TAXATION ON CORPORATION and a joint venture or consortium formed for the

The discussion on taxation of corporations is purpose of undertaking construction projects or

divided into two chapters—this chapter and the next. engaging in petroleum, coal, geothermal and other
This chapter deals with the normal tax liability and energy operations pursuant to an operating or
passive income of corporations. Minimum corporate consortium agreement under a service contract with
income tax (MCIT) is discussed in the next chapter. the Government.
“Normal income tax” shall mean the income tax rates The tax exemption of joint ventures formed for
prescribed under Sections 27(A) and 28(A)(1) of the the purpose of construction projects was pursuant to
Code at 35% effective Jan. 1, 1997; 34% effective Jan. 1, Presidential Decree 929 (dated May 4, 1976) to assist
1998; 33% effective Jan. 1, 1999; and 32% effective Jan. local contractors in achieving competitiveness with
1, 2000, and thereafter. Under R.A. 9337 or the foreign contractors by pooling their resources in
Expanded VAT Act of 2005, effective Nov. 1, 2005, the undertaking big construction projects.
income tax rate was 35%. This rate was reduced to 30% Section 3 of Revenue Regulations 10-2012 states that a
effective Jan. 1, 2009. Per R.A. 11534 or CREATE Act, joint venture or consortium formed for the purpose of
effective _ July 1, 2020, the income tax rate of domestic undertaking construction projects not taxable as
corporations, in general, shall be 25% (or 20%, see corporation under Sec. 22 of the NIRC of 1997 as
discussion in this Chapter). amended, should be:
(1) for the undertaking of a construction project; and
CLASSIFICATION OF INCOME TAXPAYERS (Other than (2) should involve joining or pooling of resources by
Individuals) licensed local contracts; that is, - licensed as general
1. Corporations contractor by the Philippine Contractors Accreditation
a. Domestic. Those created or organized under and by Board (PCAB) of the Department of Trade and Industry
virtue of Philippine laws. (DTI);
1. Domestic corporation, in general, including One (3) these local contractors are engaged in construction
Person Corporation business; and
2.Government-owned and -controlled corporations (4) the Joint Venture itself must likewise be duly
3. Taxable partnerships licensed as such by the Philippine Contractors
4. Proprietary educational institutions Accreditation Board (PCAB) of the Department of Trade
5. Non-profit hospitals and Industry (DTI).
b. Foreign. Those organized in accordance with laws Joint ventures involving foreign contractors may
of their respective countries. also be treated as a non-taxable corporation only if the
1. Resident. Those engaged in trade or business member foreign contractor is covered by a special
within the Philippines. license as contractor by the PCAB of the DTI; and the
2. Non-resident. Those not engaged in trade or construction project is certified by the appropriate
business within the Philippines. Tendering Agency (government office) that the project
2. General Professional Partnership. This is discussed in is a foreign financed or internationally-funded project
Chapter 6. and that international bidding is allowed under the
3. Estates and Trusts. This is discussed in Chapter 5. Bilateral Agreement entered into by and between the
Philippine Government and the foreign or international
Definition of Terms financing institution pursuant to the IRR of Republic Act
1. Corporation. A corporation is an artificial being. 4566, the Contractor s License Law.
created by operation of law, having the right of Absent any one the requirements, the joint
succession and the powers, attributes and properties venture or consortium formed for the purpose of
expressly authorized by law or incident to its existence undertaking construction .projects shall be considered
(Revised Corporation Code of the Philippines, Section as taxable corporations. In addition, the tax-exempt
2). joint venture or consortium as defined shall not include
Section 10 of the RCCP provides that any person, those who are mere suppliers of goods, services or
partnership, association or corporation, singly or jointly capital to a construction project.
with others but not more than fifteen (15) in number, The member to a joint venture not taxable as
may organize a corporation for any lawful purpose or corporation shall each be responsible in reporting and
purposes. paying appropriate income taxes on their respective
Corporation includes one person corporations, share to the joint venture’ s profit.
partnerships, no matter how created or organized, joint
stock companies, joint accounts (cuentas en 2. Domestic. When Applied to a corporation, means
participacion), associations, or insurance companies, created or organized in the Philippines under its laws.
but does not include general professional partnerships
One Person Corporation (OPC) is a new type of DOMESTIC AND RESIDENT FOREIGN CORPORATIONS,
corporation under the Revised Corporation Code of the IN GENERAL
Philippines (effective March 8, 2019). OPC is a
corporation with a single stockholder, who may be a
natural person, a trust or an estate (Sec. 116). One
person may incorporate two or more OPCs.

