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university of san carlos | mjat taxation law 1 finals atty kim aranas

Corporate Income Tax Rates


CLASSIFICATION SOURCES TAX BASE ENTITLED DEDUCTION TAX RATE

DC Within and without Taxable Income Yes 30%

RFC Within Taxable Income Yes 30%

NRFC Within Gross Income No 30%

1.RULES
General Rule: 30% effective January 1, 2009 (except in special cases)
Optional: DC and RFC have the option to be taxed at 15% of gross income, provided certain conditions are satisfied.

Exception:
a) MCIT — a minimum corporate income tax of 2% of the gross income at the end of the taxable year. It is imposed on a taxable
corporation beginning on the 4th taxable year immediately following the year in which such corporation commenced its business
operations, when the minimum income tax is greater than the normal income tax. The 30% tax rate may not be applied if it is lower
than the 2% of gross income of such corporate taxpayer.

Scenario 1: Scenario 2: Scenario 3:


Sales P1,000,000 Sales P1,000,000 Sales P1,000,000
COS ( 700,000) COS ( 700,000) COS ( 200,000)
Gross Income P 300,000 Gross Income P 300,000 Gross Income P 800,000
OpEx ( 200,000) OpEx ( 300,000) OpEx ( 790,000)
Taxable Income P 100,000 Taxable Income P 0 Taxable Income P 10,000

NIT: NIT: NIT:


P100,000 x 30% = P30,000 P0 P10,000 x 30% = P3,000
MCIT MCIT MCIT
P300,000 x 2% = P6,000 P300,000 x 2% = P6,000 P300,000 x 2% = P6,000

NIT > MCIT, thus NIT is the tax payable NIT < MCIT, thus MCIT is the tax payable NIT < MCIT, thus MCIT is the tax payable
Note: No need to apply the NOLCO
because you will be paying the MCIT.
b) Special Rates — check page 4

2.CONDITIONS TO BE SATISFIED TO AVAIL OF THE 15% OPTIONAL CORPORATE TAX


This is available to firms whose ratio of cost of sales to gross sales or receipts from all sources do not exceed 55%. Once elected by the
corporation, the option shall be irrevocable for the 3 consecutive years.
a) A tax effort ratio of 20% of the Gross National Product (GNP)
b) A ratio of 40% of income tax collection to total tax revenues
c) A VAT tax effort ratio of 4% of the GNP
d) A 0.9% ratio of the consolidated public sector financial position to GNP

Note: This is not yet in effect as per Atty A because there is no declaration yet from the President. But gidiscuss lang in case the President wants
this provision to take effect. But take note, there has to be a declaration from the President through the recommendation of Sec of Finance.
Check Sec 27(A).

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university of san carlos | mjat taxation law 1 finals atty kim aranas

Illustration:

Gross Sales P10M In this case, since the corporation’s ratio of cost of sales to
Cost of Sales (5M) gross sales from all sources is only 50% (5M/10M), then the
Gross Income 5M corporation is allowed to avail the 15% optional corporate tax,
Operating Expenses ( 2M) provided there is a declaration from the President that the 15%
Taxable Income 3M optional tax is already in effect.
Corp. Tax Rate x 30%
Tax Due P900K Therefore, the corporation’s tax due using 15% GIT is computed
as follows:
P5,000,000 x 15% = P750,000
3. MINIMUM CORPORATE INCOME TAX — 2%
The “minimum corporate income tax rate of 2% of gross income” means that the corporate taxpayer must pay corporate income tax not
lower than 2% of its gross income. If the actual corporate income tax is lower than the 2% tax that is supposed to be paid, it is the 2%
minimum.
➡ this is only applicable if the corporation is subject to the normal corporate income tax such that if the corporation avails of the

optional 15% GIT, or the 10% preferential rate to proprietary educational institutions, MCIT will not apply.
➡ this is only implemented during the 4th year following the start of your operation which is counted from the date of registration

with the BIR.


