far eastern university – manila income tax (corporation

TAXATION

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FAR EASTERN UNIVERSITY – MANILA

INCOME TAX (CORPORATION) (1701)

A. Corporation and Other Terms Defined

1. Corporation

For income tax purpose, the term “ Corporation” shall include partnership, 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

corporation and joint accounts.

The Term Corporation INCLUDED: The Term Corporation DOES NOT INCLUDED:

1. Partnership, no matter how created or organized 2. Joint stock companies

3. Joint accounts (cuentas en partipacion) 4. Associations or insurance companies

1. General professional partnership 2. Joint venture or consortium formed for the purpose

of undertaking construction projects 3. 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

2. General Professional Partnership

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.

3. Joint Venture

Joint venture is a commercial undertaking by two or more persons, differing from a partnership in that it relates to the disposition of a single lot of goods or the completion of a single project.

4. Joint Stock Companies Joint stock companies - are constituted when a group of individuals, acting jointly, establish and operate a business enterprise under an artificial name, with an invested capital divided into transferable shares, an elected board of directors, and other corporate characteristics, but operating without formal governmental authority.

5. Joint Accounts (cuentas en participacion)

Joint accounts are constituted when one interest himself in the business of another by contributing capital thereto, and sharing in the profits or losses in the proportion agreed upon. They are not subject to any formality and may be privately contracted orally or in writing.

6. Associations The term association includes all organizations which have substantially the salient features of a corporation to be taxable as corporation.

B. Classification of Corporations

1. Domestic Corporation – is one created or organized in the Philippines. 2. Foreign Corporation – is a corporation, which is not domestic, and it may be a resident and non-resident

corporations.

� Resident Corporation – is a foreign corporation engaged in business in the Philippines. � Non-resident Corporation – is a foreign corporation not engaged in business in the Philippines but deriving

income from the Philippines.

C. Tax Base and Tax Rate

Income

Within Without

a. Domestic Corporation Yes Yes Taxable income x 30% = Normal income tax

b. Resident foreign Corporation Yes No Taxable income x 30% = Normal income tax

c. Non-resident foreign Corporation Yes No Gross income x 30% = Final tax

d. Taxable partnerships, joint ventures, etc Yes Yes Taxable income x 30% = Normal income tax

D. Format of Computation (Annual Income Tax Return)

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Sales/Revenues/Receipts/Fees Xxx

Less: Cost of sales/services (xxx)

Gross income from operations Xxx

Add: Non-operating and taxable other income Xxx

Total gross income Xxx

Less: Deductions (xxx)

Taxable income Xxx

Regular corporate income tax (taxable income x 30%) Xxx

Minimum corporate income tax (gross income x 2%) Xxx

Tax due (whichever is higher) Xxx

Less: Unexpired excess of prior year's MCIT over normal income tax rate Xxx

Balance

Add: Tax due to the BIR on transactions under special rate Xxx

Aggregated income tax due Xxx

Less: Tax credits/payments

Prior year's excess credit other than MCIT xxx

Tax payments for the first three quarters xxx

Creditable tax withheld for the first three quarters xxx

Creditable tax withheld for the fourth quarter xxx

Foreign tax credits, if applicable xxx

Tax paid in return previously filed, if this is an amended return xxx (xxx)

Tax payable (overpayment) xxx/(xxx)

BIR Form No. 1702-

RT

(Annual Income Tax Return for Corporations, Partnerships and Other Non-Individual

Taxpayers Subject Only to the REGULAR Income Tax Rate);

BIR Form No. 1702-EX

(Annual Income Tax Return for Use Only by Corporations, Partnerships and Other Non-Individual Taxpayers EXEMPT Under the Tax Code, as amended, [Sec. 30 and those exempted in Sec. 27(C)] and Other Special Laws, with NO Other Taxable Income); and

BIR Form No. 1702-MX

(Annual Income Tax Return for Corporations, Partnerships and Other Non-Individuals with Mixed Income Subject to Multiple Income Tax Rates or with Income Subject to Special/Preferential Rate)

E. Optional Standard Deductions for Corporations (OSD) (RR No. 16-2008 as amended by RR No. 2-2010)

Determination of the amount of OSD for:

1. DOMESTIC corporation and RESIDENT FOREIGN corporation

a. In the case of corporate taxpayers, the OSD allowed shall be in amount not exceeding forty percent (40%) of

their gross income b. “Gross income” shall mean the gross sales less sales returns, discount and allowances and cost of goods

sold. c. The items of gross income under Section 32 (A) of the Tax Code, as amended, which are required to be

declared in the income tax return of the taxpayer for the taxable year are part of gross income against which

the OSD may be deducted in arriving at taxable income. Passive income which have been subjected to a final tax at source shall not form part of the gross income for purposes of computing the forty percent (40%) optional standard deduction.

Exercise:

1. JoLa Corporation has the following income and expenses for the year 2016:

Philippines USA

Sales P4,000,000 P700,000

Cost of sales 3,000,000 400,000

Other income 600,000 100,000

Business expenses 600,000 250,000

Unallocated other business expenses (P230,000)

Payments, first three quarters (if applicable) 120,000

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Required: Compute the tax payable assuming the above corporation is a: a. Domestic corporation

b. Resident foreign corporation c. Non-resident foreign corporation

F. Special Corporations

1. Kinds of special corporation a. Special domestic corporation b. Special resident foreign corporation c. Special non-resident foreign corporation

G. Tax Base and Tax Rates of Special Domestic Corporations

Special domestic corporations Tax Base Tax Rate

1. Proprietary/Private educational

institution and non-profit hospital

Taxable income –

World

10% - income from unrelated business

50% and below 30% - income from unrelated business exceeds 50% (pre-dominance test)

2. Government owned or controlled corporations, agencies or instrumentalities

Taxable income – World

Same as those imposed upon corporation or association engaged in similar business, or activity.

H. Special Domestic Corporations Explained

1. Proprietary Educational Institution

a. Summary of Tax Rules on Educational and Hospitals

Owner Educational institution Hospitals

Private 10% or 30% 30%

Non stock Non-profit Exempt 10% or 30%

Government Exempt Exempt

Any private school maintained and administered by private individuals or private groups with an issued permit to operate from the Department of Educational Culture and Sports (DECS) or the Commission of Higher

Education (CHED) or the Technical Education and Skills Authority (TESDA)

Examples of related income (RMC 4-2013) 1. Income from tuition fees and miscellaneous school fees 2. Income from hospital where medical graduates are trained for residency 3. Income from canteen situated within the school campus 4. Income from bookstore situated within the school campus

2) Unrelated business Activity

The term unrelated trade, business, or other activity means any trade, business or other activity, the conduct of which is not substantially related to the exercise or performance by such educational institution or hospital of its primary purpose or function (Section 27 B of the NIRC)

c) Treatment of capital outlays for expansion of school facilities Capital outlays for expansion of school facilities may either be: a. Deducted as expenditures or b. Depreciated over the estimated life

d) Non-stock-non-profit hospital

A nonstock non-profit hospital that is operated for charitable and social welfare is exempt from income

tax under Section 30 (E) and (G) of the Tax Code.

The nonstock-non-profit hospital must satisfy the following requisites in order to be entitled to the exemption from income tax: 1. It is a nonstock corporation. 2. It is operated exclusively for charitable purposes. 3. No part of its net income or asset shall belong to or inure to the benefit of any member, organizer, officer

or any specific person.

e). Government and Non-stock non-profit education institution All revenue of non-stock, non-profit educational institutions used actually, directly and exclusively for educational purposes shall be exempt from taxes. Likewise, government educational institutions,

universities and colleges are not subject to income tax.

