Lecture Note Chapter-15-regular-income-taxation-corporations PDF

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REGULAR INCOME TAXATION (CORPORATIONS)CORPORATIONS Generally, includes all juridical persons (e. partnership), except : 1. General professional partnership and 2. Joint ventures or consortium formed for the purpose of undertaking construction projects or engaging in petroleum, coal, geothermal, and...

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REGULAR INCOME TAXATION (CORPORATIONS) CORPORATIONS  Generally, includes all juridical persons (e.g. partnership), except: 1. General professional partnership and 2. Joint ventures or consortium formed for the purpose of undertaking construction projects or engaging in petroleum, coal, geothermal, and other energy operations pursuant to an operating consortium agreement under a service contract with the Government  Classification 1. Domestic corporation – generally subject to 30% RIT on world income  Exempt DC a. Government agencies and instrumentalities b. Certain GOCC (Note that GOCC is generally subject to RIT) c. Non-profit non-stock corporations d. Cooperatives  Special DC a. Private educational institutions and non-profit hospitals b. Foreign currency deposit units (FCDU) and Expanded FCDU c. PEZA, TIEZA, or BOI registered enterprises  Regular DC – all other DCs 2. Resident foreign corporation – generally subject to 30% RIT on Philippine income  Special RFC 1. Offshore banking units (OBU), including EFCDU 2. Regional area headquarters and Regional operating headquarters of multinational companies 3. International carriers 4. PEZA, TIEZA, or BOI registered enterprises  Regular RFC – all other RFCs 3. Non-resident foreign corporation – generally subject to 30% final income tax on Philippine income  Special NRFC  Non-resident cinematographic film owner, lessor, or distributor  Non-resident lessor of vessels chartered by Philippine nationals  Non-resident owner or lessor of aircraft, machineries, and other equipment  Regular NRFC – all other NRFCs

EXEMPT DOMESTIC CORPORATION 1. Government agencies and instrumentalities 2. Certain GOCC, such as:  GSIS  SSS  Philhealth  Local Water Districts

3. Non-profit non-stock corporations  Requisites for exemption a. It must be organized and operated exclusively for religious, educational, charitable, scientific, athletic, or cultural purposes or for rehabilitation of veterans b. All net income or assets of the corporation must be devoted to its exempt purposes and no part of its net income or asset accrues to the benefit of any member or specific person c. It must not be a branch of a foreign non-stock non-profit corporation d. It must secure a Tax Exemption Ruling from the BIR to enjoy tax exemption which is valid only for (3) years, unless sooner revoked or cancelled for the following reasons:  There is material change in character, purpose, or method of operation which are inconsistent with the basis of exemption  Failure to file an ITR (exempt corporations are still required to file returns even without income that are taxable) 4. Cooperatives  Those that transacts with its members only – exempt from RIT on related activities Gross income from unrelated activities, subject to RIT Pxx Less: Expenses from unrelated activities (xx) Reserve fund requirement (xx) Taxable income Pxx  Those that transacts both with its members and non-members a. Those having accumulated reserve and undivided net savings not more than P10M – the same tax rule from those that transacts with its members only b. Those having accumulated reserve and undivided net savings more than P10M – subject to the following taxes:  Income tax on the full amount allocated for interest on capital of members and transactions from non-members  Business tax on transactions with non-members Gross income from non-member transactions Add: Gross income from unrelated activities subject to RIT Less: Expenses from non-member transactions and unrelated activities Reserve fund requirement Net surplus from non-members

Pxx xx xx (xx) Pxx

Gross income from member transactions Less: Expenses from transactions with members All required fund appropriation Net surplus distributable to members per bylaws Multiply: Distribution % as Interest rate on member’s capital Interest on member’s capital

