CORPORATE INCOME TAXATION:

TYPES, TAX BASE, TAX RATES

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 DEFINITION: CORPORATION
Section 22 (B), Tax Code

The term “corporation” shall include 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.

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 DEFINITION: CORPORATION
'General professional partnerships' are
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.

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 DEFINITION: CORPORATION

Entities treated as a corporation for income tax purposes:

► Partnerships, no matter how created or organized

► Joint-stock companies
► Joint-accounts (cuentas en participacion)
► Associations
► Insurance companies

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 DEFINITION: CORPORATION
Partnerships no matter how created or
organized. Registered or unregistered

“ By the contract of partnership, two or more

persons bind themselves to contribute money,
property or industry to a common fund with the
intention of dividing the profits among
themselves .” (Article 1767, Civil Code)

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 DEFINITION: CORPORATION
Joint Venture

• In Kilosbayan et. al., vs. Guingona (G.R. No. 113375 dated

May 5, 1994), a joint venture has been defined as:

• “an association of person or companies jointly undertaking

some commercial enterprise; generally all contribute assets
and share risks. It requires a community of interest in the
performance of the subject matter, a right to direct and
govern the policy in connection therewith, and (a) duty,
which may be altered by agreement, to share both in profit
and losses.”

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 DEFINITION: CORPORATION
Joint Emergency Operation is a Joint Venture.

Collector of Internal Revenue vs. Batangas Transportation Company

and Laguna-Tayabas Bus Company (G.R. No. L-9692 dated January 6,
1958).

FACTS:

Batangas Transportation and Laguna Bus, two distinct and separate

corporations entered into a “Joint Emergency Operation” .

1. The companies were placed under one sole management and

operated jointly.

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 DEFINITION: CORPORATION
2. The purpose of the agreement was to allow
the companies to economize in overhead
expenses.

3. At the end of each calendar year, all the gross

receipts and expenses were determined and
the net profits were transferred fifty-fifty to the
books of accounts of each corporation.

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 DEFINITION: CORPORATION
4. Each corporation then prepared its own income tax
return from the fifty percent (50%) gross receipts and
expenditures, assets and liabilities and paid the
corresponding income taxes thereon separately.

ISSUE: Whether or not the two transportation companies

are liable to the payment of income tax as a corporation
on the ground that the “Joint Emergency Operation”
organized and operated by them is a corporation within
the meaning of the Internal Revenue Code.

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 DEFINITION: CORPORATION
DECISION:

The “Joint Emergency Operation” is considered a

joint venture. Consequently, it is liable to pay
corporate income tax.

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 DEFINITION: CORPORATION
When the Tax Code includes "partnerships"
among the entities subject to the tax on
corporations, it must refer to organizations
which are not necessarily partnerships in the
technical sense of the term, and that
furthermore, said law defined the term
"corporation" as including partnerships no
matter how created or organized,

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 DEFINITION: CORPORATION
thereby indicating that "a joint venture need not be
undertaken in any of the standard forms, or in
conformity with the usual requirements of the law
on partnerships, in order that one could be
deemed constituted for purposes of the tax on
corporations"; that besides, said section 84 (b)
provides that the term "corporation" includes "joint
accounts" (cuentas en participacion) and
"associations", none of which has a legal
personality independent of that of its members. xxx

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 DEFINITION: CORPORATION
What was actually done in this case was that,
although no legal personality may have been
created by the Joint Emergency Operation,
nevertheless, said Joint Emergency Operation,
joint venture, or joint management operated
the business affairs of the two companies as
though they constituted a single entity,
company or partnership, thereby obtaining
substantial economy and profits in the
operation.
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 DEFINITION: CORPORATION
Essential factors to constitute a “joint venture”:

(a) each party to the venture must make a contribution, not necessarily of
capital, but by way of services, skill, knowledge, material or money;

(b) profits must be shared among the parties;

(c) there must be a joint proprietary interest and right of mutual control over
the subject matter of the enterprise;

(d) usually, there is single business transaction rather than a general or

continuous transaction" (Words and Phrases, Vol. 23, p. 230)” BIR Rulings No.
254-91 dated November 26, 1991, No. 317-92 dated October 28, 1992, and
DA-081-99 dated February 9, 1999

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 DEFINITION: CORPORATION
Associations

Afisco Insurance Corporation, et. al. vs. Court of

Appeals (G.R. No. 112675 dated January 25, 1999)

FACTS:
A number of local insurance firms formed
themselves a “pool” to facilitate the handling of
business with a nonresident foreign reinsurance
company.

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 DEFINITION: CORPORATION
ISSUE: Whether or not the pool of machinery insurers was a
partnership taxable as a corporation.

DECISION:

The “pool” is an association taxable as a corporation.

The ceding companies entered into a Pool Agreement or an

association that handled all the insurance businesses covered
under their reinsurance treaty with a nonresident foreign
corporation. The following factors unmistakably indicate a
partnership or an association covered by Section 24 of the
NIRC:
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 DEFINITION: CORPORATION

“(1) The pool has a common fund, consisting of money and other valuables
that are deposited in the name and credit of the pool. This common fund
pays for the administration and operation expenses of the pool.

