CHAPTER SOLUTIONS > Tax 3. Unit 2. Chapter 4 Chapter 4. Introduction to Corporate Income Taxation.

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Tax 3. Unit 2. Chapter 4

Chapter 4. Introduction to Corporate Income Taxation I. Corporate Income Taxpayers Corporation -Includes partnerships, no matter how created or organized, joint-stock companies, joint accounts, associations, or insurance companies.

-Excludes general professional partnerships and joint ventures or consortium formed for the purpose of undertaking construction projects or engaging in petroleum, coal, geothermal, and other energy operations pursuant to an operating consortium agreement under a service contract with the Government.

II.

General Classification and Taxation of Corporations

Classification

Within

Without

Tax Rate and Tax Base

Domestic Corporation

✔

✔

20% or 25% regular corporate tax subject to Minimum Corporate Income Tax

Resident Foreign

✔

𐄂

25% regular corporate tax subject to Minimum Corporate Income Tax

Non-Resident Foreign Corporation

✔

𐄂

25% final tax on Philippine gross income

NOTE:• Effectivity of the RCIT rates under CREATE; RR 5-2021: - For DC and RFC -Beginning July 1, 2020 -20% or 25% - For NRFC -Beginning January 1, 2021. -25% •CREATE law, which was published on March 27, 2021, took effect on April11, 2021.

Although CREATE law took effect only on April 11, 2021, there are certain provisions in the law with specific effectivity dates which are earlier than April 11, 2021, such as the revised RCIT rates for DCs and RFCS as well as the revised FWT rate for NRFCS.• Illustration: A corporation with 100M assets had the following income and expenses for 2022 PH Gross revenues/rece ipts

Abroad

1,800,000

Total

1,200,000

3,000,000

References: Philippine Tax Code; CREATE Law; TRAIN Law; Income Taxation, Banggawan; RR8-2018; RR14-2001 ; RR12-2007; RA 9520

Tax 3. Unit 2. Chapter 4 Less: Business expenses

1,200,000

800,000

2,000,000

Net Income from operation

600,000

400,000

1,000,000

Add: Interest from deposit

150,000

50,000

200,000

Net Income

450,000

350,000

800,000

Domestic Corporation Net Income from operations Other income not subject to final tax Taxable net Income Multiply by: Corporate tax rate Regular corporate income tax (RCIT )due

1,000,000 50,000 1,050,000 20% 210000

Resident foreign corporation Taxable net income (Philippines only) Multiply by: Corporate tax rate Regular corporate income tax (RCIT)

600,000 25% 150000

Non Resident foreign Corporation Gross revenues/receipts Interest income from deposit Total gross income within Multiply by: Total Final tax

1,800,000 150,000 1,950,000 25% 487500

CREATE LAW Amendments: 1. Reduced the regular corporate income tax from 30% to 25% of the taxable income effective July 1, 2020.

2. Domestic corporation are subject to a 20% regular corporate income tax under the following conditions: a. Asset test - Total assets, excluding land on which their office, plant and equipment are situated, does not exceed P100 million; and b. Income Test - Taxable income does not exceed P5 million pesos. (only the taxable income subject to regular tax) Micro,- small-, and medium-sized enterprises (MSMES) - Entities with assets not exceeding P100 million Domestic corporations are mandated to separately account in their Annual Financial Statements (AFS) the cost of the land on which their office, plant and equipment are situated.

References: Philippine Tax Code; CREATE Law; TRAIN Law; Income Taxation, Banggawan; RR8-2018; RR14-2001 ; RR12-2007; RA 9520

Tax 3. Unit 2. Chapter 4

Summary of regular corporate tax rates: Taxpayer Type

Domestic Corporation

Resident foreign Corporation

-with or less than P5 million taxable income

20%

25%

-with more than P5 million taxable income

25%

25%

-with or less than P5 million taxable income

25%

25%

-with more than P5 million taxable income

25%

25%

MSME corporate taxpayers

Large Corporate taxpayers

Special Corporations -Corporations subject to special tax treatments or preferential tax rates lower than the 25% regular corporate income tax.

