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TAX FINALS NOTE: Joint ventures not for construction projects are always RM 404 taxable as a corporation.

Legend: Blue - syllabus Black - transcript Green - RM 403, 10-02-12

SY 2012-2013

But of course, if the joint venture is already taxable as a corporation because it is not for construction projects, that income that is taxable to the joint venture will no longer form part to the separate income of the two corporations. c. Joint consortium for the purpose of engaging in petroleum, geothermal and other energy operations pursuant to a

CORPORATE INCOME TAXATION consortium agreement with the government And the joint consortium for the petroleum, coal, and other

A.

B.

General Principles, Section 23 1. A domestic corporation is taxable on all income derived from sources within and without the Philippines Domestic corp taxable on sources of income within and without 2. A foreign corporation whether engaged or not in trade or business in the Philippines, is taxable only on income derived from sources within the Philippines Foreign corp whether doing business in the Philippines or not taxable on sources of income within Definition of Terms 1. Corporation - includes partnership no matter how created or organized, joint account companies, insurance companies and other associations, except: a. General professional partnership A partnership to exercise a common profession. So when you form a partnership to practice law, you cannot invite other professionals such as engineers or doctors to join your partnership. If you do so, it will not be called a general professional partnership and therefore, it will be taxable as a partnership already. Although general professional partnerships are exempt from corporate taxation, they are required to file an income tax return and have their financial statements certified by an independent auditor for the purpose of monitoring whether the individual partners of such partnership are declaring their income properly. The income of the partnership will be the expected income of the

2.

3.

4.

energy operations, it has strictly to be a contract with the government otherwise if it is a private undertaking, then both parties under the joint consortium is taxable as a corporation. Partnership - an association of 2 or more persons where they may contribute money, property or industry to a common fund with the intention of dividing the profits among themselves. Tests that will determine whether a partnership exists or not: a. There must be a contribution to a common fund b. There must be an intention to divide the profits among themselves There are 2 types of partnership 1) taxable 2) non-taxable If 2 or more person creates a partnership without registering or the non-compliance of the requirement will not benefit any association or partnership they are subjected to the 30% corporate taxation Professional partnership - partnerships formed by persons for the sole purpose of exercising their common profession, no part of the income of which is derived from engaging in any trade or business. Co-ownership - one formed and organized not for profit but for the common enjoyment of the property or for the preservation of the property. Lease of properties under common management Where there is a series of transaction whose purpose is not limited to the conservation of the common fund or even acquired

individual partners. So if there is a declaration of P100M income properties, a taxable partnership is formed. The character of

and there are two partners, then each partner have to declare the P50M as part of their gross income subject to the 5-32% tax rate. b. Joint venture for the purpose of undertaking construction projects Does it have to be with the government?

habituality peculiar to business transactions engaged in for the purpose of gain is present. (Evangelista vs. Collector, 102 Phil 140) GR: not taxable if the co-onwed property is for the common enjoyment. XPN: if the property co-ownership so long as it is not to generate

No. Joint ventures undertaking construction projects may be profit. with any private persons, juridical or natural Donor giving as a gift an undivided property to several donees without When there is a joint venture between two corporations to the latter diving the property undertake a construction project, will the income from the Deceased that would give an estate to several heirs activities of that joint venture be taxable at all? Note: NCC provision that co-ownership only last for 10/20 yrs. It would depend on how they would divide the income from 5. Joint Venture - created when 2 corporations, while registered and the joint venture and any income that is received by each operating separately, are place under 1 sole management which party will be taxable to that party alone or separately. operated the business affairs of said companies as though they

When there are two corporations who wish to develop the entire south reclamation project or the entire mountain of this area or any development subdivisions, and they decide to distribute the income 50-50, then that 50 will be taxable to one joint venturer and the other 50 to the other joint venturer.

6.

constituted a single entity thereby obtaining substantial economy and profits in the operation. Joint Account - created when 2 persons form or create a common fund and such persons engage in a business for profit. This may result in a taxable unregistered association or partnership.

TAX FINALS - JEN, JASPER, REUVILLE, JADE, JARED, JAN, NEIL, RYAN, RIZA, PATRICIO, ANTHONY, KIM, KZ, SARAH, LOR, ANGGE | 1

7.

Joint Stock Companies - the midway between a corporation and a partnership, a "hybrid personality", somewhat a corporation because this is managed by a Board of Directors and such persons may transfer their share/s without the consent of others, and somewhat a partnership because it is an association, and persons

D.

will be made over a period of time, it cannot be considered as having regularly engaged in trade or business in the Philippines.

Domestic Corporations 1. Rule on taxability of income

or members of the same contribute fund, money to a common fund. a. General Rule: 30% regular corporate income tax on net

C.

Corporate Taxpayers 1. Domestic Corporations A corporation formed or organized under Philippine laws. Situation: If a corporation composed of all American stockholder and registered as a corporation in the Philippines it is considered as a DC, but not a Philippine corporation (a because is not composed of all

income from sources within and sources without GR: Taxable at 30% on their NET income coming from sources within and without. NET income, because they are allowed certain deductions. Domestic Corporations have the option to be taxed at 15% on their GROSS income. Lower rate, but no deductions allowed. Formula:

Filipino). Gross sales-return of capital= gross income If ABC Corporation is owned 100% by an American Citizen, registered Gross income- itemized expenses or optional standard or organized in the Philippines, it is considered a Domestic Corporation deduction= net income and is taxable for income within and without. Gross Sales ABC Corporation, however, cannot be considered a Philippine Less: Cost on Return of Capital Corporation. 15% Gross Income Domestic Corporation: Organized under Philippine Laws, without Less: Itemized Expenses/OSD regard to the owners 30% Net Income -0-

Philippine Corporation: 60% (or more) owned by Filipino Citizens (Grandfather rule), without regard to where it is organized. General Rule: GOCCs will be treated as a Domestic Corporation and will be taxed as such. 2. Resident Foreign Corporations A corporation formed, organized, authorized or existing under the laws of any foreign country, and engaged in trade or business within the Philippines. "Engaged in trade or business" implies continuity of commercial transactions or dealings - continuity of business or continuity of

So the general rule is that corporations are going to be taxed based on their net income. If the corporation is reporting 0 income, naturally, that corporation will not opt to be taxed 15 per cent income tax on gross (optional Gross Income Tax). Why would you volunteer paying 15 per cent on your gross income? But the tax code provides an alternative rate and it is not an option. Even if the corporation reports 0 income or its regular 30% income tax is lower than that amount then the alternative tax will have to be paid and that alternative rate is called Minimum Corporate Income Tax (MCIT).

intention to conduct continuous business.

Exception:

Corporation organized in any foreign country but is engaged in trade or business in the Philippines. Engaged in trade or business means continuity of commercial dealings and transactions for the purpose of engaging in a profitable activity. Examples: When it has a permanent physical establishment in the Philippines, or when it appoints an agent domiciled in the Philippines, or even when the agent is not domiciled in the Philippines but has stayed in the country for more than 180 days or more. (Can now be considered as engaged in trade or business in the Philippines) The only requirement for residency (as a strict rule), is registration

i.

2% minimum corporate income tax (MCIT) Revenue Regulations No. 09-98, as amended by 12-07 MCIT= 2% x gross income as of the end of the taxable year What are the conditions for corporate income tax to apply? 1. Whenever corporation incurs a net loss or negative taxable income 2. Whenever the amount of 2% minimum corporate income tax is greater than the 30% normal income tax due from such corporation

and licensing with the SEC. It can either be considered as a Foreign Corporation - Philippine Branch, or it can be a Regional Area Headquarters (RAHQ) of a multination Corporation. It does not mean, however, that those unregistered Foreign Corporations will be free from taxation. 3. Non-Resident Foreign Corporations

15%

30%

Gross Sales Less: Cost on Return of Capital Gross Income Less: Itemized Expenses/OSD Net Income

2% MCIT

30% NCIT

1. Net Loss 2. 30% NCIT < 2% MCIT

A corporation formed, organized, authorized or existing under the Will the MCIT apply to corporations who are exempt as yet laws of any foreign country. because they are granted tax holidays? Will proprietary A Corporation organized under the laws of any foreign corporation, not educational institutions with a tax rate of 10 percent be habitually engaged in trade or business in the Philippines but may included in the MCIT? enter into isolated transactions. With regards to corporations granted tax holidays, Example: Extending a loan payable in monthly intervals for 2 years. because they are not subject to the normal income tax of The loan was a single isolated transaction, and even though payments 30%, then there will be no 2% MCIT to speak of. So this


boils down to the conclusion that corporations who are not subject to the 30% normal income tax shall not be liable to the 2%MCIT.

operations) The year when the corporation was registered was 2011, the 4th taxable year following the year of operations would be

Now about the school. 2015. So this is when MCIT will be compared as against the The school has gross income from educational activities of 30% NCIT to see if whether or not the corporation would be 50M. Its gross income from non-educational activities is 60M taxed with MCIT or NCIT. for a total of 110M. It is subject to what rate? (1) Imposition of MCIT It will be subject to the NCIT of 30% because the gross (a) Gross income, defined income from non-educational activities is more than MCIT is 2% based on the gross income, what do you 50%. So as we said, proprietary educational institutions mean by gross income? are subject to 10% tax so long as income from non- Gross sales less cost of goods sold or the return of educational activities does not exceed more than 50% of capital further reduced by the discounts given, the its total gross income. In this case, since it is already returns made by your customers or the allowances taxed NCIT, then it will now be subject to the 2%MCIT. that you have provided, and that would be the basis of your MCIT of 2%. GI GI What about the income that have already been subjected Educ Non-Educ to final withholding tax? Should it form part of your gross 50M +60M =110M *Subj. to 30%, GI - Non income?

