Basic Income Taxation: Chapter 5 — Corporate Income Taxation
Corporate Income Taxation
Corporation
A corporation in the Philippines
is an artificial being
created by operation of law,
having the right of succession and
the powers, attributes, and properties
expressly authorized by law or
incidental to its existence.
Gross Income
= All income ㅡ Exclusions
= AI ㅡ E
Net or Taxable Income
= Gross income ㅡ Allowable Deductions
= GIㅡ AD
A. Definition Under NIRC
Corporation includes: PJJAI
partnerships, no matter how created or organized,
joint stock companies,
joint accounts,
associations or
insurance companies
except: JGJ
joint construction venture (2007 Bar);
general professional partnership;
joint venture for engaging in petroleum, coal, geothermal and other energy operations pursuant to a consortium agreement with the government.
Unregistered or registered partnership
taxable provided that the following requisites concur:
Agreement, oral or writing, to contribute money, property or industry to a common fund;
Intention to divide the profits.
Evangelista v. Collector, 102 Phil. 140:
Two sisters purposely created a common fund without being registered for the purpose of engaging in a series of transactions for profit — taxable unregistered partnership is created.
The qualifying expression — no matter how created or organized — clearly indicates that a joint venture need not be undertaken in any of the standard forms, or in conformity with the usual requirements of the law on partnership, in order that one could be deemed constituted for purposes of the tax on corporations.
✅ Taxable partnership is formed where 15 persons contributed money to purchase sweepstakes tickets for the sole purpose of dividing among themselves the prize.
Rallos v. Rallos, 2 Phil. 509:
Two persons entered into an agreement to operate a cockpit under which one was to contribute his services and the other to provide the capital — a taxable partnership is formed.
Ona, et al. v. Commissioner, 45 SCRA 74:
As a rule, co-ownership is tax-exempt.
✅ It becomes taxable if it is converted into an unregistered partnership.
Converted into partnership if the properties and income are used as common fund with intention to produce profits.
If after partition, the shares of the heirs are held under a single management for profit making, unregistered partnership is formed.
Pascual and Dragon v. Commissioner. 166 SCRA 560:
Pascual and Dragon bought two (2) parcels of land from Bernardino and three (3) from Roque.
Thereafter, the first two (2) were sold to Meirenir Development Corporation at a profit of P165,224.70 and the three (3) to Reyes and Samson for a profit of P60,000.00.
They divided the profits between the two (2) of them.
There was no partnership formed.
❌ The sharing of returns does not in itself establish a partnership whether or not the persons sharing therein have a joint or common right or interest in the property. (Article 1769, NCC)
Obillos, Sr. v. Commissioner , 139 SCRA 436:
On March 2, 1973, Joe Obillos, Sr. transferred his rights under contract with Or tigas Co. to his four (4) children to enable them to build residences on the lots. TCTs were issued.
Instead of building houses, the Obillos children sold them after one ( 1) year to Walled City Securities Corporation and Olga Cruz Canda.
The Supreme Court held that the Obillos children are co-owners. It is an isolated act which shows no intention to form a partnership.
It appears that they decided to sell it after they found it expensive to build houses.
✅ Pool of insurers is taxable as unregistered partnership.
Afisco Insurance Corporation v. Court of Appeals, 302 SCRA 1:
The ceding companies entered into a Pool Agreement or an association that would handle all the insurance businesses covered under their quota-share reinsurance treaty and surplus reinsurance treaty. The following unmistakably indicate a partnership or an association under the NIRC:
The pool has a common fund, consisting of money and other valuables that are deposited In the name and credit of the pool. This common fund pays for the administration and operation expenses of the pool.
The pool functions through an executive board, which resembles the board of directors of a corporation, composed of one representative for each of the ceding companies.
True, the pool itself is not a reinsurer and does not issue any insurance policy; however, its work is indispensable, beneficial, and economically useful to the business of the ceding companies and Munich, because without it they would not have received their premiums. The ceding companies share in the business ceded to the pool and in the “expenses” according to a “Rules of Distribution” annexed to the Pool Agreement. Profit motive or business is, therefore, the primordial reason for the pool's formation.
Joint accounts or joint ventures formed for profits:
Joint Emergency Operation
no legal personality
operates the business affairs of the two companies as though they constitute a single entity thereby obtaining substantial economy and profit in operation
taxable
Stock Companies:
generally classified as a partnership possessing some of the characteristics of a corporation
they appear to be like corporations to the extent that they have capital stock but when capital is divided or made transferable even without the consent of the co-partner, they partake of the nature of partnership.
B. Major Groups of Corporations for Income Tax Purposes
Domestic Corporations
Resident Foreign Corporation
Non-Resident Foreign Corporation
Domestic Corporations
SEC. 27. Rates of Income tax on Domestic Corporations.
(A) In General.
Except as otherwise provided in this Code, an income tax rate of twenty-five percent (25%) effective July 1, 2020, is hereby imposed upon the taxable income derived during each taxable year from all sources within and without the Philippines by every corporation, as defined in Section 22(B) of this Code and taxable under this Title as a corporation, organized in, or existing under the laws of the Philippines.
Provided, That corporations with net taxable income not exceeding Five million pesos (P5,000,000.00) and with total assets not exceeding One hundred million pesos (P100,000,000.00), excluding land on which the particular business entity's office, plant, and equipment are situated during the taxable year for which the tax is imposed, shall be taxed at twenty percent (20%).
In the case of corporations adopting the fiscal-year accounting period, the taxable income shall be computed without regard to the specific date when specific sales, purchases and other transactions occur. Their income and expenses for the fiscal year shall be deemed to have been earned and spent equally for each month of the period.
The corporate income tax rate shall be applied on the amount computed by multiplying the number of months covered by the new rate within the fiscal year by the taxable income of the corporation for the period, divided by twelve.
Source:
Within and without
Tax Base:
Taxable income
Tax Rate:
25% effective July 1, 2020
20% effective July 1, 2020
Conditions:
Net taxable income not exceeding P5 Million
Total assets not exceeding P100 Million excluding land on which the particular business, entity, office, plant and equipment are situated.
Special domestic corporations:
SEC. 27. Rates of Income tax on Domestic Corporations.
(B) Proprietary Educational Institutions and Hospitals.
Proprietary educational institutions and hospitals which are nonprofit shall pay a tax of ten percent (10%) on their taxable income except those covered by Subsection (D) hereof:
Provided, That beginning July 1, 2020 until June 30, 2023, the tax rate herein imposed shall be one percent (1%):
Provided, further, Thatif the gross income from 'unrelated trade, business or other activity' exceeds fifty percent (50%) of the total gross income derived by such educational institutions or hospitals from all sources, the tax prescribed in Subsection (A) hereof shall be imposed on the entire taxable income.
For purposes of this Subsection, 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. 'Proprietary' means a private hospital or any private school maintained and administered by private individuals or groups with an issued permit to operate from the Department of Education (DepEd),or the Commission on Higher Education (CHED), or the Technical Education and Skills Development Authority (TESDA), as the case may be, in accordance with existing laws and regulations.
(C) Government-owned or –Controlled Corporations, Agencies or Instrumentalities.
The provisions of existing special or general laws to the contrary notwithstanding, all corporations, agencies, or instrumentalities owned or controlled by the Government, except the Government Service Insurance System (GSIS), the Social Security System (SSS), the Home Development Mutual Fund (HDMF), the Philippine Health Insurance Corporation (PHIC), and the local water districts shall pay such rate of tax upon their taxable income as are imposed by this Section upon corporations or associations engaged in a similar business, industry, or activity.
Private Educational Institution
Subject to ten percent (10%) on their taxable income
provided that its gross income from unrelated trade, business or other activity does not exceed fifty percent (50%) of the total income.
