Module 3 Tax On Corporations

ALDERSGATE COLLEGE INCOME AND BUSINESS TAXATION
SCHOOL OF BUSINESS AND ACCOUNTANCY

MODULE 3 TAX ON CORPORATIONS
LEARNING FOCUS
For income tax purposes, the term “corporation” shall include partnerships, no matter how
created or organized, joint stock companies, joint accounts (cuentas en participacion),
associations, or insurance companies.
The term “corporation” includes also mutual fund companies, regional operating headquarters of
multinational corporations, and joint accounts.
The term “corporation” does not include:
(a) A general professional partnership;

(b) A joint venture or consortium formed for the purpose of undertaking construction
projects;
(c) A joint venture or consortium for engaging in petroleum, coal, geothermal and other
energy operations pursuant to an operating or consortium agreement under a service
contract with the Government.
What is a general professional partnership? A general professional partnership is a partnership

formed by persons for the sole purpose of exercising their common profession, no part of the
net income of which is derived from engaging in any trade or business.
What is a domestic corporation? a resident corporation? a non-resident corporation? A domestic

corporation is one created or organized in the Philippines or under its laws. A foreign
corporation is a corporation which is not domestic, and may be a resident or a non-resident
corporation. A resident corporation is a foreign corporation engaged in business in the
Philippines. A non-resident corporation is a foreign corporation not engaged in business in the
Philippines but deriving income from the Philippines.
TAX ON DOMESTIC CORPORATION
The income tax rules of domestic corporations are found in Figure 3-1 and Figure 3-2.
Figure 3-1. Capital gain tax on domestic corporations.
(a) On sale of shares of stock of a domestic corporation not listed and traded
thru a local stock exchange*, held as capital assets**
On the net capital gain:

Not over P100,000 Final tax of 5%
On any amount in excess of P100,000 Final tax of 10%
(b) On sale of land and/or building held as capital asset**
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On the gross selling price or current fair market value prevailing at Final tax of 6%
the time of sale, whichever is higher
*Sale of shares of stock of a domestic corporation thru a local stock exchange or thru initial
public offering pays the stock transaction tax (one of the several percentage taxes in the
National Internal Revenue Code), and having paid this percentage tax, any gain shall not be
subject to income tax.
Domestic corporations are subject to any or some of the following:
(a) Capital gain tax;

(b) Final tax on passive income;
(c) Normal tax (acronym of NT or RCIT);
(d) Minimum corporate income tax (acronym of MCIT);
(e) Gross income tax (acronym of GIT);
(f) Improperly accumulated earnings tax (acronym of IAET).
Tax formula for the normal tax.
Gross income (not including passive income subject

to final tax and capital gain with capital gain tax) Pxxx
Less: Allowable deductions for expenses and losses; or
Optional Standard Deduction xxx
Taxable income subject to the normal tax Pxxx
Table 3-2. Income tax rules on domestic corporations
(a) Same as (a) and (b) of Table 3-1;

(b) From sources within the Philippines,
on passive income of:
Interest under the expanded foreign currency
deposit system Final tax of
7½%
(c) From sources within the Philippines,
Interest on any currency bank
deposit, yield or other monetary
benefit from deposit substitute, trust
fund and similar arrangement, Final tax of
royalty 20%
(d) Dividend from domestic corporation
(intercompany dividend) Exempt
(e) Taxable income (NET) from all sources within
and outside the
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Philippines – NORMAL TAX 30%
But, beginning with the fourth year from start

of operations, whichever is higher of:
NORMAL TAX 30%
MINIMUM CORPORATE INCOME TAX
(MCIT), on MCIT gross income 2%
(f) In lieu of (e), beginning with the year 2000:

GROSS INCOME TAX (GIT), on GIT gross
Income 15%
The income subject to tax of a domestic corporation may thus be divided into three categories,
each with its own set of rules (See Figure 3-3).
Illustration. A Co., a domestic corporation in its second year of operations, had the following
data for the year:
Gross income from business P2,000,000
Business expenses and losses 1,000,000
Capital gain on land sold for P5,000,000 900,000
Interest on Philippine currency bank deposit 20,000
The normal tax would have been computed, as follows:
Gross income from business P2,000,000

Less: Business expenses and losses 1,000,000
Taxable income subject to normal tax P1,000,000
Income tax at 30% P300,000
Figure 3-3. Categories of income subject to tax of a domestic corporation
Category A Category B Category C
Capital gain with capital gain tax of Passive income with final Other income
tax:
(a) 5% and 10% (a) 7½% Normal tax of 30%
(b) 6% (c) 20%
But beginning with the
fourth year of operations,
whichever is higher of:
The tax in (a) is due within 30 The tax is withheld at The normal tax of 30% and
days from the date of sale. The tax source. The income the minimum corporate
in (b) is withheld at source. received is tax-paid income tax of 2%
(Installment payment/ withholding already.
under certain conditions).
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The normal income tax

(NT) and the minimum
corporate income tax
(MCIT) are computed and
shown in the quarterly and
annual income tax returns.
Author’s note: The author would prefer to give the acronym NT, instead of RCIT, to the normal
tax of corporations. RCIT when spoken, or written, or read hurriedly, may be mistaken for
MCIT.
Minimum corporate income tax.
The minimum corporate income tax is 2% of the “minimum corporate income tax gross income”.
What is minimum corporate income tax gross income? There is a definition by law, and a
definition by revenue regulation. (See Figure 3-4.)
Figure 3-4. Minimum corporate income tax gross income.
In the case of merchandising concerns (from the statutory definition):
Net sales
Less: Cost of sales
Equals: Gross profit from sales subject to the MCIT
In the case of manufacturing concerns (from the statutory definition):
Net sales
Less: Cost of goods sold
Equals: Gross profit from sales subject to the MCIT
In the case of service concerns (from the statutory definition):
Gross receipts or revenues

