15.

A-Regular Income Taxation Special Corporation

Illustration 1
Green Air, a resident foreign air carrier, reported the following summarize its Philippines
operations during a quarter:
Inbound Outbound
Flights Flights Total
Gross receipts P 9,000,000 P 8,000,000 P17,000,000
Less:
Direct expenses 5,000,000 4,000,000 9,000,000
Other common expenses 2,000,000
Net income P 6,000,000

Green Air shall pay the following income tax:

Gross Philippine Billings P 8,000,000

Multiply by: Income tax rate. 2.5%
Income tax due P 200,000

Note:
1. The Gross Philippine Billings is the gross receipts from Outbound flights,

Illustration 2
Voyager, a resident foreign shipping company, shows the following analysis gross receipts
passengers and cargoes during a month:
Incoming Outgoing
Flights Flights Total
Fares billed in the Philippines P 9,000,000 P 10,000,000 P19,000,000
Fares billed abroad 9,000,000 5,000,000 14,000,000
P18,000,000 P15,000,000 P33,000,000

Values of fares on non-revenue

Passengers
Fares cancelled and refunded.
Voyager shall pay the following income tax:
Total billings for outbound flights P15,000,000
Less: Tickets refunded 800,000
Gross Philippine billings P14,200,000
Multiply by: Income tax rate. 2.5%
Income tax due P 355,000
Note:
1. The Gross Philippine Billings is the total receipts from outgoing flights, regardless place
where they are actually billed or paid. The gross receipts is the billing less refund tickets.
 2. Non-revenue is not deducted from the gross Philippine Billings. Hence, the value of fares
on non-revenue passengers is not deducted from the Philippine Billings
Rule on transshipment or Interrupted flights or voyages
For a flight which originates from the Philippines, but transshipment of passengers takes place at
any port outside the Philippines on another airline, only the aliquot portion of the cost of the
ticket corresponding to the leg flown from the Philippines to the point of transshipment shall
form part of Gross Philippine Billings.
Illustration

Viet Airways, an international air carrier, had the following gross receipts on outgoing flights for
the quarter:

Destination Computation Amount

Hong kong P1,500 x 10,000 passengers P15,000,000

Thailand. P2,000,000 x 500 passengers 1,000,000
UAE P4,000,000 x 300 passengers 1,200,000
China P2,500 x 400 passengers 1,000,000
Total gross receipts P18,200,000

The flight to Thailand was transshipment in Vietnam to another plane of Viet Airways. The flight
to UAE is endorsed to another air carrier which which airlifted them in the Philippines. The
flight to China was transshipment to another carrier which airlifted them in Hong kong.

The Gross Philippine Billings of Viet Airways and its income tax due shall be:

Direct outgoing flights- Philippines to Hong kong

Flights to Thailand ¹
Endorsed flights - Philippines to UAE²
Re-transshipment flights - Philippines to China³
Gross Philippine Billings
Multiply by: income tax rate
Income tax due

Note
1. Endorsed tickets are taxable to the carrying airline. Hence, they are excluded in the Gross
Philippine Billings of Viet Airways. ¹
2. In foreign transshipment involving the same carrier, the gross receipts from the entire
flight is intended in gross income and is not split.²
 3. In foreign transshipment involving another carrier , only the portion pertaining to the leg
flown from the Philippines port to an immediate foreign port ( i,e. Hong Kong) is
included in Gross Philippine Billings. Hence, P1,500x400= P600,000.³

The "48-hour" rule on transshipment passengers

Flights or voyages of passengers, mails, or excess baggage commencing from foreign countries
which will be interconnected in the Philippines for continuance of the flight or voyages to a
foreign destination by the same international carrier shall not be considered originating from the
Philippines if the actually departure is made within 48 hours from embarkation in the country,
except only when delayed by force majeure. As such, the portion of the ticket pertaining to the
outgoing flights or voyages shall be executed from the Gross Philippine Billings.

However, if continuation of the flight or voyages to a foreign destination is made by another

airline company or international sea carrier, the cost of the outgoing flights or voyages shall be
included in the Gross Philippine Billings of that airlines departure from the Philippines.

