AGAMATA certs, CPA REVIEW TAX.O-1409 | CORPORATE INCOME TAXATION Hes cieee shaee “Some of Topnotch Professionals” KNOWLEDGE ENGINEERS/REVIEWERS R. B. Banggawan REVIEW NOT! Basic Principle in Corporate Taxation: 1. a domestic corporation is taxable on all income derived from sources within and outside the Philippines; and 2, a foreign corporation, whether engaged or not in trade or business in the Philippines, is taxable only on income derived from sources within the Philippines Classification of Corporate Taxpayers: A. Domestic Corporations- this are corporations that are incorporated under Philippine Laws and are operating in the Philippines (includes business partnership) 4. Proprietary Educational Institutions and Non-Profit Hospitals If gross income from unrelated trade, If gross income from unrelated trade, business or other activities exceeds 50% of the total gross income from all sources, the general corporate rate applies _ ifthe activities of these entities are primarily conducted on principat purpose (meaning unrelated gross income do not exceed 50%), they are taxable at 10% 2. Others (Domestic corporations in general) — subject to the regutar income tax of 30% on taxable income B. Resident Foreign Corporations- this pertain to corporations that are incorporated under any faws other than that of the Philippines but are operating jn the Philippines 4, International carrier — taxable at 2 4% of Gross Philippine Billings 2. Offshore banking units and Foreign Currency Deposit Units ~ taxable at 10% of gross taxable income 3, Regional Area Headquarter and Regional Operating Headquarter of Multinational Companies ~ taxable at 10% of taxable income 4, Others —subject to the regular income tax of 30% on taxable Income = uc cpa review, www, certscollege.org ‘www.reviewer-online.com1409. Corporate Income Taxation.RN Non-resident or Foreign Corporations-refers to corporations that are aot incorporated in the: Philippines and not operating in the Phillppines except for some isolated or transactions Non-resident Cinematographic Film Owner, Lessor or Distributor — film rentals and other items of gross income shall be taxed at 25% Non-resident Owner or Lessor of vessels, chartered by Philippine nationals ~ gross rentals and other chartered fees shall be taxed at 4 43% Non-resident Owner or Lessor of aircraft, machineries, and other equipment ~ gross rentals shall be taxed at 7.9% 4, Others (Non-resident corporation in general) ~ taxable at 30% of gross income Government Owned or Controlled Corporations These corporations shall be subject to the same corporate tax rate an their taxable income are imposed upon corporations or associations engaged in similar business, industry or activity Exception: 4, Government Service insurance System (SIS) 2, Social Security System (585) C 3, Philippine Health and insurance Corporation(PHIC) 4. Philippine Charity Sweepstakes Office (PCS). Exempt Corporations Labor, agricultural or horticultural organigations not orgenized principally for profit Mutual savings bank not having a capital stack represented by shares, and cooperative bank without capital stock organized and operated for mutual purposes and without profit A beneficiary society, order of association, operating for the exclusive benefit of the members such as fraternal orgatiizations operating under the lodge system, or 2 mutual aid association or a non-stock corporation organized by employees providing for the payment of life, sickness, accident, 6r other benefits exclusively ta the members of such society ar order, or association, or nonstick'torporation or their dependents. ‘Acemetery company owned and operated exclusively for the benefit of its members Non-stock corporation ot association organized and operated exclusively for religious, charitable, scientific, athletic, or cultural purposes, or for the rehabilitation of veterans, no part of its income inure to the benefit of any member, organizer, officer or any specific person Business league, chamber of commerce, or board of trade, not organized for profit and no part of the net income or which inures to the benefit of any private stockholder or individual Civic league or organizations not organized for profit but operated exclusively for social welfare Nonsstock and nonprofit educational institution Government educational institution farmer's of other mutual typhoon or fire insurance company, mutual ditch or irrigation company, mutual cooperative telephone company, or like organizations of a purely local character, the income of which consists solely of assessments, dues, and fees