRC, as amended;
8. All taxes on transactions with insurance companies and banks, including but not limited to 20% final tax on interest
deposits and 7.5% final income tax on interest income derived from a depository bank under the expanded foreign
currency deposit system; and
9. Electric cooperatives duly registered with the Authority shall be exempt from VAT on revenues on systems loss and
VAT on revenues on distribution, supply, metering and lifeline subsidy of electricity to their members.
3-38 | Income Taxation 2022 Edition by Prof. WIN Ballada and Susan Ballada

Taxability/Exemption of Duly Registered Cooperatives Which Transact Business with Members and Non-
Members
Cooperatives with accumulated reserves and undivided net savings of not more thanP10 million –Exempt from all
national internal revenue taxes for which these cooperatives are liable as enumerated in the previous section.
Cooperatives with accumulated reserves and undivided net savings of more than P10 million–
1) Business transactions with members Exempt from all national internal revenue taxes for which these cooperatives are
liable as enumerated in the previous section;
2) Business transactions with non-members

a) pay the following taxes at the full rate:

i) Income Tax - On the amount allocated for interest on capitals: Provided, That the same tax is
not consequently imposed on interest individually received by the members. The tax base for
all cooperatives liable to income tax shall be the net surplus arising from the business
transactions with non-members after deducting the amounts for the statutory reserve funds
as provided for in the Cooperative Code and other laws.
Value Added Tax (VAT) On transactions with non-members: Provided, however, That
cooperatives, pursuant to Sec. 109, par. (, (M) and (N) of the NIRC, as amended by RA.
9337, shall be exempt from the imposition of VAT, namely the following:

(1) Sales by agricultural cooperatives duly registered and in good standing with the CDA to their
members, as well as sale of their produce, whether in its original state or processed form, to non
members, their importation of direct farm inputs, machineries and equipment, includingg spare
parts thereof, to be used directly and exclusively in the production and/or processing of their
produce (Sec. 109 (1)(L) of the NIRC, as amended).

Provided, further, That the exempt transactions pursuant to the above shall include sales made by a
duly registered agricultural cooperative organized and operated by its members to undertake the
production and processing of raw materials or of goods produced by its members into finished or
processed products for sale by said cooperative to its members and non-members: Provided,
finally, That any processed product or its derivative arising from the raw materials produced by its
members, sold in the name and for the account of the cooperative, shall be deemed the product of
the cooperative.

Sale by agricultural cooperatives to non-members can only be exempted from VAT if the producer
of the agricultural products sold is the cooperative itself. If the cooperative is not the producer
(e.g, trader), only those sales to its members shall be exempted from VAT.

Exempt transactions shall include sales made by a duly registered agricultural cooperative
organized and operated by its members to undertake the production and processing of raw
materials or of goods produced by its members into finished or processed products for sale by said
cooperative to its members and non-members.
Products produced/processed by non-members or production not related to the purposes for
which a cooperative is created as stated in its Articles of Cooperation even if sold in the name of
said cooperative shall not be considered as produced/processed by said cooperative, To illustrate,
raw materials produced by the members and processed by the cooperative shall be exempt from
VAT.

It is to be reiterated however, that sale or importation of agricultural food products in their original
state is exempt from VAT irrespective of the seller and buyer thereof, pursuant to Sec. 4.109-1 (B)
(a) of Revenue Regulations 16-05, as amended.

Chapter 3: Taxation of Corporations| 3-39

(2) Gross receipts from lending activities by credit or multipurpose cooperatives duly registered with the CDA
(Sec. 109 (1) (M) of the NIRC, as amended); or
(3) Sales by non-agricultural, non-electric and non-credit cooperatives duly registered with the Cha
Provided, That the share capital contribution of each member does not exceed P15,000 an
regardless of the aggregate capital and net surplus ratably distributed among members (Sec. 109a
09(1)
(N) of the NIRC, as amended); or
(4) Transactions of cooperatives as may be deemed VAT exempt under the NIRC.
ii) Percentage Tax- all sales of goods and/or services rendered to non-members shall be subia.
to the applicable percentage taxes imposed by Title V of the NIRC, as amended, except s ect
sales
made by producers, marketing or service cooperatives;
iv) All other Internal Revenue Taxes unless otherwise provided by the law; and
b) Be entitled to limited or full deductibility of donations to duly accredited charitable, research and
educational institutions and reinvestment to socio-economic projects within the area of operation
of such cooperative.
Pursuant to Article 61(3) be entitled to an exemption on taxes on transactions with insurance
companies and banks, including but not limited to 20% final tax on interest deposits and 7.5% final
income tax on interest income derived from a depository bank under the expanded foreign
currency deposit system.