Educ exceeds 50% of GI Would all corporations incorporated in 2012 be subject to the

No, because final withholding tax has already been subjected to tax with finality and does not form part of the gross income subject to the 5-32% tax.

2%MCIT?

(b) Cost of goods sold, defined

When: beginning on the 4th taxable year immediately

What do cost of goods sold means?

following the taxable year in which such corporation commenced its business operations. CY

Business expenses directly incurred to produce the merchandise if you are engaged in the manufacturing and all other expenses that are

Sept. 15, 2012

1234

2012 2013 2014 2015 2016 2017

No MCIT No MCIT No MCIT MCIT

incurred to bring the merchandise to the selling location which includes the freight cost, insurance and other packaging cost. (c) Cost of goods manufactured and sold, defined (d) Cost of services, defined And cost of services would be?

In his first year registration is 2012, beginning the year following its registration so we count the 4 years starting from 2013 as the law says MCIT shall be imposed beginning the 4th taxable year immediately following the year when the

Would include the services of employees but not all employees, only employees directly rendering the service such as if it is a banking institution, the salaries of the tellers, guards.

corporation commenced its business operation. How about interest expense? MCIT vs. NCIT (normal corporate income tax) It is our interest income as deposited, it is a

First 4 years, no MCIT. So even if the corporation would be reporting for losses during the first 4 years the 30% NCIT tax will apply even if the 30% tax is lower than the 2% MCIT.

direct cost from the bank, and also includes the cost of facilities that are directly used in providing service. (2) Carry forward of excess MCIT

Is date of BIR registration the same as starting commercial operation?

Any excess of the MCIT over the regular tax shall be carried forward and credited against the regular tax for

When the law provides that it is beginning the 4th taxable

the 3 immediately succeeding taxable years

year immediately following the year when such coverage commences business operations in order to make it easier the BIR considers the reckoning point as the year when it has registered with the BIR, it is not the actual year of commercial operations.

Sale Less: Cost Gross income Less: Expenses Net income NCIT (30% of Net income)

5th year 10M 5M 5M 4.8M 200K 60K

6th year 10M 5M 5M 4.7M 300K 90K

7th year 10M 5M 5M 4.8M 200K 60K

8th year 10M 5M 5M 4.6M 400K 120K

SEC Nov. 15, 2011 MCIT (2% of Gross income) 100K 100K 100K 100K BIR Dec. 1, 2011 Pay to the government 100K 100K 100K 120K SCO Jan. 2, 2012 ACTUAL payment to gov't 100K 100K 100K 30K (Start of commercial Excess MCIT (MCIT - NCIT) 40K 10K 40K 0


Carry forward to Next Year 40K 50K 90K 0You had good operations. Instead of an expense of 4.8M, you only have 4.6M in expenses. 400,000 in Your actual tax liability is only 30% (referring to the net income. NCIT). The MCIT is there to help the government in its NCIT is 120,000; as against 100,000 MCIT. tax collection. The reason why MCIT has been imposed The higher amount is the NCIT. So you pay the beginning 1998 is to get those companies who are always NCIT. reporting at a loss or a very low income to pay taxes. Actual payment to the government? 30,000. Instead In the case of year 5, the lower tax of 60,000 is your true of paying 120,000 NCIT, you are only required to tax liability. But because MCIT as compared is higher, pay 30,000. The 120,000 less the 90,000 from the then you have to pay the higher tax. excesses for the last 3 years. What happens to the difference between the MCIT and Do you still have any excess during the year? Do the NCIT? you still carry any excess MCIT to the succeeding Any payment that is in excess of your normal income year? No more. Because you fully consumed the tax of 30% is considered as an advance tax payment 90,000. to the government. In effect: It will be treated as an asset of the corporation and Your total payment for the 4 years is 330,000 offset-able in the future. (100+100+100+30). It can be carried over for the next 3 succeeding Your NCIT liability is a total of 60+90+60+120 = consecutive years after the year you paid MCIT in 330,000. This is your tax liability, but you paid it excess of NCIT. differently. It can be credited and offset against the NCIT. You paid for the first 3 years in advance because the It cannot be offset against a Minimum Income Tax MCIT was higher, but eventually it catches up during Corporate liability (MCIT) the year when crediting is still allowed. It's simply Year 5: an advance tax payment. Pay the government = 100,000. (MCIT; it being BUT if something is forfeited, f its 4.8M of net taxable higher than the NCIT) income of year 8. Still MCIT is higher then you have to Excess/advance payment = MCIT - NCIT= 100,000 pay the MCIT. How much can be recovered in year 9? - 60,000 = 40,000. (difference between MCIT and You cannot anymore carry forward the 40k in year 5 to NCIT) year 9 then you can only carry forward the 10k of year 6 Carry forward the excess = 40,000 and the 40k of year 7 and the 10k if year 8. Which is the Carry forward the 40,000 to the next 3 years which total of 60k. If in year 9 your net income is 400k that will is year 6, 7, and 8. normally form a tax liability of 120k which is higher than Year 6: the MCIT for that year which is 100k. How much will you Pay the government = 100,000 (MCIT) pay in year 9? 120k - (the carry forward)60k.Then there Excess during the year = 10,000 is no more carry forward because of the deduction and Carry forward to the next year = 50,000. Derived because there is no excess. from 40,000 from last year + 10,000 from this year. It would appear that your total payment for the 5 years is 50,000 offset-able against any normal income tax 460k while your liability is 400k. You should have only liability in year 7. paid 420k if MCIT was not provided by law. The Reason why you are not able to offset 40,000 difference is that you pay the excess of 40k if you against the 100,000 tax liability: excess MCIT can allowed the 40k in the 5th year to be forfeited. Loss only be offset against the Normal Income Tax liability comes only when you forfeit an MCIT during the year or (NCIT). allow it to expire. . Year 7: (3) Relief from the MCIT Pay the government = 100,000 (MCIT) The Secretary of Finance may suspend the imposition Excess is 40,000 of the MCIT on any corporation which suffers losses on Carry-forward to the next year = 90,000; valid until account of [i] prolonged labor dispute; [ii] force the 8th year. This is the last year wherein you can majeure; and [iii] legitimate business reverses consider the unused 40,000 as part of the asset. Assuming that your business is already on its 5th If the 40,000 cannot be utilized in year 8, then it will year operation and already covered by MCIT, in not form part of the carry-forward of year 9. Why? what instances can you ask for the suspension of The 40,000 from year 5 can only be credited to the payment of the MCIT? succeeding 3 years. Year 6, year7, and year 8. If Ask for relief from the Secretary of Finance on the not used in year 8: 0 na ang 40,000. bases that the corporation is suffering from losses Year 8: due to:


1. Force majeure, or Computing MCIT (2%) and NCIT (30%) without 2. Prolonged labor dispute (strike for more than 6 using calculator: months) For 2%, get the 1% x 2. For 30%, you get the 3. Legitimate business reverses 10% x 3. (4) Applicability of the MCIT where a corporation is In getting 1% just move two zeros backwards; if governed both under the regular tax system and a 10%, one movement backwards. special income tax system Illustration: (5) Corporations exempt from the MCIT If you will know 1% of 5,000,000 then you will know What corporations are not covered by MCIT? its 2%. 1. Domestic proprietary educational institution - But if Since its 1%, move two zeros backwards, so it there unrelated businesses exceed 50% - they becomes 50,000. 2% is 50,000 x 2 = 100,000. become subject to MCIT If 30%, get the 10%, which is one movement 2. ROHQ/RAHQ backwards, then times 3. 3. International Air Carrier/Shipping Carrier What's the 10% of 200,000? 20,000. So the 4. Non-Resident Foreign Corporation - MCIT not 30% is 20,000 x 3 = 60,000. applicable to them ii. Special rate for special domestic corporations 5. Those enjoying incentives - they are covered by the (1) Proprietary educational institutions, 10% or 30% income tax holiday (ITH) during their first 6 years of (2) Non-profit hospital, 10% or 30% operation - 5% Proprietary Educational institutions - complete definition Example: SEC. 27 ( B) TAX CODE Here's ABC Corporation under Subic Bay Dev. Non profit hospital - in order for it to enjoy the 10 % Authority. Its registration is only for manufacture of preferential rate it has to be a NON PROFIT HOSPITAL. If it is TIMEX watches. And this is covered by the first 4 operating as a profit hospital, meaning it is registered as such years under ITH or income tax holiday and the then it will be taxable as a corporation at 30 %. The basis is subsequent years or forever would be 5% gross the Gross income. income tax. If the gross income of educational or hospital activity would If it ventures into the manufacture of cellphones, not be more than half of the total gross income (50%) of the covered by its registration. There will no ITH, there total gross income then it will enjoy the 10% for the total will be no 5%, and instead there will be 10%. IF this income earned. If it were the other way around, if non related is current financial, 70% of its income is subject to income were more than half of the gross income then 30% 5%, 30% of its income subject to 30%. You can would apply to the entire income. impose the 2% MCIT on the income that is not What if it was 50% income from educational or hospital registered because it is not covered by the special activity and 50% from non related activities? Which would rate, instead it is covered by the 30%, then it has to apply? be compared with the 2% MCIT. 10 % should apply because in order for the 30% to apply the unrelated income should exceed the 50% gross ABC 45 -> income Manufacture of Timex Watches ITH 5% Income 70% For a non-profit hospital and a proprietary educational Manufacture of Cellphones XX30% 30% *not covered institution to lose the preferential rate the non-related income by special rate should exceed 50% of the total gross income. If it's 50% then the 10% tax rate is still maintained. b. Optional: 15% gross income tax

5th yr

i.

When conditions are satisfied

Gross Sale Less: Gross Income Less: Net Income

X 2% = 100,000 MCIT

X 30%= 60,000 NCIT

A tax effort ration of 20% of the Gross National Product (GNP) A ratio of 40% of income tax collection to total tax revenues A VAT tax effort ration of 4% of the GNP A 0.9% ration of the Consolidated Public Sector Financial Position to GNP

How much will you pay to the government? MCIT or NCIT?

ii. Where ration of cost of sales to gross sales/receipts from all source do not exceed 55% iii. Option is irrevocable for the 3 consecutive years

100,000 MCIT - because the MCIT

is greater

When will the 15% optional tax rate be allowed? When the ff. conditions are satisfied:


(1) (2) (3) (4)

A tax effort ratio of 20% of the Gross National Product (GNP) A ratio of 40% of income tax collection to total tax revenues A VAT tax effort ration of 4% of the GNP A 0.9% ration of the Consolidated Public Sector Financial Position to GNP

which inures to the benefit of any private stockholder or individual xii. Civic league or organization not organized for profit but operated exclusively for the promotion of social welfare xiii. Farmers associations or like associations, organized and

If the abovementioned conditions are present and it's beyond the control of the taxpayer because it's an effort ratio, as performed by the government such as 40% income tax collection vis--vis a total tax revenues at least 40% must come from income taxation and all others present, then probably the 15% gross income tax maybe allowed corporations that are domestic and resident foreign corporations. A further requirement is necessary, which is that the ratio of cost of sales to gross sales/receipts from all sources does not exceed 55%. The condition is that the cost of sales should not exceed 55% of the total gross sales. The reason why such ratio is necessary is that if no limit is provided then the gross income maybe presented at a very low amount. If this is 90% of gross sales, then the amount that will be presented, the gross margin, is only 10% of the gross rate which will result to a very low tax collection by the government. So if gross sales is 55%, the gross margin will be 45%. This is the lowest gross margin that will be subjected to the 15% gross income tax in order to avoid abuse in recognizing figures as part of cost of sales. Once, chosen it becomes irrevocable for 3 consecutive years, on the assumption that during those years the corporation is qualified under the gross income tax scheme, meaning your cost of sales would not exceed 55% of your gross sales. If you exceed such rate, you go back to the 30% net income taxation.

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 xiv. Farmers cooperative or other mutual typhoon or fire insurance, mutual ditch or irrigation 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 meetings its expenses xv. Government-owned and controlled corporations (1) Government Service Insurance System (2) Social Security System (3) Philippine Health Insurance Corporation (4) Philippine Charity Sweepstakes Office (5) Local Water Districts (RA No. 10026) NOTE on Exempt Entities under Section 30 of the Tax Code: Income of whatever kind and character from any of their properties, real or personal, or from any activities conducted for profit, regardless of the disposition made of such income, shall be taxable. We can divide the list into exempt entities under the Constitution, under Section 30 of the Tax Code, under Section 22 of the Tax

c. Exempt corporations Code defining what corporations are. First, the Constitution i. General professional partnerships provides that non-stock non-profit educational institutions are

ii. Government educational institutions iii. Non-stock, non-profit educational institutions iv. Joint venture, for purpose of undertaking construction projects v. Joint consortium, for purpose of engaging in petroleum, geothermal and other energy operations pursuant to a consortium agreement under service contract with the gov't vi. Regional area headquarters vii. Labor, agricultural or horticultural organization not organized principally for profit viii. Mutual savings bank not having capital stock represented by shares and cooperative bank without capital stock organized and operated for mutual purposes and without profit ix. A beneficiary society, order or association, operating for the exclusive benefits of the members x. 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 its income or asset shall belong to or inure to the benefit of any member, organizer, officer or any specific person xi. Business league, chamber of commerce, or board of trade, not organized for profit, and no part of the net income of

exempt from income tax. Second, the definition of corporations excludes General professional partnerships, joint ventures undertaking construction programs, and joint consortiums with the government for geothermal, petroleum, coal and other energy operations. While Regional Area Headquarters, since it does not derive any income as defined in the tax code, it is not subject to income tax. And the very long list in section 30 on exempt corporations. Section 30: List of Corporations exempt from tax which we can summarize as associations or entities which are not ordinary principally for profit, no income inures to the benefit of any private individual, or otherwise they are exclusively for the benefit of members only. For government owned and controlled corporations, we said earlier that they are just like any other domestic corporations subject to the 30% tax rate except for, under the tax code, there are 4 GOCCs which are exempt from tax which are: 1. GSIS 2. SSS 3. PhilHealth 4. PCSO Note: Another GOCC exempt - Local Water Districts (exempt by RA 10026) and they are also exempt from other local government taxes


While other GOCCs may be exempt from income tax, not thru the derived/earned by any tax payer; it may be coming from trade, tax code but because of their respective charters providing for business, or profession - but not from employment because you their exemptions. cannot employ a juridical person as an employee.

Now there is that last provision in Section 30 which provides for the exception to the exception: Income of whatever kind and character from any of their properties, real or personal, or from any activities conducted for profit, regardless of the disposition made of such income, shall be taxable. What activities are subject to income tax?

a. b.

b. Rental income c. Income from dealings in property d. Others Gross income from trade or business Rental income Differentiate an operating lease or an ordinary lease from a

Proprietary activities financial lease. So imagine a corporation having a real property. It

So of the list in section 30 of the tax code, these listed entities are NOT exempt from income tax if they derive income of whatever kind and character from any of their properties, real or personal, or from any activities that are conducted for profit. So there are 3: 1. Activity conducted for profit - taxable, because their exemption rest solely on the fact that they are not supposed to be engaged principally for profit, OR income does not inure to the benefit of any private individual OR they cater exclusively to members alone; so that if they engaged in activities conducted for profit, they will already be subject to income tax - such as the farmers association conducting reality shows "Ang Dakilang Magsasaka" and ticket sales P1000 per entry 2. Any income either from the use of personal or real property regardless of any profit made - so that if the use of real or personal property is made and it generates income to any of these entities in section 30, it is taxable regardless of whether it was intended to be profitable or not because the word for profit only defines the word "activities for profit" but NOT the

i.

