Tax - Week 7 - Week 8 Tax on Corporations: Bases and Rates - Coggle Diagram
Tax - Week 7 - Week 8 Tax on Corporations: Bases and Rates
V. Tax on Corporations: Bases and Rates
D. Joint Venture; Exempt v. Taxable
E. Domestic Corporations (NIRC 27)
F. Resident Foreign Corporations
- A corporation organized under the laws of a foreign country, which is engaged in trade or business in the Philippines.
- Generally, only on income derived from sources within the Philippines.
Engaged in Trade or Business (RA 7042 S.3d) -
SOLICITING - orders, service contracts, opening offices, whether called “liaison” offices or branches;
APPOINTING - representatives or distributors domiciled in the Philippines or who in any calendar year stay in the country for a period or periods totalling one hundred eighty (180) days or more
PARTICIPATING - in the management, supervision or control of any domestic business, firm, entity or corporation in the Philippines;
ANY OTHER - act or acts that imply a continuity of commercial dealings or arrangements, and contemplate to that extent the performance of acts or works, or the exercise of some of the functions normally incident to, and in progressive prosecution of, commercial gain or of the purpose and object of the business organization:
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Tax Rate -
GR - Default Net taxable income tax of 25%.
Articles of Incorporation (NIRC 27)
- So long as registered with the SEC, considered as a domestic corporation. Regardless of the degree of foreign ownership.
G. Non-Resident Foreign Corporations (Sec. 28)
J. Exempt Corporations (Sec. 30)
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- A foreign corporation not engaged in trade or business in the Philippines
Definition (NIRC 22C)
- a corporation created and organized in the Philippines or under its laws
Special Domestic Coproration
Private Educational Institutions and Non-profit Hospitals
Proprietary educational institution” - any private school maintained and administered by private individuals or groups with an issued permit to operate from DepEd, CHED or TESDA [Sec. 27 (B), NIRC].
Unrelated trade, business, or other activity” - any trade, business or other activity, the conduct of which is not substantially related to the exercise or performance by such educational institution or hospital of its primary purpose or function.
Exemption for Non-Stock, Non-Profit (CIR v. DLSU)
- In order to claim the tax exemption, two requisites must be present.
the taxpayer falls under the classification non-stock, non-profit educational institution; and
the income it seeks to be exempted from taxation is used actually, directly and exclusively for educational purposes.
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- no stocks, only shares of ownership.
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Government Owned and Controlled Corporations
- Subject to taxation. UNLESS in connection with governmental functions, then that receipt/income is exempt.
- The following enumeration are exempt.
2a. Government Service Insurance System (GSIS)
2b. Social Security System (SSS)
2c. Home Development Mutual Fund (HDMF)
2d. Philippine Health Insurance Corporation (PHIC)
2e. Local water districts (LWDs) under Sec. 27 (C) of NIRC
Government agencies or instrumentality:
- The government is exempt from tax.
- When it Chooses to tax itself
Royalties & Interest
Interest income from any currency bank deposit in regular banking units 20%
Yield or any monetary benefit from deposit substitutes 20%
Interest income and yield from trust funds and similar arrangements 20%
Royalties derived from sources within the Philippines 20%
Interest income derived from a depositary bank under the FCDU 15%
Interest income from foreign currency loans granted by depositary bank under the expanded foreign currency deposit system to residents other than OBUs in the Philippines or other depository banks under the expanded depository system 10%
Gross income derived from contracts by sub-contractors from service contractors engaged in petroleum operations as defined under PD 87 (“Oil Exploration and Development Act” in the Philippines), as imposed under PD 1354 8%, in lieu of any and all taxes, national and local
For Domestic - Only dollar and foreign, no premium and long term interest income.
Any income of nonresidents, whether individuals or corporations, from transactions with depository banks under the expanded system shall be exempt from income tax.
- Dividends received by a domestic corporation from another domestic corporation are NOT subject to income tax.
