Income Tax on Special Corporations | Kinds of Taxpayers – Individual, Corporations, Trusts, Estate | Nature and General Principles | Income Tax | NIRC | TAXATION LAW

Income Tax on Special Corporations under the National Internal Revenue Code of 1997, as amended by the TRAIN Law and Ease of Paying Taxes Act

The National Internal Revenue Code (NIRC) of 1997, as amended by the Tax Reform for Acceleration and Inclusion (TRAIN) Law (R.A. No. 10963) and further modified by the Ease of Paying Taxes Act (R.A. No. 11976), classifies taxpayers into individuals, corporations, trusts, and estates. Within the corporation classification, special corporations—typically defined as entities receiving particular treatment or classification based on their nature and purpose—are subject to unique income tax rules.

The TRAIN Law and the Ease of Paying Taxes Act have introduced and modified specific provisions related to the taxation of these special corporations, aiming to align their tax burdens with the government’s revenue goals and economic strategies.

I. Definition of Special Corporations

Special corporations refer to corporations granted particular tax treatment by law due to their unique status, activities, or functions. This category includes entities such as:

• Government-owned and controlled corporations (GOCCs)
• Nonprofit corporations
• Proprietary educational institutions and hospitals
• Non-stock, non-profit organizations
• Offshore banking units (OBUs)
• Regional operating headquarters (ROHQs)

Each type of special corporation is subject to its own tax regime and applicable exemptions under the NIRC, as amended.

II. Income Tax Regimes for Special Corporations

Special corporations are taxed on their taxable income, which may include income derived from trade, business, or other forms of activity. However, due to their unique nature, special corporations often qualify for preferential rates or tax exemptions. The income tax regime applicable to each type of special corporation is governed by specific sections of the NIRC, as amended.

A. Government-Owned and Controlled Corporations (GOCCs)

1. General Rule: GOCCs are generally subject to income tax based on their taxable income derived from all sources within and outside the Philippines, except those expressly exempt by law.

2. Specific Exemptions: The NIRC provides that certain GOCCs, such as the Government Service Insurance System (GSIS), Social Security System (SSS), Philippine Health Insurance Corporation (PhilHealth), and the Local Water Utilities Administration (LWUA), are exempt from income tax.

B. Proprietary Educational Institutions and Hospitals

1. Preferential Tax Rate: Under Section 27(B) of the NIRC, proprietary educational institutions and hospitals that are non-profit are generally taxed at a preferential income tax rate of 10% on their taxable income, provided they are non-profit and their income is used directly for their educational or hospital activities.

2. TRAIN Law Adjustments: The TRAIN Law retained this preferential tax rate but introduced stricter rules on documentation and substantiation to prevent abuse of the preferential rate.

3. Ease of Paying Taxes Act Implications: The Ease of Paying Taxes Act did not directly alter the tax rate but introduced procedural ease to improve compliance among these institutions.

C. Offshore Banking Units (OBUs)

1. Taxation of OBUs: Offshore banking units (OBUs) are subject to a special tax regime under the NIRC, paying a 10% tax on their gross income derived from foreign currency transactions with foreign residents and other OBUs, local commercial banks, and branches of foreign banks authorized by the Bangko Sentral ng Pilipinas (BSP) to operate as OBUs in the Philippines.

2. Exemptions and Exclusions: OBUs are exempt from all other forms of Philippine taxes on the aforementioned income. However, income derived from other sources not covered under their specific exemption is subject to the regular corporate income tax rate.

D. Regional or Area Headquarters (RHQs) and Regional Operating Headquarters (ROHQs)

1. Non-Taxable Status of RHQs: RHQs serve as administrative centers for their multinational corporations and are prohibited from earning or deriving income in the Philippines. Therefore, they are generally not subject to income tax but are liable for other taxes, such as the annual registration fee.

2. ROHQs and Preferential Tax Rate: ROHQs are subject to a 10% preferential tax rate on taxable income derived from services rendered to their affiliates, subsidiaries, or branches in the Philippines or abroad.

E. Non-Profit and Non-Stock Organizations

1. Income Tax Exemption: Non-profit and non-stock corporations organized and operated exclusively for religious, charitable, scientific, athletic, or cultural purposes, or for the rehabilitation of veterans, are exempt from income tax on income derived from activities related to their purpose.

2. Tax on Unrelated Income: Income from activities unrelated to their primary purpose is subject to the regular corporate income tax rate. The NIRC, as amended by the TRAIN Law, clarifies that the exemption applies only to income that directly supports the organization’s purpose and does not extend to income from unrelated trade or business activities.

III. Compliance Requirements under the Ease of Paying Taxes Act

The Ease of Paying Taxes Act introduced simplified compliance and reporting requirements for taxpayers, including special corporations. Key reforms include:

1. Streamlined Filing and Documentation: Simplified forms and reduced documentation requirements facilitate easier compliance for corporations qualifying for special tax regimes.

