B.

Corporations
i. Domestic Corporations S27
b. In general S27(A)
c. Special Corporations S27(B), (C)
d. Passive Income
i. Interest, Royalties S27(D)(1) & (3)
ii. Dividends S27(4)
iii. Capital gains S27(D)(2) & (5)

Under the Philippine's National Internal Revenue Code of 1997 (the "Tax Code"), the
term "corporation" includes partnerships, no matter how created or organized,
joint-stock companies, joint accounts (cuentas en participation), associations,
or insurance companies, but excluding general professional partnerships and
a joint venture or consortium formed for the purpose of undertaking
construction projects or engaging in petroleum, coal, geothermal and other
energy operations pursuant to an operating or consortium agreement under a
service contract with the Government 1 Under the Tax Code, there are three (3)
types of taxable corporations - a domestic corporation, a resident foreign corporation
and a non-resident foreign corporation.
A domestic corporation is a corporation created or organized under Philippine
law2. A domestic corporation is taxable on all income derived from sources
within and without the Philippines3.
Taxation Of Domestic Corporations
Except for certain passive incomes and incomes of domestic non-profit proprietary
educational institutions and hospitals11, a domestic corporation is taxed at thirty two
per cent (32%) of its taxable income; that is, its gross income from all sources
within and without the Philippines less allowable deductions.12 These allowable
deductions are13:
1. Ordinary and necessary trade or business expenses;
2. Interests paid or incurred within a taxable year on indebtedness in
connection with the taxpayer's trade or business;
3. Taxes except income tax, estate and donor's taxes, and taxes assessed
against local benefits of a kind tending to increase the value of the
property assessed.
Income tax imposed by authority of any foreign country is allowed either as a
deduction or tax credit. However, a foreign corporation shall not be allowed a tax
credit for the taxes imposed by foreign countries;
4. Losses actually sustained during the taxable year and not compensated
for by insurance or other forms of indemnity and incurred in trade or
business, including casualty losses;

5. The excess of allowable deductions over gross income of the business

or enterprise for any taxable year immediately preceding the current
taxable year, which had not been previously offset as deduction from
gross income shall be carried over as a deduction from gross income
for the next three (3) consecutive taxable years immediately following
the year of such loss, provided, that there has been no substantial
change in the ownership of the corporation;
6. Bad Debts except those sustained in certain transactions entered into
between related parties;
7. Depreciation ;
8. Charitable and Other Contributions or gifts actually paid or made within
the taxable year to, or for the use of the Government of the Philippines
or any of its agencies or any political subdivision thereof exclusively for
public purposes, or to accredited domestic corporations or associations
organized and operated exclusively for religious, charitable, scientific,
youth and sports development, cultural or educational purposes or for
the rehabilitation of veterans, or to social welfare institutions, or to
nongovernment organizations;
9. Research and Development expenditures;
10. Amounts transferred or paid to Pension Trusts (in addition to the
contributions to such trusts during the taxable year which contributions
are deductible as ordinary expenses).
However, beginning the fourth taxable year immediately following the taxable
year in which a corporation commenced its business operations, a minimum
corporate income tax ("MCIT") of two per cent (2%) of the gross income as of the
end of said taxable year shall be imposed instead of the foregoing "normal
corporate tax" if such MCIT is greater than the normal income tax. Any excess of
the MCIT over the normal income tax shall be carried forward and credited
against the normal income tax for the three (3) immediately succeeding taxable
year. The Secretary of the Department of Finance may suspend the imposition of the
MCIT on any corporation which suffers losses on account of prolonged labor dispute,
or because of force majuere, or because of legitimate business reverses.14
The following passive incomes of domestic corporations are subject to a final
tax as follows:15:
1. Twenty per cent (20%) on interest on currency bank deposit and yield or
any other monetary benefit from deposit substitutes and from trust
funds and similar arrangements, and royalties, derived from sources
within the Philippines. However, interest income from a depository bank
under the expanded foreign currency deposit system shall be subject to
a final income tax of seven and one-half per cent (7 1/2%) of such
interest income;
2. On the net capital gains realized during the taxable year from the sale,
exchange or other disposition of shares of stock in a domestic
corporation except shares sold or disposed of through the stock
exchange, at the rate of five per cent (5%) for the 1st P 100,000 and ten
per cent (10%) in excess of P 100,000; and,
3. On the sale, exchange or disposition of lands and/or buildings which
are not actually used in the business of a corporation and are treated as

