1. Corporation
For income tax purpose, the term “ Corporation” shall include partnership, no matter how created or organized,
joint stock companies, joint accounts (cuentas en participacion), associations, or insurance companies.
The term “corporation” includes also mutual fund companies, regional operating headquarters of multinational
corporation and joint accounts.
The Term Corporation INCLUDED: The Term Corporation DOES NOT INCLUDED:
1. Partnership, no matter how created or organized 1. General professional partnership
2. Joint stock companies 2. Joint venture or consortium formed for the purpose
3. Joint accounts (cuentas en partipacion) of undertaking construction projects
4. Associations or insurance companies 3. Joint venture or consortium for engaging in
petroleum, coal, geothermal and other energy
operations pursuant to an operating or consortium
agreement under a service contract with the
government
3. Joint Venture
Joint venture is a commercial undertaking by two or more persons, differing from a partnership in that it relates
to the disposition of a single lot of goods or the completion of a single project.
6. Associations
The term association includes all organizations which have substantially the salient features of a corporation to
be taxable as corporation.
B. Classification of Corporations
Income
Within Without
a. Domestic Corporation Yes Yes Taxable income x 30% = Normal income tax
b. Resident foreign Corporation Yes No Taxable income x 30% = Normal income tax
c. Non-resident foreign Corporation Yes No Gross income x 30% = Final tax
d. Taxable partnerships, joint ventures,
etc Yes Yes Taxable income x 30% = Normal income tax
BIR Form No. 1702- (Annual Income Tax Return for Corporations, Partnerships and Other Non-Individual
RT Taxpayers Subject Only to the REGULAR Income Tax Rate);
BIR Form No. 1702- (Annual Income Tax Return for Use Only by Corporations, Partnerships and Other Non-
EX Individual Taxpayers EXEMPT Under the Tax Code, as amended, [Sec. 30 and those
exempted in Sec. 27(C)] and Other Special Laws, with NO Other Taxable Income); and
BIR Form No. 1702- (Annual Income Tax Return for Corporations, Partnerships and Other Non-Individuals with
MX Mixed Income Subject to Multiple Income Tax Rates or with Income Subject to
Special/Preferential Rate)
E. Optional Standard Deductions for Corporations (OSD) (RR No. 16-2008 as amended by RR No. 2-2010)
a. In the case of corporate taxpayers, the OSD allowed shall be in amount not exceeding forty percent (40%) of
their gross income
b. “Gross income” shall mean the gross sales less sales returns, discount and allowances and cost of goods
sold.
c. The items of gross income under Section 32 (A) of the Tax Code, as amended, which are required to be
declared in the income tax return of the taxpayer for the taxable year are part of gross income against which
the OSD may be deducted in arriving at taxable income. Passive income which have been subjected to a
final tax at source shall not form part of the gross income for purposes of computing the forty percent (40%)
optional standard deduction.
Exercise:
1. JoLa Corporation has the following income and expenses for the year 2016:
Philippines USA
Sales P4,000,000 P700,000
Cost of sales 3,000,000 400,000
Other income 600,000 100,000
Business expenses 600,000 250,000
Unallocated other business expenses (P230,000)
Payments, first three quarters (if applicable) 120,000
F. Special Corporations
1. Kinds of special corporation
a. Special domestic corporation
b. Special resident foreign corporation
c. Special non-resident foreign corporation
Any private school maintained and administered by private individuals or private groups with an issued permit to
operate from the Department of Educational Culture and Sports (DECS) or the Commission of Higher
Education (CHED) or the Technical Education and Skills Authority (TESDA)
Examples of related income (RMC 4-2013)
d) Non-stock-non-profit hospital
A nonstock non-profit hospital that is operated for charitable and social welfare is exempt from income
tax under Section 30 (E) and (G) of the Tax Code.