Foreign Sourced Dividends -
GR - Foreign Sourced Dividends received by domestic corporations are subject to income tax.
XCPN - Exempt upon concurrence of (3) conditions.
2a. REINVESTED - dividends actually received or remitted into the Philippines are reinvested in the business operations of the domestic corporations within the next taxable year from the time the foreign-source dividends were received or remitted’
2b.EXCLUSIVE USED - dividends received shall only be used to fund the working capital requirements, capital expenditures, dividend payments, investment in domestic subsidiaries, and infrastructure project;
2c. 20% SHARE - domestic corporation holds directly at least 20% in value of the outstanding shares of the foreign corporation and has held the shareholding uninterruptedly for a minimum of 2 years at the time of the dividends distribution. In case the foreign corporation has been in existence for less than 2 years at the time of dividends distribution, then the domestic corporation must have continuously held directly at least 20% in value of the foreign corporation’s outstanding shares during the entire existence of the corporation.
- ONLY on lands and buildings. For individuals, all real property.
15% - Capital Gains on Sale of Shares of Domestic Corp (not traded in a domestic stock exchange)
6% FWT - Capital Gains on Sale of Real Property in the Philippines imposed on FMV or Gross Selling Price (higher)
DIFFERENT FROM INDIVIDUALS -
CORPORATION - Lands and buildings only. If other real corporation, regular taxation.
INDIVIDUALS - ALL forms of real property.
- A domestic corporation is taxable on all income derived from sources within and without the Philippines.
Tax Rates for Regular Domestic Corproations -
- Domestic Corporations in General
% - Corporations with net taxable income not exceeding Php 5 million AND total assets not exceeding Php 100 million,
2a. EXCLUDING - the land on which the particular business entity’s office, plant, and equipment are situated
Tax Rates for Special Domestic Corporations -
GR 1% (2020-June 20 2023)
GR 10% (June 21 2023)
XCPN - If gross income from 'unrelated trade, business or other activity' exceeds fifty percent (50%) of the total gross income derived by such educational institutions or hospitals from all sources, the tax prescribed in Subsection (A) hereof shall be imposed on the entire taxable income
MCIT Tax Rates -
GR 1% (2020-June 20 2023)
GR 2% (Post June 20 2023)
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Exact 5M and Exact 100M - 20%
- Land on which the home office is the only exclusion.
Includes one person corporations
Joint Ventures with Local Companies (RR No. 10-12)
- Taxed as a corporation if:
For a construction projection
Involves pooling of resources by PCAB licensed contractors
Contractors are engaged in construction business
The joint venture must also be licensed by PCAB
- Each member of the JV would be responsible in reporting and paying appropriate income taxes on their respective share to the JV profit.
GR - Not taxable as a corporation
XCPN - Unless these requisites are met.
Joint Ventures with Foreign Companies -
Treated as non-taxable/exempt corporation only upon the concurrence of the following requisites:
- Foreign contractor is covered by a special license as contractor by the PCAB
- construction project is certified by the appropriate Tendering Agency (government office) that
- The project is a foreign financed/internationally-funded project
- international bidding is allowed under the Bilateral Agreement entered into by and between the Philippine Government and the foreign/international financing institution pursuant to the Contractor’s License Law
Absence of Requisites
- If any of these requirements are missing, the JV with foreign companies would be considered as a taxable corporation.
Coverage of Exemption (RR 10-12)
- The tax-exempt joint venture or consortium shall not include those who are mere suppliers of goods, services or capital to a construction project. The members to a Joint Venture not taxable as corporation shall each be responsible in reporting and paying appropriate Income Taxes on their respective share to the joint ventures profit.
- Not considered as a corporation for the purposes of taxation. JVA OR CONSORTIUM formed for the purpose of
- construction projects
- in petroleum, coal, geothermal and other energy operations pursuant to an operating consortium agreement under a service contract with the Government
- Here, the partners making up the joint-venture are subjected to individual taxes.