➡ not available to non-resident foreign corporations

MCIT Exceptions (these corporations are not allowed to avail MCIT because they are subject to a tax rate other than the normal
corporate income tax):
A. For Domestic Corporations
(a) Proprietary Educational Institution — they are taxed at preferential rate of 10%. However, if they will be subject to 30% (incase
their gross income from unrelated activities exceeded 50% of the total gross income), then they will be subject to MCIT
(b) Non-Profit Hospitals — same with proprietary educational institutions
(c) Depositary banks under expanded foreign currency deposit system — subject to different tax rate

B. For Resident Foreign Corporations


(a) Offshore Banking Units
(b) International carries
(c) PEZA Registered Corporations

Definition of Terms
Gross income derived from business shall be equivalent to gross sales less sales returns, discounts and allowances and cost of goods sold.
(Section 27A and 27E)
• For taxpayers engaged in sale of service, gross income means gross receipts less sales returns, allowances and discounts. (Section 27A)

• For taxpayers engaged in sale of service, gross income means gross receipts less sales returns, allowances, discounts, and cost of

services. (Section 27E)

Cost of goods shall include all business expenses directly incurred to produce the merchandise to bring them to their present location and
use. (Section 27A and 27E)
• For trading concern: Cost of goods sold shall include the invoice cost of goods sold, plus import duties, freight in transporting the

goods to the place where the goods are actually sold, including insurance while the goods are in transit.

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university of san carlos | mjat taxation law 1 finals atty kim aranas
• For manufacturing concern: Cost of goods manufactured and sold shall include all costs of production of finished goods, such as
raw materials used, direct labor and manufacturing overhead, freight cost, insurance and other costs incurred to bring the raw
materials to the factory/warehouse.
• For service concern: Cost of services shall mean all direct costs and expense necessarily incurred to provide the services required by
the costumers and clients including (a) salaries and employee benefits of personnel, consultants and specialists directly rendering the
service, and (b) cost of facilities directly utilized in providing the service such as depreciation or rental of equipment used and cost of
supplies. Provided however, that in case of banks, cost of services shall include interest expense.

Carry Forward of Excess Minimum Tax

Any excess of the minimum corporate income tax over the normal income tax shall be carried forward and credited against the normal
income tax for the 3 immediately succeeding taxable years.

Relief from the MCIT under certain conditions

The Secretary of Finance may suspend the imposition of the MCIT on any corporation which suffers losses on account of (1) prolonged labor
dispute; (2) force majeure; and (3) legitimate business reverses.

Illustration No 1:

4TH YR 5TH YR 6TH YR 7TH YR 8TH YR 9TH YR

Sales 10M 10M 10M 10M 10M 10M

Less: Cost (5M) (2M) (2M) (3M) (4M) (4M)

Gross Income (basis for 2% MCIT) 5M 8M 8M 7M 6M 6M

Less: Expenses (5M) (7.8M) (7.7M) (6.8M) (5.5M) (5.6M)

Net Taxable Income (30% NCIT) 0 200K 300K 200K 500K 400K

30% Tax Due (NCIT) 0 60K 90K 60K 150K 120K

2% MCIT 0 160K 160K 140K 120K 120K

0
20K
(zero cos naa
Paid to the government (whichever is (120 - 100 MCIT
0 160K 160K 140K excess of MCIT
higher between MCIT and NCIT) carried
na carry
forward)
forward)

100K
Excess MCIT (carry forward for 3 100K 170K 250K
0 (250 from 7th yr 0
taxable years) (160-60) [100+(160-90)] [170+(140-80)]
- 150k this year)

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university of san carlos | mjat taxation law 1 finals atty kim aranas
Illustration No. 2:

4TH YR 5TH YR 6TH YR 7TH YR 8TH YR 9TH YR

Sales 10M 10M 10M 10M 10M 10M

Less: Cost (5M) (2M) (2M) (3M) (4M) (4M)

Gross Income (basis for 2% MCIT) 5M 8M 8M 7M 6M 6M

Less: Expenses (5M) (7.8M) (7.7M) (6.8M) (5.7M) (5.4M)

Net Taxable Income (30% NCIT) 0 200K 300K 200K 300K 600K

30% Tax Due (NCIT) 0 60K 90K 60K 90K 180K

2% MCIT 0 160K 160K 140K 120K 120K

Paid to the government (whichever is 0


0 160K 160K 140K 120K
higher between MCIT and NCIT) (180-180 MCIT)

180K
(70K excess
from 6th yr +
Excess MCIT (carry forward for 3 100K 170K 250K
0 80k from 7th 0
taxable years) (160-60) [100+(160-90)] [170+(140-80)]
year + 30k this
year)

4.SPECIAL RULES
a. Special Domestic Corporations
SOURCES TAX BASE TAX RATE

1. Proprietary Educational Institution Within and without Taxable Income 10% or 30%

Proprietary Educational Institution — any private school maintained and administered by private individual or group with an issued
permit to operate from the DepEd or CHED, or TESDA, as the case may be.