Conversely, it is subject to thirty percent (30%) if its income from unrelated trade or business exceeds fifty percent (50%) of the total (gross) income.
Effective July 1, 2020 until June 30, 2023
1% of taxable income (R.A. 11534)
This benefit is no longer applicable.
Private educational Institution
is any "private school" maintained and administered by private individuals or groups issued a permit to operate with Department of Education (DepEd), or the Commission on Higher Education (CHED), or the Technical Education and Skills Development Authority (TESDA), in accordance with existing laws and regulations.
Unrelated trade, business, or other activity
the conduct of which is not substantially related to the exercise or performance by such educational institution of its educational purpose or function.
Related activities include income derived from auxiliary activities
school owned canteen, cafeteria, dormitory and book store within the school premises.
Non-profit hospital
Same rules as private educational institutions.
Unrelated trade, business, or other activity
the conduct of which is not substantially related to the exercise or performance by such hospital of its primary purpose or function.
CIR v. St. Luke's Medical Center , Inc., 682 SCRA 66:
St. Luke's Medical Center, Inc., as a proprietary non-prof it hospital, is entitled to the preferential rate of 10% on its net income from its for-profit activities.
It remains as a proprietary non-profit hospital under Section 27(8) of the NIRC as long as:
it does not distribute any of its profits to its members and
such profits are reinvested pursuant to its corporate purposes.
Government-owned and controlled corporation
Philippine Amusement and Gaming Corporation (PAGCOR)
Tax exempt
❌ income from gaming operations, such as:
casino,
dollar pit,
regular bingo and
mobile bingo operations.
Bloomberry Resorts and Hotels, Inc. v. BIR, 800 SCRA 123:
❌ Contractees and licensees of PAGCOR are likewise exempt from the payment of corporate income tax and other taxes since Section 13(b) of P.D. No. 1869 (PAGCOR franchise) is clear and unequivocal that said exemption inures to their benefit.
Taxable
✅ Income from other related operations which indude Income from casinos, tredltlonal bingo, electronic bingo, internet casino poker and betting operated by licens ed private operators, junket operations, SM demo units, and other necessary and related services, shows and entertainment.
Tax exempt government-owned and controlled corporations (GOCC)
Government Service Insurance System;
Social Security System;
Philippine Health Insurance Corporation;
Local Water Districts;
Home Development Mutual Fund
2. Resident Foreign Corporations:
SEC. 28. Rates of Income Tax on Foreign Corporations.
(A) Tax on Resident Foreign Corporations.
(1) In General.
Except as otherwise provided in this Code, a corporation organized, authorized, or existing under the laws of any foreign country, engaged in trade or business within the Philippines, shall be subject to an income tax equivalent to twenty-five percent (25%) of the taxable income derived in the preceding taxable year from all sources within the Philippines effective July 1, 2020.
In the case of corporations adopting the fiscal-year accounting period, the taxable income shall be computed without regard to the specific date when sales, purchases and other transactions occur. Their income and expenses for the fiscal year shall be deemed to have been earned and spent equally for each month of the period.
The corporate income tax rate shall be applied on the amount computed by multiplying the number of months covered by the new rate within the fiscal year by the taxable income of the corporation for the period, divided by twelve.
Source:
Within
Tax base:
Taxable income
Tax rate:
25% effective July 1, 2020
Special Resident Foreign Corporations:
SEC. 28. Rates of Income Tax on Foreign Corporations.
(A) Tax on Resident Foreign Corporations.
(3) International Carrier.
An international carrier doing business in the Philippines shall pay a tax of two and one-half percent (2 1/2 %) on its ‘Gross Philippine Billings’ as defined hereunder:
(a) International Air Carrier.
‘Gross Philippine Billings’ refers to the amount of gross revenue derived from carriage of persons, excess baggage, cargo, and mail originating from the Philippines in a continuous and uninterrupted flight, irrespective of the place of sale or issue and the place of payment of the ticket or passage document:
Provided, That tickets revalidated, exchanged and/or indorsed to another international airline form part of the Gross Philippine Billings if the passenger boards a plane in a port or point in the Philippines:
Provided, further, That for a flight which originates from the Philippines, but transshipment of passenger takes place at any part 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.
(b) International Shipping.
‘Gross Philippine Billings’ means gross revenue whether for passenger, cargo or mail originating from the Philippines up to final destination, regardless of the place of sale or payments of the passage or freight documents.
Provided, That international carriers doing business in the Philippines may avail of a preferential rate or exemption from the tax herein imposed on their gross revenue derived from the carriage of persons and their excess baggage on the basis of an applicable tax treaty or international agreement to which the Philippines is a signatory or on the basis of reciprocity such that an international carrier, whose home country grants income tax exemption to Philippine carriers, shall likewise be exempt from the tax imposed under this provision.
(6) Tax on Certain Incomes Received by a Resident Foreign Corporation.
(b) Income Derived under the Expanded Foreign Currency Deposit System.
Income derived by a depository bank under the expanded foreign currency deposit system from foreign currency transactions with nonresidents, offshore banking units in the Philippines, local commercial banks including branches of foreign banks that may be authorized by the Bangko Sentral ng Pilipinas (BSP) to transact business with foreign currency deposit system units, and other depository banks under the expanded foreign currency deposit system shall be exempt from all taxes, except net income from such transactions as may be specified by the Secretary of Finance, upon recommendation by the Monetary Board to be subject to the regular income tax payable by banks:
Provided, however, That interest income from foreign currency loans granted by such depository banks under said expanded system to residents other than offshore banking units in the Philippines or other depository banks under the expanded system shall be subject to a final tax at the rate of ten percent (10%).
International Carriers
within
Gross Phil. Billings
2.5%
Offshore banking unit
within
Gross onshore income
10%;
Foreign currency deposit unit
within
Gross onshore income
10%
Transacting business
means continuity of commercial dealings and arrangements.
Gross Philippine Billings
refers to the amount of gross revenue
realized from carriage of persons, excess baggage, cargo and mail
originating from the Philippines
in a continuous and uninterrupted flight,
irrespective of the place of sale or issue and
the place of payment of the ticket or passage document.
Foreign Airline Companies Without Flights Starting From or Passing Through Any Point in the Philippines
An offline airline having a branch office or a sales agent in the Philippines which sells passage documents for compensation or commission to cover offline flights of its principal or head office, or for other airlines covering flights originating from Philippine ports or offline flights, is:
❌ not considered engaged in business as an international air carrier in the Philippines and
❌ is, therefore, not subject to Gross Philippine Billings Tax provided for in Section 28(A)[3][a] of the Code
❌ nor to the three percent (3%) common carrier's tax under Section 118(A) of the same Code.
This provision is without prejudice to classifying such taxpayer under a different category pursuant to a separate provision of the same Code.
International Air Carrier and International Shipping
✅ shall be taxed on the basis of their Gross Philippine Billings.
The 2.5% tax attaches only when the carriage of persons, excess baggage, cargo and mails originated from the Philippines in a continuous and uninterrupted flight, regardless of where the passage documents were sold.
❌ An offline international air carrier having no flights to and from the Philippines is clearly not liable for the Gross Philippine Billings tax.
Meaning of an offline carrier
An offline carrier is any foreign air carrier not certified by the CMI Aeronautics Board, but who maintains office or has designated or appointed agents or employees in the Philippines who sells or offers for sale any air transportation in behalf of said air carrier for others, or negotiate for, or holds itself out by solicitation, advertisement, or otherwise sells, provides, furnishes, contracts, or arranges for such transportation.
Not Certified by CAB (Civil Aeronautics Board):
no official permission to operate flights departing from the Philippines.
