INCOME TAX ON CORPORATIONS

A corporation for income tax purposes shall:

1. Include:
a. Partnerships
b. Joint stock companies
c. Joint accounts (cuentas en participacion)
d. Associations, or
e. Insurance companies

2. Not include:
a. General Professional Partnerships (GPP)

NOTE: The distributive share of each partner in a general professional partnership shall form part
of partner’s gross income in its individual tax returns subject to graduated income tax rates.
b. A joint venture or consortium formed for purposes 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 (NIRC, Sec. 22 [B]).

Kinds of corporation under the NIRC

1. Domestic Corporations (DC) – a corporation created or organized in the Philippines or under its
laws and is liable for its income from sources within and without (NIRC, Sec. 22 [C])
2. Resident Foreign Corporation (RFC) – a corporation which is not domestic and is engaged in trade
or business in the Philippines and is liable for income from sources within the Philippines
3. Non-resident Foreign Corporation (NRFC) – a corporation which is not domestic and not engaged
in trade or business in the Philippines and is liable for income from sources within and without
4. Special Types of Corporations – those corporations subject to different tax rates
1. Special RFC
a. Domestic depositary banks (foreign currency deposit units)
b. International carriers
c. Offshore banking units
d. Regional or Area Headquarters and Regional operating Headquarters of multinational
companies
2. Special NRFC
a. Non-resident cinematographic film owners, lessors or distributors
b. Non-resident owners or lessors of vessels chartered by Philippine nationals
c. Non-resident lessors of aircraft, machinery and other equipment
CORPORATE TAXPAYER IS A: TAXABILITY OF INCOME DERIVED FROM SOURCES
Within the Philippines Outside the Philippines TAX BASE RATE
DC √ √ Net taxable income 30%
RFC √ X Net taxable income 30%
NRFC √ X GROSS income 30%
Special Domestic √ √ Net taxable income
Corporations
1. Proprietary 10%
educational
institutions

XPN: Those whose

gross income from
unrelated sources
exceeds 50% of their
total gross income
2. Non-profit 10%
hospitals
3. Government- 30%
owned or controlled
corporations
4. Exempt Tax-exempt
government
institutions

Special Resident √ X GROSS income

Foreign
Corporation
1. International 2 ½% of Philippine gross
carrier billings

2. Offshore banking 10% of gross income

units
3. Branch profit 15% of remittances
remittances
4. Regional area Tax-exempt
headquarters
5. Regional operating
headquarters 10%

Special Non- √ X GROSS income

resident Foreign
Corporation
1. Cinematographic 25% of gross income
film
owner/lessor/distrib
utor
2. Lessor of
machinery,
equipment, aircraft 7 ½% of gross income
and others

INCOME TAX ON DC AND RFC

DC is a corporation created or organized in the Philippines or under its laws and is liable for its
income from sources within and without (NIRC, Sec. 22 [C]).
Outline of taxes imposed on DC
1. Normal corporate income tax (NCIT) - 30% of taxable income from all sources within and
without the Philippines
2. Minimum corporate income tax (MCIT) - 2% of gross income, if MCIT applies
3. Gross income tax (Optional corporate income tax) - 15% of gross income, if qualified
4. Improperly Accumulated Earnings Tax - 10% of improperly accumulated earnings
5. Final tax on passive income

RFC is a corporation organized, authorized, or existing under the laws of any foreign country,
engaged in trade or business within the Philippines (NIRC, Sec. 28 [A][1]).
NOTE: The general rule is that RFC shall be liable for a 30% income tax on their income from within the
Philippines, except for resident foreign corporations that are international carriers which shall be taxed
at 2 ½% on their Gross Philippine Billings.
Outline of taxes imposed on RFC
1. NCIT – 30% of taxable income from sources within the Philippines (NIRC, Sec. 28 [A])
2. MCIT – 2% of gross income, if MCIT applies
3. GIT (Optional corporate income Tax) - 15% of gross income, if qualified
4. Final tax on passive income
5. Interest from deposits and yields and royalties
6. Capital gains from sale of shares not traded in the stock exchange
7. Income derived under the Expanded Foreign Currency Deposit System
8. Inter-corporate dividends
9. Branch profit remittance tax

REGULAR TAX

Normal corporate income tax (NCIT) or Regular Tax

An income tax of thirty percent (30%) shall be imposed upon the taxable income derived during the
tacxable year from all sources within and without the Philippines for DC while from all sources within
the Philippines for RFC.