III. Sub-Classification of Corporate Income Taxpayers Domestic Corporations Exempt domestic corporations

1. Exempt non-profit corporations under the NIRC 2. Government agencies and instrumentalities 3. Certain government-owned and controlled corporations 4. Cooperatives

Special domestic corporations

1. Proprietary educational institutions and non-profit hospitals 2. Foreign currency deposit units (FCDUs) and Expanded FCDUs 3. PEZA or BOI-registered enterprises

3. Regular domestic Corporations Resident Foreign Corporations 1. Special resident foreign

1. Expanded FCDUs

References: Philippine Tax Code; CREATE Law; TRAIN Law; Income Taxation, Banggawan; RR8-2018; RR14-2001 ; RR12-2007; RA 9520

Tax 3. Unit 2. Chapter 4

corporations

2. Regional Area Headquarters and Regional Operating Headquarters of Multinational Companies 3. International Carries 4. PEZE or BOI-registered enterprises

2. Regular resident foreign corporations Non-Resident Foreign Corporations 1. Special non-resident foreign corporations

1. Non-resident cinematographic film owner, lessor or distributor (25%% of the Gross Income) 2. Non-resident Lessor of vessels, chartered by Philippine nationals (4.5% of the Gross Rentals, lease, or charter fees) 3. Non-resident owner or lessor of aircraft, machineries, and other equipment (7.5% final tax on rentals, charters, and other fees)

2. Regular non-resident foreign corporations

Exempt domestic corporations Qualification of Tax Exemption - income tax exemption relates only to income from related activities. Income from activities unrelated to the purposes for which an exempt corporation is organized and income from activities conducted for profit including income from properties are taxable regardless of the disposition made of such income. (Sec. 30 NIRC) Income from related activities=exempt Income from unrelated activities=subject to regular income tax

1. Exempt non-profit corporations under the NIRC The following organizations shall not be taxed under this Title in respect to income received by them as such: (A) Labor, agricultural or horticultural organization not organized principally for profit; (B) Mutual savings bank not having a capital stock represented by shares, and cooperative bank without capital stock organized and operated for mutual purposes and without profit; (C) A beneficiary society, order or association, operating for the exclusive benefit of the members such as a fraternal organization operating under the lodge system, or mutual aid association or a nonstock corporation organized by employees providing for the payment of life, References: Philippine Tax Code; CREATE Law; TRAIN Law; Income Taxation, Banggawan; RR8-2018; RR14-2001 ; RR12-2007; RA 9520

Tax 3. Unit 2. Chapter 4 sickness, accident, or other benefits exclusively to the members of such society, order, or association, or nonstock corporation or their dependents; (D) Cemetery company owned and operated exclusively for the benefit of its members; (E) Nonstock corporation or association organized and operated exclusively for religious, charitable, scientific, athletic, or cultural purposes, or for the rehabilitation of veterans, no part of its net income or asset shall belong to or inure to the benefit of any member, organizer, officer or any specific person; * (F) Business league chamber of commerce, or board of trade, not organized for profit and no part of the net income of which inures to the benefit of any private stock-holder, or individual; (G) Civic league or organization not organized for profit but operated exclusively for the promotion of social welfare; (H) A nonstock and nonprofit educational institution;** (I) Government educational institution; (J) Farmers' or other mutual typhoon or fire insurance company, mutual ditch or irrigation company, mutual or cooperative telephone company, or like organization of a purely local character, the income of which consists solely of assessments, dues, and fees collected from members for the sole purpose of meeting its expenses; and (K) Farmers', fruit growers', or like association organized and operated as a sales agent for the purpose of marketing the products of its members and turning back to them the proceeds of sales, less the necessary selling expenses on the basis of the quantity of produce finished by them; *Requisites for exemption of non-stock, non-profit corporations 1. It must be a non-stock corporation or association organized and operated exclusively for religious, charitable, scientific, athletic, or cultural purposes, or for the rehabilitation of veterans.

