CORPORATE INCOME

TAXATION
REGULAR INCOME TAXATION: SPECIAL CORPORATIONS
 CORPORATION…
 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 incident to its
existence (Sec.2 of Corporation Code)

 Are subject to FINAL TAX, CAPITAL GAINS TAX and

REGULAR INCOME TAX.

(MANGALINO)
 However, for income tax purposes, the term
“corporation” shall include:
 Partnerships, no matter how created or organized,
 Joint stock companies;
 Joint accounts (cuentas en participacion);
 Associations, or
 Insurance companies,
 EXCEPT:
 General Professional Partnership; and
 Joint Venture or Consortium formed for the purpose of undertaking
construction projects or engaging in petroleum, coal, geothermal
and other energy operations pursuant to an operating or consortium
agreement under a service contract with the government. (Sec.
22([B] of the Tax Code)
(Mangalino)
 Under the Civil Code, a partnership is one created when two or more persons
Partnership
contribute money, property or industry to a common fund with the intention of dividing
the profit among themselves. (Art. 1767)
General Partnerships formed by persons for sole purpose of exercising their common profession,
Professional no part of the income of which is derived from engaging in any trade or business.
Partnerships

Joint Venture A commercial undertaking by two or more persons, differing from a partnership in that
it relates to the disposition of a single lot of goods, or the completion of a single project.
Joint Stock Constituted when a group of individuals, acting jointly, establish and operate a

Companies business enterprise under an artificial name, with an invested capital divided into
transferrable shares, an elected board of directors and other corporate characteristics,
BUT operating without formal governmental authority

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

Associations Includes all organizations which have substantially the salient features of a corporation
to be taxable as such.
(Mangalino)
 GENERAL CLASSIFICATIONS AND TAXATION OF
CORPORATIONS
 1. Domestic Corporation – is a corporation created and organized under
the law of the Philippines;
 2. Foreign Corporations – are those which are created and organized under
foreign laws:
 a. Resident – having a permanent establishment/branch in the Philippines,
acquiring residency for tax purposes;
 b. Non-resident – no permanent establishment in the Philippines; not regularly
engaged in trade or business in the Philippines.
Corporation Tax Base
Domestic Corporation Taxable Income from sources within and outside the
Philippines

Resident Foreign Corporation Taxable Income from sources within the Philippines

Non-resident Foreign Corporation GROSS Sales/Receipts from sources within the Philippines

(Agapito)
 TAX BASE
 1. Tax base for Regular Corporate Income Tax purposes is taxable income which is the gross
income less allowable deductions;
 2. For Minimum Corporate Income Tax the tax base is the gross income; “Gross Income”, as
contemplated in the tax code, is Net Sales or Receipts (Gross
 sales or receipts less sales returns, discounts and allowances) less any Cost of Sales or Cost of
Services.
 3. For Non-resident Foreign Corporations, the tax base is the Gross Sales/Receipts
For reference:

Gross Sales/Receipts xxx

Discounts and Returns (xxx)
Cost of Goods Sold (xxx)
Gross Income xxx
Itemized Deductions/Optional Standard Deduction (xxx)
Taxable Income xxx
 4. Gross Income excludes items which are subject to Capital Gains Tax or Final Tax and those
which are Exempt.
(Agapito)
 Tax Rate
Income Tax Rate (or the Regular Corporate
Income Tax (RCIT) or Normal Corporate Income Tax
or Normal Income Tax) for all corporations is 30%

(effective January 1, 2009, notwithstanding if they are domestic or foreign)

(Agapito)
 SUB CLASSIFICATION OF CORPORATE INCOME TAXPAYERS

A.DOMESTIC CORPORATIONS
1. EXEMPT DOMESTIC CORPORATIONS
Exempt non-profit Corporations under the NIRC
Government agencies and instrumentalities
Certain government-owned and controlled corporations
Cooperatives

(Agapito)
 2. SPECIAL DOMESTIC CORPORATIONS
Special Domestic Corporation Tax Base Tax Rate
Proprietary Educational Institutions Generally, 10%;
and Non-profit Hospitals (Sec. 27[B] Net Income 30% - if income from unrelated
of the Tax Code) business* exceeds 50%
Non-stock, non-profit educational Exempt from income taxes**(Sec.
institutions None 4[3], Art. XIV of the 1987 Constitution)
Government-owned or controlled 30%
corporations, agencies or Same as those imposed upon
instrumentalities (Sec. 27(C) of the Net Income corporation or association engaged
Tax Code) in
similar business, or activity.***

3. REGULAR DOMESTIC CORPORATIONS

(Agapito)
B. RESIDENT FOREIGN CORPORATIONS
1. SPECIAL RESIDENT FOREIGN CORPORATIONS

(Agapito)
 *Gross Philippine Billings for:
 International air carrier refers to the amount of gross revenue derived from carriage of
persons, excess baggage, cargo, or mail originating from the Philippines in a
continuous and uninterrupted flight, irrespective of the place of sale or issue and the
place of payment of the ticket or passage document. (Sec. 28[A][3][a]) 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 transhipment of passenger takes place at any part outside the
Philippines or another airline, only the aliquot portion of the cost of the ticket
corresponding to the leg flown from the Philippines to the point of transhipment shall
form part of the Gross Philippine Billings. (as amended by RA No. 10378)
 International shipping means gross revenue whether for passenger, cargo or mail
originating from the Philippines up to final destination, regardless of the place of
sale or payment of the passage or freight documents. (Sec. 28[A][3][b])
 Exemption under reciprocity: international carriers doing business in the Philippines,
avail of a preferential rate or exemption from the tax herein imposed on the basis of
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. (as amended by RA No. 10378)
 **PEZA-registered entities are exempt from the imposition of the Branch Profits
Remittance Tax.