capital assets, six per cent (6%) based on the gross selling price or fair
market value of said land and/or building.
Dividends received by a domestic corporation from another domestic
corporation shall not be subject to tax16.
In addition to the foregoing taxes, an improperly accumulated earnings tax
("IAET") shall be imposed which tax is equivalent to ten per cent (10%) of the
improperly accumulated taxable income17. The IAET, however, shall not apply to
publicly-held corporations, banks and other nonbank financial intermediaries,
and insurance companies.

TAX

ON

CORPORATIONS

RATES OF INCOME TAX ON DOMESTIC CORPORATIONS

iv. In General

Rate of tax, in general

1997 35%
1998 34%
1999 33%
2000 onwards 32%

Tax is imposed on taxable or net income.

v. Optional 15% tax on gross income

The President, upon the recommendation of the Secretary

of Finance, may, effective 01 January 2000, allow
corporations the option to be taxed at fifteen percent (15%)
of gross income, provided certain conditions are satisfied.

This is available to firms whose ratio of cost of sales to gross sales

or receipts from all sources does not exceed 55%.

Once elected by the corporation, option shall be irrevocable for the

three consecutive years.

vi. Conditions to be satisfied to avail of the 15%

optional corporate tax

1.
A tax effort ratio of twenty percent (20%) of Gross National Product
(GNP)
2.
A ratio of forty percent (40%) of income tax collection to total tax
revenues
3.

A VAT tax effort of four percent (4%) of GNP

4.
A 0.9 percent (0.9%) ratio of the Consolidated Public Sector
Financial Position to GNP

vii. Some definitions for this purpose

Gross income derived from business shall be equivalent to gross

sales less sales returns, discounts and allowances and cost of goods
sold.

For taxpayers engaged in sale of services, gross income means

gross receipts less sales returns, allowances and discounts.

Cost of goods sold shall include all business expenses directly

incurred to produce the merchandise to bring them to their present
location and use.

Trading Concern
Cost of goods sold shall include the
invoice cost of the goods sold, plus
import duties, freight in
transporting the goods to the place
where the goods are actually sold,
including insurance while the goods
are in transit.

Manufacturing Concern
Cost of goods manufactured and sold
shall include all costs of production of
finished goods, such as raw materials
used, direct labor and manufacturing
overhead, freight cost, insurance and
other costs incurred to bring the raw
materials to the factory or warehouse.

viii. Tax rate for proprietary educational institutions

and hospitals

10% on taxable income, except on certain passive incomes

The ordinary rate imposed on corporations shall apply to
proprietary educational institutions and hospitals when
their gross income from unrelated trade, business or other
activity exceeds 50% of their total gross income derived
from all sources.

ix. Unrelated trade, business or other activity

This means any trade, business or other activity, the conduct of

which is not substantially related to the exercise or performance by
such educational institution or hospital of its primary purpose or
function.

x. Proprietary educational institution

A proprietary educational institution is any private school

maintained and administered by private individuals or groups with
an issued permit to operate from the DECS, or CHED, or TESDA, as
the case may be.

xi. GOCCs, agencies or instrumentalities

All corporations, agencies, or instrumentalities owned and

controlled by the government 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.

Exceptions: GOCCs and instrumentalities not subject to tax are

the:
1.

Government Service Insurance System (GSIS)

2.

Social Security System (SSS)

3.

Philippine Health Insurance Corporation (PHIC)

4.

Philippine Charity Sweepstakes Office (PCSO)

5.

Philippine Amusement and Gaming Corporation (PAGCOR)

xii. Rates on certain passive income subject to final

tax
1.