entered into an operating lease contract with a tenor. What is the concept of an operating lease and how would the corporation record the proceeds from the lease activity. Operating lease - a contract under which the asset is not wholly amortized during the primary period of the lease, and where the lessor does not rely solely on the rentals during the primary period for his profits, but looks for the recovery of the balance of his costs and for the rest of his profits from the sale or the re-lease of the returned assets at the end of the primary lease period. Operating Lease - ordinary lease or renting out of the property without transfer of ownership; so when a corporation receives proceeds from the operating lease, it will record it as rental income. It's just like any ordinary lease - whether long or short term lease - and the owner (in this case the corporation) does not expect full amortization or recovery from rental payments of the value of the property - the lease would be minimum recovery for the temporary use of the property

use of real or personal property. So if the USC allows rent of a space in the campus to a commercial entity, whether it is for a very minimal amount (not comparable to regular rates of such), it is still taxable because it is income derived from the use of real property. BUT let us take note that this comes in conflict with the constitution insofar as NON-stock NON-profit educational institutions are concerned; because in the tax code, it provides that it becomes taxable regardless of how the income was disposed of. So even if the ticket sales from the reality show was used to finance fertilizers to the different farmers for the purposes of the association itself, it is still taxable because the law provides regardless of how the income is disposed of - it will be taxable. But remember that the constitution provides that if it is a non-stock non-profit educational institution, the revenues and assets will be exempt from taxation so long as it is actually, directly, and exclusively used for educational purposes. Insofar as non- stock and non-profit educational institutions are concerned, there is conflict, but for all other entities, it will be implemented as provided by the tax code. Currently it is not considered unconstitutional - so now it will depend on the examiner on how to treat income of schools.

ii. Financial lease - also called the "full payout lease", a contract involving payment over an obligatory period (also called the primary or basic period) of specified rental amounts for the use of a lessors' property, sufficient in total to amortize the capital outlay of the lessor and to provide for the lessors' borrowing costs and profits. Obligatory period is primary non-cancellable period of the lease which in no case shall be less than 730 days. Lessee exercises choice over the asset. Financial Lease - similar to purchasing a property on installment basis; On the part of the lessee - not considered as expense but rather an advance of regular payment of the value of the property; But on the part of the corporation where it expects that the lessee will become the owner of the property at the end of the lease term - it is actually recorded as an installments paid and not a rental income. Financial lease - on the part of the lessee using the property, is a purchase of a property he will not consider it as an expense but rather as an advance or regular payments of the value of the property. What about on the part of the corporation entering into a financial lease where in they expect the lessee becomes the

2. What constitutes income? owner of the property on the end of the lease term is actually What constitutes Gross Income of a corporation? already an instalment sale. Recording it as an instalment sale a. Income derived from trade, business, or profession - going thru and not as an ordinary rental income the list, these are basically the same types of income


Being a financial lease the obligatory period is usually not less If a domestic corporation recieving cash dividend or property than 730 days or 2years or more. The concept here is the dividend from a domestic corporation. It is exempt as of yet.. entire contract will result in the full recovery not only the it is taxable until it reaches the individual stockholder. If it is value of the property but plus interest rate and any profit that owned further by a corporate stockholder, then further you wish to make. dividend is still exempt until it eventually reaches an Rental income only refers to operating lease while a financial individual stock holder. The concept is to avoid double

c. d.

e.

f.

g.

lease is not a rental income Royalty income (the type not subject to final withholding tax) Interest income (the type not subject to final withholding tax) A corporation can earn royalty income or interest income in the active or passive sense. Active income= regular income that he earns, not the type that is subject to withholding tax. It will be subject to the regular rate of 30% E.g a credit lending company. The income he earns from lending money to borrowers is subject not to the 20% but to the 30% . not necessarily a banking institution. A corporation lending money to its affiliates with interest. Subject to 30% and not 20%, not that type that is subject to withholding tax. Gains derived from dealings in property Gains derived in the dealings of property, we have to differentiate an ordinary asset from a capital asset. Capital gains derived from the sale of real property classified as capital assets, 6% on GSP/FMV, whichever is higher Capital gains from the sale of real property classified as a capital asset. Corporation capital gains tax rate 6% of the gross selling price or fair market value whichever is higher in selling capital asset located within the Philippines just like individual tax. Capital gains derived from the sale of shares of stock in any domestic corporation

i.

j.

taxation referring to the same income tax earner. If stock dividend is concerned. Still exempt because it is simply a transfer of the surplus to the capital account unless in two situation as exception to the rule that it changes the interest of the stockholders a redeemable and cancellable stock dividend Liquidating dividend, corporate 30% tax rate. Disguise dividend is not given out as a dividend declaration. It is when the the corporations pays off its stock holder in the guise of valid expenses. But this is really an expensive and excessive payment to the stockholders it takes the form of dividend payments. Once it is recognized really as a dividend to avoid taxation it will be treated as any cash dividend. The corporation can disguise it dividend by giving out cars to its stockholders. Avoiding the 10% tax. If unjustified then subject to the dividend tax. If given to a non-stockholder e.g. an employee. Then not subject to dividend tax because the employee is not a tax holder. (1) Cash dividend, exempt (2) Stock dividend, exempt (3) Property dividend, exempt (4) Liquidating dividend, 30% Annuities, proceeds from life insurance or other types of insurance Income from any source whatever

i. Listed and traded through the local stock exchange, of 1% E. Resident Foreign Corporations

ii. Not listed/not traded through the local stock exchange, 5% and 10% How about the sales of share of stock in the corporation? It depends if it listed and traded in the stock exchange, tax rate is of 1% of the Gross selling price. If not listed and not traded tax rate 5% or 10%

The reason why we cannot tax the income of resident foreign corporation are not taxable on income outside the Philippines is because imposing a tax on income outside the Philippines would actually violate the principle of territoriality. We cannot extend any (?) or protection to the activities outside the country. So RFC are taxed 30% on net income but only on sources within the Philippines.

h. Passive investment income derived from sources within Similarly, if you remember our discussion on domestic corporations, (subject to final withholding tax) domestic corporations have the option to be taxed at 15% gross income Same rate with individual tax payers in the sale of capital assets, tax. shares of stock and the passive income of interest income, 20% or Would RFC have the same option? 7.5% or exempt. Royalty income is 20%. Only difference will lie in The answer is YES and according to the gross income taxation so long dividend income. as the conditions of the GNP and the tax effort ratios are met and that i. Interest income, 20% or 7.5% the cost of sales of these RFC do not exceed 55% of the gross sales or ii. Royalty income, 20% receipts, then gross income tax can be availed of. It becomes iii. Dividend income from a domestic corporation irrevocable in the year of choice and the next 2 years, so it is Classification Tax rates irrevocable for 3 consecutive years on the condition that during those RC 10% 3 years, the corporation is qualified as such. But since we are dealing RA 10% with RFC, take note that the gross income we are talking about subject NRC 10% to the 15% gross income tax are only those gross income that has NRA ETB 20% been earned in the Philippines. The gross income excludes income NRA NETB 25% that is exempt from tax or income that has already been subjected to final withholding tax.


Let's go back to the 30% normal corporate income tax. If a corporation is providing for 1 1/2% tax on Gross Philippine subject to 30% normal or corporate income tax, we said that it comes with Billings will have to apply for a ruling with the it the imposition of 2% minimum corporate income tax. In fact, payment National Office of the BIR. Without any ruling shall be equivalent to that which is higher between the 30% NCIT and the application, a taxpayer can only use the 2 1/2% 2% MCIT. We have discussed this extensively with domestic corporations. rate. It says there 2 1/2% of Gross Philippine In so far as RFC, since they are doing business in the Philippines, they will Billings. be treated similarly. Any income that they earn subject to 30% income tax Gross Philippine Billings from sources within the Philippines will also be computed of the 2% includes the total amount of gross revenues derived minimum corporate income tax. Again, gross income refers to the income from the passive of not only persons, including within the Philippines only for a RFC. excess baggages, cargoes and/or mails originating 1. Rule on taxability of income from the Philippines in a continuous and a. General Rule: 30% regular corporate income tax on net income uninterrupted flight irrespective of the place of sale from sources within or issue and irrespective of place of payment of such Exception: passage document. i. 2% minimum corporate income tax (MCIT), refer to would be the total amount of gross revenue earned previous discussions by an international air carrier for the passage of

ii. Special rates for special resident foreign corporations Just like domestic corporations having special domestic corporations, they are special RFC. First of in your outline are the International Air Carriers and #2 - International Shipping Carrier. Being international, we presume that these are

persons, excess baggage, cargo and/or mail originating from the Philippines from a continuous and uninterrupted flight irrespective of the place of sale or issue of the passage document and irrespective of where such passage document will be

engaged in international trade or operations. Airports, paid. aircrafts, vessels or ships for shipping carriers. And since the -Now the issue of where it is sold, issued, and paid discussion is under RFC, naturally, we cannot help but think becomes important only if the person, baggage, that these are RFC. Do not ever think that International Air cargo or mail does not originate from the Philippines Carriers subject to 2.5% tax on Gross Philippine Billings are and not in a continuous and uninterrupted flight. So, domestic corporations. They are not. They are not as well if an International Air Carrier does not have any imputed NRFC, otherwise, if they are, then that will be online operations or does not have flight originating subject to 30% tax on net income for domestic corporations from the Philippines, will there income be subject to or 30% on gross income as a NRFC. the 2 1/2% tax? The answer is NO.

