Corporate Tax Basics

Beginning January 1, 2009, corporate income taxes were lowered to 30% of net taxable income. Now that should be good for anyone planning to put up a corporation. This rate applies to resident foreign corporations and domestic corporations. Non-resident foreign corporations are taxed at 30% final tax on their gross income. Foreign corporations, whether resident or not, pay taxes on their income from Philippine sources. Domestic corporations, however, must pay taxes on their income from both foreign and local sources. In paying income taxes, domestic and resident foreign corporations can deduct whatever tax credits they have from their income taxes. Non-resident foreign corporations can't do this.

Partnerships are taxed as corporations unless they're organized to allow the members to practice their professions or joint ventures under contract with the government for energy operations or construction.

Shares of stock that are bought and sold at the stock exchange are taxed at 1/2 of 1% of the gross sales regardless of whether or not there is profit. Shares of stock that aren't traded at the stock exchange are only taxable if there is a profit -a final capital gains tax of 5% if there is a net capital gain of Php 100,000 or less and 10% if more than Php 100,000.

Intercorporate dividends are exempt from tax unless paid by a domestic corporation to a foreign one (they get a 15% final withholding tax.) Under the Tax-sparing Principle, however, if the home country of the foreign corporation allows tax credits for taxes paid in the Philippines, or doesn't impose taxes on the dividends, a special tax rate of 15% is imposed on instead of the normal 30% income tax rate.

There is also a special tax, known as "Improperly Accumulated Earnings Tax," which is imposed on corporations on holding and investment companies. The aim of this tax is discourage the formation of corporations whose sole purpose is to receive the dividends of their stockholders from other corporations, and therefore avoid paying taxes. The prima facie evidence that the companies are formed for tax evasion is that they're either holding or investment companies. The tax is 10% on the taxable income in addition to the already-existing 30% corporate income tax. Note the following:

1.) Holding Company -a company whose only activity is holding property and collecting the rentals.

2.) Investment Company -a company that does the same activity as a holding company as well as buys and sells stocks, securities, real estate or other investment property and collects income from investment yields and market fluctuations.

Both companies are liable for IAET. The IAET won't apply if these companies have other forms of business.

IAET is computed by adding taxable income to income exempt from tax, income excluded from gross income, income subject to final tax and net operating loss carry-over deducted; then reduced by dividends actually or constructively paid and income tax paid for the taxable year. IAET doesn't apply to the following corporations:

1.) Publicly-held corporations

2.) Banks and other non-bank financial intermediaries

3.) Insurance companies

Accumulation of corporate profits is proper in the following circumstances:

1.) Retained earnings appropriated for plant expansion

2.) Retained earnings appropriated the corporation's working capital requirements

3.) Retained earnings appropriated to meet the corporation's contractual obligations (such as establishing a sinking fund to retire issued bonds of the corporation