Illustration:
Gross Sales
Less: Sales Returns/Allowances/Discounts
Cost of Goods Sold/Cost of Services
Gross Income
Less: Allowable Deductions________________
Taxable Income
x 30%________________________________________
NCIT due

Gross Income
It includes all items enumerated under Sec. 32 (A) of the NIRC, except income exempt from income tax
and income subject to final withholding tax (R.R. 12-2007).

OPTIONAL GROSS INCOME TAX (OPTIONAL CORPORATE INCOME TAX)

The President, upon the recommendation of the Secretary of Finance may, effective January 1,
2000, allow domestic corporations the option to be taxed at 15% of gross income, subject to the
following conditions:
1. A tax effort ratio of 20% of GNP;
2. A ratio of 40% of income tax collection to total tax revenue;
3. A VAT tax effort of 4% of GNP;
4. A 0.9% ratio of Consolidated Public Sector Financial Position to GNP.

MINIMUM CORPORATE INCOME TAX

Concept and rationale of MCIT

MCIT is a new concept introduced by R.A. 8424 to the Philippine taxation system. It came about as a
result of the perceived inadequacy of the self-assessment system in capturing the true income of
corporations.
Congress intended to put a stop to the practice of corporations which, while having large turnovers,
report minimal or negative net income resulting in minimal or zero income taxes year in and year
out, through under-declaration of income or over-deduction of expenses otherwise called tax
shelters. The MCIT serves to put a cap on such tax shelters.
As a tax on gross income, it prevents tax evasion and minimizes tax avoidance schemes achieved
through sophisticated and artful manipulations of deductions and other stratagems. Since the tax base
was broader, the tax rate was lowered (Chamber of Real Estate and Builders’ Association, Inc. v. Hon.
Executive Secretary, G.R. No. 160756, March 9, 2010).

Nature of MCIT
The MCIT is equal to 2% of the gross income of the corporation at the end of the taxable quarter,
except income exempt from income tax and income subject to final withholding tax.
Being a minimum income tax, a corporation should pay the MCIT whenever its normal corporate
income tax (NCIT) is lower than the MCIT, or when the firm reports a net loss in its tax return.
Conversely, the NCIT is paid when it is higher than the MCIT (J., Dimaamapo, 2015).
Therefore, the taxable due for the taxable year will be NCIT (30% of taxable income) or MCIT (2% of
gross income), whichever is HIGHER.

Illustration:
1) A domestic corporation in its 4th year of operations had a gross income of ₱300,000 and net
taxable income of ₱100,000. How much is the income tax due for the year?
MCIT (₱300,000 x 2%) ₱ 6,000
NCIT (₱100,000 x 30%) ₱30,000
Income tax due – NCIT ₱30,000
(whichever is higher)
2) A domestic corporation in its 4th year of operations had a gross income of ₱400,000 and net
taxable income of ₱20,000. How much is the income tax due for the year?
MCIT (₱400,000 x 2%) ₱8,000
NCIT (₱20,000 x 30%) ₱6,000
Income tax due – MCIT ₱8,000
(whichever is higher)

The distinctions between regular corporate income tax and the minimum corporate income tax are
the following:
1. As to taxpayer: Regular corporate income tax applies to all corporate taxpayers while minimum
corporate income tax applies to domestic corporations and resident foreign corporations.
2. As to tax rate: Regular corporate income tax is 30% while minimum corporate income tax is 2%.
3. As to tax base: Regular corporate income tax is based on the net taxable income while minimum
corporate income tax is based on gross income.
4. As to period of applicability: Regular corporate income tax is applicable once the corporation
commenced its business operation, while minimum corporate income tax is applicable beginning on
the 4th taxable year following the commencement of business operations.
Suspension of the imposition of MCIT
Since certain businesses may be incurring genuine repeated losses, the law authorizes the Secretary
of Finance, upon recommendation of the BIR, to suspend the imposition of MCIT if a corporation
suffers losses due to any of the following:
1. Prolonged Labor Dispute – losses arising from a strike staged by the employees which lasted for
more than 6 months within a taxable period and which has caused the temporary shutdown of
business operations;
2. Force Majeure – a cause due to an irresistible force as by ‘Act of God’ like lightning, earthquake,
storm, flood and the like, and shall also include armed conflicts like war or insurgency;
3. Legitimate Business Reverses – include substantial losses due to fire, theft or embezzlement or for
other economic reason, as determined by the Secretary of Finance (NIRC, Sec. 27 [E][3]; RR. No. 9-98,
Sec. 2.27 [E] [4][b,c,d]).

