Introduction to Corporations

CORPORATION DEFINED
Table 1: Corporation Defined

National Internal Revenue Code (as

Corporation Code of the Philippines
amended)
The term 'corporation' shall include
partnerships, no matter how created or
organized, joint-stock companies, joint
accounts (cuentas en participacion),
association, or insurance companies, but does
not include general professional partnerships
and a joint venture or consortium formed for
the purpose of undertaking construction
A corporation is an artificial being created projects or engaging in petroleum, coal,
by operation of law having the rights of geothermal and other energy operations
succession and the powers, attributes and pursuant to an operating consortium
properties expressly authorized by law or agreement under a service contract with the
incident to its existence. Government.
 
'General professional partnerships’ are
partnerships formed by persons 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.
 
The Tax Code definition of Corporation is broader as it includes not only the
corporations as defined by the Corporation Code of the Philippines but also:

1. Partnerships
2. Joint-stock Companies
3. Joint accounts
4. Association
5. Insurance Companies, Mutual Fund Companies
6. ROHQ of Multinational Companies
And except for the following:

1. General Professional Partnerships

2. Joint venture or consortium for the purpose of
1. undertaking construction projects pursuant to PD 929; or
 2. engaging in petroleum, coal, geothermal and other energy
operations pursuant to an operating consortium agreement
under a service contract with the Government
Generally, corporations are subject to 30% regular corporate income tax. However,
there are corporations that are exempt from tax or are subject to a lower income tax
rate.
 
 
Tax Exempt Corporations
Section 30 of the Tax Code specified the tax-exempt corporations as follows:

1. Labor, agricultural or horticultural organization not organized principally for profit;

2. Mutual savings bank not having a capital stock represented by shares, and
cooperative bank without capital stock organized and operated for mutual
purposes and without profit;
3. A beneficiary society, order or association, operating for the exclusive benefit of
the members such as a fraternal organization operating under the lodge system,
or mutual aid association or a nonstock corporation organized by employees
providing for the payment of life, sickness, accident, or other benefits exclusively
to the members of such society, order, or association, or nonstock corporation or
their dependents;
4. Cemetery company owned and operated exclusively for the benefit of its
members;
5. Nonstock corporation or association organized and operated exclusively for
religious, charitable, scientific, athletic, or cultural purposes, or for the
rehabilitation of veterans, 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;
6. Business league chamber of commerce, or board of trade, not organized for
profit and no part of the net income of which inures to the benefit of any private
stock-holder, or individual;
7. Civic league or organization not organized for profit but operated exclusively for
the promotion of social welfare;
8. A nonstock and nonprofit educational institution;
9. Government educational institution;
10. 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, the income of which consists solely of
assessments, dues, and fees collected from members for the sole purpose of
meeting its expenses; and
11. Farmers', fruit growers', or like association organized and operated as a sales
agent for the purpose of marketing the products of its members and turning back
to them the proceeds of sales, less the necessary selling expenses on the basis
of the quantity of produce finished by them;
Notwithstanding the provisions in the preceding paragraphs, 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 this Code.
Tax exemptions are strictly construed against the taxpayer. Since the exemption
restricts the collection of taxes which is the main purpose of the government’s power of
taxation, the burden of proof of exemption is with the taxpayer.
To remember the list of tax-exempt corporations easily, it should be noted that there are
two characteristics common among the listed items: the purpose of the organization
(operational test) and the ultimate beneficiary of its services (organizational test).
The Organizational Test suggest that the corporation must not be organize or operated
for the benefit of private interests or individuals such as the incorporators or the
shareholders. The organization must serve a public purpose. Operational Test, on the
other hand, requires that the activities of the corporation or association is exclusively for
the accomplishment of the purpose of its existence as specified in the list. The
corporations specified in Section 30 of the Tax Code must be non-profit.
Exemption of these corporations are not absolute. The exemption only covers the
income derived from the performance of activities to execute its purpose. If the listed
corporations derive income from any of their properties, real or personal, or any activity
conducted for profit, such income should be subject to the corresponding internal
revenue taxes. Purchase of goods or services of these corporations are also subject to
input VAT, and sales of goods and services, if any, are also subject to 12 % output VAT.
Also, the tax exemption does not cover the corporation’s obligation to withheld income
tax from compensation of its employees and income payments to suppliers. The tax-
exempt corporation is still treated as a withholding agent of the government.
 
Types of Corporations
 
There are two types of corporations for tax purpose.
Domestic corporations are corporations created and organized under Philippine laws.
Foreign corporations are corporations organized under the laws of a foreign country.
Resident Foreign Corporations (RFCs) are corporations that are engaged in business in
the Philippines, while Non-Resident Foreign Corporations (NRFCs) are those that are
not engaged in business in the Philippines.
Taxation for Corporations

Applicable Income Tax Rate and Computation of Tax Due

The applicable tax of a corporation depends on the type of the corporation and the
income subject to tax. Like individuals, a corporation’s income – ordinary income,
passive income, and capital gains, are subject to different taxes.
Table 2: Summary of Tax Rate Applicable

Income DC RFC NRFC

Within and
Ordinary Income Within Within
without
     Regular Corporate Income Tax (30% of
Applicable Applicable Applicable
TI); or
     Minimum Corporate Income Tax (2% of
Applicable Applicable N/A
GI)
     Gross Income Tax (15% of GI) Applicable Applicable N/A
Passive Income within subject to Final Tax
     
(Table 5)
Capital Gains subject to CGT (Table 6)      
 
Domestic corporations are subject to income tax on their income derived within and
without the Philippines, while Foreign Corporations are subject to their income derived
within the Philippines only.
As mentioned, corporations are generally taxed at 30%. Regular corporate income tax
(RCIT) of 30% is based on the taxable income computed in Table 3. There are
instances, however, were a corporation may be subject to a lower rate. This is the case
when the corporation is subject to MCIT or GIT, and a special corporation.
MCIT or the Minimum Corporate Income Tax of 2% is tax on the total gross income as
shown in Table 3. This tax is only applicable for DC and RFC beginning the fourth
taxable year immediately following the taxable year in which such corporation
commenced the business operations.
MCIT is imposed whenever:

1. The corporation has zero taxable income;

2. The corporation has negative taxable income; or
 3. Whenever the amount of MCIT is higher than the RCIT due.
Starting the 4th taxable year, the taxpayer shall consistently compare the RCIT and
MCIT, and get the higher of the two amounts as the total income tax due.
 