Less: Direct costs of the services**
Equals: Gross income subject to the MCIT
** Direct cost of services”. Examples are: Salaries of personnel directly rendering the services;
expenses on the facilities directly utilized; and cost of supplies.
“Gross income shall include all income earned or realized during the taxable year that is
subject to the normal tax, including gross income derived outside of the main activities of the
taxpayer (from Revenue Regulation No. 122007. October 19, 2007)
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Illustration. B Co., a domestic trading corporation in its fourth year of operations, had the
following data on operations in a taxable year:
Gross sales P800,000

Sales returns and allowances 20,000
Sales discounts 5,000
Purchases 250,000
Purchase returns and allowances
10,000
Purchase discounts 2,000
Freight-in 5,000
Inventory, January 1 30,000
Inventory, December 31 15,000
The minimum corporate income tax, which would have been compared with the normal
tax, would have been:
Gross sales P800,0

00
Less: Sales returns and allowances P20,000
Sales discounts 5,000 25,000
Net sales P775,0
00
Less: Cost of sales –
Inventory, January 1 P30,000
Add: Purchases P250,000
Less: Purchase returns
and allowances P10,000
Purchase discounts 2,000 12,000
Net purchases P238,000
Add: Freight-in 5,000 243,000
Goods available for sale P273,000
Less: Inventory, end 15,000 258,0
00
Gross profit from sales P517,0
00
Minimum corporate income tax
(P517,000x2%) P10,340
(The statutory formula for MCIT gross income is the accounting formula for gross profit from
sales).
Illustration. C Co., a domestic corporation, is in manufacturing business. In its fourth year of

operations, it had:
Net sales P850,0

00
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Raw materials:
Inventory, January 1 30,000
Net purchases 100,0
00
Inventory, December 31 15,000
Labor 50,000
Manufacturing overhead 30,000
Work in process inventory, 50,000
January 1
Work in process inventory, 40,000
December 31
Finished goods inventory, 60,000
January 1
Finished goods inventory, 45,000
December 31
The minimum corporate income tax, which would have been compared with the normal tax,
would have been:
Net sales P850,0

00
Less: Cost of goods sold –
Raw materials:
Inventory, January 1 P 30,000
Add: Net purchases 100,000
Materials available for use P130,000
Less: Inventory, December 31 15,000
Raw materials used P115,000
Add: Labor 50,000
Manufacturing overhead 30,000
Total manufacturing costs P195,000
Add: Work in process inventory, 50,000
January 1
Cost of goods put in process P245,000
Less: Work in process inventory,
December 31 40,000
Cost of goods manufactured P205,000
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Add: Finished goods inventory, 60,000
January 1
Total goods available for sale P265,000
Less: Finished goods inventory,

December 31 45,000
Cost of goods sold 220,0
00
00
Minimum corporate income tax (P630.000 x 2%) P12,6
00
(The statutory formula for MCIT gross income is the accounting formula for gross profit from
sales).
Illustration. D Co, a domestic corporation, is a service enter-rise. In its fourth year of

operations, it had:
Gross revenues P900,0

00
Discounts and allowances 50,000
Salaries of service personnel 160,0
00
Depreciation of equipment used in rendering services 10,000
Rental of office 140,0
00
Supplies used 12,000
Light, water and telephone 55,000
Repairs 5,000
Other operating expenses 110,0
00
The minimum corporate income tax, which would have been compared with the normal tax,
would have been:
Gross revenues P900,0

00
Less: Discounts and allowances 50,000
Net revenues P850,0
00
Less: Direct cost of services – P160,000
Salaries of service personnel 10,000
Depreciation of equipment 140,000
Rental of equipment 12,000
Supplies used 55,000
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Light, water and telephone 5,000 382,0
00
Repairs P468,0
00
Gross income P9,36
0
Minimum corporate income (P468,000 x 2%)
Illustration. E Co., a domestic trading corporation, in its fourth year of operations, had a gross
profit from sales of P300.000 and net taxable income of P100,000. How much was the income
tax of the corporation for the year?
Minimum corporate income tax (P300,000 x 2%)

P 6,000
Normal income tax (P100,000 x 30%)
P30,000
Income tax for the year (whichever is higher) P30,000
Illustration. F Co., a domestic manufacturing corporation, in its fourth year of operations, had a
gross profit from sales of P400,000 and a net taxable income of P20,000. How much was the
income tax of the corporation for the year?
Minimum corporate income tax (P400,000 x 2%) P8,000

Normal income tax (P20,000 x 30%) P6,000
Income tax for the year (whichever is higher) P8,000
QUARTERLY TAX ON CORPORATIONS
Within sixty (60) days after the end of each of the first three quarters of the year, a corporation
files an income tax return. On or before the fifteenth day of the fourth month following the close
of the taxable year, a final or annual income tax return is filed. The quarterly and final tax returns
are summary declarations of gross income and deductions on a cumulative basis. The normal
income tax and the minimum corporate income tax are computed on the quarterly and final tax
returns, and whichever is higher is paid. The tax computed on the quarterly or year-end taxable
income is decreased by the amount of tax paid for the preceding quarter or quarters. There may
be an income tax payable (but not refundable) in a quarterly return.
Passive income with final tax and capital gains with capital gain tax are not included in the
quarterly and year-end computations.
If the sum of the quarterly tax payments made during the year is not equal to the total tax due
on the final return, the corporation may: (a) Pay the balance of the tax still due; or (b) Carry-over
the excess tax credit; or (c) Be credited or refunded with the excess payment.
Illustration. L Co., a domestic corporation, in its fourth year of operations in 2010, had the
following cumulative balances at the end of each quarter, and at the end, of the year (in pesos):
1st Q 2nd Q 3rd Q Year

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Gross profit from sales 350,000 530,000 790,000 995,00

0
Interest on Philippine
currency bank deposit 4,000 8,000 12,000 16,000
Capital gains on sale
directly to buyers of:
Land 900,00
0
Shares of domestic
corporation 150,000 150,000 150,00
0
Dividend from domestic
corporation 10,000 10,000 20,000 20,000
Business expenses 200,000 310,000 380,000 490,00
0
Income tax at the end of: 1st Q 2nd Q 3rd Q Year

