Under the Philippine's National Internal Revenue Code of 1997 (the "Tax Code"), the term "corporation" includes partnerships, no matter how created or organized, joint-stock companies, joint accounts (cuentas en participation), associations, or insurance companies, but excluding general professional partnerships and a joint venture or consortium formed for the purpose of undertaking construction projects or engaging in petroleum, coal, geothermal and other energy operations pursuant to an operating or consortium agreement under a service contract with the Government 1 Under the Tax Code, there are three (3) types of taxable corporations - a domestic corporation, a resident foreign corporation and a non-resident foreign corporation.
A domestic corporation is a corporation created or organized under Philippine law2. A domestic corporation is taxable on all income derived from sources within and without the Philippines3.
A foreign corporation is corporation organized, authorized, or existing under the laws of any foreign country4 A foreign corporation is either a resident - a corporation engaged in trade or business in the Philippines5, or a non-resident - a corporation not engaged in trade or business in the Philippines6. Note, however, that a foreign corporation who wishes to engage in trade or business in the Philippines should first secure a license from the Philippine Securities and Exchange Commission.7
A foreign corporation, whether resident or non-resident, is taxed only on income derived from sources within the Philippines.8 The following items are, among others, deemed income from sources within the Philippines9:
- Compensation for labor or personal services performed in the Philippines;
- Rentals and Royalties from property located in the Philippines or from any interest in such property, including rentals or royalties for:
- The use of or the right or privilege to use in the Philippines any copyright, patent, design or model, plan, secret formula or process, goodwill, trademark, trade brand or other like property or right;
- The use of, or the right to use in the Philippines any industrial, commercial or scientific equipment;
- The supply of scientific, technical, industrial or commercial knowledge or information;
- The supply of any assistance that is ancillary and subsidiary to, and is furnished as a means of enabling the application or enjoyment of, any such property or right as is mentioned in paragraph (a), any such equipment as is mentioned in paragraph (b) or any such knowledge or information as is mentioned in paragraph (c);
- The supply of services by a nonresident person or his employee in connection with the use of property or rights belonging to, or the installation or operation of any brand, machinery or other apparatus purchased from such nonresident person;
- Technical advice, assistance or services rendered in connection with technical management or administration of any scientific, industrial or commercial undertaking, venture, project or scheme; and
- The use of or the right to use:
- Motion picture films;
- Films or video tapes for use in connection with television; and
- Tapes for use in connection with radio broadcasting.
- Gains, profits and income from the sale of real property located in the Philippines; and
- Gains, profits and income derived from the sale within the Philippines of personal property. However, gains from the sale of shares of stock in a domestic corporation shall be treated as derived from sources within the Philippines regardless of where said shares are sold10.
Taxation Of Domestic Corporations
Except for certain passive incomes and incomes of domestic non-profit proprietary educational institutions and hospitals11, a domestic corporation is taxed at thirty two per cent (32%) of its taxable income; that is, its gross income from all sources within and without the Philippines less allowable deductions.12 These allowable deductions are13:
- Ordinary and necessary trade or business expenses;
- Interests paid or incurred within a taxable year on indebtedness in connection with the taxpayer's trade or business;
- Taxes except income tax, estate and donor's taxes, and taxes assessed against local benefits of a kind tending to increase the value of the property assessed.
Income tax imposed by authority of any foreign country is allowed either as a deduction or tax credit. However, a foreign corporation shall not be allowed a tax credit for the taxes imposed by foreign countries;
- Losses actually sustained during the taxable year and not compensated for by insurance or other forms of indemnity and incurred in trade or business, including casualty losses;
The excess of allowable deductions over gross income 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, provided, that there has been no substantial change in the ownership of the corporation;
- Bad Debts except those sustained in certain transactions entered into between related parties;
- Depreciation ;
- Charitable and Other Contributions or gifts actually paid or made within the taxable year to, or for the use of the Government of the Philippines or any of its agencies or any political subdivision thereof exclusively for public purposes, or to accredited domestic corporations or associations organized and operated exclusively for religious, charitable, scientific, youth and sports development, cultural or educational purposes or for the rehabilitation of veterans, or to social welfare institutions, or to nongovernment organizations;
- Research and Development expenditures;
- Amounts transferred or paid to Pension Trusts (in addition to the contributions to such trusts during the taxable year which contributions are deductible as ordinary expenses).
