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PHILIPPINE TAX SYSTEM AND INCOME TAXATION

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MODULE 4:INCOME TAX ON CORPORATION

Income Tax on Corporation

LEARNING OBJECTIVES
At the end of this module you are expected to:
1. Define and classify corporate taxpayers;
2. Identify the classification and taxability of
income of a corporation;
3. Discuss the concept of Normal Corporate
Income Tax (NCIT) and Minimum Corporate Income Tax (MCIT);
4. Compute income taxes using the Normal Corporate Income Tax (NCIT);
5. Compute income taxes using the Minimum Corporate Income Tax (MCIT);
6. Discuss the treatment of a Special Corporation;
7. Compute income tax due of Special Corporate Taxpayers

Corporate Taxpayers
- 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 existence.

Classification of Corporation:
1. Domestic
- Organized under the existing laws of the Philippines
- Taxable on income earned within and without the Philippines

2. Foreign
- Organized under the laws of a foreign country
- Taxable on income earned within the Philippines only
- Classification of foreign corporation:
a. Resident foreign corporation
b. Non-resident foreign corporation

Course Module
Classification and Taxability of Income of a Corporation

CLASSIFICATION OF INCOME APPLICABLE TAX

Business Income Basic Corporate Tax


2% or 30%

Passive Income Final Tax

Capital Gain

CORPORATION

TAXABLE NON-TAXABLE

1. Non-profit labor, agricultural or horticultural


organizations
2. Non-stock and non-profit mutual savings and
Subject to BASIC TAX Subject to FINAL TAX cooperative banks
3. Non-stock organizations operating for the exclusive
benefits of the members like providing payment of
life, sickness, and accident benefits
4. Non-stock corporations operating exclusively for
religious, charitable, scientific, athletic, or cultural
purposes or for the rehabilitation of veterans,
provided that their assets or income shall not accrue
to the benefit of any member.
1. Business Income
1. Gains from dealings in 5. Non-profit business leagues, chambers of commerce
2. Rent Income property or boards of trade
3. Gains from dealings in property not 2. Passive Income 6. Non-profit civic league or organizations organized
subject to final tax for the promotion of social welfare
4. Passive Income not subject to final tax 7. Non-stock and non-profit educational institutions
8. Government educational institutions
9. Non-profit organizations such as
a. Cooperative telephone companies
b. Fire insurance companies
c. Mutual ditch or irrigation companies
d. Mutual typhoon association
with purely local operation
whose income is derived only
from assessment, dues, and
fees collected from members to
meet the needs and expenses of
the organization.
10. Non-profit organizations of
 Farmers
 Fruit growers
Allowable Deductions
 Any other similar association
for the purpose of marketing the products
of their members

Itemized Optional Standard Deduction


Business (40% of Gross Taxable Income)
Expenses
PHILIPPINE TAX SYSTEM AND INCOME TAXATION
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MODULE 4:INCOME TAX ON CORPORATION

CLASSIFICATION of CORPORATE TAXPAYERS


ORDINARY CORPORATE TAXPAYERS SPECIAL CORPORATE TAXPAYERS
Taxability Tax Tax Tax Taxability Tax Tax Tax
Liability Base Rate Liability Base Rate
Net
NCIT Taxable 30%
Income
Domestic Within Domestic Within
Corporation and MCIT Gross Corporation and
Without Taxable 2% Without
Whichever Income
is HIGHER
between Special Tax Base
NCIT & and
MCIT Special Tax Rate
Net
NCIT Taxable 30%
Resident Income
Foreign Resident
Corporation Within MCIT Gross Foreign
Taxable 2% Corporation Within
Whichever Income
is HIGHER
between
NCIT &
MCIT
Non- Non-
resident Within NCIT Gross 30% resident
Foreign Taxable Foreign
Corporation Income Corporation

Normal Corporate Income Tax(NCIT)


- 30% tax imposed on corporations, either domestic or foreign, that are classified as ordinary

Course Module
ILLUSTRATION 1
ABC Corporation has the following data for the first year of business operations
Philippines Australia
Gross Sales 8,000,000 7,000,000
Cost of Sales 6,200,000 1,300,000
Allowable business expenses 1,700,000 1,040,000
Required: Compute the amount of corporate tax liability under each of the following cases:
1. Domestic corporation using itemized deduction
2. Domestic corporation using OSD
3. Resident foreign corporation using itemized deduction
4. Resident foreign corporation using OSD
5. Non-resident foreign corporations
Answer:
1. Domestic corporation using itemized deduction