2. It should meet the organizational test and operational test -organized and operated exclusively for religious, charitable, scientific, athletic, or cultural purposes, or for the rehabilitation of veterans, 3. All net income or assets of the corporation must be devoted to its purposes and no part of its income or assets accrues to or benefits any member or specific person.

4. It must not be a branch of a foreign non-stock, non-profit corporation.

NB: Charity is essentially a gift to an indefinite number of persons which lessens the burden of government. In other words, charitable institutions provide free goods and services to the public which would otherwise fall on the shoulders of the government. Thus, as a matter of efficiency, the government forgoes taxes which should have been spent to address public needs, because certain private entities already assume a part of the burden. This is the rationale for the tax exemption of charitable institutions. The loss of taxes by the government is compensated by its relief from doing public works which would have been funded by appropriations from the Treasury.

Charitable institutions, however, are not ipso facto entitled to a tax exemption References: Philippine Tax Code; CREATE Law; TRAIN Law; Income Taxation, Banggawan; RR8-2018; RR14-2001 ; RR12-2007; RA 9520

Tax 3. Unit 2. Chapter 4 A non-profit organization is still allowed to engage in activities conducted for profit without losing its tax exemption. The income conducted for profit will be subject to tax, regardless of the disposition made of such income. (CIR v. St. Luke’s Medical Center Inc.) An institution under Section 30(E) or (G) does not lose its tax exemption if it earns income from its for-profit activities. Such income from for-profit activities, under the last paragraph of Section 30, is merely subject to income tax, previously at the ordinary corporate rate but now at the preferential 10% rate pursuant to Section 27(B). (CIR v. St. Luke’s Medical Center Inc. G.R. 195909) **Non-profit educational institutions Under Article XIV, Section 4 (3) of the Constitution, all revenue and assets of nonstock nonprofit educational institutions used actually, directly and exclusively for educational purposes are exempt from taxes and duties.

When a non-stock, non-profit educational institution proves that it uses its revenues actually, directly, and exclusively for educational purposes, it shall be exempted from income tax, VAT, and LBT. Illustration: De La Salle University, a non-profit educational institution, collected P5,000,000 school fees and assessments from its students. It also earned P200,000 from the rent of its properties and realized P300,000 in the sale of its properties. The University utilized the P200,000 rentals to fund an undergraduate scholarship program and invested the P300,000 for the retirement benefits of university directors.

Here, the P5,000,000 is an income from related activities. The P200,000 rentals and P300,000 gain in the sale of its properties are income from unrelated activities. The P5,000,000 income is exempt. The P200,000 is still exempt even if arising from unrelated activities because it is used for educational purpose. The P300,000 is subject to regular income tax because it is not used for educational purpose. (CIR v. De La Salle University, Inc. G.R. No. 196596).

2. Government agencies and instrumentalities General Rule: Exempt from income tax Rationale: they are inherently non-profit Exception: income from unrelated activities or from their properties is subject to income tax.

3. Government-Owned and Controlled Corporations (GOCCs) General Rule: Subject to income tax Rationale: generally proprietary or commercial in nature Exceptions: 1. GSIS 2. SSS 3. PHILC 4. Home Development Mutual Fund (HDMF) References: Philippine Tax Code; CREATE Law; TRAIN Law; Income Taxation, Banggawan; RR8-2018; RR14-2001 ; RR12-2007; RA 9520

Tax 3. Unit 2. Chapter 4 5. Local water districts PCSO is taxable beg. Jan. 1, 2018 or upon effectivity of the TRAIN Law. HDMF or Pag-ibig is exempt only upon the effectivity of CREATE Law 4. Cooperatives Cooperatives which transact business only with members Not Subject to any taxes and fees under the NIRC and other tax laws, such as the following: 1. Income tax (on related regular income) 2. VAT and Percentages tax 3. Donor’s tax 4. Excise Tax 5. Documentary stamp tax 6. Annual Registration fee

Cooperatives which transact business both with members and non-members 1. Those with not more than P10M accumulated reserve and undivided net savings are exempt from taxes, similar to cooperatives transacting business only with members.