Pxx xx (xx) Pxx x% xx

Taxable income

Pxx

 Taxability of cooperative regardless of classification – all cooperatives are subject to:  Applicable income tax to income from unrelated activities  Documentary stamp tax  VAT on purchases of goods or services, except on exempt importations  Withholding taxes on wages, except minimum wage earner employees  All other taxes which cooperatives are directly liable and not otherwise expressly exempted by law Note:  Exempt DC still allowed to engage in activities conducted for profit without losing its tax exemption status, provided such activity is not a substantial part to its whole operation  Exemption applies only to income from related activities, hence, income from unrelated activities, income from activities conducted for profit, and income from its properties are taxable  Exception – income from unrelated activities of non-profit non-stock educational institutions are still exempt from income tax provided such income is used for educational purposes  Common expenses not directly attributable to related or unrelated activities are allocated based on the ratio of gross income  Reporting requirements of exempt corporations (itemized deduction is required): a. BIR Form 1702-EX – if no taxable income b. BIR Form 1702-RT – if with taxable income c. BIR Form 1702-MX – if they earn income subject to special tax rates

SPECIAL CORPORATIONS  Special domestic corporations 1. Private educational institutions and non-profit hospitals – subject to the pre-dominance test:  Subject to 10% income tax – gross income from unrelated activities do not exceed 50% of the total gross income  Subject to 30% income tax – gross income from unrelated activities exceed 50% of the total gross income Classification 1. Private 2. Non-profit 3. Governmen t

Educational Institutions 10% RIT Exempt Exempt

Hospitals 30% RIT 10% RIT Exempt

2. Foreign currency deposit units (FCDU) and Expanded FCDU – refers to a unit or department, or a branch of a local bank authorized by the BSP to engage in short-term foreign currency denominated transactions (for FCDU) and short-term or long-term foreign currency denominated transactions (for EFCDU)  Taxability Nature of Income

From

Residents FCDU or OBU Other (offshore (onshore income) income) 1. Income from forex transactions  Interest income from:  Loans & receivables  Deposits  Another forex income: 2. Income from non-forex transactions

Non-residents (offshore income)

Exempt Exempt Exempt

10% FIT 30% RIT

Exempt Exempt Exempt

30% RIT (onshore income)

30% RIT

30% RIT

Note:  Income of non-residents from FCDU and EFCDU are exempt  Income of regular banking units (RBU) are subject to RIT  Only expenses directly attributable to income subject to RIT are deductible and in case of common expense, it is allocated based on gross income 3. PEZA, TIEZA, or BOI registered enterprises  BOI-registered enterprises a. Pioneer firms – exempt from income tax for (6) years from the commencement of operations b. Non-pioneer firms – exempt from income tax for (4) years from the commencement of operations Note: Such exemption may be extended up to (10) years upon meeting certain conditions.  PEZA and TIEZA registered enterprises – subject to (5%) income tax on gross income from business activity within the Ecozone for as long as it remains registered  Taxability of PEZA, TIEZA, or BOI registered enterprises – subject to: a. Real property tax on land of developers b. Final income tax and capital gains tax c. Regular income tax on income from:  Outside their registered operations  Non-registered activities (e.g. sale of scrap materials and gain on sale of factory or office building)  Special resident foreign corporation 1. Offshore banking units (OBU), including EFCDU – a branch, subsidiary, or affiliate of a foreign bank which is authorized by the BSP to conduct in the Philippines banking transactions in foreign currencies involving receipt of funds from external sources and the utilizations of such funds  Taxability of OBU and EFCDU of a foreign bank – the same tax rules from FCDU and EFCDU of local banks, except for offshore income which is exempt 2. Regional area headquarters and Regional operating headquarters of multinational companies

 Taxability a. Regional area headquarters (exempt from income tax) b. Regional operating headquarters (10% RIT) c. Both (exempt from all local taxes, except real property tax on land improvements and equipment) 3. International carriers – refers to entities that transport passengers, mails, and excess cargoes or baggage from the Philippines to any destination abroad and vice versa by air or by sea  Taxability General rule – (2.5%) of the gross Philippine billings, except:  Preferential rate or exemption on the basis of reciprocity or applicable tax treaty  Gross Philippines billings – pertains to gross revenue/receipts on carriage from the Philippines to any destination abroad (i.e. outbound), except:  Non-revenue passengers (those passengers qualifying under the free mileage programs of the air carriers)  Refunded tickets  Endorsed tickets to another airline (taxable to the endorsee airline)  Portion of series or indirect flights or voyages with another carrier (portion taxable is from the Philippines to the immediate destination or first stop only)