(Agapito)
 3. REGULAR FOREIGN CORPORATIONS
C. NON-RESIDENT FOREIGN CORPORATIONS
1. SPECIAL NON-RESIDENT FOREIGN CORPORATIONS
Special NRFC Tax Base Tax Rate
Non-resident cinematographic film owner, lessor Gross income from 25%
or distributor Philippine sources
Non-resident owner or lessor of aircraft, Gross rentals or fees derived 7½%
machineries and other equipment within the
Philippines
Non-resident owner or lessor of vessels Gross rentals, lease or charter
chartered by Philippine nationals fees from leases or charters to
Filipino citizens or corporations, 4½%
as approved by Maritime
Industry Authority

2. REGULAR NON-RESIDENT FOREIGN CORPORATIONS

(Agapito)
EXEMPT DOMESTIC CORPORATIONS
 EXEMPT NON-PROFIT CORPORATIONS UNDER NIRC
 GOVERNMENT AGENCIES AND INSTRUMENTALITIES
 EXEMPT GOVERNMENT-OWNED AND CONTROLLED CORPORATIONS
 COOPERATIVES

QUALIFICATION OF TAX EXEMPTIONS

- Relates only to income from related activites.

(Belarmino)
 TAX EXEMPT CORPORATIONS
A. Sec. 30 of the Tax Code enumerates the following corporations which are exempt from the Tax on Corporations:
B. Labor, Agriculture, or Horticultural Organization not organized principally for profit.
C. Mutual Savings Banks and Cooperative Banks
D. Fraternal Beneficiary Society, Order or Association
E. Cemetery Companies owned and operated exclusively for the benefit of its members;
F. Religious, Charitable, Scientific, Athletic or Cultural Corporations
G. Business League, Chamber of Commerce, or Board of Trade
H. Civic League
I. Non-Stock, Non-Profit Educational Institutions
J. Government Educational Institution
K. Mutual Fire Insurance Companies and Like Organizations
L. Farmers, Fruit Growers’ or Like Associations
 EXCEPTION: income from whatever kind and character of the foregoing corporations 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.
 An institution under Section 30(E) or (H) does not lose its tax exemption if it earns income from its for-profit activities.
Such income from for-profit activities, under the last paragraph of Section 30, is merely subject to income tax,
previously at the ordinary corporate rate but now at the preferential 10% rate pursuant to Section 27(B)

(Belarmino)
THE CLASSIFICATION RULE
THE INCOME FROM EXEMPT CORPORATIONS ARE CLASSIFIED INTO
INCOME FROM RELATED ACTIVITIES AND INCOME FROM UNRELATED
ACTIVITIES. THE INCOME FROM UNRELATED ACTIVITIES IS SUBJECTED TO
REGULAR INCOME TAX.

(Belarmino)
ILLUSTRATION: (SEE PAGE 622)
Bahay Kalinga, a social welfare charitable non-profit corporation,
reported the following statement of income and expenses:
Related Activities Unrelated Activities Total
Gross Income P 800,000 P 400,000 P 1,200,000
Less: Expenses 400,000 150,000 550,000
Net Surplus 400,000 250,000 650,000

ANSWER:
Net Income or Surplus from Unrelated Activities 250,000
Multiply by: Corporate tax rate 30%
Regular Corporate InTax 75,000

***NOTE: Exempt corporations are treated as regular domestic

corporations with regard to the income from unrelated resources.

(Belarmino)
 REQUISITE FOR EXEMPTION OF EXEMPTION OF NON-STOCK,
NON-PROFIT CORPORATIONS
1. It must be a non stock corporation or association ORGANIZED AND OPERATED
EXCLUSIVELY for religious, charitable, scientific, athletic, or cultural puposes or
for the rehabilitation of vetarans.

2. It should meet the following tests:

 ORGANIZATIONAL TEST – Its constitutive documents EXCLUSIVELY limit its purposes
to one or more of the following: RELIGIOUS, CHARITABLE SCIENTIFIC, ATHLETIC OR
CULTURAL PURPOSES, OR FOR THE REHABILITATION OF VETARANS.
 OPERATIONAL TEST – The regular activities of the corporation or association must
be EXCLUSIVELY devoted to the accomplishment of the aforementioned
purposes. A corporation fails this test if a substantial part of its operations is
considered “ACTIVITIES CONDUCTED FOR PROFIT.