Table 3: Computation of Tax Due and Payable (RCIT or MCIT)

Net Sales Php xx.xx

Less: Cost of Sales      (xx. xx)
Gross Income from Operations      xx.xx
Add: Other Taxable Income not subject to FT      xx.xx
Total Gross Income (subject to 2% MCIT)      xx.xx
Less: Allowable Deductions      (xx.xx)
Net Taxable Income (subject to 30% RCIT) Php xx.xx
Income Tax Due (30%) (A)      (xx.xx)
   
Income Tax Due (30%)(A)        xx.xx
MCIT (2%)        xx. xx
Total Income Tax Due (higher of MCIT and
       xx. xx
RCIT)
Less: Total tax Credits/ Payments      (xx.xx)
Net Tax Payable/ Overpayment        xx. xx
 
The Gross Income Tax (GIT) of 15% is also based on gross income. However, there are
certain requisites before corporations can avail of the 15% GIT. All the following
conditions shall be satisfied:

1. A tax effort ratio of twenty percent (20%) of Gross National Product (GNP);
2. (2) A ratio of forty percent (40%) of income tax collection to total tax revenues;
3. (3) A VAT tax effort of four percent (4%) of GNP; and
4. (4) A 0.9 percent (0.9%) ratio of the Consolidated Public Sector Financial
Position (CPSFP) to GNP.
5. The option to be taxed based on gross income shall be available only to firms
whose ratio of cost of sales to gross sales or receipts from all sources does not
exceed fifty-five percent (55%).
GIT is also called Optional Corporate Income Tax because, although the requisites are
satisfied, it is still at the option of the taxpayer to avail of the 15% GIT. The election of
the gross income tax option by the corporation shall be irrevocable for three (3)
consecutive taxable years during which the corporation is qualified under the scheme.
Table 4 shows the computation of income tax due and payable under GIT.
Table 4: Computation of Tax Due and Payable (GIT)

Net Sales Php xx.xx

Less: Cost of Sales     (xx. xx)
Gross Income from Operations      xx.xx
Gross Income Tax Rate (15%)      xx.xx
Income Tax Due      xx.xx
Less: Tax Credits/ Payments      (xx.xx)
Income Tax Due and Payable Php xx.xx
 
Table 5: Final Taxes of Passive Income Within

Certain Passive Income Derived from

DC RFC NRFC
Philippine Sources Subject to Final Tax
Interest in any currency bank deposits;
deposit substitute, trust funds and other 20% 20% 30%
similar arrangements
Interest income from depository bank
15% 7.5% Exempt
under eFCDS
Royalties 20% 20% 30%
Inter-corporate dividends received from
Exempt Exempt 30% or 15%*
DC
Branch Office Remittance (RFC)   15%**  
 
*If there is tax sparing, the final tax on dividends is 15%. The tax sparing rule shall apply
to an NRFC which is a resident or is domiciled in a country which: (1) has no effective
tax treaty with the Philippines; (2) has a worldwide system of taxation; and (3) allows a
tax credit against the tax due from the NRFC dividend taxes deemed to have been paid
in the Philippines equivalent to 15%.
**15% final tax on the amount earmarked for remittance by the branch/ RFC/ ROHQ to
its parent – multinational corporation.
 
Table 6: Capital Gains subject to Capital Gains Tax

Capital Gains from Sale of Share of

Stocks not traded in the local stock DC RFC NRFC
exchange
For DC, on net capital gain 15%    
For FC, on capital gain    
             First Php100,000   5% 5%
             In excess of Php100,000 10% 10%
Capital Gains realized from sale or
exchange or disposition of Land or      
buildings.
Tax Base SP or FMV, whichever is higher 6% N/A N/A
Special Corporations

SPECIAL CORPORATIONS
Generally, corporations are subject to 30% income tax. However, there are corporations that are
exempt from income tax or are subject to lower tax rate – MCIT or GIT, or special corporations.
So far, we have discussed the corporations exempt from income tax, the MCIT and the GIT.
Special corporations are corporations subject to lower tax rates on their regular income under the
Tax Code. Table 7 shows the income tax rates of Special Corporations.
Table 7: Income Tax Rates of Special Corporations

Domestic Corporations Rates

   Proprietary Educational Institution 10%
   Non-Profit Hospitals 10%
Resident Foreign Corporations  
   International Carriers 2.5%
   Regional Operating Headquarters of MNCs 10%
Non-Resident Foreign Corporations  
   Non-resident owner or lessor of vessel 4.5%
 Non-resident cinematographic film owner, lessor, or
25%
distributor
   Non-resident lessor of aircraft, machinery, and other
7.5%
equipment
 
Special Domestic Corporations
RMC 4-2013 provides that proprietary educational institutions (PEI) and non-profit hospitals are
subject to 10% income tax based on net income from sources within and without the Philippines
provided that the gross income from unrelated trade, business or any other activity does not
exceed 50% of the total gross income derived from all sources. Once the gross income from
unrelated trade, business or any other activity exceeds 50%, the PEI and non-profit hospital will
be subject to RCIT.
 
Proprietary Educational Institution
Proprietary educational institution (PEI) is any private school maintained and administered by
private individuals or groups with an issued permit to operate form the Department of Education
(DepEd) 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.
Unrelated trade, business or other activity is an activity is an activity which is not substantially
related to the exercise or performance of the school or hospital’s primary purpose or function
such as but not limited to rental income from available school spaces or facilities.
Example of Related Income for PEI:

1. Income from tuition fees and miscellaneous school fees

2. Income from hospital where medical graduates are trained for residency
3. Income from canteen situation within the school campus
4. Income from bookstore situated within the school campus
Special Rules on Capital Expenditures of Proprietary Education Institution
Taxable income of PEI is computed on the same manner as an ordinary domestic corporation.
However, in addition to allowable business expenses under the tax code, a private education
institution, may at its option elect either:
 To deduct expenditures otherwise considered as capital outlays of depreciable assets
incurred during the year outright; or
 To capitalize such expenditure and claim deduction from gross income for an allowance
for depreciation thereof.
Table 8: Summary of Applicable Income Tax of Educational Institutions
Educational Passive Capital
Ordinary Income
Institution Income Gains
Generally, 10% of net income
Proprietary
but subject to RCIT if
Educational FWT CGT
unrelated income > related
Institution
income
Exempt from taxes and duties
Non-stock, Non- for all revenues and assets
Profit Educational used actually, directly, and FWT CGT
Institutions (NSEIs) exclusively for educational
purposes.
Government
Educational Exempt from income tax FWT CGT
Institution
 
 
Proprietary Non-Profit Hospital
A Proprietary Non-Profit Hospital is basically a private hospital with no net income or asset
accrues to or benefits any member or specific person. All the income or asset must be devoted to
the institution’s purpose and all its activities are conducted for non-profit.
 
