INCOME TAXATION

CORPORATE INCOME TAXATION

Type of Corporation Sources of Taxable Allowed Business

Income Deductions?
Domestic Within and without Yes
Corporation (DC) the Philippines

Resident Foreign Within the Yes

Corporation (RFC) Philippines
Non-resident Within the No*
Foreign Corporation Philippines
(NRFC)
* Taxed at Gross Income
DOMESTIC CORPORATION

 Capital Gain Tax

 Final Tax on Passive Income
 Normal
Tax [OR] Minimum Corporate
Income Tax (MCIT) [OR] Gross Income Tax
(GIT)
 Improperly Accumulated Earnings Tax (IAET)
[only if a domestic and closely-held
corporation]
GROSS INCOME TAXATION
(SEC 27 (A)
MCIT (Minimum Corporate Income
Tax ) Sec 27 (E )
 A MCIT of 2% of the Gross Income as of the end
of the taxable year is imposed on a corporation
beginning on the fourth 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.
MCIT
MCIT

 Excess MCIT carry-forward

 Any excess of the minimum corporate income

tax over the normal income tax shall be carried
forward and credited against the NORMAL TAX
for the three (3) immediately succeeding
taxable years. [Sec. 27(E)(2)] In the year to
which carried forward, the normal tax should be
higher than the MCIT.
MCIT Illustrated
RELIEF FROM MCIT

 The Secretary of Finance is authorized to suspend the imposition of

the minimum corporate income tax on any corporation which
suffers LOSSES:
 on account of prolonged labor dispute (losses from a strike
staged by employees that lasts for more than 6 months and
caused the temporary shutdown of operations), or
 because of force majeure (acts of God and other calamity;
includes armed conflicts like war or insurgency), or
 because of legitimate business reverses (substantial losses
due to fire, robbery, theft or other economic reasons).
IAET (IMPROPERLY ACCUMULATED
EARNINGS TAX)
 Rule  There is imposed for each taxable year, in
addition to other taxes, a tax equal to 10% of the
improperly accumulated taxable income of domestic
and closely-held corporations formed or availed of for
the purpose of avoiding the income tax with respect to
its shareholders or the shareholders 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.
IAET

 Rationale  If the earnings and profits were distributed, the shareholders would
then be liable to income tax; if the distribution were not made to them, they
would incur no tax in respect to the undistributed earnings and profits of the
corporation. It is a tax in the nature of a PENALTY to the corporation for the
improper accumulation of its earnings, and a DETERRENT to the avoidance of tax
upon shareholders who are supposed to pay dividends tax on the earnings
distributed to them.

 Exception  The use of undistributed earnings and profits for the reasonable
needs of the business would not generally make the accumulated or
undistributed earnings subject to the tax. What is meant by “reasonable needs
of the business” is determined by the IMMEDIACY TEST.
 Immediacy Test - It states that the “reasonable needs of the business” are the
1. immediate needs of the business; and
2. reasonably anticipated needs.
IAET

 Covered Corporations  Only domestic and closely-held

corporations are liable for IAET.
Closely-held corporations are those:
a. at least 50% in value of the outstanding capital stock; or
b. 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 20
individuals. Domestic corporations not falling under the aforesaid
definition are, therefore, publicly-held corporations.
IAET Computation
RESIDENT FOREIGN CORPORATION

 Resident foreign corporations are subject to any or some of the

following:

Capital Gain Tax

Final Tax on Passive Income
Normal Tax [OR] Minimum Corporate Income Tax (MCIT) [OR] Gross
Income Tax (GIT)
Branch Profit Remittance Tax
NON-RESIDENT FOREIGN
CORPORATION

 Non-resident foreign corporations are subject to any or some of the

following:

Capital Gain Tax

Final Tax on Passive Income
Final Tax on [Other] Gross Income from sources within the Philippines
 TAXATION OF PARTNERSHIPS