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2. Government-Owned or -Controlled Corporation (GOCC)

a. Definition Any agency organized as a stock or nonstock corporation, vested with functions relating to public needs

whether governmental or proprietary in nature, and owned by the Government of the Republic of

the Philippines directly or through its instrumentalities either wholly or where applicable as in the case of stock corporations, to the extent of at least a majority of its outstanding capital stock.

b. Tax-exempt government-owned or controlled operations The following are tax-exempt government-owned or controlled corporations: 1) Government Service Insurance System (GSIS) 2) Social Security System (SSS) 3) Philippine Health Insurance Corporation (PHIC) 4) Local Water Districts (LWD)

I. Special Resident Foreign Corporations

1. International carrier 2. Offshore banking units

3. Remitting Branches of Resident Foreign Corporation(except on activities registered with PEZA) 4. Regional or Area Headquarters of Multinational Companies 5. Regional Operating Headquarters of Multinational Companies

J. Tax Base and Tax Rate of International Carriers

Special Resident Foreign Corporation

Tax Base Tax Rate

1. International carrier Gross Philippine Billings Exclusion in Gross Philippine

Billings:

1. Non-revenue passengers – those

passengers qualifying under the

free mileage programs of the air

carriers.

2. Refunded tickets

2.5% or (may also be subject to

a preferential income tax rate (lower 2.5%) or exempt from income tax based on a tax

treaty or reciprocity (RA10378

and RR 15-2013)

Gross Philippine Billings for international air carrier Gross Philippine Billings (for international air carrier) refers to the amount of gross revenue derived from carriage

of persons, excess baggage, cargo or mail originating from the Philippines in a continuous and uninterrupted flight, irrespective of the place of sale or issue and the place of sale or issue and the place of payment of the ticket or passage document.

Gross Philippine Billings for International shipping Gross Philippine Billings (for international shipping) means gross revenue whether for passenger, cargo, or mail

originating from the Philippines up to final destination, regardless of the place of sale or payment of the passage or freight documents.

Rule on transshipments or interrupted flights or voyages For flight which originates from the Philippines, but transshipment of passenger 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.

The “48-hour” rule on transient passengers

Same International Carrier

Flights or voyages of passengers, mails or excess baggage commencing from foreign

countries which will be interconnected for continuance of flight or voyage to a foreign destination by the same international carrier shall not be considered originating from the

Philippines if the actual 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 flight or voyage shall excluded from the Gross Philippine Billings. Notes: Fares for transient passengers staying herein for more than 48 hours are included

in Gross Philippine Billings.

Another International Carrier

If continuation of the flight or voyage to a foreign destination is made by another airline company or international sea carriers, the cost of the outgoing flight or voyage shall be included in Gross Philippine Billing of the airline or carrier regardless of the intervening

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period of time between the arrival and departure from the Philippines.

Foreign currency translation In the computation of the Gross Philippine Billings, tickets in foreign currencies are translated at whichever is higher of the following conversion rate:

1. Monthly average Airline Rate in the Bank Settlement Plan (BSP) Monthly sales report 2. Bankers Association of the Philippines (BAP) rate

Treatment of income Other Than Income from International Transport The other income of international carriers 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, detention fees and other charges relating to outbound and inbound cargoes as charges for the use of property or rendition of services are subject to the regular corporate tax.

Off-line international carriers Off-line international carriers are those without flights or voyage starting from or passing through any point in the Philippines (i.e. no landing rights. The branch or sales agent in the Philippines of off-line international carriers which sells passage documents for compensation or commission to cover off-line flights or voyages of its head office or other airline or sea carriers covering flight or voyages originating from Philippine ports or off-line flights or voyages is subject to the regular corporate income tax.

K. Offshore Banking Unit

1. Definition of terms

a. Offshore banking- shall refer to the conduct of banking transactions in foreign currencies involving the receipt of funds from external sources and the utilization of such funds. (PD 1035)

b. Offshore banking unit – shall mean a branch subsidiary or affiliate of a foreign banking corporation which is

duly authorized by the Central Bank of the Philippines to transact offshore banking business in the Philippines. (PD1035)

2. Distinction:

OBU – is a division of foreign bank which is authorized to conduct foreign currency denominated transactions.

FCDU – is a division of a domestic corporation bank. (Limited to short term foreign currency transactions)

EFCDU – may be a division of a domestic bank or a resident foreign bank to conduct banking under the

expanded foreign currency deposit system.(Allowed to both short term and long term

foreign currency denominated transactions)

2. Offshore banking units

Tax Base Tax Rate

a. Income derived from : 1. Foreign currency transaction with

non-residents 2. Foreign currency transactions with

local commercial banks

3. Foreign currency transactions with branches of foreign banks authorized by the BSP

4. Foreign currency transactions with OBUs in the Philippines

b. Interest income from foreign currency loans granted to residents other than OBUs or local commercial bank c. Any income of non-resident

(individual or corporation) from OBUS

Income exempt from tax

10% FWT

Exempt

3. Summary of Tax Rules on FCDUs/EFCDUs/OBUs

DOMESTIC BANK

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Received From

Nature of

income

Residents

(E)FCDUs or OBUs

Other Residents Non-residents

Income from forex transactions

Interest income

from:

-Forex loans and receivables

Exempt 10% final tax Exempt

- Forex deposits Exempt - Exempt

Other forex income

Exempt 30% regular corporate income tax

Exempt

Income from non-forex transactions

30% regular corporate income tax



If the interest income is not subjected to final tax by the borrower, the FCDU, EFCDU or OBU shall report the

same in its gross income in the income tax return and shall be subject to the same 10% tax. It shall be

separately presented from other income subject to the 30% regular corporate tax.

RESIDENT FOREIGN BANK

Received From

Nature of income

Residents (E)FCDUs or OBUs

Other Residents Non-residents

Income from forex transactions

Interest income

from:

-Forex loans and receivables

Exempt 10% final tax Exempt

- Forex deposits Exempt - Exempt

Other forex income

Exempt 30% regular corporate income tax

Exempt

Income from non-forex transactions



Exempt**

** foreign corporation are taxable only from income within the Philippines

L. Tax on Branch Profit Remittance

1. Tax base and tax rate

Tax on branch profit remittance (except on activities registered with

PEZA)

Tax Base

Tax Rate

Total profits applied or earmarked for remittance without deduction for the tax component

15%

2. Differentiation of foreign profit remittance:

Remitting entity to its head office Tax Rate

Branch of resident foreign corporation 15% of branch remittance

Subsidiary of a foreign corporation-through dividend declaration 30% final tax, 15% if the tax sparing rule applies

Branch of domestic corporation Not subject to tax

To be effectively connected it is not necessary that the income be derived from the actual operation

of the branch’s trade or business. It is sufficient that the income arises from business activity in which the

branch is engaged.

Remittance from prior year earnings is still taxable. The NIRC used the phrase “any profit remitted”

without limiting the same to current year profit remittance. The branch profit remittance tax therefore applies

to remittance of prior year earnings.

This tax only applies to a RFC which is a branch of a NRFC.

The taxable income event is not the generation of income but the remittance of income to the head office.

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Therefore, BPRT can be imposed together with other income taxes applicable on direct duplicate taxation. Profit Remittance PXXX

Rate 15% Final Tax BPRT PXXX EXCEPTION: (Not Treated as Branch Profit) Profits from activities which are registered with the Philippine Economic Zone Authority; a) Interest

b) Dividends c) Rents d) Royalties e) Remuneration from technical services f) Salaries, wages, premiums, annuities, emoluments g) Other fixed or determinable annual, periodic or casual gains, income and capital gains

If the above enumerated incomes are effectively connected with the conduct of its trade or business in the Philippines, they will be treated as branch profits subject to BPRT upon remittance.

