Corporate Income Taxation

The term corporation includes

One Person Corporations
Partnerships (except GPP)
Joint-stock companies
Joint accounts (en cuentas participation)
Associations
Insurance companies

Types of Corporation

A domestic corporation is a corporation created or organized under Philippine law. A domestic corporation is taxable on all income derived from sources within and without the Philippines.

A foreign corporation is a corporation organized, authorized, or existing under the laws of any foreign country.

A resident foreign corporation is a foreign corporation engaged in trade or business in the Philippines.

A non-resident foreign corporation is a corporation not engaged in trade or business in the Philippines.

Corporate Income Tax Rates

(Under CREATE)

	Regular		MCIT
	Rate	Effectivity	Rate	Effectivity
Domestic Corporation, in general	25%	July 1, 2020	1% 2%	July 1, 2020 – June 30, 2023 July 1, 2023
For corporations with net taxable income not exceeding P5 million and total assets not exceeding P100 million, excluding the land on which the particular business entity’s office, plant and equipment are situated.	20%	July 1, 2020	1% 2%	July 1, 2020 – June 30, 2023 July 1, 2023
Proprietary Educational Institutions and Hospitals	1% 10%	July 1, 2020 – June 30, 2023 July 1, 2023	Not Applicable
Resident Foreign Corporation	25%	July 1, 2020	1% 2%	July 1, 2020 – June 30, 2023 July 1, 2023
Offshore Banking Unit (OBUs) (OBUS shall now be taxed as resident foreign corporation upon the effectivity of the CREATE)	25%	Upon the effectivity of the CREATE*	1% 2%	July 1, 2020 – June 30, 2023 July 1, 2023
Regional Operating Headquarters (ROHQ)	25%	January 1, 2022	1% 2%	January 1, 2022 – June 30, 2023 July 1, 2023
Non-Resident Foreign Corporation	25%	January 1, 2021	Not Applicable

Regular Corporate Income Tax

Domestic Corporations are subject to 20% or 25% of the taxable income derived from sources within and without. Resident Foreign Corporations are subject to 25% taxable income derived from sources within only.

Non-resident Foreign corporations are subject to 25% of the gross sales/receipts.

	Tax Base	Sources	Tax Rate
Domestic Corporation	Taxable income	Within and Without	25%/20%
Resident Foreign Corporation	Taxable income	Within	25%
Non-resident Foreign corporation	Gross sales/receipts	Within	25%

Taxable income equals gross income less allowable deductions (itemized deductions or optional standard deductions).

For example, Alliance Corp. has the following data in 2020. Compute the income tax due if the corporation is domestic, resident foreign, or nonresident foreign corporation with assets not more than P100 million.

Gross income, Philippines, P975,000

Business expenses, Philippines, P750,000

Gross income, USA, P770,000

Business expenses, USA, P630,000

Interest on bank deposit, P25,000

Compute the Regular Corporate Income Tax Due?

	Domestic	RFC	NRFC
Gross income, Philippines	P975,000	P975,000	P975,000
Gross income, USA	770,000
Interest on bank deposit			25,000
Total	1,745,000	975,000	1,000,000
Less: Business expenses, Philippines	750,000	750,000
Business expenses, USA	630,000
Total Deduction	1,380,000	750,000	-
Taxable Income	365,000	225,000	1,000,000
Rate of Tax	20%	25%	25%
Income Tax Due	73,000	56,250	250,000

RCT of 20% applies to domestic corporations provided both conditions are present:

net taxable income not exceeding P5 million and
total assets not exceeding P100 million, excluding the land on which the particular business entity’s office, plant and equipment are situated.

Asset is below P100 million, Income is above P5 million

JPL Corporation, a manufacturer, has a gross sales of P190,000,000 for CY 2021, its 2nd year of operation. Its total assets amounted to P50,000,000, net of value of the land of P6,000,000 where its manufacturing plant and business operations are situated. Its cost of sales and allowable operating expense amounted to P100,000,000 and P50,000,000, respectively. Compute for its income tax due for CY 2021.

1. Compute the taxable income

= Gross Sales - Cost of Sales - Allowable Deductions

= P190,000,000 - 100,000,000 - 50,000,000

= P40,000,000

2. Determine the applicable tax rate.

Although the total assets, net of the value of the land, is less than P100,000,000, its net taxable income is above P5,000,000. Hence the income tax rate is 25%.