(Capulong)
3. All net income or assets of the corporation or association must be devoted
to its purposes and no part of its net income or asset accrues to or benefits any
member or specific person

4. It must not be a branch of a foreign non-stock, non-profit corporation.

*** NON-PROFIT ORGANIZATION is still allowed to engage in activities

conducted for profit without loosing its tax exemption but is being subject to
tax only to the income conducted for profit, regardless of the disposition made
of such income.

(Capulong)
 Exception to the Classification Rule: NON-PROFIT
EDUCATIONAL INSTITUTIONS
All revenues and assets of non-stock non profit educational institutions used
ACTUALLY, DIRECTLY AND EXCLUSIVELY for educational purposes shall be
exempt from taxes and duties.

*** The income from unrelated operations of these institutions is still exempt
from income tax if used for educational purposes.

(Capulong)
 TAXATION OF COOPERATIVES
 Cooperatives – is an autonomous association of persons who voluntarily
joined together to achieve their social, economic and cultural needs and
aspirations by making equitable contributions to the capital required, patronizing
their products and services, and accepting a fair share of risks and benefits of the
undertaking.

(Dabu)
 COOPERATIVES WHICH TRANSACT BUSINESS ONLY WITH
MEMBERS – are NOT subject to any taxes and fees under the NIRC and
other tax laws
 Income tax (on related Regular Income)
 VAT and Percentage tax
 Donor’s tax
 Excise tax
 Documentary stamp tax
 Annual Registration fee

(Dabu)
COOPERATIVES WHICH TRANSACT BUSINESS WITH BOTH
MEMBERS AND NON-MEMBERS
 Those with not more than P10M accumulated reserve and undivided
net savings are exempt from taxes, similar to cooperatives
transacting business only with members
 Those with more than P10M accumulated reserve and undivided net
savings are subject to the following tax at full rate:
 Income tax on the full amount allocated for interest on capital
 VAT on transaction with non-members
 Percentage Tax on all sales of good or services rendered to non-
members
 All other internal revenue taxes unless otherwise provided by the law

(Dabu)
THE NET SURPLUS OF EVERY COOPERATIVE SHALL BE DISTRIBUTED AS
FOLLOWS:

 RESERVE FUND – at least 10% of the net surplus but most not be less than
50% of the net surplus in the first 5 yrs of operation
 EDUCATIONAL AND TRAINING FUND – not more than 10% of net surplus
 COMMUNITY DEVELOPMENT FUND – not less than 3% of net surplus
 OPTIONAL LAND AND BUILDING FUND – not to exceed 7% of net surplus
 INTEREST, shall not exceed normal rate of return on investments
 PATRONAGE FUND – must not be less than 30% of the net surplus after
deducting the statutory reserves
 ANY EXCESS TO RESERVE FUNDS

(Dabu)
TAXABILITY OF COOPERATIVES TO INTERNAL REVENUE
TAX – All cooperatives regardless of classification are subject to the following

 The applicable income tax on UNRELATED INCOME

 CGT
 Documentary Stamp
 VAT on purchases of goods/services except VAT exempt
importations
 Wthholding tax on wages except MWE
 All other taxes for which cooperatives are directly liable and not
otherwise expressly exempted by any law

(Dabu)
ILLUSTRATION: (SEE PAGE 626)
 Jaro Farmers Cooperative is a marketing cooperative that sells the vegetable
productions of its members. In compliance with legal requirements, JFC reserves
the following percentage of net surplus:
 Reserve Fund – 10%
 Educational and training fund – 10%
 Community development fund – 5%
 Optional building fund – 5%
PER BY LAWS, THE NET SURPLUS AFTER THE RESERVES IS DISTRIBUTED AS FOLLOWS:
 50% as interest to capital, but must not exceed 18% normal return on average capital of
members
 50% as Patronage refunds to members
 Residual balance to reserve fund
MEMBERS HAVE 1,200,000 ON WEIGHTED AVERAGE CAPITAL AS OF YEAR-END

(Dabu)
JFC’s Income statement on its 6th year of operation is
presented below:
Sales 3,100,000
COS 1,600,000
Gross Income 1,500,000
OPEX 600,000
OPSurplus 900,000
Add: Non operating Income:
Rental on vacant facilities 200,000
interest on invstment in bonds 20,000
Interest on bank account, net of FT 4,000
TOTAL SURPLUS 1, 124, 000

REQUIRED: Compute the TAXABLE INCOME assuming JFC is

trading:
1. Only with members
2. With both members and non-member
(Dabu)
SOLUTION:
REQUIREMENT 1: Only with members
Rental Income P 200, 000
Interest on bonds investments 20, 000
Total Income 220, 000
Less: Reserve Fund Requirement 10% 22, 000 (220K x 10%)
TAXABLE INCOME 198, 000

*** Note:
1. JFC is exempt from any tax on its transactions with members
2. The interest on banks must be excluded as it is already subjected to ft
3. JFC shall report the same taxable income if it transacts business with non-members but
with an accumulated reserve of less than P10, 000,000

(Dabu)
REQUIREMENT 2: Both members and non-members
Assume that 20% of the sales were from non-members, and JFC has more than P10,000,000
accumulated reserves.