Maintains a Presence in the Philippines:
A physical branch office
Designated sales agents
Appointed employees
Sells Tickets for Others:
not necessarily its own flights
ex: tickets for flights of its main company (head office) that originate outside the Philippines.
Offline international airline is subject to corporate income tax
South African Airways v. CIR, 612 SCRA 665 (2010):
28(A)(1) = 25 % on taxable income
Section 28(A)(3)(a) = 2.5% of GPB
Section 28(A)(3)(a) of the 1997 NIRC does not, in any categorical term, exempt all international air carriers from the coverage of Section 28(A)(1) of the 1997 NIRC.
Certainly, had the legislature's intentions been to completely exclude all international air carriers from the application of the general rule under Section 28(A)(1), it would have used the appropriate language to do so; but the legislature did not.
Thus, the logical interpretation of such provisions is that:
if Section 28(A)(3)(a) is applicable to a taxpayer,
then the general rule under Section 28(A)(1) would not apply.
If, however, Section 28(A)(3)(a) does not apply, a resident foreign corporation, whether an international air carrier or not, would be liable for the tax under Section 28(A)(1).
Clearly, no difference exists between British Overseas Airways and South African Airways. The findings therein that an offline carrier is doing business in the Philippines and that income from the sale of passage documents here is Philippine source income must be upheld.
The general rule is that resident foreign corporations shall be liable for a 32% (now 25%) income tax on their income “from within the Philippines, except for resident foreign corporations that are international carriers that derive income from carriage of persons, excess baggage, cargo and mall originating from the Philippine” which shall be taxed at 2 1/2% of their Gross Philippine Billings.
South African Airways, being an international carrier with no flights originating from the Philippines, does not fall under the exception. As such, petitioner must fall under the general rule.
This principle is embodied in the Latin maxim, exception firmat regulam in cssibus non exceptis, which means, a thing not being excepted must be regarded as coming within the purview of the general rule.
To reiterate, the correct interpretation of the above provisions is that:
if an international air carrier maintains flights to and from the Philippines, it shall be taxed at the rate of 2 1/2% of its Gross Philippines Billings, while
international air carriers that do not have flights to and from the Philippines but nonetheless earn income from other activities in the country will be taxed at the rate of 32% (now 25%) of such income.
An offline international air carrier selling passage tickets in the Philippines, through a general sales agent, is a resident foreign corporation doing business in the Philippines
Air Canada v. CIR, 778 SCRA 131:
Doing business includes:
appointing representatives or distributors operating under full control of the foreign corporation, domiciled in the Philippines or
who in any calendar year stay in the country for a period totalling one hundred eighty (180) days or more.
✅ Upon this point, an offline carrier, a foreign air carrier not certified by the Civil Aeronautics Board, that maintains office or has designated or appointed agents or employees in the Philippines, through whom, it sells or offers for sale any air transportation, or negotiates for, or holds itself out by solicitation, advertisement, or otherwise sells, provides, furnishes, contracts, or arranges for such transportation, is undoubtedly “doing business” or “engaged in trade or business in the Philippines.”
As such, it is taxable under Section 28(A)(1), and not Section (A)(3) of the 1997 National Internal Revenue Code, subject to any applicable tax treaty to which the Philippines is a signatory.
Pursuant to Article 8 of the RP-Canada Tax Treaty, Air Canada may only be imposed a maximum tax of 1 1/2% of its gross revenues earned from the sale of its tickets in the Philippines.
= 1.5% of gross revenue
3. Non-Resident Foreign Corporations
SEC. 28. Rates of Income Tax on Foreign Corporations.
(B) Tax on Nonresident Foreign Corporation.
(1) In General.
Except as otherwise provided in this Code, a foreign corporation not engaged in trade or business in the Philippines, effective January 1, 2021, shall pay a tax equal to twenty-five percent (25%) of the gross income received during each taxable year from all sources within the Philippines, such as interests, dividends, rents, royalties, salaries, premiums (except reinsurance premiums), annuities, emoluments or other fixed or determinable annual, periodic or casual gains, profits and income, and capital gains, except capital gains subject to tax under subparagraph 5(c).
Source:
Within
Tax base:
Gross income
Tax rate:
25% effective January 1, 2021
Special Non-Resident Foreign Corporations:
SEC. 28. Rates of Income Tax on Foreign Corporations.
(B) Tax on Nonresident Foreign Corporation.
(2) Nonresident Cinematographic Film Owner, Lessor or Distributor.
A cinematographic film owner, lessor, or distributor shall pay a tax of twenty-five percent (25%) of its gross income from all sources within the Philippines.
(3) Nonresident Owner or Lessor of Vessels Chartered by Philippine Nationals.
A nonresident owner or lessor of vessels shall be subject to a tax of four and one-half percent (4 1/2%) of gross rentals, lease or charter fees from leases or charters to Filipino citizens or corporations, as approved by the Maritime Industry Authority.
(4) Nonresident Owner or Lessor of Aircraft, Machineries and Other Equipment.
Rentals, charters and other fees derived by a nonresident lessor of aircraft, machineries and other equipment shall be subject to a tax of seven and one-half percent (7 1/2%) of gross rentals or fees.
NR-lessor of cinematographic film
Within
Gross Income
25% final tax
NR-owner or lessor of vessels chartered by Phil. Nationals
Within
Gross rental
4.5% final tax
NR-owner or lessor of aircraft, machinery and equipment
Within
Gross rental
7.5% final tax
N. V. Reederij "Amsterdam" v. CIR, 162 SCRA 487:
Two vessels of V. Reederij Amsterdam called on Philippine ports twice to unload cargoes for foreign destinations. It has no office in the Philippines. The fees were collected by its husbanding agent, Royal International Ocean Lines.
❌ The Supreme Court held that the corporation is considered a non-resident foreign corporation. Casual activity as in this case, does not amount to engaging in trade or business in the Philippines.
Minimum Corporate Income Tax
Sections 27[E]
SEC. 27. Rates of Income tax on Domestic Corporations.
(E) Minimum Corporate Income Tax on Domestic Corporations.
(1) Imposition of Tax.
A minimum corporate income tax of two percent (2%) of the gross income as of the end of the taxable year, as defined herein, is hereby imposed on a corporation taxable under this Title, beginning on the fourth taxable year immediately following the year in which such corporation commenced its business operations, when the minimum income tax is greater than the tax computed under Subsection (A) of this Section for the taxable year:
Provided, That effective July 1, 2020 until June 30, 2023, the rate shall be one percent (1%). [21]
(2) Carry Forward of Excess Minimum Tax.
Any excess of the minimum corporate income tax over the normal income tax as computed under Subsection (A) of this Section shall be carried forward and credited against the normal income tax for the three (3) immediately succeeding taxable years.
(3) Relief from the Minimum Corporate Income Tax Under Certain Conditions.
The Secretary of Finance is hereby authorized to suspend the imposition of the minimum corporate income tax on any corporation which suffers losses on account of prolonged labor dispute, or because of force majeure, or because of legitimate business reverses.
The Secretary of Finance is hereby authorized to promulgate, upon recommendation of the Commissioner, the necessary rules and regulation that shall define the terms and conditions under which he may suspend the imposition of the minimum corporate income tax in a meritorious case.
(4) Gross Income Defined.
For purposes of applying the minimum corporate income tax provided under Subsection (E) hereof, the term 'gross income' shall mean gross sales less sales returns, discounts and allowances and cost of goods sold. ‘Cost of goods sold' shall include all business expenses directly incurred to produce the merchandise to bring them to their present location and use.
For a trading or merchandising concern, 'cost of goods sold' shall include the invoice cost of the goods sold, plus import duties, freight in transporting the goods to the place where the goods are actually sold including insurance while the goods are in transit.