PHILIPPINES AUSTRALIA TOTAL


Gross Sales P 8,000,000 7,000,000 15,000,000
Less: Cost of Sales 6,200,000 1,300,000 7,500,000
Gross Profit 1,800,000 5,700,000 7,500,000
Plus: Other Income 600,000 400,000 1,000,000
Total Income 2,400,000 6,100,000 8,500,000
Less: Allowable Deductions 1,700,000 1,040,000 2,740,000
Net Taxable Income P 700,000 5,060,000 5,760,000

NCIT 1,728,000
MCIT 150,000

Tax to be paid is the NCIT, since it is higher than the calculated MCIT 1,728,000

Domestic corporations are taxable for income earned both in the Philippines and abroad and are subject
to either normal corporate income tax (NCIT) of 30% of net income or minimum corporate income tax
(MCIT) of 2% of gross profit, whichever is higher.
Net Income Tax Rate Income Tax Due
NCIT 5,760,000 30% 1,728,000

Gross Profit Tax Rate Income Tax Due


MCIT 7,500,000 2% 150,000

2. Domestic corporation using OSD


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MODULE 4:INCOME TAX ON CORPORATION

PHILIPPINES AUSTRALIA TOTAL


Gross Sales P 8,000,000 7,000,000 15,000,000
Less: Cost of Sales 6,200,000 1,300,000 7,500,000
Gross Profit 1,800,000 5,700,000 7,500,000
Plus: Other Income 600,000 400,000 1,000,000
Total Income 2,400,000 6,100,000 8,500,000
Less: Allowable Deductions 720,000 2,280,000 3,000,000
Net Taxable Income P 1,680,000 3,820,000 5,500,000

NCIT 1,650,000
MCIT 150,000

Tax to be paid is the NCIT, since it is higher than the calculated MCIT 1,650,000

If a corporation opted to use optional standard deduction (OSD), such corporation are no longer allowed to claim
the line by line item of expenses it incurred. The deductions to total income earned will be based on a fixed rate of
40% of gross taxable income (gross profit, as the case maybe).
Philippines Australia Total
Gross Profit 1,800,000 5,700,000.00 7,500,000
OSD rate 40% 40% 40%
Allowable Deductions 720,000 2,280,000 3,000,000

Net Income Tax Rate Income Tax Due


NCIT 5,500,000 30% 1,650,000

Gross Profit Tax Rate Income Tax Due


MCIT 7,500,000 2% 150,000

3. Resident foreign corporation using itemized deduction

Course Module
PHILIPPINES
Gross Sales P 8,000,000
Less: Cost of Sales 6,200,000
Gross Profit 1,800,000
Plus: Other Income 600,000
Total Income 2,400,000
Less: Allowable Deductions 1,700,000
Net Taxable Income P 700,000

NCIT 210,000
MCIT 36,000

Tax to be paid is the NCIT 210,000

Foreign corporations, whether resident or nonresident, are taxable for income earned in the Philippines only.
Net Income Tax Rate Income Tax Due
NCIT 700,000 30% 210,000

Gross Profit Tax Rate Income Tax Due


MCIT 1,800,000 2% 36,000

4. Resident foreign corporation using OSD


PHILIPPINES
Gross Sales P 8,000,000
Less: Cost of Sales 6,200,000
Gross Profit 1,800,000
Plus: Other Income 600,000
Total Income 2,400,000
Less: Allowable Deductions 720,000
Net Taxable Income P 1,680,000

NCIT 504,000
MCIT 36,000

Tax to be paid is the NCIT 504,000


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MODULE 4:INCOME TAX ON CORPORATION

Philippines
Gross Profit 1,800,000
OSD rate 40%
Allowable Deductions 720,000

Net Income Tax Rate Income Tax Due


NCIT 1,680,000 30% 504,000

Gross Profit Tax Rate Income Tax Due


MCIT 1,800,000 2% 36,000

5. Non-resident foreign corporations


Less: Allowable Deductions 720,000
Gross Taxable Income P 1,680,000

Tax to be calculated is
only the NCIT 504,000

Non-resident foreign corporations are not subject to 2% minimum corporate income tax. Hence, such
corporate taxpayer will only be liable to the Philippine government for the 30% normal corporate
income tax.