Also, not subject to MCIT since it is in its 2nd year of operation.

3. Compute the income tax due

= taxable income x 25%

= P40,000,000 x 25%

= P10,000,000

Asset is below P100 million, Income is below P5 million

JPL Corporation, a manufacturer, has a gross sales of P190,000,000 for CY 2021, its 2nd year of operation. Its total assets amounted to P50,000,000, net of value of the land of P6,000,000 where its manufacturing plant and business operations are situated. Its cost of sales and allowable operating expense amounted to P100,000,000 and P85,000,000, respectively. Compute for its income tax due for CY 2021.

1. Compute the taxable income

= Gross Sales - Cost of Sales - Allowable Deductions

= P190,000,000 - 100,000,000 - 85,000,000

= P5,000,000

2. Determine the applicable tax rate.

Since the total assets, net of the value of the land, is less than P100,000,000 and its net taxable income is less than P5,000,000, the income tax rate is 20%.

Also, not subject to MCIT since it is in its 2nd year of operation.

3. Compute the income tax due

= taxable income x 20%

= P5,000,000 x 20%

= P1,000,000

Minimum Corporate Income Tax

The MCIT covers domestic and resident foreign corporations which are subject to the regular income tax.

Outside the Scope of MCIT

Corporations which are subject to a special corporate tax or to preferential rates under special laws do not fall within the coverage of the MCIT.
For corporations whose operations or activities are partly covered by the regular income tax and partly covered by the preferential rate under special law, the MCIT shall apply the regular income tax rate on its operations not covered by the tax incentives
Newly established corporations or firms which are on their first 3 years of operations are not covered by the MCIT.

Start of Application of MCIT

Beginning the fourth taxable year of its business operations, domestic corporations and resident foreign corporations shall pay MCIT of 2% of gross income whenever

Such corporations have zero or negative taxable income or
MCIT is greater than the normal income tax due.

For example, when will a corporation which was registered with the Bureau of Internal revenue in May 2016 be covered by MCIT?

= Commencement date + 4

= 2016 + 4

= 2020; Beginning of 2020

W Corp., which commenced business operations in 2000 has a gross income of P632,000 and allowable deductions of P610,000 in 2022. The applicable RCIT is 20%.

Compute its income tax payable in 2022.

a. Compute RCIT

= Gross Income - Deductions

= P632,000 - P610,000

= P22,000

RCIT is P4,400 (P22,000 x 20%).

b. Compute MCIT

= Gross Income x 1% (until June 30, 2023)

= P632,000 x 1%

= P6,320

The income tax payable is P6,320 (MCIT), because it is higher than the RCIT.

LMB Corporation, a retailer, has a gross sales of P1,400,000,000 with a cost of sales of P560,000,000 and allowable deductions of P150,000,000 for the calendar year 2021. Its total assets of P180,000,000 as of December 31, 2021 per AFS includes land costing P50,000,000 and the building of P25,000,000 in which the business entity is situated, with an aggregate amount of P75,000,000 as Fixed Assets.

Assuming CY 2021 is the 5th year of operation of LMB Corporation, how much is the income tax due?

1. Compute the Taxable Income

= Gross Sales - Cost of Sales - Allowable Deductions

= P1,400,000,000 - 560,000,000 - 150,000,000

= P690,000

2. Compute the income tax due

= taxable income x regular rate

= P690,000,000 x 25%

= P172,500,000

3. Compare the RCIT with the MCIT

= Gross income x 1%

= P840,000,000 x 1%

= P8,400,000

Income tax due shall be P172,500,000, whichever is higher between RCIT and MCIT.

MCIT Carry-Over

MCIT may be credited over the 3-year reglementary period.

For example, a domestic corporation had the following data for five years.

	Year 4	Year 5	Year 6	Year 7	Year 8
MCIT	80,000	50,000	30,000	40,000	35,000
RCIT	20,000	30,000	40,000	20,000	70,000
Excess MCIT over RCIT	60,000	20,000	-	20,000	-

Compute the income tax due.

In year 4, the income tax due is P80,000 since the MCIT is higher than the RCIT by P60,000.

In year 5, the income tax due is P60,000 since the MCIT is higher than the RCIT by P20,000.

