TOPIC-5-Income-Taxation-for-Corporations PDF

Republic of the Philippines BATANGAS STATE UNIVERSITY The National Engineering University JPLPC Malvar Campus G. Leviste St., Poblacion, Malvar, Batangas, Ph...

Republic of the Philippines BATANGAS STATE UNIVERSITY The National Engineering University JPLPC Malvar Campus G. Leviste St., Poblacion, Malvar, Batangas, Philippines 4233 Tel Nos.: (+63 43) 416-0350 local 100; (+63 43) 416-0068 E-mail Address: [email protected] | Website Address: http://www.batstate-u.edu.ph College of Accountancy, Business, Economics and International Hospitality Management Income Taxation TAX 301 A.B. Reaño INCOME TAXATION FOR CORPORATIONS CORPORATIONS RA11232, also known as the Revised Corporation Code of the Philippines defined Corporation as 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. For taxation purposes, corporation is defined under Section 22 of the Tax Code (RA8424), as amended under RA11534 or the Corporate Recovery and Tax Incentives for Enterprises Act (CREATE) and RR5-2021 as follows: 1. One Person Corporations (OPC) 2. Partnerships, no matter how created or organized 3. Joint stock companies 4. Joint accounts (cuentas en participacion) 5. Associations 6. Insurance Companies A one-person corporation is a corporation with a single stockholder; Provided, that only a natural person, trust, or an estate may form a one-person corporation. But does not include: 1. General professional partnerships; and 2. Joint ventures or consortiums formed for the purpose if undertaking/engaging in: a. Construction projects; or b. Engaging in petroleum, coal, geothermal and other energy operations pursuant to an operating or consortium agreement under a service contract with the government. In general, a joint venture or consortium is taxable as corporation unless it refers to joint ventures described above. JOINT VENTURE (JV) OR CONSORTIUM It is a commercial undertaking by two or more persons, differing from a partnership in that it relates to the disposition of a single lot of goods or the completion of a single project. JOINT STOCK COMPANIES They are construed when a group of individuals, acting jointly, establish and operate business enterprise under an artificial name, with an invested capital divided into transferable shares, an elected board of directors, and other corporate characteristics, but operating without formal government authority. JOINT ACCOUNT COMPANIES Joint account (cuentas en participacion) is considered 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 on in writing. ASSOCIATIONS It includes all organization which have substantially the salient features of a corporation to be taxable as a “corporation” A corporation may be liable for at most seven (7) types of income taxes, namely: Page 1 of 18  Republic of the Philippines BATANGAS STATE UNIVERSITY The National Engineering University JPLPC Malvar Campus G. Leviste St., Poblacion, Malvar, Batangas, Philippines 4233 Tel Nos.: (+63 43) 416-0350 local 100; (+63 43) 416-0068 E-mail Address: [email protected] | Website Address: http://www.batstate-u.edu.ph College of Accountancy, Business, Economics and International Hospitality Management Income Taxation TAX 301 A.B. Reaño 1. Standard Income Tax a. Net Income Tax (on Ordinary Income) b. Final Withholding Tax (on Passive Income) c. Capital Gains Tax (on Capital Gains) 2. Penalty Income Tax a. Minimum Corporate Income Tax (MCIT) b. Improperly Accumulated Earnings Tax (IAET) 3. Special Income Tax a. Gross Income Tax (GIT) b. Branch Profits Remittance Tax (BPRT) Classification of Corporate Taxpayers: 1. Domestic Corporation (DC) A corporation created or organized in the Philippines under its laws. May also be classified as Micro Small and Medium Enterprises (MSME) 2. Resident Foreign Corporation (RFC) A corporation created or organized in a foreign country under its laws and engaged in business in the Philippines 3. Non-resident Foreign Corporation (NRFC) A corporation created or organized in a foreign country under its laws and is NOT engaged in business in the Philippines 4. Exempt Corporations The following organizations shall not be subject to income tax (Sec. 30, RA8424) o Labor, agricultural or horticultural organization not organized principally for profit; o Mutual savings bank not having a capital stock represented by shares, and cooperative bank without capital stock organized and operated for mutual purposes and without profit; o A beneficiary society, order or association, operating for the exclusive benefit of the members such as a fraternal organization operating under the lodge system, or a mutual aid association or a non-stock corporation organized by employees providing for the payment of life, sickness, accident, or other benefits exclusively to the members of such society, order, or association, or non-stock corporation or their dependents; o Cemetery company owned and operated exclusively for the benefit of its members; o Non-stock corporation or association organized and operated exclusively for religious, charitable, scientific, athletic, or cultural purposes, or for the rehabilitation of veterans, no part of its net income or asset shall belong to or inure to the benefit of any member, organizer, officer, or any specific person; o Business league, chamber of commerce, or board of trade, not organized for profit and no part of the net income of which inures to the benefit of any private stockholder or individual; o Civic league or organization not organized for profit but operated exclusively for the promotion of social welfare; o A non-stock and non-profit educational institution; o Government educational institutions; o Farmers’ or other mutual typhoon or fire insurance company, mutual ditch or irrigation company, mutual or cooperative telephone company, or like Page 2 of 18  Republic of the Philippines BATANGAS STATE UNIVERSITY The National Engineering University JPLPC Malvar Campus G. Leviste St., Poblacion, Malvar, Batangas, Philippines 4233 Tel Nos.: (+63 43) 416-0350 local 100; (+63 43) 416-0068 E-mail Address: [email protected] | Website Address: http://www.batstate-u.edu.ph College of Accountancy, Business, Economics and International Hospitality Management Income Taxation TAX 301 A.B. Reaño organization of a purely local character, the income of which consists solely of assessments, dues, and fees collected from members for the sole purpose of meeting its expenses; and o Farmers’, fruit growers’, or like association organized and operated as a sales agent for the purpose of marketing the products of its members and turning back to them the proceeds of sales, less the necessary selling expenses on the basis of the quantity of produce finished by them. o Child-caring or child-placing institutions licensed and accredited by the Department of Social Welfare and Development (“DSWD”) to implement the Foster Care Program under R.A. No. 10165, otherwise known as the “Foster Care Act of 2012.” o Duly registered cooperative on income from transactions with members and non-members as long as the income is related to its main business or purpose. Provided, those with accumulated reserves and undivided net savings exceeding ₱10 Million shall be exempt only on income from transactions with members. o Homeowners’ Associations (“HOAs”). Generally, fees, dues or contributions made to HOAs are taxable. However, the same are exempt when the LGU having jurisdiction over the HOA certifies the lack of resources for the HOA to render its services. o Non-stock Savings and Loan Associations (“S&Ls”). S&Ls accumulate savings of its members to be used for long-term loans to members. These are exempt final taxes on interest income from deposits. o Building and loan associations whose accounts are guaranteed by the Home Guaranty Corporation. o Other organizations exempt from income tax in accordance with special laws (exs. Philippine Red Cross; PDIC; Sports Facilities under the control of the Philippine Sports Commission; Veterans’ Federation of the Philippines; National Commission for Culture and the Arts, etc.) Corporations may be classified further into: 1. Ordinary Corporations – corporations subject to regular corporate income tax (RCIT or CIT), also known as normal tax or basic income tax, at a rate of either 20% for domestic corporations classified as MSMEs or 25%, for domestic corporations other than MSMEs and foreign corporations. Under the TRAIN Law or prior to the effectivity of the CREATE Law (From Jan. 1, 2018 to July 1, 2020), the RCIT rate was 30%. 2. Special Corporations – corporations subject to income tax rate which is lower than the regular corporate income tax (RCIT) rate of 20% or 25%, as the case may be. SPECIAL CORPORATION TAX RATE a. Domestic Corporations CREATE Law: Proprietary Educational Institutions and Non- 1%: July 1, 2020 to June 30, 2023 profit Hospitals 10%: Beginning July 1, 2023 TRAIN Law: Before July 1, 2020 – 10% b. Resident Foreign Corporations International Carriers In general, 2.5% of Gross Philippine Billings (GPB). However, it may be subject to a lower rate or exempt under certain conditions. Page 3 of 18  Republic of the Philippines BATANGAS STATE UNIVERSITY The National Engineering University JPLPC Malvar Campus G. Leviste St., Poblacion, Malvar, Batangas, Philippines 4233 Tel Nos.: (+63 43) 416-0350 local 100; (+63 43) 416-0068 E-mail Address: [email protected] | Website Address: http://www.batstate-u.edu.ph College of Accountancy, Business, Economics and International Hospitality Management Income Taxation TAX 301 A.B. Reaño Regional Operating Headquarters (ROHQs) CREATE Law: -treated as a special corporation subject to 10% No longer a special corporation, thus, already tax on net income prior to January 1, 2022. subject to RCIT just like an ordinary RFC beginning January 1, 2022 c. Non-resident Foreign Corporations Non-resident Cinematographic Film Owner, 25% of Gross Income Lessor or Distributor Non-resident Owner or Lessor of Vessels 4.5% of Gross Income Chartered by Philippine Nationals Non-resident Owner or Lessor of Aircraft, 7.5% of Gross Income Machineries and Other Equipment Government-Owned Controlled Corporations (GOCCs) RR 5-2021, implementing the provisions of CREATE Law, provides that GOCCs, agencies and instrumentalities shall pay such rate of tax upon their taxable income as are imposed upon corporations or associations engaged in a similar business, industry, or activity, EXCEPT: a. Government Service and Insurance System (GSIS) b. Social Security System (SSS) c. Philippine Health Insurance Corporation (Philhealth) d. Local Water Districts (RA10026) e. Home Development Mutal Fund (HDMF; also known as Pag-ibig) Sources of Income Subject to Tax: 1. Domestic Corporation – taxable on income derived from within and without the Philippines. 2. RFC and NRFC – taxable on income derived from within the Philippines only. Basis of Income Subject to Tax: 1. DC, RFC – net income 2. NRFC – gross income TYPES OF INCOME AND APPLICABLE CORPORATE TAXES Ordinary Income Basic Income Tax DC: 25% or 20% RCIT RFC: 25% RCIT NRFC: 25%FWT Passive Income (derived in the Phils) FWT Capital Gains (derived in the Phils) CGT Shares of Stock: 15% Real Property: 6% Domestic Corporation considered as Micro Small and Medium Enterprise (MSME): MSME refers to a corporation with: Total assets of P100 million and below; and Net income of P5 million and below. The total assets exclude the land on which the particular business entity’s office, plant and equipment are situated during the taxable year for which the tax is imposed. Thus, if the land is held primarily for sale or for investment purposes, the value of this land is to be included in determining total assets, regardless of whether the business of the company is leasing the land. Page 4 of 18  Republic of the Philippines BATANGAS STATE UNIVERSITY The National Engineering University JPLPC Malvar Campus G. Leviste St., Poblacion, Malvar, Batangas, Philippines 4233 Tel Nos.: (+63 43) 416-0350 local 100; (+63 43) 416-0068 E-mail Address: [email protected] | Website Address: http://www.batstate-u.edu.ph College of Accountancy, Business, Economics and International Hospitality Management Income Taxation TAX 301 A.B. Reaño In case there are areas in the company’s office building that are being leased out, the percentage of the floor area devoted to the company’s office is to be multiplied with the total value of the land in determining the value of land to be excluded in the computation of total assets. All other domestic corporations are subject to RCIT rate of 25% beginning July 1, 2020. The 20% RCIT rate for MSME is not applicable to foreign corporations. MINIMUM CORPORATE INCOME TAX (MCIT) Section 27(E)(1) and Section 28(2) [for DCs and RFCs, respectively], as amended, under CREATE Law, provide that a minimum corporate income tax of two percent of the gross income as of the end of the taxable year is imposed upon any domestic corporations and resident foreign corporations beginning on the 4th taxable year immediately following the taxable year in which such corporation commenced its business operations, when the MCIT is greater than RCIT, provided that effective July 1, 2020 until June 30, 2023, the rate shall be one percent. The MCIT shall be imposed whenever: a. The corporation has zero taxable income; or b. The corporation has negative taxable income; or c. Whenever the amount of MCIT is greater than the regular corporate income tax (RCIT) due from such corporation. Hence, MCIT is always computed and compared to RCIT starting on the fourth year of operations. MCIT is not applicable to NRFCs, Special Corporations, and corporations subject to other types of income tax regime such as PEZA registered entities. CARRY FORWARD OF EXCESS MCIT (MCIT CARRY-OVER): Any excess of the MCIT over RCIT shall be carried forward and credited against the RCIT for the three immediately succeeding taxable years. RELIEF FROM MCIT: The Secretary of Finance is authorized to suspend the imposition of the MCIT on any corporation which suffers losses on account of: 1. Prolonged labor dispute 2. Force majeure 3. Legitimate business reverses NET OPERATING LOSS CARRY OVER (NOLCO) “Net Operating Loss” (NOL) means the excess of allowable deduction over gross income of the business in a taxable year. The net operating loss of the business or enterprise for any taxable year shall be carried over as a deduction from gross income for the next three consecutive taxable years immediately following the year of such loss. However, under RA 11494, also known as the Bayanihan Act II, the NOLCO of the business or enterprise for taxable years 2020 and 2021 shall be carried over as a deduction from gross income for the next five consecutive taxable years immediately following the year of loss. The net operating loss for said taxable years may be carried over as a deduction even after the expiration of RA 11494, provided the same are claimed within the next five consecutive taxable years immediately following the year of such loss. Taxable Year NOL was incurred Deductible as NOLCO within: Prior to 2020 3 consecutive years 2020 and 2021 5 consecutive years Beginning 2022 3 consecutive years Page 5 of 18  Republic of the Philippines BATANGAS STATE UNIVERSITY The National Engineering University JPLPC Malvar Campus G. Leviste St., Poblacion, Malvar, Batangas, Philippines 4233 Tel Nos.: (+63 43) 416-0350 local 100; (+63 43) 416-0068 E-mail Address: [email protected] | Website Address: http://www.batstate-u.edu.ph College of Accountancy, Business, Economics and International Hospitality Management Income Taxation TAX 301 A.B. Reaño **For corporation adopting Fiscal Year period, taxable year 2020 and 2021 shall include all those corporations with fiscal years ending on or before June 30, 2021 and June 30, 2022 respectively (RR 25-2020) Requisites for Deductibility: 1. At the time of incurring net loss, the taxpayer must not be exempt from income tax; and 2. There is no substantial change in the ownership of the business or enterprise in that: a. Not less than 75% in nominal value of outstanding issued shares, if the business is in the name of a corporation, is held by or on behalf of the same persons; or b. Not less than 75% of the paid-up capital of the corporation, if the business is in the name of a corporation, is held by or on behalf of the same persons. Additional Requirements for NOLCO incurred in 2020 and 2021 under Bayanihan Act II and RR25-2020: Presentation of NOLCO in the Income Tax Return (ITR) and Unused NOLCO in the Income Statement: 1. The NOLCO shall be separately shown in the Reconciliation Section of the Tax Return. 2. The Unused NOLCO shall be presented in the Notes to Financial Statements showing, in detail, the taxable year in which the net operating loss was sustained or incurred, and any amount thereof claimed as NOLCO deduction within five consecutive years immediately following the year of such loss. 3. The NOLCO for taxable years 2020 and 2021 shall be presented in the Notes to the Financial Statements separately from the NOLCO for other taxable years. FINAL WITHHOLDING TAX (FWT) ON “CERTAIN” PASSIVE INCOME derived from Philippine sources: PASSIVE INCOME RECEIVED BY DC RFC NRFC 1. Interest Income/Yield/Other monetary benefit Interest income in any currency bank deposit 20% 20% - Yield or any monetary benefit from deposit substitute 20% 20% 25% Yield or any monetary benefit from trust fund and other 20% 20% - similar arrangements Interest income derived from depositary bank under 15% 15% Exempt expanded foreign currency deposit unit/system (FCDS/FCDU) 2. Royalties* 20% 20% 25% 3. Dividends** From DC Exempt Exempt 25%/15%*** From Foreign Corporation If the situs of the dividend is: From within the Philippines Exempt RCIT FWT From without the Philippines Exempt**** Non- Non-taxable taxable Notes: Page 6 of 18  Republic of the Philippines BATANGAS STATE UNIVERSITY The National Engineering University JPLPC Malvar Campus G. Leviste St., Poblacion, Malvar, Batangas, Philippines 4233 Tel Nos.: (+63 43) 416-0350 local 100; (+63 43) 416-0068 E-mail Address: [email protected] | Website Address: http://www.batstate-u.edu.ph College of Accountancy, Business, Economics and International Hospitality Management Income Taxation TAX 301 A.B. Reaño *Generally, royalties are considered passive income subject to FWT. However, under BIR Ruling No. DA 351-2003 dated October 2003, if the royalty was generated in the active pursuit and performance of the corporation’s primary purpose, the same is NOT passive income but considered ordinary business income subject to basic tax. Further, as provided under BIR Ruling No 69-2016 dated February 2016, income derived or generated from activities that are in accordance with the purposes provided in its Articles of Incorporation are in the nature of ordinary business income, thus, subject to basic income tax. **Section 42(A)(2)(b) of the Tax Code, as amended, provides that dividend from a foreign corporation shall be treated as income derived from sourced within the Philippines unless less than 50% of the gross income of the foreign corporation for the three-year period ending with the close of its taxable year preceding the declaration of such dividends (or for such part of the period as the corporation has been in existence) was derived from sources within the Philippines. ***CREATE Law; RR2-2021 states that dividend income received from NRFC from DC is generally subject to 25% FWT (without tax sparing), however, a reduced rate of 15%, subject to the conditions that the country in which the NRFC is domiciled: a. Shall allow a credit against the tax due from the said NRFC which are equivalent to taxes deemed to have been paid in the Philippines equal to 10% effective January 1, 2021, which represents the difference between the regular income tax rate for NRFC under Sec. 28(B)(1) of the NIRC, as amended, and the 15% tax on dividends as herein provided; OR b. Does not impose any income tax on dividends received from a domestic corporation. Additional Note: There is tax sparing if any of the conditions above is met. Consequently, the FWT shall be reduced to 15% The FWT rate is 25% if there is no tax sparing or if both of the conditions above is not met. Prior to the effectivity of the CREATE Law, the FWT rate, in the absence of tax sparing was 30%. ****SITUS OF DIVIDEND INCOME Dividend from a domestic corporation: the dividend income is considered derived from within the Philippines. Dividend from foreign corporation: the dividend income is considered derived either from within the Philippines or abroad depending on the ratio of the foreign company’s gross income in the Philippines and abroad, as provided below: Ratio of Gross Income Situs of Dividend Applicable Tax derived in the Philippines At least 50% The entire dividend is Exempt considered derived from within the Philippines Less than 50% The entire dividend is Exempt under certain considered derived abroad conditions***** *****Requirements for Exemption of foreign-sourced dividend received by a domestic corporation: Page 7 of 18  Republic of the Philippines BATANGAS STATE UNIVERSITY The National Engineering University JPLPC Malvar Campus G. Leviste St., Poblacion, Malvar, Batangas, Philippines 4233 Tel Nos.: (+63 43) 416-0350 local 100; (+63 43) 416-0068 E-mail Address: [email protected] | Website Address: http://www.batstate-u.edu.ph College of Accountancy, Business, Economics and International Hospitality Management Income Taxation TAX 301 A.B. Reaño 1. The dividends actually received or remitted into the Philippines are reinvested in the business operations of the domestic corporation within the next taxable year from the time the foreign-sourced dividends were received or remitted. 2. The dividends received shall only be used to fund the working capital requirements, capital expenditures, dividend payments, investment in domestic subsidiaries, and infrastructure project; and 3. The domestic corporation holds directly at least 20% in value of outstanding shares of foreign corporation and has held the shareholdings uninterruptedly for a minimum of two years at the time of the dividends distribution. In case the foreign corporation has been in existence for less than two years at the time of dividends distribution, then the domestic corporation must have continuously held directly at least 20% in value of the foreign corporation’s outstanding shares during the entire existence of the corporation. CAPITAL GAINS TAX Certain Capital Gains derived from Philippines CORPORATION sources DC RFC NRFC 1. On sale of shares of a domestic corporation NOT 15% 15% 15% traded in the Local Stock Exchange 2. On sale or exchange or disposition of land or 6% N/A N/A buildings (based on Selling Price or FMV, whichever is higher) Notes: The 6% CGT regardless of whether the sale resulted to a gain or loss is imposed only to domestic corporations and individual taxpayers. Moreover, the option available to individual taxpayers to subject the sale to either 6% CGT or basic tax, if the buyer is the government, is not available to domestic corporations. For purposes of computing the 6% CGT on real properties, the Fair Market Value (FMV) shall pertain to the higher amount between the valuation provided by the Provincial or City assessors (also known as “assessed value” or “valuation for real property tax purposes) and the Zonal Value provided by the BIR. The FMV determined by independent parties is not applicable for CGT purposes. CGT is due within 30 days from date of sale. SPECIAL CORPORATIONS Special Corporations are corporations subject to lower corporate income tax rate compared to the regular tax rate of 25% (20% for MSME) under CREATE Law, on their regular or ordinary income by. There are six special corporations under the Tax Code as amended by the CREATE Law, namely: Domestic Corporations 1. Proprietary Educational Institutions 2. Hospitals which are non-profit Resident Foreign Corporations 1. International Carriers Non-resident Foreign Corporations 1. Non-resident cinematographic film owner, lessor or distributor 2. Non-resident owner or lessor of vessels chartered by Philippine Nationals 3. Non-resident owner or lessor of aircraft, machineries and other equipment Page 8 of 18  Republic of the Philippines BATANGAS STATE UNIVERSITY The National Engineering University JPLPC Malvar Campus G. Leviste St., Poblacion, Malvar, Batangas, Philippines 4233 Tel Nos.: (+63 43) 416-0350 local 100; (+63 43) 416-0068 E-mail Address: [email protected] | Website Address: http://www.batstate-u.edu.ph College of Accountancy, Business, Economics and International Hospitality Management Income Taxation TAX 301 A.B. Reaño HOSPITAL WHICH ARE NON-PROFIT AND PROPRIETARY EDUCATIONAL INSTITUTIONS The rules applicable to ordinary corporations will also apply to hospitals which are non- profit and proprietary educational institutions, except the following tax rules: a. Subject to Special Corporate Income Tax (SCIT) rate of 1% or 10% as the case may be, based on net taxable income as provided under Section 27(B) of the Tax Code, as amended by RA11534. They shall pay a tax of 10% on their taxable income: provided that beginning July 1, 2020 until June 30, 2023, the tax rate herein imposed shall be 1%. Provided, further, that 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, the tax prescribed in subsection (A) hereof shall be imposed on the entire taxable income. Provided, the unrelated income is not higher than related income TRAIN Law 10% SCIT CREATE Law From July 1, 2020 to June 30, 2023 1% SCIT Beginning July 1, 2023 10% SCIT “Unrelated trade, business or other activity” is an activity which is not substantially related to the exercise or performance of the school or hospital’s primary purpose or function such as but not limited to rental income from available school spaces or facilities. Examples of unrelated income (RMC 4-2013) Income from tuition fees and miscellaneous school fees Income from hospital where medical graduates are trained for residency Income from canteen situated within the school campus Income from bookstore situated within the school campus “Proprietary educational institution” refer any private schools maintained and administered by private individuals or groups with an issued permit to operate from the Department of Education, Culture and Sports (DECS), 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. b. They are not subject to MCIT. c. In the case of Proprietary Educational Institutions (PEIs), they have the option to treat Capital Expenditures (CAPEX) for expansion of school facilities either as an outright expense or capitalizable cost and claim depreciation expense. This rule, however, shall not apply to a non-profit hospitals. NOTE: The 25% regular corporate income tax rate prescribed under Section 27(A) of the NIRC, as amended, shall be imposed on the entire taxable income of the institutions mentioned in Section 3 of RR3-2022 if their gross income from unrelated trade, business, or other activity, as defined herein, exceeds 50% of the total gross income they derived from all sources. Moreover, a non-stock, non-profit institution, not falling under Section 3 of these Regulations, shall be subject to the rate of 25% regular corporate income tax on the portion of its revenues or assets NOT USED actually, directly, and exclusively for educational purposes, as provided in Section 27(A) of the NIRC, as amended. Page 9 of 18  Republic of the Philippines BATANGAS STATE UNIVERSITY The National Engineering University JPLPC Malvar Campus G. Leviste St., Poblacion, Malvar, Batangas, Philippines 4233 Tel Nos.: (+63 43) 416-0350 local 100; (+63 43) 416-0068 E-mail Address: [email protected] | Website Address: http://www.batstate-u.edu.ph College of Accountancy, Business, Economics and International Hospitality Management Income Taxation TAX 301 A.B. Reaño INTERNATIONAL CARRIERS International Common Carrier refers to an International Air Carrier or International Sea Carrier. International Air Carrier Refers to a foreign airline corporation doing business in the Philippines having been granted landing rights in any Philippine port to perform international air transportation services/activities or flight operations anywhere in the world. On-line carriers refer to international air carriers having or maintaining flight operations to and from the Philippines. Off-line carriers refer to international air carriers having no flight operations to and from the Philippines. International Sea Carrier Refers to a foreign shipping corporation doing business in the Philippines, having touched or intention of touching any Philippine port to perform international sea transportation services/activities from the Philippines to anywhere in the world and vice versa, in the case of online carrier, or having maintained business establishment, agent or representative office in the Philippines for the sale of owned tickets/passage documents or tickets/passage documents of other shipping companies, which shipping companies operate without touching any Philippine port, in the case of off-line carrier. An international carrier having flights or voyages originating from any port or point in the Philippines, irrespective of the place where passage documents are sold or issued, is subject to the Gross Philippine Billings Tax of 2 ½% imposed under Section 28(A)(3)(a) and (b) of the Tax Code, as amended, unless it is subject to a preferential rate (lower rate) or exemption on the basis of an applicable tax treaty or international agreement to which the Philippines is a signatory or on the basis of “reciprocity” (Sec. 4, RR 15-2013) Formula: Gross Philippine Billings Pxxx Rate 2 ½% Income Tax Pxxx International carriers may avail of a lower tax rate (preferential rate) or exemption under RA10378 on the basis of: 1. Tax Treaty; or 2. International Agreement; or 3. Reciprocity – an international carrier, whose home country grants income tax exemption to Philippine carriers, shall likewise be exempt from income tax. WHAT ARE GROSS PHILIPPINE BILLINGS? International Air Carriers It 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 of document. International Shipping Carriers It refers to the amount of 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. Page 10 of 18  Republic of the Philippines BATANGAS STATE UNIVERSITY The National Engineering University JPLPC Malvar Campus G. Leviste St., Poblacion, Malvar, Batangas, Philippines 4233 Tel Nos.: (+63 43) 416-0350 local 100; (+63 43) 416-0068 E-mail Address: [email protected] | Website Address: http://www.batstate-u.edu.ph College of Accountancy, Business, Economics and International Hospitality Management Income Taxation TAX 301 A.B. Reaño REGIONAL OPERATING HEADQUARTERS (ROHQs) Beginning January 1, 2022 Shall no longer be considered as special corporation. Consequently, the rules applicable to ordinary resident foreign corporations shall already apply, such as: RCIT rate 25% of net income derived from Philippine sources only; and MCIT (on gross income in the Philippines) PRIOR to January 1, 2022 Considered as special corporation subject to 10% income tax rate based on its net income derived from sources within the Philippines. It is not subject to MCIT. NOTE: Regional or Area Headquarter (RHQ/AHQ) and Representative Office (RO) are different from ROHQs. Regional or Area Headquarters (RHQs/AHQs) and Representative Offices (ROs) are tax- exempt and not included in the definition of corporation for income tax purposes. BRANCH PROFIT REMITTANCES TAX (BPRT) of RFCs Sec. 28 (A)(5) of the Tax Code, as amended, provides any profit remitted by a branch to its head office shall be subject to ta tax of 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 of the Tax 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. Formula: Proft Remittance Pxxx Rate 15% BPRT Pxxx PROFIT REMITTED APPLICABLE TAX Connected with the conduct of its trade or Subject to 15% BPRT business in the Philippines Others Not subject to BPRT Exempt Entities (Activities registered with the following shall be exempt from BPRT): 1. Philippine Economic Zone Authority (PEZA) 2. Subic Bay Metropolitan Authority (SBMA) 3. Clark Development Authority (CDA) Page 11 of 18  Republic of the Philippines BATANGAS STATE UNIVERSITY The National Engineering University JPLPC Malvar Campus G. Leviste St., Poblacion, Malvar, Batangas, Philippines 4233 Tel Nos.: (+63 43) 416-0350 local 100; (+63 43) 416-0068 E-mail Address: [email protected] | Website Address: http://www.batstate-u.edu.ph College of Accountancy, Business, Economics and International Hospitality Management Income Taxation TAX 301 A.B. Reaño OFFSHORE BANKING UNITS (OBUs) An OBU is a branch, subsidiary or affiliate or a foreign banking corporation located in a/an Offshore Financial Center which is duly authorized by the BSP to transact offshore banking business in the Philippines. OBUs are allowed to provide all traditional banking services to non- residents in any currency other than Philippine national currency. Upon the effectivity of the CREATE Law, OBUs are now taxable just like an ordinary resident foreign corporation. Hence, OBUs are now subject to the revised RCIT rate of 25% on their income derived from sources within the Philippines. Prior to the effectivity of the CREATE Law: Income derived by offshore banking units (OBUs) from foreign currency transactions are taxed as follows: COUNTER PARTY RATE Non-residents Exempt Other OBUs Exempt Local Commercial Banks Exempt Branches of foreign banks Exempt Other residents 10% TAXATION OF POGO ENTITIES AND SERVICE PROVIDERS RMC 107-2021, dated October 2021, was issued to circularize Republic Act No 11590 Entitled “An Act Taxing Philippine Offshore Gaming Operations, amending for the purpose sections 22, 25, 27, 28, 106, 108 and adding new sections 125-A and 288 (G) of the National Internal Revenue Code of 1997, as amended, and for other purposes” The salient changes in the 1997 NIRC, as amended by RA 11590 in relation to corporate taxpayers are as follows: The definition of “offshore gaming licensee” was added to Section 22 of the Tax Code and shall be considered engaged in doing business in the Philippines. The definition of “offshore gaming licensee-gaming agent” was added to Section 22 of the Tax Code who acting as such, shall neither be involved with the business operations of the offshore gaming licensee nor derive income therefrom. Definition of Terms: Philippine Offshore Gaming Operation (POGO) Refers to the operation by an Offshore Gaming Licensee on online games of chance or sporting events via the Internet using a network or software or program exclusively for offshore customers/players who are non-Filipinos. Offshore Gaming Licensee (OGL) Refers to an offshore gaming operator, whether organized in the Philippines (Philippine- based) or abroad (Offshore or Foreign-based), duly licensed or authorized through a gaming license issued by a POGO Licensing Authority to conduct offshore gaming operations including the acceptance of bets from offshore customers. Accredited Service Provider (ASP) Refers to any natural person regardless of citizenship or residence, or juridical person regardless of place or organization, which provides ancillary services to an OGL or any other Offshore Gaming Operator with license acquired from other jurisdictions. Such ancillary service may include but not limited to: Customer and technical relations and support Page 12 of 18  Republic of the Philippines BATANGAS STATE UNIVERSITY The National Engineering University JPLPC Malvar Campus G. Leviste St., Poblacion, Malvar, Batangas, Philippines 4233 Tel Nos.: (+63 43) 416-0350 local 100; (+63 43) 416-0068 E-mail Address: [email protected] | Website Address: http://www.batstate-u.edu.ph College of Accountancy, Business, Economics and International Hospitality Management Income Taxation TAX 301 A.B. Reaño Information technology Gaming Software Data provision Payment solutions Live studio and streaming services POGO Licensing Authority Refers to Philippine Amusement and Gaming Corporation (PAGCOR) or any other special economic zone authority, tourism zone authority or freeport authority authorized by their respective charters to issue gaming licenses and accreditation to POGO entities. OGL-Gaming Agent Refers to representative in the Philippines of a foreign-based OGL who shall act as a resident agent for the mere purpose of receiving summons, notices and other legal processes for the OGL. TAX TREATMENT OF INCOME BY POGO ENTITIES a. Offshore Gaming Licensees (OGLs) 1. Income from Gaming Operations 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 (whichever is higher): 5% of Gross Gaming Revenue (Gross wages less Payouts); or 5% of the Agreed Pre-determined minimum monthly revenue from gaming operations. The Gaming Tax shall be directly remitted to the BIR not later than the 20 th day following the end of each month. The 5% Gaming Tax under the new section of the Tax Code as amended by RA11590 is a Percentage Tax. 2. Income from Non-Gaming Operations of OGLs Philippine-based OGL Subject to 25% RCIT of taxable income derived from sources within and without the Philippines. Foreign-based OGL o Subject to 25% RCIT of taxable income derived from sources within the Philippines only. The non-gaming revenues of operations of all OGLs shall be subject to value added tax or percentage tax, whichever is applicable. OFFSHORE GAMING LICENSEES INCOME TAX BUSINESS TAX (OGL) Income from Non-Gaming Operations 25% RCIT VAT or Percentage Tax Income from Gaming Operations 5% Gaming Tax in lieu of all other direct and indirect Internal Revenue Taxes and Local Taxes b. Accredited Service Providers (ASP) 1. ASP Organized in the Philippines Subject to 25% RCIT of taxable income derived from sources within and without the Philippines, except as otherwise provided in the Tax Code. 2. ASP Organized outside the Philippines Page 13 of 18  Republic of the Philippines BATANGAS STATE UNIVERSITY The National Engineering University JPLPC Malvar Campus G. Leviste St., Poblacion, Malvar, Batangas, Philippines 4233 Tel Nos.: (+63 43) 416-0350 local 100; (+63 43) 416-0068 E-mail Address: [email protected] | Website Address: http://www.batstate-u.edu.ph College of Accountancy, Business, Economics and International Hospitality Management Income Taxation TAX 301 A.B. Reaño Subject to 25% RCIT of taxable income derived from sources within the Philippines, except as otherwise provided in the Tax Code. TAXATION OF PAGCOR PD 1869, as amended, classified PAGCOR’s income into two, namely: 1. Income from gaming operations; and 2. Income from other related services In the case of PAGCOR vs CIR, et al (G.R. No. 215427, December 2014), the Supreme Court held that PAGCOR’s income from gaming operations shall be subject to the 5% franchise tax while its income from related services shall be subject to the corporate income tax provided in the Tax Code, as amended. Income of PAGCOR from Gaming Operations includes, among others: 1. Income from its casino operations 2. Income from dollar pit operations 3. Income from bingo operations, including all variations thereof; and 4. Income from mobile bingo operations operated by it, with agents on commission basis. Provided, however, that the agent’s commission income shall be subject to regular income tax, and consequently, to withholding tax under existing regulations. Accordingly, PAGCOR’s income from its operations and licensing of gambling casinos, gaming clubs and other similar recreation or amusement places, gaming pools are, in lieu of all taxes, subject to 5% franchise tax pursuant to PD1869. It is noteworthy to mention that Section 13(2)(a) of PD1869, as amended, clearly gives PAGCOR a blanket exemption to taxes on its income from its operations under its Franchise (also known as income from gaming operations) with no distinction on whether the taxes are direct or indirect, like value added taxes. PAGCOR’s income from “other related operations/services” shall be subject to corporate income tax (RCIT), vat and other applicable taxes under the Tax Code, as amended. Income of PAGCOR from other related operations/services such as: 1. Regulatory license fees 2. Regulatory license fees from licensed private casinos 3. Regulatory license fees from licensed private bingo operations, including all variations thereof 4. Regulatory license fees from private internet casino gaming, internet sports betting and private mobile gaming operations 5. Regulatory license fees from private poker operations 6. Regulatory license fees from private junket operations 7. Regulatory license fees from SM demo units 8. Regulatory license fees from all other electronic derivatives of brick-and-mortar games regulated by PAGCOR 9. Income from other necessary and related services, shows and entertainment INCOME TAX From Gaming Operations 5% Franchise Tax in lieu of all other taxes such as income tax and VAT From Other Related Services and other income RCIT and other taxes imposed under the Tax Code such as VAT Page 14 of 18  Republic of the Philippines BATANGAS STATE UNIVERSITY The National Engineering University JPLPC Malvar Campus G. Leviste St., Poblacion, Malvar, Batangas, Philippines 4233 Tel Nos.: (+63 43) 416-0350 local 100; (+63 43) 416-0068 E-mail Address: [email protected] | Website Address: http://www.batstate-u.edu.ph College of Accountancy, Business, Economics and International Hospitality Management Income Taxation TAX 301 A.B. Reaño TAXATION OF PAGCOR CONTRACTEES AND LICENSEES P.D. 1869, as amended, expressly provides that the payment of the five percent 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 5% franchise tax since the law is clear that said exemption inures and extends to their benefit. TAXABILITY OF E-SABONG OPERATORS Just like other PAGCOR licensees, the gaming income of e-sabong operator is subject to 5% franchise tax which shall be in lieu of all internal revenue taxes except vat or percentage tax, depending on the threshold. Income from e-sabong operation (gaming income) refers to the gaming income and/or service income generated from activities authorized under the e-sabong license issued by PAGCOR, including but not limited to those derived from the plasada. FILING OF TAX RETURNS 1. Annual Income Tax Return For Corporation, Partnership and Other Non-Individual Taxpayer Subject Only to REGULAR Income Tax Rate (1702RT) This return shall be filed by Corporation, Partnership and other Non-Individual Taxpayer Subject Only to REGULAR Income Tax Rate of 25% or 20% (For corporations with net taxable income not exceeding Five Million Pesos (P 5,000,000) AND total assets not exceeding One Hundred Million (100,000,000), excluding the land on which the particular business entity’s office, plant and equipment are situated). This return is filed, with or without payment, on or before the 15th day of the 4th month following close of the taxpayer's taxable year. 2. Annual Income Tax Return for Corporation, Partnership and Other Non-Individual with MIXED Income Subject to Multiple Income Tax Rates or with Income Subject to SPECIAL/PREFERENTIAL RATE (1702MX) This return shall be filed by every Corporation, Partnership and Other Non-Individual Taxpayer with MIXED Income subject to MULTIPLE INCOME TAX RATES or with income subject to SPECIAL/PREFERENTIAL RATE. This return is filed, with or without payment, on or before the 15th day of the 4th month following the close of the taxpayer's taxable year. Page 15 of 18  Republic of the Philippines BATANGAS STATE UNIVERSITY The National Engineering University JPLPC Malvar Campus G. Leviste St., Poblacion, Malvar, Batangas, Philippines 4233 Tel Nos.: (+63 43) 416-0350 local 100; (+63 43) 416-0068 E-mail Address: [email protected] | Website Address: http://www.batstate-u.edu.ph College of Accountancy, Business, Economics and International Hospitality Management Income Taxation TAX 301 A.B. Reaño 3. Annual Income Tax Return For Corporation, Partnership and Other Non-Individual Taxpayer EXEMPT Under the Tax Code, as Amended, {Sec. 30 and those exempted in Sec. 27(C)} and Other Special Laws, with NO Other Taxable Income (1702EX) This return shall be filed by a Corporation, Partnership and Other Non-Individual Taxpayer EXEMPT under the Tax Code, as amended [Sec. 30 and those exempted in Sec. 27(C)] and other Special Laws WITH NO OTHER TAXABLE INCOME such as but not limited to foundations, cooperatives, charitable institutions, non-stock and non-profit educational institutions, General Professional Partnership (GPP) etc. This return is filed on or before the 15th day of the 4th month following the close of the taxpayer's taxable year. 4. Quarterly Income Tax Return for Corporations, Partnerships and Other Non-Individual Taxpayers (1702Q) This return is filed quarterly by every corporation, partnership, joint stock companies, joint accounts, associations (except foreign corporation not engaged in trade or business in the Philippines and joint venture or consortium formed for the purpose of undertaking construction projects or engaging in petroleum, coal, geothermal and other energy operations), government- owned or controlled corporations, agencies and instrumentalities. The corporate quarterly income tax return shall be filed with or without payment within sixty (60) days following the close of each of the first three (3) quarters of the taxable year whether calendar or fiscal year. Page 16 of 18  Republic of the Philippines BATANGAS STATE UNIVERSITY The National Engineering University JPLPC Malvar Campus G. Leviste St., Poblacion, Malvar, Batangas, Philippines 4233 Tel Nos.: (+63 43) 416-0350 local 100; (+63 43) 416-0068 E-mail Address: [email protected] | Website Address: http://www.batstate-u.edu.ph College of Accountancy, Business, Economics and International Hospitality Management Income Taxation TAX 301 A.B. Reaño 4. For both Final Withholding Tax on passive income and capital gains tax, the filing of tax returns of non-individuals is the same as filing for individuals. Sample Problems: A. The gross sales of One Direction Corporation for 2022 amounted to P6,000,000, with cost of sales amounting to P4,000,000. It incurred operating expenses amounting to P1,000,000. Its total assets excluding the land on which the particular business entity’s office, plant and equipment are situated amount to P50,000,000. On the filing of its 1st Quarter Income Tax Return, it signified its intention to avail of the OSD. Compute the income tax due. B. The following information were from the records of LANY Colleges, a proprietary educational institution with an issued permit from CHED, for the fiscal year ended May 31, 2022: Income: Miscellaneous fees P362,600 Tuition 2,843,100 Income from rents 60,000 Net Income, school canteen 36,200 Net Income, bookstore 24,800 Expenses: Payroll and administrative salary 1,425,420 Other operating expenses 844,430 Depreciation, new six-room bldg. 37,500 The capital outlay of P750,000 for the new six-room building would be expensed outright. How much was the income tax due from the LANY Colleges for the fiscal year ended May 31, 2022? C. Global Care of Labubu, a non-profit hospital, has the following data for the current calendar year: Gross receipts, related activities P15,000,000 Cost of services, related activities 6,000,000 Allowable deductions from related activities 3,250,000 Gross receipts, unrelated activities 18,000,000 Cost of services, unrelated activities 5,000,000 Allowable deductions from unrelated acts. 2,000,000 Payments, first three quarters 2,000,000 How much is the tax payable? D. The following current year data were provided by Air Alice Went international carrier doing business in the Philippines for the following year: Gross receipts, sales of tickets in the Philippines to passengers (Manila to Jerusalem flight) P8,000,000 Gross receipts, sales of tickets in Jordan to passengers (only P5,000,000 actually flown, Manila to Jordan flight) 6,000,000 Gross receipts, transport of goods, sales of tickets in Jordan (Manila to Jordan flight) 3,000,000 Gross receipts, sales of tickets in the Philippines (Manila to Paris flight), passengers were endorsed by another international airline 1,000,000 Gross receipts, sales of tickets in the Philippines (Manila to Paris flight), passengers were transshipped in Jordan to Paris by different airline company Page 17 of 18  Republic of the Philippines BATANGAS STATE UNIVERSITY The National Engineering University JPLPC Malvar Campus G. Leviste St., Poblacion, Malvar, Batangas, Philippines 4233 Tel Nos.: (+63 43) 416-0350 local 100; (+63 43) 416-0068 E-mail Address: [email protected] | Website Address: http://www.batstate-u.edu.ph College of Accountancy, Business, Economics and International Hospitality Management Income Taxation TAX 301 A.B. Reaño (flight from Manila to Jordan – 5 hours; flight from Jordan to Paris – 10 hours) 4,500,000 Expenses, sales of tickets, Philippines 4,000,000 Rental income, Philippines, gross of 5% withholding tax 1,500,000 Interest Income, bank deposit, Philippines 50,000 Expenses connected to rental income, Philippines 500,000 Payments, first three quarters 150,000 Compute the income tax due and payable: E. A resident foreign corporation has the following data on its income, expenses and remittances for CY 2021: Gross Sales, Philippines P9,000,000 Cost of Sales, Philippines 2,000,000 Gross Sales, USA 7,000,000 Cost of Sales, USA 2,000,000 Business Expenses, Philippines 2,000,000 Business Expenses, USA 1,000,000 Royalties on Philippine Copyrights 500,000 Interest on time deposit, PNB-Manila, Phils 100,000 Remittances of profit during the year, net of applicable tax 170,000 Payments, first three quarters 100,000 Determine the Philippine income tax due and payable. Determine the tax on the branch profit remittances, if any? F. Kangkong Chips ni Papa Auds Corporation’s computed normal income tax and MCIT, and creditable income taxes withheld from first quarter to fourth quarter including excess MCIT and excess withholding taxes from prior year/s are as follows: First Qtr Second Qtr Third Qtr Fourth Qtr Normal Income tax 100,000 120,000 250,000 200,000 MCIT 80,000 250,000 100,000 100,000 Taxes withheld 20,000 30,000 40,000 35,000 Additional information: Excess MCIT, prior year, P30,000.; Excess withholding tax prior year, P10,000 Compute the income tax payable for the first three quarters and the year end. “Success is not final; failure is not fatal: it is the courage to continue that counts.” – Winston Churchill **END** Page 18 of 18