For a manufacturing concern, ‘cost of goods manufactured and sold' shall include all costs of production of finished goods, such as raw materials used, direct labor and manufacturing overhead, freight cost, insurance premiums and other costs incurred to bring the raw materials to the factory or warehouse.
In the case of taxpayers engaged in the sale of service, 'gross income' means gross receipts less sales returns, allowances, discounts and cost of services. 'Cost of services' shall mean all direct costs and expenses necessarily incurred to provide the services required by the customers and clients including (A) salaries and employee benefits of personnel, consultants and specialists directly rendering the service and (B) cost of facilities directly utilized in providing the service such as depreciation or rental of equipment used and cost of supplies:
Provided, however, That in the case of banks, 'cost of services' shall include interest expense.
Sections 28A[2]
SEC. 28. Rates of Income Tax on Foreign Corporations.
(A) Tax on Resident Foreign Corporations.
(2) Minimum Corporate Income Tax on Resident Foreign Corporations.
A minimum corporate income tax of two percent (2%) of gross income, as prescribed under Section 27(E) of this Code, shall be imposed, under the same conditions, on a resident foreign corporation taxable under paragraph (1) of this Subsection:
Provided, That effective July 1, 2020 until June 30, 2023, the rate shall be one percent (1%).
Implemented by Revenue Regulations No. 9-98 as amended by Revenue Regulations No. 12-2007
Concept and Rationale of the MCIT
CREBA v. Romulo, 614 SCRA 605:
The MCIT on domestic corporations is a new concept introduced by R.A. No. 8424 to the Philippine taxation system.
It came about as a result of the perceived inadequacy of the self-assessment system in capturing the true income of corporations.
It was devised as a relatively simple and effective revenue-raising instrument compared to the normal income tax which is more difficult to control and enforce. It is a means to ensure that everyone will make some minimum contribution to the support of the public sector. x x x
Domestic corporations owe their corporate existence and their privilege to do business to the government.
They also benefit from the efforts of the government to improve the financial market and to ensure a favorable business climate.
It is therefore fair for the government to require them to make a reasonable contribution to the public expenses.
Congress intended to put a stop to the practice of corporations which, while having large turn-overs, report minimal or negative net income resulting in minimal or zero income taxes year in and year out, through under-declaration of income or over-deduction of expenses otherwise called tax shelters. x x x
The primary purpose of any legitimate business is to earn a profit.
Continued and repeated losses after operations of a corporation or consistent reports of minimal net income render its financial statements and its tax payments suspect.
For sure, certain tax avoidance schemes resorted to by corporations are allowed in our jurisdiction.
The MCIT serves to put a cap on such tax shelters.
As a tax on gross income, it prevents tax evasion and minimizes tax avoidance schemes achieved through sophisticated and artful manipulations of deductions and other stratagems.
Since the tax base was broader, the tax rate was lowered.
To further emphasize the corrective nature of the MCIT, the following safeguards were incorporated into the law.
First, recognizing the birth pangs of businesses and the reality of the need to recoup initial major capital expenditures, the imposition of the MCIT commences only on the fourth taxable year immediately following the year in which the corporation commenced its operations. This grace period allows a new business to stabilize first and make its ventures viable before it is subjected to the MCIT.
Second, the law allows the carrying forward of any excess of the MCIT paid over the normal income tax which shall be credited against the normal income tax for the three immediately succeeding years.
Third, since certain businesses may be incurring genuine repeated losses, the law authorizes the Secretary of Finance to suspend the imposition of MCIT if a corporation suffers losses due to prolonged
labor dispute, force majeure and legitimate business reverses.
Purpose of MCIT
The imposition of the MCIT is designed to forestall the prevailing practice of corporations of over claiming deductions in order to reduce their income tax payments.
Nature of MCIT
The MCIT is an estimate of the income tax that is due from a firm.
It is equal to two percent (2%) of the gross income of a corporation at the close of each taxable quarter.
Being a minimum income tax, a corporation should pay the MCIT whenever its regular (normal) income tax is lower than the MCIT, or when the firm reports a net loss in its tax return.
Conversely, the regular income tax is paid when it is higher than the MCIT.
MCIT is not an additional tax to the regular or normal income tax
At the end of the taxable quarter, the MCIT is compared with the regular income tax which is due from a corporation.
❌ If the regular income is higher than the MCIT, then the corporation does not pay the MCIT.
Not covered by the MCIT:
❌ Newly established firms, or
❌ those which are in their first three years of operations.
Coverage of the MCIT
The MCIT covers:
✅ domestic (30%) and
✅ resident foreign corporations (25%)
which are subject to the regular income tax.
The term "regular income tax"
refers to the regular income tax rates under the Tax Code.
The tax rate is:
33% for 1999
32% for 2000
35% effective July 1, 2005 and
30% effective January 1, 2009.
Thus, corporations which are subject to a special corporate tax system do not fall within the coverage of the MCIT. These are as follows:
❌ Schools,
❌ Hospitals, and
❌ income of Offshore Banking Units (OBUs), and Foreign Currency Deposit Unit (FCDU) from foreign currency transactions;
❌ Regional operating headquarters
The incomes of these corporations are subject to a ten percent (10%) preferential tax rate
❌ Firms under a special income tax regime such as those:
under the PEZA law and the Base Conversion Development Act;
International carriers:
subject to tax at 2 1/2% of their Gross Philippine Billings.
For corporations whose operations or activities are partly covered by the regular income tax system and partly covered under a special income tax system, the MCIT shall apply on operations covered by the regular income tax system.
Example:
The MCIT does not cover an activity of a firm which is registered with the Board of Investments (801) and is granted an income tax holiday.
The MCIT shall cover its other activities which are not covered by the 801 tax incentives.
When does a corporation start to be covered by the MCIT?
A corporation starts to be covered by the MCIT in the fourth (4th) year of its business operations.
The period of reckoning is the start of its business operations is the year when the corporation was registered with the BIR.
This rule will apply regardless of whether the corporation is using the calendar year or fiscal year as its taxable year.
Firms that were registered in 1994 and earlier years are covered by the MCIT beginning January 1, 1998.
Firms which were registered with the BIR in any month in 1998 will be covered by the MCIT after the lapse of three calendar years, i.e., 2002.
Suspension of the payment of MCIT
The Secretary of Finance, upon the recommendation of the BIR Commissioner, may suspend the imposition of the MCIT on a corporation in any of the following cases: PFL
Sustained losses from prolonged labor dispute;
Force majeure;
Legitimate business reverses.
Sustained losses from a prolonged labor dispute
means losses arising from a strike staged by employees which lasted for more than six (6) months within a taxable period and which has caused the temporary shutdown of business operations.
Force majeure
means a cause due to an irresistible force as by "Act of God" like lightning, earthquake, storm, flood and other natural calamities.
This term would also include armed conflicts like war or insurgency.
Legitimate business reverses
shall include substantial losses due to fire, robbery, theft or embezzlement, or for other economic reason as determined by the Secretary of Finance.
How is the MCIT computed?
The MCIT is equal to two percent (2%) of the gross income of the corporation at the end of the taxable quarter.
2% × Gross Income
"Gross income"
means gross sales less sales returns, discounts and allowances and cost of goods sold.
It will also include all items of gross income enumerated under Section 32(A) of the Tax Code, as amended, except income exempt from income tax and income subject to final withholding tax.
Gross Income = Gross Sales
Sales Returns, Discounts, and Allowances
Cost of Goods Sold
Income Exempt from Tax
Income Subject to Final Withholding Tax
Cost of goods sold
include all business expenses directly incurred to produce the merchandise to bring them to their present location and use.