(1) International air carrier, 2.5% on gross Philippine billings It's a foreign airline corporation doing business in the Philippines. A foreign corporation doing business in the Philippines, that has somehow been granted landing rights in any port in the Philippines to perform

If an international air carrier does not have any online operations or does not have any flight originating in the Philippines, will their income be subject to 2.5% tax? NO And if it is registered as a business doing in the Philippines, it will be subject to 30% net income tax. Not all international air carriers are guaranteed the 2.5%

international air transportation services or air tax on gross Philippine billings. Only when all the transportation or flight operations anywhere in the world. conditions are satisfied. So once a foreign corporation does business in the What are the three conditions? Philippines with landing rights, it can either opt to really 1. Flight would originate from the Philippines have operations or flights coming from or originating 2. Continuous and uninterrupted flight from port in the Philippines, from foreign airports or from 3. Irrespective of the place of sale or issue and the a foreign seaports or that we will call an international air place of payment of the ticket or passage carrier with online/online air carrier. document It becomes online when there is a flight/ vessel So what if the flight is interrupted or there is a stop originating from Philippine port. It becomes offline when over? What will happen to the gross revenues? Will the its flight operations does not originate in the Philippines. entire gross revenue on the ticket declared still as part RULE ON TAXABILITY OF INCOME of Philippine billings or not? Now, what is its taxability? No! The total revenue will be declared as part of International Air Carriers as a RFC doing Philippine billings is only the portion related to the flight business in the Philippines are taxed only at 2 from the Philippines until the stop-over or transshipment 1/2% on the Gross Philippine Billings. Of course, in the foreign airport. Afterwards, the related income or the tax treaty would provide a lower and a gross revenue will be subject to a different tax rate. No preferential rate. But the availment of a tax longer the 2.5% because it is not anymore a gross treaty provision such as RP-US Tax Treaty Philippine billing.


When will there be an interruption or transshipment? So even of the 2.5% tax on gross Philippine billings is lower in Does it mean to say when the flight is from Philippines rate, take note that the amount computed is directed against to Florida, there is no direct flight, if the foreign airline the entire payment, to the entire ticket cost. No deductions company will have a stopover in Hong Kong or in allowed. Not even the fuel for the aircraft. Korea, does it mean to say that we only consider the Question! Maning: Transfer to another same company but gross revenue from the flight in the Philippines and different airline mam! stopover in Hong Kong or Korea as part of gross Atty: As long as it is the same airline company and does Philippine billings? not exceed 48 hours. It depends. (Sorry cannot here the 2nd question.) If the interruption will result in the transfer of another (2) International shipping, 2.5% on gross Philippine aircraft belonging into another airline company, that billings becomes an interruption, then only aliquot portion from (3) Offshore banking units the Philippines to the transshipment or stop over will only Another special resident foreign corporation is be considered as part of Philippine billings. offshore banking units. What are offshore banking But if it is a simple stop over not exceeding 48 hours units? within the same airline and same company, that will still Offshore banking units are branches, subsidiaries or be considered as uninterrupted and continuous flight. affiliates of foreign banking corporations duly Another item that will form part of the gross Philippine billing authorized by the Bangko Sentral ng Pilipinas to is the gross revenue from tickets that has been revalidated, perform banking operations in the Philippines. exchanged and endorsed to another international airline What is the taxability of an OBU? company. It was sold by the first company and sell by the It depends. passenger airline to another company. It will still form part of Taxability of Offshore Banking Units (OBU's) - As gross Philippine billings. RFC also, OBUs are only taxable on income derived But for international air carrier, if you look into your within. tax code. Are the gross Philippine billings for if the income is derived by the OBUs from international air carrier the same as gross Philippine interests on loans of residents (citizens or billings for international shipping? aliens), individual residents, taxable at 10%. No! if they give up the interest, it's an interest What is missing? What phrase is missing? expense. In international carrier, gross Philippine billings mean If the income is derived from non-residents, gross revenue whether for passenger, cargo or mail whether individuals, aliens, corporations, OBUs, originating from the Philippines up to final destination, tax exempt. regardless of the place of sale or payments of the EXCEPTION to the rule - if the income is passage or freight documents. derived from a Phil. commercial bank or a local What is missing? The phrase "continuous and commercial bank, it is still exempt.( because it is uninterrupted flight". already subjected to withholding tax by depository So in case of the international shipping the cost of ticket bank) will have to be included as part of the gross Philippine Income of OBU's on interests of deposits from non- billings subject to 2.5%. resident depositors under an expanded foreign currency It appears that gross Philippine billings for international air deposit system unit - Withholding Tax exempt carrier has stricter interpretation while in international (a) Income derived from foreign currency transactions shipping it's more general in the sense that the entire ticket with nonresidents, OBUs and local commercial cost, so long as it originated in the Philippines, will form part banks, exempt of the gross Philippine billings. (b) Income derived from foreign currency loans If the foreign corporation opens a branch in the Philippines or granted to residents, 10% appoints an agent in the Philippines for the sale of tickets and (c) Income of non-residents from OBUs, exempt the flights bought from these tickets will not originate in the (4) Regional operating headquarters of multinational Philippines, will it be subject to tax in the Philippines? Yes, at companies, 10% 30%! The correct term will be is that it's not the gross any profits, the taxable income of which, will be subject revenue that will be subject to Philippine income tax in that to the special rate of 10%.(plus 12% VAT) case but rather the net income. Why? Because we are talking the foreigner or Filipino employees are given the about the regular rate of 30% which is imposable on resident preferential rate of 15% so long as they're occupying a foreign corporations based on their taxable net income after position of managerial or technical. all expenses have been deducted. b. Optional: 15% gross income tax, refer to previous discussions 2. What constitutes income?


a. b.

c.

d.

e.

a RFC that comes here in the Philippines to register and do business are taxable in the same way as a DC. The income that they will declare is subject to income tax of 30%. Gross income from trade or business Rental income ex. From personal property. Royalty income (the type not subject to final withholding tax) Subject to the ordinary rate of 30%. Interest income (the type not subject to final withholding tax) Those that are not a passive income that are NOT given out by banking institutions subject to the ordinary rate of 30% Ex. Interest income from the loans extended to another corporation Loans extended to EEs forms part of the gross income subject to 30% rate. Gains derived from dealings in property Whether real or personal will be subjected ENTIRELY to the rate of 30%

7. NRA-ETB - 20%

8. NRA-NETB - 25%

1. DC - exempt

Div. - P10M each

6. RA -10%

ABC Corp -DC

2. RFC - exempt

5. NRC -10%

4. RC -10%

3. NRFC -30% or 15%

f.

The reason: sec. 28 of the tax code, doest mention any reference to the 6% capital gains tax. Therefore any sale of a real property classified as a capital asset will ALWAYS be subject to the 30% net income tax in the hand of a RFC. Capital gains derived from the sale of shares of stock in any domestic corporation

The reason why it is not as yet subjected to final withholding tax at this stage of declaration and issuance or payment of dividends is because eventually when these corporations declare dividends to their stockholders and it so happens that their stockholders are individuals then only at that time will the tax rates apply.

i.

Listed and trade through the local stock exchange, of 1%

This is allowed to happen and it is not taxed in the first instance is because, aside from the fact that we avoid double

g.

ii. Not listed/not traded through the local stock exchange, 5% and 10% Same rule as the other Passive investment income derived from sources within (subject to final withholding tax)

taxation, these corporations are still within our controlboth are registered in the Philippines, both are tasked as withhold agents. If they declare themselves dividends to stockholders, the Philippines will still have jurisdiction over them. So the Government is assured that these two corporations both

i.