• For purposes of branch profit remittance, income items which are not effectively connected with the conduct of its trade or business in the Philippines are not considered branch profits. Petroleum subcontractor is not exempted from 15% BPRT According to the BIR, while a foreign subcontractor providing maintenance and engineering services to a

service contractor engaged in petroleum operation is entitled to the 8% preferential final

withholding tax (instead of the 30% regular tax) in lieu of any and all taxes, it is not exempt from the 15% BPRT. The 8% final tax in lieu of any and all taxes as provided under PD No. 1354 applies only to a subcontractor’s gross income derived from contracts with a service contractor engaged in petroleum operations in the Philippines. On the other hand, the BPRT is a tax on profit realized for remittance abroad. (BIR Ruling No. 122-2015 dated 17 April 2015)

M. Regional or Area Headquarters

Regional or area headquarters is a branch established in the Philippines by multinational companies and which headquarters do not earn or derive income from Philippines and which act as supervisory, communications and coordinating center for their affiliates, subsidiaries or branches in the Asia Pacific Region and other foreign markets.

Tax base Tax rate

Exempt from tax -

N. Regional Operating Headquarters

Regional operating headquarters is a branch established in the Philippines by multinational companies which are engaged in different services (e.g. general administration and planning, business planning and coordination, marketing control and sales promotion, etc.)

Tax base Tax rate

Taxable income 10%

Exercises:

a. (Adapted): Singapore Airlines, an international carrier doing business in the Philippines provided you the following data:

Gross ticket sales(passengers) in the Philippines (Manila to Macau flight) P2,000,000

Gross ticket sales(cargoes) in China (Manila to Beijing flight) 2,000,000

Gross ticket sales(passengers) in the Philippines (Macau to Manila flight) 1,000,000

Gross ticket sales(cargoes) in China (Beijing to Manila flight) 1,000,000

Value of fares on non-revenue passenger (Outbound flights) *150,000

Fares cancelled and refunded (Outbound flights) 200,000

Value of fares on non-revenue passenger (Inbound flights) 50,000

Fares cancelled and refunded (Inbound flights) 50,000

Rental income(earned in the Philippines), net of withholding tax 950,000

Expenses connected to rental income 500,000

Required: 1. How much was the total Philippine income tax due?

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2. Assuming subject to a preferential income tax rate of 1.5% based on a tax treaty, how much was the Philippine income tax due?

b. Foreign International Carrier (Rule on transhipments or interrupted flights or voyages) Jacky Lipad is a resident foreign international carrier. Its records of income and expenses are as follows: (a) Continuous flight from Manila to Beijing = 2,000 tickets at P5,000 per ticket. (b) Ticket sold for flight from Manila to Hongkong: Transfer flight from Hongkong to Beijing = 4,000 tickets at

P6,000 per ticket.

(c) Direct flight from Manila to Hongkong= 2,000 tickets at P3,000 per ticket.

(d) Total operating expenses is P10,000,000. What is the amount of Jacky Lipad’s income tax payable in the Philippines?

c. Profit Branch Remittances

During year 200A, Abbott Laboratories, branch of a foreign company doing business in the Philippines, reported the following income and expense within as follows:

Gross income P100,000,000 Less: Operating expenses ___60,000,000 Net taxable income P 40,000,000 Less: Income tax (P40,000,000x30%) ___12,000,000 Net income after tax P 28,000,000 Add: Dividend income from Pharma Co. (domestic) ____7,000,000 Total net income P 35,000,000

In year 200B, Abbott earmarked for remittance to its head office in North Carolina, USA some of its income as

follows:

Operating net income after tax P24,000,000 Dividend income from Pharma Co. ___-

7,000,000 Total branch profit remittance P31,000,000

Required: 1. How much is the branch profit remittance tax and the total amount to be remitted after tax? 2. Assuming all activities registered with PEZA. How much is the tax on the branch profit remittances, if any?

d. Tax on Capital Assets Star Corporation has the following capital asset transactions 200A: a. Sold 12,000 investment in common shares of stock not traded in the local stock exchange for P1,600,000. The

cost per stock in P110 per share. b. Sold 5,000 investment in preferred stock traded in the local stock exchange for P1,800,000. The cost per

stock is P300. c. Sold land located in Japan for P3,000,000. The related cost and expenses on sale of land amounted to

P2,500,000. d. Sold land located in the Philippines for P1,000,000. The cost of land is P900,000 with a fair market value of

P1,200,000.

Star Diamond Corporation’s taxes payable (income tax and percentage tax) on sales of capital assets assuming the taxpayer is a:

1. Domestic corporation (DC). 2. Resident foreign corporation (RFC). 3. Non-resident foreign corporation (NRFC).

e. Final and Normal Income Taxes

A Philippine Commercial Bank has been authorized to operate a Foreign Currency Deposit Unit by the BSP and had the following revenue and expenses:

(a) Dividend income from Magnolia, a domestic corporation at P1,000,000. (b) Interest income on US dollar loans from resident borrowers at $3,000. ($1.00 = P50.00) (c) Interest on Philippine peso loans from borrowers at P2,000,000. (d) Operating expenses of P900,000.

1. What is the total amount of final income taxes of Philippine Commercial Bank? 2. What is the total amount of normal corporate income tax of Philippine Commercial Bank?

O. Special Non-Resident Foreign Corporation

1. Kinds of Special Nonresident Foreign Corporation a. Cinematographic Film Owner , Lessor, or Distributor

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b. Owner of Lessor of Vessels Chartered by Philippine Nationals c. Owner of Lessor of Aircraft, Machineries, and Other Equipment

Cinematographic film includes motion picture films, films, tapes, discs and such other similar or related products

(RR 6-2001).

KINDS TAX BASE

TAX

RATES

Cinematographic FOLD* Gross Income from Philippine Sources 25%

Lessor or Owner of Vessels**

Gross Rentals, lease or charter fees from leases or charters to Filipino Citizen or Corporations as approved by Maritime Industry Authority 4.5%

Owner or Lessor of AMO*** Gross Rentals or fees derived within the Philippines 7.5%

*Film, Owner, Lessor or Distributor **LOVe chartered by Philippine Nationals ***Owner or Lessor of Aircraft, Machineries, and Other Equipment Differentiation:

Lessor Lease or charter of

Cinema films Vessels Aircraft Other equipments

Domestic 30% world

taxable income

30% world taxable

income

30% world taxable

income

30% world taxable income

Resident foreign

30% world taxable income

2.5% Gross Philippine Billings OR Preferential rate

2.5% Gross Philippine Billings OR Preferential rate

30% Philippine taxable income

Non-resident foreign

25% Philippine gross income

4.5% Philippine gross rental, lease or charter fees (Philippine Gross Income)

7.5% Philippine gross rental, or fees (Philippine Gross Income)

7.5% Philippine gross rental, or fees (Philippine Gross Income)

Note: The Gross Income is gross receipts less the direct cost of services while the Gross Philippine Billings

relates to gross receipts.

P. Tax Exempt Corporations –

Under section 30 of the Tax Code, the following organizations shall not be taxed in respect to income received by them as such: (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) A beneficiary society, order or association, operating for the exclusive benefit of the members such as a fraternal organization operating under the lodge system, or mutual aid association or a nonstock corporation organized by employees providing for the payment of life, sickness, accident, or other benefits exclusively to the members of such society, order, or association, or nonstock corporation or their dependents;

(D) Cemetery company owned and operated exclusively for the benefit of its members; (E) Nonstock corporation or association organized and operated exclusively for religious, charitable, scientific,

athletic, or cultural purposes, or for the rehabilitation of veterans, no part of its net income or asset shall

belong to or inures to the benefit of any member, organizer, officer or any specific 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 stock-holder, or individual; (G) Civic league or organization not organized for profit but operated exclusively for the promotion of social

welfare; (H) A nonstock and non-profit educational institution; (I) Government educational institution;

(J) Farmers' or 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 finished by them. Note: Notwithstanding the provisions in Section 30, the income of whatever kind and character of the foregoing

organizations 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, shall be subject to corporation tax.