BRANCH PROFIT REMITTANCE TAX

Any profit remitted by branch office of a multinational corporation to its head office is subject to 15%
final tax based on total profits applied or earmarked for remittance without deduction for the tax
component. A branch is classified as a resident foreign corporation. As such, it is subject to income tax at
the rate of 30% on its net income derived within the Philippines. Such income items include interest,
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.

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. 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 the business activity in which the branch is
engaged. The 15% final tax should exclude profits on activities registered with PEZA (Tabag, 2015).

INCOME TAX ON NON-RESIDENT FOREIGN CORPORATIONS

A foreign corporation not engaged in trade or business in the Philippines shall pay a tax equal to
30% of the gross income during such taxable year from all sources within the Philippines except
capital gains from sale of shares of stock not traded in the stock exchange (NIRC, Sec. 28 [B][1]).
Outline of taxes imposed on a Non-Resident Foreign Corporation (NRFC):
1. NCIT – 30% on gross income from sources within the Philippines (NIRC, Sec. 28 [B])
2. Non-resident Cinematographic Film owner, lessor or distributor – 25% of its gross income from all
sources within the Philippines
3. Non-resident owner or lessor of vessels chartered by Philippine nationals – 4.5% of gross rentals,
lease, or charter fees
4. Non-resident owner or lessor of aircraft, machineries and other equipment – 7.5% of gross rentals
or fees
5. Interest on foreign loans – 20% of interest
6. Intercorporate Dividends – 15% of dividends received from Domestic Corporation
7. Capital Gains from Sale of Shares of Stock not traded in the Stock Exchange – 5-10% of capital gains
NOTE: A casual activity in the Philippines by a foreign corporation does not amount to engaging in
trade or business in the Philippines for income tax purposes. For such a foreign corporation to be
considered engaged in trade or business, business transactions must be continuous (N.V. Reederij v.
CIR, G.R. No. L-46029, June 23, 1998).

INCOME TAX ON SPECIAL CORPORATIONS

The following are special corporations under the NIRC:
1. Domestic Corporation
i. Proprietary educational institutions and hospital
ii. Non-profit hospital
iii. Government-owned or controlled corporations, agencies or instrumentalities
iv. Depository banks (foreign currency deposit units).

2. Resident Foreign Corporation

i. International carrier doing business in the Philippines.
ii. Off-shore banking units.
iii. Resident depository banks (foreign currency deposit units).
iv. Regional or Area Headquarters and Regional Operating Headquarters of Multinational
Companies

PROPRIETARY EDUCATIONAL INSTITUTION AND HOSPITAL

Proprietary educational institution
It is any private school maintained and administered by private individuals or groups with an
issued permit to operate from the Department of Education, Culture and Sports (DECS), or the
Commission on Higher Education (CHED), or the Technical Education and Skills Development
Authority (TESDA), as the case may be, in accordance with existing laws and regulations.
They are not tax-exempt but are rather taxed at a preferential rate of 10% on their taxable income,
except on certain passive incomes which are subject to final tax.

10% preferential rate

Section 27(B) of the NIRC does not remove the income tax exemption of proprietary non-profit
hospitals as charitable institutions under Section 30(E) and (G). The effect of the introduction of
Section 27(B) is to subject the taxable income of two specific institutions, namely, proprietary non-
profit educational institutions and proprietary non-profit hospitals, among institutions covered by
Section 30, to the 10% preferential rate under Section 27(B) instead of the ordinary 30% corporate
rate under the last paragraph of Section 30 in relation to Section 27(A)(1).
The only qualifications for hospitals are that they must be (1) proprietary; and (2) non-profit.
“Proprietary” means private, following the definition of a “proprietary educational institution” as
“any private school maintained and administered by private individuals or groups” with a
government permit. “Non-profit” means no net income or asset accrues to or benefits any member
or specific person, with all the net income or asset devoted to the institution’s purposes and all its
activities conducted not for profit (CIR v. St. Luke’s Medical Center, Inc., G.R. No. 195909, 195960,
September 26, 2012).