However, beginning the fourth taxable year immediately following the taxable year in which a corporation commenced its business operations, a minimum corporate income tax ("MCIT") of two per cent (2%) of the gross income as of the end of said taxable year shall be imposed instead of the foregoing "normal corporate tax" if such MCIT is greater than the normal income tax. Any excess of the MCIT over the normal income tax shall be carried forward and credited against the normal income tax for the three (3) immediately succeeding taxable year. The Secretary of the Department of Finance may suspend the imposition of the MCIT on any corporation which suffers losses on account of prolonged labor dispute, or because of force majuere, or because of legitimate business reverses.14
The following passive incomes of domestic corporations are subject to a final tax as follows:15:
- Twenty per cent (20%) on interest on currency bank deposit and yield or any other monetary benefit from deposit substitutes and from trust funds and similar arrangements, and royalties, derived from sources within the Philippines. However, interest income from a depository bank under the expanded foreign currency deposit system shall be subject to a final income tax of seven and one-half per cent (7 1/2%) of such interest income;
- On the net capital gains realized during the taxable year from the sale, exchange or other disposition of shares of stock in a domestic corporation except shares sold or disposed of through the stock exchange, at the rate of five per cent (5%) for the 1st P 100,000 and ten per cent (10%) in excess of P 100,000; and,
- On the sale, exchange or disposition of lands and/or buildings which are not actually used in the business of a corporation and are treated as capital assets, six per cent (6%) based on the gross selling price or fair market value of said land and/or building.
Dividends received by a domestic corporation from another domestic corporation shall not be subject to tax16.
In addition to the foregoing taxes, an improperly accumulated earnings tax ("IAET") shall be imposed which tax is equivalent to ten per cent (10%) of the improperly accumulated taxable income17. The IAET, however, shall not apply to publicly-held corporations, banks and other nonbank financial intermediaries, and insurance companies.
Taxation Of Resident Foreign Corporations
In general, a resident foreign corporation is taxed in the same manner as a domestic corporation on its income derived from all sources within the Philippines. That is, a resident foreign corporation shall be subject to the normal income tax rate of thirty two per cent (32%) of its taxable Philippine-sourced income18.
In the computation of taxable income, there shall be deducted from the Philippine-sourced gross income, such allowable expenses, losses and other deductions properly allocated thereto and a ratable part of expenses, interests, losses and other deductions effectively connected with the business or trade conducted exclusively within the Philippines which cannot definitely be allocated to some items or class of gross income19.
However, the following shall be subject to a different tax rate20:
- International carriers doing business in the Philippines shall be taxed at two and one-half per cent (2 1/2 %) of gross Philippine billings;
- Income derived by offshore banking units from foreign currency transactions with local commercial banks and branches of foreign banks and interest derived from foreign currency loans to residents shall be subject to a final tax at the rate of ten per cent (10%) of such income;
- Regional operating headquarters shall pay a tax of ten per cent (10%) of their taxable income. A Regional operating headquarter refers to a branch established in the Philippines by multinational companies which are engaged in any of the following services: general administration and planning; business planning and coordination; sourcing and procurement of raw materials and components; corporate finance advisory services; marketing control and sales promotion; training and personnel management; logistic services; research and development services and product development; technical support and maintenance; data processing and communication; and business development21 .
The following passive incomes of resident foreign corporations are subject to a final tax at the same rates as domestic corporations22:
- Twenty per cent (20%) on interest from any currency bank deposit and yield or any other monetary benefit from deposit substitutes and from trust funds and similar arrangements and royalties derived from sources within the Philippines, provided, however, that interest income derived by a resident foreign corporation from a depository bank under the expanded foreign currency deposit system shall be subject to a final income tax at the rate of seven and one-half per cent (7 1/2%) of such interest income.
- On the net capital gains realized during the taxable year from the sale, exchange or other disposition of shares of stock in a domestic corporation except shares sold or disposed of through the stock exchange at the rate of five per cent (5%) for the 1st P 100,000 and ten per cent (10%) for amount in the excess
Dividends received by a resident foreign corporation from a domestic corporation shall not be subject to tax23. Profits remitted by a branch to its head office abroad shall be subject to a fifteen per cent (15%) branch profit remittance tax24.
As in domestic corporations, the provisions on MCIT shall also be imposed on a resident foreign corporations.25 As to the IAET, this appears to apply even to foreign corporations, resident or non-resident. However, Philippine jurisprudence states that there can be no violation of this provision if the intended distributees or shareholders are not subject to tax by the Philippine government26.
