Lecture 3 - Income Taxation (Corporate)
income tax for corporation...
Lecture 3: INCOME TAXATION – CORPORATION I. Pro-Forma Computation For CORPORATIONS, including business partnerships, domestic corporations, resident foreign corporations, joint ventures, and associations, except non-resident foreign corporations (which is taxable at gross income): Gross receipts/sales xx Less: Cost of service/sales (xx) Gross income from business or profession xx Add: Passive Incomes, not subjected to final tax xx Capital Gains, not subjected to CGT xx Total Gross Income xx Less: Deductions for: Itemized Deductions or OSD (xx) Net Operating Loss Carry-Over (NOLCO) (xx) Taxable Income xx *NCLCO is not applicable since the holding period is also not applicable. II. Overview The term ‘corporation’ includes partnerships, no matter how created or organized, joint-stock companies, joint accounts (cuentas en participacion), associations, or insurance companies, but does not include general professional partnerships (GPPs) and joint venture or consortium formed for the purpose of undertaking construction porjects or engaging in petroleum operation, coal, geothermal and other energy operations pursuant to an operating or consortium agreement under a service contract with the Government. III. Classes of Corporate Taxpayer 1. Domestic corporations are taxed on worldwide income, at 30% of the taxable income. 2. Resident foreign corporations are taxed on incomes from the Philippines only, at 30% of the taxable income. 3. Non- Resident foreign corporations are taxed on incomes from the Philippines only, at 30% of the gross income. Note: a. GPPs 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. IV. Components of Gross Income 1. Business and/or Professional Income 2. Passive Income 3. Capital Gains
The components of gross income for individuals are also the same in the case of corporate taxpayers . (See discussions on Gross Income for individuals, Lecture 2)
V. Deductions from Gross Income 1. Optional Standard Deduction 2. Itemized Deductions (See discussions on Deductions and Dealing in Property.) VI. Corporate Tax 1. Gross Income Tax (GIT) It is an optional income tax given to corporate earners equivalent to 15% of its gross income instead of the 30% net income tax. Only domestic corporations and resident foreign corporations may avail such GIT. Requirements:
Lecture 3: INCOME TAXATION – CORPORATION a. b. c. d. e. f. g. h.
A tax ratio of 20% of Gross National Products A ratio of 40% income tax collection of total tax revenues A VAT tax effort of 4% of GNP A 0.9% ratio of consolidated public sector financial position to GNP Available only to firms whose ratio of cost of sales to gross sales or receipts from all sources is 55%. The election shall be irrevocable for three (3) consecutive year Recommendation from the Secretary of Finance Subject to approval of the Office of the President
2. Normal Corporate Income Tax (NCIT) Period January 1 to October 31, 2005 November 1, 2005 to December 31, 2008 January 1, 2009 and onwards
Corporate Income Tax Rate 32% 35% 30%
3. Minimum Corporate Income Tax (MCIT) The following are liable to MCIT beginning the 4th taxable year in which such corporation commenced its business operations: a. Domestic Corporations b. Resident foreign corporations
The 2% of gross income is imposed whenever a company: a. Has no taxable inocome; or b. Has taxable income but the amount of MCIT is greater than the NCIT (30%) Excess MCIT can be carried forwards for 3 succeeding years and credited againts the normal corporate income tax only when the NCIT is greater than MCIT MCIT can be claimed as a credit against the MCIT itself or against any other losses
The following are exempt from MCIT (these are special corporations): a. Domestic corporations operating as proprietary (private) educational institutions subject to tax at 10% on their taxable income; b. Domestic corporations engaged in hospital operations which are nonprofit subject to tax at 10% on their taxable income; c. Domestic corporations engaged in business as depository banks under the expanded foreign currency deposit system on their income from foreign currency transactions which has been subjected to final tax at 10%; d. Resident foreign corporations engaged in business as “international carrier” subject to tax at 2 ½% of their Gross Philippine Billings; e. Resident foreign corporations engaged in busines as Offshore Banking Units (OBUs) on their income from foreign currency transactions which has been subjected to a final income tax at 10% of such income; f. Resident foreign corporations engaged in business as regional area headquarters subject to tax at 10% of their taxable income; and g. Firms that are taxed under a special income tax system
The computation and payment of MCIT, shall likewise apply at the time of filing the quarterly corporate income tax. In the computation of the tax due for the taxable quarter, if the quarterly MCIT is higher than the quarterly normal income tax, the tax due to be paid for such taxable quarter at the time of filing the quarterly corporate income tax return shall be the MCIT.