Cooperatives which are duly registered with and regulated by the CDA are not liable for final WT on the interest paid to
members on their savings and time deposits. The Court cited BIR Rulings 551-88 and DA-591-2006 dated Oct. 5, 2006
wherein it was held that since the members' deposits with the cooperatives are not currency bank deposits nor deposit
substitutes, Sec. 24 (B) will not apply to interest from such deposits (Dumaguete Cathedral Credit Cooperative vs.
Commissioner of Internal Revenue, Supreme Court (Second Division) G.R. 182722, Jan. 22, 2010).
Taxability of Unrelated Income of Cooperative
All income of cooperatives not related to the main/principal business under its Articles of Cooperation shall be subject to
all the appropriate taxes under the NIRC, as amended. This is applicable to all types of cooperatives whether dealing
purely with members or both members and non-members.
Taxability of Cooperatives to Other Internal Revenue Taxes
All cooperatives, regardless of classification shall be subject to:
1. Capital Gains Tax from sale of shares of stock or sale, exchange or other disposition of real property classified as
capital assets;
2. Documentary stamp taxes on transactions of cooperatives dealing with non-members, except transactions with banks
and insurance companies, provided that whenever one party to the taxable document enjoys the exemption from DST, the
other party who is not exempt shall be the one directly liable for the tax; a
3. VAT billed on purchases of goods and services, except the VAT on the importation by agricultural cooperatives of
direct farm inputs, machineries and equipment, including spare parts thereof, to be used directly and exclusively in the
production and/or processing of their produce, pursuant to Sec. 109(L) of the NIRC, as amended. All tax free importations
shall not be transferred to any person until five (5) years, otherwise, the cooperative and the transferee or assignee shall be
solidarity liable to pay twice the amount of the tax and/or the duties thereon;
4. Withholding tax on compensation/wages, except in the case where an employee is a minimum wage earner; and
creditable and final withholding taxes, if applicable. All cooperatives, regardless of classification, are considered as
withholding agents on all income payments that are subject withholding pursuant to the provisions of Revenue
Regulations 2-98, as amended; and
5. All other taxes Tor which cooperatives are directly liable and not otherwise expressly exempted by any law.
Taxability of Members/share Holders of Cooperatives
All members of cooperatives shall be liable to pay all the necessary internal revenue taxes under the NIRC, as amended,
except for the following:
1. Any tax and fee, including but not limited to final tax on member's deposits or fixed deposits (otherwise known as share
capital) with cooperatives, and documentary tax on transaction of members with the cooperative; and
2. Patronage Refund which includes all refunds, returns or rebates of the net savings generated from the operation of the
cooperative.
PAL AND OTHER FRANCHISE GRANTEES SIMILARLY SITUATED
The franchise of Philippine Airlines (PAL) provides that it shall pay government the lower of the basic corporate income
tax or franchise tax in lieu of all other taxes, duties, royalties, registration, license, and other fees and charges, except only
real property tax. The "in lieu of all other taxes" clause includes the MCIT (Commissioner of Internal Revenue vs.
Philippine Airlines, Inc., Supreme Court (Third Division) G.R. 180066, July 7, 2009). Thus, RMC 66-2003 is set aside.
Section 13 of P.D. 1590 grants the Philippine Airlines two options to pay its income tax liability. PAL's income tax
liability shall be the lower amount between: basic corporate income tax or 2% franchise tax.
In the case of PAL, its gross revenues include passenger revenue; cargo revenue; other transport revenue; and non-
transport revenue. Cost of services consist of salaries, wages and other employee benefits directly engaged in the transport
of passenger, cargo or mail; commissions paid to sales agents; fuel and oil used in transport equipment/aircraft; insurance
expenses incurred which are directly connected to transport activities (e.g. hull insurance, passenger liability insurance,
and the like); traffic Servicing expenses; aircraft. servicing expenses; passenger service expenses; depreciation of and/or
lease/rental charges for aircraft, flight equipment and ground equipment; and maintenance and repairs of aircraft, flight
and ground equipment.