The nonstock-non-profit hospital must satisfy the following requisites in order to be entitled to the exemption
from income tax:
1. It is a nonstock corporation.
2. It is operated exclusively for charitable purposes.
3. No part of its net income or asset shall belong to or inure to the benefit of any member, organizer, officer
or any specific person.
a. Definition
Any agency organized as a stock or nonstock corporation, vested with functions relating to public needs
whether governmental or proprietary in nature, and owned by the Government of the Republic of
the Philippines directly or through its instrumentalities either wholly or where applicable as in the case of
stock corporations, to the extent of at least a majority of its outstanding capital stock.
1. International carrier
2. Offshore banking units
3. Remitting Branches of Resident Foreign Corporation(except on activities registered with PEZA)
4. Regional or Area Headquarters of Multinational Companies
5. Regional Operating Headquarters of Multinational Companies
Notes: Fares for transient passengers staying herein for more than 48 hours are included
in Gross Philippine Billings.
Another If continuation of the flight or voyage to a foreign destination is made by another airline
International company or international sea carriers, the cost of the outgoing flight or voyage shall be
Carrier included in Gross Philippine Billing of the airline or carrier regardless of the intervening
1. Definition of terms
a. Offshore banking- shall refer to the conduct of banking transactions in foreign currencies involving the receipt
of funds from external sources and the utilization of such funds. (PD 1035)
b. Offshore banking unit – shall mean a branch subsidiary or affiliate of a foreign banking corporation which is
duly authorized by the Central Bank of the Philippines to transact offshore banking business in
the Philippines. (PD1035)
2. Distinction:
OBU – is a division of foreign bank which is authorized to conduct foreign currency denominated transactions.
FCDU – is a division of a domestic corporation bank. (Limited to short term foreign currency transactions)
EFCDU – may be a division of a domestic bank or a resident foreign bank to conduct banking under the
expanded foreign currency deposit system.(Allowed to both short term and long term
foreign currency denominated transactions)
DOMESTIC BANK
17. CORPORATION Page 5 of 23
Received From
Nature of Residents Other Residents Non-residents
income (E)FCDUs or
OBUs
Income from forex transactions
Interest income
from:
-Forex loans and Exempt 10% final tax Exempt
receivables
- Forex deposits Exempt - Exempt
Other forex Exempt 30% regular corporate Exempt
income income tax
Income from 30% regular 30% regular corporate 30% regular corporate income tax
non-forex corporate income income tax
transactions tax
If the interest income is not subjected to final tax by the borrower, the FCDU, EFCDU or OBU shall report the
same in its gross income in the income tax return and shall be subject to the same 10% tax. It shall be
separately presented from other income subject to the 30% regular corporate tax.
To be effectively connected it is not necessary that the income be derived from the actual operation
of the branch’s trade or business. It is sufficient that the income arises from business activity in which the
branch is engaged.
Remittance from prior year earnings is still taxable. The NIRC used the phrase “any profit remitted”
without limiting the same to current year profit remittance. The branch profit remittance tax therefore applies
to remittance of prior year earnings.
This tax only applies to a RFC which is a branch of a NRFC.
The taxable income event is not the generation of income but the remittance of income to the head office.
If the above enumerated incomes are effectively connected with the conduct of its trade or business in the
Philippines, they will be treated as branch profits subject to BPRT upon remittance.
• For purposes of branch profit remittance, income items which are not effectively connected with the
conduct of its trade or business in the Philippines are not considered branch profits.
Regional or area headquarters is a branch established in the Philippines by multinational companies and which
headquarters do not earn or derive income from 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.
Tax base Tax rate
Exempt from tax -
Regional operating headquarters is a branch established in the Philippines by multinational companies which are
engaged in different services (e.g. general administration and planning, business planning and coordination,
marketing control and sales promotion, etc.)
Tax base Tax rate
Taxable income 10%
Exercises:
a. (Adapted): Singapore Airlines, an international carrier doing business in the Philippines provided you the following
data:
Gross ticket sales(passengers) in the Philippines (Manila to Macau flight) P2,000,000
Gross ticket sales(cargoes) in China (Manila to Beijing flight) 2,000,000
Gross ticket sales(passengers) in the Philippines (Macau to Manila flight) 1,000,000
Gross ticket sales(cargoes) in China (Beijing to Manila flight) 1,000,000
Value of fares on non-revenue passenger (Outbound flights) *150,000
Fares cancelled and refunded (Outbound flights) 200,000
Value of fares on non-revenue passenger (Inbound flights) 50,000
Fares cancelled and refunded (Inbound flights) 50,000
Rental income(earned in the Philippines), net of withholding tax 950,000
Expenses connected to rental income 500,000
Required:
1. How much was the total Philippine income tax due?
What is the amount of Jacky Lipad’s income tax payable in the Philippines?