Improperly Accumulated Earnings Tax It is a tax imposed on improper accumulation of earnings. “Improperly accumulated earnings (IAE)” are the profits of a corporation that are permitted to accumulate instead of being distributed by a corporation to its
Lecture 3: INCOME TAXATION – CORPORATION shareholders for the purpose of avoiding the income tax with respect to its shareholders or the shareholders of another corporation.
The rate of 10% of the Improperly Accumulated Taxable Income, computed as follows: Taxable Income for the Year xx Add: Income exempt from tax xx Income excluded from gross income xx Income subject to final tax, net xx NOLCO xx Less: Income tax paid for the taxable year (xx) Dividends actually or constructively paid/issued from the applicable year’s taxable income (xx) Amount reserved for the reasonable needs (xx) Tax Base for IAET xx Note: Earnings for the reasonable needs are enumerated as follows [Revenue Regulation No. 22001]: 1. Allowance for the increase in the accumulation of earnings up to 100% of the paid-up capital of the corporation as of the balance sheet date, inclusive of accumulation taken from other years; 2. Earnings reserved for definite corporate expansion or projects as approved by the board; 3. Earnings reserved for building, plants or equipment acquisition as approved by the board; 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; 6. In case of subsidiaries of foreign corporations in the Philippines, all undistributed earnings intended or reserved investments within the Philippines as can be proven by corporate records.
Applicability: a. Shall apply to every corporation formed or availed for the purpose of avoiding the income tax with respect to its shareholders or shareholders of any other corporation, by permitting earnings and profits to accumulate instead of being divided or distributed. These are: i. Domestic corporations ii. Closely-held corporations
Exceptions: a. Publicly-held corporations b. Banks and other non-banks financial intermediaries c. Insurance companies d. Taxable (business) partnerships (deemed to have actually or constructively received the taxable income under Sec. 73D) e. General professional partnerships f. Non-taxable joint ventures g. 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
Income Tax Return Filing and Payment of Income Tax Income Tax Return (BIR Form) Annual Income Tax Return – Corporate (BIR Form 1702)
Deadline for Filing and Payment On or before the 15th day of the 4th month of the following the close of the taxable year
Lecture 3: INCOME TAXATION – CORPORATION Annual Income Tax Return – Self-Employed Individual (BIR Form 1701) Quarterly Income Tax Return (BIR Form 1702Q)
On or before the 15th day of the 4th month of the following the close of the taxable year Within 60 days after the end of each first 3 quarters of the taxable year
IX. BIR Issuances and Court Decisions Related to Income Tax 1. Valuation of Contributions or Gifts Actually Paid or Made in Computing Taxable Income Revenue Memorandum Circular (RMC) No. 86-2014 dated December 5, 2014 - This circular is issued to clarify the valuation of contributions or gifts actually paid or made in computing taxable income as part of the substantiation requirement under Revenue Regulations No. 13-98: Information Required in Certificate Donation (BIR Form No. 2322)
Allowable income tax deduction (on the part of the donor)
Actual receipt by the accredited NSNP/ NGO of the donation or contribution Date of the receipt of donation, and Amount of donation a. Amount of donation or contribution –if cash b. Acquisition cost – if real or personal property Net book value of the property donated as reflected in the financial statements of the donor.