collected from members for the sole purpose of meeting its expenses; and mh | TAX.0-1409.Corporate Income Taxation AN TL, Farmer's fruit growers’, or lke association organized and operated as a sales agent for the purpose of marketing the products of its members and turning back the proceeds of sales) Jess the necessary selling expenses on the basis of the quantity of produce finished by them, Income from whatever kind and character of the above organizations from any of thelr Note: a from activities Conducted for profit regordiess of the dispasition made properties, real or personal, of ‘of such income, shall be subject to income tax. Key points to remember with exempt corporations: _cnon-stock and non-profit organization no income inures to the benefit of any person or organization ; f ‘on applies only to inéome received from related to thelr main activities or purpose NON-CORPORATE BUSINESSES UNDER THE LAW The following entities are not corporations. Their inco shareholders: é 1. Co-ownership . 2, General Professional Partnership 3. Joint venture for the purpose of un the Government “2 4. Joint venture for engaging in petrofeum, coal, geothermal and other energy operation pursuant ‘to an operating or consortium agreement undef a service contract with the Government: exempt me ig taxable'to their owners) venturers OF dertaking constryction projects under 3 service eortact with JTEMS OF INCOME OF CORPORATIONS A. Passive Income ~ Refer to HO04 for details. 8, Capital Gains 1, Sale of shares corporations. Sale of real property 10 domestic corporations only Bae nee cl A C. > Regular & Other Income ~ subject to proportional tax of 30%6 OF Spt 1 x Business Income:='these refer to those that‘are derived from the riormal course of busine of the corporation. Exarhples: rental income, subscription fee) commission income, Brose income from sales. 2, Other Income: all other items wt n under the final taxation scheme. Example: recovery of bad debts, income from wag gains and dividends income from a foreign corparation 5 of stack in a domestic corporation (traded or non-traded) = applicable to all ‘ted in the Philippines classified as capital assets ~ applicable (0 hich meets the definition of income’ but are not tixable ine BASIS OF CORPORATE INCOME TAX Domestic Resident Gross Income 006 cg Less: ttemized Deductions 50% wk Taxable Income » = mi wivwreviewer-online,com lic cpa review www.certscollege.org Www reviewer-online corn uc cpa review109.Corporate Income Taxa‘ we following are the pertinent tax rates that apply for corporate taxpayers: effective January, 2000 32% effective November.1,2005** 35% effective January 1, 2009 30% CIAL, TAXATION RULES FOR REGULAR CORPORATIONS MINIMUM CORPORATE INCOME TAX * computed as 2% of gross income * beginning on the fourth taxable year immediately following the year in which such corporation commenced its business operation when the minimum corporate income tax is higher than the regular corporate income tax during the period, the minimum corporate income tax shall be payable ‘excess of minimum corporate income tax can be carried over and credited to the regular income/tax for the next three immediately succeeding taxable years applies only to domestic and resident corporations and excludes those entities enjoying preferential rates * Exemption Rule to McIT The Secretary of Finance is authorized to suspend the*ighposition of minimum corporate income (wx onany corporation which suffers losses on account of: a: prolonged labor disputes (aver 6 mafiths) b. force majeure © legitimate business reverses Gross Income for purposes of MCIT shiaitbe: &.. for sale of goods ~ gross sales less sales returns, allowances, discounts and cost of goods sold b, gross receipts less sales returns, allowances discounts and cost of services sold Cost of services shall include all direct costs. and expenses. incurred:-to| provide: the: services) Fequired by the customers and clients and including salaries and employee;benefits of personnel, consultants and specialists: directly rendering the services and:cost of facilities used directly in providing the service such as depreciation, rental of property and cost of'supplies. For banks, cost of services includes interest expense. IMPROPERLY ACCUMULATED EARNINGS TAX * 10% of the improperly accumulated earnings to be determined by the Bureau of Internal Revenue, * — Effective January 1, 1998. * This is assessed by the Bureau of Internal Revenue on its contention for improper ‘accumulation of profits and not applied for or computed by the corporation in its income tax