Chapter 3: Taxation of Corporations | 3-41

ENTERPRISES REGISTERED UNDER THE BASES CONVERSION & DEVELOPMENT

ACT OF 1992 & THE SPECIAL ECONOMIC ZONE ACT OF 1995 (R.A. 7916)
Enterprises that are registered with the Subic Bay Metropolitan Authority (SBMA), the Clark Development Authority
(CDA) or the Philippine Economic Zone Authority(PEZA), engage in registered as well as unregistered activities.
Registered Activities
Income derived by such enterprises from registered activities shall be subject to such tax treatment as may be specified in
the terms of registration, i.e.:

 5% preferential tax rate

 income tax holiday (ITH)
 regular income tax rate

Except for real property taxes on land owned by developers, no taxes, local and national, shall be imposed on business
establishments operating within the ecozone. In lieu thereof, 5% of the gross income earned (GIE) by all business
enterprises within the ecozone shall be paid and remitted as follows:
a. Three percent (3%) to the National Government;
b. Two percent (29%) which shall be directly remitted by the business establishments to the treasurer's office of
the municipality or city where the enterprise is located.
The Revenue Regulations of the PEZA Law defines "gross income earned (GIE)" as "gross sales or gross revenues
derived from business activity within the ecozone, net of sales discounts, sales return and allowances and minus costs of
sales or direct costs but before any deduction is made for administrative expenses or incidental losses during a given
taxable period."
For PEZA-registered export enterprises, free trade enterprises and domestic market enterprises, the regulations state that
"(for) purposes of computing the total five percent tax rate imposed, the following direct costs are included in the
allowable deductions to arrive at gross income earned:
1. Direct salaries, wages or labor expenses
2. Production supervision salaries
2. Raw materials used in the manufacture of products
4. Decrease in goods in process account (intermediate goods)
5. Decrease in finished goods account
6. Supplies and fuels used in production
7. Depreciation of machinery and equipment used in production, and of that portion of the building owned or constructed
that is used exclusively in the production of goods
7. Rent and utility charges associated with building, equipment and warehouses used production, and
9. Financing charges associated with fixed assets used in production the amount of which were not previously
capitalized." (RR 11-2005)

The enumeration in RR 11-2005 on the direct costs that are deductible from GIE is not exclusive. PEZA-registered
enterprises that are subject to the 5% tax on GIE are allowed to deduct expenses which are in the nature of direct costs,
even if these are excluded in the list.

Illustration. Source: East Asia Utilities Corporation vs. Commissioner of Internal Revenue,
Court of Tax Appeals (Second Division) Case 8179, May 21, 2014
East Asia Utilities Corporation (EAC) is a PEZA-registered Ecozone Utilities Enterprise that operates a power plant
within the Mactan Export Processing Zone.
The criterion in determining whether the item of cost or expense should be part of direct cost is the relation of such item in
the conduct of its PEZA-registered activities. If the cost or expense can be directly attributed in providing the PEZA-
registered services, then it should be treated as direct cost.
Section 27(E)14) of the Tax Code defines cost of services as "ox direct costs and expenses necessarily incurred to provide
the services required by the customers and clients including (A) salaries and employee benefits of personnel, consultants
and specialists directly rendering the services and (B) cost of facilities directly utilized in providing the service such as
depreciation or rental of equipment used and cost of supplies: xo. The rest of the costs can be classified as operating
expenses which are defined as "primary recurring costs associated with central operations, other than cost of goods sold,
which are incurred to generate sales."

To validly claim a deduction, EAC needs to prove that the disallowed expenses were directly used in or related to its
power generation services, and not just for the continued efficient and effective operations of the company.
Upon evaluation, the CTA determined that certain expenses form part of direct cost that are deductible from gross income,
including SSS and Pag-IBIG employer cost, medical/health and accident/life insurance, uniform/working gears, technical
training and development, hauling and trucking services, insurance and freight, brokerage fees, other inventory incidental
cost, insurance for power plant and other assets, safety program and services, and other professional fees.

On the other hand, the CTA held that the following expenses are deemed operating expenses, hence, not deductible from
gross income: employee activities, nontechnical training and development, DOE electrification fund, general office
expense, business expense, taxes and licenses

A BOl-registered developer of a low-cost mass housing project is exempt from income tax/CWT on revenues from its
BOl-registered activity. This exemption shall not extend to sales of units with selling price exceeding P3,000,000. In the
computation of the ITH incentive, interest income from in-house financing shall not be considered as revenue generated
from the registered activity. (BIR Ruling 317-2013, Aug. 12, 2013).