2. Those with more than P10M accumulated reserve and undivided net savings are subject to the following taxes at full rate: a. Income tax on the full amount allocated for interest on capital b. VAT on transactions with non-members c. Percentage Tax on all sales of goods or services rendered to non-members d. All other internal revenue taxes unless otherwise provided by law

Taxability of Cooperatives to Internal Revenue Tax All cooperatives regardless of classification are subject to the following: 1. The applicable income tax on unrelated income 2. Capital gains tax 3. Documentary stamp tax 4. VAT on purchases of goods or services except VAT exempt importations 5. Withholding tax on wages except for minimum wage employees 6. All other taxes for which cooperatives are directly liable and not otherwise expressly exempted by any law.

Accumulated reserves (reserve fund) - the totality of the amounts legally required to be deducted annually from the annual surplus (income) of the cooperative for its protection and stability.

Under RA9520, the net surplus of every cooperative shall be distributed as follows: 1. Reserve fund - at least 10% of the net surplus but must not be less than 50% of the net surplus in the first five years of operation References: Philippine Tax Code; CREATE Law; TRAIN Law; Income Taxation, Banggawan; RR8-2018; RR14-2001 ; RR12-2007; RA 9520

Tax 3. Unit 2. Chapter 4 2.

3.

4.

5.

Education and training fund - not more than 10% of net surplus Community development fund - not less than 3% of net surplus Optional land and building fund - not to exceed 7% of net surplus Interest, which shall not exceed normal rate of return on investments and patronage refunds which must not be less than 30% of the net surplus after deducting the statutory reserves 6. Any excess to reserve fund Allocation of Common Expenses of Exempt Corporations Expenses of an exempt corporation not directly traceable to either related and unrelated activities are allocated based on gross income Illustration: A non-profit entity presented the following analysis of its net surplus: Related Activities Gross receipts

Unrelated Activities

Total

1,200,000

800,000

2,000,000

Less: Cost of Services

400,000

400,000

800,000

Gross income

800,000

400,000

1,200,000

Less: Direct expenses

280,000

70,000

350,000

Common expenses

180,000

Surplus

670,000

Gross income from unrelated activities Less: Direct Expenses Allocated common expenses (400,000k/(400,000+800,000))x180,000 Taxable Net Income

400,000 70,000 60000

130,000 270,000

MINIMUM CORPORATE INCOME TAX (MCIT) As a minimum tax, the MCIT is payable when: a. The corporation has zero taxable income b. The corporation has negative taxable income c. MCIT is greater than the regular corporate income tax. (MCIT>RCIT) References: Philippine Tax Code; CREATE Law; TRAIN Law; Income Taxation, Banggawan; RR8-2018; RR14-2001 ; RR12-2007; RA 9520

Tax 3. Unit 2. Chapter 4

Rationale for the Imposition of MCIT As a tax on gross income, MCIT prevents tax evasion and minimizes tax avoidance schemes achieved through sophisticated and artful manipulations of deductions.

Scope of the MCIT -applicable to every corporation taxable to the regular corporate income including non-profit, exempt, and special corporations with respect to their taxable income subject to regular corporate income tax.

Entities Exempt from MCIT 1. Real Estate Investment Trusts or REITs 2. Domestic corporations which opted to be taxed under the 15% corporate income tax (gross income tax) 3. Domestic or resident corporations subject to special tax rates a. Proprietary educational institutions and non-profit hospitals b. Foreign currency deposit units (FCDUs) and Expanded FCDUs c. International carriers d. PEZA or BOI-registered enterprises 4. All non-resident foreign corporations When MCIT Commences MCIT is imposed beginning on the 4th taxable year immediately following the year in which such corporation commenced its business operations. (X+4th year of operation) (NIRC, as amended by TRAIN, Sec. 27 (E)(1)) Tax Rate: 2% or 1% (DC and RFC) Tax Base: Gross income except income exempt from income tax and income subject to final withholding tax.