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Exercises:

a. (Educational Institution-Capital Expenditures vs. Revenue Expenditure) The XYZ University, a private educational institution, provided the following income and expenses for the year 2016:

Tuition and miscellaneous fee P14,000,000

Sales of canteen 700,000

Sales of bookstore 300,000

Non-educational income: Rent income, net of CWT 4,940,000

Sale of scrap materials 60,000

Cost and expenses:

Cost of services – canteen 400,000

Cost of books sold 240,000

Operating expenses 2,000,000

Purchase of library books 1,000,000

Cost of classroom construction 500,000

Purchase of school furniture 200,000

The operating expenses do not yet include the cost of capital expenditures. The fixed assets are estimated to be useful for 10 years. Required: 1. What would be the 2016 income tax still due and payable per ITR of University of XYZ (Capital outlays for

expansion of school facilities deducted as expenditures)?

2. What would be the 2016 income tax still due and payable per ITR of University of XYZ (Capital outlays for expansion of school facilities depreciated over the estimated life)?

b. (Non-stock Non-profit Hospital) A non-stock, non-profit hospital has presented the following data for the calendar year 2016:

Income, related activities P5,000,000

Income, unrelated activities (including P2,000,000 rent from commercial spaces, gross of 5% withholding tax) 7,000,000

Expenses, related activities 2,000,000

Expenses, unrelated activities 3,000,000

Dividend from a domestic corporation 100,000

Payments, first three (3) quarters 1,000,000

Required: How much is the tax payable?

c. (GOCC - Tax Exempt) A corporation has the following income and expenses for the year 20X1:

Sales P4,000,000

Cost and expenses 3,000,000

Required: Compute the normal income tax, assuming the corporation is: 1. Government Service Insurance System (GSIS) 2. Social Security System (SSS) 3. Philippine Health Insurance Corporation (PHIC) 4. Philippine Charity Sweepstakes Office (PCSO) 5. Local Water District

d. (Government Educational Institution) A government owned and controlled educational institution reported an educational related income of P1,000,000. Its operating expenses amounted to P3,000,000.

Required: How much is its income tax payable for the period?

Q. Income Tax Rates

Domestic Corporation

Resident Foreign Corporation

Non-resident Foreign Corporation

1. In general Sec. 27 (A)

Domestic

Sec. 28 (A) (1) Resident FC Sec. 28 (B) (1) Non-

resident FC

Tax rate 30% 30% 30%

Tax base Net income within and without

Net income within Gross income within

2. Optional corporate tax

Sec. 27 (A) Domestic

Sec. 28 (A) (1) Resident FC Sec. 28 (B) (1) Non-resident FC

Tax rate 15% 15% -

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Tax base Gross income Gross income -

3. Capital gains from sale of shares of stock not traded in the local stock exchange

Tax base Net capital gain Net capital gain Net capital gain

Tax rate 15% 15% 15%

Capital gains realized from sale or exchange or disposition of land and/or building

Capital asset – on gross selling price or fair market value whichever is higher - 6% final tax

Not applicable Capital Gain Tax on sale or disposition of real properties is

not applicable. (RR 7-2003)

Notes:

Domestic Corporations

6% CGT for land and building only, otherwise the same shall be subject to the ordinary income tax or MCIT, whichever is applicable

Resident Foreign

Corporations

Subject to creditable withholding

tax and consequently, the ordinary income tax or MCIT, whichever is applicable

Non-Resident foreign Corporations

30% Final Tax

Sale, barter, transfer and/or assignment of shares of stock of publicly-listed

companies not compliant with mandatory minimum public ownership (10% of the publicly-listed companies’ issued and outstanding shares,

exclusive of any treasury shares) (RR No. 16-2012)

15% 15% 15%

4. On certain passive income derived from Philippine sources

a. Interest in any currency bank deposit

20% final tax 20% final tax 30% final tax

b. Yield or any monetary benefit from deposit substitute, trust funds and similar

arrangement

20% final tax 20% final tax 30% final tax

c. Royalties 20% final tax 20% final tax 30% final tax

d. Interest income derived from

depository bank under expanded foreign

currency deposit

system

15%% final tax 15% final tax Exempt

5. Income derived under expanded foreign currency deposit system by depository banks

a. From foreign currency transactions with non-residents, OBUs in the

Philippines, local commercial bank including branches of

foreign banks

Exempt from all taxes except net income from transactions specified by Sec. Of Finance

Exempt from all taxes except net income from transactions specified by Sec. Of Finance

Exempt

b. From foreign currency loans granted to residents other than

OBUs in the Philippines and other depository

bank

10% 10% Exempt

6. Inter-corporate dividends received from domestic corporation

a. Inter-corporate dividends received

from domestic corporation

Not subject to tax Not subject to tax *15% or 30% * if the country where the

NRFC is domiciled allows a credit for taxes deemed paid

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in the Philippines equivalent to 15% (known as tax sparing), the tax rate is 15%, otherwise, 30% (without tax sparing)

7. Interest on foreign loans contracted on or after Aug. 1, 1986

Not applicable Not applicable 20% final tax

8. Minimum corporate income tax

2% of gross income within and without

2% of gross income within Not applicable

Offshore Banking Units – a branch, subsidiary or affiliate or a foreign baking corporation authorized by the Bangko

Sentral ng Pilipinas (BSP) to transact offshore banking business in the Philippines as a separate accounting unit.

Foreign currency deposit unit – an accounting unit or department in a local bank or in an existing local branch of a

foreign bank, authorized by the BSP to operate under the expanded foreign currency deposit system.

Notes: Dividend from foreign corporation: (***Predominance Test)

If ratio is:

(< 50%) Less than 50%, the entire dividend purely without the Philippines

From foreign company

( > 50%) At least 50%, the dividend income partly within and partly without the Philippines

From foreign corporation (based on the ratio of the gross income of the foreign corporation for the preceding 3 years prior to declaration of dividends derived from Philippine sources):

Philippine Gross income (3 years) x Dividend

***Income within = Total Gross income (3 years)

R. Summary of applicable income tax on the regular income of corporations:

Corporate Income Tax Rates on Regular Income

DC RFC NRFC

1. NCIT

Tax Rate 30% Net income 30% Net income 30% Gross income (Final tax)

Basis Within and without Within only Within only

MCIT*** 2% Gross income –Within and without

2% Gross income – Within only

Not applicable

OR

2. GIT (Optional)

Tax Rate 15% 15% Not applicable

Basis Gross income –Within and without

Gross income – Within only

*** Starting on the 4th year of operations immediately following the taxable year in which such corporation

commenced its business. The tax due is the higher between the NIT and MCIT

S. OPTIONAL CORPORATE INCOME TAX

1. Gross Income Tax (GIT)/ Optional Corporate Income Tax (also known as 15% gross income tax)

The President, upon the recommendation of the Secretary of Finance may, effective January 1, 2000, allow

corporation to be subjected to optional corporate tax.

Allow only to Domestic Corporations and Resident Foreign Corporation the option to be taxed on gross income, as follows:

• 15% tax rate (based on the gross income)

• Irrevocable for 3 consecutive years during which the corporation is qualified under the scheme.