In year 200B, Abbott earmarked for remittance to its head office in North Carolina, USA some of its income as
follows:
Required:
1. How much is the branch profit remittance tax and the total amount to be remitted after tax?
2. Assuming all activities registered with PEZA. How much is the tax on the branch profit remittances, if any?
Star Diamond Corporation’s taxes payable (income tax and percentage tax) on sales of capital assets assuming the
taxpayer is a:
1. Domestic corporation (DC).
2. Resident foreign corporation (RFC).
3. Non-resident foreign corporation (NRFC).
1. What is the total amount of final income taxes of Philippine Commercial Bank?
2. What is the total amount of normal corporate income tax of Philippine Commercial Bank?
Cinematographic film includes motion picture films, films, tapes, discs and such other similar or related products
(RR 6-2001).
TAX
KINDS TAX BASE RATES
Cinematographic
FOLD* Gross Income from Philippine Sources 25%
Lessor or Owner of Gross Rentals, lease or charter fees from leases or charters to Filipino Citizen
Vessels** or Corporations as approved by Maritime Industry Authority 4.5%
Owner or Lessor of
AMO*** Gross Rentals or fees derived within the Philippines 7.5%
Differentiation:
Lessor Lease or charter of
Cinema films Vessels Aircraft Other equipments
Domestic 30% world 30% world taxable 30% world taxable 30% world taxable income
taxable income income
income
Resident 30% world2.5% Gross 2.5% Gross 30% Philippine taxable
foreign taxable Philippine Billings Philippine Billings income
income OR OR
Preferential rate Preferential rate
Non-resident 25% 4.5% Philippine 7.5% Philippine 7.5% Philippine gross rental,
foreign Philippine gross rental, lease gross rental, or fees or fees (Philippine Gross
gross income or charter fees (Philippine Gross Income)
(Philippine Gross Income)
Income)
Note: The Gross Income is gross receipts less the direct cost of services while the Gross Philippine Billings
relates to gross receipts.
a. (Educational Institution-Capital Expenditures vs. Revenue Expenditure) The XYZ University, a private
educational institution, provided the following income and expenses for the year 2016:
Tuition and miscellaneous fee P14,000,000
Sales of canteen 700,000
Sales of bookstore 300,000
Non-educational income: Rent income, net of CWT 4,940,000
Sale of scrap materials 60,000
Cost and expenses:
Cost of services – canteen 400,000
Cost of books sold 240,000
Operating expenses 2,000,000
Purchase of library books 1,000,000
Cost of classroom construction 500,000
Purchase of school furniture 200,000
The operating expenses do not yet include the cost of capital expenditures. The fixed assets are estimated to be
useful for 10 years.
Required:
1. What would be the 2016 income tax still due and payable per ITR of University of XYZ (Capital outlays for
expansion of school facilities deducted as expenditures)?
2. What would be the 2016 income tax still due and payable per ITR of University of XYZ (Capital outlays for
expansion of school facilities depreciated over the estimated life)?
b. (Non-stock Non-profit Hospital) A non-stock, non-profit hospital has presented the following data for the
calendar year 2016:
Income, related activities P5,000,000
Income, unrelated activities (including P2,000,000 rent from
commercial spaces, gross of 5% withholding tax) 7,000,000
c. (GOCC - Tax Exempt) A corporation has the following income and expenses for the year 20X1:
Sales P4,000,000
Cost and expenses 3,000,000
Required: Compute the normal income tax, assuming the corporation is:
1. Government Service Insurance System (GSIS)
2. Social Security System (SSS)
3. Philippine Health Insurance Corporation (PHIC)
4. Philippine Charity Sweepstakes Office (PCSO)
5. Local Water District
d. (Government Educational Institution) A government owned and controlled educational institution reported an
educational related income of P1,000,000. Its operating expenses amounted to P3,000,000.