For a trading or merchandising concern
cost of goods sold means the invoice cost of goods sold, plus import duties, freight in transporting the goods to the place where the goods are actually sold, including insurance while the goods are in transit.
COGS = Invoice Cost of Goods Sold
Import Duties
Freight
Insurance
For a manufacturing concern,
cost of goods manufactured and sold means all costs of production of finished goods such as raw materials used, direct labor and manufacturing overhead, freight cost, insurance premiums and other costs incurred to bring the raw materials to the factory or warehouse.
COGS = All Costs of Production of Finished Goods
(Raw Materials Used
Direct Labor
Manufacturing Overhead
Freight Cost
Insurance Premiums
Other Production Costs)
For sale of services
gross income means gross receipts less sales returns, allowances, discounts and cost of services which cover all direct costs and expenses necessarily incurred to provide the services required by the customers and clients including:
Salaries and employee benefits of personnel, consultants and specialists directly rendering the service;
Cost of facilities directly utilized in providing the service such as depreciation or rental of equipment used;
Cost of supplies.
Gross Income = Gross Receipts
Sales Returns, Discounts, and Allowances
Cost of Services
Cost of Services = Salaries and Employee Benefits
Consultant and Specialist Fees
Depreciation or Rental of Equipment
Cost of Supplies
❌ Interest expense is not included as part of cost of service, except in the case of:
✅ banks and
✅ other financial institutions.
The term “gross receipts” means amounts actually or constructively received during the taxable year.
However, for taxpayers employing the accrual basis of accounting, it means amounts earned as gross income.
When is the MCIT reported and paid?
The MCIT shall be paid in the same manner prescribed for the payment of the normal corporate income tax which is on a quarterly and on a yearly basis.
The taxpayer shall pay the MCIT whenever it is greater than the regular or normal corporate income tax which is imposed under Section 27(A) and Section 28(A)(1) of the Code.
Thus, 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 and the time of filing the quarterly corporate income tax return shall be the MCIT which is two percent (2%) of the gross income as of the end of the taxable quarter.
Effective July 1, 2020 until June 30, 2023, the rate shall be one percent (1%) (R.A. No. 11534).
The final comparison between the normal income tax payable by the corporation and the MCIT shall be made at the end of the taxable year and the payable or excess payment in the Annual Income Tax Return shall be computed taking into consideration corporate income tax payment made at the time of filing of quarterly corporate income tax return whether this be MCIT or normal income tax.
Can the company claim the MCIT it paid as a deduction from gross income?
❌ Since the MCIT is an estimate of the normal income tax, it cannot be claimed as deduction.
What is the carry-forward provision under the MCIT?
✅ Any excess of the MCIT over the normal income tax may be carried forward on an annual basis and be credited against the normal income tax for the three immediately succeeding taxable years.
Illustration:
The taxpayer is required to pay the MCIT whenever it is greater than the regular income tax.
Thus, in 2000, the taxpayer will pay MCIT of P75,000 since this is greater than the normal income tax of PS0,000.
In 2001, the taxpayer will pay MCIT of P100,000 because its MCIT in 2001 is still higher than the regular income tax.
The excess MCIT of P25,000 in 2000 (or the difference between the MCIT and the regular income tax in 2000) cannot be used In this instance.
In 2002, when the regular income tax of P100,000 is higher than the MCIT of P60,000, the taxpayer is allowed to claim as credit the excess MCIT of P25,000 and P40,000 for 2000 and 2001 respectively, or a total credit of P65,000. Hence, the taxpayer will pay only P35,000 (P100,000 - P65,000).
Improperly Accumulated Earnings Tax
Section 29(A) as Implemented by Revenue Regulations No. 2-2001.
Domestic corporations as defined under the Tax Code and which are classified as closely-held corporations are subject to 10% improperly accumulated earnings tax on their improperly accumulated earnings.
Repealed by R.A. 11534 which took effect on April 11, 2021.
Section 8. Section 29 of the National Internal Revenue Code of 1997, as amended, on the imposition of improperly accumulated earnings tax, is hereby repealed.
Rationale of improperly accumulated earnings tax of 10%
If the earnings and profits were distributed, the shareholders would then be liable to income tax thereon, whereas if the distribution were not made to them, they would incur no tax in respect to the undistributed earnings and profits of the corporation.
Thus, a tax is being imposed:
in the nature of a penalty to the corporation for the improper accumulation of its earnings, and
as a form of deterrent to the avoidance of tax on shareholders who are supposed to pay dividends tax on the earnings distributed to them by the corporation.
What is the touchstone of the liability?
It is the purpose behind the accumulation of the income and not the consequences of the accumulation.
❌ Thus, if the failure to pay dividends is due to some other causes, such as the use of undistributed earnings and profits for the reasonable needs of the business, such purpose would not generally make the accumulated or undistributed earnings subject to the tax.
✅ However, if there is a determination that a corporation has accumulated income beyond the reasonable needs of the business, 10% improperly accumulated earnings tax shall be imposed.
Determination of reasonable needs of the business
An accumulation of earnings or profits (including undistributed earnings or profits of prior years) is reasonable if it is necessary for the purpose of the business, considering all the circumstances of the case.
The term “reasonable needs of the business” are hereby construed to mean the immediate needs of the business, including reasonably anticipated needs.
What constitute accumulation of earnings for the reasonable needs of the business?
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;
Earnings reserved for definite corporate expansion projects or programs requiring considerable capital expenditure as approved by the Board of Directors or equivalent body;
Earnings reserved for building, plants or equipment acquisition as approved by the Board of Directors or equivalent body;
Earnings reserved for compliance with any loan covenant or pre-existing obligation established under a legitimate business agreement;
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;
In the case of subsidiaries of foreign corporations in the Philippines, all undistributed earnings intended or reserved for investments within the Philippines as can be proven by corporate records and/or relevant documentary evidence.
To determine the “reasonable needs” of the business in order to justify an accumulation of earnings, the Courts of the United States have invented the so-called “Immediacy Test” which construed the words “reasonable needs of the business” to mean the immediate needs of the business, and it was generally held that if the corporation did not prove an immediate need for the accumulation of earnings and profits, the accumulation was not for the reasonable needs of the business, and the penalty tax would apply.
Coverage of IAET
The 10% Improperly Accumulated Earnings Tax (IAET) is imposed on improperly accumulated taxable income earned starting January 1, 1998 by domestic corporation as defined under the Tax Code and which are classified as closely-held corporations.
What are closely-held corporations?
Closely-held corporations are those corporations at least fifty percent (50%) in value of the outstanding capital stock or at least fifty percent (50%) of the total combined voting power of all classes of stock entitled to vote is owned directly or indirectly by not more than twenty (20) individuals.
Corporations not subject to IAET:
Banks and other non-bank financial intermediaries;
Insurance companies;
Publicly-held corporations;
Taxable partnerships;
General professional partnerships;
Non-taxable joint ventures;
Enterprises duly registered with the Philippine Economic Zone Authority (PEZA) under RA No. 7916, and
Enterprises registered pursuant to the Bases Conversion and Development Act of 1992 under R.A. No. 7227.
Prima facie instances of accumulation of profits beyond the reasonable needs of a business are indicative of purpose to avoid income tax upon shareholders:
Investment of substantial earnings and profits of the corporation in unrelated business or in stock or securities of unrelated business;
Investment in bonds and other long-term securities;
Accumulation of earnings in excess of 100% of paid-up capital, not otherwise intended for the reasonable needs of the business.
IAET is not covered by the prescriptive period for assessment.
It would not be proper for the law to compel a corporation to report improper accumulation of surplus.
A tax imposed upon unreasonable accumulation of surplus is in the nature of a penalty.
Other Corporate Tax Rates
Common Tax Rates
Capital gain from sale of share of stock.
