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Definition of Term
1. 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 existencei.
2. Partnership (Ordinary Partnership) is one created when two (2) or more persons contribute money, property or industry to
common fund with the intention to divide the profit among themselvesii.
3. General Professional Partnerships (GPP) are partnership formed by person for sole purpose of exercising their common profession,
no part of the income of which is derived from engaging in any trade or business iii.
4. Joint Stock Companies are constituted when a group of individuals acting jointly, establish and operate a business enterprise under
artificial name, with an invested capital divided into transferable shares, an elected board of directors, and other corporate
characteristics, but operating without formal government authority, its shareholders have unlimited liability for corporate debts and
obligationsiv.
5. Joint Account (cuentas en participacion) 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 writingv.
6. Joint Venture is a commercial undertaking by two (2) or more persons differing from a partnership in that it relates to disposition
of a single lot of goods or the completion of a single projectvi.
Corporation
The term corporation shall include partnership, no matter how created or organized, joint stock companies, joint account (ceuntas en
participacion), associations, or insurance companies. It also include mutual fund companies, regional operating headquarters of
multinational corporations, and joint accounts but does not include general professional partnership 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 service contract with the Governmentvii.
Types of Corporationviii
1. Domestic Corporation (DC)
2. Resident Foreign Corporation (RFC) ETB
Domestic corporations are taxable on their income derived from all sources (world) while foreign corporation are taxable on
their income derived from sources within the Philippines only. Generally, domestic and resident foreign corporations are
subject to 30% normal or regular corporate income tax (NCIT or RCIT) based on net income during the taxable year.
However, starting on the fourth (4th) year of business operations, the tax due for domestic and resident foreign
corporations should be the higher between the NCIT and the minimum corporate income tax (MCIT) of 2% of gross
income. If qualified, however, they may opt to be taxed 15% on their gross income instead of the higher between NCIT
and MCIT.
Sample Computation:
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Income Taxation (Corporate Taxation)
Sales/Revenue PXX
Cost of Sales/Cost of direct services XX
Gross Income XXX
Gross income tax rate 15%
Income tax due XXX
Less: Tax withheld XXX
Tax paid-previous quarter XXX
Foreign tax credits XXX
Income tax payable PXX
4. GOCC (Government Owned Control Corporation refer to all corporations, agencies, or instrumentalities owned or controlled by
the Government. GOCCs shall pay such tax rate of tax upon their taxable income as are imposed upon corporations or associations
engaged in similar business, industry or activity, except the following exempt GOCCs as provided by law: SSS, GSIS, PHIC, and
PCSO)
Note: The term domestic, when applied to corporation, means created or organized in the Philippines or under its laws, while foreign
means a corporation which is not domestic. Thus, foreign corporations are those organized, authorized or existing under any law other
than the Philippine law.
Taxability of Corporation (Tax rate and Basis in computing the Tax due)
DC RFC NRFC
NCIT
Tax rate 30% Net Income (taxable income) 30% Net Income (taxable income) 30% Gross Income
Tax base (basis) World Within Only Within Only
MCIT
Tax rate 2% Gross Income 2% Gross Income N/A
Tax base (basis) World Within Only N/A
OR
GIT (Optional)
Tax rate 15% GI 15% GI N/A
Tax base (basis) World Within only N/A
Note: (1) Corporations, whether domestic, resident foreign or non-resident foreign, are generally subject to a tax rate of thirty
percent (30%). (2) MCIT starting on the 4th year of operations immediately following the taxable year in which the corporation
commenced its business. The tax due is the higher between NCIT and MCIT.
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Income Taxation (Corporate Taxation)
b. Manufacturing Concern
Raw materials used PXXX
Direct Labor XXX
Manufacturing overhead XXX
Freight Cost XXX
Insurance Premiums XXX
Other costs of production XXX
Total PXXX
3. Seller of Services
Gross Receipts PXXX
Sales Discounts (XXX)
Sales Returns and Allowances (XXX)
Cost of Services (XXX)
Gross Income PXXX
4. Cost of Services:
Salaries and Employee benefits of personnel, consultants and
specialists directly rendering the service . PXXX
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Income Taxation (Corporate Taxation)
Quarterly and annual corporate Tax due (Carry-over of excess MCIT from Previous taxable year)
In the computation of the tax due for the taxable quarter, if the computed quarterly MCIT is higher than the quarter normal income
tax, the tax due to be paid for such taxable quarter at the time of filing the quarter corporate income tax return shall be the MCIT
which is 2% of the gross income as of the end of the taxable quarter.