Operating Surplus - non members 180,000 (900k x 20%)

Unrelated income:
Rent Income, net 200,000
Interest on bonds investment 20,000
Taxable Surplus 400,000
Less: Reserve fund requirement 10% 40,000 (400K X 10%)
Net Surplus after reserve from non-members 360,000

Operating surplus from members 720, 000

Less: Reserve Fund 10% 72,000 (720K x 10%)
Educ and Training fund 10% 72,000
Community Dev't fund 5% 36,000 (720K x 5%)
Optional building fund 5% 36,000 216,000
Net Surplus Distributable 504,000 (Dabu)
Net surplus is distributable per by-laws as follows:

As interest on members's capital* 216,000

As patronage refunds 50% 252,000
Excess balance to reserve fund 36,000
Net surplus as distributes 504,000

*Interest on Capital is the LOWER OF:

 50% of distributable surplus = 504, 000 x 50% = 252, 000
 18% normal return on capital = 1,200,000 x 18% = 216,000

(Dabu)
The taxable income and income tax due shall be computed as follows:

Net surplus after reserve from non-members 360,000

Net surplus distributed as interest to members 216,000
taxable income 576,000
multiply by Corpo tax rate 30%
Regular Corporate InTax 172, 800

***Note:
1. The ultimate distribution of the 216,000 interest to members shall no longer be
subjected to FT
2. The patronage refund is not deemed income by law as it is a mere return f savings
to the members

(Dabu)
ALLOCATION OF COMMON EXPENSES OF EXEMPT CORPORATIONS
- Expenses of an exempt corporation that are not directly traceable to either related and unrelated activities are
allocated based on gross income
ILLUSTRATION: (See page 628)
A non-profit entity presented the following analysis of its net surplus:
Related Activities Unrelated Activities Total
Gross Income 800,000 400,000 1,200,000
Less: Direct expenses 280,000 70,000 350,000
Common expenses 180,000
Surplus 670,000

TAXABLE INCOME FROM UNRELATED ACTIVITIES:

Gross income fr. Unrelated activities 400,000
Less: direct expenses 70,000
allocated common expenses
(400k/(400k+800k))x180k 60,000 130,000
Taxable Net income 270,000

(Dayrit)
REPORTING REQUIREMENTS FOR EXEMPT
CORPORATIONS
 Exempt corporation with no taxable income shall file BIR
FORM 1702-EX using ITEMIZED DEDUCTION ONLY.
 If they are not delinquent in filing their return or doesn’t
have any violation on their withholding taxes, they will
not pay any tax
 Exempt corporations with taxable income subject to
Regular tax shall file BIR FORM 1702-RT.
 If they also earn income subject to special tax rates,
they must file BIR FORM 1702-MX.

(Dayrit)
 SPECIAL DOMESTIC CORPORATIONS

*** PRIVATE OR PROPRIETARY EDUCATIONAL INSTITUTIONS:

 DepEd
 CHED
 TESDA (Dayrit)
PRE-DOMINANCE TEST
 If the Gross Income from UNRELATED trade, business or
other activity EXCEEDS 50% of the TOTAL GROSS INCOME
derived by such EDUCATIONAL institutions or HOSPITALS
from ALL sources, use 30% Corporate InTax rate

 ***UNRELATED TRADE , BUSINESS OR ACTIVITY

NOT SUBSTANTIALLY RELATED TO THE EXERCISE OR
PERFORMANCE FROM ITS PRIMARY PORPOSE OR FUNCTION

(Guanlao)
 ILLUSTRATION: (SEE PAGE 630)
A private EDUCATIONAL institution reported the following during the year:
Related Activities Unrelated Activities Total
Gross Income 700,000 500,000 1,200,000
Less: Deductions 400,000 100,000 500,000
Surplus 300,000 100,000 700,000

Predominance Test:
GI fr. UNRELATED Activities 500,000 ***Failed the predominance test***
divide by: Total G.I 1,200,000
42%

Taxable NI 700,000
Muliply by: CorpoTAX% 10%
InTax Due 70,000
(Guanlao)
ILLUSTRATION: (SEE PAGE 630)
A NON-PROFIT HOSPITAL reported the following during the year:
Unrelated
Activities Related Activities Total
Gross Income 700,000 500,000 1,200,000
Less: Deductions 400,000 100,000 500,000
Surplus 300,000 100,000 700,000

Predominance Test:
GI fr. UNRELATED Activities 700,000 ***Passed the predominance test***
divide by: Total G.I 1,200,000
58%

Taxable NI 700,000
Muliply by: CorpoTAX% 30%
InTax Due 210,000 (Guanlao)
 FOREIGN CURRENCY DEPOSIT UNITS (FCDUs) AND
EXPANDED FCDUs
 refer to a unit or department of a local bank or a local branch of a foreign
bank authorized by the BSP to engage in foreign currency denominated
transactions pursuant to RA 6426

 DISTINCTION OF FCDU, OBU AND EFCDU

FCDU- short-term foreign currency transaction, division of a domestic bank.
EFCDU – long-term and short-term foreign currency transaction, division of a
domestic bank or resident foreign bank authorized to conduct banking under
the expanded FCD system
OBU (offshore banking unit) – division of a foreign bank which is authorized to
conduct foreign currency denominated transaction.