If not listed and traded through stock exchange
15% of net capital gain
The term disposition is accorded its ordinary meaning, that is, any act of disposing, transferring to the care or possession of another, or the parting with, alienation of, or giving up of property.
If listed and traded through local stock exchange
6/10 of 1% of Gross Selling Price
It is in the nature of percentage tax.
Domestic Corporations
Corporations have the option to be taxed at 15% of gross income.
In this regard, the President may, upon the recommendation of the Secretary of Finance, effective 1 January 2000, allow corporations the option to be taxed at 15% of gross income, after the following conditions have been satisfied:
A tax effort ratio of 20% of Gross National Product (GNP);
It requires the country to collect a total tax revenue equal to at least 20% of its GNP.
GNP is an economic measure that estimates the total value of all final products and services produced within a country by the means of production owned by its residents.
GNP = total value of all goods and services produced in the country + net income received from abroad - profits earned by foreigners from domestic investments.
A ratio of 40% of income tax collection to total tax revenues;
Income tax should make up at least 40% of the total tax revenue collected.
Income tax is levied on income earned by individuals and businesses.
A VAT tax effort of 4% of GNP; and
It requires Value Added Tax (VAT) to contribute at least 4% of the total value of goods and services produced.
VAT is a broad-based tax applied to the consumption of goods and services.
GNP is an economic measure that estimates the total value of all final products and services produced within a country by the means of production owned by its residents.
A 0.9% ratio of the Consolidated Public Sector Financial Position (CPSFP) to GNP.
It relates to the overall financial health of the government
CPSFP refers to the net financial position (assets - liabilities) of the entire government sector, including the national government and local government units.
It provides a sense of the government's debt situation when ratioed with the GDP.
The option to be taxed based on gross income shall be available only to firms whose ratio of cost of sales to gross sales or receipts from all sources does not exceed 55%.
Ratio of Cost of Sales to Gross Sales ≤ 55%
Gross Sales / Cost of Goods Sold (COGS)
The election of the gross income tax option by the corporation shall be irrevocable for three consecutive taxable years during which the corporation is qualified under the scheme.
The term "gross income" derived from business shall be equivalent to gross sales less sales returns, discounts and allowances and cost of goods sold.
Gross Income = Gross Sales − Sales Returns, Discounts and Allowances − Cost of Goods Sold (COGS)
"Cost of goods sold" shall include all business expenses directly incurred to produce the merchandise to bring them to their present location and use.
Interest on currency deposit and royalties derived from sources within the Philippines
20% Final Tax.
Ex:
Interest earned on Philippine Peso (PHP) bank deposits (regular savings accounts, time deposits, etc.)
Royalties derived from sources within the Philippines (e.g., royalties from books written by a Philippine resident)
Interest income from deposit under the expanded foreign currency system
15% Final Tax
Ex:
FCDU accounts are special accounts offered by Philippine banks to attract foreign investments.
Resident Foreign Corporations
SEC. 28. Rates of Income Tax on Foreign Corporations.
(A) Tax on Resident Foreign Corporations.
(4) Tax on Branch Profits Remittances.
Any profit remitted by a branch to its head office shall be subject to a tax of fifteen (15%) which shall be based on the total profits applied or earmarked for remittance without any deduction for the tax component thereof (except those activities which are registered with the Philippine Economic Zone Authority). The tax shall be collected and paid in the same manner as provided in Sections 57 and 58 of this Code:
Provided, that interests, dividends, rents, royalties, including remuneration for technical services, salaries, wages premiums, annuities, emoluments or other fixed or determinable annual, periodic or casual gains, profits, income and capital gains received by a foreign corporation during each taxable year from all sources within the Philippines shall not be treated as branch profits unless the same are effectively connected with the conduct of its trade or business in the Philippines.
Branch Profit Remittance Tax
Tax base:
Profits applied for or earmarked for remittance.
This took effect on January 1, 1998.
Profits a branch earns in the Philippines that are designated for remittance back to the head office.
This excludes any Philippine income tax already paid on those profits.
Tax rate:
15% final tax.
Condition:
Branch profits are effectively connected with the conduct of its trade or business in the Philippines.
Commissioner v. Marubeni, 177 SCRA 500:
The dividend income remitted to Marubeni Corporation of Japan arising from its equity investments in Atlantic, Gulf and Pacific Company of Manila is considered separate and distinct income from the branch office in the Philippines.
There can be no other logical conclusion that the investment was made for purposes peculiarly germane to the conduct of the corporate affairs of Marubeni, Japan, but certainly not of the branch in the Philippines.
Exempt profits remitted:
Derived from activities registered with the Philippine Economic Zone Authority (PEZA).
Deutsche Bank AG Manila Branch v. CIR, 704 SCRA 216:
The branch office in the Philippines of a resident of the Federal Republic of Germany may be subjected to the branch profits remittance tax withhold at source in accordance with Philippine law but shall not exceed 10% of the gross amount of the profits remitted by that branch to the head office.
This is pursuant to Paragraph 6, Article 10 of the RP-Germany Tax Treaty.
Purpose of Remittance Tax:
The remittance tax was conceived in an attempt to equalize the income tax burden on foreign corporations maintaining, on the one hand, local branch offices and organizing, on the other hand, subsidiary domestic corporations where at least a majority of all the latter's shares of stock are owned by such foreign corporations.
Non-Resident Foreign Corporations
SEC. 28. Rates of Income Tax on Foreign Corporations.
(B) Tax on Nonresident Foreign Corporation.
(a) Interest on Foreign Loans.
A final withholding tax at the rate of twenty percent (20%) is hereby imposed on the amount of interest on foreign loans contracted on or after August 1, 1986;
(b) Intercorporate Dividends.
A final withholding tax at the rate of fifteen percent (15%) is hereby imposed on the amount of cash and/or property dividends received from a domestic corporation, which shall be collected and paid as provided in Section 57(A) of this Code, subject to the 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 equivalent to fifteen percent (15%), which represents the difference between the regular income tax and the fifteen percent (15%) tax on dividends as provided in this subparagraph:
Provided, That effective July 1, 2020, the credit against the tax due shall be equivalent to the difference between the regular income tax rate provided in Section 28(B)(1) of this Code [38] and the fifteen percent (15%) tax on dividends;
Interest on foreign loan
20% Final Tax.
Dividend received from domestic corporation
This is known as the tax sparing credit rule.
Under this rule, the dividends received shall be subject to 15% FWT, provided, that the country in which the corporation is domiciled either:
allows a tax credit of 15% against the taxes due from the foreign corporation for taxes deemed paid; or
does not impose income tax on such dividends.
Tax rate:
15% final tax.
Condition:
foreign government shall allow a credit against the tax due from the foreign corporation taxes deemed to have been paid.
Tax credit allowed:
15% effective January 1 2009
The 15% represents the difference between the NCIT of 30% on corporations and the 15% tax on dividends.
Issues:
May a subsidiary corporation (withholding agent) file an action for refund?
Com. v. Procter, 204 SCRA 377:
Procter and Gamble Philippines, subsidiary corporation of P&G-USA is properly regarded as a “taxpayer” within the meaning of Section 309, NIRC (now Section 22[N]) and therefore, authorized to refund.
Withholding agent is technically considered as taxpayer.
Reason: It is also an agent of the taxpayer in reporting such an income.
A withholding agent, a person liable for tax, has been held to be a person subject to tax and properly considered a taxpayer.
Does the phrase “deemed paid” tax credit mean tax credit actually granted by the foreign country?
The Tax Code merely requires that the foreign country (USA) shall allow a credit against the tax due from Procter and Gamble-USA for taxes deemed to have been paid in the Philippines.