Predominance test
If the gross income from unrelated trade/business/other activity exceeds 50% of the total gross
income from all sources, the entire taxable income of the proprietary educational institution shall
be subject to the regular corporate tax rate of 30%.
Unrelated trade/business/activity of a proprietary educational institution
The trade, business or other activity of a proprietary educational institution is unrelated when the
conduct of which is not substantially related to the exercise or performance by such educational
institution of its primary purpose or function.
NOTE: Related activities include auxiliary activities such as school-owned canteen, cafeteria,
dormitory and bookstore within the school premises (BIR Ruling 237-87, December 16, 1987).

Difference in the tax treatment between a proprietary educational institution and a non-
stock non-profit educational institution
Proprietary educational institutions which are non-profit shall pay a tax of 10% on their taxable
income, except on certain passive incomes which are subject to final tax: Provided, that if the gross
income from unrelated trade, business or other activity exceeds 50% of the total gross income
derived from all sources, the entire taxable income of the proprietary educational institution shall
be subject to the regular corporate tax rate of 30% (NIRC, Sec. 27 [B]).
A non-stock non-profit educational institution is exempt from tax on its revenues and assets actually,
directly and exclusively used for educational purposes (NIRC, Sec. 30).

NON-PROFIT HOSPITALS
A nonstock-nonprofit hospital that is operated for charitable and social welfare purposes is exempt
from income tax under Section 30 (E) and (G) of the NIRC. However, as provided in St. Luke's
Medical Center, Inc. vs CIR (2011), the nonstock-nonprofit 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; and
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.

Tax on Proprietary Non-Profit Educational Institutions and Non-Profit Hospitals

30%
Private, non-profit hospitals and
educational institutions whose
gross income from unrelated
trade, business or other activity
exceeds 50% of total gross income
from all sources.
Hospitals and educational
institutions claiming to be
proprietary non-profit but do not
meet the definition thereof.
10%
Private, non-profit hospitals and
educational institutions whose
gross income from unrelated
trade, business or other activity
does not exceed 50% of total
gross income from all sources.
EXEMPT
Organized and operated
exclusively for charitable
purposes and 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.

GOVERNMENT OWNED OR CONTROLLED CORPORATIONS

GR: All corporations owned or controlled by the government are taxed in the same manner that
domestic private corporations are taxed.
XPNs:
2. Government Service Insurance System (GSIS)
3. Social Security System (SSS)
4. Philippine Health Insurance Corporation (PHIC)
5. Philippine Charity Sweepstakes Office (PCSO)
6. Local Water District (LWD) (R.A. 10026 amending Section 27[c] of NIRC)

Under Sec. 32 (B)(7) of the NIRC, even if the GOCC is not one of those enumerated under Sec. 27 (C), it
may still be exempt if it is performing governmental function. Thus, income derived from any public
utility or from the exercise of any essential government function accruing to the Government of the
Philippines or to any political subdivision shall be exempt from income tax.

NOTE: PAGCOR is no longer exempt from corporate income tax as it has been effectively omitted from
the list of GOCCs that are exempt from the payment of the income tax. Nevertheless, PAGCOR’s tax
privilege of paying five percent (5%) franchise tax in lieu of all other taxes with respect to its income
from gaming operations, pursuant to P.D. 1869, as amended, is not repealed or amended by Section 1(c)
of R.A. No. 9337. Also, PAGCOR’S income from gaming operations is subject to the five percent (5%)
franchise tax only and its income from other related services is subject to corporate income tax
(PAGCOR v. BIR, G.R. No. 215427, December 10, 2014).

DEPOSITORY BANKS (FOREIGN CURRENCY DEPOSIT UNITS)

Income derived by a depository bank under the expanded foreign currency deposit system from foreign
currency transactions with local commercial banks, including branches of foreign banks that may be
authorized by the Bangko Sentral ng Pilipinas (BSP) to transact business with foreign currency depository
system units and other depository banks under the expanded foreign currency deposit system, including
interest income from foreign currency loans granted by such depository banks under said expanded
foreign currency deposit system to residents, shall be subject to a final income tax at the rate of ten
percent (10%) of such income.