Illustration
Fair Airways, an international carrier had the following summary of flights during a quarter.

Direct outgoing flights

To Guam (P2,400 x 5,000 passengers) P 12,000,000

To USA (P6,000 x 4 ,000 passengers) P 24,000,000

Inter-connecting flights
The following inter-connecting flights were continued in the Philippines:

Flights Nos. of passengers status

Korea for Guam 600 passengers Continued after 96 hour as scheduled
China for Guam 400 passengers Delayed 52 hours; due to storm
Taiwan for USA 500 passengers Continued after 40 hours as scheduled
Guam for USA 300 passengers Delayed 52 hours; due to storm*
Korea for USA 200 passengers Continued after 24 hours*

Endorsed to Fresh Airlines, another international air carrier, which airlifted the passengers or
their final destination

The gross receipts from inter-connecting flights to be included in the Gross Philippine Billings o
Fair Airways shall be:

Korea for Guam 600 passengers x P2,400* P 1,440,000

Note:
Fares for transient passengers staying herein for more than 48 hours are included in Gross
Philippine Billings, except when they are delayed by force majeure. Hence, the fares of 48
passengers stranded by storm shall not be included.
The applicable average fair rate from Philippines to Guam is P2,400 similar to the average used
in direct flights.*
Fares on endorsed flights are excluded as they are part of the Gross receipts of the carrying
airline.

The following shall be included in the Gross Philippine Billings of Fresh Airline:

Guam for USA 300 passengers x P6,000* P 1,800,000

Korea for USA 200 passengers x P6,000 1,200,000
Total P 3,000,000

Note: The 48-hour exemption rule on force majeure applies only to flights continue by the same
international carrier.*

The Gross Philippine Billings and the income tax due of Fair Airways for the quarter shall be:
Direct flights to Guam P 12,000,000
Direct flights to USA P 24,000,000
Connected flight from Korea for Guam 1,440,000
Gross Philippine Billings P 37,440,000
Multiply by: Income tax rate 2.5%
Income tax due P 936,000

Note to readers
All previous illustrations on international carriers are made in the context of international air
carrier, but it must be noted that the same principles and procedures apply to international sea
carrier on their voyages.

Foreign guy translation

In the computation of the Gross Philippine Billings, tickets in foreign currencies are translated at
whichever is higher of the following conversation rates:
1. Monthly average Airline Rate in the Bank Settlement Plan (BSP) Monthly sales report
2. Banker Association of the Philippines (BAP) rate
Treaty or Reciprocity Consideration
International carrier may avail of a preferential rate or exemption from income tax on the basis
of applicable tax treaty or international agreement to which the Philippines is a signatory on the
basis of Reciprocity such that an international carrier whose home country exempt Philippine
carrier shall likewise be exempt from income tax in the Philippines.
Treatment of Income Other Than International Transport
Other income of international carrier other than from international transport is subject to the
appropriate type of income tax. Active income such as demurrage fees, which are in the nature of
a rent for the use of property of the carrier in the Philippines as charge or the use of property or
rendition of services are subject in the regular corporate income tax.

Off-line International carrier

Off-line International carrier are those without flights or voyages starting from passing through
any point in the Philippines (i,e., No landing rights). The branch sales agent in the Philippines of
off-line International carrier which sells pass documents for compensation or commission to
cover off-line flights or voyages its head office or other airline or sea carriers covering flight or
voyages original from Philippine port or off-line flights or voyages is subject to the regular
corporate income tax.

BOI OR PEZA-REGSTERED INTERPRISES FOREIGN CORPORATIONS

These enterprises are subject to the same incentives as those Dom corporate counterparts.

REPORTING OF SPECIAL CORPORATIONS FOREIGN ON NET INCOME

Special corporations, domestic or resident foreign, subject to tax on tax on net income are
mandatory required to use the itemized deduction. They are not allowed optional standard
deduction. They file their income using BIR Form 1702-MX.