0
0
Taxable income 150,000 220,000 410,000 505,00
0
MCIT at 2% 7,000 10,600 15,800 19,900

NT at 30% 45,000 66,000 123,000 151,50
0
Whichever is higher 45,000 66,000 123,000 151,50
0
Less: Income tax of-
First quarter (45,000) (45,000) (45,000
)
Second quarter (21,000) (21,000
)
Third quarter (57,000
)
Income tax due 45,000 21,000 57,000 28,500
In this problem, the income tax expense in the books of accounts and in the Income Statement
will be P151.500, from the journal entries (pro forma) at the end of each quarter, and of the year
of:
(Debit) Income tax expense Pxx

(Credit) Income tax payable Pxx
44 | Tax 11
Illustration. U Co., a domestic corporation in its seventh year of operations, had the following
data for 2010:
Gross profit from sales 400,000 780,000 990,000 1,200,000 Business

expenses 380,000 600,000 710,000 1,500,000
The computation for the income tax at the end of each quarter, and of the year, and the
journal entries for them, would have been:
Gross profit from sales 400,000 780,000 990,000 1,200,0

00
Business expenses 380,000 600,000 710,000 1,500,0
00
Taxable income 20,000 180,000 280,000 (300,0
00)
MCIT at 2% 8,000 15,600 19,800 24,000

Normal tax at 30% 6,000 54,000 84,000 0
Whichever is higher 8,000 54,000 84,000 24,000
Less: Income tax paid-
First quarter (8,000) (8,000) (8,000)

Second quarter (46,000) (46,000
)
Third quarter (30,000
)
Due (refundable) 8,000 46,000 30,000 (P60,0
00)
and suggested journal

entries are,
First quarter
(Debit) Income tax expense P8,000
(Credit) Income tax payable P8,000
Second quarter:
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0
Third quarter:
0
Year:
(Debit) Income tax P60,000
refundable
(Debit) Deferred charge - 24,000
MCIT
(Credit) Income tax P84,00
expense 0
Excess MCIT carry-forward. Any excess of the minimum corporate income tax over the normal
tax of a year will be carried forward and credited against the normal tax for the three
immediately succeeding taxable years. In the year to which carried forward, the normal tax
should be higher than the minimum corporate income tax.
Illustration. A domestic corporation had the following data on computations of the normal tax
(NT) and minimum corporate income tax (MCIT) for five years:
Year 4 Year 5 Year 6 Year 7 Year

8
MCIT P80,000 P50,000 P30,000 P40,000 P35,0
00
NT 20,000 30,000 40,000 20,000 70,0
00
The excess MClTs over NTs carry-forward are shown in Figure 3-5.
The gross income tax.
The President of the Philippines, upon recommendation of the Secretary of Finance, may,
effective 2000, allow domestic and resident corporations the option to be taxed on gross
income, as follows: (a) The tax is fifteen percent (15%); (b) Available only to firms whose ratio of
cost of sales to gross sales or receipts from all sources does not exceed fifty-five percent (55%);
(c) Shall be irrevocable for three (3) consecutive years during which the corporation is qualified
under the scheme.
46 | Tax 11
“Gross income”, for purposes of the gross income tax (GIT) is: (a) For trading or manufacturing
concerns, gross profit from sales; and (b) For service concerns, gross receipts less sales
allowances and discounts.
(Note: At the date of publication of this edition of the book, the President of the Philippines had
not made available the optional Gross Income Tax.)
Figure 3-5. Excess MCIT carry-forward
The income tax expense.
The income tax expense for a year of a corporation would be the total of the three taxes of:
(a) Capital gain tax;

(b) Final tax on passive income; and (c) Normal income tax.
Illustration. G Co., a domestic corporation, a trading concern, in its fourth year of operations in
2010, had the following:
Gross sales P40,000,000

Dividend from domestic corporation 50,000
Dividend from resident foreign corporation 40,000
Capital gain on sale directly to buyer of shares

of stock of a domestic corporation on a
selling price of P600,000 80,000
Capital gain on sale of land and building on a
47 | Tax 11
selling price at the prevailing market
value of P5,000,000 1,000,000
Interest on trade notes receivable 20,000
Sales returns and allowances 700,000
Sales discounts 800,000
Cost of sales 18,500,0
00
Business expenses 19,000,0
00
The income taxes of the corporation would have been:
Final tax on passive income

On interest on Philippine currency
bank deposit
(P100,000 x 20%) 20,000
Capital gain tax:

On shares of stock of domestic corporation
(P80,000 x 5%) P4,000
On land and building
(P5,000,000 x 6%) P300,000
Income tax on other income:
Normal tax:
Gross sales P40,000,0
00
Less: Sales returns and P700,000
allowances
Sales discounts 800,000 1,500,000
Net sales P38,500,0
00
Less: Cost of sales 18,500,0
00
Gross profit from sales P20,000,0
00
Add:
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Dividend from foreign corporation 40,000
Interest on trade notes receivable 20,000
Gross income P20,060,0

00
Less: Deductions for business 19.000.0
expenses 00
Taxable income P1,060,0

00
Normal income tax (P1,060,000 x P318,000

30%)
(P20,060,000 x 2%) P401,200

Income tax (whichever is higher) P401,200
Income tax payments of P724,000

is:
Final tax on passive income P20,000
Capital gain tax on shares P 4,000
Capital gain tax on land and 300,000 304,00
building 0
Normal income tax 318,00
0
Income tax expense P642,00
0
and a Deferred Charge - MCIT of 83,200
Total P725.20
0
TAX ON FOREIGN CORPORATIONS
Foreign corporations may be resident corporations (engaged in business in the Philippines), or

non-resident corporations (not engaged in business in the Philippines).
A foreign corporation can engage in business in the Philippines only after it had registered with,
and had been allowed by, the regulatory agencies of the Philippine government to engage in
business in the Philippines.
49 | Tax 11
The income tax rules for resident corporations are in Figure 3-6, while the income tax rules for
non-resident corporations are in Figure 3-7.
Illustration. H Co. is a resident corporation. In 2010, its first year of operations. H Co. had the
following data on income and expenses:
Gross income from within the Philippines P580.0