Sales xxx

Sales return and allowance (xxx)

Sales discount (xxx) xxx

Cost of sales/Cost of direct services

(xxx)

Gross income from operation

xxx

Other income

xxx

Gross income

xxx

Gross income tax rate

15%

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Income tax due

Less: Taxes withheld

(xxx)

Tax paid - previous quarters

(xxx)

Foreign tax credits

(xxx)

Income tax payable xxx

2. Conditions shall have to be satisfied in the allowance of optional corporate tax:

a. A tax effort of ratio of 20% of GNP b. A ratio of 40% of income tax collection of total tax revenue c. A VAT tax effort of 4% of GNP

d. A 0.9% ratio of Consolidated Public Sector Financial Position to GNP e. Available only to firms whose ratio of cost of sales to gross sales or receipts from all sources does not exceed

55%

T. Minimum Corporate Income Tax (MCIT)

1. Corporate subject to MCIT

a. Domestic corporation b. Resident foreign corporation

2. Corporations not subject to MCIT

a. Domestic corporations: 1) Proprietary educational institution subject to 10% tax 2) Non-profit hospital subject to 10% tax 3) Domestic corporation engaged in business as a depository bank under EFCDS

b. Special Resident foreign corporations:

1) International carriers 2) Offshore banking units (OBUs) 3) Regional operating headquarters (ROHQs)

c. Firms taxed under a special income tax regime (PEZA Law and the Bases Conversion Development Act)

d. Non-resident foreign corporation

3. Tax based and tax rate

The tax rate is 2% based on: 1) Gross income within and without – Domestic Corporation 2) Gross income within – Resident Foreign Corporation

4. Gross income defined (RR 12-2007)

1) For the purpose of the MCIT, the term “gross income” means gross sales less sales returns, discounts, and allowances and cost of goods sold, in case of sale of goods, or gross revenue less sales returns, discount and allowances and cost of services/direct cost, in the case of sale of services.

2) The term “gross income” will also include all items of gross income enumerated under Sec. 32 (A) of the Tax Code, as amended, except income exempt from income tax and income subject to final withholding tax.

Amount of Tax for Seller of Goods: Gross Sales PXXX Sales Returns and Allowances and Discounts (XXX) Cost of Goods Sold (XXX)

Gross income from operation XXX Other income XXX Gross Income PXXX

Rate 2% MCIT PXXX

Cost of Goods Sold (CGS):

1. Trader or Merchandiser:

Invoice Cost PXXX Import Duties XXX Freight XXX Insurance XXX

COS PXXX

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2. Manufacturer:

Raw Materials Used PXXX Direct Labor XXX Manufacturing Overhead XXX Freight Cost XXX Insurance Premiums XXX

Other Costs* XXX Cost of Goods Manufactured and Sold PXXX

NOTE*: Other costs must be incurred in bringing the raw materials to the factory or warehouse.

Amount of Tax for Seller of Services:

Gross Receipts PXXX Sales Discounts (XXX) Cost of Services (XXX) Gross Income from operation XXX Other income XXX Gross Income PXXX Rate 2%

MCIT PXXX

Cost of Services (COS) in General: Salaries and employee benefits of personnel,

consultants and specialists directly rendering

the services. PXXX Cost of facilities directly utilized in providing

the service such as depreciation or rental of equipment used and cost of supplies. XXX

Other direct cost and expenses necessarily incurred to provide the services XXX

COS PXXX

NOTE: In case of BANKS, other than the items enumerated above, it shall also include Interest expense.

5. MCIT imposed on the 4th taxable year The tax is imposed beginning on the fourth taxable year immediately following the year in which such corporation

commenced its business operation.

Simply stated, MCIT applies on the X+4th year of operations. For instance, a corporation which started operations at any day in 20X2 will be covered by MCIT in 20X6.

6. Tax due

The tax due is the higher between the minimum corporate income tax and normal or regular corporate income tax.

7. Quarterly computation of MCIT (RR 12-2007)

1) The computation and the payment of MCIT, shall likewise apply at the time of filing of the quarterly corporate income tax.

2) In the computation of the tax due for the taxable quarter, if the computed quarterly MCIT is higher than the quarterly normal income tax, the tax due to be paid for such taxable quarter at the time of filing the quarterly corporate income tax return shall be the MCIT.

3) In the payment of the quarterly MCIT (MCIT is greater than normal corporate income tax), excess MCIT from the previous taxable year/s shall not be allowed to be credited.

4) Any excess of the minimum corporate income tax, payments under the normal income and the MCIT paid in the previous taxable quarter/s are allowed to be applied against the quarterly MCIT due.

8. Excess MCIT as carry forward

Any excess of the minimum corporate income tax over the normal corporate income tax shall be carried forward and

credited against the normal income tax for the three succeeding taxable years.

9. Suspension of imposition of MCIT The secretary of finance is authorized to suspend the imposition of MCIT on any corporation, which suffers losses on account of:

1) Prolonged labor disputes

2) Force majeure

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3) Legitimate business reverses

Exercises:

a. (Corporation) The following information are presented to you by a taxpayer who seeks your assistance in

computing the correct taxes:

DC RFC NRFC

Interest from Philippine peso bank

Yield from deposit substitute in the Philippines

Interest from bank deposit in Chase J.P Morgan Bank, USA

Prizes (P90,000), Philippines

Prizes (P10,000), Philippines

Winnings (P90,000), Philippines

Winnings (P10,000), Philippines

Royalty – all kinds

Interest from Philippines depository bank under EFCDS

Interest income from long term deposit, Philippines

Dividend from domestic corporation

Dividend from foreign corporation

Required: Based on the above data identify the final tax rate on passive income assuming the taxpayer is:

1. Domestic corporation 2. Resident foreign corporation

3. Non-resident foreign corporation b. (Domestic Corporation) ABC Corporation was created in accordance with Philippine Laws. During the calendar

year 20X1, it has the following data on income and expenses:

Philippines USA

Gross income (Gross sales, P15,000,000- Phils) (Gross sales P8,000,000 – USA)

P10,000,000 P5,000,000

Business expenses 2,000,000 1,500,000

Interest income from bank deposit 300,000 100,000


Interest income from domestic depository bank under EFCDS 120,000

Prizes 200,000

Rent income from equipment, gross of applicable withholding tax 1,000,000

Payment, first three (3) quarters 500,000

Required: 1. How much is the Philippine income tax payable?

2. How much is the total final withholding tax? 3. How much is the Philippine income tax payable using OSD? 4. Assuming the above corporation is a foreign corporation engaged in trade or business in the

Philippines, how much is the Philippine income tax payable? 5. Disregard certain information which are not applicable and assuming the corporation is not engaged in business

in the Philippines, how much is the final withholding taxes in the Philippines?

c. (Final Tax and Capital Gain Tax) A Corporation has the following income:

Interest income derived from depository bank under Expanded Foreign Currency Deposit System (EFCDS) P100,000

Capital gain from sale of shares of stock not traded in the local stock exchange 200,000


Dividend from a foreign corporation 400,000

Stock dividend 100,000

Required: (Assuming with tax sparing, if applicable) 1. How much is the final tax on the passive income and the capital gain tax, assuming the corporation is a

domestic corporation? 2. How much is the final tax on the passive income and the capital gain tax, assuming the corporation is a

resident foreign corporation? 3. How much is the final tax on the passive income and the capital gain tax, assuming the corporation is a non-

resident foreign corporation?