Note:  Series or indirect flights or voyages from the Philippines to any destination abroad with the same carrier is nevertheless 100% taxable  Series or indirect flight or voyages from abroad having a stoppage in the Philippines with same carrier: a. Departs from the Philippines within (48) hrs. from embarkation – excluded from gross Philippine billings b. Departs from the Philippines beyond (48) hrs. from embarkation – the flight or voyage from Philippines to the next stop is included in the gross Philippine billings, except when it is delayed by force majeure  Series or indirect flight or voyages from abroad having a stoppage in the Philippines with another carrier  the flight or voyage from Philippines to the next stop is included in the gross Philippine billings regardless of the time of departure from embarkation  Branch or sales agent of offline international carriers (no landing rights in the Philippines) which sells passage documents for compensation or commission to cover offline flights or voyages originating from Philippine ports is subject to RIT  Other income of international carriers is subject to applicable type of income tax

 Foreign currency translation to Philippine peso – whichever is higher conversion rates of:  Monthly average airline rate in the Bank Settlement Plan Monthly Sales report and  Banker’s Association of the Philippines (BAP) rate 4. PEZA, TIEZA, or BOI registered enterprises – subject to the same tax rules applicable to its domestic corporations counterpart  Special non-resident foreign corporations 1. Non-resident cinematographic film owner, lessor, or distributor – subject to 25% FIT from all sources of gross income within the Philippines 2. Non-resident lessor of vessels chartered by Philippine nationals – subject to 4.5% FIT on gross rentals, lease, or charter fees received from Filipino resident or corporations as approved by the Maritime Industry Authority 3. Non-resident owner or lessor of aircraft, machineries, and other equipment – subject to 7.5% FIT on rentals, charters, and other fees from residents of the Philippines Note:  NRFC is generally subject to 30% FIT, hence, other income of special NRFC from sources within the Philippines are subject to 30% FIT, except Non-resident cinematographic film owner, lessor, or distributor (fix 25% FIT for all types of income)  Residents who pays income to NRFC shall withhold the final income tax and remits the same to the BIR through BIR Form 1601-F  Reporting of special corporations with taxable income (BIR Form 1702-MX) Domestic or resident are mandatorily required to use the itemized deduction for their income subject to regular income tax, preferential or special tax rates, except those subjects only to final income tax (i.e. NRFC) REGULAR CORPORATIONS  Tax schemes 1. For domestic corporations – may opt to be taxed at either:  15% gross income tax – provided the following conditions are satisfied: a. A cost of sales ratio not exceeding (55%) of gross sales from all sources b. A tax effort ratio of (20%) of Gross National Product (GNP) c. A ratio of (40%) of income tax collection to total tax revenues d. A VAT tax effort of (4%) of GNP and e. A (0.9%) ratio of the Consolidated Public Sector Financial Position to GNP Note: The election to this scheme is irrevocable for (3) consecutive taxable year during which the corporation is qualified under the scheme.  30% RIT subject to minimum corporate income tax 2. For resident foreign corporations – 30% RIT subject to minimum corporate income tax 3. For non-resident foreign corporations – generally subject to 30% FIT  Minimum corporate income tax (MCIT) – a (2%) gross income tax is payable when:

1. The corporation has zero or negative taxable income or 2. MCIT is greater than the RIT  Scope – applicable to all corporations subject to the 30% RIT, including exempt and special corporations with respect to their income taxable under 30% RIT, excluding:  Real Estate Investment Trust (REIT)  DC opted to be taxed under the 15% gross income tax  DC or RFC subject to special tax rates: a. Private educational institution and non-profit hospitals b. FCDUs, EFCDUs, and OBUs c. Regional Operating Headquarters of multinational companies d. International carriers e. PEZA and TIEZA registered enterprises  All NRFCs Note: MCIT is applicable only starting from the 4rth year of operation of the corporation.  Excess MCIT carry-over – the excess of MCIT over the RIT can be claimed as tax credit against RIT tax due in the immediately succeeding (3) years, subject to the following rules: a. It can only be used as tax credit against RIT, not against MCIT b. It can be deducted to the full amount of RIT due c. FIFO method application d. Unused excess MCIT at the end of (3)-year period shall expire and can no longer be used Note: MCIT applies quarterly, hence, the same rules shall apply in quarterly tax payments.  Relief from MCIT – upon recommendation of the CIR, the Secretary of Finance may suspend the imposition of MCIT upon submission of proof that the corporation sustained substantial losses on account of: a. Prolonged labor dispute b. Force majeure c. Legitimate business reverses  Reporting for regular DC and RFC – they may choose either itemized deduction or OSD in income reporting through BIR Form 1702-RT IMPROPERLY ACCUMULATED EARNINGS TAX (IAET)  A (10%) penalty tax imposed on the improper accumulation of corporate earnings beyond the needs of the business to defeat the (10%) FIT on dividends by mere non-declaration of dividends  Scope – applies only to domestic corporations whether regular or special, except:  Exempted under the NIRC a. Publicly-held corporations b. Finance companies c. Banks d. Insurance companies  Exempted by nature a. Business partnership and taxable joint ventures (automatic 10% final income tax on share of partners/venturer from net income) b. GPP and non-taxable joint ventures (not considered corporation)

c. Ecozone-registered enterprises (5% gross income tax is in lieu of all taxes, except real property tax)  Allowed appropriation of earnings a. Mandatory appropriations – those required by law (e.g. appropriation for treasury share acquisitions) b. Contractual appropriations – those required by private contracts (e.g. appropriation for bond sinking fund required c. Reasonable appropriations – those made for the immediate or anticipated needs of the business provided there is direct correlation between the appropriation and the need of the business  Prima facie instances of improper accumulation of earnings a. Investment of substantial profit in unrelated business or securities of unrelated business b. Investment in bonds and other long-term securities c. Accumulation of earnings in excess of 100% of the paid-up capital Note:  IAET is not automatic, it is due only upon formal assessment from the BIR  The above prima facie instances do not apply to:  Holding companies  Investment companies  Closely-held corporations  Formula Taxable income Less: Corporate income tax due Add: NOLCO Earnings from regular income, net of tax Add: Passive income, net of FIT Capital gains, net of CGT Exempt or excluded income Total earnings Less: Dividends declared Allowed appropriations Net earnings Add: Retained earnings, prior years Total accumulated earnings Less: Paid-up capital, at par Improperly accumulated earnings Multiply: IAET rate Improperly accumulated earnings tax

Pxx (xx) xx Pxx xx xx xx Pxx (xx) (xx) Pxx xx Pxx (xx) Pxx 10% Pxx

 Timing of payment of IAET – corporations with accumulated earnings exceeding the paid-up capital (at par) must declare dividend within (1) year from the end of the taxable year and any IAET of the same taxable year shall be determined and should be paid within (15) days from the end of the following year BRANCH PROFIT REMITTANCE TAX (15% FIT)

 Any profit by a branch from their active income which are effectively connected with its trade or business in the Philippines remitted to its head office abroad is subject to 15% tax based on the total profits applied or earmarked for remittance Note:  Effectively connected with the trade or business includes gain on sale of properties used in business (e.g. PPE) [i.e. passive income and capital gains are excluded]  Any profit means it also applies from income of prior years but it excludes remittances out of capital (i.e. remittances exceeding the accumulated profit is a return of capital, hence, not taxable)  It also applies to indirect remittance, such as:  Remittance of profits to a resident affiliate or to a Philippine regional operating headquarters (ROHQ) of the home office, except if it is a loan from the branch to the affiliate or ROHQ (i.e. if it is treated as a loan from the home office to affiliate or ROHQ, it is an indirect remittance)  Transfer of net profits to increase the branch assigned capital account (i.e. profit capitalization)

 Scope – it applies to all profit remittances of all RFC, including Regional Operating Headquarters of multinational companies, FCDU or OBU of foreign banks, and international carriers, except PEZA-registered enterprises...