Tax Rates:
➡ 10% of its income derived from unrelated trade, business or activity does not exceed 50% of its gross total income

➡ 30% ordinary corporate tax rate if its income from unrelated trade or business or activity exceeds 50% of its gross income

SOURCES TAX BASE TAX RATE

2. Non-Profit Hospital Within and without Taxable Income 10% or 30%

Same principle applied in proprietary institution.

b. Special Resident Foreign Corporations


SOURCES TAX BASE TAX RATE

1. International Air Carrier Within Gross Philippine Billings 2.5%

2. International Sea Carrier Within Gross Philippine Billings 2.5%

For purposes of International Air Carrier, Gross Philippine Billings refer to the amount of gross revenue derived from carriage of
persons, excess baggage, cargo and mail originating from the Philippines in a continuous and uninterrupted flight irrespective of

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university of san carlos | mjat taxation law 1 finals atty kim aranas
the place of sale or issue, and the place of payment of the ticket or passage document. Tickets revalidated, exchanged, and/or
endorsed to another international airline form part of the GBP if the passenger boards a plane in a port or point in the Philippines.
➡ the international air carrier should have landing rights in the Philippines because it requires that it must originate from the

Philippines in a continuous and uninterrupted flight.


➡ in case the flight is interrupted by force majeure resulting in the transshipment of the passengers, their excess baggage, freight,

cargo and/or mail to another airplane operated by another airline company and transshipment takes place in another country, the
GBP shall be determined based on that portion of flight from the Philippines up to the point of said transshipment.

Example:
The value of the ticket paid by a passenger traveling from the Philippines to the US via Hong Kong is P100,000. Coming to the
Philippines, he paid another P100,000 passing through Korea. Will the international carrier which flies these flights be subject to tax in
the Philippines?
➡ The trip from the PH to HK in an uninterrupted and continuous flight will be subject to tax here in the country. The P100,000 will

be apportioned for the value from PH to HK. The Philippines however has no jurisdiction for the trip from JK to US because this is a
resident foreign corporation.

For purposes of International Sea Carrier, Gross Philippine Billings mean gross revenue whether from passenger, cargo, or mail
originating from the Philippines up to final destination, regardless of the place of sale or payments of the passage or freight
documents.

3. Offshore Banking Units Within Income derived from Exempt


foreign Currency
transactions with
nonresidents, offshore
banking units in the PH,
local commercial banks,
incorporated branches of
foreign banks that may be
authorized by the BSP to
transact business with OBU
10%
Income derived from
foreign currency loans
granted to residents
Exempt
Income of non-residents
(individual/corporation
from OBUs)

4. Tax on Branch Profit Remittances Total profits applied or 15%


This is only available to resident foreign earmarked for remittance,
corporations, not to DC and NRFC. without deduction for the
tax components thereof

5. Regional Area HQs N/A Exempt

6. Regional Operating HQs Within Taxable Income 10%

Note: Revenue Regulation No. 15-2013, dated September 20, 2013.

Branch Profit Remittance


Example:
A company registered in the US has a branch here in the Philippines. The Philippine branch earns an income of P1M but it decided to
remit P500,000 to its home office in the US. How much is the applicable branch profit tax?

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university of san carlos | mjat taxation law 1 finals atty kim aranas
➡ P75,000 (P500,000 x 15%). Section 28(A)(5) of the NIRC provides that any profit remitted to its head office shall be subject to a tax of
15% based on the total profits applied for or earmarked for remittance without any deduction of the tax component, except those
activities which are registered with the Philippine Economic Zone Authority.
Note: Earmarked means that there is an intention for the amount to be remitted. But even without actual remittance, they will still be
subject to tax at a rate of 15%.

Subsidiary vs Branch
A subsidiary (parent-subsidiary relationship) is a corporation set-up here in the Philippines. It is a domestic corporation where the shares
are owned by a foreign corporation and it is a separate entity. When a corporation is a stockholder of a corporation, the subsidiary will
distribute income to its principal through dividends and not remittance. It is taxed at 30% or at 15% depending on the applicability of
the tax sparing rule. It is as if it is a domestic corporation distributes income through dividends to a non-resident foreign corporation.

A branch (home office-branch relationship), on the other hand, is an extension of the home office abroad and it is not a separate entity. It
has no separate shareholders. It has the same assets, liabilities and profit with the home office. When a branch earns a profit, it does not
declare dividends but it simply remit profits to the owner, NRFC. This is what we call profit remittance.

Regional Area Headquarters and Regional Operating Headquarters


Area headquarters are not earning income here in the Philippine because it is only for liaising and cooperation purposes. If it starts to
earn income then it is subject to a 30% and not 10% because it is registered as an area headquarter. It will not be converted to an
operating headquarter.