INTERNATIONAL CARRIER DOING BUSINESS IN THE PHILIPPINES

An international carrier refers to foreign airline corporation doing business in the Philippines which has
landing rights in any Philippine port to perform international air transportation services or flight
operations anywhere in the world. They shall be taxed at 2.5% on their Gross Philippine Billings (GPB)
unless it is subect to preferential rate or exempt from tax on the basis of applicable tax
treaty/international agreement to ehich the Philippines is a signatory or on the basis of reciprocity, such
that an international carrier, whose home country grants income tax exemption to Philippine carries,
shall likewise be exempt from income tax imposed under the NIRC.

Reciprocity may be invoked by an international carrier as basis for GBP Tax exemption when its
Home Country grants income tax exemption to Philippine carriers.
The domestic law of the Home Country granting exemption shall cover income taxes and shall not
refer to other types of taxes that may be imposed by the relevant taxing jurisdiction. The fact that
the tax laws of the Home Country provide for exemption from business tax, such as gross sales tax,
in respect of the operations of Philippine carriers shall not be considered as valid and sufficient
basis for exempting an international carrier from Philippine income tax on account of reciprocity.
Reciprocity requires that Philippine carriers operating in the Home Country of an international
carrier are actually enjoying the income tax exemption (RR 15-2013).

OFFSHORE BANKING UNITS

OBU is a branch, subsidiary or affiliate or a foreign banking corporation located in an Offshore
Financial Center which is duly authorized by the BSPto transact offshore baking business in the
Philippines. OBUs are allowed to provide all traditional banking services to non-residents in any
currency other than hilippine national urrency. OBUs are forebidden to make any transactions in
Philippine Peso. Banking transactions to residents are oimited and restricted (Tabag, 2015).
Income Exempt from Tax
Income derived from
1) Nonresidents
2) Foreign currency transactions with local commercial banks,
3) Foreign currency transactions with branches of foreign banks authorized by the BSP
4) Foreign currency transactions with OBUs in the Philippines
Income subject to 10% Final Tax
Interest income derived from foreign currency loans granted to residents other han OBUs or local
commercial banks (Ibid).

RESIDENT DEPOSITORY BANKS (FOREIGN CURRENCY DEPOSIT UNITS)

Income derived by a depository bank under the expanded foreign currency deposit system from foreign
currency transactions with local commercial banks, including branches of foreign banks that may be
authorized by the Bangko Sentral ng Pilipinas (BSP) to transact business with foreign currency depository
system units and other depository banks under the expanded foreign currency deposit system, including
interest income from foreign currency loans granted by such depository banks under said expanded
foreign currency deposit system to residents, shall be subject to a final income tax at the rate of ten
percent (10%) of such income.

ROHQ AND RHQ OF MULTINATIONAL COMPANIES

Income tax rate of ROHQ is 10% of net income. ROHQ is a branch established in the Philippines
which is engaged in any of the following qualifying services:
- General administration and planning;
- Business planning and coordination;
- Sourcing/procurement of raw materials and components;
- Corporate finance advisory services;
- Marketing control and sales promotion;
- Training and personnel management;
- Logistics services;
- Research and development services, and product development;
- Technical support and maintenance;
- Data processing and communication; and
- Business development.
RHQ is a tax exempt entity. It is a branch establsihed in the Phiippines and which headquarters do
not earn or derived income from the Philippines and which act as supervisory, communications and
coordinating center for its affiliates, subsidiaries, or branches in the Asia-Pacific region and other
foreign markets (Tabag, 2015).

IMPROPERLY ACCUMULATED EARNINGS OF CORPORATIONS

Domestic corporations and closely-held corporations are subject to 10% improperly
accumulated earnings tax on their improperly accumulated earnings (NIRC, Sec. 29 [A]).