Required: How much is its income tax payable for the period?
Offshore Banking Units – a branch, subsidiary or affiliate or a foreign baking corporation authorized by the Bangko
Sentral ng Pilipinas (BSP) to transact offshore banking business in the Philippines as a separate accounting unit.
Foreign currency deposit unit – an accounting unit or department in a local bank or in an existing local branch of a
foreign bank, authorized by the BSP to operate under the expanded foreign currency deposit system.
From foreign corporation (based on the ratio of the gross income of the foreign corporation for the preceding 3 years
prior to declaration of dividends derived from Philippine sources):
Philippine Gross income (3 years) x Dividend
***Income within = Total Gross income (3 years)
1. Gross Income Tax (GIT)/ Optional Corporate Income Tax (also known as 15% gross income tax)
The President, upon the recommendation of the Secretary of Finance may, effective January 1, 2000, allow
corporation to be subjected to optional corporate tax.
Allow only to Domestic Corporations and Resident Foreign Corporation the option to be taxed on gross
income, as follows:
• 15% tax rate (based on the gross income)
• Irrevocable for 3 consecutive years during which the corporation is qualified under the scheme.
Sales xxx
Sales return and allowance (xxx)
Sales discount (xxx) xxx
Cost of sales/Cost of direct services (xxx)
Gross income from operation xxx
Other income xxx
Gross income xxx
Gross income tax rate 15%
1. Trader or Merchandiser:
Invoice Cost PXXX
Import Duties XXX
Freight XXX
Insurance XXX
COS PXXX
NOTE*: Other costs must be incurred in bringing the raw materials to the factory or warehouse.
NOTE: In case of BANKS, other than the items enumerated above, it shall also include Interest expense.
Simply stated, MCIT applies on the X+4th year of operations. For instance, a corporation which started operations at
any day in 20X2 will be covered by MCIT in 20X6.
6. Tax due
The tax due is the higher between the minimum corporate income tax and normal or regular corporate income tax.
Exercises:
a. (Corporation) The following information are presented to you by a taxpayer who seeks your assistance in
computing the correct taxes:
DC RFC NRFC
Interest from Philippine peso bank
Yield from deposit substitute in the Philippines
Interest from bank deposit in Chase J.P Morgan Bank, USA
Prizes (P90,000), Philippines
Prizes (P10,000), Philippines
Winnings (P90,000), Philippines
Winnings (P10,000), Philippines
Royalty – all kinds
Interest from Philippines depository bank under EFCDS
Interest income from long term deposit, Philippines
Dividend from domestic corporation
Dividend from foreign corporation
Required: Based on the above data identify the final tax rate on passive income assuming the taxpayer is:
1. Domestic corporation
2. Resident foreign corporation
3. Non-resident foreign corporation
b. (Domestic Corporation) ABC Corporation was created in accordance with Philippine Laws. During the calendar
year 20X1, it has the following data on income and expenses:
Philippines USA
Gross income (Gross sales, P15,000,000- Phils) (Gross sales P10,000,000 P5,000,000
P8,000,000 – USA)
Business expenses 2,000,000 1,500,000
Interest income from bank deposit 300,000 100,000
Dividend from a domestic corporation 150,000
Interest income from domestic depository bank under EFCDS 120,000
Prizes 200,000
Rent income from equipment, gross of applicable withholding tax 1,000,000
Payment, first three (3) quarters 500,000
Required:
1. How much is the Philippine income tax payable?
2. How much is the total final withholding tax?
3. How much is the Philippine income tax payable using OSD?
4. Assuming the above corporation is a foreign corporation engaged in trade or business in the
Philippines, how much is the Philippine income tax payable?