Table 9: Summary of Applicable Income Tax of Hospitals
Passive
Hospital Ordinary Income Capital Gains
Income
Generally, 10% of net income but
subject to RCIT if unrelated income >
Proprietary Non-Profit
related income or provided that no part FWT CGT
Hospital
of its profits is distributed to its
members/ owners.
Exempt from taxes on income under
Section 30 of the tax code provided:
1.       It is a non-stock corporation; and
Non-stock, Non-Profit
2.       It is operated exclusively for
Hospitals for charitable charitable purposes; and
FWT CGT
and social welfare
purposes 3.       No part of income or assets shall
belong to or inure to the benefit of any
member, organizer, officer or any
specific person.
 
 
Special Resident Foreign Corporations
International Carriers
International carriers are subject to income tax rate of 2.5% on their Gross Philippine Billings
(GPB). An international carrier, however, may be subject to a preferential tax rate (a tax rate
lower than 2.5%) or exempt based on the following:
 an applicable tax treaty to which the Philippines is a signatory; or
 reciprocity, such that the international carrier’s home country grants income tax
exemption to Philippine carriers. The tax code extends the same exemption from income
tax to the international carrier.
Gross Philippine Billings refers to the total amount of gross revenue derived from passage of
persons, excess baggage, cargo, and/or mail, originating from the Philippines in a continuous and
uninterrupted flight, irrespective of the place of sale or issue and the place of payment of the
passage documents.
Originating from the Philippines includes the following:

1. Where passengers, their excess baggage, cargo and/or mail originally commence their
flight or voyage from any Philippine port to any other port or point outside the
Philippines.
2. Chartered flights or voyages originally commencing their flights or voyages from any
foreign port and whose stay in the Philippines is for more than forty-eight hours prior to
embarkation
3. Chartered flights originally commencing their flights or voyagers from any Philippine
port to any foreign port.
4. Where passengers, their excess baggage, cargo and/or mail originally commence their
flight or voyage from any foreign port alights or is discharged in any Philippine port and
thereafter boards or is loaded to another airplane owned by the same airline company or
vessel owned by the same international sea carrier, the flight or voyage from the
Philippine to any foreign port shall not be considered as originating in the Philippines,
unless the time intervening between arrival and departure from the Philippines exceeds
40 hours except for reasons beyond control. If, however, the second aircraft belongs to a
different airline company or the second vessel belongs to a different international sea
carrier, the flight or voyage from the Philippines to any foreign port shall be considered
originating from the Philippines regardless of the intervening period between the arrival
and departure from the Philippines.
5. Where passengers, their excess baggage, cargo and/or mail originally commence their
flight or voyage from any port or point in the Philippines but where transshipment takes
place elsewhere in another aircraft belonging to a different airline, the GPB shall be
determined based on the portion of the revenue corresponding to the leg flown from any
point in the Philippines to the point of transshipment.
Table 10: Summary of Applicable Income Tax of Common
Carriers                                          
Passive Capital
Hospital Ordinary Income
Income Gains
Domestic Common
Higher of RCIT vs MCIT FWT CGT
Carriers
2.5% on Gross Philippine
International Carriers Billings or preferential rate or FWT CGT
exempt
 
 
Regional Operating Headquarters (ROHQs)
An ROHQ is a foreign entity allowed to derived income in the Philippines by performing
qualifying services to its affiliates, subsidiaries, or branches in the Philippines, in the Asia
Pacific Region and in other foreign markets. Such services include general administration and
planning, business planning and coordination, sourcing and procurement of raw materials and
components, corporate governance advisory services, marketing control and sales promotion,
training and personnel management, logistic services, research and development services ad
product development, technical support and maintenance, data processing and communication,
and business development. ROHQs are subject to 10% tax on its net income.
An Regional Headquarter (RHQ), on the other, a branch established in the Philippines by a
multinational corporation which does not earn or derive any income from the Philippines and
which acts only as a supervisory , communications and coordinating center to its affiliates
subsidiaries, or branches in the Asia Pacific Region and other foreign markets. Unlike ROHQs,
RHQs are tax exempt entities, however, they still constitute as withholding agents of the
government on employee compensation and income payments to individuals and corporations.
Inclusions and Exclusions from Gross Income
COMPUTATION OF NET TAXABLE INCOME FOR CORPORATION
Generally, a corporation’s net taxable income is computed as follows:

Sales/ Receipts/ Revenues/ Fees P xx.xx

Less: Sales Returns, Allowances and
(xx.xx)
Discounts
Net Sales/ Receipts/ Revenues/ Fees    xx. xx
Less: Cost of Sales/ Services    (xx.xx)
Gross Income from Operations    xx.xx
Add: Other Income not subject to final tax    xx.xx
Total Taxable Income    xx.xx
Less: Deductions Allowable under existing
   (xx.xx)
laws
Net Taxable Income      xx.xx
 
The computation has two primary components: (1) sales/ receipts/ revenues/ fees and
other income; and (2) allowable deductions.
Gross Income
Gross income means the total income of a taxpayer subject to tax. We have been
encountering different sources of gross income since our discussion of taxation for
individuals. We identified three major classifications of income. Income is classified as
to territorial source, as to source and as to taxability.
As to territorial source, corporations are taxed as follows:

Corporate Taxpayer Taxable Income Source

DC Within & Without
FCs (RFC and NRFC) Within only
 
As to source, we also classify corporate income to ordinary income, passive income,
and capital gains.
 

