Chapter 3: Income Taxation PDF

## CHAPTER 3: INCOME TAXATION ### Learning Objectives: After studying this chapter, you should be able to: * Identify the income taxpayers other than individuals. * Define corporation. * Identify the classification of corporate taxpayers. * State the sources of income of corporate taxpayers. * Re...

## CHAPTER 3: INCOME TAXATION ### Learning Objectives: After studying this chapter, you should be able to: * Identify the income taxpayers other than individuals. * Define corporation. * Identify the classification of corporate taxpayers. * State the sources of income of corporate taxpayers. * Recognize the categories of income and state the tax rates to be used by each type of corporate taxpayer. * List the sources of passive income and state the final tax rates to be used by each type of corporate taxpayer. * Show the pro-forma computation of the normal income tax of domestic, resident, and non-resident foreign corporations. * Compute the income tax for micro, small, and medium enterprises (MSMEs). * Identify the special corporations for tax purposes and be able to provide the relevant tax rates. * Define the allowable deductions from gross income. * Define and compute taxable income and tax for each type of corporate taxpayer depending on income category. * List the corporate taxpayers exempt from income tax. * Outline the taxation for cooperatives, franchises and SBMA, CDA, PEZA registered enterprises. * Compute the quarterly corporate income tax. ### Sources of Income Aside from knowing the classification of the taxpayer the source of income is the next important thing to determine - whether it is from within the Philippines or without. The following rules apply: 1. Domestic corporations are taxable on income from sources within and without the Philippines. 2. Foreign corporations whether resident or non-resident, are taxable only on income from Philippine sources. A partnership other than a general professional partnership is considered a corporation and is taxable as such. | Corporation | Source of Income | |---|---| | Domestic | Within the Phil. | √ | | Domestic | Without the Phil. | √ | | Foreign | | √ | ### Classification of Income Taxpayers (Other than Individuals) 1. **Corporations** * **Domestic** 1. Domestic corporation, in general, including One Person Corporation. 2. Government-owned and controlled corporations. 3. Taxable partnerships. 4. Proprietary educational institutions. 5. Non-profit hospitals. * **Foreign** 1. **Resident**. Those engaged in trade or business within the Philippines. 2. **Non-resident**. Those not engaged in trade or business within the Philippines. 2. **General Professional Partnerships** * This is discussed in Chapter 6. 3. **Estates and Trusts** * This is discussed in Chapter 5. ### Definition of Terms * **Corporation**: A 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 (Revised Corporation Code of the Philippines, section 2). * Section 10 of the RCCP provides that any person, partnership, association or corporation, singly or jointly with others but not more than fifteen (15) in number, may organize a corporation for any lawful purpose or purposes. * Corporation includes one person corporations, partnerships, no matter how created or organized, joint-stock companies, joint accounts (cuentas en participacion), associations, or insurance companies, but does not include general professional partnerships and a 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. * **Domestic**: When applied to a corporation, means created or organized in the Philippines or under its laws. ### Tax Incentives To qualify for the tax incentives under Sec. 5 of RR 13-2011, a REIT must: * Be a public company and maintain its status as a public company as provided for under Section 6 of RR 13-2011. * Enlist with an Exchange within 2 years from the date of initial availment of DST incentive and maintain the listed status of the investor securities by the SEC. * Distribute at least 90% of its distributable income as required under the Act and its IRR, as revised. * Comply with its Reinvestment Plan, as certified by the Commission. The Certification from the Commission that the REIT is compliant with its Reinvestment Plan must be submitted by the REIT as an attachment to its annual income tax return with its audited financial statements on or before April 15 (or on the 15th day of the 4th month following the close of the fiscal year). (Rev. Reg. 3-2020 amending Rev. Reg. 11-2019). To be deductible, the dividends distributed should be at least 90% of a REIT’s distributable income for the taxable year, and actually paid to the shareholders not later than the last day of the 5th month from the close of the taxable year. Dividends distributed by a REIT from its distributable income after the close of a taxable year and on or before the last day of the 5th month following the close of the taxable year shall be considered as paid on the last day of such taxable year. Sec. 10 of RR 13-2011 mandates that the income tax collectible from the dividends deducted from gross income should be placed in escrow in favor of the BIR with an authorized agent bank. By the end of the 3rd year from its listing, at the latest and thereafter, the REIT shall maintain the 67% minimum public ownership. Otherwise, dividend payment shall not be allowed as a deduction from its taxable income. In general, cash or property dividends paid by a REIT shall be subject to a final tax of 10%, unless: * the dividends are received by a non-resident alien individual or a non-resident foreign corporation entitled to claim a preferential withholding tax rate of less than 10% pursuant to an applicable tax treaty; or * the dividends are received by a domestic corporation or resident foreign corporation or an overseas Filipino investor in which case, they are exempt from income tax or any withholding tax, In the case of overseas Filipino investors, they are exempt from the dividends tax for 7 years from the effectivity of the RR 13-2011. All income payments to a REIT shall be subject to a lower creditable withholding tax of 1%. REITs shall not be subject to the minimum corporate income tax. Other incentives include reduced documentary stamp tax (DST) for transfers of real property and shares of stock to the REIT and exemption of REIT securities from the initial public offering (IPO) tax. ### Income Taxation of Accredited Service Providers * Accredited Service Providers organized within the Philippines shall pay an income tax rate of 25% imposed upon the taxable income derived during each taxable year from sources within and without the Philippines. * Accredited Service Providers organized outside the Philippines shall pay an income tax rate of 25% imposed upon the taxable income derived during each taxable year from sources within the Philippines. ### Income Taxation of Alien Individuals Employed by POGO Entities Foreign nationals or non-Filipino citizens, regardless of their residency term and class of working or employment permit or visa, who are employed and assigned in the Philippines by an OGL or its Accredited Service Provider shall have a Taxpayer Identification Number (TIN) and pay a final withholding tax of 25% on their gross income; Provided, however, that the minimum final withholding tax due for any taxable month from said persons shall not be lower than P12,500. The final withholding tax due shall be withheld and remitted monthly by the employer, including the corresponding penalties, interests, and surcharges, if any, in accordance with Revenue Regulations 2-98, as amended. The gross income shall include, whether in cash or in kind, basic salary/wages, annuities, compensation, remuneration, and other emoluments, such as honoraria and allowances, received by the alien employee from a POGO entity. ### Income from Non-Gaming Operations * The income from non-gaming operations of Philippine-based OGLs shall be subject to an income tax equivalent to 25% of the taxable income derived during each taxable year from sources within and without the Philippines. * The income from non-gaming operations of Foreign-based OGLs shall be subject to an income tax equivalent to 25% of the taxable income derived during each taxable year from sources within the Philippines. ### Income Taxation of Offshore Gaming Licensees (OGLs) In lieu of all other direct and indirect internal revenue taxes and local taxes, there shall be levied, assessed and collected from OGLs, whether Philippine-based or Foreign-based) a gaming tax equivalent to _5% of the GGR or 5% of agreed predetermined minimum monthly revenue from gaming operations, whichever is higher._ The gaming tax shall be directly remitted to the BIR not later than the 20th day following the end of each month. ### Taxable Income and Tax Due In case of corporations, taxable income is the pertinent items of gross income less the deductions authorized for such types of income. Taxable income is the amount or tax base upon which the tax rate is applied to arrive at the tax due. Depending on the taxpayer involved and for purposes of computing the income tax liability of corporation, taxable income may refer to either one of the following: 1. **Net income**: The income arrived at after subtracting from the gross income the deductions of the taxpayer. For domestic and resident foreign corporations, in general; and other corporations from whose gross income deductions. are allowed. * Sales/Revenues/Receipts/Fees: XXX * Less: Cost of Sales/Services: XXX * Gross Income from Operation: XXX * Add: Non-Operating and Taxable Other Income: XXX * Total Gross Income: XXX * Less: Deductions: * Optional Standard Deduction (OSD) or Itemized Deduction: XXX * Taxable Income: XXX * Multiply by: Tax Rate: x% * Tax Due: XXX 2. **Gross income**: The entire or gross income from business without any deductions for either optional standard deduction or itemized deduction. For domestic and resident foreign corporations subject to the MCIT; and non-resident foreign corporations not subject to the normal income tax rate (Section 28(B)(1)). * Gross Income: XXX * Multiply by: Tax rate: x% * Tax Due: XXX ### Tax Treatment of PAGCOR's Contractees and Licensees P.D. 1869, as amended, expressly provides that the payment of the 5% franchise tax of PAGCOR inures to the benefit of its Contractees and Licensees. Hence, following the ruling in Bloomberry, like PAGCOR, its Contractees and Licensees shall be exempt from the payment of corporate income tax realized from the operation of casinos upon payment of the 5% franchise tax since the law is clear that said exemption inures and extends to their benefit. ### Tax Treatment of PAGCOR PAGCOR is constituted as a withholding agent for the government as regards the compensations give to its employees subject to withholding tax on compensation and for payments made to individual or corporations subject to the withholding taxes at source as required under Chapter XIII and Sec. 57 of the NIRC, as amended. ### Taxability of Electronic Sabong or Cockfight (e-Sabong) Electronic Sabong or e-Sabong is the online and/or remote or off-site wagering/betting on live cockfighting matches, events, and/or activities streamed or broadcasted live from cockpit arena/s licensed or authorized by the Local Government Units having jurisdiction thereof. The e-Sabong fights are being streamed live online and bettors can place their bet through different agents that use different platforms. The bettor must be a member of a certain platform under an agent in order to watch and place bets. PAGCOR accredits and/or licenses the electronic sabong. The Bloomberry ruling in the previous section apply to e-Sabong. _Gaming income from e-Sabong operation by an e-Sabong Operator_, shall be subject to a _5% franchise tax_, which shall be in lieu of all internal revenue taxes except VAT or percentage tax, depending on the threshold. _Service income_ and all other income from e-Sabong operation whose authorization does not derive from the e-Sabong license issued by PAGCOR, shall be subject to regular income tax, value-added tax or percentage tax depending on the threshold, withholding tax and other taxes, as may be deemed appropriate. The 5% franchise tax in lieu of all other income tax, shall not apply. ### Taxability of Unrelated Income of Cooperative All income of cooperatives not related to the main/principal business under its Articles of Cooperation shall be subject to all the appropriate taxes under the NIRC, as amended. This is applicable to all types of cooperatives whether dealing purely with members or both member and non-members.