(Guanlao)
TAX ON EFDCUs AND OBUs
A. NON RESIDENTS (INC. FROM FOREX TRASAC.) – EXEMPT FROM INCOME TAX
B. RESIDENTS
1. Banks under the foreign currency deposit system:
a. OBUs – exempt from InTax
b. local commercial banks and branches of foreign banks
authorized by the BSP to transact with FCDUs – exempt from
InTax
2. Other Residents (INC. FROM FOREX TRASAC.)
a. ***Interest Income Only – 10% FT
b. Other income (commissions and gains) – Regular corporate InTax
***If the Interest is not subjected to FT by the borrower, the FCDU, EFDCU and
OBU shall report the same Gross Income in the InTax return and shall be
subjected to the same 10% tax. Shall be separately presented from other
income subject to 30%.
NOTE: FCDU are taxed the SAME way as EFDCUs and OBUs.
NOTE: INCOME FROM NON FOREX TRANSACTIONS – REGULAR CORP. INTAX
(Guanlao)
 TAX ON REGULAR BANKING UNITS – DOMESTIC BANKS – 30% OF RCIT

 TAX ON INCOME FROM DEPOSITORY BANKS UNDER THE EFCDS:

 Any Income of NON RESIDENT – EXEMPT from Intax
 Interest Income of RESIDENTS – 7.5% FT

(Guanlao)
 ILLUSTRATION: (SEE PAGE 630)
The expanded foreign currency deposit unit of a DOMESTIC commercial bank derived the
following income from its foreign currency and other transactions:

Received from
RESIDENTS NON RESIDENTS
INCOME ITEMS
EFCDUs/OBUS/FCDUs Other Residents
Interest incomes from
5,000,000 10,000,000 4,000,000
loans and receivable

Interest incomes-foreign 200,000

currency deposits
Forex trading gains 300,000 200,000 100,000
Consultancy fees 250,000 500,000 100,000
Rent income 50,000 120,000 80,000

REQUIREMENT: Identify the exempt income, Gross Income subject to FT and those subject to RT.

(Guanlao)
SOLUTION:

Forex trading gains to other residents 200,000

On-shore income from non-forex transactions:
Consultancy fees (250k + 500k) 750,000
Rent income (50k + 120K) 170,000 920,000
Off-shore income from non-forex transactions:
Consultancy fees 100,000
Rent Income 80,000 180,000
Gross income 1,300,000

(Guanlao)
SOLUTION:
Received from
RESIDENTS NON RESIDENTS
INCOME ITEMS
EFCDUs/OBUS/FCDUs Other Residents

Interest incomes from loans 5,000,000 10,000,000 4,000,000

and receivable

Interest incomes-foreign 200,000

currency deposits

Forex trading gains 300,000 200,000 100,000

Consultancy fees 250,000 500,000 100,000
Rent income 50,000 120,000 80,000

1). Exempt income = 9,600,000

2). Final tax = 10,000,000
3). Regular tax = 1,300,000
(Guanlao)
ALLOCATION OF COST AND EXPENSES OF BANKS

A. SPECIFIC IDENTIFICATION – Expenses directly traceable to an

income are allocated to that income

B. PRO-RATA ALLOCATION – Expenses that are not directly

traceable to an income are allocated pro-rata on the ration of
all income.

(Guanlao)
ILLUSTRATION: (SEE PAGE 634)
Specific Identification:
A DOMESTIC bank reported the summary of income and expense as to source:

Received from
RESIDENTS NON Total
EFCDUs/OBUS/ Other RESIDENTS
FCDUs Residents
RBU Gross income - 1,200,000 150,000 1,350,000
FCDU Interest
1,000,000 800,000 400,000 2,200,000
Income

RBU Expenses - 600,000 50,000 650,000

FCDU Expenses 300,000 200,000 60,000 560,000
Net Income 2,340,000

REQUIRED: Determine the final income tax and the income tax due

(Guanlao)
SOLUTION:
The final tax withheld is 80,000 (800,000x10%), Income from OBUs and FCDUs of 1M and
the FCDU income from non-residents of 400,000 are EXEMPT.

RBU Gross income 1,350,000

Less: RBU expenses 650,000
Taxable net income 700,000
Multiply by Corp Tax % 30%
RCIT 210,000

***ANY COST OR EXPENSES RELATED TO THE OPERATION OF FCDU OR EFCDU OR OBU IS

NOT ALLOWED AS DEDUCTION FROM RBU’S TAXABLE INCOME
(Guanlao)
 ILLUSTRATION: (SEE PAGE 635)
Pro-rata allocation:
A DOMESTIC bank reported the following summary of income and expenses:

RBU Total Gross income - 2,000,000 750,000 2,750,000

FCDU Interest Income 800,000 800,000 400,000 2,000,000
FCDU rent fees 100,000 120,000 30,000 250,000
Total gross income 900,000 2,920,000 1,180,000 5,000,000
Direct expenses:
RBU expenses - 900,000 400,000 950,000
FCDU expenses
Interest Income 450,000 350,000 150,000 950,000
Rent fees 20,000 10,000 15,000 45,000
Total Direct expenses 2,295,000
Indirect/common expenses 315,000
Total Expenses 2,610,000