As to taxability, there are also corporations who are not taxable in certain income or on
their capacity as a corporation exempted from income tax as discussed in Section 30 of
the Tax Code.
Gross Income as to Source: Ordinary Income
Income classified as ordinary income is subject to income tax, thus, included in the
computation of income tax due.

1. Business Income – income from the conduct of trade or business. This includes
rent received by a corporate or individual taxpayer engaged in the real estate
business. In case of manufacturing or a merchandising business, gross business
income is sales less cost of goods sold increased by any income or gain not
subjected to final tax or capital gains tax.
Classified as other business income also are bad debt recoveries and tax
refunds up to the extent of the actual benefit received (“Tax Benefit Rule”) by the
taxpayer.
To illustrate Tax Benefit Rule, see example below:

Write – off Bad Debt in 2019

Allowance for Doubtful Accounts P100.00  
             Accounts Receivable   P100.00
 
Assuming the Company has the following results of operations in 2019

Gross Income P200.00

 Expense: Written Off Debt (100.00)
Net Income P100.00
Income Tax P   30.00
 
Note that for tax purposes, only actual debt written off are allowed as deductions
from gross income. Provisions for bad debt (Bad Debt Expense) are considered
temporary difference between accounting and tax income.

Recovered Bad Debt in 2020

Cash P100.00  
       Allowance for Doubtful Accounts   P100.00
 
For easy comparison, assuming the Company has the same results of operations
in 2020

Gross Income from Operations P200.00

Add: Other Income 100.00
Gross Income/ Total Taxable
300.00
Income
Expense: Written Off Debt      -
Net Income P300.00
Income Tax P   90.00
 
              Over the two consecutive periods, the income tax due totaled P120.
Assuming there was no write off and recovery the total income tax due for the
two consecutive years is still P120. The goal of the rule is that the taxpayer pays
what is due to the BIR on the subsequent recovery of bad debt and refund of tax
that previously reduced the tax due when it was claimed as expenses.

YEAR 2019 2020 TOTAL

Gross Income/ Total
P200.00 P200.00 P400.00
Taxable Income
Expense: Written Off
-      - -
Debt
 Net Income P200.00 P200.00 P400.00
Income Tax P 60.00 P   60.00 P120.00
 

1. Interest Income – The interest income referred to here are interest income aside
from those subject to final tax on passive income already, such as
 Interest income earned without (for RC and DC)
 Interest income from indebtedness as compensation
for loan or forbearance of money, goods, or credits.
Interest Income Applicable Tax
Interest income on deposits, deposit substitutes,
government securities and similar arrangements Final Tax
within the Philippines
Interest income on deposits, deposit substitutes,
government securities and similar arrangements Income Tax
without the Philippines, applicable to RC and DC
Interest Income on Loans or Forbearance of
Income Tax
money, goods or credits
 

1. Royalty Income – there are three types of royalty income and these are subject
to different tax and tax rates.
Royalty Income Applicable Tax
Royalty on books, literary works, and musical
10% Final Tax
compositions
Royalty on items other than subject to 10% Final
20% Final Tax
Tax earned within the Philippines
Royalty income earned without the Philippines Income Tax
 

1. Dividend Income
Dividend Income Applicable Tax
dividends from DC to individual taxpayers Final Tax
dividends from DC to NRFC Final Tax
dividends from DC to DC or RFC (intercorporate Exempt
 dividends)
Distributable share of a partner in a GP Final Tax
Distributable share of a partner in a GPP Income Tax
Dividends from foreign Corporation Income Tax
 

1. Dealings in Property

Dealings in Properties
Dealings in Properties
Dealings in Properties refer to transaction involving disposal of assets, through sale or exchange,
classified as either ordinary or capital assets. The tax code only defined ordinary assets. Ordinary assets
are

1. Property, real or personal, in trade or sale in the ordinary course of business (inventory)
2. Property used in trade or business subject to depreciation (Those properties classified in FS as
PPE except land)
3. Real property used in trade or business (Land classified under PPE)
Simply stated, ordinary assets are assets that are either sold or used in the ordinary course of business.
Capital assets, on the other hand, by residual definition, are assets that are held by the taxpayer that are
neither used nor sold in the ordinary course of business. Properties initially classified as capital assets are
automatically converted into capital assets upon showing proof that the same have not been used in
business for more than two (2) years prior to the consummation of the taxable transaction involving said
properties.

 
Applicable Taxes

Type of Gain   Applicable Tax Tax Base

Sale of Shares of a DC 15% CGT (DC & individual taxpayers)

Gain (SP-Cost)
directly to buyer 5% on first Php100K + 10% in excess (FC)

Sale of Real Properties FMV or SP, whichever is

6% CGT (except N/A for FCs)
classified as CA higher

Capital Gains S Sale of Shares of a DC 60% of 1% Stock Transaction Tax

Gross SP
directly through the LSE (Other Percentage Tax)

Gain becomes art of

Gross Income subject to
All other capital gains Subject to basic income tax (GTT)
rules in recognizing
capital gains and losses

Gain on Sale of ordinary Gain becomes art of

Ordinary Gain Subject to basic income tax (GTT)
asset Gross Income

 
Capital asset transactions other than those subject to capital gains tax or other percentage taxes are may
result to either capital gains or losses which are subject to basic income tax.
This lesson is applicable to capital asset transactions subject to basic income tax.
Requisites:

1. Transactions must involve properties classified as capital asset.

2. Transactions involve either sale or exchange
3. Net capital gains are added to ordinary gains/ income in computing for the net taxable income.
However, if the result is a net capital loss, such loss can only be deducted from a capital gain.
Remember that the tax code only allows ordinary and necessary expenses to be deducted from ordinary
income, thus any capital losses are not allowed to be deducted unless if it is to be deducted from a capital
gain. Capital losses are not business connected. It is not ordinary and not necessary in the course of
trade or business.

4. Net capital gains or losses are subject to holding period for individuals including estates and
trusts. Holding period refers to the length of time the capital asset was held by the taxpayer, from
date of acquisition to date of exchange. The net capital gain subject to basic income tax will
depend on the length of time the asset was held by the individual taxpayer as follows:
Percentage to be
Holding Period
Recognized
12 months or less 100%
More than 12 months 50%

                Holding period is not applicable to corporations.