5. Disregard certain information which are not applicable and assuming the corporation is not engaged in business
in the Philippines, how much is the final withholding taxes in the Philippines?
c. (Final Tax and Capital Gain Tax) A Corporation has the following income:
Interest income derived from depository bank under Expanded Foreign Currency
Deposit System (EFCDS) P100,000
Capital gain from sale of shares of stock not traded in the local stock exchange 200,000
Dividend from a domestic corporation 300,000
Dividend from a foreign corporation 400,000
Stock dividend 100,000
Required: (Assuming with tax sparing, if applicable)
1. How much is the final tax on the passive income and the capital gain tax, assuming the corporation is a
domestic corporation?
2. How much is the final tax on the passive income and the capital gain tax, assuming the corporation is a
resident foreign corporation?
3. How much is the final tax on the passive income and the capital gain tax, assuming the corporation is a non-
resident foreign corporation?
Note: The return shall be sworn to by above officer and by the Treasurer or Assistant Treasurer
5. Manual Filing
Every corporation subject to tax shall render, in duplicate a true and accurate quarterly return and final or
adjustment except corporations not engaged in trade or business in the Philippines (NRFC).
• Not later than 60 days from the close of each of the first three quarters of the taxable year, whether calendar
or fiscal year.
Note : The tax so computed shall be decreased by the amount of tax previously paid or assessed during the
preceding quarters.
Sum of quarterly payment not equal to the total tax due for the year
If the sum of the quarterly tax payments made during the taxable year is not equal to the total tax due on the
entire taxable income of that year, the corporation shall either:
a. pay the balance of tax still due
b. Once the option to carry-over has been made, such option shall be considered irrevocable for that taxable
period
EFPS Authorized Agent Banks refer to a BIR authorized agent bank (AAB) that has passed the accreditation
criteria for EFPS AAB such as being an internet-ready bank, indorsed by Bureau of Treasury for EFPS
accreditation, certified by the Information Systems Group of the BIR that the applicant bank’s system is
acceptable and compatible with the EFPS of the BIR.
Large Taxpayers who will e-pay shall enroll with any EFPS AAB authorized to serve them and who are capable
to accept e-payments. E-payments shall be made within the day the return was electronically filed following
the “pay as you file system”. Unless otherwise notified by the Commissioner of Internal Revenue, for all
returns that will be filed starting August 1, 2002, e-payment of the taxes due thereon thru EFPS shall become
mandatory (RR 9-2002).
For Non-Large Taxpayers who intend to e-pay, electronic payment shall be made through the internet banking
facilities of any AAB. The volunteering two hundred (200) or more Non-Large Taxpayers previously identified
by the BIR to have availed of the option to file their return under EFPS shall nevertheless continue to file their
returns under such method. (RR No. 10-2007). However, upon receipt of a notification letter duly signed by
the Commissioner of Internal Revenue, it becomes mandatory for them, including their branches located in the
computerized revenue district offices, to file their returns and pay their taxes thru EFPS. (RR No. 10-2007).
The filing of the return ahead of the payment of the tax due thereon is still in accordance with “pay as you file”
as long as the payment of the tax is made on or before the due date of the applicable tax.
Non-large taxpayers shall have the option to file a consolidated return in the head office following the
procedure in RR No. 1-98 or to file returns on a per branch or facility basis. Provided, however, that they shall
update their registration with the affected or concerned revenue district officers by filing BIR Registration
Update Form (BIR FORM 1905) before they change their manner of filing returns.
• RR 9-2001 defines EFPS as the system developed and maintained by the BIR for electronically filing tax
returns, including attachments, if any, and paying taxes due thereon, specifically through the internet.
• Upon filing, a Filing Reference Number is issued by EFPS as a control number to acknowledge that a tax
return, including attachments, has been successfully filed electronically. This shall serve as evidence of filing
and the date of filing of the return.
• Upon payment of the tax due to an authorized agent bank (AAB) under EFPS, the AAB shall issue
Acknowledgement Number as a control number to the BIR to confirm that tax payment has been credited
to the account of the government or recognized as revenue (internal revenue tax collection) by the Bureau of
Treasury.
• Likewise, a Confirmation Number shall be issued by the AAB as a control number to the taxpayer and BIR
to acknowledge that the taxpayer’s account has been successfully debited electronically in payment of his tax
liability. This shall serve as evidence of the fact of payment of the taxpayer’s liability to the extent of the
amount reflected in the confirmation number and the date of payment by the taxpayer.