A BO1-registered corporation enjoying the ITH incentive is exempt from CWT on income payments received during the
ITH period with respect to its BOl-registered activities (BIR Ruling 371-2011, Oct. 7, 2011).
Since a PEZA-registered enterprise is subject to the preferential tax rate of 5% in lieu of all national and local taxes
pursuant to R.A. 7916, income payments made to PEZA registered enterprise by its customers, whether Ecozone-
registered enterprises or within the Customs Territory, for the performance of a PEZA-registered enterprise’s registered
activities are not subject to CWT (BIR Ruling 049-2010, Sept. 1, 2010).

Sec. 1 of the Department of Finance Department Order 18-2013 (dated Apr. 16, 2013) amended Sec. 12 of DOF
Department Order 03-08. It reads: "It is understood that henceforth, registered Ecozone and Freeport Enterprises already
availing of the incentives and benefits under R.A. 9400 in accordance with these rules, shall be expressly disqualified
from availing of the incentives and benefits defined and/or granted under other laws, rules and regulations. Qualified
enterprises already enjoying incentives under other preferential regimes should have their registrations thereunder
cancelled before they may subsequently avail of the benefits provided under R.A. 940

PEZA Board Resolution 12-610, published Nov. 22, 2012, amends the PEZA guidelines on the registration and
administration of incentives to Tourist Economic Zones (TEZ) developers and locator enterprises, as follows:
1. The 5% Gross Income Tax (GIT) incentive shall no longer be granted to developers of TEZs in Metro Manila, Cebu
City, Mactan Island, and Boracay Island;
2. The Income Tax Holiday (ITH) and 5% GIT incentives shall no longer be granted to locator enterprises of TEZs in
these four areas, except for tax and duty-free importation and zero- VAT rating on local purchases of capital equipment;
and
3. No new TEZS shall be established in Metro Manila, Cebu City, Mactan Island, and Boracay Island.
This new policy shall not be given retroactive effect, but TEZ developers/operators and locator enterprises in these four
areas that have not signed their Registration Agreements with PEZA shall be covered by this new policy.
Existing and future TEZ developers and locator enterprises outside these 4 areas shall continue to avail of the incentives
granted by PEZA subject to existing guidelines, as follows:
1. For TEZ developer/operator 5% GIT; and
2. For TEZ locator enterprises ITH, 5% GIT, tax and duty-free importation, and zero-VAT rating
on local purchases of capital equipment.
3-44|Income Taxation 2022 Edition by Prof. WIN Ballada and Susarn Ballada
Unregistered Activities
Revenue Regulations 20-2002 clarified the tax treatment of income earned from unregistered activities by enterprises
registered under the Bases Conversion and Development Act or 1992 and the Philippine Economic Zone Act of 1995.
Income derived from unregistered activities shall be subject to the regular internal revenue taxes such as the following:

Interests
Interest income from Philippine currency bank
deposits, yield or any other monetary benefit from
deposit substitutes, from trust funds and similar arrangements 20% Final Income Tax
Interest income from foreign currency deposits 15% per TRAIN Final Income Tax
(formerly 7.5%)

Sale of Shares of Stock

Not traded in the stock exchange
On the net capital gain from sale, exchange or other 15% per TRAIN Capital Gains Tax
disposition of shares of stock in a domestic (formerly 5%, 10%)
corporation

Traded in the stock exchange- 6/10 of 1% per Stock Transaction Tax

On the gross selling prince TRAIN
(formerly h of 1%)

Income payments made by a registered enterprise to an entity in the Customs territory shall not be subject to the
preferential tax rates or tax exemption enjoyed by the registered enterprise. They shall be subject to the appropriate rate of
tax imposable on the recipient of such income. The following are examples:
1. Dividends paid to the shareholders
2. Interest payments to creditors
3. Other similar payments

Foreign exchange gains derived by a contact center from currency hedging contracts are not attributable to its registered
activity; hence, are not covered by the Income Tax Holiday (1TH) incentive (Aegis People Support, Inc. vs.
Commissioner of Internal Revenue, CTA (En Banc) Case EB 996, Aug. 4, 2014).
The 5% preferential tax granted to PEZA-registered enterprises does not cover FWT on their interest payments to non-
resident lender corporations (Edison (Bataan) Cogeneration Corporation vs. Commissioner of Internal Revenue, Court of
Tax Appeals (En Banc) 735, Apr. 12, 2012).
Chapter 3: Taxation of Corporations | 3-45

