Income Tax Computation Corporate Taxpayer 1 What is

Income Tax Computation Corporate Taxpayer 1

What is a corporation? Corporation – is an artificial being created by law, having the rights of succession and the powers, attributes and properties authorized by law or incident to its existence. For taxation purposes, corporation shall include – Ø Partnerships Ø Joint-stock companies Ø Joint accounts Ø Associations Ø Insurance companies 2

A corporation does not include – • General Professional Partnership • 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 3

Classification of Corporation o Domestic corporation o Foreign corporation n Resident Foreign – engaged in trade or business within the Phil. Generally, it establishes branch or an office for the purpose of doing business or trade. n Non-Resident Foreign – not engaged in trade or business within the Philippines. 4

Evolution of Corporate Income Tax Rate Effectivity Basis 34% Jan 1, 1998 RA 8424 33% Jan 1, 1999 RA 8424 32% Jan 1, 2000 RA 8424 35% Nov 1, 2005 RA 9337 30% Jan 1, 2009 RA 9337 5

Taxability of Corporations (RA 9337) Income In General All income derived from sources within or outside the Phils. Domestic 30% (Net Taxable Income) All income derived from sources within the Phils. Resident Foreign Non-Res. Foreign -- -- 30% (Net Taxable Income) 30% (Gross Income) --- Optional Corporate Tax Rate 15% (Gross Income) Minimum Corporate Income Tax (MCIT) 2% (Gross Income) -6

Taxability of Corporations Domestic corporations o In general n Taxable on all income Derived from sources Within and without the Phil. n Optional corporate tax rate (based on gross income) n Minimum Corporate Income Tax (MCIT) 30% 15% 2% 7

Taxability of Corporations Domestic corporations o Proprietary educational institutions & hospitals (non-profit) o GOCCs (except GSIS, SSS, PHIC and PCSO) o Improperly accumulated earnings o Passive income n Interest income from FCDU 7. 5% n Royalties 10% 30% 10% 20% 8

Taxability of Corporations Domestic corporations o Capital gains from sale of shares of Stocks not traded in the SE - Not over P 100, 000 - In excess of P 100, 000 o Income from foreign currency loans Granted by depository bank under FCDU o Intercorporate dividends o Capital gains from sale of land building 5% 10% exempt 6% 9

Taxability of Corporations Resident Foreign corporations o In general n Taxable on all income derived from sources within the Phil. n Optional corporate tax rate (based on gross income) n Minimum Corporate Income Tax (MCIT) 30% 15% 2% 10

Taxability of Corporations Resident Foreign corporations o Gross Philippine Billings n International air carrier 2. 5% n International shipping 2. 5% n Interest income on foreign currency Loans granted by OBU n Branch profit remittance n Regional or area headquarters n Regional operating headquarters 10% 15% exempt 10% 11

Taxability of Corporations Resident Foreign corporations o Passive income n Interest income from FCDU 7. 5% n Royalties o Income from foreign currency loans Granted by depository bank under FCDU o Capital gains from sale of shares of Stocks not trade in the SE n Not over P 100, 000 n In excess of P 100, 000 o Intercorporate dividends 20% 10% 5% 10% exempt 12

Taxability of Corporations Non-resident Foreign corporations o In general n On gross income received from all sources within the Phils. 30% o Cinematographic film owner, lessor, or distributor 25% o Owner/lessor of vessels chartered by Phil. Nationals 4. 5% o Owner/lessor of aircraft, machineries & other equipment 7. 5% 13

Taxability of Corporations Non-resident Foreign corporations o Interest on foreign loans o Intercorporate dividends o Capital gains from sale of shares of stocks not traded in the SE n Not over P 100, 000 n In excess of P 100, 000 10% 20% 15% 5% 14

The Normal Corporate Income Tax BIR Form 1702 (General Format for Income tax computation on business income) Sales/ Revenues/ Fees from within and without Less: Sales returns, allow. , and disc. (if any) Cost of Sales Gross Income from operation Add: Non-operating and other income not subjected to final tax or capital gains tax P xxx xxx P xxx Gross Income xxx Less: Allowable itemized business deductions/ OSD xxx Net Taxable Income xxx Multiply by Normal Corporate Income Tax Rate 30% Normal Corporate Income Tax xxx === 15

MINIMUM CORPORATE INCOME TAX (MCIT) RR No. 9 -98, as amended by RR no. 12 -07 16

Sec. 27(E) and 28 (A)(2) of the NIRC Imposed on: Domestic & Resident Foreign 2% on Gross Income if: - in the 4 th year of operation - net loss/zero taxable income/ MCIT is greater than NCIT 17

Gross income Include all items of gross income enumerated under Section 32(A) of the Tax Code, as amended, except income exempt from income tax and income subject to final. withholding tax. For Sale of goods Gross sales – (cost of goods sold + sales returns + discounts+ allowances) “Gross sales” Include only sales contributory to income taxable under Sec. 27(A) of the Code. “Cost of goods sold” Include all business expenses directly incurred to produce the merchandise to bring them to their present location and use. 18

For sale of services Gross revenue – (cost of services/direct cost + sales returns + discounts + allowances) “Gross Revenues” Include income from sale of services, likewise, taxable under Sec. 27(A) “Cost of services or Direct cost of Services” Include all business expenses directly incurred or related to the gross revenue from rendition of services. 19

Illustration Gross sales/ revenues 1, 000. 00 Less: Sales Ret. , Disc & Allow. 25, 000. 00 Cost of Goods Sold/ services 500, 000. 00 Gross Income from operation 475, 000. 00 Add: Other Income not subject to Final Tax or Capital Gains Tax 100, 000. 00 Total Gross Income subject to MCIT 575, 000. 00 ==== 20

Carry forward of Excess MCIT • Excess of MCIT over normal income tax shall be carried forward on an annual basis and credited against the normal income tax for the 3 immediately succeeding taxable years. • Excess MCIT can only be credited against the income tax due if the normal income tax is higher than the MCIT 21

Carry forward of Excess MCIT • Excess MCIT which has not or cannot be so credited against the normal income tax due for the 3 -year period shall lose its credibility. • Excess MCIT cannot be claimed as a credit against the MCIT itself or against any other losses 22

Carry forward of Excess MCIT • The final comparison between the normal income tax payable and the MCIT shall be made at the end of the taxable year. • The payable or excess payment in the Annual Income Tax Return shall be computed taking into consideration income tax payment made at the time of filing of quarterly income tax returns whether this be MCIT or normal income tax 23

Rules on crediting of tax payments & taxes withheld Annual Computation NIT is higher than MCIT is higher than Normal Income Tax Excess MCIT from prior year can be deducted from the NIT due Excess MCIT from prior years cannot be deducted from the MCIT due Excess withholding tax from prior year can be deducted from the NIT due Excess withholding tax from prior year can be deducted from the MCIT due 24

Rules on crediting of tax payments & taxes withheld Annual Computation NIT is higher than MCIT is higher than Normal Income Tax Quarterly taxes withheld can be credited from the NIT due Quarterly taxes withheld can be credited from the MCIT due Quarterly income tax payments whether Normal Income Tax or MCIT can be deducted from the NIT due Quarterly income tax payments whether MCIT or Normal Income Tax can be deducted from the MCIT due Note: The final comparison between the NIT and MCIT shall be made at 25 the end of te taxable year

Rules on crediting of tax payments & taxes withheld Annual Computation NIT is higher than MCIT is higher than Normal Income Tax Excess MCIT from prior year can be deducted from the quarterly NIT due MCIT from prior year cannot be deducted from the quarterly MCIT due Excess withholding tax from prior year can be deducted from the quarterly NIT due Excess withholding tax from prior year can be deducted from the quarterly MCIT due 26

Rules on crediting of tax payments & taxes withheld Annual Computation NIT is higher than MCIT is higher than Normal Income Tax Quarterly taxes withheld can be credited from the quarterly NIT due Quarterly taxes withheld can be credited from the quarterly MCIT due Payment from previous quarters of the taxable year can be deducted from the cumulative tax due Note: Quarterly comparison to determine whichever is higher between the NIT and MCIT shall be done on a cumulative basis 27

Suspension of MCIT • Instances when MCIT may be suspended Substantial losses on account of – v Prolonged labor dispute v Force majeure v Legitimate business reverses • Who may suspend v Secretary of Finance upon recommendation of the CIR 28

Suspension of MCIT • Required documentation v Submission of proof by the corporation v Duly verified by the CIR’s duly authorized representative 29

IMPROPERLY ACCUMULATED EARNINGS TAX (IAET) RA 8424/ RR No. 2 -2001/RMC 35 -2011 30

CONCEPT OF IAET • Taxpayer is a corporation • Improper accumulation of taxable income beyond • • the reasonable needs of the business Non-distribution of earnings/profits to stockholders The purpose of accumulation is to avoid the payment of the income tax Imposition of tax equivalent to 10% of the improperly accumulated taxable income The tax imposed is in the nature of penalty to a corporation for improper accumulation of earnings beyond the reasonable needs of the business 31

EVIDENCE OF PURPOSE TO AVOID THE TAX • The corporation is a mere holding or investment company • Earnings or profits are permitted to accumulate beyond the reasonable needs of the business 32

Reasonable vs. Unreasonable Accumulation o Reasonable Needs of Business: n Immediate needs of business, including reasonably anticipated needs (Immediacy Test) o Unreasonable Accumulation n Not necessary for the purpose of the business considering all circumstances of the case 33

Reasonable Needs of Business o 100% of the paid up capital or the amount contributed to the corporation representing the par value of the shares of stock, hence, any excess capital over & above the par shall be excluded (RMC 35 -2011). 34

Reasonable Needs of Business o Earnings Reserved n for definite corporate expansion projects n for building, plant or equipment acquisition n for compliance with loan covenant or preexisting obligation established under a legitimate business agreement. n Required by law to be retained or with legal prohibition n In case of foreign corporation subsidiaries, intended for investments within the Philippines 35

Unreasonable accumulation of Profits o Investment of substantial earnings and profits of the corporation in unrelated business or in stock or securities of unrelated business; o Investment in bonds and other long term securities; and o Accumulation of earnings in excess of 100% of paid-up capital or contribution representing the par value of the shares of stock. 36

Corporation Exempt from IAET o o o o Banks and non-bank financial intermediaries Insurance companies Publicly held corporations Taxable partnerships GPP Non-taxable joint ventures Firms registered under RA 7916, 7227, and other special ecozones 37

IMPOSITION OF IAET Tax rate 10% Corporations liable Closely-held domestic corporations Deadline 15 th day after the end of he year following the close of the taxable year 38

Closely-held corporations: n are corporations at least 50% in value of the outstanding capital stock or at least 50% of the total combined voting power of all classes of stocks entitled to vote is owned directly or indirectly by or for not more than 20 individuals 39

TAX BASE OF IAET (Improperly Accumulated Taxable Income) Taxable income Add: (a) Income subject to final tax (b) NOLCO (c) Income exempt from tax (d) Income excluded from gross income Total Less: Income tax paid for the year Div. actually or const. paid/issued Total Less : Amount that can be retained IATI P xxx Pxxx xxx P xxx xxx Pxxx === 40

Payment of IAET o Dividend must be declared and paid not later than one year following the close of the taxable year o Otherwise, IAET should be paid within 15 days thereafter Once the profit has been subjected to IAET, the same shall no longer be subjected to IAET in later years, even if not declared as dividend. Profits subjected to IAET, when finally declared as dividends, shall be nevertheless be subject to 10% final withholding tax 41

Proprietary Educational Institution Any private school created and organized as domestic corporation and which is maintained and administered by private individuals or groups with an issued permit to operated from DECS, CHED or the TESDA, as the case may be, in accordance with existing laws and regulations. Taxability In general 10% If gross income from unrelated trade, business or other activity exceeds 50% of the total gross income 30% 42

Non-Profit Hospital A non-stock and non-profit domestic corporation organized and created to maintain and administer a hospital without a capital stock divided into shares, and no part of the income of which is distributable as dividends to its members, trustees or officers, but are used only for the furtherance of the said purpose. Hospital means an institution for the reception and care of sick, wounded, infirm or aged persons. It does not include hospitals for the care of animals. Taxability In general 10% If gross income from unrelated trade, business or other activity exceeds 50% of the total gross income 30% 43

Exempted Corporations (Sec. 30) o Labor, agricultural or horticultural organizations not organized principally for profit o Mutual savings bank without capital stock represented by shares and cooperative bank without capital stock organized and operated for mutual purposes and without profit o Beneficiary society, order or association, operating for the exclusive benefit of the members 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. 44

Exempted Corporations (Sec. 30) o o o Business league, chamber of commerce, or board of trade, not organized for profit Civic league or organization not organized for profit but operated exclusively for the promotion of social welfare Non-stock, non-profit educational institution Government educational institution Farmer’s or other mutual typhoon or fire insurance co. , mutual ditch or irrigation co. , mutual or cooperative telephone co. or like organization of local character Farmers, fruit growers or like association organized and operated as sales agents of its members and turning back to them the proceeds of sales less the necessary expenses Income from any of their properties or from any activity conducted for profit shall be subject to tax regardless of disposition. 45

Partnership By the contract of partnership, two (2) or more persons bind themselves to contribute money, property or industry to a common fund with the intention of dividing the profits among themselves. Types of Partnership o General partnership (Partnership) o General Professional partnership (GPP) o General Co-ownership 46

General Partnership o A partnership other than GPP o It is considered as a corporation for tax purposes o Partners are considered as stockholders thus, profits distributed are considered as dividends o Partners distributive share in the profits of the partnership is not subject to normal income tax 47

General Professional Partnership o Partnership formed by persons for the sole purpose of exercising their common profession, no part of the income of which is derived from engaging in any trade or business o Not considered as a corporation o GPP is not subject to income tax o Individual partners shall be liable to income tax on his share in the distributable net income of the GPP 48

General Co-Ownership Activities of the coowners are limited to the preservation of the property and the collection of the income therefrom Co-ownership is not subject to tax Co-owners invest the income of the coownership in any income producing properties Will constitute a partnership subject to tax as a corporation Co-owner is taxed individually on his distributive share 49

Income Tax Forms and Due Dates 50

Individual Form No. Form Name 1701 Q Quarterly Income Tax Return 1701 Deadline for Filing No. of Copies 1 st – April 15 2 nd – August 15 3 rd – November 15 3 copies Annual Income Tax Calendar – April 15 3 copies Return Fiscal – 15 th day of the 4 th month ff. the close of the year

Corporations Form No. 1702 Form Name Annual Income Tax Return (For Corporations, Partnerships and Other Nonindividual Taxpayers) Deadline for Filing On or before April 15 No. of Copies 3 copies On or before the 15 th day of the 4 th month following the close of the fiscal year 52

Form No. 1702 Q 1704 Form Name Quarterly Income Tax Return (For Corporations, Partnerships and Other Non-individual Taxpayers) Improperly Accumulated Earnings Tax Return Deadline for Filing No. of Copies 60 days following the close of the first 3 taxable quarters 3 copies On or before the 15 th day of the following year following the taxable year 3 copies 53

Attachments Required o Account Information Form (AIF) BIR Form 1702 AIF and the Certificate of the Independent CPA (The CPA Cert. is req’d. if the Gross sales, earnings, receipts exceed P 150, 000. 00); o Certificate of income payments not subjected to withholding tax (BIR Form 2304), if applicable; o Certificate of Creditable withholding tax withheld at source (BIR Form 2307, if applicable); 54

o o o Summary Alphalist of W/T (SAWT) per RR 2 -2006; Duly approved Tax Debit Memo, if applicable; Proof of prior year’s excess credits, if applicable; Proof of Foreign Tax credits, if applicable; For amended return, proof of tax payment and the return previously filed; o For those availing of fiscal incentives, see RMC No. 21 -2007 55

Deductions from the Income Tax Due • Taxes withheld from current year’s income • Tax credits foreign taxes paid • Tax credits (tax credit memo) • Taxes paid in the first 3 quarters (NIT or MCIT) • Excess tax payments in the preceding year 56

NOTE: Installment Payments • Applicable to individual taxpayer only and NOT TO CORPORATION next 57

“Knowing is not enough; we must apply. Willing is not enough; we must do. ” Goethe Johann Wolfgang von 58