00
Gross income from outside the Philippines 650,00
0
Expenses on the income from within the Philippines 340,00
0
Expenses on the income from outside the Philippines 420,00
0
Figure 3-6. Income tax rules on resident corporations
(a) On sale of shares of stock of a domestic corporation not

listed and traded thru a local stock exchange, held as capital
assets:

Not over P100,000 Final tax
of 5%
On any amount in excess of P100,000 Final tax of
10%
(b) From sources within the Philippines,

Interest under the expanded foreign currency
deposit system Final tax of
7½%
(c) From sources within the Philippines,
Interest on any currency bank deposit, yield or other
monetary benefit from deposit substitute, trust fund and Final tax of
similar arrangement, royalty 20%
(d) Dividend from domestic corporation (intercompany dividend) Exempt
(e) Taxable income (NET) from all sources within the Philippines –
NORMAL TAX 30%
But, beginning with the fourth year from start of operations,

whichever is higher of:
NORMAL TAX
MINIMUM CORPORATE INCOME TAX (MCIT) on MCIT gross income from within the
Philippines
50 | Tax 11
(f) In lieu of (e), beginning with the year 2000:
GROSS INCOME TAX (GIT), on GIT gross income from all sources within the Philippines
15%
Is gross income tax be available to a resident corporation? Yes.
The Philippine normal income tax for the year would have been computed, as follows:
Gross income from within the Philippines P580,0

00
Less: Deductions for expenses 340,0
00
Taxable income from within the Philippines P240,0
00
00
Illustration. I Co., a resident corporation in its fifth year of operations in the Philippines in 2010,
had:
Philippines Foreign
P4,000.000 P9,000,000
1,200,000 2,700,000
2,000,000 4,500,000
The Philippine income tax would have been computed, as follows:
Net sales, Philippines P4,000,000

Cost of sales, Philippines 1,200,000
Gross profit from sales
P2,800,000
Less: Business expenses, Philippines
2,000,000
Taxable income, Philippines P 800,000
(P2,800,000 x 2%) P 56,000
Normal income tax (P800.000 x 30%)
P 240,000
Income tax (whichever is higher)
P 240,000
Figure 3-7. Income tax rules on non-resident corporations
(a) On sale of shares of stock of a domestic corporation not listed and traded thru a
local stock exchange, held as capital assets:
51 | Tax 11
Not over P100,000 Final tax of 5%
On any amount in excess of P100,000 Final tax of 10%
(b) Interest on foreign loans Final tax of 20%

(c) Dividend from domestic corporation (under certain conditions) Final tax of
15%
(d) Gross income from sources within the Philippines Final tax of 30%
Illustration. J Co. is a non-resident corporation, with the following income from within the
Philippines:
Capital gain on sale direct to buyer of shares of stock of a domestic corporation

P100,000
Gross income from one transaction in the Philippines 800,000
Expense related to the income 150,000
The income tax of the corporation would have been:
Capital gain tax on shares of stock

(P100,000 x 5%) P 5,000
Final tax on the one isolated
transaction P240,00
(P800,000 x 30%) 0
SPECIAL CORPORATIONS
Figure 3-8 Special corporations.
Taxpayer Tax Base Rate
Taxable income from all sources 10%

Proprietary educational institution
and nonprofit hospital
Resident international carrier Gross Philippine billings 2½%
Non-resident owner or lessor of 4½%

Gross rentals, lease and charter
vessel
fees from the Philippines
Non-resident cinematographic film Gross income from the Philippines 25%

owner,
lessor or distributor
Non-resident lessor of aircraft, Gross rentals, charges and other fees 7½%
machinery and other equipment from
52 | Tax 11
Philippine sources
Regional operating headquarters of Philippine taxable income 10%

multinational corporation
There is no minimum corporate income tax for special corporations.
Under the Philippine Constitution, on private educational institutions: All revenues of non-stock,
non-profit educational institutions used actually, directly and exclusively for educational
purposes shall be exempt from taxes.
Illustration. The K University is an educational institution. In 2010, it had the following

condensed data:
Net income from tuition fees P10,000,0

00
Net income from the canteen 400,000
Net income from the book store 500,000
Miscellaneous income 100,000
The net income from all sources was P11,000,000. If K University was a stock corporation, the
income tax at 10% would have been P1,100,000. If K University was a non-stock corporation
operated by a religious order, it would have been exempt from income tax.
If the gross income of a proprietary educational institution or hospital from unrelated trade,
business or other activity exceeds fifty percent (50%) of the total gross income derived from all
sources, such educational institution or hospital will be taxed as an ordinary corporation
(predominance test).
Illustration. The KL University, a stock corporation, is an educational institution. In 2010, it had

the following condensed data:
Gross income from tuition and other school fees P1,000,0

00
Gross rent income 2,500,0
00
Total expenses of operations (as university) 1,200,0
00
Total expenses on rental properties 900,000
The income tax of KL University would have been:
Gross income from tuition and other school fees P1,000,000