In year 6, the income tax due is P40,000. This year, the RCIT is higher than the MCIT. The excess MCIT in years 4 and 5 can be utilized up to P40,000 as a tax credit. Hence, there will be no resulting tax payable in year 6.

In year 7, the income tax due is P40,000 since the MCIT is higher than the RCIT by P20,000. Excess MCIT from the previous years cannot be used as a tax credit against MCIT.

In year 8, the income tax due is P70,000since RCIT is higher than MCIT. The unutilized excess MCIT in year 4 can no longer be used as it has already been prescribed. But the excess MCIT in year 5 and year 7 can be used as tax credits. Hence, the income tax payable in year 8 is P30,000 as shown below.

	Year 4	Year 5	Year 6	Year 7	Year 8
	MCIT	MCIT	RCIT	MCIT	RCIT
Income Tax Due	80,000	50,000	40,000	40,000	70,000
Less: MCIT Carry over from
Year 4 (60,000)			(40,000)
Year 5 (20,000)					(20,000)
Year 6
Year 7 (20,000)					(20,000)
Tax Payable	80,000	50,000	-	40,000	30,000

Suspension of MCIT

The Secretary of Finance may suspend imposition of MCIT on any corporation which sustained substantial losses on account of (LMB):

Prolonged labor dispute (losses from a strike staged by employees that lasts for more than 6 months and caused the temporary shutdown of operations), or
Force majeure (acts of God and other calamity; includes armed conflicts like war or insurgency), or
Legitimate business reverses (substantial losses due to fire, robbery, theft or other economic reasons).

Preferential Tax Rate

Proprietary educational institutions and non-profit hospitals are subject to special rate of 1% (10%) tax on taxable income (except on income subject to capital gains tax and passive income subject to final tax) within and without the Philippines, provided…

Provided that the gross income from unrelated trade, business or other activity must not exceed 50% of the total gross income derived by such educational institutions or hospital from all sources.

Unrelated trade, business or other activity – 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.

Under RR No. 5-2021, Proprietary Educational Institution refers to any private schools, which are non-profit for the purpose of these Regulations, maintained and administered by private individuals or groups, with an issued permit to operate from DepEd or the CHED or the TESDA, as the case may be, under existing laws and regulations.

Proprietary Hospitals shall refer to any private hospitals, which are non-profit for the purpose of these Regulations, maintained and administrate by private individuals or groups.

As used in the definition of Proprietary Educational Institutions and Proprietary Hospitals, Non-Profit means that no net income or assets accrues to or benefits any member or specific person, with all the net income or assets devoted to the institution’s purpose and all its activities conducted not for profit.

For example, RPSV uses a fiscal year accounting ending July 31st of each year. On July 31, 2021, it recorded total gross receipts amounting to P18,000,000, of which P10,000,000 came from education-related activities, while P8,000,000 from other unrelated business activities. Also RSPV recorded cost of service and operating expenses from related activities amounting to P2,000,000 and P1,000,000, respectively, and from unrelated business activities amounting to P3,000,000 and P2,000,000, respectively.

How much is the income tax due?

1. Compute the gross income

a. Related activities

= gross receipts - cost of service

= P10,000,000 - 2,000,000

= P8,000,000

b. Unrelated activities

= gross receipts - cost of service

= P8,000,000 - 2,000,000

= P5,000,000

Total gross income is P13,000,000.

2. Determine if the school qualifies to use preferential tax rate

= gross income from unrelated activities / total gross income

= P5,000,000 / P13,000,000

= 38%

The educational institution is subject to income tax at the rate of 1% of its taxable income since its gross income from unrelated activities did not exceed 50% of the total gross income.

Note that if the gross income from unrelated activities is equal to or lower than the gross income from related activities, it would mean that gross income from unrelated activities did not exceed 50% of the total gross income.

3. Compute the net taxable income

= Gross income - allowable deductions

= P13,000,000 - 3,000,000

= P10,000,000

4. Compute the income tax due

= Taxable income x 1%

= P10,000,0000 x 1%

= P100,000

The preferential tax rate is 1% until June 30, 2023.

No MCIT is likewise due.

Unrelated Trade or Business or Other Activity

If gross income from an unrelated trade or business or other activity exceeds 50% of total gross income derived from all sources, the tax rate of 20% or 25% (30%) shall be imposed on the entire taxable income.