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U. Corporate Returns

1. Filing of quarterly and final or adjustment return Every corporation subject to tax shall render, in duplicate a true and accurate quarterly return and final or

adjustment return 2. Non-resident foreign corporations

Corporation not engaged in trade or business in the Philippines (NRFC) shall not be required to file income tax return

3. Who shall file the corporate return a. President b. Vice President c. Other Principal Officers

Note: The return shall be sworn to by above officer and by the Treasurer or Assistant Treasurer

4. Corporate declarations and returns Declaration of quarterly corporate income tax a. On a cumulative basis b. Required :

1) Manually

2) Electronic Filing and Payment System (EFPS)

3) Electronic BIR forms

SEC. 52. Corporation Returns. – (A) Requirements. – Every corporation subject to the tax herein imposed, except foreign corporations not engaged in

trade or business in the Philippines, shall render, in duplicate, a true and accurate quarterly income tax return and final or

adjustment return in accordance with the provisions of Chapter XII of this Title. The income tax return shall consist of a

maximum of four (4) pages in paper form or electronic form, be filed by the president, vice- president or other principal

officer, shall be sworn to by such officer and by the treasurer or assistant treasurer, and shall only contain the following

information:

“(1) Corporate profile and information;

“(2) Gross sales, receipts or income from services rendered, or conduct of trade or business, except income subject to

final tax as provided under this Code;

“(3) Allowable deductions under this Code;

“(4) Taxable income as defined in Section 31 of this Code; and

“(5) Income tax due and payable.

“Provided, That the foregoing provisions shall not affect the implementation of Republic Act No. 10708 or TIMTA. 5. Manual Filing

Every corporation subject to tax shall render, in duplicate a true and accurate quarterly return and final or adjustment except corporations not engaged in trade or business in the Philippines (NRFC).

Manual Filing of Quarterly Income Tax Return

Quarterly return 60 days after end of the quarter

Final Adjusted (annual) return

15th day of the fourth month of following (i.e. April 15 applying calendar year)

• Not later than 60 days from the close of each of the first three quarters of the taxable year, whether calendar

or fiscal year.

Note : The tax so computed shall be decreased by the amount of tax previously paid or assessed during the

preceding quarters.

Final adjustment return a. Covers the total taxable income for the preceding calendar or fiscal year b. Filed on or before

1) In case corporation uses calendar year - 15th day of April 2) In case corporation uses fiscal year - on or before the 15th day of the 4th month following the

close of the fiscal year

Sum of quarterly payment not equal to the total tax due for the year If the sum of the quarterly tax payments made during the taxable year is not equal to the total tax due on the

entire taxable income of that year, the corporation shall either: a. pay the balance of tax still due

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b. carry over the excess credit or be credited or refunded with the excess amount paid

Corporation is entitled to tax refund or credit

a. In case the corporation is entitled to tax refund or credit of the excess estimated quarterly income taxes paid, the excess amount shown on its final adjustment return may be carried over and credited against the estimated quarterly income tax liabilities for the taxable quarters of the succeeding taxable years

b. Once the option to carry-over has been made, such option shall be considered irrevocable for that taxable

period

Time of payment of the income tax

The income tax due shall be paid at the time the declaration or return is filed Place of filing of return

a. The quarterly income tax declaration and the final adjustment shall be filed with: 1) Authorized agents banks

2) Revenue District office 3) Collection Agent 4) Duly authorized Treasurer of the city or municipality having jurisdiction over the location of the principal

office of the corporation filing the return of placed where the main books of accounts and other data from which the return is prepared are kept

6. Electronic Filing and Payment System

EFPS Authorized Agent Banks refer to a BIR authorized agent bank (AAB) that has passed the accreditation

criteria for EFPS AAB such as being an internet-ready bank, indorsed by Bureau of Treasury for EFPS

accreditation, certified by the Information Systems Group of the BIR that the applicant bank’s system is

acceptable and compatible with the EFPS of the BIR.

Large Taxpayers who will e-pay shall enroll with any EFPS AAB authorized to serve them and who are capable

to accept e-payments. E-payments shall be made within the day the return was electronically filed following

the “pay as you file system”. Unless otherwise notified by the Commissioner of Internal Revenue, for all

returns that will be filed starting August 1, 2002, e-payment of the taxes due thereon thru EFPS shall become

mandatory (RR 9-2002).

For Non-Large Taxpayers who intend to e-pay, electronic payment shall be made through the internet banking

facilities of any AAB. The volunteering two hundred (200) or more Non-Large Taxpayers previously identified

by the BIR to have availed of the option to file their return under EFPS shall nevertheless continue to file their

returns under such method. (RR No. 10-2007). However, upon receipt of a notification letter duly signed by

the Commissioner of Internal Revenue, it becomes mandatory for them, including their branches located in the

computerized revenue district offices, to file their returns and pay their taxes thru EFPS. (RR No. 10-2007).

The filing of the return ahead of the payment of the tax due thereon is still in accordance with “pay as you file”

as long as the payment of the tax is made on or before the due date of the applicable tax.

Non-large taxpayers shall have the option to file a consolidated return in the head office following the

procedure in RR No. 1-98 or to file returns on a per branch or facility basis. Provided, however, that they shall

update their registration with the affected or concerned revenue district officers by filing BIR Registration

Update Form (BIR FORM 1905) before they change their manner of filing returns.

• RR 9-2001 defines EFPS as the system developed and maintained by the BIR for electronically filing tax returns, including attachments, if any, and paying taxes due thereon, specifically through the internet. • Upon filing, a Filing Reference Number is issued by EFPS as a control number to acknowledge that a tax return, including attachments, has been successfully filed electronically. This shall serve as evidence of filing

and the date of filing of the return. • Upon payment of the tax due to an authorized agent bank (AAB) under EFPS, the AAB shall issue Acknowledgement Number as a control number to the BIR to confirm that tax payment has been credited to the account of the government or recognized as revenue (internal revenue tax collection) by the Bureau of Treasury. • Likewise, a Confirmation Number shall be issued by the AAB as a control number to the taxpayer and BIR to acknowledge that the taxpayer’s account has been successfully debited electronically in payment of his tax

liability. This shall serve as evidence of the fact of payment of the taxpayer’s liability to the extent of the amount reflected in the confirmation number and the date of payment by the taxpayer.

Filing of Returns under EFPS • For purposes of filing returns under the EFPS, the taxpayers classified under the following business industries shall be required to file monthly withholding tax returns, except withholding of VAT; monthly VAT

declarations; and monthly percentage tax returns on or before the dates prescribed and presented below:

Group Monthly Withholding Tax Returns Monthly VAT declarations and Monthly

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except Withholding of VAT Percentage Tax Return

Group A 15 days following the end of the month 25 days following end of the month

Group B 14 days following the end of the month 24 days following end of the month

Group C 13 days following the end of the month 23 days following end of the month

Group D 12 days following the end of the month 22 days following end of the month

Group E 11 days following the end of the month 21 days following end of the month

Persons Required to File and Pay under EFPS Those mandated are the following:

• Taxpayer Account Management Program (TAMP) Taxpayers (RR No. 10-2014)

• Accredited Importer and Prospective Importer required to secure the BIR-ICC & BIR-BCC (RR No. 10-2014)

• National Government Agencies (NGAs) (RR No. 1-2013)

• All Licensed Local Contractors (RR No. 10-2012)

• Enterprises Enjoying Fiscal Incentives (PEZA, BOI, Various Zone Authorities, Etc.) (RR No. 1-2010)

• Top 5,000 Individual Taxpayers (RR No. 6-2009)

• Corporations with Paid-Up Capital Stock of P10 Million and above (RR No. 10-2007)

• Corporations with Complete Computerized Accounting System (CAS) (RR No. 10-2007)

• Procuring Government Agencies with respect to Withholding of VAT and Percentage Taxes (RR No. 3-2005)

• Government Bidders (RR No. 3-2005)

• Insurance companies and Stock brokers (RMC No. 71-2004)