In the payment of the said quarterly MCIT, excess MCIT from the previous taxable year(s) shall not be allowed to be credited
(deducted). However the expanded withholding tax and quarterly corporate income tax payment under the normal income tax and
MCIT paid previous taxable quarter(s) are allowed to be applied against the quarter MCIT due.
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Income Taxation (Corporate Taxation)
A tax of 10% is imposed on the improperly accumulated taxable income of corporation formed or availed of for the purpose of
avoiding the income tax with respect to its shareholders or the shareholder of any other corporation, by permitting the earnings and
profits of the corporation to accumulate instead of dividing them among or distributing them to the shareholders xii.
The rationale is that if the earnings and profits were distributed, the shareholder would then be liable to income tax thereon,
whereas if distribution were not made to them, they would incur no tax in respect to undistributed earnings and profits of the
corporation.
Improperly accumulated earning tax is being imposed in the nature of a penalty to the corporation for the improper
accumulation of its earnings, and as a form of deterrent to the avoidance of tax upon shareholders who are supposed to pay
dividend tax on earnings distributed to them by the corporationxiii.
Improperly accumulated earning tax (IAET) is imposed on improperly accumulated taxable income earned starting January 1,
1998 by domestic corporation as defined under the tax code and which are classified as closely held Corporation
The ownership of a corporation for the purpose of determining whether it is a closely held corporation or a publicly held
corporation is ultimately traced to the individual shareholders of the parent company. Where at least 50% of the outstanding
capital stock or at least 50% of the total combined voting power of all classes of stock entitled to vote is owned directly or
indirectly by or for not more than 21 or more individuals, the corporation is a publicly held corporation. Domestic corporations
not falling under the aforementioned definition are, therefore, closely held corporations xiv.
Effect of improperly accumulated earning tax (IAET), once the profit has been subjected to IAET, the same shall no longer se
subject to IAET in later year, even not declared as dividends. Notwithstanding the imposition of the IAET, profit which have
been subjected to IAET, when finally declared as dividends, shall nevertheless be subject to tax on dividends under the tax
code except in those circumstances where the recipient is not subject thereto.
6. Non-stock Corporation or association organized and operated exclusively for religious, charitable, scientific, athletic, or cultural
purposes of for the rehabilitation of veterans; provided that no individual person owns its assets or no individual person receives
benefit on its earnings.
7. Non-stock/nonprofit mutual saving banks or non-stock/nonprofit cooperative bank.
8. Nonprofit civic league or organization operating exclusively for the Promotion of social welfare.
9. Cemetery company owned and operated exclusively for the benefits of its members.
10. Nonprofit business league, chamber of commerce, or board of trade.
11. Associations, orders, beneficiary societies operating for the exclusive benefits of their members xv
Note: Taxability of PAGCOR. Philippine Gaming Corporation (PAGCOR) derives its incomes from two sources: operation conducted
under the franchise, and operations of other necessary and related services. The Supreme Court has ruled the following regarding the
taxability of PAGCOR:
PAGCORs income from gaming operations can only be subject to five (5) percent franchise tax, and not to a corporate income
tax. Presidential Decree 1896 exempts PAGCORs gaming operations from any kind of taxes, except the 5% franchise tax it is
required to pay. PAGCORs income from other related services can be subject to a corporate income tax.
i
Section 2, Batas Pambansa 68, The Corporation Code of the Philippines
ii
Article 1767, New Civil Code of the Philippines
iii
ibid
iv
Omar Erasmo G. Ampongan, Income taxation in the Philippines 2/3, June 2015, page 185
v
Ibid.
vi
Ibid.
vii
Section 22(B), National Internal Revenue Code of the Philippines (RA 8424)
viii
Enrico D. Tabag and Earl Jimson R. Garcia, Income taxation, 2015 edition, page 148
ix
Revenue Regulation 12-2007
x
Revenue Regulation 9-98
xi
Section 27 (E), NIRC
xii
Section 29, NIRC
xiii
RR 2-2001 as amended by RMC 35-2011
xiv
BIR Ruling 025-02
xv
Section 30, NIRC
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