Less: Expenses 1,200,000
Net loss (P200,0
00)
Gross rent income P2,500,00
53 | Tax 11
Less: Expenses 900,000 1,600,00
00
00
The KL University will be treated as an ordinary corporation because the gross income from
sources not related to education is P2,500,000, which, in relation to the total gross income of
P3,500,000, is 71.43%.
Non-resident owners of vessels are treated as special corporations only from charters or leases
of the vessels to Filipino citizens or corporations approved by the Maritime Industry Authority.
What are the income tax rules on regional headquarters and operating headquarters of
multinational companies?
(a) A regional headquarters of a multinational company will not be subject to income tax.
A regional headquarters is a branch established in the Philippines by a multinational
company and which headquarters do not earn or derive income from the Philippines
and which act as supervisory, communications and coordinating center for its
affiliates, subsidiaries or branches in the Asia-Pacific region and other foreign
markets.
(b) A regional operating headquarters of a multinational company will pay a tax of ten
percent (10%) of its net income. What is a regional operating headquarters of a
multinational company? A regional operating headquarters is a branch established in
the Philippines by a multinational company which is engaged in any of the following
qualifying services: general administration and planning, business planning and
coordination, sourcing/procurement of raw materials and components, corporate
finance advisory services, marketing control and sales promotion, training and
personnel management, logistic services, research and development services and
project development, technical support and maintenance, data processing and
communication, and business development.
IMPROPERLY ACCUMULATED EARNINGS TAX (IAET)
A corporate form of organization provides a way of pooling capital from a great number of
investors to finance a business venture which would otherwise be too big, for an individual,
alone, or for individuals in a small group, to undertake. But a corporation should be formed, and
its affairs conducted, for the attainment of legitimate business objectives. If a corporation is
formed or availed of for the purpose of retaining earnings which otherwise should be distributed
to shareholders, to enable the latter to escape the income tax, as:
Example 1.M Co., a corporation formed some years ago, does not pay
any dividend, accumulating profits beyond the reasonable needs of the
business;
54 | Tax 11
Example 2. All capital stock of N Co., a domestic corporation, with the

exception of four shares owned by nominal stockholders, are held by 0
Co., a domestic corporation. N Co. had accumulated profits beyond the
needs of the business, but does not distribute any dividend so that O
Co. would not have enough retained earnings from which to pay
dividends to its own (O’s) stockholders,
then measures may be taken by the state to force the corporation to pay dividends. One such
measure is the imposition of the additional tax on the corporation for improper accumulation of
profits. The loss in revenue to the state for lack of dividend that may be taxed on the individual
stockholders is recouped by the imposition of the additional tax on the corporation.
Presumptions of improper accumulation.
There are three cases when, in the absence of proof to the contrary, a corporation would be
considered as improperly accumulating profits, that is, formed for the purpose of preventing the
imposition of the income tax on its shareholders (Example 1) or on the shareholders of another
corporation (Example 2), namely:
(a) When the corporation is a mere holding company;

(b) When the corporation is an investment company;
(c) When the corporation permits its profits to accumulate beyond the reasonable needs of
the business.
A corporation having practically no activities except holding property, and collecting the income
therefrom or investing therein, shall be considered a holding company. If the activities further
include, or consist substantially of, buying and selling stocks, securities, real estate, or other
investment properties (whether upon an outright or a marginal basis) so that the income is
derived not only from the investment yield but also from profits upon market fluctuations, the
corporation shall be considered an investment company.
Under the Income Tax Regulations, an accumulation of profits (including undistributed profits of
prior years) is unreasonable if it is not required for legitimate business purposes, considering all
the circumstances of the case. The law would not prohibit an accumulation for:
(a) Additional working capital;

(b) Expansion, improvement and repairs;
(c) Debt retirement;
(d) Acquisition of a related business, or the purchase of stock of a related business
where a subsidiary relationship is established;
(e) Anticipated losses or reverses in business.
Where retention of profit is for legitimate business needs, the immediacy test applies, i.e., that
the profit must be applied not too long from the time of retention of profits.
Under the Corporation Code of the Philippines, a corporation can retain profits not exceeding
one hundred percent (100%) of its paid-in capital. So that, increase in the accumulation of
55 | Tax 11
earnings up to one hundred percent (100%) of the paid-up capital of the corporation, is not
improper accumulation.
The improperly accumulated profits tax is not computed and applied by the corporation on itself
in its income tax return for a taxable year. The Bureau of Internal Revenue makes the
computation on its allegation of improper accumulation of profits by the corporation. The Bureau
makes a computation a year or years after the so-called improper accumulation shall have
taken place.
What corporations are exempt from the IAET?
(a) Publicly-owned corporations;

(b) Banks and other nonbank financial intermediaries; (c)
insurance companies.
The IAET, or improperly accumulated earnings tax.
The improperly accumulated earnings tax is ten percent (10%) of the improperly
accumulated earnings.
What is improperly accumulated profits or earnings? The formula is:
Taxable income
Increased by:
Income exempt from tax;
Income excluded from gross income;
Income subject to final tax;
Net operating loss carry-over deducted
(NOLCO) Reduced by:
Income tax paid /payable during the year
Dividend actually or constructively paid (issued from the applicable year’s taxable income)
Amount reserved for the reasonable needs of the business emanating from the covered year's
taxable income.
(Words in regular letters are in the statutory formula [provision of law]. Words in Italic letters are
additions by revenue regulation)
Illustration. Co. BB, a domestic corporation in its tenth year of operations in 2010, had a net
taxable income (no capital gain with capital gain tax, and no passive income with final tax) of
P1,000,000. It never distributed profits to its stockholders, and the Bureau of Internal Revenue
considered the accumulation of profits of the year as improper. How much must have been the
IAET, as computed by the Bureau of Internal Revenue?
56 | Tax 11
The IAET would have been computed as follows:
Net taxable income P1,000,000

Less: Normal tax (P1,000,000 x 30%) 300.000
Improperly accumulated profits P 700,000
IAET (P700.000 x 10%) P 70,000
Illustration. By 2010, P Co., a domestic corporation, was in its fifteenth year of operations. It
had a retained earnings at the end of that year of P2,000,000 even as there was a net loss in
2009 of P200.000. The Bureau of Internal Revenue was imposing the improperly accumulated
profits tax on the accumulation of profits of 2010. In that year, the corporation had:
Net sales P4,200,0
00
Cost of sales 1,200,0
00
Business expenses 800,000
Dividend from domestic 200,000
corporation
Quarterly income tax paid,
first,
second and third quarters 510,000
Income tax due, end of the 90,000
year
Dividend declared, 2010 500,000
*
*Paid in 2011
For the year, the taxable income and income tax of the corporation would have been computed,
as follows:
Net sales P4,200,000