• Top 20,000 Private Corporation (RR No 2-98 as amended)

• Large Taxpayers (RR No. 2-2002, as amended, as amended under RR 17-2010)

Large taxpayers (RR No. 2-2002, as amended under RR 17-2010):

1. As to tax payments

Percentage tax P200,000 per quarter

VAT P200,000 per quarter

Excise Tax P1,000,000 per year

Income tax P1,000,000 per year

Documentary stamp tax P1,000,000 per year

Withholding taxes (all types) P1,000,000 per year

2. As to financial condition

Gross sales/receipts P1,000,000,000 per year

Net worth P300,000,000 at the close of each calendar or fiscal year

Gross purchases P800,000,000

Per S.E.C lists Top corporations as listed and published by the Securities and Exchange Commission

Non-Large Taxpayers • Volunteering 200 or more Non-Large Taxpayers • Top 20,000 private corporations (starting April, 2009)

Other Taxpayers: • Corporation with paid-up capital of P10,000,000 and above

• Corporation with complete computerized system • Taxpayers joining public bidding pursuant to E.O. No. 398 as implemented by RR 3-2005. Enterprises enjoying fiscal incentives granted by other government agencies such as those registered with: • PEZA (Philippine Economic Zone Authority) • BOI (Board of Investments)

• Various zone authorities • Cagayan Special Economic Zone Authority • Export Development Council • Tourism Infrastructure and Enterprise Zone Authority; and • PHIVIDEC Industrial Authority

Failure to comply with the provisions on e-filing and e-payment shall be penalized under Section 275 of the Tax Code. However, only the first and second offenses may be compromised. For the third and subsequent offenses, no compromise shall be entertained or allowed.

7. Use of Electronic BIR Forms

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The eBIR Forms is an application covering thirty-six (36) BIR Forms Comprised of the following:

a. Income tax returns

b. VAT forms

c. Excise tax forms

d. Withholding tax forms

e. Donor’s tax forms

f. Estate tax forms

g. Documentary stamp tax forms

h. ONNET forms

i. Other forms as provided under RR 6-2014

Advantages of the use of eBIR Forms (RMO 24-2013)

a. Validate automatically the registration information indicated on the tax returns submitted by the

taxpayers in the Integrated Tax System (ITS) database of the BIR.

b. Prompt concerned revenue officials or employees on any discrepancies between registration submitted by

the taxpayer and its ITS database

c. Encourage concerned taxpayers to update their registration information with the BIR upon validation of

tax returns submitted.

• The eBIRForms, as provided in RR 6-2014 and RMC 61-2012, was developed to provide taxpayers particularly the non-EFPS filers with accessible and convenient service through easy preparation of tax returns. The use of eBIRForms will improve the BIR’s tax return data capture and storage thereby enhancing efficiency and accuracy in the filing of tax returns.

• eBIR Forms refers to the two (2) types of electronic services provided by the BIR relative to the

preparation, generation and submission of tax returns, which are the 1. eBIR Forms System for Online Filing 2. eBIR Forms Package to fill-up forms offline. • The eBIR Forms Package can be downloaded through the BIR website or a copy of the software package

may be requested from the taxpayer’s registered RDO particularly in the designated BIR e-Lounge.

eBIRForms Software Package (also known as Offline eBIRForms Package) — is a tax preparation

software that allows the taxpayer and Accredited Tax Agent (ATA) to accomplish or fill up tax forms offline. It

is an alternative mode of preparing tax returns which deviates from the conventional manual process of

filling-up tax returns on pre-printed forms that is highly susceptible to human error. Taxpayers/ATAs can

directly encode data, validate, edit, save, delete, view and print the tax returns. The form package has

automatic computations and has the capability to validate information inputted by the taxpayers/ATAs.

Online eBIRForms System — is a filing infrastructure that accepts tax returns submitted online and

automatically computes penalties for tax returns submitted beyond due date. The System creates secured

user accounts thru enrollment for use of the online System, and allows ATAs to file on behalf of their clients.

The System also has a facility for Tax Software Providers (TSPs) to test and certify the data generated by

their tax preparation software (certification is by form). It is capable of accepting returns data filed using

certified TSP's tax preparation software.

Mandatory eBIR Forms and Mandatory e-FIling Only those non-EFPS filers are covered RR 6-2014, particularly the following :

• ACCREDITED TAX AGENTS/ PRACTITIONERS & all its client-taxpayers who authorized them to file in

their behalf

• ACCREDITED PRINTERS of Principal and Supplementary Receipts/Invoices

• One-Time Transaction (ONETT) taxpayers

• Those engaged in business, or those with mix income (both compensation and business income) who

shall file a “NO PAYMENT” Return (exception under RMC No. 12-2015)

• Government-Owned or Controlled Corporations (GOCCs)

• Local Government Units (LGUs), except barangays

• Cooperatives, registered with National Electrification Administration (NEA) and Local Water Utilities Administrations (LWUA)

Taxpayers who are not covered by the regulation may opt to file their returns using the manual

filing or eBIR forms

Those exempted and may file manually Under Sec. 4(3) of RR 6-2014 and RR 5-2015 mandating the use of eBIRForms and electronically filing “No

Payment Returns”, the following can file manually their “No Payment Returns”:

• Senior Citizen (SC) or Persons with Disabilities (PWDs) filing for their own return

• Employees deriving purely compensation income whether from one or more employers, whether or not

they have any tax due that need to be paid

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• Employees qualified for substituted filing under RR 2-98 Sec. 2.83.4, as amended, but opted to file for an

Income Tax Return (ITR) and are filing for purposes of promotion (PNP/AFP), loans, scholarship, foreign travel requirements, etc.

Other Terms:

• Accredited Printers are duly constituted agents of the BIR in the printing of principal and supplementary receipts/invoices and included in the List of Accredited Printers of Principal and

Supplementary Receipts/Invoices published in the BIR website. • Accredited Tax Agents (ATAs) are known as accredited tax practitioners, who are engaged in tax

practice included in the List of Accredited Tax Practitioner as published in the BIR website. The designation of ATA by the taxpayer may at any time be cancelled or revoked upon execution of “removal of tax agent” within the online eBIR Forms System and aforementioned action shall be completed upon submission of a duly notarized notice of termination to the taxpayer’s registered RDO.

• Offline – is a technical term generally used when the user’s workstation is not connected to the internet.

• Online - is the most common technical term used wherein the user connects his workstation to the internet to access various information through the worldwide web.

• No Payment Returns – refers to the tax return that is not accompanied by any payment where the same is filed with any authorized BIR receiving office (e.g. breakeven, no transaction, refundable or second installment tax return).

Exercise:

a. (MCIT and Quarterly Corporate Income Tax)ABC Corporation under fiscal year starting July 1, 20X5 and

ending June 30,20X6 computed normal income tax and MCIT, and creditable income taxes withheld from first

quarter to fourth quarter including excess MCIT and excess withholding taxes from prior year’s are as follows:

First Q Second Q Third Q Fourth Q

Normal income tax P100,000 P120,000 P250,000 P200,000

Minimum corporate income tax

80,000 250,000 100,000 100,000

Taxes withheld 20,000 30,000 40,000 35,000

Additional information: Excess MCIT, prior year, P30,000; Excess withholding tax prior year, P10,000; Date of

registration with BIR July 1,20X0. Required: 1. Compute the income tax payable for the first three (3) quarters and the year end and the due dates. 2. What is the BIR Form Return to be filed? 3. When is the last day for the filing of income tax return?