Operating Headquarters earn income from their operations and they conduct activities that are income generating and so they will be
subject to tax on such income.

c. Special Non-Resident Foreign Corporations


SOURCES TAX BASE TAX RATE

1.Non-Resident Cinematographic Within Gross Income 25%


Film Owner, Lessor or Distributor

2.Non-Resident Owner or Lessor of Within Gross Rentals, Lease or 4.5%


Vessels Chartered to Filipino Charter Fees
Nationals or Corporations
The Charter Agreement of which is
approved by Maritime Industry
Authority

3.Non-Resident Owner or Lessor of Within Gross Rentals or Fees 7.5%


Aircraft, Machinery and Equipment

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university of san carlos | mjat taxation law 1 finals atty kim aranas
5. PASSIVE INCOME
TYPE OF PASSIVE INCOME DC RC NRFC

1.Interest income on Bank Deposit This should be


included in its gross
income subject to
30% tax. But in the
case of interest on
20% 20%
loans which have
been made on or
before August 1, 1896,
the same is subject to
20% final tax

2.Interest income on Bank Deposit under Expanded Foreign


15% 15% Exempt
Currency Deposit System

3. Royalties Derived within the Philippines 20% 20% 30%

4. Capital Gains Derived from its sale of shares of stock


a.If it is listed and traded through local stock exchange:
This rule applies to BOTH corporate and individual
6/10 (or .6) of 1% of the gross selling price
taxpayers.
b.If it is not listed or traded through local stock exchange:
15% of the net capital gains

5. Capital Gains derived from the sale of real property which is 6% of the Gross
not used in trade or business Selling Price or
Should be treated as other income
Zonal Value
subject to 30%
whichever is
higher

6. Branch Profit Remitted by a Branch Office Subject to BPRT


of 15%, the
basis of the tax
N/A is the amount N/A
applied for or
earmarked for
remittance

7. Dividends Received from Domestic Corporation These dividends


received from DC by
NRFC is subject to 15%
final tax IF the foreign
Exempt Exempt corp. allows a tax
credit of at least 15%
of the taxes deemed
paid in the Philippines
by NRFC.

Tax Sparing Credit [Section 28B(5)b] — 15%

Purpose: To attract investors in the Philippines


There is no statutory provision that requires actual grant of tax credit by the foreign government. Neither is there a Revenue Regulation
requiring actual grant. It is clear that the provision of the law says “allows”. So, it is enough to prove that the foreign government allows a
tax credit. It is not incumbent upon the foreign government to prove the amount actually granted.

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university of san carlos | mjat taxation law 1 finals atty kim aranas
Tax on Improperly Accumulated Earnings
[Section 29, NIRC]

➡ This is a penalty tax upon a corporate taxpayer for accumulating so much net income after tax beyond the reasonable needs of the business.
Section 43 of the Corporation Code prohibits a stock corporation to maintain a retained earnings more than 100% of its paid-up
capitalization.
➡ In a corporate set-up, stockholder-owners get their share in the earnings of the corporation through the dividends from retained earnings. If
the corporation do not declare dividends, it means that the government will lose the revenue from dividend tax. As such, IAET is imposed to
recover the revenue it should have earned.
➡ There will be no IAET however if the company is holding earnings within reasonable means of business.

Prima Facie Instances of Accumulation of Profits


1. Investments of substantial earnings or profits of corporation to unrelated business, stocks or securities of unrelated business
2. Investments in bonds or other long term securities
3. Accumulated earnings (or Retained Earnings) in excess of 100% of your paid-up capital, not otherwise intended for the reasonable
needs of the business

1.COVERAGE
For corporations using the calendar basis, the accumulated earnings tax shall not apply on improperly accumulated income as of December
31, 1997.

For corporations adopting the fiscal year accounting period, the improperly accumulated income not subject to this tax shall be reckoned as
of the end of the month comprising the 12-month period of FY 1997-1998.

2. CORPORATIONS SUBJECT TO IMPROPERLY ACCUMULATED EARNINGS TAX (IAET)


The IAET shall apply to every corporation formed or availed for the purpose of avoiding income tax with respect to shareholders or
the shareholders of any other corporation, by permitting earnings and profits to accumulate instead of being distributed or divided.

3. EXCEPTIONS TO IAET:
The IAET shall not apply to:

1) Publicly held corporations
- Publicly held corporation is a corporation in which at least 50% of its outstanding shares of stock allowed to vote is held directly
or indirectly by more than 20 individuals, while closely held corporation is a corporation in which at least 50% of its
outstanding shares of stock allowed to vote is held directly or indirectly by not more than 20 individuals

- Publicly listed corporation is a corporation in which it is listed in the local stock exchange
Note: All publicly listed corporations are publicly held corporations but not all publicly held corporations are publicly listed
corporations.

