PART VIII CORPORATE TAXATION

1. Corporate Tax Rates (Lim, 386) 32% 2000 2005 35% 2006 2008 (RA 9337) 30% 2009 onwards (RA 9337) 2. Corporation, define (Lim, 386) An artificial being created by operation of law, having the right of succession and the powers, attributes and properties expressly authorized by law, implies therefrom or incident to its existence. It includes partnership, no matter how created or organized, joint stock companies, joint accounts (cents en participation), associations or insurance companies. 3. Joint Stock Company, define (Lim, 386) A group of individuals acting jointly whereby they establishes and operates a business enterprise under an artificial name, with an invested capital divided into transferable shares, an elected BOD, and other corporate characteristics, but operating without formal governmental authority. Its shareholders have unlimited liability for corporate debts and obligations. 4. Joint Accounts, define (Lim, 387) These are constituted when one interest himself in the business of another by contributing capital thereto and sharing in the profits or losses in the proportion agreed upon. They are not subject to any formality and may be privately contracted orally or in writing. 5. Partnership a. b. c. Partnership, define Elements of a partnership Classification of Partnership Based on its Nature and Purposes (Lim, 391) General professional partnership and General co-partnership or business partnership a. General Partnership b. Limited Partnership 1) General Professional Partnership,(GPP) define (Lim, 391) d.

A partnership formed by persons for the sole purpose of exercising their common profession, no part of the income of which is derived from engaging in trade or business. (Sec. 22, NIRC) Nature

a)

b) Exemption from Tax c) d. Share in General Professional Partnership of a Partner

Classification of Partnership for Tax Purposes (Lim, 391) Partnership NOT subject to income tax, and Partnership subject to income tax no matter how created or organized, whether registered, licensed or otherwise. Kinds of Partnership NOT Subject to Income Tax (Lim, 391) a. General Professional Partnership A partnership formed by persons for the sole purpose of exercising their common profession, no part of the income of which is derived from engaging in trade or business. (Sec. 22, NIRC) b. A joint venture or consortium formed for the purpose of undertaking construction projects, or c. A joint venture or consortium formed for the purpose of engaging in petroleum, coal, geothermal and other energy operations pursuant to an operating or consortium agreement a service contract with the government. (Sec. 22(b), NIRC) Tax liability of Partners in Exempt Partnership (Lim, 393) General professional partnership as such is not subject to income tax. Persons engaging in business as partners in a general professional partnership shall be liable for income tax only in their separate and individual capacities. Each partner shall report as his gross income his distributive share, actually or constructively received, in the net income of the partnership. (Sec. 26, NIRC) The share of a partner in the net profits of the partnership shall be taxable to the partner, whether distributed or not.

e.

The share of a partner shall be subject to creditable withholding tax of

10%. Or 15% as the case may be.

 For purposes of computing the distributive share of the partners, the net
income of the partnership shall be computed in the same manner as a corporation. (Sec. 26, NIRC) Co-ventures in a joint venture or consortium which is not subject to income tax have the same tax liability as partners in exempt partnership. e. Partnership Subject to Income Tax (Lim, 394) All other partnership (business), except GPP and Joint Venture, no matter how created or organized, are considered corporations subject to corporate income tax [Sec. 22 (b), NIRC]. The partners are considered as stockholders and therefore, profits distributed to them by the partnership are considered as dividends. The net income declared by a business partnership for a taxable year which is subject to corporate income tax, after deducting such tax, shall be deem to have been actually or constructively received by the partners in the same taxable year and shall be tax to them in their individual capacity, whether actually distributed or not. Share of Partners in all Taxable Partnership (Lim, 395) The share of a partner in the net profits is subject to final tax of 10% or 15% as the case may be. Payments made to the partners for services rendered shall be considered as compensation income subject to Sec. 24 A. h. Filing of Tax Return (Lim, 396) 1) Of Exempt Partnership (Lim, 396) Exempt partnership are required to file an annual; income tax return (referred to as the Annual Information Return). The purpose is to furnish information as to the share each partner shall report and include in his personal income tax return. 2) Of Taxable Partnership (Lim, 396) File quarterly income tax returns for the first (May 15), second (Aug. 15) based on their accounting periods. (NOTE Within 60 days after the end of each quarter, but in no case shall it be later than the given dates) i. Rules on Partnership

6. Entities Subject to Corporate Income Tax 7. Co-ownership

f.