For example, a private non-profit hospital has gross receipts of P15,000,000 with a cost of P6,000,000 and allowable deductions of P3,250,000 from related activities, while for its unrelated activities, it incurred P5,000,000 and P2,000,000 as cost of sales and allowable deductions, respectively, with a gross income of P18,000,000 for the calendar year 2021.

1. Compute the gross income

a. Related activities

= gross sales - cost of sale

= P15,000,000 - 6,000,000

= P9,000,000

b. Unrelated activities

= gross receipts - cost of service

= P18,000,000 - 5,000,000

= P13,000,000

Total gross income is P22,000,000.

2. Determine if the school qualifies to use preferential tax rate

= gross income from unrelated activities / total gross income

= P13,000,000 / P22,000,000

= 38%

The hospital is subject to the regular rate of 25% since its gross income from non-related activities is more than 50% of its total gross income.

Note that if the gross income from unrelated activities is higher than the gross income from related activities, it would mean that gross income from unrelated activities exceeded 50% of the total gross income.

3. Compute the net taxable income

= Gross income - allowable deductions

= P22,000,000 - 5.250,000

= P16,750,000

4. Compute the income tax due

= Taxable income x 25%

= P16,750,000 x 25%

= P4,187,500

The entire taxable income shall be subject to regular rates.

MCIT also applies. In this example, MCIT is only P220,000 (P22,000,000 x 1%).

Exempt Corporation

Labor, agricultural or horticultural organization – non-profit
Mutual savings bank or cooperative bank – non-stock, non-profit, operated for mutual purposes
Beneficiary society, order, or association – operating for the exclusive benefits of their members; includes: fraternal organization operating under the lodge system; or mutual aid association or a nonstock corporation organized by employees providing life, sickness, accident, or other benefits exclusively to the members
Cemetery company – owned and operated exclusively for the benefit of its members
Non-stock corporation or association organized and operated exclusively for religious, charitable, scientific, athletic, or cultural purposes or for the rehabilitation of veterans, provided that no part of its income or asset belong to or inure to the benefit of any individual
Business league, chamber of commerce, or board of trade – Non-profit; no part of net income inures to the benefit of an individual
Civic league or organization – Non-profit; operating exclusively for the promotion of social welfare
Non-stock and non-profit educational institutions
Government educational institutions
Organizations of a purely local character whose income consists solely of assessment, duties and fees collected from their members to meet expenses; includes: farmers’ or other mutual typhoon or fire insurance company, mutual ditch or irrigation company and mutual or cooperative telephone company
Farmers’, fruit growers’, and like association – whose primary function is to market the product of their members

The income of the foregoing organizations from (1) their properties, real or personal, or from (2) their activities conducted for profit regardless of the disposition made of such income, shall be subject to tax imposed under the NIRC.

The above rule does not apply to non-stock and non-profit education institution. All revenues and assets of non-stock, non-profit education institutions used actually, directly, and exclusively for educational purposes shall be exempt from taxes and duties.

Government-Owned or Controlled Corporations, Agencies Instrumentalities

GOCCs are taxable as any other corporation engaged in similar business, industry or activity.

Only the following are exempt from income tax:

Government Service Insurance System (GSIS)
Social Security System (SSS)
Philippine Health Insurance Corporation (PHIC)
Local water districts (LWDs)

Special Rates for Foreign Corporations

Before CREATE

Type	Tax Base	Tax Rate
International carrier	Gross Philippine Billings	2 ½%
Offshore banking Units [Sec. 28(A)(4)] Foreign currency deposit units and offshore banking units [Sec. 28(A)(7)	Usually exempt, except Interest income from foreign currency loans granted to residents (other than offshore banking units in the Philippines)	10%
Regional or area headquarters	Exempt
Regional operating headquarters	Taxable Income	10%
Branch Profit remittance	Profits applied or earmarked	15%

Amendments by CREATE

	Regular		MCIT
Foreign Corporation	Rate	Effectivity	Rate	Effectivity
Resident Foreign Corporation	25%	July 1, 2020	1% 2%	July 1, 2020 – June 30, 2023 July 1, 2023
Offshore Banking Unit (OBUs) (OBUS shall now be taxed as resident foreign corporation upon the effectivity of the CREATE)	25%	Upon the effectivity of the CREATE	1% 2%	July 1, 2020 – June 30, 2023 July 1, 2023
Regional Operating Headquarters (ROHQ)	25%	January 1, 2022	1% 2%	January 1, 2022 – June 30, 2023 July 1, 2023

International Carrier

An International carrier doing business in the Philippines shall pay a tax of 2 ½% on its Gross Philippine Billings.