return. TAX.0-1409.Corporate Income Taxation AN Presumption of evidence of improper accumulation of profits and hence avoidance of 10x payables of stockholders: 1. holding companies 2. investment companies 3. closely-held corporations 4, profit accumulation beyond the needs of business Indicators of improper profit accumulations: 1. withdrawals of stackholders disguised as loans expenditures by the corporation for the personal benefits of the stockholders yearly substantial advances made to stackholders-officers investments in unrelated business radical change of business when large profit have been accumulated pron Reasonable accumulation of profits: 1. additional working capital purposes 2, purchase of long-life assets reasonably required by the business(expansion, improvement and repairs) ; 3, the acquisition of a related business or the purchase:of the stock of a related business where a subsidiary relationship is established 4, obligation in a contract to set aside funds ina sinking fund to settle a debt 5... anticipated losses or business reverses *) immediacy Test ~ profit must be applied nat'tbo long from the time of retention of profits, This rule applies ifthe accumulation of profit is deemed for the reasonable needs of business. Limit under the Corporation Code GP the Philippines ~ a corporation can retain profits not ‘exceeding 100% of its paid in capital. A¢cumulation of profits up to 100% of the paid up capital therefore is not an improper accumulation of profit. Taxable items of improperly accumulated profits: 1. after tax net incame 2. income subject to final tax the relevant income 4, income exempt from final tax 5. NOLCO deducted in determining IAET Exempt Corporations: 1, Insurance companies 3. Non-bank financial intermediaries 2. Publicly-held corporations 4. Banks GROSS INCOME TAXATION The president, upon recommendation of the Secretary of Finance, may effective January 1, 2000 allow corporations the option to be taxed at 15% of gross income after the following conditions are satisfied: 1. tax effort ratio of twenty percent (20%) of gross national product(GNP) 2. aratio of forty percent (40%) of income tax collection to total tax revenues 3. a VAT tax effort of four (4%) of GNP www. revieweronline.com www.certscollege org uc cpa review uc cpa review www.certscollege.org, www. reviewer-onling.com re0-1409.Corporate Income Taxation.RN jated Public Sector Financial Position (CPSFP) to GNP 8.0.9 percent (.9%) ratio of the Cons ome tax to gross sales this option shall be allowed only to firms whose ratio of gross ine or receipts from all sources does not exceed 55% + the election of grass income taxation shall be irrecoverable for the three consecutive taxable years during which the corporation is qualified under the scheme jeaning of Gross Income for Purposes Gross Income Taxation: Sale of goods~ Gross income = gross sales less sales returns, ‘of goods sold discounts and allowances and costs Cost of goods sold“ include’ all business expenses directly incurred to produce the merchandise or to bring them to their present location and use. I merchandising concern ~ 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 in transit 2, manufacturing concern — include costs of production, of finished goods, such as raw tnaterials, labor and manufacturing overhead, freight dast;sinsurance premiums and other costs incurred to bring the new materials to factory or warehouse. Sale of service — Gross income = gross receipts less sales Feturns, allowances and discounts * + As compared with MCIT gross income from service; this does not have direct cost of service eal accounting period, the taxable income shall be Note: With respect to corporations adopting fis he relevant income is earned. computed without regard to the specific date to which t QRANCH PROFIT REMITTANCE TAX Any profit remitted by the branch to its head office shall be subject to a final tax at 15% which: Shall be based on the total.profit (exclusive of investment income) applied or earmarked for femittances, without any dediiction for the tax component thereof, except those activities that. registered with the Philippine Economic Zone Authority (PEZA) un corporation” excludes one of the following: ©. General professional partnership D. An incorporated business organization A. Ordinary partnership B. Business partnership One of the following does not f fall under the definition of a “ ” A Gener pris Care Joint stock company D. Sole PrPBReEyaRa Which of the following is subject to the corporate income tax? A. Anon-stack and non profit educational institution : 8. Public