There is no statutory provision or revenue regulation requiring “Actual Grant.”
Therefore, the phrase “deemed paid” “tax credit” does not imply tax credit actually granted by the foreign government.
In order to determine whether foreign tax law complies with the requirements for applicability of the reduced or preferential fifteen (15%) dividend tax rate under Section 28 85(b), NIRC, it is necessary:
to determine the amount of the 15 percentage points dividend tax waived by the Philippine government under Section 28 (B)(5)(b), NIRC, and which hence goes to the foreign cor poration;
to determine the amount of the “deemed paid” tax credit which foreign tax law must allow to foreign corporation; and
to ascertain that the amount of the “deemed paid” tax credit allowed by foreign law Is at least equal to the amount of the dividend tax waived by the Philippine Government.
“Deemed paid”
concept merely reflects economic reality, since the Philippine corporate income tax was in fact paid and deducted from revenues earned In the Philippines, thus reducing the amount remittable as dividends to the foreign corporation.
Purpose of Tax Sparing Credit:
To encourage foreign investments and to attract foreign investors.
Tax Exempt Corporations Under the NIRC
Labor, Agriculture, or Horticultural Organization Not Organized Principally for Profit
✅ Provincial fairs and like associations of a quasi-public character:
designed to encourage development of better agricultural and horticultural products through a system of awards, prizes or premiums and
whose income derived from gate receipts, entry fees, donations, etc. is used exclusively to meet necessary expenses of upkeep and operation are thus exempt.
❌ On the other hand, the holding of periodical race meets by associations, the profits from which inure to the benefit of their stockholder are not tax-exempt.
❌ Similarly, corporations engaged in growing agricultural or horticultural products or raising livestock or similar products for profit are subject to tax.
Mutual Savings Banks and Cooperative Banks
Requisites for exemption:
No capital stock represented by shares;
Earnings, less only the expenses of operating are distributable wholly among the depositors
Operated for mutual purposes and without profit.
✅ Exemption applies to foreign as well as domestic banks.
❌ Not qualified as mutual savings bank if deposits are made compulsory under contracts between the bank and depositors and is operated for speculation rather than for savings.
Fraternal Beneficiary Society, Order or Association
Requisites for exemption:
Operated under lodge system or for the exclusive benefit of the members of a society - they have parent and local organizations which are active;
Established system of payment to its members or their dependents of life, sick, accident, or other benefits;
No part of the net income inures to the benefit of the stockholders or members.
✅ A grand lodge established for the care of the members, their dependents, and members of an affiliated lodge unable to earn a livelihood by reason of the infirmities of age was held tax exempt.
❌ Mutual protective societies not operating under the lodge system and traveler's association providing for fixed death benefits to the beneficiaries or members are not tax exempt.
Cemetery Companies
Requisites for exemption:
Owned and operated exclusively for the benefit of its owners;
Not operated for profit.
✅ Any cemetery corporation chartered solely for burial purposes and not permitted by its charter to engage in any business not necessarily incident to that purpose, is exempt from income, provided that no part of its net earnings inures to the benefit of any private shareholder or individual.
✅ Cemetery company which fulfills the other requirements of the Statute may be exempt, even though it issues preferred stock entitling the holders to dividend at a fixed rate, provided that its articles of incorporation require:
that the preferred stock shall be retired at par as soon as the sufficient funds are realized from sales; and
that all funds not required for the payment of dividends upon or to the retirement of preferred stock shall be used by the company for the care and improvement of the cemetery/property.
❌ Cemetery having a capital stock represented by shares, or which is operated for profit or for the benefit of persons other than its members, does not come within the exempted class.
Religious, Charitable, Scientific, Athletic or Cultural Corporations
Requisites for exemption:
Organized and operated for one or more of the specified purposes;
No part of its net income must inure to the benefit of private stockholders or individuals.
✅ In the case of religious activities, income from the conduct of strictly religious activities, such as fees received for administering baptismal, solemnizing marriages, attending burials, holding masses, and other like income is exempt.
✅ Charitable corporation includes association for the relief of the families of clergymen, even though the latter make contributions to the fund established for this purpose, or for furnishing the series of trained nurses to persons unable to pay for them or for aiding the general body of litigants by improving the efficient administration of justice.
CIR v. St. Luke's Medical Center, Inc., 682 SCRA 66:
St. Luke's Medical Center, Inc., fails to meet an indispensable requirement under Section 30(E) - operated exclusively for charitable purposes - to be completely tax exempt from all its income.
It admitted having derived profits from its paying patients.
To be exempt under Section 30(E) of the NIRC, a charitable institution must be:
A non-stock corporation or association;
Organized exclusively for charitable purposes;
Operated exclusively for charitable purposes;
No part of its net income or asset shall be long to or inure to the benefit of any member, organizer, officer or any specific person.
To be clear, for an institution to be completely exempt from income tax, Section 30(E) of the NIRC requires said institution to operate exclusively for charitable purpose.
But in case an exempt institution under Section 30(E) of the said Code earns income from its for-profit activities, it will not lose its tax exemption.
However, its income from for-profit activities will be subject to income tax at the preferential 10% rate pursuant to Section 27(8) thereof.
Business, Chamber of Commerce, or Board of Trade
Requisites for exemption:
Association of persons having some common business interest;
Limited its activities to work for such common interests;
Not engaged in a regular business for profit;
No part of the net income inures to the benefit of any private stockholder or individual.
❌ Ceases to be tax exempt if it engages in a regular business for profit even if it conducts business on a cooperative basis or produces only sufficient income to be self-assessing.
❌ An association engaged in furnishing information to prospective investors, to enable them to make sound investment, is not exempt, since its members have no common business interests even though all its income is devoted to the purpose stated.
✅ A clearing house association, not organized for profit, no part of the net income of which inures to the benefit of any private shareholder or individual, is exempt provided its activities are limited to the exchange of checks and similar work for the common benefit of its member.
✅ An association of persons who are engaged in the transportation business whether by land or water, which is designed to promote the legitimate objects of such business, and all of the income of which is derived from membership fee dues and is expended for office expenses is exempt.
❌ Makati Stock Exchange is not a business league, chamber of commerce, or board of trade within the purview of Section 30(f) of the Tax Code, as amended, and must pay income tax on its taxable income. Earnings inure to the benefit of its members.
Civic League
Requisites for exemption:
Not organized for profit but operated ex clusively for purposes beneficial to the community as a whole.
In general, organizations engaged in promoting the welfare of mankind.
Sworn affidavit with the BIR showing the following:
Character of the league or organization;
Purpose for which it was organized;
Actual activities;
Sources of income and disposition there;
All facts relating to the operation of the organization which affects its right to exemption.
The copy of articles of incorporation, by laws and financial statements should be attached to the sworn affidavit.
✅ Activities which consist in the doing of acts and things designed to promote the best interests and well-being, as well as to safeguard the community welfare, of the residents of the place which is a contiguous community of property owners and residents within an area, its source of income coming from dues assessed against the members on the basis of their relative holding in said place, and no part of such income inures to the benefit of any private stockholder or individual is exempt from the payment of income.
✅ An association organized for maintaining sanitation, to afford community police protection, fire prevention as well as the beautification and uniformity of the surrounding premises of the occupants of a subdivision is exempt from income tax.
An institution to be completely exempt from income tax under Section 30(G) of the 1997 NIRC must operate exclusively for social welfare purposes.
But in case an exempt institution under Section 30(G) of the said Code earns income from its for-profit activities, it will not lose its tax exemption.
However, its income from for-profit activities will be subject to income tax at the preferential rate pursuant to Section 27(8) thereof.