International Carrier consists of two kinds, namely:

international air carrier
international shipping.

An international carrier which is either domestic corporation or nonresident foreign corporation is not subject to 2.5% GPB.

Gross Philippine Billings

In International Air Carriers, GPB means:

gross revenue derived from (a) carriage of persons, excess baggage, cargo and mail (b) originating from the Philippines in a continuous and uninterrupted flight, (c) irrespective of the place of sale or issue and the place of payment of the ticket or passage document
tickets revalidated, exchanged and/or indorsed to another international airline – part of GPB if passenger boards a plane in a port or point in the PH
flights which originate from the PH, but transshipment of passenger takes place at a port outside PH on another airline – part of GPB only the aliquot portion of the cost of the ticket corresponding to the leg flown from the PH to transshipment point

In International Shipping, GPB means: Gross revenue for (a) passenger, cargo or mail (b) originating from the Philippines up to final destination, (c) regardless the place of sale or payments of the passage or freight documents.

For example, a resident international carrier has the following data for the current year: Gross income of P700,000 and expenses of P200,000 from the Philippines; Gross income of P500,000 and expenses of P100,000 from Hongkong. How much is the tax payable of the corporation?

= Gross Philippine Billings x 2.5%

= P700,000 x 2.5%

= P17,500

Offline International Air Carrier

A resident foreign corporation which is an offline international air carrier is subject to normal corporate income tax, not GPB tax.

An offline international air carrier does not have flights originating from or coming to the Philippines and does not operate any airplane in the Philippines.

Regional or Area Headquarters and Regional Operating Headquarters

Regional or area headquarters are not subject to income tax while regional operating headquarters are subject to 25% 10% tax based on taxable income upon the effectivity of the CREATE.

Regional or Area Headquarters

Regional or area headquarters refer to branches established in the Philippines by multinational companies and which headquarters do not earn or derive income from the Philippines and which act as supervisory, communications and coordinating center for their affiliates, subsidiaries, or branches in the Asia-Pacific Region and other foreign markets.

Regional Operating Headquarters

Regional operating headquarters refer to branches established in the Philippines by multinational companies which are engaged in any of the following services: (i) general administration and planning; (ii) business planning and coordination; (iii) sourcing and procurement of raw materials and components; (iv) corporate finance advisory services; (v) marketing control and sales promotion; (vi) training and personnel management; (vii) logistic services; (viii) research and development services and product development; (ix) technical support and maintenance; (x) data processing and communications; and (xi) business development.

The regular rate of 25% shall be effective on January 1, 2022 for ROHQ. It will also be subject to MCIT beginning on the said date since BBQ Corp. started is operation way back in 2015.

MCIT rate of 1.5% was used since the rate from January 1 to June 30, 2023 is 1%, and for July 1 to December 31, 2023, the rate is 2%; thus the average rate is 1.5%, the income tax rate to be used by BBQ Corporation in computing the income tax due/payable for TY 2023.

Branch Profits Remittance Tax (BPRT)

Resident foreign corporations shall pay Branch Profits Remittance Tax of 15% on the total profits applied or earmarked for remittance without any deduction for the tax component (except those activities registered with PEZA).

The following are not treated as branch profits unless effectively connected with the conduct of trade or business in the Philippines:

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 during each taxable year from all sources within the Philippines

Taxation of NRFC in General

Gross income in general	Under CREATE, the tax is 25% of gross income received during each taxable year from all sources within the Philippines.
Interest on Foreign Loans	20% on the amount of interest on foreign loans contracted
Intercorporate Dividends	15% subject to tax sparing rule
Capital gains from sale of shares not traded though local stock exchange	5% on the first P100,000, 10% on any amount in excess of P100,000 (15% under CREATE)

Tax Sparing Rule

A final withholding tax of 15% on dividends received from domestic corporations, if the country in which the nonresident foreign corporation is domiciled allows a tax credit of at least 15% for taxes “deemed paid” in the Philippines or does not impose tax on dividends received by a non-resident foreign corporation from the Philippines.