Taxation Of Non-Resident Foreign Corporations
In general, a non-resident foreign corporation shall pay a tax equal to thirty-two per cent (32%) of the gross income received during each taxable year from all sources within the Philippines. However, the following non-resident foreign corporations shall be subject to a different tax rate27:
- Nonresident Cinematographic Film Owner, Lessor or Distributor - twenty-five per cent (25%) of its gross income from all sources within the Philippines.
- Nonresident Owner or Lessor of Vessels Chartered by Philippine Nationals - four and one-half per cent (4 1/2%) of gross rentals, lease or charter fees from leases or charters to Filipino citizens or corporations, as approved by the Maritime Industry Authority.
- Nonresident Owner or Lessor of Aircraft, Machineries and Other Equipment - seven and one-half per cent (7 1/2%) of gross rentals or fees.
The following passive incomes of a nonresident foreign corporation are subject to a final tax as follows:
- Twenty per cent (20%) on the amount of interest on foreign loans contracted on or after August 1, 1986;
- The net capital gains realized during the taxable year from the sale, exchange or other disposition of shares of stock in a domestic corporation except shares sold or disposed of through the stock exchange are, in the same manner as domestic and resident foreign corporations, taxed at the rate of five per cent (5%) for the 1st P 100,000 and ten per cent (10%) for amount in the excess of P 100,000.
- Fifteen per cent (15%) on the amount of cash and/or property dividends received from a domestic corporation subject to the condition that the country in which the nonresident foreign corporation is domiciled, shall allow a credit against the tax due from the nonresident foreign corporation taxes deemed to have been paid in the Philippines equivalent to seventeen per cent (17%), which represents the difference between the regular income tax of thirty-two per cent (32%) on corporations and the fifteen per cent (15%) tax on dividends as provided herein;
The income of nonresident foreign corporations from transactions with depository banks under the expanded foreign currency deposit system shall be exempt from income tax28.
There are special laws which provides favorable tax treatments to corporations involved in any of the activities listed in the Philippines Investment Priority Plan or those locating in special economic zones through out the Philippines (i.e. those locating in Subic Bay Freeport, pay 5% of gross income in lieu of income taxes plus tax free importatsions). Furthermore, where a foreign element is involved, applicable tax treaties with which the Philippines is a signatory may likewise provide a preferential tax treatment. Presently, the Philippines has the tax treaties with 29 countries29.
1 Sec. 22(B), National Internal Revenue Code of the Philippines, hereafter the "Tax Code"
2 Sec. 22(C), Tax Code.
3 Sec. 23(E),Tax Code
4 Sec. 22(D) and Sec.28(A), Tax Code
5 Sec. 22(H),Tax Codes
6 Sec. 22(I),Tax Code
7 Sec. 123, Corporation Code of the Philippines.
8 Sec. 23 (F), Tax Code.
9 Sec. 42,Tax Code.
10 Sec. 42(E), Tax Code.
11 Taxed at 10% of taxable income, Sec. 27(B), Tax Code.
12 Sec. 27(A),Tax Code.
13 Sec. 34,Tax Code.
14 Sec. 27(E),Tax Code.
15 Sec. 27(D), Tax Code.
16 Sec. 27(D)(5), Tax Code.
17 Sec. 29, Tax Code.
18 Sec. 28(A)(1), Tax Code.
19 Sec. 42(B)(1), Tax Code.
20 Sec. 28(A)(3), (4), (6), Tax Code.
21 Sec. 22(EE), Tax Code.
22 Sec. 28(A))(7), Tax Code.
23 Sec. 28(A)(7)(d), Tax Code.
24 Sec. 28(A)(5), Tax Code.
25 Sec. 28(A)(2), Tax Code.
26 Gestetner Limited v. Commissioner of Internal Revenue, Court of Tax Appeals Case No. 3549, November 29, 1990, affirmed by the Court of Appeals, CA-GR SP No. 23979, August 7, 1992.
27 Sec. 28(B), Tax Code.
28 Sec. 27(D)(3), Sec. 28(A)(7)(b), Tax Code.
29 Australia, Austria, Belgium, Brazil, Canada, Denmark, Finland, France, Germany, Hungary, India, Indonesia, Israel, Italy, Japan, Korea, Malaysia, Netherlands, New Zealand, Norway, Pakistan, Romania, Russia, Singapore, Spain, Sweden, Thailand, United Kingdom of Great Britain and Northern Ireland, and United States of America.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.