5. Net Capital Loss can be carried over for individual taxpayers. If a taxpayer sustains in any taxable
year a net capital loss, such loss will be treated in the next taxable year as a short-term loss.
 Computation of Gain or Loss from Dealings in Properties

Amount Realized (SP) xx.xx

Less: Cost (xx.xx)
Gain (Loss) xx.xx

 
The following are considered in computing for the cost of the property:

Mode of Acquisition Cost basis

Property purchased Purchase price + expenses of acquisition
Property supposedly included in the inventory Its latest inventory value
Property acquired by devise, bequest, or
FMV at the date of transfer
inheritance
FMV or purchase price of the last
Property acquired through donation or gift preceding owner (not acquired through
gift), whichever is lower.

 
When and Where to File?
CAPITAL ASSET
Who will
Tax Tax Where to file return
Tax Base Form Deadline
Type Rate File and pay
taxes
Within 30 days
after each sale,
RDO
exchange,
where
CGT 6% 1706 Seller transfer or
property is
other
Highest among located
disposition of
the following: real property.
1.    Gross Selling
Price Within five (5)
2.    Zonal Value, days after the
3.    Market Value close of the
RDO month when
as determined Seller/Buyer
2000- where the taxable
DST 1.5% by PAO/CAO but typically
OT property is document was
Buyer
located made, signed,
issued,
accepted or
transferred
 

 
ORDINARY ASSET
Who will
Where file return
Tax Base Form Deadline  
to File and pay
taxes
2550M/ RDO of
Buyer    
Highest among 2550Q Buyer
the following: RDO On or before the 10th  
1.   Gross Selling where day following the end of
1606 Buyer  
Price property the month in which the
is located transaction occurred
2.   Zonal Value,
Within five (5) days after
2.   Market Value RDO the close of the month
as Seller/Buyer
2000- where when the taxable
determined but typically  
OT property document was made,
by PAO/CAO Buyer
is located signed, issued,
accepted or transferred

Deductions from Gross Income

Deductions from Gross Income
The Tax Code allows taxpayers to deduct various items from the gross income,
especially if such is necessary to be incurred to produce the income. Ordinary and
necessary expenses are generally allowed as deductions from gross income to arrive at
the taxable income.
Allowed Deductions in General

1. Individuals earning purely compensation income

No deductions are allowed for individuals earning purely compensation
income under the TRAIN Law.

2. Individuals earning business or professional income

1. Itemized Deduction or Optional Standard Deduction
3. Corporations and Partnership
1. Itemized Deduction or Optional Standard Deduction
4. Estates and Trusts
1. Itemized deductions same as individual taxpayers
2. Special Deduction – Distributed share of heirs/ beneficiaries
Itemized Deductions
Individual taxpayers earning business or professional income, corporations and
partnerships can deduct in their gross income items of expenses paid or incurred during
a taxable year provided that
 The expenses are directly attributable to the development, management,
operation, and conduct of the business;
 The expenses are ordinary and necessary to produce the income; and
 The corresponding tax was properly withheld and remitted by the taxpayer
claiming the expense; and
 The taxpayer must be able to substantiate the claim for deduction since the
burden of proving that he is entitled to the deduction as the law allows lies with
the taxpayer.
Substantiation requirements include official receipts, invoices, vouchers, bank
remittances and other supporting documents that shows:
 The amount of expenses being claimed as deduction
 The nature of the expense
 
 
Under Section 34 of the NIRC, deductions from gross income include but is not limited
to the following:
 1. Ordinary and Necessary Trade and Business Expenses
Ordinary means normal in the course of business.
Necessary means appropriate and helpful in the process of earning the
income.
 

1. Salaries, wages, allowances and other form of compensation

This includes all form of compensation given to employees such as salaries,
allowances, wages, grossed up monetary value of fringe benefits, actual
contributions to defined plans, employer’s share of SSS, PHIC and HDMF, as
well as commissions paid to employees.
Special laws:
RA 9994 – Expanded Senior Citizen Act of 2010 (RR 7-2010)
              An entity employing senior citizens are entitled to additional deduction from
gross income equivalent to 15% of the total amount paid as salaries and wages to
senior citizens provide that the employment continues for a period of at least six months
and the annual income of the senior citizen does not exceed the poverty level as
defined by NEDA.
 
To illustrate, assume that employment in Corporation A is composed of 50% senior
citizens with total salaries expense of P100,000.
 
With employed Senior Without Employed
 
Citizens SC
Salaries of Regular Employees     50,000 P100,000
Salaries of SC
   57,500 0
((50%*100,000)*1.15)
Total Allowed Deductible
P107,500 P100,000
Salaries
 
   RA 7277 – Magna Carta for Disabled Persons (PWD)
An entity employing disabled persons who meet the required skills, either as
regular employee, apprentice or learner are entitled to additional deduction from gross
income equivalent to 25% of the total amount paid as salaries and wages to disabled
persons.
 
To illustrate, assume that employment in Corporation A is composed of 50% PWDs with
total salaries expense of P100,000.
 
With employed Without Employed
 
PWDs PWD
Salaries of Regular Employees     50,000 P100,000
Salaries of PWD
   62,500 0
((50%*100,000)*1.25)
Total Allowed Deductible Salaries P112,500 P100,000
 

1. Travel Expense
 Should be reasonable
 Ordinary and necessary in the course of business

1. Rent
2. Representation and Entertainment Expense
This are expenses incurred in providing amusement and recreation to, or
meeting with a guest at a dining place, place of amusement, country club,
theater, concert, play, sporting events and similar establishments.
 