CREATE Law: starting July 1, 2020 until June 30, 2023, the MCIT rate of both DC and RFC will only be 1%. Starting July 1, 2023, the MCIT will again be 2%.

Gross Income for MCIT purposes -Gross income shall mean gross sales/gross receipt less sales returns, discounts and allowances and cost of sales/cost of services.

-Gross income will also include all items of gross income enumerated under Sec. 32(A) of the NIRC, except income exempt from income tax and income from final withholding tax. Thus, if apart from deriving income from these core business activities, there are “other items” of gross income realized or earned by the taxpayer during the taxable period which are subject to the NCIT, the same items must be included as part of the gross income for computing MCIT. Computation of MCIT: Gross Sales/receipts, net of discounts and allowances Less: Cost of Goods Sold/service

XX (xx)

References: Philippine Tax Code; CREATE Law; TRAIN Law; Income Taxation, Banggawan; RR8-2018; RR14-2001 ; RR12-2007; RA 9520

Tax 3. Unit 2. Chapter 4 Gross income from operations Add: Other taxable income not subject to final tax Total Gross income Multiply by: MCIT rate MCIT

XX (xx) XX 2% XX

Illustration A domestic corporation started operations in 2018. It had the following results of operations in 2021 and 2022

Total gross income Dividend income domestic

2021

2022

2,100,000

4,000,000

-

50,000

Business expenses

2,600,000

3,400,000

Net Income (Net loss)

(500,000)

650,000

The MCIT will commence in 2022 (2018+4). Since there is no MCIT yet in 2021, the tax payable for 2021 is nil.

The 2022 income tax due of the corporation shall be determined as: Total gross income 4,000,000 Less: Itemized deductions Regular allowable deductions 3,400,000 NOLCO-2021 500,000 3,900,000 Taxable net income 100,000 Multiply by: Corporate income tax rate 25% Regular corporate income tax rate -2022 25000 Total gross income Multiply by: MCIT rate MCIT - 2022 (Higher)

4,000,000 1% 40000

The P40,000 MCIT is the income tax due in 2022.

Illustration: A corporation which is also an MSME, reported the following on its fifth year of operation Sales, net of 1% withholding tax

4,950,000

References: Philippine Tax Code; CREATE Law; TRAIN Law; Income Taxation, Banggawan; RR8-2018; RR14-2001 ; RR12-2007; RA 9520

Tax 3. Unit 2. Chapter 4 Cost of Sales

2,000,000

Interest from deposit, net of tax

75,000

Gain on sale of domestic stocks directly to buyer

150,000

Casual rent income, net of 5% creditable withholding tax

95,000

Interest income from advances to employees

50,000

Business expenses

3,100,000

Estimated quarterly tax payments

10,000

*Gain on sale of domestic stocks directly to buyer is subject to 15% capital gains tax The regular income tax and minimum corporate income tax shall be computed as follows: Sales (4,950,000/99%) Less: Cost of sales Gross income from operations Add: Other gross income not subject to final tax Casual rent income (95,000/95%) Interest from employee advances Total gross income

5,000,000 2,000,000 3,000,000 100,000 50,000

150,000 3,150,000

Total gross income Less: Regular allowable deduction Taxable net income Multiply by: Corporate income tax rate RCIT

3,150,000 3,100,000 50,000 20% 10,000

Total gross income Multiply by: MCIT rate MCIT

3,150,000 1% 31500

The income tax payable shall be computed as follows Income tax due-MCIT Less: Tax Credits Creditable withholding tax withheld on gross income Sales (1%x 5,000,000)

31500

50000

References: Philippine Tax Code; CREATE Law; TRAIN Law; Income Taxation, Banggawan; RR8-2018; RR14-2001 ; RR12-2007; RA 9520

Tax 3. Unit 2. Chapter 4 Rent Income (5%x100,000) Total creditable withholding tax Estimated quarterly tax payments Income tax payable or (refundable)

5000 55000 10,000

65,000 (33,500)

Excess MCIT Carry-Over The excess of the MCIT over the RCIT in any year is a tax credit that is deductible against any RCIT tax due in the immediately succeeding three years.