If the country within which the NRFC is domiciled does NOT allow a tax credit, the tax is 25% on dividends received from a domestic corporation.

Non-Resident Foreign Corporations Subject to Preferential Tax Rates

Type of NRFC	Tax Base	Tax Rate
Non-resident cinematographic film owners, lessors or distributors	Gross income from the Philippines	25%
Non-resident owner or lessor of vessels charted by Philippines nationals	Gross rentals, lease and charter fees from the Philippines	4.5%
Non-resident owner or lessor of aircraft, machineries or other equipment	Gross rentals, lease and charter fees from the Philippines	7.5%

Final Taxation on Certain Passive Income

Final Tax on Interest Income

	DC	RFC	NRFC
Interest from any currency bank deposit, yield or any other monetary benefit from deposit substitutes, trust funds and similar arrangements	20%	20%	25%
Interest under the expanded foreign currency deposit system	15%	15%	Exempt

*15% upon the effectivity of the CREATE; 7.5% before CREATE

For example, B Corp., a domestic corporation, invested P5,000,000 in 6-year time deposit issued by BPI. The investment earns 8% per year. How much is the final income tax arising from this investment?

= Interest income x 20%

= P5,000,000 x 8% x 20%

= P80,000

Final Tax on Royalties

Royalties received by domestic corporations and resident foreign corporations are subject to 20% final tax. Royalties received non-resident foreign corporations are subject to 25%.

Final Tax on Dividends

Passive Income

RFC

NRFC

Intercorporate dividends (dividends received from domestic corporation)

Exempt

25 (15%)

Intercorporate dividends (dividends, which are income within, received from foreign corporation)

RCIT/ MCIT (exempt*)

RCIT/ MCIT

25%

*subject to reinvestment of earnings in the Philippines

Foreign-Sourced Dividend

Are dividends received from non-resident foreign corporations? In general, foreign-sourced dividends received by domestic corporations are subject to income tax.

Exempt Foreign-Sourced Dividend

However, the same shall be exempt if all of the following conditions concur:

The dividends actually received or remitted in the Philippines are reinvested in the business operations of the domestic corporation within the next taxable year from the time the foreign source dividends were received or remitted;
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
The domestic corporation holds directly at least 20% in value of the outstanding shares of the foreign corporation and has held the shareholdings uninterruptedly for a minimum of two years at the time of the dividends distribution.

Effect of Absence of Requisites

Absent any one of the conditions, the foreign-sourced dividends shall be considered as taxable income of the domestic corporation in the year of actual receipt or remittance, subject to surcharges, interest, and penalties, as applicable.

Effect on Foreign Tax Credits

Further, no credit or deduction shall be allowed for any taxes of foreign countries paid or incurred by the domestic corporation in relation to the exempt foreign-sourced dividends.

Any taxes of foreign countries paid or incurred by the domestic corporation in relation to the exempt foreign-sourced dividends shall be disregarded in computing the limitations.

For example,

Scenario	Tax Treatment
RLI Corporation, a domestic, owns 20% of the outstanding shares of USA Corporation, a non-resident foreign corporation, since August 1, 2015. On June 30, 2021, it received dividends amounting to P1,000,000 from the said NRFC. The said dividends has not been used until January 13, 2023.	In this case, the P1,000,000 shall be declared as taxable income for calendar year 2021, subject to surcharge, interest, and penalty, since it was not utilized within the next taxable year, which is in 2022.
RSDV Corporation, a domestic, owns 20% of the outstanding shares of UK Corporation, a non-resident foreign corporation, since August 1, 2015. On May 1, 2021, it received dividends amounting to P1,000,000 from the said NRFC. On September 1, 2022, RSDV Corporation utilized P800,000 for its dividend payments. On January 1, 2023, it utilized the remaining P200,000 for its working capital requirements.	In this case, the P800,000 shall be treated as tax-exempt since this was properly utilized within 2022. On the other hand, P200,000 shall be declared as taxable income for the taxable year 2021, subject to surcharge, interest, and penalty, since it was not utilized within the next taxable year, which is in 2022.
BKTD Corporation, a domestic, owns 20% of the outstanding shares of EU Corporation, a nonresident foreign corporation. BKTD’s holding in EU Corporation started in 2018, and the holding period is uninterrupted. On July 1, 2021, BKTD Corporation received dividends from EU Corporation amounting to P2,000,000 and subsequently paid out dividends on December 31, 2022, in the amount of P1,500,000. The remaining amount of P500,000 has not been used in any qualified activity for exempt foreign-sourced dividends.	In this situation, BKTD Corporation shall be subject to income tax on the unused amount in the taxable period 2021, subject to surcharge, interest, and penalty.