SPECIAL NON-RESIDENT FOREIGN CORPORATION

Non-resident foreign corporations are generally subject to 30% final tax section discussions the
rules on the following special non-resident for corporations which are subject to lower final
taxes:
 Non-resident cinematographic film owner, lessor , or distributor
 Non-resident lessor of vessels chartered by Philippine nationals
 Non-resident owner or lessor of aircraft, machineries, and other equipment

NON-RESIDENT CINEMATOGRAPHIC FILM OWNER, LESSOR OR DISTRIBUTION

Cinematographic film includes motion picture films, tapes, disc and their similar or related
products [RR6-2001].

Under the NIRC, owners, lessors, or distributors of cinematographic film subject to a 25% final
tax on their gross income from all sources within the Philippines. The phrase "from all sources
within" is broad to encompass of taxable income, passive or active, other than those arising from
rentals of cinematographic films.
NON-RESIDENT OF VESSELS CHARTERED BY PHILIPPINE NATIONALS
These are subject to a 4 ½% final tax on gross rental, lease, or charter fees from leases or
charter to Filipino resident or corporations as approved by the maritime Industry Authority.
Illustration
PhilOil, a domestic corporation, wished to import a scientific deep sea drilling vessel but wanted
to rent a unit to assess its capabilities first. PhilOil chartered a unit from Explorer with the unit,
PhilOil contracted Explorer Lab to provide training for its employees at a training fee of
P1,000,000 before buying a new one.

Required: Compute the final tax to be withheld by PhilOil.

Solution:
The total final tax shall be computed as follows:

Charter fees (P2,000,000 x 4.5%) P 90,000

Training fees (P1,000,000 x 30%) 30,000
Total final withholding tax P 390,000

Note: Only rental, lease, or charter fees are covered by the 4.5% final tax. The normal 30% final
tax to a non-resident foreign corporations applies to other item of Gross income earned within
the Philippines such as the training fees in this case.

NON-RESIDENT OWNER OR LESSOR OF AIRCRAFT, MACHINERIES, AND OTHER

EQUIPMENT
These are subject to a 7 ½% final tax on rentals, charter, and other fees.

Illustration
Goldrich Mining, a resident corporation , rented specialized mining equipment from abroad. The
non-resident lessor billed Goldrich the following amounts in peso equipments:

Equipment rental P10,000,000

Set-up and training fee 1,000,000
Initial service and maintenance fee 500,000
Interest on rent in arrears 50,000
Total bill P11,550,000
Required: Compute the total final tax to be withheld by Goldrich Mining.

Solution:
The total final tax to be withheld is:

Equipment rental (P10,000,000 x 7.5%) P 750,000

Set-up and training fee (P1,000,000 x 7.5% 75,000
Initial service and maintenance fee (P500,000 x 7.5%) 37,000
Interest on rent in arrears (P50,000 x 30%) 15,000
Total final withholding tax P 877,500

Note: Exemption is limited to charter, rentals and other fees. Other income from within such as
the interest income in this case is subject to the 30% final income tax.

Differentiation
Lessor Lease or charter of:
Cinema films Vessels Aircraft Other
equipment
Domestic 30%WTI 30%WTI 30%WTI 30%WTI
Resident foreign 30%PTI 2.5%GPB 2.5%GPB 30%PTI
Non-resident 25%PGI 4.5%PGI 7.5%PGI 7.5%PGI
foreign

Legend:
WTI= World taxable income; PTI= Taxable income
PGI= Philippine gross income
GPB= Gross Philippine billings

Note that gross income is gross receipts less the direct cost of services while Gross Philippine
Billings relates to gross receipts.

Non-resident foreign corporations, special or resident, do not file income returns. Philippines
residents who make income payments to them must within the final tax and remit the same to the
government through BIR Form 1601-F6

CHAPTER 15-A: SELF-TEST EXERCISES

Discussion Questions
1. State the general income tax rules for regular type of corporations.
2. Enumerate the different types of resident foreign corporations and their corresponding tax
rates.
 3. What are exempt corporations? What is their primary distinguishing features?
4. Explain the classification rule.
5. Explain the dominance test. What types of taxpayers are covered by the dominance test?
6. Discuss the taxation rules for FCDU and offshore banking units.
7. Explain the meaning of Gross Philippine Billings
8. What are the special types of non-resident foreign corporations and their tax rates?