Rules on Carry-Forward of Excess MCIT 1. The excess of MCIT vet the RCIT can be carried forward; 2. It can be credited against the RCIT due in the next 3 immediately succeeding taxable years; 3. Any excess not credited in the next 3 years shall be forfeited; 4. Carry forward is possible only if RCIT is greater than MCIT; 5. The maximum amount that can be credited is up to the amount of the RCIT; 6. The excess MCIT cannot be claimed as credit against the MCIT itself or against any other losses; 7. The tax payable shall be the MCIT whenever it is greater than the RCIT. 8. When there are several Excess MCITs from prior years, tax crediting shall be made in first in-first out basis.

Illustration 1: A corporation became the subject to MCIT in 2017. MCIT and RCIT data through the years 2017

2018

2019

2020

2021

MCIT

400

620

200

350

350

RCIT

0

500

300

200

400

Income tax due

400

620

300

350

400

Excess MCIT

400

120

150

The income tax payable(still due) in each year is indicated in Bold font.

2017

2018

2019

2020

2021

Income tax due

400

620

300

350

400

Excess MCIT

400

120

MCIT Application

(300) —------------>

Remaining Excess MCIT

*100

150 (300)

120

References: Philippine Tax Code; CREATE Law; TRAIN Law; Income Taxation, Banggawan; RR8-2018; RR14-2001 ; RR12-2007; RA 9520

Tax 3. Unit 2. Chapter 4 0 MCIT application

(expired)

(120)

(150)

(270) 130

Note: 1. The 100 unused Excess MCIT-2017 cannot be used in 2020 since the tax due for that year is the MCIT. Excess MCIT prior year cannot be credited against MCIT tax due.

2. The unused Excess MCIT-2017 expired at the end of 2020 and cannot be carried over as tax credit in 2021. Thus only the 2018 and 2020 excess MCITs are credited in 2021.

Illustration 2 An MSME which became subject to MCIT in 2021 had the following statement of income in 2021 and 2022 2021

2022

Total gross income

300,000

500,000

Business expenses

420,000

250,000

Net income

(120,000)

250,000

2021

2022

Total gross income

300,000

500,000

Less: Allowable deductions

420,000

250,000

Net Income (NOLCO)

(120,000)

250,000

2022 taxable net income and RCIT

Less: NOLCO-2021 application

(120,000) (120,000)

130,000

2021

2022

0

130,000

20%

20%

RCIT

0

26000

MCIT

3000

5000

Excess MCIT

3000

Taxable income

taxable income Multiply by:

References: Philippine Tax Code; CREATE Law; TRAIN Law; Income Taxation, Banggawan; RR8-2018; RR14-2001 ; RR12-2007; RA 9520

Tax 3. Unit 2. Chapter 4

The income tax payable in each year is indicated in Bold Font

income tax due

2021

2022

3000

26000

Less: Excess MCIT-2021

3000

Income tax payable

23000

Schedules of Effectivity of New tax rates Regular CIT Domestic Corporations Domestic Corporations, in general MSME with <P5m taxable income

Rate

25%

20%

Effectivity

7/1/2020

7/1/2020

MCIT Rate

Effectivity

1%

7/1/2020 to 6/30/2023

2%

7/1/2023

1%

7/1/2020 to 6/30/2023

2%

7/1/2023

Special CIT Proprietary Educational Institutions and Hospitals

1%

7/1/2020 to 6/30/2023

10

7/1/2023

MCIT

Not applicable

Regular CIT Foreign Corporations Resident foreign corporations

Offshore banking units Regional Operating Headquarters

Rate

25%

25%

25%

Effectivity

7/1/2020

Upon the effectivity of the CREATE law (4/11/2021)