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V. Improperly Accumulated Earning Tax (For Closely Held Corporations)

1. Improperly Accumulated Earning Tax

a. Objective: To force corporations to distribute dividends to shareholders in order that related tax in

dividends will be collected.

b. 10% of improperly accumulated taxable income (In addition to other taxes imposed, there is imposed

for each year on the improperly accumulated taxable income of each corporation an improperly accumulated earning tax equal to 10% of the improperly accumulated taxable) c. Only Domestic Corporations not public listed are covered by the IAET.

2. The Improperly Accumulated Earning Tax shall not apply to:

a. Publicly held corporation b. Banks and other non-bank financial intermediaries c. Insurance Companies d. Taxable partnership e. General professional partnership f. Non-taxable joint ventures g. Enterprise registered with PEZA and under Bases Conversion and Development Act (BCDA) and special

economic zones

3. Prima facie evidence to avoid the tax upon the shareholders The fact that any corporation is a mere holding company or investment company shall be prima facie evidence of a purpose to a avoid the tax upon its shareholders or members.

4. Holding company or Investment company A corporation having practically no activities except holding property, and collecting the income therefrom or investing the same.

5. Closely-held corporations

The ownership of a corporation for the purpose of determining whether it is a closely held corporation or a publicly held corporation is ultimately traced to the individual shareholders of the parent company. Where at

least 50% of the outstanding capital stock or at least 50% of the total combined voting power of all classes of stock entitled to vote is owned directly or indirectly by or for not more than 20 or more individuals, the corporation is a publicly held corporation. Domestic corporation not falling under the aforementioned definition are, therefore, closely-held corporations (BIR Ruling 25-02).

6. Rules in determining whether or not a corporation is a closely held corporation:

• Stock not owned by individuals: Stock owned directly or indirectly by or for a corporation,

partnership, estate or trust shall be considered as being owned proportionately by its shareholders, partners or beneficiaries.

• Family and Partnership ownership: An individual shall be considered as owning the stock owned, directly or indirectly, by or for his family, or by or for his partner. “ Family of an individual” includes his brothers or sisters (whether by whole or half-blood), spouse, ancestors and lineal descendants.

• Option to acquire stocks: If any person has an option to acquire stock, such stock shall be considered

as owned by such person.

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7. Circumstances indicating improper accumulation of profits

• Substantial changes to corporate officers who are shareholders at the same time/Personal loans.

• Radical changes in the nature of business after a considerable surplus has been accumulated. • Investment is unrelated business or activity. • Substantial expenditures of corporations for the personal benefit of stockholders only.

8. Earning or profits of a corporation are permitted to accumulate beyond the reasonable needs

The fact that the earning or profits of a corporation are permitted to accumulate beyond the reasonable needs

of a business shall be determinative of the purpose to avoid the tax upon its shareholders or members, unless the corporation, by clear preponderance of evidence, shall prove to the contrary.

9. Law would not prohibit an Accumulated Earning

a. Additional working capital b. Expansion, Improvement and Repairs c. Debt Retirement

d. Acquisition of business e. Anticipated losses (Business Reverses)

10. Reasonable need of the business

Immediacy Test - under this test of determining justified accumulation, "Reasonable needs of the business"

means the immediate needs of the business. If the corporation does not prove an immediate need for the

accumulation of the earnings and profits, then the accumulation is not for the reasonable needs of the business

and the penalty tax would apply.

Reasonable needs of the business include the reasonably anticipated needs of the business. (immediacy

test)

(RMC 35-2011) The amount that may be retained, taking into consideration the accumulated earnings within

the “reasonable needs of the business” shall be 100% of the paid-up capital or the amount contributed to the corporation representing the par value of the shares of stock, hence, any excess capital over and above the par shall be excluded and therefore must be part of the income declared as dividends. (Additional paid in capital is now removed from the equation). Any excess capital over and above the par shall be excluded which is in contrast with the principle of “immediacy test”

Section 3 of RR No. 2-2001 provides that the following shall constitute accumulation of earnings of “reasonable needs” of the business:

- Reasonable needs of the business is determined by the “immediacy test” (immediate needs of the business, including reasonably anticipated needs - There should be PROOF of immediacy or direct correlation of anticipated needs a) (Up to 100% of the paid up capital of the corporation for reserve purposes) Allowance for the

increase in the accumulation of earnings up to 100% of the paid-up capital of the corporation as of balance sheet date, inclusive of accumulations taken from other years, under RMC 35-2011 paid up capital shall refer to the par value of the shares.

b) (For definite corporate expansion projects as approved by the BOD) Earnings reserved for the

definite corporate expansion project or programs requiring considerable capital expenditure as approved by the board of directors or equivalent body.

c) (For building, plants or equipment acquisition as approved by the BOD) Earnings reserved for building, plants or equipment acquisition as approved by the board of directors or equivalent body.

d) (For compliance with any loan covenant or pre-existing obligation established under a legitimate business agreement) Earnings reserved for compliance with any loan covenant or pre-existing obligation established under a legitimate business agreement.

e) (Required by law or applicable regulations to be retained by the corporation or in respect of which there is legal prohibition against its distribution) Earnings required by law or applicable regulations to be retained by the corporation or in respect of which there is legal prohibition against its distribution.

f) (SUBSIDIARIES OF FC: investments in the Philippines as proven by corporate records) In the case of subsidiaries of foreign corporations in the Philippines, all undistributed earnings intended or reserved for the investments within the Philippines as can be proven by corporate records and/or relevant documentary evidence.

17. CORPORATION

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11. Profits subjected to IAET no longer subject to same tax in later years Once the profits have been subjected to IAET, the same shall no longer be subject to IAET in later years even if not declared as dividends. (Not cumulative but yearly)

12. Profits subjected to IAET still subject to tax on dividends

The imposition of the IAET, profits which have been subjected to IAET, when finally declared as dividends, shall nevertheless be subject to tax on dividends under the Tax Code, except in those circumstances where the recipient in not subject thereto.

13. Declaration of dividend to avoid IAET The dividend must be declared and paid or issued not later than one (1) year following the close of the taxable year

14. Tax Form

BIR Form 1704

15. Payment of IAET Improperly accumulated earnings tax shall be paid within 15days after one year following the close of the taxable year if dividends are not declared and paid or issued

16. Computation for Improperly Accumulated Earning Tax:

Taxable income Pxxx

Less: Corporate income tax due (xxx)

Add: Net operating loss carry- over Pxxx

Earnings from regular income , net of tax Pxxx

Passive income, net of final tax xxx

Capital gains, net of capital gain tax xxx

Exempt or excluded income xxx

Total earnings Pxxx

Less: Dividends declared (xxx)

Add: Retained earnings from prior years xxx

Less: Amount that may be retained

(100% of paid up capital as of year end) (xxx)

Improperly accumulated earnings xxx

Multiply by IAET rate 10%

Improperly accumulated earnings tax xxx

Exercise:

a. (Adapted) The record of a closely held corporation, registered with BIR in 2009, reveals the following:

2015: Gross income P3,000,000

Less: Expenses 3,800,000

Net operating loss (P800,000)

Accumulated retained earnings, end of 20X7 P6,000,000

2016: Gross income P5,000,000

Expenses 3,000,000

Rent income, net of 5% withholding tax 475,000

Interest on money market placement, net of 20% withholding tax 80,000

Capital gain on shares of stock, net of capital gain tax 230,000

Inter-corporate dividends received 500,000

Dividends paid by the corporation 1,500,000

It had a capital stock of P5,000,000 and share premium of P700,000 as of December 31, 2016. Upon examination of the 2016 return, the BIR concludes that there is an improper accumulation of profit. The corporation fails to show

proof to prove the contrary. Required: 1. How much is the tax payable of the corporation per return in the year 2016? 2. How much is the tax on the improper accumulated income in 2016?

far eastern university – manila income tax (corporation

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