Closely-held Corporations
These are corporations, at least 50% in value of the outstanding capital stock of which 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 not more than 20 individuals (R.R. 2-2001, Sec. 4).
NOTE: Corporations outside the above definition are considered publicly-held corporations.
IAET not applicable to the following:
1. Publicly-held corporations (NIRC, Sec. 29 [B][2])
2. Banks and other non-bank financial intermediaries
3. Insurance companies
4. Publicly-held corporations
5. Taxable partnerships
6. General professional partnerships
7. Non-taxable joint ventures

8. Enterprises duly registered with the Philippine Economic Zone Authority under R.A. 7916, and
enterprises registered pursuant to the Bases Conversion and Development Act of 1992 under R.A.
7227, as well as other enterprises duly registered under special economic zones declared by law
which enjoy payment of special tax rate on their registered operations or activities in lieu of other
taxes, national or local (R.R. 2-2001, Sec. 4)

EXEMPTIONS FROM TAX ON CORPORATIONS

The following organizations shall not be taxed in respect to income received by them as such:
(NIRC, Sec. 30)
1. Labor, agricultural or horticultural organization, not organized principally for profit;
a. Provincial fairs and like associations of a quasi-public character designed to encourage
development of better agricultural and horticultural products through a system of awards, prizes
and premiums, and whose income derived from gate receipts, entry fees, donations, etc. is used
exclusively to meet necessary expenses of upkeep and operation are thus exempt.
b. The holding of periodical race meets by associations, the profits from which inure to the benefit
of their stockholder are not tax exempt. Similarly, corporations engaged in growing agricultural or
horticultural products or raising livestock or similar products for profits are subject to tax (R.R. No.
2, Sec. 25).

2. Mutual savings banks and cooperative banks, either domestic or foreign, provided that:
a. No capital represented by shares;
b. Earnings, less only the expenses of operating, are distributable wholly among the depositors;
c. It is operated for mutual purposes and without profit
NOTE: If the deposits are made compulsory under contract between the bank and the depositors
and is operated for speculation rather for savings, the bank is not qualified as a mutual savings
bank.

3. Fraternal Beneficiary Society, Order or Association, provided that:

a. It must be operated under lodge system or for the exclusive benefit of the members of society,
with parent and local organizations which are active;
b. There must be an established system of payment to its members or their dependents of life, sick,
accident or other benefits;
c. No part of the net income inures to the benefit of the stockholders/members

4. Cemetery Companies, provided that:

a. It must be owned and operated exclusively for the benefit of their owners;
b. It is not operated for profit.

5. Religious, Charitable, Scientific, Athletic or Cultural Corporations, provided that:

a. It is organized and operated for one or more specified purposes;
b. No part of the net income inures to the benefit of the any private stockholder or individual

St. Luke’s Medical Center, Inc. fails to meet an indispensable requirement under Section 30(E) –
operated exclusively for charitable purposes – to be completely tax exempt from all its income. It
admitted paying patients from which profit is derived. (CIR v. St. Luke’s Medical Center, Inc., 682
SCRA 66)

6. Business, Chamber of Commerce, or Board of Trade, provided that:

a. It is an association of persons having some common business interest;
b. Its activities are limited to work for such common interests;
c. Not engaged in a regular business for profit;
d. No part of the net income inures to the benefit of any private stockholder or individual

7. Civic league, provided that:

a. It is not organized for profit but operated exclusively for purposes beneficial to the community as
a whole. In general, organizations engaged in promoting the welfare of mankind;
b. Sworn affidavit filed with the BIR showing the following:
i. Character of the league or organization
ii. Purpose for which it was organized

iii. Actual activities

iv. Sources of income and disposition thereof, and
v. All facts relating to the operation of the organization which affects it right to exemption.
vi. The copy of articles of incorporation, by laws and financial statements should be attached to the
sworn affidavit

8. Non-stock, Non-Profit Educational Institutions;

9. Government Educational Institutions;
10. Mutual Fire Insurance Companies and like Organizations;
Requisites for exemption:
a. Income is derived solely from assessments, dues and fees collected from members;
b. Fees collected from members are for the sole purpose of meeting its expenses

To be exempt from income tax, Sec. 30(E) of the NIRC requires that a charitable institution must be
“organized and operated exclusively” for charitable purposes. Likewise, to be exempt from income
tax, Sec. 30 (G) requires that the institution be “operated exclusively” for social welfare (CIR v. St.
Luke’s, G.R. Nos. 195909 and 195960, September 26, 2012).
11. Farmers, Fruit Growers or like Associations;

Requisites for exemption:

a. Formed and organized as sales agent for the purpose of marketing the product of its members
b. No net income to the members
c. Proceeds of the sale shall be turned over to them less necessary selling expenses on the basis of
the quantity of goods produced by them