Less: Cost of sales 1,200,000
Less: Business expenses P800,000
Net operating loss carry-over from 2009 200,000 1,000,000
Minimum corporate income tax (P3,000,000 x 2%) P 60,000
Normal income tax (P2,000,000 x 30%) P 600,000
Whichever is higher P 600,000
Less: Quarterly income tax paid 510,000
Income tax still due P 90,000
An assessment for an improperly accumulated earnings tax would have been from a
computation, as follows:
Taxable income at the end of the P2,000,0

year 00
57 | Tax 11
Add:
Dividend from a domestic P200,000
corporation
Net operating loss carry-over 200,000 400,000
Total P2,400,0
00
Less:
Normal income tax P600,000
Dividend declared 500,000 1,100,0
00
Improperly accumulated earnings P1,300,0
00
Improperly accumulated earnings
tax
(P1,300,000 x 10%) P
130,000
Illustration. At the end of 2009, after ten years of operations, Q Co., a domestic corporation,
had a retained earnings of P1,200,000. The Bureau of Internal Revenue is willing to concede
that the reasonable needs of the business would justify the retention of that amount by the
corporation. For 2010, the corporation had:

00
Capital gain on sale of land at a selling price of P3,000,000 300,0
00
Business expenses 200,0
00
Capital gain tax on land 180,0
00
Final tax on interest from bank deposit 4,000
Income tax on its taxable income of P500,000 150,0
00
Quarterly income tax paid 110,0
00
Dividend declared and paid 250,0
00
The Bureau of Internal Revenue assessed the IAET for 2010. The computation by the Bureau of
Internal Revenue would have been as follows:
Taxable income, end of the year P500,0

00
58 | Tax 11
Add:
Income exempt from tax –
Dividend from domestic corporation P10,000
Passive income with final tax –
Capital gain with capital gain tax –
Capital gain on sale of land 300,000 330,0
00
Total 830,0
00
Less:
Income tax paid during the year:
Final tax on passive income P4,000
Capital gain tax 180,000
Normal tax of the year 150,000
Dividend declared and paid 250,000 584,0
00
Improperly accumulated earnings P246,0
00
Improperly accumulated earnings
tax (P246,000 x 10%) P24,6
00
Each taxable year has its own improperly accumulated earnings (separate computation), with its
own improperly accumulated earnings tax.
Illustration. The Bureau of Internal Revenue conceded that the balance' in the retained
earnings account of DD Co., a domestic corporation, as at the end of 2008 was necessary for
legitimate business purposes, but not the retention of profits for 2009 and 2010. The taxable
income for 2009 was P700.000, and for 2010 was P1,000,000, with no distribution of dividend in
2009 and a distribution of dividends in 2010 of P400.000. How much were the lAETs for the
years?
Such lAETs would have been:
2009 2010
Net taxable income P 700,000 P1,000,0

00
Less: Income tax 210,000) (300,00
0)
Dividends paid (400,00
0)
Improperly accumulated earnings P 490,000 P300,00
0
IAET P 49,000 P30,00
0
59 | Tax 11
PROFIT REMITTANCE TAX
Any profit remitted by a branch to its head office shall be subject to a final tax at fifteen percent
(15%) which shall be based on the total profit applied or earmarked for remittance, without any
deduction for the tax component thereof, except those activities which are registered with the
Philippine Economic Zone Authority (PEZA).
GOVERNMENT OWNED OR CONTROLLED CORPORATION
All corporations, agencies or instrumentalities owned or controlled by the Government, shall pay
such rate of tax upon their taxable income as are imposed upon corporations or associations
engaged in a similar business, industry or activity, except the following:
(a) Government Service Insurance System (GSIS);

(b) Social Security System (SSS);
(c) Philippine Health Insurance Corporation (PHIC); and
(d) Philippine Charity Sweepstakes Office (PCSO);
EXEMPT ASSOCIATIONS
Enumerated hereunder are corporations and associations that are:
Not subject to income tax on income received by them from undertakings which are essential to
or necessarily connected with the purposes for which they were organized and operated, but
Subject to income tax on income of whatever kind and character from any of their properties,
real or personal, or from any of their activities conducted for profit, regardless of the disposition
made of such income:
(a) Labor, agricultural or horticultural organization not organized principally for profit;
(b) Mutual savings bank not having a capital stock represented by shares, and cooperative
bank without capital stock organized and operated for mutual purposes and without
profit;
(c) Beneficiary society, order or association operating for the exclusive benefit of the
members, such as fraternal organization operating under the lodge system, or mutual
aid association or a non-stock corporation organized by employees providing for the
payment of life, sickness, accident or other benefits exclusively to the members of such
society, order, association or non-stock corporation, or their dependents;
(d) Cemetery company owned and operated exclusively for the benefit of its members;
(e) Non-stock corporation or association organized and operated exclusively for religious,
charitable, scientific, athletic, or cultural purposes, or for the rehabilitation of veterans, no
part of the net income or assets of which shall belong to or inure to the benefit of any
member, organizer, officer or a specified person;
(f) Business league, chamber of commerce, or board of trade, not organized for profit and
no part of the net income of which inures to the benefit of any private stockholder or
individual;
60 | Tax 11
(g) Civic league or organization not organized for profit but operated exclusively for the
promotion of social welfare;
(h) A non-stock and non-profit educational institution;
(i) Government educational institution;
(j) Farmers and other mutual typhoon or fire insurance company, mutual ditch or irrigation
company, mutual or cooperative telephone company, or like organization of a purely
local character, the income of which consists solely of assessments, dues and fees
collected from members for the sole purpose of meeting its expenses; and
(k) Farmers, fruit growers, or like association organized and operated as a sales agent, for
the purpose of marketing the products of its members and turning back to them the
proceeds of sales, less the necessary selling expenses, on the basis of the quantity of
produce furnished by them.
Illustration. R Inc., a non-stock domestic charitable corporation, had the following data in a
year:
Donations received P600,0

00
Administrative expenses 400,0
00
Rent income 70,000
Expenses on the rental property 30,000
Income tax withheld on rent 3,500
Income tax paid, first, second and third quarters 8,000
The taxable income and income tax for the year would have been:
Rent income P70,000

Less: Expenses on the rental property 30,000
Taxable income P40,000
Less.
Income tax withheld on rent P3,500
Income tax paid, first, second and third quarters 8,000 11,500
Income tax still due P500
Posttest
I. QUESTIONS
1. For income tax purposes, define “corporation”.