3. Foreign. When applied to a corporation, means a

corporation which is not domestic.

4. Resident Foreign Corporation. Applies to a foreign DOMESTIC AND RESIDENT FOREIGN CORPORATIONS,
corporation engaged in trade or business within the IN GENERAL
Philippines. Domestic corporations classified as Micro, Small and
Medium Enterprises with net taxable income not
5. Non-Resident Foreign Corporation. Applies to a exceeding P5,000,000 and total assets not exceeding
foreign corporation not engaged in trade or business P100,000,000, excluding land on which the particular
within the Philippines. business entity’s office, plant and equipment are
situated, shall be taxed at 20% effective July 1, 2020.
6. General Professional Partnerships. Partnerships
formed by persons for the sole purpose of exercising Illustration 1: ABC Corporation, a manufacturer, has a
their common profession, no part of the income of gross sales of P190,000,000 for CY2021, its 2nd year of
which is derived from engaging in any trade or business. operation. Its total assets amounted to P50,000,000,
net of the value of the land of P6,000,000 where its
7. Government-Owned or Controlled Corporations manufacturing plant and business operations are
(GOCCs), Agencies or Instrumentalities. All situated. Its cost of sales and allowable operating
corporations, agencies, or instrumentalities owned or expenses amounted to P100,000,000 and P50,000,000,
controlled by the Government. 8. Foreign-Sourced respectively. Compute for its income tax due for
Dividends. Dividends received from non resident foreign CY2021.
corporations. Illustration 2: Given the same facts as above, except for
the allowable operating expenses, which amounted to
SOURCES OF INCOME P85,000,000. The net taxable income will be
Aside from knowing the classification of the taxpayer, P5,000,000.
the source of income is the next important thing to
determine —whether it is from within the Philippines or Illustration 1 Answer
without. The following rules apply:
1. Domestic corporations are taxable on income from
sources within and without the Philippines.
2. Foreign corporations whether resident or non-
resident, are taxable only on income from Philippine
sources.
Although the total assets, net of the value of the land, is
A partnership other than a general professional
less than P100,000,000, its net taxable income is above
partnership is considered a corporation and is taxable
P5,000,000. Hence, the income tax rate is 25%
as such.

Illustration 2 Answer

For domestic and resident foreign corporations

adopting the fiscal-year accounting period, the taxable
income shall be computed without regard to the
specific date when specific sales, purchases and other
transactions occur. Their income and expenses for the
fiscal year shall be deemed to have been earned and
spent equally for each month of the period.

The corporate income tax rate shall be applied

on the amount computed by multiplying the number of
months covered by the new rate within the fiscal year
by the taxable income of the corporation for the period,
divided by twelve.

The corporate income tax rate of 35% became

effective beginning Nov. 1, 2005 (R.A. 9337). This law
presented a scenario where the months of January to
October 2005 are under the rate of 32%. Regardless of
the taxable year (calendar or fiscal) followed, the
formula for determining the total tax due for the year
shall be as follows (RMC 16-06, Feb. 21, 2006).

COMPUTATION

ILLUSTRATION: Warranty Corporation’s fiscal year

ended Mar. 31, 2006. It has a taxable income of
P600,000 for the fiscal year, its second year of
operations. The income tax payable for the fiscal year
ended Mar. 31, 2006 is computed below