Due to its nature that can be overly abused, there is a limit for claiming
expenses that can be characterized under representation and entertainment
expense. Limit is set at
 
 ½% for seller of goods
 1% for seller of services
 Pro-rated for those sellers of both goods and services.
               Requisites:
 Must be paid or incurred during the year
 Must be directly connected to trade or business and necessary
to earn income
 Must not be contrary to law, morals, public policy, and public
order such as kickbacks
 It must be duly substantiated
 The appropriate withholding tax is withheld and remitted to BIR
 
2. Interest Expense
Interest expense is the payment for the use or forbearance of money.
Requisites for the deductibility of interest:
 Interest must be on an indebtedness connected with trade
 It must be the indebtedness of the taxpayer
 The interest must be in writing and legally due
 The interest is paid or incurred on such indebtedness within the
taxable year.
 It is not expressly disallowed by law such as interest to finance
petroleum operations
 The interest payment is not between related parties
Interest expense on tax delinquency and deficiency are deductible in full if the tax
is related to trade or business.
The taxpayer has the option to claim and deduct outright any Interest expense
incurred on acquired property to be used in trade or business or capitalized it as
cost of the asset and depreciate over time.
When the taxpayer has both interest expense and interest income subject to final
tax, the interest expense must be reduced by 33% of the interest income subject
to final tax.
 

3. Bad Debts
In general, debts due to the taxpayer actually ascertained to be worthless and
charged off within the taxable year, except those not connected with trade or
business or those sustained in a transaction entered between related parties.
Provided further that recovery of bad debts previously allowed as deduction in
the preceding years shall be included as part of the gross income in the year
of recovery to the extent of the income tax benefit of the said deduction.
 
It should be noted that reserved or provision for bad debts are not allowed as
deduction from gross income because the mere setting up of the allowance or
reserves will not give rise to any deduction under Section 34 (E ) of the Tax
Code. Only those ascertained to worthless are allowed as deduction for tax
purposes.
 

4. Depreciation and Amortization

 Should be
 reasonable based on guidelines by the Secretary of Finance
(SLM, DBM, SYM, any other method prescribed by the Sec. of
Finance)
 in relation to a property being used in trade or business
 actually charged – off as a direct deduction in the book value of
the asset or as a credit to an accumulated depreciation account
 with attached allowance schedule to the return
 

5. Research and Development

6. Taxes and Licenses
Taxes and licenses incurred or paid by the taxpayer within the taxable year in
connection with the pursuit of the taxpayer’s trade or business shall be
allowed as deduction from gross income. However, not all taxes and licenses
are allowed as deduction from gross income.
Requisites for deductibility:
 It must be paid or incurred within the year
 It must be connected to the taxpayer’s trade or business
 The tax is imposed directly to the taxpayer
Deductible Taxes Non – Deductible Taxes
Income tax paid abroad, if Income tax except fringe benefit
claimed as operating expense tax
Income tax paid abroad if
Documentary Stamp Taxes
claimed as tax credit
Occupational Taxes Estate and Donor’s Tax
Excise Tax Stock Transaction Tax
Import duties Value Added Tax
Taxes not related to trade or
Local Business Taxes
business
Percentage Taxes under Tax
Code except Sec 127 (a) and (b)  
or Stock Transaction Tax
 
 Note that interest on deficiency or delinquency taxes provided that the
corresponding tax is related to trade or business are deductible in FULL and not
subject to the 33% rule on interest expense.

7. Charitable Contributions
Charitable contributions deductible from gross income may be deductible in
full or subject to limitation depending upon the organization to which the
contribution was given. The amount of contribution, other than money, must
be based on the acquisition cost of the property.
 
Requisites for deductibility:

1. The contribution or gift must be actually paid

2. It must be given to an organization specified by law
3. It must be within the taxable year
4. The net income of the institution to which the contribution is given
must not inure to the benefit of a private individual or shareholder
5. The taxpayer claiming the deduction is engaged in trade or
business
 

Donations deductible in full Donations subject to limitations

Donations to DC organized and operated
Donations to institutions, whether exclusively for the following purposes
government, any of its agencies or but will not fall under the NGO
fully owned government corporations classification
or to accredited Non-government
organizations which are classified as ·         Religious
non-profit DC, exclusively organized
for priority activities ·         Charitable

·         Education ·         Scientific

·         Health ·         Youth and Sports Development

·         Youth and Sports Development ·         Cultural

·         Human Settlement ·         Education

·         Science and Culture ·         Rehabilitation of Veterans

·         Economic Development ·         Social Welfare

 
   
Donations to the government of the
Donation to foreign institutions or
Philippines or political subdivisions for
international organizations in
public purposes (not priority)
 compliance with agreements, treaties  
and special laws
Accredited NGOs when requisites for full
deductions are not complied with:
1.       No part of the benefit must inure to the
benefit of a private individual;
2.       The donation must be utilized not later
than the 15th day of the 3rd moth
following the close of taxable year;
3.       The administration expense must
conform to the rules and regulations set
out by the Secretary of Finance, in no
  case it shall exceed 30% of total expense;
4.       The assets, in the event of dissolution,
will be distributed to:
-          Another DC organized for
similar purposes
-          The state for public purpose
-          Another organization to be
used in such manner as in the
judgment of the court shall
best accomplish the purpose
to which the dissolved
organization is organized.
 
The limit or allowable deduction for charitable contributions not qualifying for full
deduction is
 Individual taxpayer – 10% of taxable income derived from trade or
business before deducting the contribution
 Corporate taxpayer – 5% of taxable income derived from trade or
business before deducting the contribution
8. Losses
See separate Discussion on  Losses.
 
 
Optional Standard Deduction

Losses
Section 34 (D) of the Tax Code provides
(D) Losses. —
(1) In General. — Losses sustained during the taxable year and not compensated for by insurance or
other forms of indemnity shall be allowed as deductions:

1. If incurred in trade, profession, or business.

2. Of property connected with the trade, business, or profession, if the loss arises
from fires, storms, shipwreck, or other casualties, or from robbery, theft, or
embezzlement.
The losses described above pertain to the allowable deductible losses namely, ordinary loss and casualty
loss, respectively. These losses may be offset against all income and capital gains in the same tax year.
Capital losses, on the other hand, are deductible only from capital gains. This is further discussed under
Dealings in Properties.
Though both ordinary and casualty losses are deductible, their distinction lies with the additional
documentation required for the deductibility.
Casualty losses
This loss pertains to loss of property connected to trade, business or practice of profession arising from
acts of nature (fire, storm, earthquake, shipwreck, and other calamities) and acts of man (robbery, theft,
embezzlement) for which declaration of loss was filed with BIR within 45 days from the date the loss was
incurred.
Section 34 of the NIRC provides that
“the time and manner by which the taxpayer shall submit a declaration of loss sustained from casualty or
from robbery, theft, or embezzlement during the taxable year: Provided, however, That the time limit to be
so prescribed in the rules and regulations shall not be less than thirty (30) days nor more than ninety (90)
days from the date of discovery of the casualty or robbery, theft or embezzlement giving rise to the loss.”
NIRC Section 34 further provides that
"(2) Proof of Loss. - In the case of a nonresident alien individual or foreign corporation, the losses
deductible shall be those sustained during the year incurred in business, trade or exercise of a profession
conducted within the Philippines, when such losses are not compensated for by insurance or other forms
of indemnity. The Secretary of Finance, upon recommendation of the Commissioner, is hereby authorized
to promulgate rules and regulations prescribing, among other things, the time and manner by which the
taxpayer shall submit a declaration of loss sustained from casualty or from robbery, theft or
embezzlement during the taxable year: Provided, That the time to be so prescribed in the rules and
regulations shall not be less than thirty (30) days nor more than ninety (90) days from the date of
discovery of the casualty or robbery, theft or embezzlement giving rise to the loss.”
Revenue Regulation No. 12 – 77 provides the substantiation requirements for losses arising from
casualty, robbery, theft, or embezzlement. RR 12-77 prescribes the format of the sworn declaration of
loss which contains the following information:
SECTION 3. Declaration of loss. — Within forty-five days after the date of the occurrence of casualty or
robbery, theft or embezzlement, a taxpayer who sustained loss therefrom and who intends to claim the
loss as a deduction for the taxable year in which the loss was sustained shall file a sworn declaration of
loss with the nearest Revenue District Officer. The sworn declaration of loss shall contain, among other
things, the following information:
(a) The nature of the event giving rise to the loss and the time of its occurrence.
(b) A description of the damaged property and its location.
(c) The items needed to compute the loss such as cost or other basis of the property; depreciation
allowed or allowable if any; value of property before and after the event; cost of repair.
(d) Amount of insurance or other compensation received or receivable.
Since it is a sworn declaration, the document must be made public by declaring the required information
under oath to a notary public. Evidence supporting the information in the sworn declaration must also be
submitted to the RDO having jurisdiction to where the property is located. Evidence includes purchase
contracts and deeds, pictures, appraisal reports before and after the casualty.
Though the sworn declaration is one of the major requirements, it is not sufficient to justify the
deductibility of the loss.
RR 12-77 provides
“Therefore, the mere filing of a declaration of loss does not automatically entitle the taxpayer to deduct the
alleged loss from gross income. The failure, however, to submit the said declaration of loss within the
period prescribed in these regulations will result in the disallowance of the casualty loss claimed in the
taxpayer's income tax return. The taxpayer should therefore file a declaration of loss and should be
prepared to support and substantiate the information reported in the said declaration with evidence which
he should gather immediately or as soon as possible after the occurrence of the casualty or event causing
the loss.”
Casualty losses are usually supported by photographs of the property as it existed before it was
damaged, and photographs taken after the casualty which show the extent of damage. Photographs
showing the condition and value of the property after it was repaired, restored, or replaced may also be
helpful. Evidence of cost may also be helpful in establish the amount of loss. Other evidence that may be
acceptable includes Certification from DILG Bureau of Fire Protection, and Certification from Police
Station who responded (H. Tambunting Pawnshop, Inc. v. Commissioner of Internal Revenue, C.T.A.
Case No. 6238, [October 8, 2004]). The foregoing evidence should be kept by the taxpayer as part of his
tax records and be made available to a revenue examiner, upon audit of his income tax return and the
declaration of loss.
On the other hand, to support the deduction for losses arising from robbery, theft or embezzlement, the
taxpayer must prove by credible evidence all the elements of the loss, the amount of the loss, and the
proper year of the deduction. The taxpayer bears the burden of proof, and no deduction will be allowed
unless he shows the property was stolen, rather than misplaced or lost. A mere disappearance of
property is not enough, nor is a mere error or shortage in accounts.
Failure to report theft or robbery to the police may be a factor against the taxpayer. On the other hand, a
mere report of alleged theft or robbery to the police authorities is not a conclusive proof of the loss arising
therefrom.

 
Net Operating Loss
The term 'net operating loss' shall mean the excess of allowable deduction over gross income of the
business in a taxable year. Section 34 of NIRC states that
“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 (3) consecutive taxable years
immediately following the year of such loss”
The net operating loss can be carried over and deducted within the 3 consecutive taxable years if