(2) The pool functions through an executive board, which resembles the
board of directors of a corporation, composed of one representative for each
of the ceding companies.

(3) True, the pool itself is not a reinsurer and does not issue any insurance
policy; however, its work is indispensable, beneficial and economically useful
to the business of the ceding companies and Munich, because without it they
would not have received their premiums. The ceding companies share "in the
business ceded to the pool" and in the "expenses" according to a "Rules of
Distribution" annexed to the Pool Agreement. Profit motive or business is,
therefore, the primordial reason for the pool's formation.

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 DEFINITION: CORPORATION

The fact that the pool does not retain any profit or
income does not obliterate an antecedent fact, that of
the pool being used in the transaction of business for
profit. It is apparent, and petitioners admit, that their
association or coaction was indispensable [to] the
transaction of the business. . . If together they have
conducted business, profit must have been the object as,
indeed, profit was earned. Though the profit was
apportioned among the members, this is only a matter of
consequence, as it implies that profit actually resulted.

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 TYPES OF CORPORATIONS
Domestic Corporation- a corporation organized
under the laws of the Republic of the Philippines

Foreign corporation shall mean one which is

formed, organized or existing under laws other
than those of the Philippines. (Implementing
regulations, FIA)

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 TYPES OF CORPORATIONS
• Resident Foreign Corporation- a foreign corporation that is
engaged in or doing business in the Philippines.

"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
totalling one hundred eighty (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:

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 TYPES OF CORPORATIONS
• Provided, however, That the phrase "doing
business “ shall not be deemed to include mere
investment as a shareholder by a 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 own name and for its
own account

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 TYPES OF CORPORATIONS
The following acts shall not be deemed "doing
business" in the Philippines:

• (1) Mere investment as a shareholder by a

foreign entity in domestic corporations duly
registered to do business, and/or the exercise of
rights as such investor;

• (2) Having a nominee director or officer to

represent its interest in such corporation;

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 TYPES OF CORPORATIONS
(3) Appointing a representative or distributor
domiciled in the Philippines which transacts
business in the representative's or distributor's
own name and account;

(4) The publication of a general

advertisement through any print or broadcast
media;

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 TYPES OF CORPORATIONS
(5) Maintaining a stock of goods in the
Philippines solely for the purpose of having the
same processed by another entity in the
Philippines;

(6) Consignment by a foreign entity of

equipment with a local company to be used in
the processing of products for export;

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 TYPES OF CORPORATIONS
(7) Collecting information in the Philippines; and

(8) Performing services auxiliary to an existing

isolated contract of sale which are not on a
continuing basis, such as installing in the Philippines
machinery it has manufactured or exported to the
Philippines, servicing the same, training domestic
workers to operate it, and similar incidental
services.
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 TYPES OF CORPORATIONS
Non-resident foreign corporation- a foreign
corporation that is not engaged in or doing
business in the Philippines.

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 TAX BASE
TAX BASE

Domestic Corporation Worldwide Income

Resident Foreign
Corporation
(RFC) Income from within
the Philippines

Non Resident
Foreign
Corporation Income from within
(NRFC) the Philippines

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 TAX RATES
DOMESTIC and RESIDENT FOREIGN CORPORATIONS

In General
• Regular Corporate Income Tax (RCIT)
– Effective January 1, 2009 – 30% of Taxable Income

Minimum Corporate Income Tax (MCIT)

► 2% of Gross Income

(whichever is higher)

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 TAX RATES
RESIDENT FOREIGN CORPORATION:

- Branch profit remittance tax

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NOT TAXABLE AS A CORPORATION
General Professional Partnerships (GPPs)

The GPP is not a taxable entity for income tax

purposes since it is only acting as a "pass-through"
entity where its income is ultimately taxed to the
partners comprising it. (Rev. Regs. No. 16-2008)

A GPP shall not be subject to income tax since it is the

individual partners who shall be subject to income tax
in their separate and individual capacities. (RMC No. 3-
2012)
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NOT TAXABLE AS A CORPORATION
Joint Venture for Construction:

The exclusion of joint venture for construction

projects from the term “corporation” was
introduced as amendment to the Tax Code by
Pres. Decree (PD) No. 929, May 4. 1976.