CLASSIFICATION OF PARTNERSHIPS FOR TAX

PURPOSES
1.General Professional Partnerships (GPP) –
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
2.Other Partnerships (or General Co-partnerships) –
partnerships wherein all or part of their income is
derived from the conduct of trade or business
GENERAL PROFESSIONAL
PARTNERSHIP
Rules:
 A GPP as such shall not be subject to the income tax.
 The partners shall only be liable for income tax only in their separate and individual
capacities.
 For purposes of computing the distributive share of the partners, the net income of
the GPP shall be computed in the same manner as a corporation.
 Each partner shall report as gross income his distributive share, actually or
constructively received, in the net income of the partnership.
 The share of a partner shall be subject to a creditable withholding income tax of 15%
or 10% as the case may be.
TAXABLE PARTNERSHIPS
Rules:
 The partnership is subject to the same rules on corporations (capital gains
tax, final tax on passive income, normal tax, minimum corporate income
tax [MCIT] and gross income tax [GIT]), but is not subject to the improperly
accumulated earnings tax [IAET]. The partnership must file quarterly and
year-end income tax returns.
 The taxable income of the partnership, less the normal corporate income
tax thereon, is the distributable net income of the partnership.
 The share of a partner in the partnership’s distributable net income of a
year shall be deemed to have been actually or constructively received by
the partners in the same taxable year and shall be taxed to them in their
individual capacity, whether actually distributed or not. [Sec. 73(D)] Such
share will be subjected to a final tax of 10%. [Sec. 24(B)(2)]
Special Rule on GPPs and the Choice of
Deductions (Itemized or OSD) (RR 2-2010)

 If the GPP availed of itemized deductions, the partners are not

allowed to claim the OSD from their share in the Net Income
because the OSD is a proxy for all the items of deductions allowed in
arriving at taxable income. Instead, the partners can claim itemized
deductions which have yet to be claimed by the GPP.
 If the GPP avails of OSD of computing its net income, the partners
comprising it can no longer further claim deduction from their share
in the said net income.
Illustration

 Atty. Gambino is a partner in a general professional

partnership. The partnership computes its gross revenues,
claims deductions allowed under the Tax Code, and
distributes the net income to the partners, including Atty.
Gambino, in accordance with its articles of partnership.
 In filing his own income tax return, Atty. Gambino
claimed deductions that the partnership did not claim,
such as purchase of law books, entertainment expenses,
car insurance and car depreciation. The BIR disallowed
the deductions.
 Was the BIR correct?
Answer (Ingles)

 The BIR is wrong. If the GPP availed of itemized

deductions in computing its net income, the partners
may still claim itemized deductions provided, these
deductions are different from those claimed by the
GPP. In the case at hand, the deductions are
different from those claimed by the GPP and are
necessary in the pursuit of Atty. Gambino’s
profession.
TRAIN Amendments: (On OSD)
ESTATES AND TRUSTS
Computation and Payment of the Tax  The tax shall be computed upon the taxable income of the estate or
trust and shall be paid by the fiduciary. (GENERAL RULE)
 EXCEPTIONS:
 Revocable Trusts. - Where at any time the power to revest in the grantor title to any part of the corpus of
the trust is vested
 in the grantor either alone or in conjunction with any person not having a substantial adverse interest in the
disposition of such part of the corpus or the income therefrom, or
 in any person not having a substantial adverse interest in the disposition of such part of the corpus or the
income therefrom,
 the income of such part of the trust shall be included in computing the taxable income of the grantor.

 Income for Benefit of Grantor - Where any part of the income of a trust
 is, or in the discretion of the grantor or of any person not having a substantial adverse interest in the disposition of such part
of the income may be held or accumulated for future distribution to the grantor, or
 may, or in the discretion of the grantor or of any person not having a substantial adverse interest in the disposition of such
part of the income, be distributed to the grantor, or
 is, or in the discretion of the grantor or of any person not having a substantial adverse interest in the disposition of such part
of the income may be applied to the payment of premiums upon policies of insurance on the life of the grantor,

 such part of the income of the trust shall be included in computing the taxable income of the grantor.
 How Taxable Income of the Estate or Trust is Computed 
 [Sec. 61] The taxable income of the estate or trust shall be computed in the same manner and on
the same basis as in the case of an individual, EXCEPT that:
 (A) There shall be ALLOWED AS A DEDUCTION in computing the taxable income of the estate or trust
the amount of the income of the estate or trust for the taxable year which is to be distributed
currently by the fiduciary to the beneficiaries, and the amount of the income collected by a
guardian of an infant which is to be held or distributed as the court may direct, BUT the amount so
allowed as a deduction shall be included in computing the taxable income of the beneficiaries,
whether distributed to them or not. Any amount allowed as a deduction under this Subsection shall
not be allowed as a deduction under Subsection (B) of this Section in the same or any succeeding
taxable year.
 (B) In the case of income received by estates of deceased persons during the period of
administration or settlement of the estate, and in the case of income which, in the discretion of the
fiduciary, may be either distributed to the beneficiary or accumulated, there shall be allowed as an
ADDITIONAL DEDUCTION the amount of the income of the estate or trust for its taxable year, which is
properly paid or credited during such year to any legatee, heir or beneficiary but the amount so
allowed as a deduction shall be included in computing the taxable income of the legatee, heir or
beneficiary.
 (C) In the case of a trust administered in a foreign country, the deductions mentioned in
Subsections (A) and (B) of this Section shall not be allowed: Provided, That the amount of any
income included in the return of said trust shall not be included in computing the income of the
beneficiaries.
Illustration: (2009 Bar)
Johnny transferred a valuable 10- door commercial apartment
to a designated trustee, Miriam, naming in the trust instrument
Santino, Johnny's 10-year old son, as the sole beneficiary. The
trustee is instructed to distribute the yearly rentals amounting
to P720,000.00. The trustee consults you if she has to pay the
annual income tax on the rentals received from the
commercial apartment.