Net Income Tax Rate Income Tax Due


NCIT 1,680,000 30% 504,000

Course Module
Minimum Corporate Income Tax (MCIT)
- 2% tax on gross income imposed on corporations, either domestic or foreign, that are classified as
ordinary
- Guidelines in MCIT:
1. Applicable beginning on the fourth year of business operation
2. Applicable even if a corporation has zero taxable income
3. Applicable even if a corporation incurs a loss
- However, the Secretary of Finance is authorized to suspend the imposition of
MCIT on any corporation which suffers losses because of:
 Prolonged labor dispute
 Force majeure
4. Applicable only to ordinary domestic and resident foreign corporations
5. NOT applicable to the following domestic corporationssince these groups are not subject to
MCIT:
a. Proprietary educational institutions
b. Non-profit hospitals
c. Banking institutions under the expanded foreign currency deposit system
d. Corporations under a special income tax regime such as PEZA law and the Bases
Conversion Development Act
6. Tax liability is being calculated at 2% based on gross income
7. Starting on the fourth year of operation, the corporate income tax liability shall be based on
o NCIT of 30%
or whichever is HIGHER
o MCIT of 2%
8. Excess of MCIT over NCIT is creditable
- Any excess of the MCIT over NCIT shall be carried forward and credited
(deducted) against the NCIT for the three succeeding taxable years, provided
that, the NCIT should be higher than MCIT in the year to which the excess MCIT
is forwarded.

QUARTERLY AND ANNUAL CORPORATE TAX DUE


1. The computation and the payment of MCIT shall also be applied at the time of filing the quarterly corporate income
tax
2. If in the computation of the tax due for the taxable quarter, MCIT is higher than the quarterly NCIT, the amount of tax
to be paid at the time of filing the quarterly corporate income tax return shall be MCIT
3. In the payment of said quarterly MCIT, the following guidelines shall apply:
Allowed to be credited?
excess MCIT from the previous taxable years No
excess MCIT from the previous quarters Yes
expanded withholding tax Yes
quarterly NCIT payment Yes

ILLUSTRATION 2
The records of a domestic corporation which commenced operation in 2010 are as follows:
2015 2016 2017
Gross Income P15,000,000 P17,000,000 P19,000,000
Allowable Deductions (14,500,000) (17,200,000) (17,800,000)
Required: Determine the income tax payable for 2015, 2016 and 2017
PHILIPPINE TAX SYSTEM AND INCOME TAXATION
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MODULE 4:INCOME TAX ON CORPORATION

Answer:
2015 2016 2017
Gross Income P 15,000,000 P 17,000,000 P 19,000,000
Less: Allowable Deductions 14,500,000 17,200,000 17,800,000
Net Taxable Income P 500,000 P (200,000) P 1,200,000

NCIT 150,000 - 360,000


MCIT 300,000 340,000 380,000

Income Tax Payable P 300,000 P 340,000 P 380,000

2015
Net Taxable
Income/ (Net Loss) 500,000

Net Income Tax Rate Income Tax Due


NCIT 500,000 30% 150,000

Gross Income Tax Rate Income Tax Due


MCIT 15,000,000 2% 300,000
On 2015, the corporation is liable for P300,000, since the MCIT is higher than the NCIT.

2016
Net Taxable
Income/ (Net Loss) (200,000.00)

Net Loss Tax Rate Income Tax Due


NCIT - 30% -

Gross Income Tax Rate Income Tax Due


MCIT 17,000,000 2% 340,000
On 2016, the corporation suffered from a net loss, hence, the company is not subject to the NCIT
of 30%. However, as provided in the tax code, a minimum corporate income tax of 2% still
applies even if a corporation incurs a loss.

Course Module
2017
Net Taxable
Income/ (Net Loss) 1,200,000

Net Income Tax Rate Income Tax Due


NCIT 1,200,000 30% 360,000

Gross Income Tax Rate Income Tax Due


MCIT 19,000,000 2% 380,000
On 2017, the corporation is liable for P380,000, since the MCIT is higher than the NCIT.
PHILIPPINE TAX SYSTEM AND INCOME TAXATION
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MODULE 4:INCOME TAX ON CORPORATION

ILLUSTRATION 4
XYZ Corporation’s normal corporate income tax, minimum corporate income tax, income taxes withheld
from 1st to 4th quarters including excess MCIT and excess withholding taxes from prior years are as
follows:
Quarter NCIT MCIT Taxes Excess Excess
withheld MCIT Withholding tax
during the prior year prior year
year
1st P250,000 P210,000 P90,000 P110,000 P20,000
2nd 290,000 550,000 110,000
3rd 550,000 250,000 130,000
4th 450,000 250,000 120,000
Required: Determine the following:
1. Income tax payable for the first quarter
2. Income tax payable for the second quarter
3. Income tax payable for the third quarter
4. Annual income tax payable
Answer:
1. Income tax payable for the first quarter
Q1
MCIT 210,000
NCIT 250,000

Income Tax Payable P 250,000

NCIT 250,000
Withholding tax-Prior Year (20,000)
Withholding tax-Current Year (90,000)
Excess MCIT-Prior Year (110,000)
Tax Paid-Previous Quarter -

Income Tax Still Payable P 30,000

The total tax liability of a corporation is either the NCIT or MCIT, whichever is higher. However, on some
instances, there are already payments made to the government that can be deducted to the total amount of
tax liability to arrive at the amount still payable to the government. These amounts are called “tax credits”.