The “Whereas clauses” embody the rationale

for the said exclusion:
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NOT TAXABLE AS A CORPORATION
WHEREAS, local contractors contribute substantially to the development
program of the country;

WHEREAS, local contractors are at a disadvantage in competitive bidding

with foreign contractors in view of limited capital and financial resources;

WHEREAS, in order to be able to compete with big foreign contractors, it

may be necessary for them to enter into joint ventures to pool their
limited resources in undertaking big construction projects;

WHEREAS, to assist them in achieving competitiveness with foreign

contractors, the joint ventures formed by them should not be considered
an additional income tax;

WHEREAS, the corporate income tax is imposed on joint ventures as well

as on the entities composing such joint ventures;

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NOT TAXABLE AS A CORPORATION
WHEREAS, the 3% contractor's tax is based both
on the total contract price received by a principal
contractor and on the portion of such contract
price which is allocated by the said principal
contractor to and received by, a subcontractor;

WHEREAS, the double taxation of gross receipts

to a principal contractor and sub-contractor also
diminishes the competitive capability of local
contractors against foreign contractors;
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NOT TAXABLE AS A CORPORATION
Joint Venture for Construction

BIR Ruling No. 108-10, October 19, 2010

FACTS:
On January 13, 2010, Aurora and Avida entered into a Joint
Development Agreement (the "JDA") for the formation of a joint
venture for construction purposes whereby Aurora, as registered
owner of the Property, shall contribute the Property to the joint
venture, and Avida, shall contribute project development services to
construct and develop the Property into a residential subdivision (the
"Project") with shared amenities, utilities and facilities to be
developed on the Property.

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NOT TAXABLE AS A CORPORATION
In return for their respective contribution, each
party shall receive their respective allocation of
Saleable House and Lot Units/Saleable Lot Units
from the Project. Aurora shall receive an
allocation of 11% of the saleable House and Lot
Units and 25%of the Saleable Lots of the
Project. Avida shall receive an allocation of 89%
of the Saleable House and Lot Units and 75% of
the Saleable Lots of the Project.
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NOT TAXABLE AS A CORPORATION
RULING:

The Development Agreement entered into by

and between Aurora and Avida is not subject to
the income tax.

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NOT TAXABLE AS A CORPORATION
1. The allocation of the saleable units between
Aurora and Avida, which is done effectively in
consideration of their respective contributions,
does not constitute a taxable event, as no income
is actually realized by either Aurora and/or Avida.

2. The Partition Agreement or Deed of Allocation

will be executed without consideration, and will
not be in connection with any sale between the
said parties.
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NOT TAXABLE AS A CORPORATION
3. Aurora and Avida, having contributed to the
development of the aforementioned real
properties, will not realize any income upon
the allocation of the saleable units. Hence,
the allocation of units arising from the
Partition Agreement is not subject to income
tax, and consequently, to withholding tax.

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NOT TAXABLE AS A CORPORATION
4. Aurora and/or Avida will only realize income
upon their respective sales of the saleable
units allocated to each of them.

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NOT TAXABLE AS A CORPORATION
REVENUE REGULATIONS NO. 10-2012-

Joint Venture or Consortium Formed For The

Purpose Of Undertaking Construction Projects
and Mandatory Enrollment of Local
Contractors in the Electronic Filing and
Payment System (EFPS)

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NOT TAXABLE AS A CORPORATION
Requirements to be considered as a JV for construction:

(1) Formed for the undertaking of a construction project; and

(2) should involve joining or pooling of resources by licensed local

contractors; that is, 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 Joint Venture itself must likewise be duly licensed as such by
the Philippine Contractors Accreditation Board (PCAB) of the
Department of Trade and Industry (DTI)

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NOT TAXABLE AS A CORPORATION
The tax-exempt joint venture or consortium as
herein defined shall not include those who are
mere suppliers of goods, services or capital to a
construction project.

The members 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 ventures
profit.
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NOT TAXABLE AS A CORPORATION
Joint ventures involving foreign contractors may also be treated as a
non-taxable corporation only if

1. the member foreign contractor is covered by a special license as

contractor by the Philippine Contractors Accreditation Board
(PCAB) of the Department of Trade and Industry (DTI); and

2. the construction project is certified by the appropriate Tendering

Agency (government office) that the project is a foreign financed/
internationally-funded project and that international bidding is
allowed under the Bilateral Agreement entered into by and
between the Philippine Government and the foreign /
international financing institution pursuant to the implementing
rules and regulations of Republic Act No. 4566 otherwise known
as Contractor’s License Law.

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INCOME; SOURCES OF INCOME
Income Principle From Sources Within
Interest Where the capital ► If derived within the Philippines.
is employed ► Includes interest on bonds, notes
or other interest bearing
obligations of residents

Dividends Where the capital ► Received from domestic corp.

is employed ► Received from foreign
corporation; if 50% or more of
the gross income of said
corporation for the immediately
preceding 3 year period was
Philippine sourced

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 INCOME; SOURCES OF INCOME
Income Principle From Sources Within
Services Where service is ► If performed within the
performed Philippines.

Rentals and Location of ► If property is located in the

royalties property or interest Philippines.
in such property

Sale of Real Location of ► If property is located in the

Property property Philippines.

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 INCOME; SOURCES OF INCOME
Income Principle From Sources Within

Sale of personal ► Sale of shares in a domestic corporation

property

For property ► Personal property purchased in or

purchased and sold – outside the Philippines. but sold within
place of sale

For property ► For personal property produced in

produced and sold – whole or in part and sold outside; or
apportioned produced in whole or in part of and sold
within; gain is considered derived from
partly within and without the Philippines.

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