1. As to tax payments
Percentage tax P200,000 per quarter
VAT P200,000 per quarter
Excise Tax P1,000,000 per year
Income tax P1,000,000 per year
Documentary stamp tax P1,000,000 per year
Withholding taxes (all types) P1,000,000 per year
2. As to financial condition
Gross sales/receipts P1,000,000,000 per year
Net worth P300,000,000 at the close of each calendar or fiscal year
Gross purchases P800,000,000
Per S.E.C lists Top corporations as listed and published by the Securities and
Exchange Commission
Non-Large Taxpayers
• Volunteering 200 or more Non-Large Taxpayers
• Top 20,000 private corporations (starting April, 2009)
Other Taxpayers:
• Corporation with paid-up capital of P10,000,000 and above
• Corporation with complete computerized system
• Taxpayers joining public bidding pursuant to E.O. No. 398 as implemented by RR 3-2005.
Enterprises enjoying fiscal incentives granted by other government agencies such as those
registered with:
• PEZA (Philippine Economic Zone Authority)
• BOI (Board of Investments)
• Various zone authorities
• Cagayan Special Economic Zone Authority
• Export Development Council
• Tourism Infrastructure and Enterprise Zone Authority; and
• PHIVIDEC Industrial Authority
Failure to comply with the provisions on e-filing and e-payment shall be penalized under Section 275 of the
Tax Code. However, only the first and second offenses may be compromised. For the third and subsequent
offenses, no compromise shall be entertained or allowed.
eBIRForms Software Package (also known as Offline eBIRForms Package) — is a tax preparation
software that allows the taxpayer and Accredited Tax Agent (ATA) to accomplish or fill up tax forms offline. It
is an alternative mode of preparing tax returns which deviates from the conventional manual process of
filling-up tax returns on pre-printed forms that is highly susceptible to human error. Taxpayers/ATAs can
directly encode data, validate, edit, save, delete, view and print the tax returns. The form package has
automatic computations and has the capability to validate information inputted by the taxpayers/ATAs.
Online eBIRForms System — is a filing infrastructure that accepts tax returns submitted online and
automatically computes penalties for tax returns submitted beyond due date. The System creates secured
user accounts thru enrollment for use of the online System, and allows ATAs to file on behalf of their clients.
The System also has a facility for Tax Software Providers (TSPs) to test and certify the data generated by
their tax preparation software (certification is by form). It is capable of accepting returns data filed using
certified TSP's tax preparation software.
Taxpayers who are not covered by the regulation may opt to file their returns using the manual
filing or eBIR forms
Other Terms:
• Accredited Printers are duly constituted agents of the BIR in the printing of principal and
supplementary receipts/invoices and included in the List of Accredited Printers of Principal and
Supplementary Receipts/Invoices published in the BIR website.
• Accredited Tax Agents (ATAs) are known as accredited tax practitioners, who are engaged in tax
practice included in the List of Accredited Tax Practitioner as published in the BIR website. The
designation of ATA by the taxpayer may at any time be cancelled or revoked upon execution of “removal
of tax agent” within the online eBIR Forms System and aforementioned action shall be completed upon
submission of a duly notarized notice of termination to the taxpayer’s registered RDO.
• Offline – is a technical term generally used when the user’s workstation is not connected to the internet.
• Online - is the most common technical term used wherein the user connects his workstation to the
internet to access various information through the worldwide web.
• No Payment Returns – refers to the tax return that is not accompanied by any payment where the
same is filed with any authorized BIR receiving office (e.g. breakeven, no transaction, refundable or
second installment tax return).
Exercise:
a. (MCIT and Quarterly Corporate Income Tax)ABC Corporation under fiscal year starting July 1, 20X5 and
ending June 30,20X6 computed normal income tax and MCIT, and creditable income taxes withheld from first
quarter to fourth quarter including excess MCIT and excess withholding taxes from prior year’s are as follows:
First Q Second Q Third Q Fourth Q
Normal income tax P100,000 P120,000 P250,000 P200,000
Minimum corporate income 80,000 250,000 100,000 100,000
tax
Taxes withheld 20,000 30,000 40,000 35,000
Additional information: Excess MCIT, prior year, P30,000; Excess withholding tax prior year, P10,000; Date of
registration with BIR July 1,20X0.