These tax credits are the:


 Withholding tax – a government requirement for the payer of an item of income to withhold or deduct tax
Course Module
from the payment, and pay that tax to the government.
 Excess MCIT – this amount is the difference between the NCIT and MCIT. This excess arises when during the
taxable year, a corporation has become liable for MCIT instead of NCIT. In this case, such excess is only
deductible to total income tax liability if the corporation is liable for NCIT. If the corporation is liable to pay
an MCIT, then such excess could not deducted.
 Tax payments made on the previous quarters.

2. Income tax payable for the second quarter


Q1 Q2 TOTAL
MCIT 210,000 550,000 760,000
NCIT 250,000 290,000 540,000

Income Tax Payable P 760,000

MCIT 760,000
Withholding tax-Prior Year (20,000)
Withholding tax-Current Year 90,000 110,000 (200,000)
Excess MCIT-Prior Year -
Tax Paid-Previous Quarter (30,000) (30,000)

Income Tax Still Payable P 510,000

On the second quarter, the corporation is liable to pay the MCIT. On this case, such excess MCIT that has
been carried over from the previous quarter cannot be offset or deducted against MCIT itself. Remember
that any excess of the MCIT shall be carried forward and credited (deducted) against the NCIT only. Hence,
the NCIT should be higher than MCIT in the year or quarter to which the excess MCIT is forwarded.

3. Income tax payable for the third quarter


PHILIPPINE TAX SYSTEM AND INCOME TAXATION
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MODULE 4:INCOME TAX ON CORPORATION

Q1 Q2 Q3 TOTAL
MCIT 210,000 550,000 250,000 1,010,000
NCIT 250,000 290,000 550,000 1,090,000

Income Tax Payable P 1,090,000

NCIT 1,090,000
Withholding tax-Prior Year (20,000)
Withholding tax-Current Year 90,000 110,000 130,000 (330,000)
Excess MCIT-Prior Year (110,000)
Tax Paid-Previous Quarter 30,000 510,000 (540,000)

Income Tax Still Payable P 90,000

4. Annual income tax payable


Q1 Q2 Q3 Q4 TOTAL
MCIT 210,000 550,000 250,000 250,000 1,260,000
NCIT 250,000 290,000 550,000 450,000 1,540,000

Income Tax Payable P 1,540,000

NCIT 1,540,000
Withholding tax-Prior Year (20,000)
Withholding tax-Current Year 90,000 110,000 130,000 120,000 (450,000)
Excess MCIT-Prior Year (110,000)
Tax Paid-Previous Quarter 30,000 510,000 90,000 (630,000)

Income Tax Still Payable P 330,000

Course Module
CLASSIFICATION of CORPORATE TAXPAYERS
ORDINARY SPECIAL
Taxability Tax Tax Tax Taxability Tax Tax Tax
Liability Base Rate Liability Base Rate
Net
NCIT Taxable 30%
Income
Domestic Within Domestic Within
Corporation and MCIT Gross Corporation and
Without Income 2% Without
Whichever
is HIGHER Special Tax Base
between and
NCIT & Special Tax Rate
MCIT
Net Resident
NCIT Taxable 30% Foreign
Resident Income Corporation
Foreign Non-
Corporation Within MCIT Gross resident Within
Income 2% Foreign
Whichever Corporation
is HIGHER
between
NCIT &
MCIT

Special Corporation

SPECIAL DOMESTIC CORPORATION


CLASSIFICATION APPLICABLE TAX
1. Proprietary educational institutions 10% of net taxable income
2. Non-profit hospitals 10% of net taxable income
3. Government Service Insurance System (GSIS)
4. Social Security System (SSS) Tax Exempt
5. Philippine Health Insurance Corporation (PHIC)
6. Philippine Charity Sweepstakes Office (PCSO)
PHILIPPINE TAX SYSTEM AND INCOME TAXATION
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MODULE 4:INCOME TAX ON CORPORATION