True or False 1
1. Foreign and domestic banks may have an EFCDU.
2. The income of FCDU, OBU, and EFCDU from residents other than depositary banks in
the EFCDS or FCDS is subject to a 10% final tax.
3. The income of FCDU or EFCDU from foreign sources is subject to regular info tax.
4. Corporation subject to a rate below 30% are referred to as special corporations.
5. Corporation includes joint ventures, associations, and partnerships.
6. Joint ventures fromed for the purpose of undertaking construction projects or engaging in
energy operations are taxable as corporations.
7. Exempt corporations are never subject to corporate income tax.
8. Government-owned and controlled corporations are subject to corporate income tax.
9. A non-profit hospital is an exempt corporation taxable only on income from unrelated
activities.
10. PEZA-registered enterprises are exempt from tax.
11. BOI-registered enterprises enjoy income tax Holiday for 20 years.
12. FCDU and OBU are divisions of a for bank.
13. The income of OBU from foreign sources is exempt from income tax.
14. International carrier are subject to a tax of 2.5% on taxable income.
15. A domestic carrier is subject to 30% tax on Philippine Billings taxable income.
16. Special corporations can claim optional standard deduction.
17. Exempt are not required to file income tax returns because they do not pay tax.
18. Exempt corporations and special do are mandated to use the itemized deductions.
19. Exempt who filed late are not subject to penalties because they have no tax due.
20. Exempt corporations filing BIR Form 1702-EX will not pay tax as a rule.

True or False

1. The classification rule is applied to private schools and non-profit hospitals.

2. The dominance test is applied to non-profit schools and private hospitals.
3. A government school is exempt from income tax.
4. A non-resident owner or lessor of vessels is subject to tax at 7.5% of the gross rental
5. A regional area headquarter is exempt from tax because it does not derived income.
6. A regional operating headquarter of a multinational company is subject to 10% on world
income.
 7. A non-resident cinematographic film owner lessor, or distributor is subject to 25% tax
on taxable income.
8. A non-resident owner or lessor of aircraft, machineries and other equipment in subject to
tax at 4.5% of gross rentals.
9. A farmers' or fruit growers' association is exempt from income tax.
10. Exempt corporations are subject to income tax on their income tax on their income from
unrelated activities.
11. A non-stock, non-profit institution must be organized for religious, charitable scientific,
athletic, cultural, or for the rehabilitation of veterans.
12. To be exempt, all of the net income or asset of a non-profit corporation or association
must be devoted to its purposes, and no part of its net income or asset accrues to benefit
any member or a scientific person.
13. The unrelated income of non-profit corporations is exempt from income tax is the same is
diverted to its non-profit purpose.
14. The exemption of non-stock and non-profit corporations or associations shall commence
when they secure their tax exemption ruling.
15. The certificate of tax exemption ruling is valid for one year and renewable every year
thereafter

True or False
1. The FCDUs, OBUs and EFCUs are never subject to regular income tax.
2. Persons and services establishment inside an ECOZONE are subject to the regular tax.
3. The Gross Philippine Billings if international carrier includes receipts from outgoing
voyage or flights which must be billed in the Philippines.
4. Expenses of an exempt corporation not directly traceable to either related or unrelated
operations are allocated based on the ratio of gross income.
5. Local water district are exempt from income.
6. Cooperatives that transacts business with non-members are taxable on income allocated
to interest in members' capital when their accumulated reserve exceeds P10,000,000.
7. All cooperatives, regardless of classification, are subjects to income tax on their income
from unrelated activities.
8. The expenses of exempt corporations from exempt operations are deductible to its gross
income from unrelated operations.
9. When the income from unrelated activities exceeds 50% of total Income private schools
are subject to tax at 10% of taxable from related and unrelated activities.
10. When the income from unrelated activities exceeds 50% of total Income, only the income
from unrelated activities of private schools and non-profit hospitals by subject to 30%
tax.
11. Refunded tickets name tickets if non-revenue passengers are excluded from Gross
Philippine Billings.
12. The gross receipts from transient passengers are excluded from Gross Philippine Billings
if they depart from this Philippines through the same carrier within 4 hours from their
arrival.
 13. The 48-hour rule does not apply when another carrier continued the flight of voyages of
transient passengers.
14. The 48-hour rule may be extended by force majeure.
15. Domestic film owners, lessors or distributors shall be subject to 25% tax on gross income
from all sources within.