The sale of fixed assets by a PEZA-registered export enterprise is not part of its registered activities of manufacture and
assembly of electronic equipment and components; thus, the gain from the sale is subject to the 30% regular corporate
income tax rate (BIR Ruling 291-2012, Apr. 25, 2012).
When a sale of land by an ecozone developer/operator violates the developer/operators registration agreement with PEZA,
profits from such sale cannot be subject to 5% preferential tax rate (BIR Ruling 504-2011, Dec. 19, 2011).
DECLARATION OF QUARTERLY CORPORATE INCOME TAX
Every corporation shall file in duplicate a quarterly summary declaration of its gross income and deductions on a
cumulative basis for the preceding quarter or quarters upon which the income tax shall be levied, collected and paid. The
income tax computed decreased by the amount of tax previously paid or assessed during the preceding quarters shall be
paid and the return filed not later than sixty (60) days from the close of each of the first three (3) quarters of the taxable
year, whether calendar or fiscal. A return showing the cumulative income and deductions shall still be filed even if the
operations for the quarter and the preceding quarters yielded no tax due.
Every taxable corporation is likewise required to file a final adjustment return covering the total taxable income of the
corporation for the preceding calendar or fiscal year, which is required to be filed and paid on or before April 15, or'on or
before the 15th day of the 4th month following the close of the fiscal year, as the case may be.
If the sum of the quarterly tax payments made during the said taxable year is not equal to the total tax due on the entire
taxable income of that year, the corporation shall either:
1. pay the balance of tax still due; or
2. carry over the excess credit; or
3. be credited or refunded with the excess amount paid.

Illustration: The result of operations of a corporation for 2019 whose taxable year is on a calendar year basis, is as
follows:
Gross Income Deduction Net Income
1st quarter
(Jan. 1 to March 31) P500,000 P300,000 P200,0000
2nd quarter
(April 1 to June 1) 600,000 350,000 250,000
3rd quarter
(July 1 to Sept. 30) 700,000 400,000 300,000
4th quarter
(Oct. 1 to Dec. 31) 800,000 450,000 350,000
Tax credit for overpaid income tax for the preceding year is P50,000.
3-46 | Income Toxation 2022 Edition by Prof WiIN Ballada and Susan Balloda
The return to be: filed for the 1st quarter follows:
Gross Income this quarter P500,000
Less: Deductions 300,000
Taxable Income P200,000

Income Tax Due

(P200,000x 30%) P60,000
Less: Tax Credit 50,000
Balance of Tax to be paid this quarter P10,000

The return for the second quarter to be filed follows:

Gross Income this quarter P600,000
Add: Gross Income for 1st quarter 500,000
Gross Income for 1st and 2nd quarters P1,100,000
Less: Deductions
1st quarter P300,000
2nd quarter 350,000 650,000 .
Taxable Income P 450,000

Income Tax Due

(P450,000 x 30%) P135,000
Less: Tax Due for previous quarter
1st quarter 60,000
Income Tax due this quarter P 70,000

The return to be filed for the 3rd quarter is shown below:

Gross Income this quarter P 700,000

Add: Gross Income for previous quarters:
1st quarter P500,000
2nd quarter 600,000 1,100,000
Gross Income for 1st , 2nd and 3rd quarter s P1,800,000

Less: Deductions
1st quarter P300,000
2nd quarter 350,000
3rd quarter 400,000 1,050,000
Taxable Income P 750,000

Income Tax Due

(P750,000x 30%) P225,000
Less: Income Tax Due for previous quarters
1st quarter P60,000
2nd quarter 70,000 130,000
Income tax Due this quarter P 95,0000

Chapter 3: Taxation of Corporations | 3-47

The final adjustment return shall be filed and the tax due thereon paid on or before April 15 of the following year.
Computation follows:
Gross Income, 4th quarter P 800,000
Add: Gross Income for previous quarters:
1st quarter P500,000
2nd quarter 600,000
3rd quarter 700,000 1,800,0000
Gross Income for the year P2,600,000
Less: Deductions
1st quarter P300,000
2nd quarter 350,000
3rd quarter 400,000
4th quarter. 450,000 1,500,000
Taxable Income P1,100,000

Income Tax Due

(P1,100,000 x 30%) P330,000
Less: Income Tax Due for previous quarters
1st quarter P60,000
2nd quarter 70,000
3rd quarter 95,000 225,000
Income Tax Due, 4th quarter P105,000

Note at this point that the computation and the payment of MCIT, shall likewise apply at the time of filing the quarterly
corporate income tax. 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 2% or 1% (per CREATE) 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.
Expanded WT, 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 (RR 12-2007).