Illustration:
A owns 50%, 50% is held by 20 individuals Closely held corporation

A owns 51%, 49% is held by 20 individuals Closely held corporation

A owns 49%, 51% is held by 22 individuals Publicly held corporation

A owns 49%, 51% is held by 20 individuals Closely held corporation

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university of san carlos | mjat taxation law 1 finals atty kim aranas

2) Banks and other non-bank financial intermediaries — monitored by BSP


3) Insurance companies — monitored by Insurance Commission
4) Revenue Regulations No. 2-01
The following constitute accumulation of earnings for the reasonable needs of the business:
i. Allowance for the increase in the accumulation of earnings up to 100% of the paid-up capital of the corporation as of the
Balance Sheet date, inclusive of accumulations taken from other years;
ii. Earnings reserved for definite corporate expansion projects or programs requiring considerable capital expenditure as
approved by the Board of Directors or equivalent body;
iii. Earnings reserved for building, plants or equipment acquisition as approved by the Board of Directors or equivalent body;
iv. Earnings reserved for compliance with any loan covenant or pre-existing obligation established under a legitimate
business agreement;
v. Earnings required by law or applicable regulations to be retained by the corporation or in respect of which there is legal
prohibition against its distribution; f. In the case of subsidiaries of foreign corporations in the Philippines, all undistributed
earnings intended or reserved for investments within the Philippines as can be proven by corporate records and/or relevant
documentary evidence.
5) PEZA-registered companies — they are taxed at a special rate of 5% in lieu of all taxes
6) Foreign corporations — they are registered as a branch and therefore no capital of its own and no shareholder, no distribution of
dividends
7) Taxable business partnerships or general co-partnerships — there is no capital stock to speak of
8) General Professional Partnerships — not considered as a corporation for tax purposes


4. EVIDENCE OF PURPOSE TO AVOID INCOME TAX


Prima Facie Evidence: The fact that any corporations is a mere holding company or investment company

Evidence Determinative of Purpose: The fact that the earnings or profits of a corporation are permitted to accumulate beyond the
reasonable needs of the business shall be determinative of the purpose to avoid the tax upon its shareholders or members unless the
corporation, by clear preponderance of evidence, shall prove to the contrary. The term “reasonable needs of the business” includes the
reasonable anticipated needs of the business.

5. COMPUTATION OF IMPROPERLY ACCUMULATED TAXABLE INCOME

Taxable Income for the year P xx


Add: Income Subjected to Final Tax P xx
NOLCO xx
Income Exempt From Tax xx
Income Excluded from Gross Income xx xx

Less: Income Tax Paid P xx


Dividends Declared or Paid xx (xx)
Total P xx
Add: Retained Earnings from prior Years P xx
Accumulated Earnings as of December 31, 2010 xx xx
Less: Amount that may be retained
(100% of Paid-Up Capital as of December 31, 2010) (xx)
Improperly Accumulated Taxable Income (IATI) P xx

The resulting IATI is thereby multiplied by 10% to arrive at the Improperly Accumulated Earnings Tax.

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university of san carlos | mjat taxation law 1 finals atty kim aranas
Accounting Periods, Methods, and Withholding
A.ACCOUNTING PERIOD
General Rule: The taxable income shall be computed upon the basis of the taxpayer’s annual accounting period in accordance with the
method of accounting regularly employed in keeping the books of such taxpayer.

Exception: Computations shall be made in accordance with such method as in the opinion of the Commissioner clearly reflects the income:
i. If no such method of accounting has been so employed; or
ii. If the method employed does not clearly reflect the income. [Section 43, NIRC]

B. TAXABLE YEAR
- The calendar year or the fiscal year ending during such calendar year, upon the basis of which the net income is computed.

Accounting Periods

i. Calendar Year — January 1 to December 31


ii. Fiscal Year — an accounting period of twelve months ending on the last day of any month other than December

Calendar year shall be used under the following instances:

i. If the taxpayer chooses the calendar year;


ii. If the taxpayer has no annual accounting period;
iii. If the taxpayer does not keep books;
iv. If the taxpayer is an individual

When the Commissioner is authorized to terminate taxable period

i. When a taxpayer retires from business subject to tax


ii. When he intends to leave the Philippines
iii. When he removes his property from the Philippines
iv. When he hides or conceals his property
v. When he performs any act tending to obstruct the proceedings for the collection of the tax for the past or current quarter or year
vi. When he renders the collection of the tax totally or partly ineffective

