1. Income Tax

(a) Schedular

Income that are subjected to different sets of graduated or flat income tax rates.

Optional Tax Scheme for Domestic Corporations

Domestic corporations may opt to be taxed at either:

• Corporate gross income tax – The President, upon recommendation of the Sec. of Finance, may allow domestic corporations the option to be taxed at 15% of gross income after conditions have been satisfied.
• Regular corporate income tax (RCIT) subject to minimum corporate income tax

Corporate tax scheme on regular corporations

(a) Regular Corporate Income Tax (RCIT)

RCIT applies to all corporations in general. It covers all taxable income of corporations that are not subject to final tax or capital gains tax.

The regular domestic tax rates are:

(b) Minimum Corporate Income Tax (MCIT)

The MCIT is applicable to domestic corporations and resident foreign corporations subject to the regular corporate income tax when the statutory conditions for MCIT are met, including non-profit, exempt, and special corporations with respect to their taxable income subject to the regular corporate income tax, but not to the income subject to special tax rates. (NIRC Secs. 27(E) and 28(A)(2), as amended by RA 11534) (Banggawan)

Imposition of MCIT

Computed as 2% of gross income subject to regular income tax (GI)

The MCIT is not a tax on capital. It is imposed on gross income which is arrived at by deducting the capital spent by a corporation in the sale of its goods, i.e., the cost of goods and other direct expenses from gross sales. Clearly, the capital is not being taxed. Thus, MCIT is constitutional. (Chamber of Real Estate and Builders' Associations, Inc. v. Executive Secretary Alberto Romulo, G.R. No. 160756, 9 March 2010)¹

When applicable: Beginning on the 4th taxable year from the year in which such corporation commenced its business operation, i.e. the year when corporation registers with the BIR, regardless of whether the corporation is using calendar or fiscal year. Thus, a corporation which started operations on any day in 2012 will be covered by the MCIT in 2016.

When imposed: When the corporation has either (Rev. Regs. 12-07)²:

• Zero or negative taxable income or
• when the MCIT exceeds the RCIT computed at the corporation’s applicable current rate (MCIT > RCIT), under NIRC Secs. 27(A), 27(E), 28(A)(1), and 28(A)(2), as amended by RA 11534

When computed/paid: At the time of filing of quarterly corporate income tax as prescribed under Secs. 75 and 77 of the NIRC³. (Rev. Regs. 12-07)

Rationale: Designed to prevent corporations from escaping tax by including frivolous expenses in their statement of income (e.g., over-statement of depreciation expense).

Relief from MCIT

Upon recommendation of the CIR, MCIT may be suspended by the Sec. of Finance upon submission of proof that the corporation sustained losses on account of:

• Prolonged labor dispute
• Force majeure
• Legitimate business reverses

Illustrations

A. The following dates are available for X Corp:

• SEC Registration - December 17, 2010
• BIR Registration - January 4, 2010
• Start of operations - January 1, 2012

The MCIT may first be imposed on X Corp in taxable year 2016, if it exceeds the RCIT.

B. Computation of RCIT (PHP)

Note: The MCIT is not applicable in 2014 since it has not yet reached the “fourth taxable year” requirement.

Determination of Tax Due and Payable

Note: The 10,000 excess MCIT may be carried forward and credited against RCIT for any of the three immediately succeeding taxable years, to the extent allowable (NIRC, Secs. 27(E)(2) and 28(A)(2)).

Corporations Exempt from MCIT

• Resident foreign corporations engaged in business as international carriers
• Resident foreign corporations engaged in business as offshore banking units
• Firms that are taxed under a special income tax regime (like those under PEZA or other economic zones)
• Proprietary educational institutions
• Non-profit hospitals
• Income of depositary banks under the FCDU/EFCDU that is not subject to regular corporate income tax (income taxable under the regular corporate income tax system is subject to MCIT when its statutory conditions are met)
• Real Estate Investment Trusts (REITs)
• Nonresident foreign corporations

Applicability of the MCIT where a corporation is governed both under the regular tax system and a special income tax system

In the case of a domestic corporation whose operations or activities are partly covered by the regular income tax system and partly covered under a special income tax system, the MCIT shall apply on operations covered by the regular income tax system. For example, if a BOI registered enterprise has a “registered” and an “unregistered” activity, the MCIT shall apply to the unregistered activity. (Rev. Regs. 09-98)⁴

Branch Profits Remittance Tax (BPRT)

Any profit remitted by a branch to its head office shall be subject to a tax of 15% which shall be based on the total profits applied or earmarked for remittance without any deductions for the tax component (except those activities which are registered with PEZA) (Sec. 28(A)(5))⁵.