Interest from deposits and yield or any other monetary benefit from
deposit substitutes and from trust funds and similar arrangements
20%

2.

Royalties 20%

3.

Interest income derived from a depository bank under the expanded

foreign currency deposit system 7 %

4.

Capital gains from sale of shares of stock not traded in the stock
exchange

5.

a.

Not over P100,000 5%

b.

Over P100,000 10%

Tax on income derived by a depository bank under the expanded

foreign currency deposit system from foreign currency transactions
10%

Note: This is different from the interest income. This pertains to the
income derived by a depository bank itself.
Note: Any income of non-residents, whether individuals or
corporations, from transactions with depository banks under
the expanded system is exempt from income tax.
6.

Intercorporate dividends exempt

7.

Capital gains realized from the sale, exchange or disposition of lands

and/or buildings 6%

Sale of corporate real property that has ceased to be used in

trade or business subject to 6% capital gains tax ( No. 21-99
dated 2/25/99)

A final tax of 6% is imposed on the gains presumed to have been

realized in the sale, exchange or disposition of lands and/or
buildings which are not actively used in the business of a
corporation and which are treated as capital assets based on the
gross selling price or fair market value, whichever is higher.
However, since in the instant case the taxpayer claimed a
depreciation deduction when the building and other improvements
were not used in trade or business, the taxpayer must file and
amend its income tax return and pay the deficiency income tax, if
any, plus surcharge and interest, based on its adjusted taxable
income resulting from the disallowance of the depreciation
deduction.

MINIMUM CORPORATE INCOME TAX

xiii. Minimum corporate income tax

A minimum corporate income tax of two percent (2%) of the gross

income as of the end of the taxable year is hereby imposed on a
corporation subject to income tax, beginning on the fourth taxable
year immediately following the year in which such corporation
commenced its business operations, when the minimum income tax
is greater than the regular corporate income tax for the taxable
year.

xiv. Carry forward of excess minimum tax

Any excess of the minimum corporate income tax over the normal
income tax shall be carried forward and credited against the normal
income tax payable for the next three years immediately

succeeding the taxable year in which the minimum corporate

income tax was paid.

xv. Relief from the minimum corporate income tax

under certain conditions

The Secretary of Finance may suspend the imposition of the

minimum corporate income tax on any corporation which suffers
losses on account of prolonged labor dispute, or because of force
majeure, or because of legitimate business reverses.

Meaning of gross income and cost of goods sold under minimum

corporate income tax compared with meaning of gross income
and cost of goods sold under Section 27(A)

Gross Income
Cost of goods sold

Cost of goods sold for a

trading or
merchandising concern

Cost of goods
manufactured and sold
for a manufacturing
concern
Gross Income for
taxpayers engaged in
sale of service
Cost of services

Section 27(A)
Section 27(E) MCIT
equivalent to gross sales less sales returns,
discounts and allowances and cost of goods sold.
shall include all business expenses directly
incurred to produce the merchandise to bring
them to their present location and use.
shall include the invoice cost of the goods sold,
plus import duties, freight in transporting the
goods to the place where the goods are actually
sold, including insurance while the goods are in
transit.
shall include all costs of production of finished
goods, such as raw materials used, direct labor
and manufacturing overhead, freight cost,
insurance and other costs incurred to bring the
raw materials to the factory or warehouse.
gross receipts less
gross receipts less sales
sales returns,
returns, allowances and
allowances and
discounts and cost of
discounts.
services
All direct costs and
expenses necessarily
incurred to provide the
services required by the
customers and clients
including (A) salaries and
employee benefits of
personnt6el, consultants
and specialists directly
rendering the service and
(B) cost of facilities
directly utilized in
providing the service such
as depreciation or rental
of equipment used and

cost of supplies.
For banks, it includes
interest expense.
Note: Definition of gross income for taxpayers engaged in the sale of
service includes cost of services in MCIT but not in the case of the
optional 15% tax on gross income [Section 27(A), NIRC].