The income of whatever kind and character of the foregoing organizations from any of their
properties, real or personal, or from any of their activities conducted for profit regardless of the
disposition made of such income, shall be subject to tax imposed under the NIRC.
TAX ON GENERAL PARTNERSHIPS
Classifications of partnerships for tax purposes
1. General professional partnerships
2. Business partnership

GENERAL PROFESSIONAL PARTNERSHIP BUSINESS PARTNERSHIP/

(GPP)
Formed by persons for the sole purpose of
exercising their common profession, no part of
income of which is derived from engaging in any
trade or business
NOT a taxable entity
The distributive share of the partners in the net
income is reportable and taxable as part of the
partner’s gross income subject to the scheduled
rates
NO need to file an income tax return but an
information return
NOT subject to double taxation being taxed only
once
GENERAL PARTNERSHIP
Formed by persons for the sole purpose of engaging in any trade
or business
Considered as a corporation hence a taxable entity and its income
is taxable as such
The share of an individual in the distributable net income after
tax of a general partnership is subject to a final tax
Must file an income tax return
Taxed once on its income and again when the share in the profits
of the partners is distributed; then taxed as dividends

TAX ON GENERAL PROFESSIONAL PARTNERSHIPS

GPP not subject to income tax
GPP are not subject to income tax but are required to file information returns for its income for the
purpose of furnishing information as to the share in the net income of the partnership, which each
partner should include in his individual return. Partners shall be liable for income tax in their
separate and individual capacities.
GPP is only required to file a return for its income, except income exempt under Sec. 32 (B) of the
NIRC, setting forth the items of gross income and of deductions allowed, and the names, Taxpayer
Identification Numbers (TIN), addresses and shares of each of the partners (NIRC, Sec. 55).
Partners shall nonetheless be liable for income tax in their separate and individual capacities.

ESTATES AND TRUSTS

Estate
An estate refers to the mass of properties left by a deceased person.
NOTE: The income that is subject to income taxation is the “income received by estates of the
deceased persons during the period of administration or settlement of the estate (NIRC, Sec.
60(A)(3)).
Income taxation for estates
GR: Subject to income tax in the same manner as individuals. The tax imposed by Title II, Tax on
Income, of the NIRC of 1997, upon individuals shall also apply to income of estates and trusts (NIRC,
Sec. 60 [A]).
XPN:
1. Personal exemption is limited only to P20,000.
2. No additional exemption is allowed.
3. Distribution to the heirs during the taxable year of estate income is deductible from the taxable
income of the estate (BIR Ruling 233-86).
NOTE: The distributed income shall form part of the respective heir’s taxable income. Deduction is
allowed only when the distribution is made during the taxable year when the income is earned.

Trusts
A trust is a right to the property, whether real or personal, held by one person for the benefit of
another. It is:
A confidence given by a person, the grantor (creator);
Reposed in one person who is called fiduciary (trustee);
For the benefit of another who is called the cestui que trust (beneficiary);
Regarding property given by the grantor (creator) to the fiduciary (trustee) for the benefit of
the cestui que trust (beneficiary).

Classifications of trust for tax purposes [TIP]

1. Taxable and tax-exempt trust
2. Irrevocable trust and revocable trust
3. Trust administered in the Philippines and trust administered in a foreign country

Income taxation for trusts

GR: Subject to income tax in the same manner as individuals. The tax imposed by Title II, Tax on
Income, of the NIRC of 1997, upon individuals shall also apply to income of estates and trusts (NIRC,
Sec. 60 [A]).
XPNs:
1. Personal exemption is limited to only ₱20,000 (NIRC, Sec. 62).
2. No additional exemption is allowed.
3. Distribution to the beneficiaries during the taxable year of trust income is deductible from the
taxable income of the trust. Deduction is allowed only when the distribution is made during the
taxable year when the income is earned (NIRC, Sec. 61 [A]).

NOTE: However, such deduction shall be included in computing the taxable income of the
beneficiaries, whether distributed to them or not.

TAX ON CO-OWNERSHIPS
As a rule, co-ownership is tax exempt. It becomes taxable if it is converted into an unregistered
partnership. It is converted into partnership if the properties and income are used as common fund
with the intention to produce profits. If after partition, the shares of the heirs are held under a
single management for profit making, unregistered partnership is formed (Ona v. CIR, 45 SCRA 74).