-48| Income Taxation 2022 Edition by Prof. WIN Ballada and Susan Ballada

NAME: SCORE:
SECTION: PROFESSOR:
True or False
1, Foreign corporation, whether engaged in business in the Philippines or not, is taxable on income derived from sources
within and without the Philippines.
2. Income derived by offshore banking units authorized by the BSP, from foreign currency transactions with local
commercial banks is subject to 10% final tax.

3. Resident foreign corporation applies to a foreign corporation not engaged in trade or business within the Philippines.

4. A domestic, resident foreign and non-resident foreign corporations may deduct from their business income, itemized
deductions under the Tax Code.
5. A return showing the cumulative income and deductions need not be filed if the operations for the quarter and the
preceding quarters yielded no income tax due.
6. Non-resident foreign corporation receives the same tax treatment as domestic and resident foreign corporations with
regard to capital gains from sale of shares of stock not traded in the stock exchange.
7. The 10% tax on the taxable income of a proprietary educational institution and nonprofit hospital is absolute.

8. Foreign corporation is created and organized under the laws of countries other than the Philippines.

9. Effective Jan. 1, 2021, all dividends received from a domestic corporation by a non- resident foreign corporation are
subject to a final withholding tax of 15%.

10. Domestic corporation is taxable on all income derived from sources within and outside the Philippines.
11. Subject to the provisions of existing special laws or general laws, all corporations, agencies, or instrumentalities
owned or controlled by the Government shall paySuch rate of tax upon their taxable income as are imposed by the Code
upon
corporations or associations engaged in a similar business, industry or activity.
12
4 Any profit remitted by a branch to its head office shall be subject to a 15% tax which
shall be based on the total profits applied or earmarked for remittance without
deduction for the tax. component thereof, except those activities which are
registered with the Philippine Economic Zone Authority.

Chapter 3: Taxation of Corporations | 3-49

13. Corporations on their income, are taxed, generally, from 30% to 35% depend:.
the taxable year. nding on
14. Non-resident owner or lessor of vessels chartered by Philippine nationals is
taxed
4 4% of gross rentals, lease or charter fees from leases or charters to e
citizens or corporations, as approved by the Maritime Industry Authority, Flipino
15. Interests on foreign loans contracted on or after Aug. 1, 1986 by a non-recia
foreign corporation are taxed at 10%. sident
16. Non-resident cinematographic film owner, lessor or distributor is taxed at 150
gross income.
17. International air carrier and international shipper doing business in the Philippina.
shall pay a tax of 2.5% on its gross Philippine billings. es
18. Every corporation shall file a quarterly summary declaration of its gross income and
deductions on a cumulative basis for the preceding quarter or quarters upon which
the income tax shall be levied, collected and paid.
19. If the gross income from unrelated trade, business or other activity of a proprietar
educational institution or non-profit hospital exceeds 50% of the total gross income
derived from all sources, the tax prescribed under Section 27(A) shall be imposed on
the entire taxable income.
20. Non-resident foreign corporation applies to a foreign corporation engaged in trade
or business within the Philippines.
21. For domestic and resident corporations adopting the fiscal-year accounting period,
the taxable income shall be computed without regard to the specific date when the
specific sales, purchases and other transactions occur such that their income and
expenses for the fiscal year shall be deemed to have been earned and spent equally
for each month of the period.
22. Non-resident owner or lessor of aircraft, machinery and other equipment is taxed a
7 4% of gross rentals, charters and other fees.
23. Exempt corporation may not be income tax-exempt on its other activities the tax
rates of which shall be 25% depending on the taxable year.
24, Partnership other than a general professional partnership is also taxable on
income as a general professional partnership.
25. Domestic corporation is created or organized under Philippine laws.

