Module 4

• According to Section 22 (B) of the NIRC

  • The term 'corporation' shall include one person corporations, partnerships, no matter how created or organized, joint-stock companies, joint accounts, associations, or insurance companies, but does not include general professional partnerships and a joint venture or consortium formed for the purpose of undertaking construction projects or engaging in petroleum, coal, geothermal and other energy operations pursuant to an operating or consortium agreement under a service contract with the Government.
• According to Section 22 (B) of the NIRC

  'General professional partnerships' are partnerships formed by person for the sole purpose of exercising their common profession, no part of the income of which is derived from engaging in any trade or business.
• Article 1767 of the Civil Code states that by the contract of partnerships, two or more persons bind themselves to contribute money, property, or industry to a common fund with the intention of dividing the profits among themselves.
• The definition of a corporation in the Revised Corporation Code is found in section 2. It says that a corporation is an artificial being created by the operation of law having the right of succession and the powers, attributes, and properties expressly authorized by law or incidental to its existence.
• General Professional Partnership

  • Formed by persons who wish to practice a profession where no part of the income will be used to engage in trade or business
  • The Partners in General Professional Partnerships are individually liable for filing their own separate income tax returns
  • Example: Law firms, Accounting firms
• General Partnership

  • Formed by persons who wish to engage in trade or business
  • For income tax purposes, they are considered as corporations
  • Partners are considered as shareholders, and the profit that they receive from the partnership is treated like dividends
• Domestic Corporations - those incorporated under our laws
• Foreign Corporations - those incorporated under the laws of their respective countries, and they are in turn divided into

  • Resident - those engaged in trade or business within the Philippines
  • Non-resident - those who are not so engaged
• Domestic Corporation Tax Liability:

  • taxed for their income from all sources within and outside of the Philippines.
• Resident Foreign Corporation and Non-resident foreign Corporation Tax Liability:

  • taxed for their income from sources within the Philippines
• Gross Income or Gross taxable income is the total income of a taxpayer, from whatever source, that is subject to tax.
• Income is all wealth that flows into the taxpayer other than return of capital. In the language of the supreme court, capital is the tree while income is the fruit.
• Taxable income is comprised of the relevant items in the gross income specified in the NIRC, less the deductions or exemptions
• Requisites for income to be taxable:

  • There must be gain,
  • The gain must be realized or received,
  • The gain must not be excluded by law from taxation.
• What are included in gross income? (CGGIRDAPPP)

  • Compensation for services in whatever form paid, including, but not limited to fees, salaries, wages, commissions, and similar items;
  • Gross income derived from the conduct of trade or business or the exercise of a profession;
  • Gains derived from dealings in property;
  • Interests;
  • Rents;
  • Royalties;
  • Dividends;
  • Annuities;
  • Prizes and winnings;
  • Pensions; and
  • Partner's distributive share from the net income of the general professional partnership
• Exclusions from Gross Income: (LAGCIRM)

  • Life Insurance
  • Amount Received by Insured as Return of Premium
  • Gifts, Bequests, and Devises
  • Compensation for Injuries or Sickness
  • Income Exempt under Treaty
  • Retirement Benefits, Pensions, Gratuities, etc.
  • Miscellaneous Items
• Miscellaneous Items are as follows:

  • Income Derived by Foreign Government.
  • Income Derived by the Government or its Political Subdivisions.
  • Prizes and Awards.
  • Prizes and Awards in Sports Competitions.
  • 13th Month Pay and Other Benefits.
  • GSIS, SSS, Medicare and Other Contributions. - GSIS, SSS, Medicare and Pag-Ibig contributions, and union dues of individuals.
  • Gains from Sale of Bonds, Debentures or other Certificate of Indebtedness.
  • Gains from Redemption of Shares in Mutual Fund
  • Income derived from the sale of gold pursuant to RA 7076
• Deductions from the Gross Income:

  • Expenses. - Ordinary and Necessary Trade, Business or Professional Expenses.
  • Interest.
  • Taxes.
  • Losses.
  • Bad Debts.
  • Depreciation.
  • Depletion of Oil and Gas Wells and Mines.
  • Charitable and Other Contributions.
  • Research and Development.
  • Pension Trusts.
  • Premium payments on Health and/or Hospitalization Insurance of an individual taxpayer
• Optional Standard Deduction

  • In the case of a corporation subject to tax under Sections 27(A) and 28(A)(1), it may elect a standard deduction in an amount not exceeding forty percent of its gross income as defined in Section 32 of this Code.
• Other allowable deductions under Special laws:

  • RA 9994 and RA 7227 - discounts granted to senior citizens and PWDs
  • RA 8525 - donations for the adopt a school program
• Net Operating Loss Carry-Over (NOLCO):