REQUIRED: Determine the tax due of the FCDU and RBU

(Guanlao)
SOLUTION:
FSDU RBU
RBU Total gross income - 2,750,000
FCDU rent fees* 250,000
Gross Income 250,000 2,750,000
Less: Deductions
directly traceable expenses 45,000 1,300,000
common expenses ** 15,750 173,250
Taxable net income 189,250 1,726,750
multiply by: 30% 30%
RCIT 56,775 383,025
1. NON FOREX INCOME OF FCDU IS SUBJECTED TO REGULAR TAX*
2. THE COMMON EXPENSES ARE ALLOCATED ON THE RATIO OF TOTAL GI SUBJECT TO RIT
AND FT INCLUDING THOSE EXEMPT FROM INTAX**
FCDU = 250,000/5,000,000 X 315,000 = 15,750
RBU = 2,750,000/5,000,000 x 315,000 = 173,250
3. THE EXPENSE ALLOCABLE TO THE EXEMPT INCOME AND INCOME SUBJECT TO FT
SHALL NOT BE DEDUCTIBLE AGAINST GROSS INCOME SUBJECT TO RT

(Guanlao)
PEZA(PHILIPPINE ECONOMIC ZONE AUTHORITY) OR BOI(BORD OF INVESTMENTS) -
REGISTERED ENTERPRISES
 BOI-REGISTERED ENTERPRISES
 Enjoy the INCOME TAX HOLIDAY(income tax exemption) for 6 years from commercial
operations for pioneer firms and 4yrs for NON-pioneer firms.
 The income tax holiday may be further extended NOT to exceed 10 years upon meeting
certain conditions.
 PEZA-REGISTERED ENTERPRISES
 Shall pay a tax of 5% OF GROSS INCOME EARNED (in lieu of ALL TAXES EXCEPT REAL
PROPERTY TAX ON LAND OF DEVELOERS) and shall be divided 3% to the national
government and 2% to the city/municipality where it is located.

***BOI AND PEZA are required to secure CERTIFICATE ON INCOM TAX HOLIDAY
ENTITLEMENT AND CERTIFICATE OF INCENTIVES.

(Mangalino)
TAXABILITY OF BOI OR PEZA
 Upon graduation which expires in not more than 10 years, there is no more income
tax holiday incentives. But there are still benefits remaining as BOI-Registered
especially on there VAT.
 Items of PASSIVE INCOME are subjected to the appropriate FINAL TAX OR CAPITAL
GAINS TAX
 Items of REGULAR INCOME that are NOT part of the registered activities are
subjected to REGULAR CORPORATE TAX (30%)
 TAX INCENTIVES TO ECOZONE APPLY ONLY TO:
 Registered operations
 During period of its registration

****FAILED TO MEET THEIR REGISTRATION REQUIREMENTS are subjected to the same tax
rule and are required to file reports as annual ITR and Audited FS – subject to BIR audit
and to taxation

(Mangalino)
SPECIAL RESIDENT FOREIGN CORPORATIONS

(Mangalino)
 *Gross Philippine Billings for:
 International air carrier refers to the amount of gross revenue derived from carriage of
persons, excess baggage, cargo, or mail originating from the Philippines in a continuous
and uninterrupted flight, irrespective of the place of sale or issue and the place of payment of
the ticket or passage document. (Sec. 28[A][3][a]) 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 transhipment of passenger takes
place at any part outside the Philippines or another airline, only the aliquot portion of the cost
of the ticket corresponding to the leg flown from the Philippines to the point of transhipment
shall form part of the Gross Philippine Billings. (as amended by RA No. 10378)
 International shipping means gross revenue whether for passenger, cargo or mail originating
from the Philippines up to final destination, regardless of the place of sale or payment of the
passage or freight documents. (Sec. 28[A][3][b])
 Exemption under reciprocity: international carriers doing business in the Philippines, avail of
a preferential rate or exemption from the tax herein imposed on the basis of 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. (as amended by RA No. 10378)
 **PEZA-registered entities are exempt from the imposition of the Branch Profits Remittance Tax.

(Mangalino)
TAXATION ON OFFSHORE BANKING UNITS (OBUs)

 Branch, subsidiary or affiliate of a foreign banking corporation which is

authorized by Central Bank of the Philippines to transact offshore banking
business in the Philippines.
 OBU or EFCDU of a resident foreign bank is subjected to the SAME TAX RULE
applicable to FCDUs/EFCDUs of domestic bank, except that ALL OF THEIR
OFFSHORE INCOME IS EXEMPT FROM INCOME TAX because foreign
corporations are taxable only on income WITHIN THE PHILIPPINES.

(Mungcal)
ILLUSTRATION: (SEE PAGE 638)
The OBU of a resident foreign bank reported the following:
Received from
RESIDENTS NON RESIDENTS
INCOME ITEMS
EFCDUs/OBUS/FCDUs Other Residents
Interest incomes from loans
5,000,000 10,000,000 4,000,000
and receivable

Interest incomes-foreign 200,000

currency deposits
Forex trading gains 300,000 200,000 100,000
Consultancy fees 250,000 500,000 100,000
Rent income 50,000 120,000 80,000

REQUIRED: Determine the exempt income, gross income subject to final tax and gross
income subject to regular tax.