Multiple Choice: Theory 1

1. A non-resident foreign corporations is taxable on.

a. world taxable income c. Philippine taxable income
b. world gross income d. Philippine gross income

2. The resident and non-resident classification do not apply to

a. domestic corporation
b. foreign corporation
c. both domestic and foreign corporations
d. neither domestic nor foreign corporations

3. Which of these is a special corporate taxpayers?

a. A private school c. A business partnership
b. A private hospital d. A trading corporation

4. As a rule non-profit, non-stock corporations are exempt from income tax of these non-
profit entities is subject to income tax?
a. Association c. Farmer's cooperative
b. School d. Hospital

5. The exemption of non-profit corporations specifically pertains to income from

a. related parties c. related activities
b. unrelated d. both related and unrelated activities

6. A domestic is taxable on
a. world taxable income c. Philippine taxable income
b. world gross income d. Philippine gross income

7. A resident foreign corporation is taxable on

a. world taxable income c. Philippine taxable income
b. world gross income d. Philippine gross income

8. Benguet State University , a public educational institution, is

a. subject to income tax at preferential rate
b. subject to income tax at the regular rate
c. subject to both regular and preferential income tax
d. exempt from corporate income tax
 9. Generally, government-owned and controlled corporation are
a. subject to preferential income tax
b. subject to regular income tax
c. subject to both regular and preferential income tax
d. exempt from income tax

10. Generally, government-owned and controlled corporations are

a. subject to preferential income tax
b. subject to regular income tax
c. subject to both regular and preferential income tax
d. exempt from income tax

11. Which is not an exempt corporations?

a. Social Security System
b. Philippine Health Insurance System
c. Government-owned and controlled corporations
d. Home development Mutual Fund

12. Which of these foreign corporations is subject to the 30% regular corporate tax
a. Offshore banking units
b. International carrier
c. Regional operating headquarters of a multinational company
d. Call center

13. non-resident foreign corporations is

a. Subject to 30% tax on taxable income
b. Subject to 25% tax on gross income
c. not subject to 30% tax on gross income
d. never subject to 30% tax on gross income abroad

14. A resident foreign corporation is

a. subject to 10% tax on global taxable income
b. subject to 10% tax on Philippine taxable income
c. not subject to 30% tax on foreign income
d. not subject to 30% tax on Philippine taxable income

15. A domestic corporation is not subject to the 30% regular income tax on
a. Foreign income c. Philippine income
b. global income d. Gross income

Multiple Choice: Theory 2

1. An allocation of common expenses between damaged and unrelated activities is made to
properly reflect taxable income. This procedure is required only of
a. domestic corporations
b. resident foreign corporations
c. exempt corporations
d. non-profit hospitals

2. What percentage of profit will shareholders ultimately received from the corporate earnings?
a. 70% of taxable income c. 63% of taxable income
b. 70% of gross income d. 63% of Gross income

3. Which of these concepts is not relevant to corporation?

a. Exclusion c. Deduction
b. gross income d. Personal exemption

4. The precedential tax rate of 10% on taxable income applies to

a. Proprietary hospital c. non-profit school
b. Proprietary school d. Non-profit association

5. When applicable, the 10% preferential tax rate applies to income from
a. Related activities
b. Unrelated activities
c. both related and unrelated activities
d. Neither related and unrelated activities

6. Exempt corporations are nevertheless subject to 30% tax on income from

a. Related activities
b. Unrelated activities
c. both related and unrelated activities
d. Neither related and unrelated activities

7. Which is not taxable on unrelated activities?

a. Government agencies
b. Non-profit corporations
c. Government-owned and controlled corporation
d. none of these

8. The income from properties of exempt corporations is considered income from

a. related sources
b. unrelated sources
c. either related or unrelated activities at the discretion of the examiner
d. Either related or unrelated activities depending on the nature, properties concerned.

9. The classification rule is not relevant to a

a. Cooperative
b. Farmers 'association
c. Government school
d. Profit - oriented agricultural organization