Definition (NCC 484)
- whenever the ownership of an undivided thing or right belongs to different persons.
When Exempt )Obillos v. CIR)
- When the co-ownership’s activities are limited merely to the preservation of the co-owned property and to the collection of the income from the property, each co-owner is taxed individually on his distributive share in the income of the co-ownership. [De Leon]
Sale of Co-owned Properties
- . If later on they found it not feasible to build their residences on the lots because of the high cost of construction, then they had no choice but to resell the same to dissolve the co-ownership. The division of the profit was merely incidental to the dissolution of the co-ownership which was in the nature of things a temporary state.
When Subject to Tax
- When the following instances are present:
When a co-ownership is formed or established voluntarily, or upon agreement of the parties;
When the individual co-owner reinvested his share, and
When the inherited property remained undivided for more than ten years, and no attempt was ever made to divide the same among the co-heirs, nor was the property under administration proceedings nor held in trust, the property should be considered as owned by an unregistered partnership. [Valencia and Roxas]
Transitions into Unregistered Partnership
- If turned into business. Relevant because the taxpayer changes. Turns into corporation and the profit distribution to the individual partners becomes dividends, which constitutes passive income.
- Plain and simple co-ownership, even if distribution of profits does not render it into an unregistered partnership. Here, income received is subject to regular taxation.
Kinds of Partnerships
- General Partnerships & General Professional Partnerships
((Sec. 22(B), NIRC) - A partnership which is not a general professional partnership. Treated as a
corporation. Where all or part of their income is
derived from the conduct of trade or business;
it is treated as a corporation
Scope (Afiscoo Insurance v. CIR) -
Covers Unregistered partnerships, associations, and other entities resembling corporations.
General Professional Partnerships (22b)
- 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.
- A GPP as such shall not be subject to the income tax. It is not a taxable entity for income tax purposes. Instead, tax imposed on the income of the individual partners.
Filing of Tax Return (RR-28) -
partnership itself is required to file income tax returns for the purpose of furnishing gains or profits which each partner shall include in his individual return
Rationale (Tan v. CIR)
- The GPP is deemed to be no more than a mere mechanism or a flow-through entity in the generation of income by, and the ultimate mechanism distribution of such income to the individual partners
- It is the individual partners who shall be subject to income tax, as well as to withholding tax, in their separate and individual capacities (Sec. 26, NIRC)
Income Payments to the Partners [RMC 03-12]
- Covers as drawings, advances, sharings, allowances, stipends and the like:
15% creditable withholding tax -
If payments to the partner exceed P720k for the current year.
10% creditable withholding
- if less than P720,000.
Not a taxable entity. Instead, a flow-through entity. The taxation here is dependent on the character of the partner that receives the net distributive share of the GPP.
GR - The partnership is subject to the same rules and rates as corporations.
XCPN - A partner’s share in the partnership’s distributable net income is deemed actually or constructively received by the partners in the same taxable year.
2a. such share will be subjected to dividend tax (10%) whether actually distributed or not.
2b. there can never be an instance of improperly accumulated taxable income; note that RR 2-01 provides that IAET does not apply to taxable partnerships.
Unregistered Partnership (Lorenzo Ona v. CIR)
- Co-ownership of inherited properties is converted into an unregistered partnership if:
The said common properties and/or the incomes derived therefrom are used as a common fund
With intent to produce profits in proportion to their respective shares.
- mere co-ownership does not make it an unregistered partnership. Subsequent acts that turn the management into a business renders it unregistered partnership. Intent to earn profit, expand.
Distributable Net Income
If partnership, (taxable income - normal corporate income tax [30%]).
A partner’s contribution to the general partnership fund is a capital investment and is not taxable income of the partnership
One Person Corporation
- Amendment introduced by the CREATE law. OPC's are covered under the scope of Sec. 22.