educational institution C. Private cemeteries D. "Civic league or organization not organized for profit and operated exclusively for the ganizatic Bani profit and operated exclusively for t/ A corporation organized and created under the laws of a forelgn’tountry and is authorle ° under the ta business trade in the Philippines is: PH A MR a A. Domestic corporation Be esidene FGFUBh co/eraton C,Non-resident foreign corporation D, Gefteral co-partnership One of the general principles of income taxatigh: A.A foreigr-corporation eny iness i gaged in business fh'the Phil i from Sources within and without the Philippines. oe A foreign corporation eng: busi , \gaged i6 Hisiness in the Philippines i Aire eatin oraape ss ilippines is taxable on all income derived C. Adomestic corporation j : ig taxabl a le on income derived from sources within the Philippines D. Adomes only, B. tic corporation is taxable on income derived from sources without the Philippines Which of the following is classified as special income tax rate? A. Social Security System 8, Proprietary Educational institution corporations subject to preferential corporate C. Philippine Charity Sweepstakes Office D. Government Service Insurance System A corporation which may be cl a resident corp: hon: lay be classified as either oreo sident corporation or a non-resident A. Domestic corporation B. Foreign corporation C. Government owned a controlled corporation D. Non-profit hospital | www. reviewer-online.com uc cpa review www certscollege.org uc cpa review www.certscollege,org. www, reviewer-ontine.com aTAX.0-1409.Corporate Income Taxation, ae 17. The Xue and Shu Company are equal co-joint venturers engaged in the sale of machineries onc Jth Insurance Corporation, a government owned corporation, equipment. During the year 2006, the foliowing data are made known to you: The Philippine Health ins! rate income tax A, Exempt from the corpo! Gross sates P..8,000,06 J. Sublet ED A comet Sates returns 0 ©, Subject to the preferential corp cus oteates as D, Subject to final tax Jy of the Philippines is deemed by law: Operating expenses (including interest expense of P70,000, entertainment public educational institutions, like the University of the ecial corporations expense of P40,000 and insurance premium of P50,000 paid on the insurance es ib) tito the preferential corporate income tax for sp policy of the manager, the joint venture is the beneficiary) 1,500,00 Subje 5 | 500, A ae tothebasic corporate income tax te income tx Interest income from Philippine bank deposit, gross of final tax 100,00 babe te both the preferential income tax and the Cc ubjec + D. Exempt from the corporate income tax How much is the taxable net income of the joint venture? ite income tax: A. P3,000,000 B. P3,050,000 - exempt from the corporate int a - P3000, . P3,050, Which ts not correct? The following are C. Philippine Charity svisnpeates Mons ‘A. Bureau of Internal Revenue D. Government owned or controlle 8. Social Security System C. P3,090,500 D, P3,094,500 48, Baguio Realty and Upland Developers formed a joint venture to carry out a cons under service contract with the government. The followin, Baguio Realty, Upland Development and the join income tax? Which of the following is subject to the corporate inc A. Apublic educational institution 8. Aprivate educational institution truction project ig relates to the 2009 income of the it venture: Cae , ; Baguio Realty Upland Developers... Joint venture ‘Anon-stock and non-profit educational institution Construction income P5,000,000 *. P.4,000,000 4,000,000 Government Service Insurance System “ corporate income tax return Business expenses 3,500,000 3,500,000 3,200,000 « its annual corporate inc ft i ‘ sstic corporation may employ as a basis for filing its anr Baguio Realty and Upland Developers hold etal ownership in the joint Ventute, Compute the eyeMies Bee. erneaniendercandisce pon income tax due of Upland Developers, the: y Ne ca cnuditie ote D. Neither calendar nor fiscal year A, P150,000 8. P270,000 ¢. P120,000 , P100,000 ar only i J Bi er 4 opetdtions 1A December 1, 2008 will be covered by MCIT in 19. Which of the following government-owned and controlled lich started opel * A corporation which st ¢, 2012 A, 2008 corporate income tax? A D. 2015, ke i 2014 ‘ ti Corporations shall be subject to 8. pine Amusement.ahd Gaming Corporation (PAGCOR) National Development Corporation IM, Philippine Charity Sweepstakes Office NN. Social Security System. A. Allofthe above C.land it only B. only D. None of the above i Which of the following is not covered by