(Mungcal)
SOLUTIONS:

Received from
RESIDENTS NON RESIDENTS
INCOME ITEMS
EFCDUs/OBUS/FCDUs Other Residents
Interest incomes from loans
5,000,000 10,000,000 4,000,000
and receivable

Interest incomes-foreign 200,000

currency deposits
Forex trading gains 300,000 200,000 100,000
Consultancy fees 250,000 500,000 100,000*
Rent income 50,000 120,000 80,000*

1). Exempt income = 9,780,000

*Resident foreign corp are taxable only on income within
2). Final tax = 10,000,000
3). Regular tax = 1,120,000 (Mungcal)
REGIONAL AREA HEADQUARTERS AND REGIONAL OPERATING HEADQUARTERS OF
MULTINATIONAL COMPANIES
 RAH/RHQ – Head quarters that do not earn or derive income from
Philippines and which acts as supervisory, communication and
coordinating center for their affiliates and etc.
 ROHQ – which are engaged of the following services:
 General administration and planning
 Business planning and coordination
 Sourcing and procurement of raw materials
 Corporate finance advisory services
 Etc. (see page 639)

(Mungcal)
TAXABILITY OF RHQs and ROHQs
 RHQs are exempt from income tax since they are merely administrative
offices. THEY DO NOT EARN INCOME
 ROHQS are subjected to 10% INCOME TAX. They are allowed to derive
income on their services to their affiliates, branches and etc.

***RHQs and ROHQs are EXEMPT to local taxes, fees or charges imposed by
a local government unit, except real property tax on land improvements
and equipment.

(Mungcal)
INCOME TAX RATES TO INTERNATIONAL CARRIERS

 General Rule: 2 ½% of the GROSS PHILIPPINES BILLINGS

 INTERNATIONAL AIR CARRIERS – 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/PAYMENTS
 INTERNATIONAL SHIPPING CARRIER – gross revenue whether for passenger, cargo or
mail ORIGINATING FROM PHILIPPINES UP TO FINAL DESTINATION REGARDLESS OF
PLACE OF SALE/PAYMENTS
 EXCEPTION to the rule: international carriers doing business in the Philippines, avail of
a preferential rate or exemption from the tax herein imposed on the basis of
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.

(Pasamonte)
 Tickets revalidated, exchanged and/or endorsed to another international
airline form PART OF THE GROSS PHILIPPINE BILLINGS OF THE CARRYING
AIRLINE if the passenger boards a plane or port or point IN THE PHILIPPINES

 EXCLUSION IN GROSS PHILIPPINE BILLINGS

 NON-REVENUE PASSENGERS – qualifying under the free mileage programs of the
air carriers
 REFUNDED TICKETS

(Pasamonte)
 ILLUSTRATION: (SEE PAGE 641)
Voyager, a resident foreign shipping company, shows the following analysis of its gross
receipts from passengers and cargoes during a month:
Incoming flights Outgoing flights Total
Fares billed in the Philippines 9,000,000 10,000,000 19,000,000
Fares billed abroad 9,000,000 5,000,000 14,000,000
Total Billings 18,000,000 15,000,000 33,000,000

Value of fared on non-revenue Passengers 700,000 800,000 1,500,000

Fares cancelled and refunded 500,000 800,000 1,300,000

Voyager shall pay the following income tax:

Total billings for outbound 1. GPB – receipts from outgoing flights
flights 15,000,000 regardless of place of sale/payments.
less: Tickets refunded 800,000 Refunded tickets are deducted
2. Non-revenue passengers is not
Gross Philippine billings 14,200,000
deducted from the GPB because they
Multiply by: Income tax rate 2.50% are not billed
Income tax Due 355,000
(Pasamonte)
RULE ON TRANSHIPMENTS OR INTERRUPTED FLIGHTS
OR VOYAGE
 Flights originated from the Philippines, but transhipment
of passenger takes place at any port outside the PH on
ANOTHER AIRLINE, only the aliquot portion of the cost of
the ticket shall be part of the GPB

(Pasamonte)
ILLUSTRATION: (SEE PAGE 642)
Viet Airways, an INTERNATIONAL AIR CARRIER, had the following gross receipts on
outgoing flights for the quarter:

Destination Computation Amount

Hong Kong P1500x10,000 Passengers 15,000,000
Thailand P2000x500 1,000,000
UAE P4000x300 1,200,000
China P2500x400 1,000,000
Total Gross receipts 18,200,000

The flight to Thailand was transhipped in Vietnam to another plane of Viet Airways.
The flight to UAE is endorsed to another air carrier which airlifted them in the Philippines.
The flight to china was transhipped to another carrier which airlifted them to HK.