Answer: The term “corporation” shall include partnerships, no matter how created or
organized, joint stock companies, joint accounts (cuentas en participacion), associations,
or insurance companies. Includes also mutual fund companies, regional operating
headquarters of multinational corporations, and joint accounts
2. Give three associations that are not within the meaning of the term “corporation”.
61 | Tax 11
Answer: general professional partnership, a joint venture or consortium formed for the
purpose of undertaking construction projects and a joint venture or consortium for
engaging in petroleum, coal, geothermal and other energy operations pursuant to an
operating or consortium agreement under a service contract with the Government.
3. What are the three categories of income subject to tax of a domestic corporation?
Answer: Capital gain tax, final tax on passive income and normal income tax.
4. Is the “improperly accumulated profits tax” a penalty tax? Why?

Answer: Improperly accumulated earning tax is a penalty tax upon a corporate taxpayer
for accumulating so much net income after tax beyond the reasonable needs of the
business.
5. How are educational institutions taxed?

Answer: Educational institutions are special corporations which are taxed 10% on
taxable income from all sources
II. PROBLEMS
6. A domestic corporation had the following data in its second year of operations:
Capital gain on sale of land in Malaysia, on a selling price at fair market value of P5,000,000
P1,000,000
Capital loss on sale of land and building in the
Philippines on a selling price of P4,000,000 500,000
Capital gain on direct sale to buyer of shares of stock of a domestic corporation 150,000
Gross profit from sales 5,000,000
Interest on bank deposits 50,000
Expenses of operations 3,000,000
The capital gain taxes? 34,000

The final tax on passive income? 10,000
The year-end tax? 644,000
The income tax expense of the year? 600,000
7. A domestic corporation had, in its fourth taxable year:
Gross profit from sales

P4,000,000
Expenses of operations
3,000,000
(Disregard considerations of quarterly income tax payments)
Minimum corporate income tax? 80,000

Normal income tax? 300,000
62 | Tax 11
Income tax of the year? 300,000
8. A domestic corporation had the following data in its sixth year of operations:

00
Interest income from trade notes receivable 50,000
Expenses of operations 2,020,0
00
Minimum corporate income tax? 40,000
Income tax of the year? 40,000
9. In its seventh year of operations, a domestic corporation, a service

provider, had:
Gross revenue P5,000,0

00
Costs and expenses:
Direct costs of the services 2,000,0
00
Other operating expenses 500,000
(Disregard considerations of quarterly income taxes paid)
How much is the minimum corporate income tax? 60,000
How much is the normal tax? 750,000
What is the income tax for the year? 750,000
10. A foreign corporation in its fourth year of operations, with business operations within and
outside the Philippines, had the following data for the year:
Philippin Foreign
es
Net sales P2,000 P4,000,0
00
Interest on Philippine peso deposits 60,000
Interest on foreign currency deposits 60,000
Dividend from foreign corporation 50,000
Capital gain on sale of land in the
foreign country, on a selling
price in equivalent pesos of P5,000,000 1,000,0
00
Capital gain on direct sale to buyer of
63 | Tax 11
shares of stock of a domestic corporation 200,00
Cost of sales 600,000 2,400,0
00
Philippine quarterly income tax paid 205,000
Operating expenses 300,00 600,000
Minimum corporate income tax (MCIT)?
28,000
Income tax due, end of the year? 125,000
11. The domestic corporation is a private educational institution in its fifth year of operations,
with the following data on income and expenses for the year:
Gross income from tuition fees P5,000,0

00
Gross income from miscellaneous fees 600,000
Gross income from rentals, net of a 5% creditable withholding tax on the gross 190,000
Interest on bank deposits, net of withholding final tax 48,000
Operating expenses 4,000,0
00
Minimum corporate income tax? None
Income tax, end of the year? 180,000
12. A domestic corporation had the following cumulative data as at the end of each of the
first three quarters, and end, of a taxable year:
First Second Third Year
Gross profit from sales P500,000 P700,000 P850,000

P990,000
Operating expenses 200,000 280,000 340,000 396,000
Income tax due at the end of each of the first three quarters, and due or refundable at the end
of the year? Q1=237,000 Q2=66,000 Q3=108,000 year end=136,200 payable
13. A domestic corporation had the following cumulative data as at the end of each of the
first three quarters, and end, of its fifth year of operations:
First Second Third Year
Gross profit from sales P400,000 P600,000 P700,000

P900,000
64 | Tax 11
of the year? Q1=222,000 Q2=0 Q3=24,000 year end=36,000 payable
14. A domestic corporation had the following data on transactions in each of the four
quarters of a taxable year:
First Second Third Fourth
Gross profit from sales P500,000 P350,000 P800,000 P900,0

00
Dividend from a domestic
corporation 20,000 20,000
Interest on bank deposit 4,000 8,000 12,000
0
of the year? Q1=15,000 Q2=3,000 Q3=0 year end=132,000 payable
15. A domestic corporation, had the following data for each of the four quarters of the
calendar year 2010 (fourth year of operations):
First Second Third Fourth

Dividend from:
Domestic corporation 8,000 8,000
Resident corporation 5,000 5,000 Capital gain on sales:
Land in the Philippines
Sale at P1,000,000
Cost of 500,000 500,0
00
Direct sale to buyer,
of shares of domestic
corporation:
Sale at P80,000
Cost of 50,000 30,00
0
Capital loss on sale
direct sale to buyer, of
shares of domestic
corporation:
65 | Tax 11
Sale at P100,000
Cost of 140,000 40,00
0
00 00 00 0
Quarterly income tax paid ? ? ? ?

