Module No.

2 – Special Corporations

Learning Outcome/s:
 Discuss and familiarize with the tax rates of different special corporations
 Able to analyze and solve problems in relation to taxes of special corporations

Core Values/Biblical Principles:

“As for me, I will always have hope; I will praise you more and more. My mouth will tell of your
righteous deeds, of your saving acts all day long—though I know not how to relate them all. I will come
and proclaim your mighty acts, Sovereign Lord; I will proclaim your righteous deeds, yours alone.”
Psalms 71:14-16

Special Domestic Corporation

1. PRIVATE EDUCATIONAL INSTITUTION AND NON-PROFIT HOSPITAL

- 10% on world taxable income subject to pre-dominance test

*Pre-dominance test

 If the gross income from unrelated trade, business or other activity exceeds fifty
percent (50%) of the total gross income derived by such educational institutions or
hospital from all sources – subject to 25% regular income tax

Summary of Tax Rules on Educational Institutions and Hospitals

Owner Educational Institutions Hospitals

Private 10% / 1% of taxable income 25% / 20% of taxable income
Non-profit Exempt 10% / 1% of taxable income
Government Exempt Exempt

Sample Problem no. 1

A large non-profit non-stock school has a gross income of P4,000,000, only 40% of which was
contributed by related activities and total expenses of P3,000,000, 50% of which was incurred in
connection with non-related activities.

Required: Compute the total income tax

a. if the income from non-related activities is not used exclusively for educational purposes
b. if all income of the non-profit school is used for educational purposes
c. Assuming the taxpayer is a non-profit charitable institution
d. Assuming the taxpayer is a private school
e. Assuming the taxpayer is a private hospital
 f. Assuming the taxpayer is a non-profit hospital
g. Assuming the taxpayer is a government hospital

2. FOREIGN/EXPANDED CURRENCY DEPOSIT UNIT

FROM
Nature of Income Residents
Non-residents
(E)FCDUs or OBUs Other Residents
Income from forex transaction
Interest income from:
 Forex loans & receivables exempt 10% FIT* exempt
 Forex deposits exempt - exempt
25% / 20% of
Other forex income exempt exempt
taxable income
25% / 20% of 25% / 20% of 25% / 20% of taxable
Income from non-forex transaction
taxable income taxable income income

*If the interest income is not subjected to final tax by the borrower, the FCDU or EFCDU shall
report the same in its gross income in the ITR and shall be subject to the same 10% tax

 Income from Regular Banking Unit – 25% regular corporate income tax
 Income of depositors under EFCDs
o Resident -15% final tax
o Non-resident – Exempt

Sample Problem no. 2

A domestic multinational bank reported the following summary of income and expense:

Residents
Non-Residents Total
OBU/FCDU Others
RBU total gross income P - P 2,000,000 P 750,000 P 2,750,000
FCDU interest income 800,000 800,000 400,000 2,000,000
FCDU rent fees 100,000 120,000 30,000 250,000
Total Gross Income 900,000 2,920,000 1,180,000 5,000,000
Direct expenses:
RBU expenses P - P 900,000 P 400,000 P 1,300,000
FCDU expenses:
Interest Income 450,000 350,000 150,000 950,000
Rent Fees 20,000 10,000 15,000 45,000
Total direct expenses P 2,295,000
Indirect/common expenses 315,000
Total Expenses P 2,610,00
Required: Determine the tax due of the FCDU and RBU

Sample Problem no. 3

A large domestic bank reports the following income from its regular banking (RBU) and foreign currency
deposit unit (FCDU):

RBU FCDU
Interest from lending with FCDUs/OBUs P - P 300,000
Interest from lending to other residents 2,000,000 3,000,000
Interest from lending to non-residents 1,000,000 1,500,000
Less: Business expenses 1,800,000 2,000,000
Net Income 1,200,000 2,800,0000

Required:

1. Compute the total final tax

2. Compute the regular income tax due

Special Resident Foreign Corporation

1. EXPANDED FCDUs

Tax treatment: Same tax rules to FCDUs/EFCDUs of domestic local banks, EXCEPT:
 All of their offshore income is exempt from income tax

Sample Problem no. 4

A domestic multinational bank reported the following summary of income and expense:

Residents
Non-Residents Total
OBU/EFCDU Others
Interest income from forex loans 800,000 800,000 400,000 2,000,000
EFCDU rent fees 100,000 120,000 30,000 250,000
Total Gross Income 900,000 920,000 430,000 2,250,000
Direct expenses:
EFCDU expenses:
Interest Income 450,000 350,000 150,000 950,000
Rent Fees 20,000 10,000 15,000 45,000
Total direct expenses P 995,000
Indirect/common expenses 315,000
Total Expenses P 1,310,00

Required: Determine the tax due of the EFCDU

Note: Offshore Banking Unit (OBU) is now treated as regular foreign corporation subject to the 25% RCIT
and other taxes upon effectivity of CREATE LAW
- Before CREATE Law, tax treatment is same as to FCDUs and EFCDUs

2. REGIONAL AREA HEADQUARTERS AND REGIONAL OPERATING HEADQUARTERS OF

MULTINATIONAL COMPANIES

Before effectivity of CREATE Before effectivity of CREATE Law

Law (Effective January 1, 2022)
Regional or Area Headquarters
Exempt Exempt
(RAH or RHQ)
Regional operating headquarters
10% of taxable income 25% RCIT
(ROH or ROHQ)

 RHQs and ROHQs are exempt from all kinds of local taxes, fees, or charges imposed by a local
government unit, EXCEPT real property tax on las improvements and equipment

3. INTERNATIONAL CARRIERS

 International carriers are only of two types:

o International air carrier
o International sea or shipping carrier
Type of Carrier (Air/Sea or Income tax rates
Shipping)
Philippine Carrier 25% of world taxable income
2.5% of Gross Philippine Billings*
International Carrier Exception: Preferential rate or exemption on the basis
of reciprocity applicable tax treaty or reciprocity

* Gross Philippine Billings

a. International air carriers – Amount of gross revenue derived from carriage of persons,
excess baggage, cargo, and 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 ticket or passage document
b. International shipping carrier – Amount of gross revenue, whether for passenger, cargo
or mail originating from the Philippines up to final destination, regardless of the place of
sale or payments of the passage or freight documents

Reminders:

 Tickets revalidated, exchanged and/or endorsed to another international airline form part of
the Gross Phil. Billings of the carrying airline if the passenger boards a plane or a port or
point in the Philippines
 Non-revenue passengers and refunded tickets are deducted from gross Philippine billings
Sample Problem no. 5

Nevergreen, a resident foreign shipping company, shows the following analysis of its gross receipts from
passengers and cargoes during a month:

Incoming Flights Outgoing Flights Total

Fares billed in the Philippines 9,000,000 10,000,000 19,000,000
Fares billed abroad 9,000,000 5,000,000 14,000,000
Total billings 18,000,000 15,000,000 33,000,000

Value of fares on non-revenue passengers 700,000 800,000 1,500,000

Fares cancelled and refunded 500,000 800,000 1,300,000
Fare of tickets endorsed to another air
300,000 200,000 500,000
carrier (included in the fares billed)

Required: How much is the income tax due?

 Rule on transshipments or interrupted flights or voyage

o For a flight which originates from the Philippines, but transshipment of passenger takes
place at any sort outside the Philippines on another airline, only the aliquot portion of
the cost of the ticket shall form part of Gross Philippines Billings

Sample Problem no. 6

Celebrity Airways, a Japan air carrier, reported the following for its air transport operations:

Destination Fares
Philippines - Australia P1,000,000 (1,000 tickets)
Australia – Philippines P1,250,000 (1,000 tickets)
Philippines – Russia* P2,000,000 (1,000 tickets)
Philippines - Japan P1,500,000 (2,000 tickets)

*The flight was referred to another airliner in Japan. The Japanese airliner airlifted passengers for Russia.
The direct expenses related to the air transport is amounted to P3,000,000.