Interest income, 20% or 7.5%

domestic and resident foreign corporation will be withholding

ii. Royalty income, 20% same), refer to sec. 24 and 25 (Encourage to memorize) iii. Dividend income from a domestic corporation If a DC declares dividends in favor of a RFC then the cash dividends is not taxable until and unless it reaches the individual stockholder. Same holds true for property dividends. Ex. AbC corp a DC declares dividends of 10m for the ff. tax payers the rate shall be as follows:

the tax from the dividends declared to their own stockholders. Property dividends will fall under the same rules. Stock Dividends, however as we have discussed, are not income to the stockholders because these are mere entries to the books of the corporationa transfer from the surplus to the capital amount. These are inchoate income which has cannot be translated into realized or actual income. The exceptions to this rule are: when the stock dividends issued are cancellable and redeemable and stock dividends which distort the proportional interest before the declaration. Liquidating Dividends

DIAGRAM Company ABC is partly owned by a resident foreign corporation ABC dissolved the corporation. If the resident foreign corporation receives liquidating dividends beyond its cost of investment, the gain (liquidating gain), will be subject to tax at a rate of 30%. Annuities, proceeds from life insurance, and income from whatever sources, you can relate that with previous discussions (1) Cash dividend, exempt (2) Stock dividend, exempt


(3) Property dividend, exempt tax of 15%. If you register yourself as a subsidiary, you will be taxed (4) Liquidating dividend, 30% at 15% on dividends. h. Annuities, proceeds from life insurance or other types of So if the corporation registered with PEZA is given 4 years income tax insurance holiday, and afterwards 5% tax on gross income, will the exemption i. Income from any source whatever from BPRT apply during the income tax holiday? Or will it only apply if Annuities, proceeds from life insurance, and income from the corporation is already enjoying the 5% special tax rate? whatever sources, you can relate that with previous discussions What does the tax code provide? 3. Branch profits remittances, 15% on the total profits applied or Usually corporations which seek registration under the PEZA are earmarked for remittance without deduction for the tax granted tax holidays for the first 4 or 6 years of its operations and components thereof. thereafter will be subjected to the 5%tax rate at its option or it ING Bank, Manila Branch vs. CIR, CTA Case No. 6017, March 11, may be taxed at 30% on its net income. But usually PEZA 2002 corporations would avail of the 5% tax on its gross income instead Of the three types of corporationsDomestic, RFC, and NRFCyou will of the higher 30% tax rate on its net income. Now the exception only see this topic under RFC. Domestic Corporations and NRFCs do from the PBRT applies to corporations registered with PEZA not have branch profit remittances. regardless of whether it is still on its income tax holiday years or when it is taxed 5% income tax. So it would not matter if the

15% Dividends

Interest

(Parent) NRFC

(Head Office)

Branch Profit Remmittance - 15%

corporation is exempt or 5%, the exception to that rule is the PEZA company is engaged in activities that are not registered with the PEZA which can happen, you call it unregistered business activities. Any income from the unregistered business activities that is remitted to its head office will already be subjected to the 15% BPRT. So what is covered by the exemption are only those profits remitted abroad which arose from activities that were registered with the PEZA.

DC Subsidiary

RFC Phi. Branch

So for example, when a head office sends 100M dollars for construction of manufacturing plant. Of the 100M, only 90 M was utilized. 10 M was sent back by the branch to its head office. Will it be subject to BPRT assuming it is not a PEZA company?

5% tax on gross

No, because it is not a profit in the first place. It was only a capital infusion made by the head office and any return will not in any way will be subject to BPRT.

PEZA

4 years ITH

,

Another example.

If a NRFC wishes to do business in the Philippines, it has two options:

If the head office and the branch had an arrangement that the head office would send some personnel to help the branch

In cases of profit distribution, if these operations in the PH generates profit and it wishes to return the profit to its head office, you call that branch profit remittances. It is no longer dividends because it is not governed by shares of stocks but rather it is simply remitting the profits generated to its head office.

operation and the branch would shoulder the cost of lodging, transportation, and other expenses of these personnel coming to the Philippines and the arrangement was that the branch will send out money to the head office for these expenses subject to liquidation later on by the head office will that be subject to branch profit remittance tax?

Whenever a resident foreign corporation remits profit to its head office, it will be subject to the rate of 15%. Will a Cebu branch remitting its profits to the Manila head office be subject to the 15% BPRT?

The concept is not remittance of profit, the arrangement really was that its an advance given by the branch for the expenses of the head office personnel. So since its actually an expense and subject to liquidation later on, it is not a branch

No. So BPRT will only be applicable to resident foreign corporations when it remits to its main office.

profit remittance thus not subject to the 15% bprt What is the basis of the 15% BPRT?

Would all Philippine Branches registered as resident foreign corporations be subject to the 15%BPRT on all its remittances to head office?

It is the total profit applied or earmarked for remittance without any deduction to the tax component thereof, so if 100M is earmarked for remittance to the head office then the tax to be

No, the exception is in cases of corporations registered in PEZA, they will not be covered by the BPRT.

paid to the government would be 15M. Note: Head office and the branch exist under one and the same entity,

So if you are a corporation registered under the PEZA, a tax avoidance scheme would be to register your business not as a subsidiary but a Philippine Branch of a non-resident foreign corporation so that all the profits that you will remit will not be subject to the final withholding

therefore, if the non-resident foreign corporation through the branch made an investment in the Philippines it becomes an investment of the branch. But if the non-resident foreign corporation directly makes an


investment in a corporation without going through the branch, then for (except capital gains from the sale of shares of stock not tax purposes that is a separate investment. traded in the stock exchange) With regards to the profit, how do we arrive at the profit? do GR: Gross income may include: (subject to 30% on gross we have a computation? income) No, a Philippine branch is just the same as a domestic corporation, a. Interest, at the end of the year of its operation it will have a separate books b. Dividends, of accounts. For Philippine tax purposes we only consider the c. Rents, income of the branch not that of the foreign corporation. If it has d. Royalties, net income or accumulated income of 500M pesos and all the e. Salaries, 100M is earmarked for remittance, the rest will remain with the f. Premiums (except insurance premiums), branch for future working capital, then only that 100M wil be g. Annuities subject to tax multiplied by 15%. You wont consider the net h. Emoluments or other fixed or determinate annual, periodic or income, only the earmarked amount. casual gains, profits and income, and i. Capital gains (except capital gains from the sale of shares of F. Non-Resident Foreign Corporations stock not traded in the stock exchange) are corporations organized under the laws of a foreign country and is not doing business in the Philippines. Although at some point in time they may Practically, ALL income of NRFC derived WITHIN the Philippines be earning on isolated cases that is why even if they are not registered as are subject to the rate of 30% final tax on gross income. Even the doing business in the Philippines we consider the taxability beforehand. So capital gains on the real property classified as capital asset. any income earned by a non-resident foreign corporation on isolated Exceptions: Certain other income where the rates are applied transactions in the Philippines will also be subject to the same tax rate of differently: 30% but on the basis of its GROSS INCOME without the benefit of expense b. Certain other income

deductions even if these expenses are related to the income which has been earned. So it's the same as the taxability of a non-resident alien not engaged in trade or business. And it is already a final tax. so any payer of a non resident foreign corporation has no obligation to withhold the tax with finality. If the non-resident foreign corporation parent company enters into a technical service agreement with its subsidiary domestic corporation to transfer the manufacturing process know-how etc. the non-resident foreign

i.