2. Enhanced Electronic Filing Systems: The Bureau of Internal Revenue (BIR) has improved its electronic systems to streamline tax filing and payments for all taxpayers, including special corporations.

3. Clearer Documentation for Exemptions and Preferential Rates: Special corporations availing of preferential rates or exemptions must provide appropriate documentation to substantiate their claims. The Ease of Paying Taxes Act emphasizes the importance of transparency in availing exemptions and tax reliefs.

IV. Recent Developments and Implications

The amendments to the NIRC, particularly under the TRAIN Law and the Ease of Paying Taxes Act, aim to ensure that only those special corporations genuinely entitled to preferential rates and exemptions can benefit from them. The reforms also reflect the government’s goal of broadening the tax base while ensuring fairness in the tax system. In summary:

1. Strengthened Compliance: Special corporations are required to maintain rigorous documentation to support their preferential tax status.

2. Tax Incentives Rationalization: The government has moved towards a rationalized tax incentive scheme, eliminating outdated or abused tax incentives.

3. Improved Tax Administration: Enhanced tax administration and electronic filing systems aim to reduce tax leakage and improve collections from special corporations.

Conclusion

Income taxation of special corporations in the Philippines involves a complex interplay of exemptions, preferential rates, and compliance requirements under the NIRC, as amended by the TRAIN Law and the Ease of Paying Taxes Act. These laws provide targeted tax relief to special corporations to support their roles in socio-economic development while ensuring that only legitimate beneficiaries receive such relief. For these entities, meticulous compliance with documentation and reporting requirements is crucial to maintain their preferential tax status.

Individual vs. Corporate Income Taxation – Schedular vs. Flat Rate | Kinds of Taxpayers – Individual, Corporations, Trusts, Estate | Nature and General Principles | Income Tax | NIRC | TAXATION LAW

Overview of Individual vs. Corporate Income Taxation: Schedular vs. Flat Rate under Philippine Tax Law

Under the National Internal Revenue Code (NIRC) of 1997, as amended by the Tax Reform for Acceleration and Inclusion (TRAIN) Law (Republic Act No. 10963) and the Ease of Paying Taxes Act (Republic Act No. 11976), income taxation for individuals and corporations in the Philippines is structured differently. This distinction is rooted in two primary principles: schedular taxation for individual income and flat-rate taxation for corporate income. Each type of taxpayer—individual, corporation, trust, or estate—is subject to specific tax rules that govern the computation, rates, and compliance obligations for income tax.

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A. Nature and General Principles of Income Taxation

Income tax is imposed on the income earned by individuals, corporations, trusts, and estates, regardless of the taxpayer's residence, nationality, or source of income. The Philippine tax system generally follows a global taxation principle, taxing all income earned by residents, whether from domestic or foreign sources, while non-residents are taxed only on income from Philippine sources.

The TRAIN Law and Ease of Paying Taxes Act introduced significant reforms to simplify compliance, adjust tax rates, and ease the tax burden on low- and middle-income taxpayers. These changes have further clarified the distinct approaches to individual and corporate income taxation.

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B. Kinds of Taxpayers under Philippine Tax Law

1. Individual Taxpayers

   • Residents (citizens and aliens)
   • Non-residents (citizens and aliens)

2. Corporations

   • Domestic Corporations (organized under Philippine laws)
   • Resident Foreign Corporations (foreign corporations engaged in business in the Philippines)
   • Non-resident Foreign Corporations (foreign corporations not engaged in business in the Philippines but earning Philippine-sourced income)

3. Trusts and Estates

Each type of taxpayer has distinct tax rates, compliance requirements, and allowable deductions or exemptions.

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C. Individual Income Taxation – Schedular System

The schedular system applies to individuals, where income tax rates increase progressively based on income brackets. This method primarily applies to the following:

• Compensation income earned from employment,
• Business or professional income earned from trade or practice,
• Other forms of income (e.g., capital gains).

1. Tax Rates for Individuals under the TRAIN Law

• Graduated Rates: Under the TRAIN Law, taxable income for individuals is subject to graduated rates, ranging from 0% to 35%.
• Bracketed System: Income is divided into brackets, each of which has a corresponding tax rate.
  • For example, taxable income not exceeding ₱250,000 is exempt, while income exceeding ₱8 million is taxed at the maximum rate of 35%.
• Personal and Additional Exemptions: The TRAIN Law eliminated the personal and additional exemptions that previously applied, streamlining the computation of taxable income.

2. Passive Income Tax

• Interest Income: Interest income from bank deposits is taxed at a flat rate of 20%.
• Dividends: Dividends received by individuals from domestic corporations are taxed at a flat rate of 10%.
• Capital Gains: Gains from the sale of shares listed on the stock exchange are taxed at 0.6%, while gains from sales of real property are subject to a 6% capital gains tax.