3-50| Income Taxation 2022 Edition by Prof. WIN Ballada and Susan Ballada

In come Tay ahon

NAME: SCORE:
SECTION: PROFESsOR:
Multiple Choice

1. Guidant Resources Caorporation, a corporation registered in Norway, has a 50 MW

electric power plant in San Jose, Batangas. Aside from Guidant's income from its
power plant, which among the following is considered as part of its income rom
sources within the Philippines?
a. Gains from the sale to an locos Norte power plant of generators bought Trom
the United States.
b. Interests earned on its dollar deposits in a Philippine bank under the Expanae
Foreign Currency Deposit System.
c. Dividends from a two-year old Norwegian subsidiary with operations in Zambia
but derives 60% of its gross income from the Philippines.
d. Royalties from the use in Brazil of generator sets designed in the Philippines by
its engineers.

2. Aplets Corporation is registered under the laws of the Virgin Islands. It has
extensive operations in Southeast Asia. In the Philippines, Its products are imported
and sold at a mark-up by its exclusive distributor, Kim's Trading, Inc. The BIR
compiled a record of all the imports of Kim from Aplets and imposed a tax on Aplets
net income derived from its exports to Kim. Is the BIR correct?
a. Yes. Aplets is a non-resident foreign corporation engaged in třade or business in
the Philippines.
b. No. The tax should have been computed on the basis of gross revenues and not
net income.
C. No. Aplets is a non-resident foreign corporation not engaged in trade or
business in the PhilipPpines.
d. Yes. Aplets is doing business in the Philippines through its exclusive distributor
Kim's Trading. Inc.

3. What is the rule on the taxability of, income that a government educational
institution derives from its school operations? Such income is
a. subject to 10% tax on its net taxable income as if it is a proprietary educational
institution.
b. exempt from income taxation if it is actually, directly, and exclusively used for
educational purposes.
C.subject to the ordinary income tax rates with respect to incomes derived from
educational activities.
exempt from income taxation in the same manner as government-owned and
controlled corporations.

Chapter 3: Taxation of Corporations | 3-51

4 Zygomite Minerals, Inc., a corporation registered and holding office in Austr

tralia
operating in the Philippines, may be subject to Philippine income taxation on o
on
a. gains it derived from salein Australia of an ore crusher it bought f.
Philippines with the proceeds converted to pesos. from the
b. gains it derived from sale in Australia of shares of stock of Philey A
Corporation, a Philippine corporation. Mining
C. dividends earned from investment in a foreign corporation that derived 4no
its gross income from Philippine sources.
d. interests derived from its dollar deposits in a Philippine bank under
Expanded Foreign Currency Deposit System. the
5. Lualhati Educational Foundation, Inc., a stock educational institution organized to
profit, decided.to lease for commercial use a 1,500 sq. m. portion of its school. Tha
school actually, directly, and exclusively used the rents for the maintenance of it
school buildings, including payment of janitorial services. Is the leased portion
subject to real property tax?
a. Yes, since Lualhati is a stock and for profit educational institution.
b. No, since the school actually, directly, and exclusively used the rents for
educational purposes.
No, but it may be subject to income taxation on the rents it receives.
d. Yes, since the leased portion is not actually, directly, and exclusively used for
educational purposes.
6. Which of the following is not an income tax on corporations?
a. minimum corporate income tax
b. stock transaction tax
C. gross income tax
d. normal tax
7.The following domestic corporations are generally taxed at the same rate. Whichs
not?

a. taxable partnerships
b. proprietary educational institutions
C. government-owned and -controlled corporations
d. none of the above

8. Which of the following domestic corporations is exempt from income taxr

a, Non-stock and non-profit educational institution
b. Labor, agricultural or horticultural organization organized principally for prorit
C. Cemetery company owned and operated not exclusively for the benefit of ts
members
d. Civic league or organization organized for profit and operated not exclusively for
the promotion of social welfare
9. All the statements below are true except one. Which is the exception? Non-prort,
non-stock educational institutions are exempt from
a final withholding taxes on interest income when used actually, directly, and
exclusively for educational purposes.
b. internal revenue taxes on all revenues and assets used actually, directly, and
exclusively for educational purposes.
C. internal revenue taxes on income from trade, business or other activity, the
d. conduct of which is not for educational purposes.
none of the above
10. Corporation does not include
a. joint accounts.
b. insurance companies.
C. joint stock companies.
d. general professional partnerships.
11. Which of the following non-resident foreign corporations is imposed the highest
income tax rate?
a. cinematographic film owner, lessor or distributor
b. owner or lessor of vessels chartered by Philippine nationals
owner or lessor of aircraft, machinery and other equipment
d. same for all
.Double taxation of corporate income may be avoided by
a. borrowing money from shareholders.
b. renting property from shareholders.
C.hiring shareholders as employees.
d. all of the above