Capital gains derived from the sale of shares of stock in any domestic corporation (1) Listed and trade through the local stock exchange, of 1% (2) Not listed/not traded through the local stock exchange, 5% and 10% This is the only type of tax that remains consistent all throughout different types of taxpayers.

corporation will be earning royalty payment from the Philippines, even if the contract provides that it will be paid on a monthly basis, 5% of the gross sales generated by the domestic corporation does not make the foreign corporation as doing business in the Philippines because there is only one transaction entered into. Now being a non-resident foreign corporation any royalty payment made by the domestic corporation will be subject to the final withholding tax of 30% unless the tax treaty provides a lower rate. 1. Rule on taxability of income General Rule: 30% regular corporate income tax on the gross income from sources within Exception: Special rates for special non-resident foreign corporations a. Non-resident cinematographic film owner, lessor or distributor, 25%% on gross rental or fees b. Non-resident owner or lessor of vessels chartered to Filipino nationals/corporations, 4.5% on gross rentals, lease or charter fees c. Non-resident owner or lessor of aircraft, machinery and equipment, 7.5% on gross rental or fees 2. What constitutes income? a. Gross income which may include interests, dividends, rents,

ii. Interest on foreign loans, 20% Interest on foreign loans obtained in 1985 onwards will NOT be subject to 30% tax rate, but only to 20% rate (this is the tax code rate) Note: Tax treaty provides 10% rate iii. Intercorporate dividends, 15% under the Tax Sparing Credit Rule Condition: That the country in which the nonresident foreign corporation is domiciled, shall allow a credit against the tax due from the nonresident foreign corporation taxes deemed to have been paid in the Philippines GR: 30% final tax EXC: 15% under Tax Sparing Credit Rule Condition: That the country in which the NRFC is domiciled, shall allow a credit against the tax due from the NRFC taxes deemed to have been pain in the Philippines. Unless, Tax treaty provides a lower rate, let's say 10%. But if you don't want to invoke the tax treaty where the country to which you are declaring dividends, or the corporation is domiciled in a country where we have no existing tax treaty, we can only use the tax code provision (rate) So when can a NRFC avail the lower rate of 15%?

royalties, salaries, premiums (except reinsurance premiums), The condition states that the country in which the NRFC annuities, emoluments or other fixed or determinate annual, is domiciled, shall allow a credit against the tax due from periodic or causal gains, profits and income, and capital gains


the NRFC taxes deemed to have been paid in the Philippines. SUMMARY OF TAXABILITY OF CASH OR PROPERTY DIVIDENDS RECEIVED So it is always considered, whether or not there is actual BY A CORPORATION payment, there is a tax credit deemed to have been paid of

15%. Why 15%? The difference between the 30% regular tax rate and 15% intercorporate dividend rate = 15%, is the taxes deemed to have been paid in the PH by the NRFC. Actually, we usually apply 15%, unless the tax treaty provides for a lower rate.

Dividends Received BY:

DC

Received FROM a DC

EXEMPT

Received FROM a FC

30%; whether resident or non-resident

Comments

We don't even talk of where the foreign corporation is

NRFC

ABC

NRFC DEF

DC is taxable on

operating:

whether

its

income

earned

operation is more than 50%

Dividend, 15%

60% Owner

40% Owner

Dividend, 15%

within and without

in the Philippines, it wouldn't matter; because a DC is taxable on income within and

RFC ABC Branch

Dividend, EXEMPT

DC

XYZ

RFC

EXEMPT

without.

Dividends coming from EXEMPT = not taxable

sources within: 30% RFC taxable on income

Dividends declared by XYZ (DC) to DEF&ABC (NRFC), subject to 15% intercorporate tax?

Coming from sources earned within. without: EXEMPT

Yes

What about dividend declared by XYZ (DC) to ABC Philippine Branch (RFC), subject to tax?

NRFC

30% or 15%

Dividends coming from sources within: 30%

Did we not say that RFC and NRFC are taxable on income

No. when RFC receives dividend from DC, it exempt from tax.

Coming from sources without: EXEMPT

within to the extent that we can identify such dividends

How about the dividends declared by a DC to ABC- NRFC taxable on from sources within. Philippine branch? Is that subject to tax? income earned

We said that when a RFC receives dividends from a DC, it is exempt from tax.

within * The passive type of dividends granted exemption are only dividends received

How about the dividends declared by a DC to a head office of the Philippine branch? Subject to tax or not?

from a DC.

Yes, 15%. RECAP: SUMMARY OF TAXABILITY OF CASH OR PROPERTY DIVIDENDS Can the NRFC, ABC Corp, invoke the single entity RECEIVED BY INDIVIDUAL TAXPAYERS concept that being one and the same with the branch in

the Philippines (RFC), therefore any dividend payment made to it by a domestic corporation is also exempt

Received by a:

From a DC

From a FC

Comments

from tax?

RC

10%

Within or without: 5- Not 10% because FC cannot

NO. As I've said before, in situations wherein it's an investment made by the head office independently of the branch, then that is the investment alone of the head office. So in this case since they have separate investments, 30% by the branch (RFC) and 30% by the NRFC, one is still a payment to a NRFC subject to tax, and the other is a payment to a RFC exempt from tax. They will be in this case treated as 2 separate investors.

NRC

RA

10%

10%

32%

Within: Without: exempt

Within:

5-32%

5-32%

withhold; no jurisdiction to withhold; has to be declared as part of gross income by R C.

Reason why the dividends going out to a NRFC is not exempt from tax:

Without: exempt

We do not have control over these corporations, if and when finally or ultimately they declare their income to their other stockholders, they are not considered as withholding agents of the Philippine tax authority. So at this point pa lang, we have to withhold na the tax from the cash or property or strict (?) dividends.

NRAetb

NRAnetb

20%

25%



5-32%

25%


1. There must be a law allowing such deductions NRA-etb taxable at the rate of 20% coming from a domestic 2. That the taxpayer has proved that he is qualified to claim such corporation, if coming from a foreign corporation taxable 5- deductions 32% on income coming within and without exempt. 3. If such extent is required to be withheld of tax, it must be withheld of NRA-netb - taxable at a rate of 25% if within and if without tax then exempt 4. It must be strictly construed against the taxpayer. The catch all phrase here in deductions is expense which refer to ordinary G. Partnerships and necessary expenses of the business which would depend on the TAXABLE PARTNERSHIPS AND NON TAXABLE PARTNERSHIPS business the taxpayer is engaged in. There are generally 2 types of partnerships : 1. Itemized business expenses 1. A partnership that is taxable a. Expenses

2. A partnership that is exempt from tax General Professional partnerships are not subject to income tax but the individual partners are based on the withdrawals they have made or the net distributed share of partners Taxable partnerships such as those engaged in trade or business, it will be taxable as a corporation as long as all documentary requirements have been complied with. 1. Business Partnerships

i.

Business expenses vs. capital expenses A private educational institution may, at its option, elect either: (1) To deduct expenditures otherwise considered as capital outlays of depreciable assets incurred during the table year for the expansion of school facilities; or (2) To deduct allowance for depreciation thereof SPECIAL RULES:

Similarly taxed as a taxable corporation. We said that deductions must refer only to ordinary 2. General Professional Partnerships expenses based on a day to day expenses. Exempt from income taxation. However, for purposes of computing Would capital expenses or capital expenditures be allowed as an the distributive share of partners, the net income of the outright deduction? No. But the non-deductible items that we have partnership shall be computed in the same manner as a learned is if there is a purchase of a capital asset it will not be corporation. Each partner shall report as gross income his allowed as a deductible expense instead it will only be depreciated distributive share, actually or constructively received, in the net over its usual life. income of the partnership. If a corporation makes a major capital expenditure which is used to extend or prolong the life of the asset, such capital expenditure or H. Kinds of Deductions extra ordinary expense will not be expensed out right but instead it Our discussion on the kinds of deductions would not be strictly limited to will be capitalized and deducted over the usual life of the asset. corporate income taxation. Way back in our outline on income taxation in With regards to PRIVATE EDUCATIONAL INSTITUTIONS general, we identified already that as part of the deductible items of an A private educational institution at its option may elect to individual taxpayer is the itemized deductions and the optional standard deduct expenditures which are considered as capital outlays in deduction so long as in some form or another the individual taxpayer is the taxable year when it was purchased or to deduct the earning income from trade, business or profession. So we are assuming allowance of depreciation over its usual life. that from this point forward that the taxpayer is engaged in trade, business It would not make any difference for tax purposes if the school or a profession. The kinds of deductions for business purposes would be is a non stock non profit or a stock corporation because it is the itemized deductions and the standard optional deductions. exempt from income tax, whether the entire amount is May a corporation claim personal deductions or additional deducted in the year of purchase or all throughout the exemptions? estimated time of the property or capital (di ko ka dakop sa NO. unsa g ingon, murag "asset" ang g ingon). Can a resident citizen, non-resident citizen and resident alien claim What must be observed in deducting these instances? itemized deduction or optional standard deduction if they are Take note that the expense must be paid or incurred inorder purely employed without any other sources of income? to generate the income. If the expense had been incurred to NO pay for a number of years then it will not be deductible in the How about a non resident alien engaged in trade and business? Can year of incurrence or payment but also spread out over life in they claim itemize deduction or OSD? which it seeks to benefit the income earner. NRA-etb They are allowed itemized deduction because they are taxed ii. Common requisites for deductibility: on net income but because they are non- resident then they cannot (1) The expenses must be ordinary and necessary claim optional standard deduction. When is it an expense ordinary? It is an ordinary expense How about a non resident alien not engaged in trade or business? when it is normal or usual to the taxpayers business in Both itemized and OSD are not available to them because they are the surrounding circumstances. It is necessary when it is taxed at gross same with non resident foreign corporation. appropriate and helpful in the development of the The principle to be observed in claiming for itemized expenses or taxpayers business and are intended to minimize the deductions is that losses or to increase the profits.