  • The net operating loss of the business or enterprise for any taxable year immediately preceding the current taxable year, which had not been previously offset as deduction from gross income shall be carried over as a deduction from gross income for the next three consecutive taxable years immediately following the year of such loss.
• Items not Deductible:

  • Personal, living or family expenses
  • Any amount paid out for new buildings or for permanent improvements, or betterments made to increase the value of any property or estate
  • Any amount expended in restoring property
  • Premiums paid on any life insurance policy covering the life of any officer or employee
  • Losses from Sales or Exchange of Property
• Taxable Income Gutierrez v Collector

  • All income not expressly excluded or exempted from the class of taxable income, irrespective of the voluntary or involuntary action of the taxpayer in producing the said income, and regardless of the source of the income, is taxable.
• Income Tax Rate of Corporations:

  • Rates: In general 25%
  • Exception: corporations with net taxable income not exceeding five million pesos and with total assets not exceeding one hundred million pesos are taxed at a rate of 20%
• Proprietary Educational Institutions and Hospitals which are nonprofit

  • 10% Income Tax rate
  • 1% during the Pandemic (July 1, 2020 to June 30,2023)
• How to Compute tax due:

  • Net Taxable Income x Applicable tax rate = tax due
• Tax Liability of Domestic Corporations

  • taxed for their income from all sources within and outside of the Philippines
• Tax Liability of Resident Foreign Corporation and Non-resident foreign corporation

  • taxed for their income from sources within the Philippines
• Tax exempt corporations

  • Labor, agricultural or horticultural organization
  • Mutual savings bank, cooperative bank
  • A beneficiary society, order, or association
  • Cemetery company owned and operated exclusively for the benefit of its members
  • Non-stock corporations or associations organized and operated exclusively for religious, charitable, scientific, athletic, or cultural purposes, or for the rehabilitation of veterans
  • Business league chamber of commerce, or board of trade
  • Civic League or organization
  • A non-stock and non-profit educational institution
  • Government educational institution
  • Farmers' or other mutual typhoon or fire insurance company, mutual ditch or irrigation company, mutual or cooperative telephone company, or like organization of a purely local character
  • Farmers', fruit growers', or like association
• Take note however that their properties or activities conducted for profit regardless of the disposition of such income, shall be subject to tax imposed under this Code.
• Minimum corporate income tax or MCIT is applicable on the 4th taxable year.
• MCIT of 2% of the gross income as of the end of taxable year is imposed on a corporation under title 2 of the tax code as amended. It is applicable on the 4th taxable year immediately following the taxable year in which such corporation commenced its business operations.
• MCIT is compared with the regular income tax, whichever is higher, is the tax to be paid
• MCIT is applicable:

  • if the corporation has zero taxable income
  • or it has negative taxable income or
  • whenever the amount of the MCIT is greater than the regular corporate income tax due from the corporation
• Carry forward provision under the MCIT

  • Any excess of the MCIT over the normal income tax may be carried forward and credited against the normal income tax for the three immediately succeeding taxable years.
• MCIT:

  • Domestic Corporation - 2% of gross income within and outside the Philippines
  • Resident Foreign Corporation - 2% of gross income from within the Philippines
  • Non-Resident Foreign Corporation - Not applicable
• Given that EdVal, Inc. has the following data at the end of the taxable year:

  • Gross Income, Philippines - 1,000,000
  • Expenses, Philippines - 600,000
  • Gross Income, Japan - 500,000
  • Expenses, Japan - 400,000
  • Interest on Bank Deposit - 45,000

  Determine the income tax due if the corporation is a domestic corporation with the total assets less than one hundred million.

  100,000
• Given that EdVal, Inc. has the following data at the end of the taxable year:

  • Gross Income, Philippines - 1,000,000
  • Expenses, Philippines - 600,000
  • Gross Income, Japan - 500,000
  • Expenses, Japan - 400,000
  • Interest on Bank Deposit - 45,000

  Determine the income tax due if the corporation is a resident foreign corporation

  100,000
• Given that EdVal, Inc. has the following data at the end of the taxable year:

  • Gross Income, Philippines - 1,000,000
  • Expenses, Philippines - 600,000
  • Gross Income, Japan - 500,000
  • Expenses, Japan - 400,000
  • Interest on Bank Deposit - 45,000

  Determine the income tax due if the corporation is a non-resident foreign corporation.

  261,250
• Given that EdVal, Inc. is on its 5th year of operating a business and it has more than P200M of total assets. It has the following data at the end of the taxable year:

  • Gross Income, Philippines - 1,000,000
  • Expenses, Philippines - 975,000
  • Gross Income, Japan - 500,000
  • Expenses, Japan - 475,000
  • Interest on Bank Deposit - 45,00

  Determine the income tax due if the corporation is a domestic corporation

  MCIT: 30,000

  Regular: 12,500

  Tax due is MCIT