SPECIAL RESIDENT FOREIGN CORPORATIONS


CLASSIFICATION APPLICABLE TAX
1. International carrier 2.5% of the Philippine Gross Billings
 Philippine Gross Billings
- Gross revenue from:
 Carriage
 Persons
 Excess baggage
 Cargo
 Mail
originating from the Philippines
under the following conditions:
o In a continuous flight and
uninterrupted flight
o In case of transshipment:
portion of the cost of the ticket
corresponding to the
leg flown from the
Philippines
to the point of
transshipment
2. Offshore banking units 10% of Gross Income
3. Branch remittances 15% of Remittances
4. Regional area headquarters Tax Exempt
5. Regional operating headquarters 10% of Taxable Income
SPECIAL NON-RESIDENT FOREIGN CORPORATIONS
CLASSIFICATION APPLICABLE TAX
1. Owner, Lessor or Distributor of 25% of the Gross Income
Cinematographic film
2. Lessor of machinery, equipment, aircraft and 7.5% of the Gross Income
others
3. Lessor of vessels chartered by Philippine 4.5% of the Gross Income
Nationals

Course Module
ILLUSTRATION
Case 1 The following data were reported for 20xx business activities of Students
University, a private educational institution:
Tuition fees 525,000
School business related expenses 325,000
Answer (CASE 1)
Tuition fees P 525,000
School business related expenses (325,000)
Net Taxable Income 200,000
Tax Rate 10%
Income Tax Payable P 20,000

A proprietary educational institution is classified as a


special corporation, hence a special tax rate should be used.

A 10% tax on net taxable income is being imposed to this


group of taxpayer.
Case 2 The Air Europe, an international carrier doing business in the Philippines,
provided the following data during the current taxable year:
Gross receipts for flight Manila to Paris P12,500,000
(tickets sold in the Philippines)
Gross receipts for flight Manila to Switzerland 6,500,000
(tickets sold in Switzerland)
Gross receipts for flight Paris to Manila 4,500,000
(tickets sold in Paris)
Gross receipts for flight Rome to Manila 3,500,000
(tickets sold in Philippines)
Gross receipts for flight Manila to England 5,500,000
(tickets sold in the Philippines)
The passengers were transhipped in Germany to
England by another airline.
Flight from Manila to Germany is nine hours and
flight from Germany to England is three hours
Operating expenses in Philippines 2,500,000
PHILIPPINE TAX SYSTEM AND INCOME TAXATION
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MODULE 4:INCOME TAX ON CORPORATION

Answer (CASE 2) Gross receipts for flight Manila to Paris P 12,500,000 Commented [e1]: The 3% should be 2.5%
because it automatically rounds off. You may
Gross receipts for flight Manila to Switzerland 6,500,000 open this highlighted text to see the full excel
Gross receipts for flight Manila to England 4,125,000 information of the computation.
Total 23,125,000
Tax Rate 3%
Income Tax Payable P 578,125

For an international carrier, only those gross revenue from carriage,


persons, excess baggage, cargo and mail originating from the
Philippinesare subject to tax. Thus, only receipts for flight from Manila
will be included in the computation of tax.

And, on the case of transshipment from Manila to Germany for flight of


Manila to England, only the portion of the cost of the ticket corresponding
to the leg flown from the Philippines to the point of transshipment will be
considered on tax computation. Hence, calculated as follows:
Gross receipts for flight Manila to England
P5,500,000 * (9hrs/12hrs) = P4,125,000

End of Module 4

Links to Supplemental Readings


1. http://www.chanrobles.com/legal6nircmain.htm#.WW14qRUrLIU
2. https://www.bir.gov.ph/index.php/tax-code.html#title1
3. https://www.bir.gov.ph/index.php/tax-code.html#title2

Links to Other Video Lectures


1. https://www.youtube.com/watch?v=MHIr_SjyVME
2. https://www.youtube.com/watch?v=LwesvsAwctY
3. https://www.youtube.com/watch?v=nEkSZtKuRjQ

References
National Internal Revenue Code of 1997 . (n.d.). Retrieved from
https://www.bir.gov.ph/index.php/tax-code.html.
Aduana, N. L. (2012). Simplified and procedural handbook on income taxation (2nd Edition
ed.). Quezon City: C & E Publishing Inc.

Course Module
Garcia, E. R., & Tabag, E. D. (2014). Income Taxation (3rd Edition ed.). Quezon City: Good
Dreams Publishing .
Valencia, E. G. (2016). Income Taxation (7th Edition ed.). Baguio City: Valencia Educational
Supply .