3. Compliance Requirements for Individuals

• Individuals are required to file an annual income tax return (ITR) on or before April 15 of each year.
• Those solely earning compensation income from one employer may opt to file a substituted filing form, where the employer withholds and remits taxes on their behalf.

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D. Corporate Income Taxation – Flat Rate System

Corporations in the Philippines are subject to a flat rate system, meaning they are taxed at a uniform rate on net taxable income.

1. Tax Rates for Corporations under the TRAIN Law and CREATE Law (Corporate Recovery and Tax Incentives for Enterprises Act)

• Domestic Corporations:

  • General rate: 25% on net taxable income.
  • Small and medium corporations (SMEs) with net taxable income not exceeding ₱5 million and total assets not exceeding ₱100 million (excluding land) are subject to a reduced rate of 20%.

• Resident Foreign Corporations: Also subject to the flat 25% rate on Philippine-sourced income, though tax treaties may reduce this rate.

• Non-resident Foreign Corporations: Income from Philippine sources, such as dividends, interest, and royalties, is subject to a 30% final withholding tax, unless reduced by a tax treaty.

2. Minimum Corporate Income Tax (MCIT)

• Corporations are subject to a Minimum Corporate Income Tax (MCIT) of 2% of gross income, starting from the fourth year of operation.
• If a corporation’s regular income tax liability is less than the MCIT, it must pay the higher amount. Any excess MCIT over the regular corporate income tax can be carried forward and credited against future regular corporate income taxes for up to three years.

3. Passive Income Tax for Corporations

• Domestic corporations are subject to a 20% final tax on passive income derived from interest, royalties, and other income sources.
• For non-resident foreign corporations, passive income is taxed at rates prescribed in the NIRC or applicable tax treaties.

4. Compliance Requirements for Corporations

• Corporations must file an annual corporate income tax return on or before April 15 of each year or the 15th day of the fourth month following the close of the fiscal year.
• Quarterly income tax returns must also be filed for the first three quarters of the year, with payments made quarterly.

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E. Comparative Analysis of Individual vs. Corporate Income Taxation

Feature	Individual Income Taxation	Corporate Income Taxation
Tax System	Schedular	Flat Rate
Tax Rates	Graduated (0% - 35%)	Flat (20% or 25%)
Bracketed Income	Yes (graduated)	No (flat rate)
Minimum Tax	Not applicable	MCIT (2%)
Passive Income	Separate rates for interest, dividends	Final withholding on passive income
Capital Gains	0.6% or 6%	6%
Compliance	Annual filing; substituted filing for some	Annual and quarterly filing

F. Key Legislative Amendments: TRAIN Law and Ease of Paying Taxes Act

The TRAIN Law reformed individual income tax rates to ease the burden on low- and middle-income earners and simplified corporate taxation. Meanwhile, the Ease of Paying Taxes Act introduced reforms aimed at reducing compliance complexity for both individual and corporate taxpayers, including electronic filing options, more efficient audits, and simplified return forms for MSMEs.

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G. Conclusion

The NIRC, as amended by the TRAIN Law and Ease of Paying Taxes Act, has established a clear distinction between individual and corporate income taxation systems in the Philippines. The schedular approach for individual taxpayers ensures a progressive tax system where higher-income individuals bear a greater tax burden, while the flat-rate system for corporations aims to provide predictability and efficiency in business taxation. These changes underscore the government’s intent to create a fair, efficient, and simplified tax system for diverse taxpayer categories.

Kinds of Taxpayers – Individual, Corporations, Trusts, Estate | Nature and General Principles | Income Tax | National Internal Revenue Code of 1997 (NIRC), as amended by R.A. No.… | TAXATION LAW

Under the National Internal Revenue Code of 1997 (NIRC), as amended by R.A. No. 10963 (the Tax Reform for Acceleration and Inclusion or TRAIN Law) and further modified by R.A. No. 11976 (the Ease of Paying Taxes Act), there are distinct classifications and rules regarding income tax, especially concerning the different types of taxpayers. The following is an exhaustive and meticulous explanation of these classifications and their respective income tax implications.

I. Taxpayer Classifications under the NIRC

The NIRC identifies the following classifications of taxpayers for income tax purposes:

1. Individuals
2. Corporations
3. Trusts
4. Estates

Each category of taxpayer is subject to distinct income tax provisions, rates, and compliance requirements.

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II. Individuals

A. Nature and Types of Individual Taxpayers

The NIRC, as amended by the TRAIN Law, further categorizes individual taxpayers based on residency, citizenship, and type of income earned.

1. Resident Citizens

   • Subject to tax on income derived from both within and outside the Philippines.
   • Liable for progressive tax rates under the TRAIN Law, which established new tax brackets effective January 1, 2018.