Required:

1. Compute the income tax due

2. Assuming the carrier is a domestic carrier, how much is the income tax due?
3. Assuming the flight was transferred to another plane of Celebrity airways, how much is the
income tax due?

 Flights or voyages commencing from foreign countries which will be interconnected in the
Philippine for continuance of the flight or voyage to a foreign destination
o The continuance should be made by the same international carrier
 o Not considered originating from the Philippines if the actual departure is made within
48 hours from embarkton in the country
 EXCEPT: when the cause of delay is due to force majeure
o Treatment: Portion of the ticket pertaining to the outgoing flight shall be excluded from
Gross Philippine Billings
o If the continuance is made by another airline or company, the cost of the outgoing flight
or voyage should be included in the Gross Philippine Billings of that airline or carrier
regardless of the intervening period of time between the arrival and departure from the
Philippines

Sample Problem no. 7

Fair Airways, an international carrier had the following summary of flights during a quarter:

Direct outgoing flights

To Guam (P2,400 x 5,000 passengers) P12,000,000

To USA (P6,000 x 4,000 passengers) 24,000,000

Inter-connecting flights
The following inter-connecting flights were continued in the Philippines:

Flights Nos. of passengers Status

Korea for Guam 600 passengers Continued after 96 hours as scheduled
China for Guam 400 passengers Delayed 52 hours; due to storm
Taiwan for USA 500 passengers Continued after 40 hours as scheduled
Guam for USA 300 passengers Delayed 52 hours; due to storm*
Korea for USA 200 passengers Continued after 24 hours*

*Endorsed to Fresh Airlines, another international air carrier, which airlifted the passengers to their final
destination

Compute the income tax due.

Reminders:

 For computation of Gross Philippine Billings, if the tickets are in foreign currencies are translated
at whichever is higher of the following:
o Monthly average Airline Rate in the Bank Settlement Plan (BSP) Monthly Sales Report
o Bankers Association of the Philippines (BAP) rate
 Income other than the income from International Transport is subject to appropriate type of
income tax.
 Income from branch or sales agent in the Philippines of off-line international carriers – subject
to RCIT
  Special corporations, domestic or resident foreign, subject to tax on net income mandatorily
required to use itemized deduction. They file their income using BIR Form 1702-MX

4. BOI OR PEZA-REGISTERED ENTERPRISES

 BOI-registered – Given a tax holiday

 PEZA and other economic zones – offers tax holiday or 5% gross income tax in lieu of all taxes,
national or local.

Sample Problem no. 8

A calendar-year BOI-registered enterprise has the following data from its registered activity for 2018:

Total sales for year P 90,000,000

Cost of sales 45,000,000
Other business expenses 30,000,000
Taxable income for the year 15,000,000
Regular corporate tax rate 30%

Compute the following:

1. Income Tax Due
2. Tax covered by the ITH for the entire taxable year 2018

Special Non-Resident Foreign Corporation

Lessor/Owner/Distributor of:
Cinema films Vessels Aircraft Other Equipment
4.5% final tax on gross 7.5% final tax on 7.5% final tax on
25% final tax on all sources
rentals, lease or charter rentals, charters and rentals, charters and
of gross income
fees other fees other fees

Sample Problem no. 9

Dark Desire Corporation, a MSME, reported the following gross income and expenses in 2022:

Philippines Abroad Total

Gross Income 400,000 300,000 700,000
Deductions 200,000 150,000 350,000
Taxable Income 200,000 150,000 350,000

Required: Compute the income tax due if the corporation is a/an:

1. Non-resident owner or lessor vessels

2. Non-resident cinematographic film owner, distribution or lessor
3. Non-resident owner or lessor of aircraft, machineries, and other equipment
Reference:

Income Taxation, Rex Banggawan, CPA, MBA, 2021 edition