C. METHODS OF ACCOUNTING
a. Cash Basis
Income, profits and gains earned by taxpayer are not included in gross income until received. Expenses are deducted until paid within
the taxable year.

b. Accrual Method
Income, gains and profits are included in the gross income when earned, whether received or not. Expenses are allowed as deductions
when incurred although not yet paid.

c. Mixed or Hybrid
Combination of cash and accrual method.

d. Any other method which clearly reflects the income


Cash vs Accrual Method of Accounting
Gains, profits and income are to be included in the gross income for the taxable year in which they are received by the taxpayer, unless
they are included when they accrue to him in accordance with the approved method of accounting followed by him.

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university of san carlos | mjat taxation law 1 finals atty kim aranas

Tax Accounting vs Financial Accounting


While taxable income is based on the method of accounting used by the taxpayer, it will always differ from accounting income. This is so
because of a fundamental difference in the ends of the two concepts serve. Accounting attempts to match cost against revenue. Tax law
is aimed at collecting revenue. It is quick to treat an item as income, slow to recognize deductions as losses. Thus, tax law will not
recognize deductions for contingent future losses except in very limited situations. Good accounting, on the other hand, requires their
recognition. (Consolidated Mines vs CTA, 58 SCRA 618)

D. LONG-TERM CONTRACTS
The term “long term contract” means building, installation or construction contracts covering a period in excess of one year. (Section 48,
NIRC)

Treatment of Income from Long-Term Contracts


i. Percentage of Completion Basis — allows you to recognize as income that percentage of total income that matches the percentage of
completion of a project. This method works best when it is reasonably possible to estimate the stages of project completion on an
ongoing basis, or at least to estimate the remaining costs to complete a project
ii. Completed Contract Basis — is used to recognize all of the revenue and profit associated with a project only after the project has been
completed. This method is used when there is uncertainty about the collection of funds due from a customer under the terms of a
contract.

Note: Section 48 of the NIRC provides that “persons whose gross income is derived in whole or in part from such (long term contracts) shall
report such income upon the basis of percentage of completion.”

The return should be accompanied by a return certificate of architects or engineers showing the percentage of completion during the taxable
year of the entire work performed under the contract.

E. SALES OF DEALERS IN PERSONAL PROPERTY


A person who regularly sells or otherwise disposes of personal property on the installment plan may return as income therefrom in any
taxable year that proportion of the installment payments actually received in that year, which the gross profit realized or to be realized when
payment is completed, bears to the total contract price. (Section 49, NIRC)

Treatment of sales of realty and casual sales of personality


These include:
a) Casual sale or other casual disposition of personal property (other than property included in the inventory at the close of the taxable
year) for a price exceeding P1,000; and
b) Sale or other disposition of real property

Treated either on installment or deferred sales basis


a) Installment Basis — if the initial payments do not exceed 25% of the selling price
b) Deferred Sales Basis — if the initial payments exceed 25% of the selling price (Section 49, NIRC and Section 175, RR2)

Initial Payments
These include payments received in cash or property other than evidences of indebtedness of the purchaser during the taxable period in
which the sale or other disposition is made.

The term “initial payments” contemplates at least one other payment in addition to the initial payment. (Section 175, RR 2)

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university of san carlos | mjat taxation law 1 finals atty kim aranas
F. TERMINATION OF LEASEHOLD
Lessor who acquires building or improvements made by the lessee after the termination of the lease has two options in reporting the said
income:
1. Lessor may report as income at the time when such buildings or improvements are completed the fair market value of such buildings
or improvements; or
2. Lessor may spread over the life of the lease the estimated depreciated value of such buildings or improvements at the termination of
the lease and report as income for each of the lease an adequate part thereof. (Section 49, RR 2)

G. ALLOCATION OF INCOME AND DEDUCTIONS


In the case of two or more organizations, trades or businesses (whether or not incorporated and whether or not organized in the Philippines)
owned or controlled, directly or indirectly, by the same interests, the Commissioner is authorized to distribute, apportion or allocate gross
income or deductions between or among such organization, trade or business, if he determines that such distribution, apportionment or
allocation is necessary in order to prevent evasion taxes or clearly to reflect the income of any such organization, trade or business. (Section
50, NIRC)