2. Non-resident Citizens

   • Taxed only on income derived from Philippine sources.
   • Non-residency applies if the citizen has physically left the Philippines with the intent to reside abroad permanently, has been abroad for over 183 days, or is considered an Overseas Filipino Worker (OFW) who meets the conditions under the law.

3. Resident Aliens

   • Subject to tax only on income derived from Philippine sources.
   • Residency is determined by the presence and duration of stay within the Philippines (typically defined as over 180 days of stay).

4. Non-resident Aliens

   • Engaged in Trade or Business: Taxed on income derived from Philippine sources at graduated rates (similar to resident aliens).
   • Not Engaged in Trade or Business: Subject to a final withholding tax of 25% on gross income from Philippine sources.

B. Tax Rates for Individuals

The TRAIN Law introduced new income tax rates for individuals effective January 1, 2018, applicable to both resident citizens and resident aliens:

• Graduated Tax Rates:

  • Income up to PHP 250,000 is exempt from tax.
  • Tax rates range from 20% to 35% for income exceeding PHP 250,000, with different rates applying to various income brackets.
  • After December 31, 2022, adjusted income brackets apply under the TRAIN Law, which further fine-tuned the rates.

• Final Taxes on Certain Types of Income:

  • Interest, royalties, and dividends may be subject to final withholding taxes.
  • Non-resident aliens not engaged in trade or business pay a final withholding tax rate of 25% on their gross income.

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III. Corporations

A. Classification of Corporations

1. Domestic Corporations

   • Corporations established or organized under Philippine laws are subject to tax on all income, both from within and outside the Philippines.

2. Resident Foreign Corporations

   • Corporations organized under foreign laws but engaged in trade or business within the Philippines.
   • Taxed on income derived solely from Philippine sources.

3. Non-resident Foreign Corporations

   • Corporations organized under foreign laws and not engaged in trade or business within the Philippines.
   • Subject to final withholding tax rates on certain types of passive income from Philippine sources.

B. Tax Rates for Corporations (as modified by the TRAIN Law and subsequent laws)

1. Domestic and Resident Foreign Corporations:

   • The Corporate Income Tax (CIT) rate is 25% on net taxable income, with a reduced rate of 20% applicable to domestic corporations with net taxable income not exceeding PHP 5 million and total assets not exceeding PHP 100 million.

2. Minimum Corporate Income Tax (MCIT):

   • Imposed at a rate of 1% of gross income, effective from July 1, 2020, until June 30, 2023, under the CREATE Act.

3. Non-resident Foreign Corporations:

   • Subject to a 25% final withholding tax on gross income derived from Philippine sources (e.g., dividends, interests, royalties).

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IV. Trusts and Estates

A. Tax Treatment of Trusts

1. Definition and Scope:

   • A trust is a legal arrangement where a trustee holds and manages assets for the benefit of beneficiaries.
   • Trusts are treated as separate taxpayers under the NIRC, and income generated within a trust is subject to taxation.

2. Income Tax Rates:

   • Trusts are subject to the same graduated income tax rates applicable to individual taxpayers.
   • The income tax applies to the income retained within the trust; distributed income to beneficiaries may be subject to taxation at the beneficiaries' level.

B. Tax Treatment of Estates

1. Definition:

   • An estate is the total property or assets left by a deceased person, which is subject to taxation until transferred to legal heirs.

2. Income Tax Rates:

   • Estates are also subject to the graduated income tax rates applicable to individual taxpayers.
   • The income earned by an estate during the period of administration or settlement is taxable, and the rates are computed similarly to those applicable to individuals.

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V. Special Provisions and Simplifications under the Ease of Paying Taxes Act (R.A. No. 11976)

The Ease of Paying Taxes Act introduced reforms aimed at simplifying tax compliance requirements, which apply to all types of taxpayers.

1. Simplified Filing and Payment Procedures:

   • Streamlined and more user-friendly tax filing processes, particularly for individual taxpayers and small businesses.

2. Single-Tier Filing System:

   • Simplified filing procedures that consolidate certain tax returns, reducing compliance burdens for corporations and trusts.

3. Administrative and Procedural Reforms:

   • Enhanced taxpayer services, expanded digitalization of tax compliance processes, and clarified tax rulings to assist all types of taxpayers, from individuals to corporations.

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Summary

The NIRC, as amended by the TRAIN Law and the Ease of Paying Taxes Act, provides a clear categorization of taxpayers, each with distinct income tax obligations. Individual taxpayers are subject to progressive tax rates, while corporations face a corporate income tax with specific rates for domestic, resident foreign, and non-resident foreign corporations. Trusts and estates, treated similarly to individuals, must comply with graduated tax rates. The recent Ease of Paying Taxes Act enhances tax compliance through streamlined processes, particularly benefiting individual taxpayers and small businesses.