So if the expense is not necessary or ordinary in the In order for an expense under itemized deductions to be business then that expense becomes extraordinary allowed as a deduction to reduce the gross income it expense, not deductible for tax purposes. Although, it must be support by either official receipt, sales invoice, may be shown as part of the expenses but in computing or any other adequate records. If the expense you are the income tax liability it will not reduce your net taxable trying to claim is a transportation expense of an income. employee riding a jeepney, you cannot get an official

(2)

It must be paid or incurred during the taxable year So actually it depends on what method of accounting the taxpayer is following. There are different methods. It can be the cash basis accounting, the accrual method, or the mixed type. Usually we follow the accrual method of accounting that whenever income already earned or realized regardless whether it is received it is already taxable income and the expense whenever it has already been incurred regardless if it when it is paid it becomes deductible expense. It means to say that if the all-events test has already been satisfied, in order for the right to the income and the obligation to pay is already there then we recognize the expense of the income already. So income earned, expense incurred. If the taxpayer is under the cash basis of accounting, expense becomes deductible only when it is paid. But in accrual method of accounting, when it is incurred, or when the obligation is already due and demandable. Exception: net operating loss carry-over The exception there is the net operating loss carry over. The concept of NOLCO is whenever a corporation suffers net loss, instead of a net income, so the financials would reflect that the expenses are higher than the gross income, it would result to a negative, which we call as a net operating loss. The tax code allows this to be carried over and deducted against the gross income of the taxpayer for the following year. This is an exception to the rule that the expense must be paid or incurred during the year. This is because when a net operating loss is

receipt. So instead of official receipts, you can support that with adequate records such as a trip ticket filled out by the employee claiming for reimbursement. If the company secures the services of a home-based person, that person will not be able to issue official receipt or invoice for service rendered. It will only be an acknowledgment receipt. For purposes of claiming such services an acknowledgment receipt will not suffice. It has to be supported additionally by the contract entered into for the subcontracting service. When you give out salaries, do employees give out official receipts to employers? No. So the substitute would be the payroll, payslips, annual/monthly reporting by the employer to the Bureau for taxes withheld. So that if expense is claimed without any supporting document it will not be allowed as a deduction. Except that which qualifies under the common rule, that if there is a showing that an expense is actually incurred but the taxpayer corporation cannot show adequate document then it is up to the BIR to determine the proximate amount that can be allowed as deduction to the taxpayer so long as there is an excuse for non-procurement of official receipts, invoices and documents and it can be proven that the expense was really incurred. Example, if you purchase from a fisherman, the individual ones, you cannot expect them to issue you an official receipt but the alternative is to sign an acknowledgment receipt or if you can deposit it to his bank account, then the deposit slip. Can the BIR say that it is not justifiable?

carried over to the succeeding year and deducted against It will be justifiable if you are in the business of the gross income we are now talking about an expense making canned sardines. Naturally, your cost will be which is attributable to the credit income. That is a the purchase of raw materials from individual deduction resulting from the past and the income fishermen who don't usually issue official receipts. generated has no relation to the loss of the prior year. The only proof that they can show to the BIR are

(3)

(4)

(5)

It must be paid or incurred in connection with the trade, business or profession of the taxpayer Any personal expense of the stockholder, employer, or officers of a corporation can in no way be deducted from expense. So if there are purchases, grocery, personal motor vehicles it cannot be claimed as a deduction if it cannot be connected to the trade, business or profession of a taxpayer. It must be reasonable in amount What is reasonable would depend not only on the amount of the expense but has to be taken into consideration with the size, the nature of operation of the business, the current economic conditions, etc. It must be substantiated by sufficient evidence such as official receipts and other official records

those mentioned above plus delivery receipts plus proof that it has been weighed over by some public weighing company. In this case, by the Cohan Rule it will be allowed. It is now up to the BIR to determine as to what extent the only will be allowed, not the entire amount. In the production of his plays Cohan was obliged to be free-handed in entertaining actors, employees, and, as he naively adds dramatic critics. He had also to travel much, at times with his attorney. These expenses amounted to substantial sums, but he kept no account and probably could not have done so. At the trial before the Board he estimated that he had spent eleven thousand dollars in this fashion during the first six months of 1921, twenty-two thousand dollars, between July first, 1921 and June thirtieth, 1922, and as much for his following fiscal year, fifty- five thousand dollars in all. The Board refused to allow him any part of this, on the ground that it was impossible to tell how much he had in fact spent, in the absence


of any items or details. The question is how far this refusal is justified, in view of the finding that he had spent much and that the sums were allowable expenses. Absolute certainty in such matters is usually impossible and is not necessary; the Board should make as close an approximation as it can, bearing heavily if it chooses upon the taxpayer whose inexactitude is of his own making. But to allow nothing at all appears to us inconsistent with saying that something was spent. True, we do not know how many trips Cohan made, nor how large his entertainments were; yet there was obviously some basis for computation, if necessary by drawing upon the Board's personal estimates of the minimum of such expenses. The amount may be trivial and unsatisfactory, but there was basis for some allowance, and it was wrong to refuse any, even though it were the travelling expenses of a single trip. It is not fatal that the result will inevitably be speculative; many important decisions must be such. We think that the Board was in error as to this and must reconsider the evidence. Cohan vs. Commissioner, 39 F. 2d 540 (2d Cir. 1930).

(6) It must not be against law, morals, public policy or public order What would be the type of expenses which would be contrary to law, morals, public policy, or public order? a. Payments to government officials Example you are being assessed P10M in taxes and you are able to negotiate that only P5M will be paid but the counter negotiation was that only P2M in official receipts will be issued, will you be able to claim the difference of P3M as an expense? You may reflect it as miscellaneous expense but it will not be allowed as a deduction in computing your tax liabilities. But it has to be recorded somehow because it was an outflow of cash in the corporation (for private purposes) BUT for TAX purposes, it cannot be allowed as an expense deduction.

government otherwise the entire expense will not be allowed as a deduction. Example: [This is one way for the BIR to collect taxes in advance - the method of withholding. But this is not the type that is subject to final withholding tax; this is the creditable withholding tax.] The regulations provide that rental payments by the lessees to the lessor shall be subject to 5% withholding tax. So that if there is a domestic corporation A leasing from another domestic corporation B worth P1.5M monthly. So if the lessee pays P1.5M every month and there is that requirement that it has to be withheld the 5% withholding tax, then the lessee will only be paying the lessor P1,425,000 every month. This would constitute as a tax payment and the lessor corporation would receive P1,425,000 (instead of the P1.5M). The P75,000 withheld by the lessee will be given to the government constituting as an advance payment of the lessor because this is a tax on the income of the lessor. If it is not withheld, meaning to say the lessee paid entirely the P1.5M, this amount will not be allowed as expense in the books of the lessee corporation. The lessee cannot deduct the P1.5M and sadly for the entire year, all the rental payments will not be deductible. BUT the lessor corporation has to declare as well P1.5M as the monthly income and any computation of the tax due will be offsetted against what has been advanced to the government. So the creditable withholding is simply a scheme by the government to collect in advance from the tax payers slowly towards the end of the year. Going back to expense requirements, if an expense is required to be withheld of tax, it has to be withheld otherwise the expense will not be allowed as a deduction.

Now payments that are contrary to law, morals, etc. iii. Salaries, wages, bonuses and other forms of compensation are not deductible BUT any income derived from for personal services actually rendered, including the illegal activities are taxable. But take note that it is grossed-up monetary value of the fringe benefits subjected allowed that illegal expenses can be allowed as a to fringe benefits tax which should have been paid deduction only to the extent of illegal gains. Now So what are the different types of expenses mentioned in these illegal expenses can be deducted if you have Section 34-A? illegal income. But that would be self-incriminating - a. Salaries, wages, understandably, every corporation you wouldn't declare your activities to be illegal employing personnel will have to spend for the salaries therefore you cannot altogether claim these as an and wages, even bonuses of these individuals under an expenses ER-EE relationship. BUT for salaries and wages to be

Note: Any amount paid or payable which is otherwise deductible form, or taken into account in computing gross income or for which depreciation or amortization may be allowed, shall be allowed as a deduction only if it is shown that the tax required to be deducted and withheld therefrom has been paid to the BIR. Any amount paid or payable which is otherwise deductible from the gross income may be allowed as

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