A joint purchase of land, by two, does not constitute a co-partnership in respect thereto, nor does
an agreement to share the profits and losses on the sale of land create a partnership; the parties are
only tenants in common. Where the transactions are isolated, in the absence of other circumstances
showing a contrary intention, the case can only give rise to a co-ownership (Pascual v. CIR, 166 SCRA
560).

Co-heirs who own inherited properties which produce income should not automatically be considered
as partners of an unregistered partnership or corporation subject to income tax. REASONS: Sharing
of gross returns does not by itself establish a partnership; there must be an unmistakable intention
to form a partnership or joint venture. There is no contribution or investment of additional capital
to increase or expand the inherited properties, merely continuing the dedication of the property to
the use to which it had not been put by their forbears (Obillos Jr. v. CIR, 139 SCRA 436).
Co-ownership is not taxable if the activities of the co-owners are limited to the preservation of the
property and the collection of income. In such case, the co-owners shall be taxed individually on
their distributive share in the income of the co-ownership.

Co-owners investing the income in a business for profit

If the co-owners invest the income in a business for profit they would constitute themselves into a
partnership and such shall be taxable as a corporation.

TAX ON JOINT VENTURES AND CONSORTIUMS

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. Joint
venture or consortium, in general, is taxable as corporation (Tabag, 2015).
However, a joint venture or consortium formed for the purpose of undertaking construction
projects is not considered as corporation under Section 22 of the NIRC provided:
a. The joint venture was formed for the purpose of undertaking a construction project; and
b. Should involve joining/pooling of resources by licensed local contracts; that is, licensed as
general contactor the Philippine Contractors Accreditation Board (PCAB) of the Department of
Trade and Industry (DTI);
c. The local contractors are engaged in construction business; and
d. The joint venture itself must likewise be duly licensed as such by the Philippines Contractors
Accreditation Board (PCAB) of the Department of trade Industry (DTI).

Tax treatment of the co-venturer’s share in the joint venture profit

Corporate co-venturer
Taxable Joint The respective share in the joint venture
Venture profit is considered as dividends income
received by a DC from a DC. Hence, it shall
be treated as inter-corporate dividend
which is tax exempt.
Non-taxable The respective share in the joint venture
Joint Venture profit shall be included in the computation
of the corporate venturer’s taxable income
subject to normal corporate income tax of
30%.
Individual co-venturer
The respective share in the joint venture profit
is considered as dividends income received by
an individual taxpayer from a DC.
Consequently, it shall be subject to 10% final
withholding tax.
The respective share in the joint venture profit
shall be subject to creditable withholding tax.
Consequently, the same be included in the
computation of the individual taxpayer’s
taxable income.

WITHHOLDING TAX
Concept of Withholding Taxes
Taxes imposed or prescribed by the NIRC are to be deducted and withheld by the payor-
corporations and/or persons for the former to pay the same directly to the BIR. Hence, the taxes are
collected practically at the same time the transaction is made or when the taxable transaction
occurs. It is taxation at source (Domondon, 2013).

The withholding tax system is embedded in the income tax system in the Philippines to ease the
administration and collection of taxes. It is not a “separate” kind of tax as withholding tax is simply
a way of collecting tax from the source (Ingles, 2015).
Importance of Withholding Taxes
In the operation of the withholding tax system, the payee is the taxpayer– the person on whom the
tax is imposed, while the payor, a separate entity, acts no more than an agent of the government for
the collection of the tax in order to ensure its payment.

Creditable withholding tax (CWT)

- Taxes withheld on certain income payments are intended to equal or at least approximate the tax
due of the apyee on said income;
- Creditable tax must be withheld at source, but shoud still be included in the tax return of the
recipient;
- The liability to withhold arises upon the accrual, not upon the actual remittance. The purpose of
the withholding tax is to compel the agent to withhold under all circumstances (Ingles, 2015).

CWT FWT
As to income Compensation Income Passive incomes
subject of Professional/talent fees Fringe benefits
the system Rentals
Cinematographic film rentals and other
payments
Income payments to certain contractors
As to The income is required to be included in the The recipient may not report the said
whether or gross income in ITR. income in his gross income because the tax
not income withheld constitutes final and full
should be settlement of the tax liability.
reported as
part of the
gross
income
As to the The tax withheld can be claimed as a The tax withheld
effect of