Chapter 3: Taxation of Corporations | 3-53

13. Which is not true about resident foreign corporations?

a. Gross Philippine billings, in case of international shipping, means gross
oss revenue
whether for passenger, cargo or mail originating from the Philippines un
destination. es up to fina
b. Gross Philippine billings, in case of international carrier, refers to the amo.
gross revenue derived from carriage of persons, exces baggage, cargo and n
originating from the Philippines in a continuous and uninterrupted flight. nt o
c. Any profit remitted by a branch to its head office shall be subject to a tay n
which shall be based on the net profits applied or earmarked for remitta
with deduction for the tax component thereof. 15%
d. None of the above tance
14. Dividends received by domestic corporations from a domestic corporation is subiet
to which income tax rate?
a. 20%
b. 6% C. exempt
d. none of the above
15. The following corporations are exempt from income tax. Which one is not?
a. PHIC
b. GSIS d. LWD
C. SSS e. PCSO
f. All of the above
16. Which of following is authorized to issue permit to operate proprietary educational
institutions?
a. CHED
b. TESDA C. DEPED
d. All of the above
17. Effective July 1, 2020, in general, the normal tax of a domestic corporation is
a. 20%
b. 25%. C. 30%.
d. 35%.
8. It is important to know the source of income for tax purposes (i.e., from within 0
without the Philippines) because
a. export sales are not subject to income tax.
b. some individual taxpayers are citizens while others are aliens.
C. the Philippines imposes income tax only on income from sources within.
d. some individual and corporate taxpayers are taxed on their worldwide incom
while others are taxable only upon income from sources within the Philippine>

-54 | Income Taxation 2022 Edition by Prof. wIN Ballada and Susan Ballada

Income JayodHon

19. Which is not true?

a. Non-resident cinematographic film owner, lessor or distributor is taxEu au %
of gross income.
b. Non-resident owner or lessor of aircraft, machinery and other equipment
taxed at 7 %% of gross rentals, charters and other fees.
C. Non-resident owner or lessor of vessels chartered by Philippine nationals
taxed at 4 4% of gross rentals, lease or charter fees from leases or charters to
Filipino Citizens or corporations, as approved by the Maritime Industr
Authority.
d. None of the above
20. Interest received as passive income by resident foreign corporations may be subject
to which tax rate?

a. 20% C. 10%
b. 15% d. all of the above

21. Which of the following corporations is imposed the least income tax rate
a. offshore banking units c. regional operating headquarters
b. international carriers d. branch profits remittances

22. One of the statements is false. Which is it? Non-stock, non-profit corporations are
a. exempt from income tax on income received as such corporation.
b. not exempt from taxes on their passive income from interests and royalties.
C. exempt from internal revenue taxes on their income derived from any of their
properties.
d. not exempt from internal revenue taxes on their income derived from any
activity conducted for profit.

23. If the sum of the quarterly tax payments made during the said taxable year is not
equal to the total tax due on the entire taxable income of that year, the corporation
shall either

a. be credited or refunded with the excess amount paid.

b. pay the balance of tax still due.
C. carry over the excess credit.
d. all of the above

Chapter 3: Taxation of Corporations | 3-55

24. To be exempt from taxation revenues derived from assets used in the ono
cafeterias/canteens and bookstores by non-profit, ration d
institutions should be non-stock educations
a. located within the school premises
b. owned by such educational institution.
C.operated by the educational institution as ancillary activities.
d. all of the above
25. The following may constitute gross income of a non-resident foreign corporatin.
Which one cannot?
a. Emoluments ion
b. Reinsurance premiums C. Dividends
d. Royalties
26. Which corporation does not receive the same treatment with regard to the income
tax imposed on the net capital gain from sale, exchange or other dispositiono
shares of stock in a domestic corporation not traded in the stock exchange?
a. non-resident foreign corporation
b., resident foreign corporations
C. domestic corporations
d. none of the above

Income Taxation 2022 Edition by Prof, WIN nt