Filing of Tax Return and Payment of the Tax


H. TAX RETURN
A report prepared by the taxpayer showing to internal revenue officers an enumeration of taxable amounts and description of taxable
transactions, allowable deductions, amounts subject to tax and tax payable by the taxpayer to the government (self-assessment). There is
pain in perjury if the return is not correct.
i. BIR Form No. 1700 and 1701 — Annual Tax Returns for Individuals
ii. BIR Form No. 1702 — Annual Income Tax Returns for Corporations and Partnerships
(a) BIR Form No. 1702-EX — Annual ITR for use only by corporation, partnership, and other non-individual taxpayer exempt under
tax code and other special laws with no other taxable income
(b) BIR Form No. 1702-MX — Annual ITR for use by corporation, partnership, and other non-individual taxpayer with mixed
income subject to multiple income tax rates or with income subject to special or preferential rate
(c) BIR Form No. 1702-RT — Annual ITR for use by corporation, partnership, and other non-individual taxpayer subject only to
regular income tax rate
iii. BIR Form No. 1800 — Donor’s Tax Return
iv. BIR Form No. 1801 — Estate Tax Return

I. PERSONS REQUIRED TO FILE INCOME TAX RETURN


a. Individual
1) Resident Citizen;
2) Non-resident citizen on income from within the Philippines;
3) Resident alien on income from within the Philippines;
4) NRA-ETB on income from within the Philippines;
5) An individual (citizens/aliens) engaged in business or practice of a profession within the Philippines regardless of the amount of
gross income;
6) Individual deriving compensation income concurrently from two or more employers at any time during the taxable year;
7) Individual whose pure compensation income derived from sources within the Philippines exceeds P250,000.

b. Taxable Estate and Trust

c. General Professional Partnership

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university of san carlos | mjat taxation law 1 finals atty kim aranas
d. Corporation
1) Not exempt from income tax;
2) Exempt from income tax under Section 30 of the NIRC but has not shown proof of exemption.

J. INDIVIDUALS EXEMPT FROM FILING INCOME TAX RETURN


1) Pure compensation income earners whose gross income does not exceed P250,000;
2) Pure compensation income earners who qualifies for substituted filing;
3) Individual whose sole income has been subjected to final withholding income tax;
4) An individual who is a minimum wage earners

K. SUBSTITUTED FILING OF INCOME TAX RETURNS BY EMPLOYEES RECEIVING PURELY COMPENSATION


INCOME (SECTION 4, RR 3-2002)
Requisites:
✓ The employee receives purely compensation income regardless of amount during the taxable year;

✓ The employee the income only from one employer in the PH for the calendar year

✓ The amount of tax due from the employee have been withheld correctly by the ER (tax due equals tax withheld)

✓ The employee’s spouse also complies with all three conditions above

✓ The employer files the annual information return (BIR Form 1604-CF); and

✓ The employer issues BIR Form 2316 to each employee

Individuals not qualified for substituted filing (still required to file)


1)Individuals deriving compensation from 2 or more employers concurrently or successively during the taxable year
2)Employees deriving compensation income, regardless of the amount, whether from a single or several employers during the
calendar year, the income tax of which has not been withheld correctly (i.e. tax due is not equal to the tax withheld) resulting to
collectible or refundable return.
3)Employees whose monthly gross compensation income does not exceed P5,000 or the statutory minimum wage, whichever is
higher, and opted for non-withholding of tax on said income
4)Individuals deriving other non-business, non-profession-related income in addition to compensation income not otherwise subject
to finals tax.
5)Individuals receiving purely compensation income from a single employer although the income tax of which has been correctly
withheld, but whose spouse falls under 1 to 4 above.
6)Non-resident aliens engaged in trade or business in the Philippines deriving purely compensation income, or compensation
income and other non-business, non-profession-related income.

L. PLACE OF FILING
1)Legal Residence — authorized agent bank; Revenue District Officer; Collection agent or duly authorized treasurer
2)Principal Place of Business
3)With the Office of the Commissioner

M.DUE DATES OF FILING AND PAYMENT OF TAX (UNDER TRAIN LAW)


INCOME TAXES DUE DATES

Income Tax — Compensation (Individual Taxpayer) April 15 succeeding year

Income Tax — Business or Profession (Individual Taxpayer)


a)First Quarter (January - March) May 15 (please verify)
b)Second Quarter (April - June) August 15
c)Third Quarter (July - September) November 15
d)Annual Final Return April 15 succeeding year

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university of san carlos | mjat taxation law 1 finals atty kim aranas
INCOME TAXES DUE DATES

Income Tax — Corporate Taxpayers


a)First Quarter 60th day after end of quarter
b)Second Quarter 60th day after end of quarter
c)Third Quarter 60th day after end of quarter
d)Annual Final Return April 15 succeeding year
or “15th day of the 4th month following the close of the
taxable year”

Capital Gains Tax on Sale of Real Property


a)Cash Sale 30th day after sale
b)Installment Sale 30th day after receipt of installment

Remittance of Tax Withheld


1.Final Withholding Tax 1.Not later than the last day of the month following the
close of the quarter during which withholding was
2. Creditable Withholding Tax made.
2.Not later than the last day of the month following the
close of the quarter during which withholding was
made.
Exception: withholding taxes on compensation which
is still filed on a monthly basis

Note: When the tax dues is in excess of P2,000, the taxpayer may elect to pay in two (2) equal installments:
(a)1st installment — April 15;
(b) 2nd installment — on or before October 15.