MCIT? A. Offshore banking units y B, _ Non-profit hospital stitution dprietary educational inst : Fi ager owned and controlled corporations 20. A domestic corporation had the following data: Gross income Deductions Which'ls covered by MCIT? C. Non-resident owner or lessor ot eee 2005 P 1,000,000 P 1,200,000 A, International air oi ters of MNCS D. Banks and insurance companies 2006 2,000,000 1,900,000 B, Regional Area Headquar 2007 3,000,000 2,950,000 2008 2,000,000 4,100,000 a » taxation results to oa oon ace cretion on the part ofthe tax examiners 09 980,000 500,000 i eataarcaid corruption The taxable income in 2009 i G) lowerincometaxrevenues A._P380,000 8, 330,000 €.P100,000 D. P50,000 i ations - 1D. more complicated tax comput — Tc cpa review uc cpa review www.certscollege.org, wwiw.ce| ww rovieweronline.com wrurencer www.reviewer-online.com409.Corporate Income Taxation. MC ‘A corporation's records show: Excess Withholding ‘Tax Prior Year P 10,000 Excess MCIT Prior Year P 30,000 Taxes Withheld P 20,000 30,000 40,000 35,000 Normat IncomeTax — MCIT P 80,000 250,000 100,000 100,000 Quarter First P 100,000 Second 120,000 Third 250,000 Fourth 50,000 The income tax due for the first quarter is A, 100,000 B. P8O,000 D, P40,000 cc. P50,000 The income tax due for the first quarter is A, P120,000 B, P150,000 ¢, P230,000 1b. P250,000 The income tax due for the third quarter is A, P250,000 B. P140,000 D. P70,000 €. P100,000:, The Income tax due for the year is “ A. -P120,000 B.P75,000 C.P§5,000 ‘1D. P45,000 The MCIT shall not apply to the following residént foreign corporations, except A, RFC engaged in business as international cagrier subject to 2 4% of thelr Gross Philippine Billings B. _ RFC engaged in business as Offst@te, Banking Units on their income from foreign currency transactions with local commerciabbanks. ©. RFC engaged in business as regional operation headquarters D. RFC engaged in hotel, nigte| and resort operations Andrix Corporation reports P2,400,000 taxable income for the fiscal year 2009-2010, This was ‘earned 20%, 30%, 30% and 20% in third quarter of 2009 through the second quarter of 2010. Anudtix Corporations fiscal year-ends every June 30. Assuming that the corporate income tax rate is changed from 35% to 30% effective October 1, 2009, compute the corporate income tax for the fiscal year ending June 30, 2010. ‘A, P744,000 B. P750,000 c, P819,000, b. Pg4o,o00 Andrix Corporation reports P2,400,000 taxable income for the catendar year 2009. This was tearned 20%, 30%, 30% and 20% in the first through fourth quarters of 2009. Assuming that the corporate income tax rate is changed from 35% to 30% effective April 1, 2009, compute the corporate income tax for 2009. A, 744,000 B, P720,000 D, P840,000 C. P810,000 Oi www.reviewer-online.com _ www. certscollege.org uc cpa review TAX.0-1409.Corporate Income Taxation, MG 28, A domestic corporation organized in 2003 provided the following informations A. P1,200,000 8. P1,140,000 €, P750,000 deduction. A. P4,800,000 8, paid00,000 €. P3,300,000 2010: 2008 2009 Gross income P 1,000,000 P 2,000,000 P 8}000,000 Expenses 2,000,000 2,500,009, 4,000,000 13 2004 2005 2006 2007 Net sales P4,000,000. - P'5,000,000.. ..P-6,000,000. ..P7,000,000 P 8,000,000 Cost of Sales 2,000,000 2,500,000 2,800,000 4,000,000 5,200,000 Business Expenses 2,200,000 2,450,000 2,900,000 3,200,000 2,300,000 The tax due after tax credit, if any for 2005 A, P48,750 B, P52,500 c. P48,000: 0, P97,500 29. Using the above data, the tax due after credit, if any for 2007 ‘A. 30,000 B. P32,000 c. Pa5,000 D. P56,000 30. Excellence Unlimited started operations in 2004. The following shows details of its income |n Operation had been profitable since the start of operation except that @ major strike in 2008 and 2009 caused major problems in business operations. Consequently, MCIT was lifted for Excellence Unlimited in 2008 and 2009. Compute the income tax payable in 2010. ©..P690,000 31, Compute the taxable income of Excellence Unlimited in 2010 if opted to use optional standard D.P. 32, The record of a closely held corporation which is already in operation in 2003, reveals the following: 2006: Gross income P 3,000,000 Less: expenses 3,800,000- Net operating loss (P...800,090) 2007: Gross income 5,000,000 Less: expenses 4,000,000 Rent income, gross of 5% withholding tax 50,000 interest on money market placement, net of 20% final tax 80,000 Inter-corporate dividends received 500,000 Dividends paid by the corporation 4,000,000 Tax pald, first three quarters 50,000 uc cpa review www. certscollege.org _www.reviewer-online.com