1) When is there co-ownership? a) In General

b) For Income Tax Purpose 10% FWTX is imposes on the share of an individual partner (RC, NRC, RA) in the distributable net income of a partnership, association, joint account, joint venture, or consortium taxable as corporation where he is a partner, member or co-venture therein. If the individual partner is a NRAEBT his distributive share in the net income after tax of a business partnership is subject to 20% FWTX. The partners share in the net loss of a business partnership is NOT deductible from his personal income tax. Shares of individual partners in the net income of a General Profession Partnership are subject to 15% or 10% creditable withholding tax and his share in the net loss may be claimed as a deductable expense in his personal income tax returns. g. After-Tax Net Profits, define (Lim, 396) The net profit of the partnership computed in accordance with generally accepted principles of accounting, LESS the corporate income tax imposed in Sec. 27 of the Tax Code. 2) Taxation of co-ownership a) When co-ownership is Subject to Income Tax

b) When Co-ownership is not Subject to Income Tax 1) Tax Liability of Co-owners in Exempt Co-ownership 2) Tax on income of Undivided Inherited Property 3) Rule on How Co-ownership is Subject to Income Tax 4) Rules on Co-ownership 8. Classification of Corporations (Lim, 398) a. Domestic Corporation (DC), define (Lim, 398)

 Created or organized in the Philippines under its laws. These

corporations are taxed on ALL income from sources within and without the Philippines. b. Resident Foreign Corporations, define (Lim, 399) Created and organized under a foreign law and engaged in business in the Philippines. These are taxed ONLY on income realized within the Philippines. Non-resident Foreign Corporations, define (Lim, 400) Created and organized under a foreign law, not engaged in business in the Philippines. It has no branch or office here but derives fixed or determinate income from sources within the Philippines such as interest, dividends, rents royalties, etc. Special Corporations: (Lim, 400) Are those that are subject to tax bases and rates other than the usual rates (32% now 35%) and bases being applied to ordinary corporations. 1) Special Domestic Corporations, classified (Lim, 400) a. Non-Profit Private educational institutions and Non-Profit Hospitals 10%, but if the gross income from allied services, business or activity exceeds 50% of the total income from all sources, it shall be taxed at 35%. b. GOCC, Agencies and Instrumentalities including PAGCOR Same tax rate upon their taxable income in a similar business, industry or activity. Except: GSIS, SSS, PHIC and PCSO NOTE: BIR Ruling 038-02 (Nov. 5, 2002) Duty Free Philippines and duty free merchandising division of the Phil. Tourism Authority of the government, is now deemed subject to income tax. c. Depositary Banks On interest income earned from foreign currency transactions including interest income from foreign loans. Predominance Test Rule (Lim, 400) If the gross income from unrelated trade, business or other activity exceeds 50% of the total gross income derived by such schools or hospitals from all sources, the tax shall be based on

the usual tax rates imposed on ordinary corporations (35% until end of 2008). The 10% preferential rate is on their taxable income earned from educational services, except on their passive income. Non-stock, Non-profit schools are subject to IR taxes on their income from trade, business or other activity, the conduct of which is NOT related to the exercise or performance of its purpose or function. (BIR Ruling No. 130, s. 1990) b) Unrelated trade, business or other activities (Lim, 401) Refers to any trade, business or other activity, the conduct of which is not substantially related to the exercise or performance by such schools or hospitals of its primary purpose or function. c) Preferential Tax Rule

c.

d.

2) Special Resident Foreign Corporation (Lim, 402) a) Resident International Carrier (Lim, 402) At 2.5% on gross Philippine billings. i. International Air Carrier (Lim, 403) This is a foreign airline corporation doing business in the Philippines having granted landing rights in any Philippines port to perform international air transportation services/activities or flight operations anywhere in the world. ii. Offline Carrier (Lim, 403) An international air carrier with no landing rights and flight operations to and from the Philippines. b) International Shipping Corporations (Lim, 404) Taxed at 2.5% on Gross Philippine Billings same as international carriers. c) Offshore Banking Units (OBUs) (Lim, 404) 10% on any interest income derived from foreign currency loans granted to residents other than offshore banking units or local commercial banks that may be authorized by the BSP to transact business with offshore banking units. But, interest income derived by OBUs authorized by the BSP from foreign currency transactions on loans granted to non-

a)