The 15% branch profit remittance tax is a final tax which is required to be withheld at source by the branch of a foreign corporation.

Interest, dividends, rents, royalties, remuneration for technical services, salaries, wages, premiums, annuities, emoluments or other fixed or determinable annual, periodic or casual gains, profits, income, and capital gains received by a foreign corporation during each taxable year from all sources within the Philippines shall not be treated as branch profit unless the same are effectively connected with the conduct of the taxpayer’s trade or business in the Philippines. (Sec. 28(A)(5))

The term “effectively connected with the conduct of taxpayer’s trade, or business: does not necessarily mean that the income must be derived from the actual operation of the taxpayer-corporation’s trade or business, it is sufficient that the income arises from the business activity in which the corporation is engaged. (RMC No. 55-80)⁶

Scope

BPRT covers the remittance of all resident foreign corporations including ROHQs of multinational companies, FCDUs or OBUs of foreign banks, and international carriers, except PEZA-registered entities.

Remittance form prior year earnings is still taxable

The NIRC used the phrase “any profit remitted” without limiting the same to current year profit remittance. The BPRT therefore is understood to apply to remittance of prior year earnings. (Banggawan)

Illustration

A resident foreign corporation earning purely active income reported the following since it started operation in 2019:

Which corporations are required to file an Income Tax Return?

Every corporation subject to the tax herein imposed, except foreign corporations not engaged in trade or business in the Philippines, shall render, in duplicate, a true and accurate quarterly income tax return and final or adjustment return in accordance with the provisions of Chapter XII of this Title. (Sec. 52 (A))⁷

Who shall file for the corporation?

The income tax return shall consist of a maximum of four (4) pages in paper form or electronic form, be filed by the president, vice-president or other principal officer, shall be sworn to by such officer and by the treasurer or assistant treasurer. (Sec. 52 (A))⁸

Taxable Year of a Corporation

A corporation may employ either calendar year or fiscal year as a basis for filing its annual income tax return: Provided, That the corporation shall not change the accounting period employed without prior approval from the Commissioner in accordance with the provisions of Section 47⁹. (Sec. 52 (B))¹⁰

i. Quarterly Income Tax

Every corporation shall file in duplicate a quarterly summary declaration of its gross income and deductions on a cumulative basis for the preceding quarter or quarters upon which the income tax, as provided in Title II of this Code¹¹, shall be levied, collected and paid. The tax so computed shall be decreased by the amount of tax previously paid or assessed during the preceding quarters and shall be paid not later than sixty (60) days from the close of each of the first three (3) quarters of the taxable year, whether calendar or fiscal year. (Sec. 75)¹²

ii. Final Adjustment Return

Every corporation liable to tax under Section 27¹³ shall file a final adjustment return covering the total taxable income for the preceding calendar or fiscal year. If the sum of the quarterly tax payments made during the said taxable year is not equal to the total tax due on the entire taxable income of that year, the corporation shall either:

"(A) Pay the balance of tax still due; or

"(B) Carry-over the excess credit; or

"(C) Be credited or refunded with the excess amount paid, as the case may be.

In case the corporation is entitled to a tax credit or refund of the excess estimated quarterly income taxes paid, the excess amount shown on its final adjustment return may be carried over and credited against the estimated quarterly income tax liabilities for the taxable quarters of the succeeding taxable years. Once the option to carryover and apply the excess quarterly income tax against income tax due for the taxable quarters of the succeeding taxable years has been made, such option shall be considered irrevocable for that taxable period and no application for cash refund or issuance of a tax credit certificate shall be allowed therefor. (Sec. 76)¹⁴