N. EXTENSION OF TIME TO FILE RETURN


The Commissioner may on meritorious cases grant a reasonable extension of time for filing income tax return and may subject the
imposition of twenty (20) percent interest per annum from the original due date.

O. RETURN OF HUSBAND AND WIFE


File one return during the taxable year if following requisites are complied:
1. Married individuals (citizens, resident, or non-resident aliens)
2. Do not derive income purely from compensation

If impracticable to file one return: each spouse file a separate return of income but the return so filed shall be consolidated by the Bureau
for the purposes of verification for the year.

Unmarried Minor

Income of unmarried minors derived from property received by the living parent shall be included in the return of the parent, except:
a) When donor’s tax has been paid on such property, or
b) When transfer of such property is exempt from donor’s tax

P. PERSONS UNDER DISABILITY


If a taxpayer is unable to make his own return, it may be made by his (a) duly authorized agents, (b) representative, (c)guardian, or (d) other
person charged with the care of his person or property who will assume the responsibility of making the return and incurring penalties
provided for erroneous, false, or fraudulent return.

Q. RETURN OF ESTATE AND TRUST AND PARTNERSHIP


Estate and trust with gross income of P20,000 or more and partnership (whether professional or business) shall file their income tax return
on or before April 15.

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university of san carlos | mjat taxation law 1 finals atty kim aranas
R. TAX RETURNS OF GENERAL PROFESSIONAL PARTNERSHIPS (GPP)
Each GPP shall file in duplicate, a return of its income (except those income exempt) and shall set forth:
1. Items of gross income or deductions allowed
2. Names of Partners
3. TIN
4. Share of each partner

S. SELF-EMPLOYED INDIVIDUALS
Self employment income
Self employment income consists of the earnings derived by the individual from the practice of profession or conduct of trade or business
carried on by him as a sole proprietor or by a partnership of which he is a member.

Return and payment of estimated income tax by individuals


The amount of estimated income shall be paid in four installments.

Estimated tax
Estimated tax means the amount of which the individual declared as income tax in his final adjusted and annual income tax return for the
preceding taxable year minus the sum of the credits allowed against the said tax.

If, during the current taxable year, the taxpayer reasonably expects to pay a bigger income tax, he shall file an amended declaration during
any interval of installment payment dates.

T. CORPORATE RETURNS
Every corporation subject to income tax, except foreign corporations not engaged in trade or business in the Philippines, shall render, in
duplicate, a true and accurate:
1. Quarterly income tax return; and
2. Final or adjustment return

• The return shall be filed by the president, vice president, or other principal officer, and shall be sworn to by such officer and by the
treasurer or assistant treasurer.
• A corporation may employ either the calendar or fiscal year as basis for filing its annual income tax return.
• Every corporation deriving capital gains from the sale or exchange of shares of stock not traded through a local stock exchange shall file a
return within 30 days after each transaction and a final consolidated return of al transactions during the taxable year on or before the 15th
day of the fourth month following the close of the taxable year.

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 tax computed shall be decreased by the amount of tax previously paid or assessed during the preceding quarters and shall be paid not
later than 60 days from the close of each of the first three quarters of the taxable year, whether calendar or fiscal year.

Fiscal adjustment return


Every corporation liable for tax shall file a final adjustment return covering the total taxable income for the preceding calendar or fiscal year.

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:

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university of san carlos | mjat taxation law 1 finals atty kim aranas
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, as the case may be.

U. COMPUTATION OF INCOME TAX

All Income for Taxable Year P xx


Less: Exclusions ( xx)
Gross Income xx
Less: Allowable Deductions ( xx)
Net Income P xx
Less: Personal and additional exemptions (??? wala nani sa TRAIN pero naa sa handouts ni atty) ( xx)
Taxable Net Income P xx
Multiply with appropriate Tax Rate x%
Income Tax Due P xx
Less: Creditable Withholding Tax or Tax Credits ( xx)
Net Income Tax Payable P xx

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