Improperly Accumulated Earnings Tax

The improperly accumulated earnings tax shall no longer be imposed upon the effectivity of the CREATE onwards. This shall apply to the entire taxable year for all fiscal year/taxable years ending after the effectivity of CREATE.

CREATE repealed the imposition of improperly accumulated earnings tax under Section 29 of the National Internal Revenue Code (NIRC).

Before CREATE, the 10% IAET is imposed on improperly accumulated taxable income by closely held domestic corporation.

For example, JDS Corporation, a domestic corporation, has unappropriated retained earnings in excess of its paid-up capital stock amounting to P20,000,000 and P50,000,000 as of the fiscal years ending June 30, 2020 and June 30, 2021, respectively.

How much is the Improperly Accumulated Earnings Tax in 2020 and 2021?

a. In 2020

= IAE x 10%

= P20,000,000 x 10%

= P2,000,000

b. In 2021

No IAET.

JDS shall be subject to the 10% improperly accumulated earnings tax as of June 30, 2020. However, it shall not longer be subject to IAET for the entire fiscal year ending June 30, 2021, which is after the effectivity of the CREATE.

Reasonable Needs of the Business

The term "reasonable needs of the business" means (1) the immediate needs of the business, including (2) reasonably anticipated needs.

The following are considered accumulated for reasonable needs:

Accumulation of earnings up to 100% of paid-up capital;
Definite corporate expansion projects requiring considerable capital expenditure (approved by Board of Directors or equivalent body);
Building, Plant or Equipment Acquisition (approved by Board of Directors or equivalent body)
Compliance with any Loan Covenant or pre-existing obligation (established under a legitimate business agreement);
Required by Law or applicable regulations to be retained;
In case of subsidiaries of foreign corporations in the Philippines, undistributed earnings reserved for Investments within the Philippines

Closely Held Corporations

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

When IAET does not Apply

IAET does not apply to Banks and other non-bank financial intermediaries, Insurance companies, Publicly held corporations, Taxable partnerships.

Prizes and Winnings

Which of the following passive income is not subject to final tax when received by corporations?

a. Prizes and winnings

b. Interest on Philippine currency bank deposit

c. Royalties

d. Yield or monetary benefit from deposit substitute

Answer: a. Prizes and winnings

Capital Gains Tax

Capital Gains from Sale of Shares of Stock

RFC

NRFC

Capital gains from sale of shares of stock of a Philippine corporation not traded in the stock exchange. The tax base is the net capital gains resulting from the subject transaction.

15%

15%*

*Upon the effectivity of the CREATE

For example, K Corporation, a non-resident foreign corporation, purchased 1,000 unlisted shares of P Corp. amounting to P1,500,000. After 6 months, he sold these shares at P2,500,000.

Compute the capital gains tax due.

= (Selling price - Cost) x 15%

= (P2,500,000 - 1,500,000) x 15%

= P150,000

Capital Gains from Sale of Land/Building

RFC

NRFC

Capital gains from sale of land and/or buildings situated in the Philippines

RCIT/MCIT

25%

For example, J Corp. sold a building, which is used as its principal office, for P50,000,000. At the time of the sale, the fair market value of the building was P60,000,000. The office was constructed five years ago for P45,000,000. J Corp. utilized the entire proceeds to construct a new building as its principal office. How much is the capital gains tax on the sale?

The building sold is an ordinary asset. An ordinary gain is subject to RCT/MCIT.

X Corp. sold an idle lot held as capital asset for P50,000,000. At the time of the sale, the fair market value of the idle lot was P60,000,000. It was bought five years ago for P45,000,000. X Corp. utilized the entire proceeds to buy a new lot and construct a new building as its principal office. How much is the capital gains tax on the sale?

= P60,000,000 x 6%

= 3,600,000;

The idle lot sold was held as capital asset; the corporation (unlike individual) is not entitled to exemption from capital gains tax