2. Requirements for Deductibility of Certain Income Tax Payments Revenue Regulation No. 12- 2013 dated July 12, 2013 - Requirements for deductibility: Any income payment which is otherwise deductible under the Code shall be allowed as a deduction from the payor’s gross income only if it is shown that the income tax required to be withheld has been paid to the Bureau in accordance with Sections 57 and 58 of the Code. - No deduction will also be allowed notwithstanding payments of withholding tax at the time of audit investigation or reinvestigation/reconsideration in cases where no withholding of tax was made in accordance with Sections 57 and 58 of the Code. 3. Validity of Principal and Supplementary Receipts/Invoices Revenue Regulations No. 18- 2012 dated October 22, 2012 - All taxapyers are mandated by the BIR to make new sets of ORs and Sales invoices wuth special security marking features printed by BIR – Accredited printers only. - All ORs and Sales invoices shall be valid only until full usage of the approved serial numbers or five years from its issuance whichever comes first. - This should be effective starting January 18, 2013 4. Taxability of Associations Dues, Membership Fees Received by Condominium Corporations Revenue Memorandum Circular (RMC) No. 65-2012 dated October 31, 2012 - Amounts paid in as dues or fees by members or tenants of a condominium corporation form part of the gross income of such corporation subject to income tax. This is because the condominium corporation furnishes its members and tenants with benefits, advantages, and privileges in return for such payments. - For tax purposes, the following constitute income tax payment or compensation which are subject to income tax: a. Association dues b. Membership fees c. Other assessments/charges - The previous interpretation that the assessment dues are funds which are merely held in trust by a condominium corporation lacks legal basis and is hereby abandoned.
Lecture 3: INCOME TAXATION – CORPORATION
Note: The same rule applies to homeowner’s association per RMC No. 9-2013 dated January 9, 2013 5. Rules on Deductibility of Depreciation Expenses on Vehicles Revenue Regulation No. 12 – 2012 dated October 12, 2012 - Limitations on deductions: a. Only one (1) vehicle for land transportation is allowed for the use of an official or employee, the value of which should not exceed P2.4 million b. No depreciation shall be allowed for yachts, helicopters, airplanes and/or aircrafts, and land vehicles which exceed the said threshold. c. All related maintenance expenses on account of a non-depreciable vehicle for taxation purposes are also disallowed in its entirety. d. Loss to be incurred from sale of non-depreciable vehicle shall not be allowed as deduction from gross income [Revenue Memorandum Circular (RMC) No. 2 -2013 dated December 8, 2012] -
Exception: a. Unless the taxpayer’s mainline of business is transport operations or lease of transportation equipment and the vehicles purchased are used in the said operations. This regulation shall take effect immediately. (Published in October 17, 2012)
6. Clarifying the Taxability of Clubs Organized and Operated Exclusively for Pleasure, Recreation and Other Non-Profit Purposes Revenue Memorandum Circular (RMC) No. 35 – 2012 dated August 3, 2012 - Clubs which are organized and operated exclusively for pleasure, recreation and other non-profit purposes are subject to income tax under the Tax Code, as amended. - Background: The provision in the NIRC of 1977 which granted income tax exemption to such recreational clubs were omitted in the current of tax exempt corporations under NIRC of 1997, as amended. HENCE, the income of recreational clubs from whatever source, including but not limited to membership fees, assessment dues, rental income, and service fees are subject to income tax.