1. The net operating loss is not be incurred in a taxable year during which the taxpayer was exempt
from income.
2. There has been no substantial change in the ownership of the business or enterprise in that –
 1. Not less than seventy-five percent (75%) in nominal value of outstanding
issued shares., if the business is in the name of a corporation, is held by
or on behalf of the same persons; or
2. Not less than seventy-five percent (75%) of the paid-up capital of the
corporation, if the business is in the name of a corporation, is held by or
on behalf of the same persons.
NOLCO cannot also be applied against MCIT or if the taxpayer uses Optional Standard Deduction.
NOLCO benefit, like MCIT, is applied on a first-in, first out basis.
Other Special Laws on NOLCO
For mines other than oil and gas wells, a net operating loss without the benefit of incentives provided for
under Executive Order No. 226, as amended, otherwise known as the Omnibus Investments Code of
1987, incurred in any of the first ten (10) years of operation may be carried over as a deduction from
taxable income for the next five (5) years immediately following the year of such loss. The entire amount
of the loss shall be carried over to the first of the five (5) taxable years following the loss, and any portion
of such loss which exceeds the taxable income of such first year shall be deducted in like manner form
the taxable income of the next remaining four (4) years.
Current Events – Revenue Regulations No. 25 -20
RR 25-20 issued on September 30, 2020 is BIR’s most recent issuance pertaining to NOLCO which is in
connection with the Bayanihan to Recover to One Act or RA 11494.
RA11494 states that
"SEC. 4. COVID-19 Response and Recovery Interventions. x x x
xxx xxx xxx
(bbbb) Notwithstanding the provision of existing laws to the contrary, the net operating loss of the
business or enterprise for taxable years 2020 and 2021 shall be carried over as a deduction from gross
income for the next five (5) consecutive taxable years immediately following the year of such loss;
Provided, That this subsection shall remain in effect even after the expiration of this Act;"
This provision extends the validity of Net Operating Losses sustained by business during the years 2020
and 2021 to 5 years valid claiming period instead of the ordinary 3 years.
RR 25-20 provides that
SECTION 4. Five (5)-Year Period of Entitlement to Deduct Net Operating Loss Incurred for Taxable Years
2020 and 2021. — Unless otherwise disqualified from claiming the deduction, the business or enterprise
which incurred net operating loss for taxable years 2020 and 2021 shall be allowed to carry over the
same as a deduction from its gross income for the next five (5) consecutive taxable years immediately
following the year of such loss. The net operating loss for said taxable years may be carried over as a
deduction even after the expiration of RA No. 11494 provided the same are claimed within the next five
(5) consecutive taxable years immediately following the year of such loss.
SECTION 5. Presentation of NOLCO in Tax Return and Unused NOLCO in the Income Statement. —
The NOLCO shall be separately shown in the taxpayer's income tax return (also shown in the
Reconciliation Section of the Tax Return) while the unused NOLCO shall be presented in the Notes to the
Financial Statements showing, in detail, the taxable year in which the net operating loss was sustained or
incurred, and any amount thereof claimed as NOLCO deduction within five (5) consecutive years
immediately following the year of such loss. The NOLCO for taxable years 2020 and 2021 shall be
presented in the Notes to the Financial Statements separately from the NOLCO for other taxable years.
Failure to comply with this requirement will disqualify the taxpayer from claiming the NOLCO.
Optional Standard Deduction
Optional Standard Deductions
The election to avail of the OSD should be signified in the return and it shall be irrevocable for the taxable
year for which the return is made. The following can claim OSD in lieu of itemized deduction:

Taxpayer Basis

Individuals 40% of Gross Sales and Receipts

Corporations (including partnerships and except

40% of Gross Income
NRFC)

 
For corporations, Gross income basis is same as MCIT.

Improperly Accumulated Earnings Tax

Improperly Accumulated Earnings Tax (IAET)
The improperly accumulated earnings tax of 10% is imposed on the improper accumulation of taxable
income of corporations for the purposes of avoiding tax on dividends distributed to shareholders. IAET
forces closely held corporations to distribute dividends to shareholders.
The test of the liability is the purpose behind the accumulation of the income and not the consequences of
the accumulation. Thus, if the purpose of retaining income and not issuing dividends is for the reasonable
needs of business, such purpose would not generally make the accumulated or undistributed earnings
subject to tax. However, if there is a determination that the corporation has accumulated income beyond
the reasonable needs of the business, the 10% IAET shall be imposed.
RR 02-01 enumerated reasonable needs of business for which accumulations of earnings may be
allowed:

1. 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.
2. Earnings reserved for definite corporate expansion projects or programs requiring considerable
capital expenditure as approved by the Board of Directors or equivalent body.
3. Earnings reserved for building, plants or equipment acquisition as approved by the Board of
Directors or equivalent body.
4. Earnings reserved for compliance with any loan covenant or pre-existing obligation established
under a legitimate business agreement.
5. Earnings required by law or applicable regulations to be retained by the corporation or in respect
of which there is legal prohibition against its distribution.
6. In the case of subsidiaries of foreign corporations in the Philippines, all undistributed earnings
intended or reserved for investments within the Philippines as can be proven by corporate
records and/or relevant documentary evidence.
IAET is applicable only to closely held corporations. To determine whether a corporation is a closely or
publicly held corporation is ultimately traced to the individual shareholders of the parent company. A
closely held corporation is 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 individuals. Domestic corporations not falling under the aforesaid definition are, therefore,
publicly held corporations.
IAET does not apply to

1. Public-held Corporation
2. Banks and Other Non-Banks Financial Intermediaries
3. Insurance Companies
4. GPs
5. GPPs
6. Non-taxable JVs
7. Enterprises registered with PEZA
For purposes of determining whether the corporation is closely held corporation, insofar as such
determination is based on stock ownership, the following rules shall be applied:
(1) Stock Not Owned by Individuals. — Stock owned directly or indirectly by or for a corporation,
partnership, estate or trust shall be considered as being owned proportionately by its shareholders,
partners or beneficiaries.
(2) Family and Partnership Ownership. — An individual shall be considered as owning the stock owned,
directly or indirectly, by or for his family, or by for his partner. For purposes of this paragraph, the family of
an individual includes his brothers or sisters (whether by whole or half-blood), spouse, ancestors and
lineal descendants.
(3) Option to Acquire Stocks. — If any person has an option to acquire stock, such stock shall be
considered as owned by such person. For purposes of this paragraph, an option to acquire such an
option and each one of a series of option shall be considered as an option to acquire such stock.
(4) Constructive Ownership as Actual Ownership. — Stock constructively owned by reason of the
application of paragraph (1) or (3) hereof shall, for purposes of applying paragraph (1) or (2), be treated
as actually owned by such person; but stock constructively owned by the individual by reason of the
application of paragraph (2) hereof shall not be treated as owned by him for purposes of again applying
such paragraph in order to make another the constructive owner of such stock.
Provided, however, that a branch of a foreign corporation is not covered by these Regulations, the same
being a resident foreign corporation.
Computation of IAETGF

Taxable Income for the year   P xx. xx

P xx.
Add: Income exempt from tax  
xx
Add: Income excluded from Gross income    xx. xx  

Add: Income subject to Final Tax    xx. xx  

Add: NOLCO    xx. xx xx. xx

Less: Income Tax Paid or Payable for the P xx.

 
Year xx

Less: Dividends (actual or constructive)    xx. xx  xx. xx

Total   xx. xx

Add: Retained Earnings prior years (beg)    xx. xx

Accumulated earnings as of year-end (end)   xx. xx

Less: Amounts Received for Reasonable

   xx. xx
needs

Excess is considered Improperly Accumulated   P xx. xx

X 10% IAET   ( xx. xx)

 
The IAET is not like any of the other internal revenue taxes computed, filed, and paid for by the taxpayer in a tax
return. The BIR makes a computation on its allegation of improper accumulation of profits by the corporation.