Required:
1. Compute the income tax payable for the first three (3) quarters and the year end and the due dates.
2. What is the BIR Form Return to be filed?
3. When is the last day for the filing of income tax return?
a. Objective: To force corporations to distribute dividends to shareholders in order that related tax in
dividends will be collected.
b. 10% of improperly accumulated taxable income (In addition to other taxes imposed, there is imposed
for each year on the improperly accumulated taxable income of each corporation an improperly accumulated
earning tax equal to 10% of the improperly accumulated taxable)
c. Only Domestic Corporations not public listed are covered by the IAET.
5. Closely-held corporations
The ownership of a corporation for the purpose of determining whether it is a closely held corporation or a
publicly held corporation is ultimately traced to the individual shareholders of the parent company. Where at
least 50% 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 or more individuals, the
corporation is a publicly held corporation. Domestic corporation not falling under the aforementioned definition
are, therefore, closely-held corporations (BIR Ruling 25-02).
8. Earning or profits of a corporation are permitted to accumulate beyond the reasonable needs
The fact that the earning or profits of a corporation are permitted to accumulate beyond the reasonable needs
of a business shall be determinative of the purpose to avoid the tax upon its shareholders or members, unless
the corporation, by clear preponderance of evidence, shall prove to the contrary.
Immediacy Test - under this test of determining justified accumulation, "Reasonable needs of the business"
means the immediate needs of the business. If the corporation does not prove an immediate need for the
accumulation of the earnings and profits, then the accumulation is not for the reasonable needs of the business
and the penalty tax would apply.
Reasonable needs of the business include the reasonably anticipated needs of the business. (immediacy
test)
(RMC 35-2011) The amount that may be retained, taking into consideration the accumulated earnings within
the “reasonable needs of the business” shall be 100% of the paid-up capital or the amount contributed to the
corporation representing the par value of the shares of stock, hence, any excess capital over and above the
par shall be excluded and therefore must be part of the income declared as dividends. (Additional paid in
capital is now removed from the equation). Any excess capital over and above the par shall be excluded which
is in contrast with the principle of “immediacy test”
Section 3 of RR No. 2-2001 provides that the following shall constitute accumulation of earnings of
“reasonable needs” of the business:
- Reasonable needs of the business is determined by the “immediacy test” (immediate needs of the business,
including reasonably anticipated needs
- There should be PROOF of immediacy or direct correlation of anticipated needs
a) (Up to 100% of the paid up capital of the corporation for reserve purposes) Allowance for the
increase in the accumulation of earnings up to 100% of the paid-up capital of the corporation as of balance
sheet date, inclusive of accumulations taken from other years, under RMC 35-2011 paid up capital shall refer to
the par value of the shares.
b) (For definite corporate expansion projects as approved by the BOD) Earnings reserved for the
definite corporate expansion project or programs requiring considerable capital expenditure as approved by
the board of directors or equivalent body.
c) (For building, plants or equipment acquisition as approved by the BOD) Earnings reserved for
building, plants or equipment acquisition as approved by the board of directors or equivalent body.
d) (For compliance with any loan covenant or pre-existing obligation established under a legitimate
business agreement) Earnings reserved for compliance with any loan covenant or pre-existing obligation
established under a legitimate business agreement.
Exercise:
a. (Adapted) The record of a closely held corporation, registered with BIR in 2009, reveals the following:
2015: Gross income P3,000,000
Less: Expenses 3,800,000
Net operating loss (P800,000)
It had a capital stock of P5,000,000 and share premium of P700,000 as of December 31, 2016. Upon examination of
the 2016 return, the BIR concludes that there is an improper accumulation of profit. The corporation fails to show
proof to prove the contrary.
Required:
1. How much is the tax payable of the corporation per return in the year 2016?
2. How much is the tax on the improper accumulated income in 2016?