STRAIGHT PROBLEMS: 1. A Corporation has the following data for the year 2011: Gross Income, Philippines P 1,000,000 Gross Income, USA 500,000 Gross Income, Japan 500,000 Expenses, Philippines 300,000 Expenses, USA 200,000 Expenses, Japan 100,000 Other Income: Dividend from San Miguel Corp. 70,000 Dividend from Ford Motors, USA 120,000 Gain, sale of San Miguel Shares directly to buyer 150,000 Royalties, Philippines 50,000 Royalties, USA 100,000 Interest from trade receivables 60,000 Rent, land in USA 250,000 Other rent income within the Philippines 100,000 Prize, contest in Manila 200,000
Lecture 3: INCOME TAXATION – CORPORATION a. The total tax liability as a domestic corporation is ___________________ b. The total tax liability as a resident corporation is ___________________ c. The total tax liability as a non-resident corporation is ___________________ 2. ABC, is a domestic corporation engaged in merchandising business. For the calendar year 2014, it had a net income per books of P 500,000, after considering, among others, the following: a. Dividend received from a domestic corporation P 30,000 b. Provision for doubtful accounts 10,000 c. Dividend received from a foreign corporation 20,000 d. Portion of P150,000 advance rental already earned 100,000 e. Recovery of receivables previously written off included as part of net income above: Allowed by the BIR as deduction 10,000 Disallowed by the BIR as deduction 30,000 f. Refund of taxes (included as part of the net income above): Allowed by the BIR as deduction 25,000 Disallowed by the BIR as deduction 15,000 g. Bank Interest income: Philippine National Bank 80,000 USA Bank 100,000 The taxable net income is
The total tax liability is
3. A domestic corporation organized in 1998, provided the following information: Net Sales Cost of Sales Business Expenses
2006 P 4,000,000 2,000,000 1,900,000
Compute the income tax due for: a. 2006 ____________________ b. 2007 ____________________ c. 2008 ____________________
2007 P 5,000,000 3,500,000 1,550,000
2008 P 6,000,000 4,200,000 1,820,000
2009 P 7,000,000 5,000,000 2,100,000
d. 2009 e. 2010
2010 P 9,000,000 5,200,000 2,300,000
Assuming the company elects to claim OSD on the year 2006, 2007 and 2008, but claims itemized deduction for the year 2009 and 2010, compute the income tax due for: a. 2006 b. 2007 c. 2008
____________________ ____________________ ____________________
d. 2009 e. 2010
4. JAMBY Co. is a domestic corporation and has been in business for six our years. For the year 2013, JAMBY has the following cumulative information: Q1 Gross Sales Sales Returns Cost of Goods Sold Capital Gain on Sale directly to buyer of shares of domestic corporation
1,500,000.00 50,000.00 650,000.00
2,560,000.00 70,000.00 890,000.00
3,450,000.00 115,000.00 935,000.00
4,500,000.00 115,000.00 1,285,000.00
Lecture 3: INCOME TAXATION – CORPORATION
Dividend from a Domestic Corporation Interest in Philippine Currency Bank Deposit Allowable Business Expense Income tax paid to paid a. b. c. d.
The income tax still due at the end of the first quarter The income tax still due at the end of the second quarter The income tax still due at the end of the third quarter The income tax still due (refundable) at the end of the year
___________________. ___________________. ___________________. ___________________.
5. The records of a closely held corporation show the following data for 2012: Gross Income Business Expenses Gain on Sale of Business Asset Interest on deposits with Metrobank, net of tax Sale of shares of stocks, not listed and traded: Selling Price Cost Dividends from Victory Corporation, domestic Dividends paid during the year Reserved for Building Acquisition
1,500,000.00 600,000.00 60,000.00 5,000.00 150,000.00 115,000.00 35,000.00 120,000.00 300,000.00
In 2011, the corporation suffered an operating loss of P130, 000. This amount was carried over and claimed as deduction from gross income in 2012. a. The income tax due in 2012 is __________________. b. If the corporation opted to claim OSD, the income tax due in 2012 is __________________. c. If the corporation has improperly accumulated its earnings and considering that itemized deduction is claimed by the corporation, the IAET payable is __________________. 6. RM, a general professional partnership, with Ms. Robyn, with seven dependent children, and Ms. Mena, participatin equally in the partnership net income or loss. The data in their operation for 2013 are as follow: RM Partnership Ms. Robyn Ms. Mena Gross Income P700,000 P200,000 P600,000 Expenses related to the income 500,000 90,000 500,000 Drawings by the partner from 2013 income 24,000 0 Income tax was withheld by the partnership at 10%. a. The income tax still due or refundable of Ms. Mena. _________________ b. The income tax still due or refundable of Ms. Robyn. _________________ 7. Claudia and Amor, sisters, inherited an income producing property from their father. They have their own separate practice of their profession and their interest on the property is only to preserve the property and collect the income from the property. Claudia, the elder sister, was in charge of the property. In 2013, the sisters had given you the following data: Gross Income from property P500,000 Expenses related to the property 100,000 Withholding income tax by the co-ownership on income distributed to sisters 10% Separate data for Amor: Gross income from profession, net of CWT P522,000 Expenses on her practice of profession 150,000
Lecture 3: INCOME TAXATION – CORPORATION
a. The income tax of the co-ownership. b. The income tax of Amor.