Partnership/Corporation is generally taxed based on the net taxable income for the year at the applicable Regular Corporate Income Tax (RCIT). On the fourth year of operation, RCIT is compared to Minimum Corporate Income Tax (MCIT). The income tax due will be the higher between RCIT and MCIT.

Net Taxable Income is derived from Gross Income (Sec. 32 of NIRC) less Allowable Deduction. Taxpayer has option to choose between Itemized Deduction or Optional Standard Deduction.

TYPE OF CORPORATE INCOME TAX

There are two types of Corporate Income Tax:

1. REGULAR CORPORATE INCOME TAX_(RCIT) (As amended by R.A. 11534 CREATE LAW)

a. Domestic Corporation with Total Assets of Php 100 million and below AND Net Taxable Income of Php 5 million and below will have RCIT Rate of 20% instead of 30% starting July 1, 2020. In determining the Total Assets of the Domestic Corporation, the Total Assets exclude the land on which the particular business entity’s office, plant and equipment are situated during the taxable year for which the tax is imposed.

b. All other Domestic Corporation will have RCIT Rate of 25% starting July 1, 2020.

c. Resident Foreign Corporation will have RCIT Rate of 25% starting July 1, 2020.

d. Nonresident Foreign Corporations will have RCIT Rate of 25% starting January 1, 2021.

e. Proprietary Educational Institutions and Hospitals will be subjected to lower Corporate Income Tax from 10% to 1% starting July 1, 2020 until June 30, 2023

f. 10% Preferential Tax on Regional Operating Headquarters (ROHQ) shall continue up to December 31, 2021 only. ROHQs will be subject to RCIT starting January 1, 2022.

g. 10% Preferential Tax Rate on Income of Offshore Banking Units (OBUs) is removed and therefore, taxed under RCIT.

2. MINIMUM CORPORATE INCOME TAX (MCIT) (As amended by R.A. 11534 CREATE LAW)

• Minimum Corporate Income Tax (MCIT) Rate is generally 2% of Gross Income.

• With the enactment of CREATE LAWs MCIT rate is reduced from 2% to 1% starting July 1, 2020 until June 30, 2023.

GROSS INCOME (Sec. 32 of NIRC)

Under Section 32 of NIRC, Gross Income includes:

1. Compensation for services in whatever form paid (Fees, Salaries, Wages, Commission, Allowances, etc)

2. Gross Income derived from the conduct of trade or business

3. Gross Income derived from practice of profession

4. Gains derived from dealings in property

5. Interests

6. Rents (Rental Income)

7. Royalties

8. Dividends (Dividend Income)

9. Annuities

10. Prizes & Winnings

11. Pensions

12. Partner’s distributive share from Net Income of the General Professional Partnership (GPP)

Exclusion from Gross Income based on Sec 32:

1. Life Insurance

2. Amount Received by the Insured as Return of Premium

3. Gifts, Bequests and Devises

4. Compensation for Injuries or Sickness

5. Income Exempt under Treaty

6. Retirement Benefits, Pensions, Gratuities, etc. (SSS, GSIS)

7. Miscellaneous Items

a. Income derived by Foreign Government

b. Income derived by the Government or it Political Subdivisions

c. Prizes and awards

d. Prizes and awards in Sports Competition

e. 13^th Month Pay and Other Benefits (Not exceeding Php 90,000)

f. Benefits received by officials and employees (EE) of national and local government pursuant to R.A. 6686 (Annual Christmas Bonus to Government EE)

g. Benefits received by EE pursuant to PD 851

h. Benefits received by officials and EE not covered by PD 851

i. Other benefits such as productivity incentives and Christmas Bonus

NIRC SEC. 32 Exclusion from Gross Income under Train Law Section 6 & RR 8-2018

•GSIS, SSS, Medicare and Other Contributions

•Gains from Sale of Bonds, Debentures or other certificate of indebtedness with a maturity of more than five (5) years; and

•Gains from Redemption of Shares in Mutual Fund

Allowable Deduction (Sec. 34 of NIRC)

Under Section 34 of NIRC, the partnership/ corporation are allowed a reasonable deduction of the following expenses:

1. 1. Salaries, wages, and other forms of compensation for personal services actually rendered

   2. Grossed-up monetary value of fringe benefit (Fringe Benefit Tax must be paid first)

   3. Travel expenses, here and abroad, while away from home in the pursuit of trade, business or profession

   4. Rentals and/or other payments which are required as a condition for the continued use or possession

   5. Entertainment, amusement and recreation expenses during the taxable year

   6. Interest Expense (subject to limitation of Interest Income)

   7. Taxes in general

   8. Losses incurred in Trade/Business in general ( with no insurance claim)

   9. Bad Debts

   10. Depreciation/Depletion

   11. Charitable & Other Contribution (Subject to Limitation)

   12. Research & Development

   13. Pension Trusts

Taxpayer can choose between itemized deduction and optional standard deduction in claiming allowable deduction.

A. ITEMIZED DEDUCTION

• If taxpayer opted for itemized deduction, these expenditures must be duly supported with valid/registered invoices/receipts.

• Sales Invoice must be obtained for purchase of goods and Official Receipts for purchase of services.

• To be considered as VALID Invoices/receipts, the following information must be indicated in the sale invoice or official receipt:

  1. Name of the Partnership/Corporation

  2. Complete Address

  3. Taxpayer Identification Number (TIN)

  4. Business Style (Trade Name of the Partnership/Corporation)

  5. Breakdown of VATable amount, 0%/12%VAT, Total Amount Due if Sales Invoice/Official Receipt is from a VAT registered supplier.

• These expenses must be tallied with those presented in the income statement:

a) Cost of Goods Sold and Services

b) Distribution Cost

c) Administrative Expenses

d) Finance Cost

e) Other Expenses

B. OPTIONAL STANDARD DEDUCTION (OSD)

• If taxpayer opted for optional standard deduction, the taxpayer is granted automatic 40% of Gross Profit as allowable deduction.

• Gross Profit = Gross Income/Revenue less Cost of Goods Sold/Services