Details for income tax due, first
quarter?
Details for income tax due, second
quarter?
Details for income tax due, third quarter?
Details for income tax due (refundable or creditable), end
of the year?
16. A domestic corporation had the following data in its tenth and eleventh year of
operations:
Tenth year Eleventh

year
Gross income P2,000,000 P4,000,0
00
Expenses of operations 1,900,000 2,900,0
00
(Disregard considerations of quarterly income tax

payments)
Income tax at the end of the tenth year? 40,000
Income tax at the end of the eleventh year?

320,000
17. A domestic corporation, had the following data in its fourth, fifth, sixth and seventh year
of operations:
Fourth Fifth Sixth Seventh

Gross income P800,000 P600,000 P700,000 P900,000
Expenses of operations 780,000 580,000 750,000 600,000
(Disregard considerations of quarterly income taxes paid)

Income tax for each of the fourth to the seventh year of operations?
18. The following were computed income taxes (MCIT for minimum corporate income tax
and NT for normal tax) of a domestic corporation:
66 | Tax 11
MCIT NT
Seventh year P70,000 P20,000
Eighth year 10,000 30,000
Ninth year 40,000 15,000
Tenth year 2,000 5,000
Eleventh year 45,000 80,000

Income tax for each of the years?
19. A domestic corporation had the following data in a taxable year:
Net taxable income at the end of the year P1,000,000

Dividend paid within the year 200,000
If the Bureau of Internal Revenue makes a finding that the accumulation of profits is improper,
how much is the improperly accumulated earnings tax (IAET)?
20. A domestic corporation had the following data in a taxable year, income taxes not
included:
Net taxable income at the end of the year P2,000,0

00
Capital gain on real property sold at 1,000,0
P5,000,000 00
Interest on Philippine currency bank 30,000
deposit
Dividend received from domestic 50,000
corporation
Appropriation for plant expansion 200,000
Dividend paid within the year 500,000
What are the income taxes of the year?
Assuming that the Bureau of Internal Revenue is correct in its finding that the accumulation of
the year is improper, how much is the IAET?
21. A foreign corporation is doing business in the Philippine through its branch in the
Philippines. Philippine operations in its fifth year in the Philippines had the following data:
Gross income from operations of the year P5,000,0

00
Operating expenses of the year 3,000,0
00
Remittance of profits to Y Co., its mother company
abroad (net of profit remittance tax) 425,000
67 | Tax 11
The minimum corporate income tax?
The aggregate of income taxes of the year?
22. A foreign corporation not licensed to do business in the Philippines derived an income of
P2,000,000 from an isolated transaction in the Philippines, on which the total of related
expenses was P200.000. The Philippine income tax? Answer: None
68 | Tax 11

Module 3 Tax On Corporations

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ALDERSGATE COLLEGE INCOME AND BUSINESS TAXATION

SCHOOL OF BUSINESS AND ACCOUNTANCY

The term “corporation” does not include:

(a) A general professional partnership;

What is a general professional partnership? A general professional partnership is a partnership

What is a domestic corporation? a resident corporation? a non-resident corporation? A domestic

TAX ON DOMESTIC CORPORATION

Figure 3-1. Capital gain tax on domestic corporations.

On the net capital gain:

(b) On sale of land and/or building held as capital asset**

Domestic corporations are subject to any or some of the following:

(a) Capital gain tax;

Tax formula for the normal tax.

Gross income (not including passive income subject

Table 3-2. Income tax rules on domestic corporations

(a) Same as (a) and (b) of Table 3-1;

Philippines – NORMAL TAX 30%

But, beginning with the fourth year from start

(f) In lieu of (e), beginning with the year 2000:

The normal tax would have been computed, as follows:

Gross income from business P2,000,000

Figure 3-3. Categories of income subject to tax of a domestic corporation

Category A Category B Category C

The normal income tax

Minimum corporate income tax.

Figure 3-4. Minimum corporate income tax gross income.

In the case of merchandising concerns (from the statutory definition):

Equals: Gross profit from sales subject to the MCIT

In the case of manufacturing concerns (from the statutory definition):

In the case of service concerns (from the statutory definition):

Gross receipts or revenues

Gross sales P800,000

Gross sales P800,0

Illustration. C Co., a domestic corporation, is in manufacturing business. In its fourth year of

Net sales P850,0

Net sales P850,0

Less: Finished goods inventory,

Illustration. D Co, a domestic corporation, is a service enter-rise. In its fourth year of

Gross revenues P900,0

Gross revenues P900,0

Minimum corporate income tax (P300,000 x 2%)

Minimum corporate income tax (P400,000 x 2%) P8,000

QUARTERLY TAX ON CORPORATIONS

1st Q 2nd Q 3rd Q Year

Gross profit from sales 350,000 530,000 790,000 995,00

Income tax at the end of: 1st Q 2nd Q 3rd Q Year

Gross profit from sales 350,000 530,000 790,000 995,00

MCIT at 2% 7,000 10,600 15,800 19,900

(Debit) Income tax expense Pxx

1st Q 2nd Q 3rd Q Year

Gross profit from sales 400,000 780,000 990,000 1,200,000 Business

1st Q 2nd Q 3rd Q Year

Gross profit from sales 400,000 780,000 990,000 1,200,0

MCIT at 2% 8,000 15,600 19,800 24,000

First quarter (8,000) (8,000) (8,000)

and suggested journal

Year 4 Year 5 Year 6 Year 7 Year

The gross income tax.

Figure 3-5. Excess MCIT carry-forward

The income tax expense.

(a) Capital gain tax;

Gross sales P40,000,000

Capital gain on sale directly to buyer of shares