MCIT Rate

Effectivity

1%

7/1/2020 to 6/30/2023

2%

7/1/2023

1%

Upon effectivity of the CREATE law until 6/20/2023

2%

7/1/2023

1%

7/1/2020 to 6/30/2023

1/1/2022

References: Philippine Tax Code; CREATE Law; TRAIN Law; Income Taxation, Banggawan; RR8-2018; RR14-2001 ; RR12-2007; RA 9520

Tax 3. Unit 2. Chapter 4 2% Final Income Tax Non-resident foreign corporations

25%

1/1/2021

7/1/2023 MCIT

Not Applicable

Improperly Accumulated Earnings Tax -previously imposed on undistributed earnings of domestic corporations without valid reasons for such retention.

- The same shall no longer be imposed for all taxable years ending after April 11, 2021.

Branch Profit Remittance Tax - 15% branch profit remittance tax is imposed on any profit remitted by a branch to its head office based on total profit applied or earmarked for remittance without any deduction for the tax component thereof except those activities which are registered with the Philippines Economic Zone Authority.

- interests, dividends, rents, royalties, including 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 profits unless the same are effectively connected with the conduct of its trade or business in the Philippines - The income should be an active - The NIRC used the phrase “any profit remitted” without limiting the same to current year profit remittance. The branch profit remittance tax therefore is understood to apply to remittance of prior year earnings.

Rationale of BPRT: To equalize the tax burden on foreign corporations maintaining, on the one hand, subsidiary domestic corporations. Prior to the imposition of the BPRT, local branches of foreign corporations were made to pay only the RCIT applicable to resident foreign corporations doing business in the Philippines. While Philippine subsidiaries of foreign corporations were subject to the (a) RCIT on their net income and dividend payments; and (b) were additionally subjected to a withholding tax. In order to avert what would otherwise appear to be an unequal tax treatment on such subsidiaries vis-a-vis local branch offices, a BPRT was imposed. (Bank of America NT & SA v. Court of Appeals., G.R. Nos. 103092 & 1031106) Tax Rate: 15%(RFC) Tax Base: Total profit applied or earmarked for remittance without any deduction for the tax component thereof.

Scope of the Branch Profit Remittance Tax -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.

References: Philippine Tax Code; CREATE Law; TRAIN Law; Income Taxation, Banggawan; RR8-2018; RR14-2001 ; RR12-2007; RA 9520

Tax 3. Unit 2. Chapter 4

Illustration: A branch of a foreign corporation engaged in servicing reported the following income statement in 2021: Service fees

4,000,000

Gain on sale of fully depreciated properties

400,000

Dividend income

50,000

Capital gain on sale of stocks, net of tax

90,000

Less: Business expenses

3,600,000

Profits before income tax

940,000

Less: Income tax due -RCIT

200,000

Net Profits

740,000

The branch earmarked 40% of the entire profits for remittance to the home office abroad The branch profit remittance tax shall be determined as follows: Net Profits Less: Investment income Dividend income Capital gain on the sale of stocks Taxable profit Multiply by: portion remitted Profit Remittance Multiply by: tax rate Branch profit Remittance tax

740,000 50,000 90,000

140,000 600,000 40% 240000 15% 36000

Note: 1. The gain on sale of equipment is included in the base of the branch profit remittance tax because it is an income effectively connected with the business of the taxpayer.

2. The portion of the branch remittance representing capital gains and dividend income is excluded from the branch profit remittance tax base.

References: Philippine Tax Code; CREATE Law; TRAIN Law; Income Taxation, Banggawan; RR8-2018; RR14-2001 ; RR12-2007; RA 9520