residents, other OBUs, local commercial banks including branches of foreign banks that may be authorized by the BSP to transact business with OBUs, is Exempt from income taxation. i. Foreign Currency Division Unit (FCDU) (Lim, 405) Is a local bank allowed by the BSP to engaged in foreign currency transactions. d) Regional or Area Headquarters of Multinational Corporations, define (Lim, 404) Branch(es) established in the Philippines but no income is earned or derived by it from the Philippines. They act as supervisory, communications and coordinating center of affiliates, subsidiaries, branches in Asia-Pacific Regions and other foreign marketers or for information dissemination, production promotion and the performance of quality control of goods for export to its head office or affiliates NOT SUBJECT TO PHILIPPINE INCOME TAX. e) Regional Operating Headquarters of Multi-National Corporations (Lim, 405) Taxed on their income earned within the Philippines at 10% realized by its branches established in the Philippines. These entities are branches of MNC that are engaged in various services and generating income from sources within the Philippines.

10. Corporations Subject to Net Income Tax (Sec. 27 and 28 (A), NIRC11. Corporation Subjected to Gross Income Tax (Sec. 28 (B), NIRC 12. Domestic Corporations Subject to Special Tax Rates (Sec. 27 (B), NIRC 13. Corporate Income Subject to Final Tax: a. On Domestic Corporations (Sec. 27 (D) (1-5) 1) Interest (Sec. 27 (D) (1) 2) Capital gains from Sales of Shares of Stock not traded in Stock Exchange (Sec. 27 (D) (2) 3) Income under EFC (D) (Sec. 27 (1) (3) 4) Capital gains Realized from the Sale, Exchange or Disposition of Lands and/or Buildings (Sec. 27 (D) (5) b. On Resident Foreign Corporations 1) Income Derived by OBU (Sec. 28 (A) (4); 2) Tax on Branch Profits Remittances (Sec. 28 (A), NIRC; 3) Interest from Deposits and yields or any other Monetary Benefit from Deposit substitutes, Trust Funds and Similar Arrangements and Royalties (Sec. 28 (A) (7) (a); 4) Income derived under EFCO (Sec. (A) (7) (b); and 5) Capital Gains from Sales of Shares of Stock not Traded in Stock (Sec. 28 (A) (7) (c). c. On Non-Resident Foreign Corporations: 1) Gross Income (Sec. 28 (B) (1); 2) Cinematographic Filon owner, Lessor or Distributor (Sec. 28 (B) (2); 3) Owner or Lessor or Vessels Chartered by Philippine Nationals (Sec. 28 (B) (3); 4) Owner or Lessor or Aircraft, Machineries and other Equipment (Sec. 28 (B) (4);

3) Special Non-Resident Foreign Corporations: (Lim, 405) a) Non-Resident lessor of vessels chartered by Philippine Nationals (Lim, 405) Taxed on gross rentals, lease and charter fees from leases to Filipino citizens/corporations as provided under the Maritime Industry Authority at 4.5%. b) Non-resident lessor of aircrafts, machineries and other equipment (Lim, 406) Taxed on rentals, chartered and other fees at 7.5%. c) Non-resident cinematographic film owner, lessor or distributors (Lim, 406) Taxed on gross income from Philippine sources at 25%.

9. Tax Exempt Corporations under Sec. 30, NIRC

5) Interest on Foreign Loans (Sec. 28 (B) (5) (a); 6) Intercorporate Dividends (Sec. 28 (B) (5) (b); and 7) Capital Gains from Shares of Stock not Traded in Stock (Sec. 28 (B) (5) (c). Taxability of Cash and/or property dividend issued by a Corporation: 1. Dividend, define 2. 3. 4. 5. Stock dividend, defined Disguished dividend, defined Cases when redemption of stock is not taxable Holding period, defined 4.

c. d. e.

Nature of the IAET Purpose of IAET Corporation Liable for IAET a) Closely-held corporations, defined

f. g. h.

Entities to which IAET is Not Applicable Meaning of IAET as Taxable Income Immediately Test, defined a) Its relevance to IAET

Option Corporate Income Tax (OCIT) a. b. Applicability of the OCIT When allowed

New Taxes Introduced Under RA 8424: 1. Fringed Benefit Tax (FBT) 2. Minimum Corporate Income Tax of 2% (MCIT) a. Purpose of the Imposition of the MCIT b. c. d. e. f. g. h. 3. Imposition of the MCIT Relief from the MCIT Effectivity of the MCIT Carry Forward of excess MCIT, defined Exceptions to the MCIT Comparison between the normal income tax and the MCIT Payment of the MCIT

14.

Improperly Accumulated Earnings Tax of 10% (IAET) a. Imposition of the IAET b. Concept of the IAET