a. What advice will you give the trustee? Explain.

b. Will your advice be the same if the trustee is directed to
accumulate the rental income and distribute the same only
when the beneficiary reaches the age of majority? Explain.
Answer to a and b:

a. I will advise the trustee that she has nothing to pay in annual
income taxes because the trust’s taxable income is zero. This is so
because the amount of income to be distributed annually to the
beneficiary is a deduction from the GI of the trust but must be
reported as income of the beneficiary.
b. No. The Trustee has to pay the income tax in the trust’s net income
determined annually if the income is required to be accumulated.
Once a taxable trust is established, its net income is either taxable
to the trust, represented by the trustee, or to the beneficiary
depending on the provision for distribution of income following the
one-layer taxation scheme.
FRINGE BENEFITS
Definition of Fringe Benefit  any good, service or other benefit furnished or granted in
cash or in kind by an employer to an individual employee except rank and file
employees (The fringe benefit covered by Sec 33 refers to those enjoyed by
managerial and supervisory employees.)
Examples of fringe benefits:
 Housing
 Expense account
 Vehicle of any kind
 Household personnel, such as maid, driver and others
 Interest on loan at less than market rate to the extent of the difference between
the market rate and actual rate granted
 Membership fees, dues and other expenses borne by the employer for the
employee in social and athletic clubs or other similar organizations
 Expenses for foreign travel
 Holiday and vacation expenses
 Educational assistance to the employee or his dependents
 Life or health insurance and other non-life insurance premiums or similar amounts in
excess of what the law allows
Fringe Benefit

 Tax Rate and Tax Base – [Generally] 35% of the grossed-up monetary
value (GMV)
 GMV represents the whole amount of income realized by the
employee.
 How GMV is determined  GMV is determined by dividing the actual
monetary value of the fringe benefit by 65% [100% - tax rate of 35%].
Special Cases:
 For fringe benefits received by non-resident alien not engaged in trade of
business (NRANETB), the tax rate is 25% of the grossed-up monetary value
(GMV). The GMV is determined by dividing the actual monetary value of the
fringe benefit by 75% [100% - 25%].
 For fringe benefits received by alien individuals and Filipino citizens employed
by regional or area headquarters, regional operating headquarters, offshore
banking units (OBUs), or foreign service contractor, the tax rate is 15% of the
grossed-up monetary value (GMV). The GMV is determined by dividing the
actual monetary value of the fringe benefit by 85% [100% - 15%].


Fringe Benefit

 What is the tax implication if the employer gives ‘fringe benefits’ to

rank-and-file employees? Fringe benefits given to a rank-and-file
employee are treated as part of his compensation income subject
to income tax and withholding tax on compensation income, which
must be withheld and deducted by his employer from the
compensation income of his employee.

 Payor of Fringe Benefit Tax (FBT) – the employer [but the law allows
the employer to deduct such tax as a business expense, in
determining his taxable income]
Fringe Benefits which are not taxable [Sec. 33 of the
NIRC, consolidated with Sec. 2.33(C) of RR 03-98]
[RED CNC]
 Fringe benefits which are authorized and EXEMPTED from tax under
special laws
 CONTRIBUTIONS of the employer for the benefit of the employee to
retirement, insurance and hospitalization benefit plans
 Benefits given to the RANK AND FILE employees, whether granted under
a collective bargaining agreement or not
 DE MINIMIS benefits
 If the grant of fringe benefits to the employee is required by the nature
of, or NECESSARY to the trade, business, or profession of the employer
 If the grant of fringe benefits is for the CONVENIENCE of the employer
[Convenience of the Employer Rule]

Dealings in Property
Capital Gains and Losses

 Net
Capital Gain – the excess of the gains from sales or
exchanges of capital assets over the losses from such sales or
exchanges
 Net
Capital Loss – means the excess of the losses from sales or
exchanges of capital assets over the gains from such sales or
exchanges
 Holding
Period – the length of time the asset was held by the
taxpayer
Capital Gains and Losses
ILLUSTRATION: