Page |1 Slide 1: Intro: Good Evening everyone Im going to report tonight Corporate Income Tax.

To start with is to have the definition of corporation in the context of Taxation. Slide 2: It is an artificial being created by operation of law, having the rights of succession and the powers, attributes and properties, expressly authorized by law or incident to its existence. (Sec. 2, BP No. 68 Corporation Code). Sec 22 paragraph (b) of the National Internal Revenue Code, however, provides a broader definition of corporation. Section 22(B),NIRC - corporation shall include partnerships, no matter how created or organized, joint-stock companies, joint accounts ( cuentas en participacion ), associations or insurances companies, but does not include General professional partnerships, Joint venture & consortium formed for the purpose of undertaking construction projects or Joint venture & consortium formed for the purpose of engaging petroleum, coal geothermal and other energy operations pursuant to an operating or consortium agreement under a service contract with the Government.. as given by the definition of corporation provided by NIRC, the general rule is that a partnership, no matter how created or organized, is subject to tax. However, there are 3 specific exceptions to that general rule: the general professional partnership, Joint venture & consortium formed for the purpose of undertaking construction projects, and Joint venture & consortium formed for the purpose of engaging petroleum, coal geothermal and other energy operations pursuant to an operating or consortium agreement under a service contract with the Government. let us have of the cases involving application of corporate taxes to partnerships. Suppose, A, B, etc. Put up money to buy a sweepstakes ticket for the sole purpose of dividing equally the prize which they may win as they did in fact the amount of P50,000.00. Is the prize taxable? The answer is YES. It is clear in this case that there is a partnership. The act of contributing money to buy a sweepstakes ticket is equivalent to contributing into a common fund with the intent of course that when the ticket win a prize or realize a profit, it will be divided among those who contributed, is evident of organizing a partnership. Also the act of one of them to represent the others in collecting the winnings is an obvious manifestation of that there is really a partnership among them. Thus, they are engaged in an unregistered partnership and therefore a corporate tax should be imposed on the said prize. This is the case of Jose Gatchalian vs CIR. In another case, A and B are co-owners of inherited properties. They agreed to use the said properties and the income derived therefrom as a common fund with the intention to produce profits for them in proportion of their respective shares in the inheritance. Is there a co-ownership or partnership? It is clear that there is co-ownership as the heirs of the descedent, before actual partition occurs, has an interest in the estate. However, if the heirs decided to allow their shares to be held in a common fund under a single management and be used to the intent of making profit which shall be divided among themselves, the said co-ownership will automatically be converted to a partnership and thus income realized therein are subject to tax. This what happens to the case Lorenzo Oa vs CIR. Now, supposing, A, after completing payment to B on two lots, transferred his rights to his four children, C,etc., to enable them to build their residences. B sold the two lots to C who resold the lots after a year to D for a higher price treating the profit as capital

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Page |2 gains and paying an income tax of their respective shares of the profit. Is there a partnership in this case? Definitely NONE. The original purpose in this case was to divide the lots for residential purposes. But since it is found that it is not feasible to do so due to high cost of construction, then they had no choice but to resell the same. Thus it is clear that the division of profits was merely incidental and not the main intent of heirs and therefore the said income is not covered by the imposition of corporate tax. It should be noted that the intent to form a partnership should be unmistakeable. This is the case Obillos, Jr. vs CIR. Slide 8: Now, let us go to the exceptions of partnership under the tax code. First is the General professional partnership. Section 22 (B) actually defines General professional partnerships' as partnerships formed by persons for the sole purpose of exercising their common profession, and expressly provides that no part of the income of which is derived from engaging in any trade or business. This is also in connection with the notion that the practice of a profession is not in itself a business or an enterprise for profit but a public service service even if it is incidentally a means of livelihood. Thus, this kind of partnership is not covered by corporate tax, however, each of its partners are liable for their individual income tax. The law on Partnership, consider Joint Ventures as an informal partnership in its technical and legal sense, thus it is governed and has the same rules and principles with that of the Partnership. It is therefore logical to say that profits of joint ventures are generally taxable. One example of joint venture is the Joint emergency operation which has no legal personality but is still considered as an entity, company or partnership which makes the profits obtained by them to be taxable. This was discussed in the case of Collector of Internal Revenue vs Batangas Transportation Company wherein two distinct and separate corporations engaged in a joint emergency operation for the purpose of saving their companies from losses because of the World War. The Court ruled in this case that the said Joint Emergency Operation was a corporation distinct from the two respondent companies and thus liable to income tax. there are two exceptions under Joint venture. First are joint ventures undertaking construction activity. BIR Ruling 317-92 is a case wherein Ayala Land, Inc. (ALI) and Appleyard Properties, Inc. (API) entered into a Memorandum of Agreement (MOA) for the construction of an office building on that lot owned by ALI located along Ayala Avenue, Makati, to be known as 6750 Ayala Office Tower (Building). They also agree to a joint venture wherein they will lease out to third party tenants the specific floors separately owned by them. The Memorandum of Agreement entered into by and between ALI and API in 1990 providing for the construction of the aforementioned office tower has not by itself created a taxable joint venture. (However, the joint venture to be subsequently entered into by and between ALI and API, for the leasing of the Building floors or portions thereof separately owned by them will create, a joint venture subject to tax under Section 24(a) of the Tax Code, as amended, separate and distinct from ALI and API). Recently, Revenue Regulation 10-2012 was promulgated by BIR. This provides that for a joint venture to be exempt from corporate tax should have the following requisites: 1.) the undertaking should be for a construction project; 2) should involve joining or pooling of resources by licensed local contracts (licensed as general contractor by Philippine Contractors Accreditation Board (PCAB) of the DTI; 3) these contractors are engaged in construction business; and 4) the joint venture must likewise be duly licensed by the Philippine Contractors Accreditation Board (PCAB) of the DTI. The second exception is the Joint venture & consortium formed for the purpose of engaging petroleum, coal geothermal and other energy operations pursuant to an

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Page |3 operating or consortium agreement under a service contract with the Government. The reason is obvious; the government cannot tax a joint venture wherein it is a partner. It will amount to taxing itself. Section 11: there are 2 major Kinds of corporate tax payers. The domestic corporations which are created and organized in the Philippines or under its laws and the Foreign Corporations which are those created and organized under the laws of foreign country. Foreign corporations are further divided into two. The resident foreign corporations which are engaged in trade and business within the Philippines and the Non-resident foreign corporations which are not engaged in trade and business within the Philippines. Slide 12: Determination of Taxable Income: Domestic corporation is taxable on the entire net income received from sources within and outside the Philippines. Net taxable income is the amount equal to gross income less allowable deductions. Resident Foreign Corporation is tax in the manner similar with domestic corporation but only to its incomes derived from sources within the Philippines and not outside the Philippines. Non- Resident Foreign Corporation on the other hand is taxed through its gross income from sources within the Philippines. The following are not included in the computation of the gross income of taxpayers: 1) Proceeds of life insurance policies but not the interest paid to the heirs or beneficiaries; 2) Amount received by the insured as return of premium; 3) Value of property acquired by gratuitous transfer but not the income from such property; 4) Compensation for injuries or sickness including damages received; 5) Income exempt under treaty; 6) Retirement benefits, pensions, gratuities, etc. under certain conditions; 7) Income derived by foreign governments, financing institutions owned, controlled or enjoying financing from foreign governments, and international or regional financing institutions established by foreign governments, from their investments in loans, stocks, bonds or other domestic securities or from interest on their deposits in banks in the Philippines; 8) Income derived from any public utility or from the exercise of any essential government function accruing to the Philippine government or to any political subdivision; 9) Prizes and awards made primarily in recognition of religious, charitable, scientific, educational, artistic, literary, or civic achievement but only if the recipient was selected without any action on his part to enter the contest or proceeding, and is not required to render substantial future services as a condition to receiving the prize or award. Deductions from Gross Income. For Domestic Corporation - Same deductions allowed for individual taxpayers except premium payments on health and/or hospitalization insurance or optional standard deduction equivalent to 40% of its gross income. With respect to charitable and other contributions subject to limitation, the same should not exceed 5% of the taxable income without the benefit of said deduction. For Resident Foreign Corporation - Same deductions allowed domestic corporations and conditions and limitations except on the following items of deductions: 1) Taxes - the deductions for taxes shall be allowed only if and to the extent that they are connected with income from sources within the Philippines; 2) Losses - losses deductible shall be those actually sustained during the year incurred in business, trade or exercise of a profession conducted within the Philippines and not compensated for by insurance or other forms of indemnity; 3) Bad debts - the deductions for bad debts shall be allowed only if they arise in the course of business or trade conducted within the Philippines; 4) Depreciation - a reasonable allowance for the deterioration of property arising out of its use or employment or its non-use in the business, trade or profession on properties located in

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Page |4 the Philippine; 5) Depletion of oil and gas wells and mines - the allowance for depletion of oil and gas wells or mines is authorized only with respect to oil and gas wells or mines located within the Philippines. For Non-resident Foreign Corporation there is No deductions are allowed to the gross income. Slide 16-17: These are those which are exempt from the payment of corporate income tax, but are subject to certain conditions: 1) Labor, agricultural, or horticultural organizations not organized principally for profit; 2) 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; 3) A beneficiary society, order, or association, such as fraternal organization, or a mutual aid association or a non-stock corporation, organized and operated exclusively for the benefit of its members; 4) Cemetery company owned and operated exclusively for the benefit of its members; 5) Religious, charitable, scientific, athletic, and cultural organizations or those organized for the rehabilitation of veterans, under certain conditions; 6) 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 individual; 7) Civic league or organization organized for profit but operated exclusively for the promotion of social welfare; 8) Non-stock and nonprofit educational institutions; 9) Government educational institutions; 10) Farmers or other mutual typhoon or fire insurance company or like organization of purely local character; and 11) Farmers, fruit growers, or like associations organized and operated as sales agent, under certain conditions. For Tax Base and Tax Rates on (1) Domestic Corporations: In general - 30% of the taxable income derived during each taxable year from all sources within and outside the Philippines by every corporation, organized in, or existing under the laws of the Philippines; (2) Proprietary Educational Institutions and Hospitals which are nonprofit will be taxed 10% on their taxable income from the operation of the educational institution and hospital but if their gross income from unrelated trade, business or other activity exceeds 50% of the total gross income then the regular corporate income tax shall apply; (3) Government-owned or controlled corporations, agencies or instrumentalities, except Government Service Insurance System (GSIS), Social Security System (SSS), Philippine Health Insurance Corporation (PHIC), Local Water Districts (LWD), and Philippine Charity Sweepstakes Office (PCSO) shall be taxed 30% upon their taxable income derived during each taxable year; (5) Interest income from foreign currency loans granted by such depository banks under said expanded system to residents other than offshore banking units in the Philippines or other depository banks under the expanded system- shall be imposed with 10% final tax. Income derived by a depository bank under the expanded foreign currency deposit system from foreign currency transactions with nonresidents, offshore banking units in the Philippines, local commercial banks including branches of foreign banks that may be authorized by the Bangko Sentral ng Pilipinas (BSP) to transact business with foreign currency deposit system units under the EFCDS, except net income from such transactions as may be specified by the Secretary of Finance- exempt. Income of nonresidents, whether individuals or corporations, from transactions with depository banks under the expanded system- exempt. Slide 19-20: (1) In General - Resident foreign corporations will be taxed in the same manner with domestic corporations which is 30% of their taxable income derived during the taxable year from all sources within the Philippines by a corporation organized, authorized, or existing under the laws of any foreign country, engaged in trade or business within the

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Page |5 Philippines; (2) International carrier will be taxed by 2.5% of their Gross Philippine Billings; (3) Offshore banking units Income derived from foreign currency transactions with local commercial banks and branches of foreign banks authorized by the BSP to transact with OBUs and Income of non-residents, whether individuals or corporations, from transactions with said offshore banking units- exempt; (4)Interest income derived from foreign currency loans granted to residents other than offshore banking units or local commercial banks, including local branches of foreign banks that may be authorized by the BSP to transact business with offshore banking units- 10% final tax; (5) Branch profits remittances - 15% on any profit remitted by a branch to its head office abroad, except profit remitted by enterprises which are registered with the Philippine Economic Zone Authority (PEZA); (6) Regional or Area Headquarters of Multinational Corporations. exempt; (7) Regional Operating Headquarters - 10% final tax on their taxable income; (8) Depository banks under the Expanded Foreign Currency Deposit System (EFCDS) Income derived by a depository bank under the expanded foreign currency deposit system from foreign currency transactions with non-residents, offshore banking units in the Philippines, local commercial banks including branches of foreign banks that may be authorized by the Bangko Sentral ng Pilipinas (BSP) to transact business with foreign currency deposit and Income of nonresidents, whether individuals or corporations, from transactions with depository banks under the expanded system are exempt from tax except net income from such transactions as may be specified by the Secretary of Finance and Interest income from foreign currency loans granted by such depository banks under said expanded system to residents other than offshore banking units in the Philippines or other depository banks under the expanded system- 10% final tax. Slide 21: Gross Income = Gross Sales( - ) Sales returns, discounts and allowances( - ) Cost of goods sold; If taxpayer is engaged in sale of service: Gross Income = Gross receipts( - ) Sales returns, allowances and discounts Gross Philippine Billings refers to the amount of gross revenue derived from carriage of persons, excess baggage, cargo and mail originating from the Philippines in a continuous and uninterrupted flight, irrespective of the place of sale or issue and the place of payment of the ticket or passage document. Tickets revalidated, exchanged and/or endorsed 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. For a flight which originates from the Philippines, but transshipment of passenger takes place at any port outside the Philippines on another airline, only the aliquot portion of the cost of the ticket corresponding to the leg flown from the Philippines to the point of transshipment shall form part of the Gross Philippine Billing. Any profit remitted by a branch to its head office shall be subject to a tax of fifteen percent (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 following shall not be treated as branch profits unless the same are effectively connected with the conduct of its trade or business in the Philippines: (1) interests; (2) dividends; (3) rents; (4) royalties; (5) remuneration for technical services; (6) salaries; (7) wages; (8) premiums; (9) annuities; (10) emoluments; and (11) other fixed or determinable annual, periodic or casual gains, profits, income and capital gains.

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Page |6 Only profits remitted abroad by a branch office to its head office which are effectively connected with its trade or business in the Philippines are subject to the 15% profit remittance tax. To be effectively connected, it is not necessary that the income be derived from the actual operation of taxpayer-corporations trade or business; it is sufficient that the income arises from the business activity in which the corporation is engaged. The dividends received by Marubeni from AG&P are not income arising from the business activity in which Marubeni is involved. Accordingly, said dividends if remitted abroad, are not considered branch profits for purposes of the 15% profit remittance tax. Note: Test of whether remittance of profit by a branch to its head office comes under the purview of the profit remittance tax, the branch itself should have made the remittance. In this case, it was not Marubenis branch in the Philippines, but the investee corporation, AG&P, which directly remitted the dividends to Marubeni of Japan. Also, only the branch office is the authorized withholding agent for the profit remittance tax. AG&P, being an investee of Marubeni, erred in withholding the profit remittance tax from the dividends it remitted to Marubeni.

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(1) In general Non-resident Foreign Corporations - 30% on the gross income received during the taxable year from all sources within the Philippines, such as interests, dividends, rents, royalties, salaries, premiums (except reinsurance premiums), annuities, emoluments or other fixed or determinable annual, periodic, or casual gains, profits and income, and capital gains, except gains realized from sale, exchange or disposition of shares of stock in any domestic corporation. (2) Non-resident Cinematographic film owners, lessors or distributors - 25% of their gross income from all sources within the Philippines; (3) Non-resident Owners or lessors of vessels chartered by Philippine nationals - 4.5% on gross rentals, lease or charter fees; (4) Non-resident Owners or lessors of aircrafts, machineries and other equipment - 7.5% on gross rentals, lease and other fees. A Minimum Corporate Income Tax (MCIT) at two percent (2%) of the gross income of domestic and resident foreign corporations is imposed beginning on the fourth taxable year immediately following the year in which said corporations commenced their business operations. The MCIT is payable only when the minimum income tax exceeds the regular corporate income tax. Any excess of the MCIT over the regular corporate income tax is allowed to be carried forward and credited against the regular income tax payable by subject corporations for three (3) immediately succeeding taxable years. The Secretary of Finance may suspend MCIT upon recommendation of BIR Commissioner in any of the following cases: (1) Sustained losses from prolonged labor dispute lossess arising from a strike staged by employees which lasted for more than 6 months within the taxable period had caused the temporary shutdown of business operations; (2) Force Majeure Act of God, may also include armed conflicts like war or insurgency; (3) Legitimate Business reverses substantial loss due to fire, robbery, theft or for other economic reason as determined by Sec of Finance. Paid on Quarterly and Yearly Basis. The term improperly accumulated taxable income means the taxable income adjusted by income exempt from tax, income excluded from gross income, income subject to final tax, and the amount of net operating loss carry-over deducted and reduced by the sum of dividends actually or constructively paid and income tax paid for the taxable year. It is Imposed as a form of penalty to corporations retaining earnings for more than the reasonable needs of business in order to recoup the lost taxes. Accumulation of

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Page |7 earnings or profits is reasonable if it is necessary for the purpose of the business, considering all the circumstances of the case. Immediacy Test provides that reasonable needs of the business means the immediate needs of the business. Does not apply to the following: (1) Publicly held corporations; is a stock corporation in which the shares of stock are available to the public. The shares are traded on the open market through a stock exchange. (2) Banks and other non-bank financial intermediaries; Nonbank financial intermediary is a collection of institutions, which range from leasing, factoring and venture companies as well as those who conduct contractual savings and institutional investors. They compete with banks and force them to be more efficient in delivery of services. They are also actively involved in the securities markets and allocation of long-term financial resources. (3) Insurance companies (4) Taxable Partnerships (5) General Professional Partnership (6) Non-taxable joint ventures (7) Enterprises duly registered with the Philippine Economic Zone Authority (PEZA). Tax sparing rule: Involves intercorporate dividends received by a non-resident foreign corporation from a domestic corporation; Only 15% final withholding tax on cash and/or property dividends is imposed; Provided the country in which the non-resident foreign corporation is domiciled shall allow a credit against the tax due from the non-resident foreign corporation taxes deemed to have been paid in the Philippines, which is 32% by 2000 [Sec. 28, (B) (5) (b)] Auxiliary; aiding or supporting in an inferior capacity or position. In the law of corporations, a corporation or company owned by another corporation that controls at least a majority of the shares. A subsidiary corporation or company is one in which another, generally larger, corporation, known as the parent corporation, owns all or at least a majority of the shares. As the owner of the subsidiary, the parent corporation may control the activities of the subsidiary. This arrangement differs from a merger, in which a corporation purchases another company and dissolves the purchased company's organizational structure and identity