Non-Stock, Non-Profit Educational Institutions (Revenue Memorandum Circular No. 76-2003
✅ The exemption of non-stock, non-profit educational institutions refers to internal revenue taxes imposed by the National Government on all revenues and assets used actually, directly and exclusively for educational purposes.
✅ Furthermore, revenues derived from assets used in the operation of cafeterias/canteens and bookstores are exempt from taxation provided they are owned and operated by the educational institution as ancillary activities and the same are located within the school premises.
❌ However, they shall be subject to internal revenue taxes on income from trade, business or other activity, the conduct of which is not related to the exercise or performance by such educational institutions of their educational purposes or functions.
i.e., rental payment from their building/premises.
✅ Unlike non-stock, non-profit corporations, their interest income from currency bank deposits and yield from deposit substitute instruments used actually, directly and exclusively in pursuance of their purposes as an educational institution, are exempt from the 20% final tax and 7 1/2% tax on interest income under the expanded foreign currency deposit system imposed under Section 27(B)[1] of the Tax Code of 1997, subject to compliance with the conditions that as a tax-exempt educational institution, they shall on annual basis submit to the Revenue District Office concerned an annual Information return and duly audited financial statement together with the following:
Certification from their depository banks as to the amount of interest income earned from passive investment not subject to the 20% final withholding tax and 7 1/2% tax on interest income under the expanded foreign currency deposit system imposed by Section 27(B)[1] of the Tax Code of 1997;
Certification of actual utilization of the said income; and
Board Resolution by the school administration on proposed projects (i.e., construction and/or improvement of school buildings and facilities, acquisition of equipment, books and the like) to be funded out of the money deposited in banks or placed in money markets, on or before the 14th day of the fourth month following the end of its taxable year.
❌ Finally, the exemption does not cover holding taxes.
As an educational institution, they are constituted as withholding agents for the government required to withhold the tax on compensation income of their employees, or the withholding tax on income payments to persons subject to tax pursuant to Section 57 of the Tax Code of 1997.
Jurisprudential requisites for exemption:
The school must be non-stock and non-profit;
The income is actually, directly and exclusively used for educational purposes.
There are no other conditions and limitations.
Doctrinal rulings:
✅ The income and revenues of De La Salle University, a non-stock and non-profit educational institution actually, directly and exclusively used for educational purposes are exempt from duties and taxes.
❌ The last paragraph of Section 30 of the Tax Code is without force and effect for being contrary to the Constitution insofar as it subjects to tax the income and revenues of non-stock, non-profit educational institutions used actually, directly and exclusively for educational purposes.
Government Educational Institution
The University of the Philippines (Act No. 1870, as amended) is subject to 20% final tax.
Other government educational institutions are likewise subject thereto.
Reason:
Income from 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 tax.
Mutual Fire Insurance Companies and Like Organizations
Requisites for exemption:
Income is derived solely from assessments dues and fees collected from members;
Fees collected from members are for the sole purpose of meeting its expenses.
✅Receipt which is a mere incident of the business of the company does not prevent exemption. Thus, receipt or the proceeds of the sale of badges, office supplies, or equipment will not defeat the exemption.
✅ The same holds true with the receipt of interest upon government bonds.
However, where such bonds are bought as permanent investment, the receipt of interest destroys the exemption.
✅ Receipt of entrance fee (premium) does not render the company taxable.
❌ Issuing policies for stipulated cash premiums or requiring advance deposits to cover the cost of insurance and maintaining investment from which income is derived is no longer exempt.
✅ Advance assessment for the sole purpose of meeting losses and expenses is tax exempt.
Farmers, Fruit Growers or Like Association
Requisites for exemption:
Formed and organized as sales agent for the purpose of marketing the product of its members;
No net income to the members;
Proceeds of the sale shall be turned over to them less necessary selling expenses on the basis of the quantity of produce finished by them.
✅Cooperative dairy companies which are engaged in collecting milk and disposing of it, or the products thereof and distributing the proceeds less necessary operating expenses among the members upon the basis of the quantity of the milk or of butter fat in the milk are exempt from the tax.
❌ If the proceeds of the business are distributed in any other way other than on such proportionate basis, the company will be subject to tax.
❌ Farmers association is not tax exempt, if it deducts more than the necessary selling to the tanners.
❌ Cooperative associations acting as purchasing agents are not expressly exempt from tax.
✅ But rebates made to purchases, whether or not member of the association, in proportion to their purchases may be excluded from gross income, any profits made from non-members and distributed to members in the guise of rebates are, of course, subject to tax.
“Like association” is construed as referring only to association whose activities are similar to farming and fruit growing.
✅ Credit Union which is a non-stock corporation organized and operated for mutual purposes without profit, its activities being confined to the members thereof, is exempt from income business and residence taxes.
Common Requisites: PBCE
Not organized and operated principally for profit;
No part of the net income inures to the benefit of any member or individual;
No capital represented by shares of stock;
Educational or instructive in character.
Objectives:
betterment of the conditions engaged in such pursuits,
the improvement of the grade of their product and
the development of a higher degree of efficiency in their respective occupations.
Common Limitations:
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 tax.
The income of such organizations which is considered as income from their properties, real or personal, generally consists of income from corporate dividend, rentals received from their properties, interests from Philippine currency bank deposits or capital loaned to other persons, income from agricultural lands, owned by such corporations, profits from the sale of property, real or personal and other similar income are taxable.
Exception: When earned by a non-stock, non-profit educational institution (Article XIV, Section 4[3], 1987 Constitution).
Commissioner of Internal Revenue v. CA, 298 SCRA 83:
Young Men's Christian Association of the Philippines, Inc. (YMCA) established as a welfare educational and charitable non-profit corporation is subject to income tax on the rental income derived from the lease of its properties, real or personal, and is therefore not exempt from income taxation, even if such income is exclusively used for the accomplishment of its objectives.
The exemption claimed by the YMCA is expressly disallowed by the very wording of the last paragraph of then Section 26 (now last paragraph of Section 30) of the NIRC which mandates that income of exempt organizations (such as the YMCA) from any of their properties, real or personal, be subject to the tax imposed by the same Code.
Because the last paragraph of said section unequivocally subjects to tax the rent income of the YMCA from its real property, the Court is duty-bound to abide strictly by its literal meaning and to refrain from resorting to any convoluted attempt at construction.
CIR v. St. Luke's Medical Center, Inc., 682 SCRA 66:
The last paragraph of Section 30 provides that if a tax exempt charitable institution conducts “any” activity for profit, such activity is not tax exempt even as its not-for-profit activities remain tax exempt.
This paragraph qualifies the requirements in Section 30(E) that the “[n]on-stock corporation or association [must be] organized and operated exclusively for x x x charitable x x x purposes x x x.”
It likewise qualifies the requirement in Section 30(G) that the civic organization must be “operated exclusively” for the promotion of social welfare.
Thus, even if the charitable institution must be “organized and operated exclusively” for charitable purposes, it is nevertheless allowed to engage in “activities conducted for profit” without losing its tax exempt status for its not-for-profit activities.
The only consequence is that the “income of whatever kind and character” of a charitable institution “from any of its activities conducted for profit, regardless of the disposition made of such income, shall be subject to tax.”
Prior to the introduction of Section 27(8), the tax rate on such income from for-profit activities was the ordinary corporate rate under Section 27(A). With the introduction of Section 27(8), the tax rate is now 10%.
Tax exempt government-owned and controlled corporations (GOCC)
Government Service Insurance System;
Social Security System;
Philippine Health Insurance Corporation;
Local Water Districts;
Home Development Mutual Fund
Tax-Exempt Corporations under Special Laws
Cooperatives are exempted from taxes subject to certain conditions under R.A. No. 6938.
Foundation created for scientific advancement is exempt from tax under Section 24 of R.A. No. 2067.
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