(Pasamonte)
SOLUTION:

Direct outgoing flights - PH to HK 15,000,000

Flight to Thailand (1) 1,000,000
Endorsed Flights - PH to UAE (2) -
Re Transhipped flights - PH to CH (3) 600,000
Gross Phil. Billings 16,600,000
Multiply by: 2.50%
Income Tax due 415,000

1. Endorsed tix are taxable to the CARRYING AIRLINES ONLY

2. Foreign transhipments involving same carrier – gross receipts from the ENTIRE FLIGHT
is INCLUDED
3. Foreign transhipments involving another carrier, only to the portion pertaining to the
leg flown from PH to an immediate foreign port is INCLUDED in GPB. (P1500x400
passengers = 600,000)

(Pasamonte)
“ 48-HOUR” RULE ON TRANSIEN PASSENGERS
 Flights or voyages of passengers, mails, or excess baggage commencing
from foreign countries which will be interconnected in the PH for
continuance of the flight or voyage to foreign destination by:
 THE SAME INTERNATIONAL CARRIERS SHALL NOT BE CONSIDERED ORIGINATING
FROM PH IF THE ACTUAL DEPARTURE IS MADE WITHIN 48 HOURS FROM
EMBARKATION IN THE COUNTRY. EXCEPT ONLY DELAYED BY FORCE MAJEURE.
 IF MADE BY ANOTHER AIRLINE COMPANY OR INTERNATIONAL SEA CARRIER, THE
COST OF THE OUTGOING FLIGHT OR VOYAGE SHALL BE INCLUDED IN THE GPB OF
THAT AIRLINEOR CARRIER REGARDLESS OF THE INTERVENING PERIOD OF TIME
BETWEEN ARRIVAL AND DEPARTURE FROM THE PH.

(Pasamonte)
 ILLUSTRATION: (SEE PAGE 643)
Fair Airways, and INTERNATIONAL Carrier, had the following summary of flights:
Direct outgoing flights
to Guam (P2400x5000 passengers 12,000,000
to USA (P6000x4000) 24,000,000

Inter-connecting flights:
Flights no. of passengers Status
Korea for Guam 600 Continued after 96 hours as scheduled
China for Guam 400 Delayed 52hrs; due to storm
Taiwan for USA 500 Countinued after 40hrs as scheduled
Guam for USA 300 Delayed 52 hrs; due to storm*
Korea for USA 200 Continued after 24hrs*
*Endorsed to Fresh Airlines, another international air carrier, which airlifted the passengers to their final destination

The gross receipts from inter-connecting flights to

be included in the GPB of Fair Airways shall be: READ: “Note” on page 643

Korea for Guam P2400x^00 = 1,440,000

(Pasamonte)
 SOLUTION:
The following shall be included in the Gross Philippine Billings of Fresh Airlines:
Guam for USA P6,000x300* 1,800,000
Korea for USA P6,000x200 1,200,000
Total 3,000,000

Note: *The 48-hr exemption rule on force majeure applies ONLY TO FLIGHTS CONTINUED
BY THE SAME INTERNATIONAL CARRIER
Direct flight to Guam 12,000,000
Direct flight to USA 24,000,000
Connected flight from Korea for Guam 1,440,000
GPB 37,440,000
Multiply by: 2.50%
Income Tax Due 936,000
FOREIGN CURRENCY TRANSLATION:
WHICHEVER IS HIGHER OF THE FOLLOWING CONVERSION RATES:
1. Monthly average of Airline Rate in the Bank Settlement Plan Monthly sales report
2. Bankers Association of the Philippines rate
(Pasamonte)
SPECIAL NON-RESIDENT FOREIGN CORPORATIONS
Special NRFC Tax Base Tax Rate
Non-resident cinematographic film owner, lessor Gross income from 25%
or distributor Philippine sources
Non-resident owner or lessor of aircraft, Gross rentals or fees derived 7½%
machineries and other equipment within the
Philippines
Non-resident owner or lessor of vessels Gross rentals, lease or charter
chartered by Philippine nationals fees from leases or charters to
Filipino citizens or corporations, 4½%
as approved by Maritime
Industry Authority

(Pasamonte)
ILLUSTRATION: (SEE PAGE 646)
PhilOil, a domestic corporation, wished to import a scientific deep sea drilling vessel but
wanted to rent a unit to assess its capabilities first. PhilOil chartered unit from Explorer
Lab Inc., a non resident foreign lessor, at a total charter fee of P2,000,000. satisfied with
the unit, PhilOil contracted Explorer Lab to Provide training for its employees at a training
fee of 1,000,000 before buying a new one.
REQUIRED: Compute the Final Withholding Tax by Phil Oil

SOLUTION:

Charter fees (2Mx4.5%) 90,000

Training fees (1Mx30%) 300,000
Total Final Withholding Tax 390,000

(Pasamonte)
ILLUSTRATION: (SEE PAGE 646)
Goldrich Mining, a resident corporation, rented specialized mining equipment from
abroad. The non-resident lessor billed Goldrich the following amounts in peso
equivalents:
Equipment rental 10,000,000
Set-up and training fee 1,000,000
Initial service and maintenance fee 500,000
Interest on rent in arrears 50,000
Total Bill 11,550,000
REQUIRED: Compute the Final withholding tax by Goldrich Mining
SOLUTION:

Equipment rental (10Mx7.5%) 750,000

Set-up and training fee(1Mx7.5%) 75,000
Initial service and maintenance fee (500k x 7.5%) 37,500
Interest on rent in arrears(50k x 30%) 15,000
Total Bill 877,500

(Pasamonte)