The Bureau of Internal Revenue (BIR) has addressed the questions and concerns of taxpayers and stakeholders on corporate income taxation in its Revenue Memorandum Circular (RMC) 62-2021 issued on May 17, 2021. The RMC clarifies BIR Revenue Regulations (RR) 5-2021.
Which corporate income tax rate should be used?
Under the Corporate Recovery and Tax Incentives for Enterprises (Create) Act, domestic corporations may be subjected to a lower regular corporate income tax (RCIT) rate of 25 percent starting July 1, 2020. Meanwhile, corporations with net taxable income not exceeding P5,000,000 and total assets not exceeding P100,000,000 excluding the land on which the particular business entity’s office, plant and equipment are situated, are subject to a much lower RCIT rate of 20 percent.
The BIR declared that the total assets must be net of any depreciation and allowance for bad debts on top of the exclusion of the corporation’s land where the office, plant and equipment are situated. For purposes of identifying the value of the land to be excluded, the acquisition cost or fair market value of the land must be taken into consideration, as presented in the corporation’s financial statements.
The land to be excluded in the computation of total assets should only pertain to land where the office, plant and equipment are situated. Land used in inventory or as investment property, including plantation lands, is included in the computation of total assets. Should a piece of land be divided between office/plant space and other spaces, such as portions being leased out, the value of the land must be divided pro-rata according to area to determine which should be included to or excluded from the computation of total assets.
What are the income taxes for private educational institutions and hospitals?
Private educational institutions and hospitals which are for-profit and which distribute dividends to shareholders are outside the scope of the Create Act. Only proprietary educational institutions accredited as non-profit by the Department of Education (DepEd), Commission on Higher Education (Ched) and the Technical Education and Skills Development Authority (Tesda) may be subjected to the lower preferential tax rate of one percent from July 1, 2020 to June 30, 2023.
Private educational institutions and hospitals which are for-profit and which distribute dividends to shareholders are subject to the RCIT rate of 25 percent or 20 percent, as the case may be.
What happens to foreignsourced dividend income received by domestic corporations?
The Create Act enjoins domestic corporation investors to utilize dividend income received from non-resident foreign corporations in funding working capital requirements, capital expenditures, dividend payments, investment in domestic subsidiaries and infrastructures. RR 5-2021 has laid out the specific requirements (i.e., sworn affidavits and certifications) that domestic corporations have to comply with upon receipt of such foreign-sourced dividends.
Should the sworn affidavits and certifications portray that the foreign-sourced dividends have been unutilized, said dividends shall be considered as taxable income, subject to tax, surcharges, interest and penalties.
For dividends received from resident foreign corporations, Section 42(A)(2)(b) of the Tax Code shall govern as to whether the said dividends are tax-exempt. Dividends received from a resident foreign corporation (RFC) shall be treated as taxable income derived from sources within the Philippines, unless less than 50 percent of the gross income of the foreign corporation for the three-year period ending in the period preceding the declaration of such dividends was derived from sources within the Philippines.
Accordingly, should a domestic corporation receive dividends from an RFC, and 50 percent of the said RFCs gross income for the past three years prior to the dividend declaration is derived from sources within the Philippines, it may be considered as tax-exempt income by the domestic corporation. Otherwise, the domestic corporation would have to prove through the required sworn affidavits and certifications that it has utilized the said dividend income.
When should MCIT be imposed again?
From July 1, 2020 to June 30, 2023, domestic corporations may be subjected to the one percent minimum corporate income tax (MCIT) on gross income, should the said MCIT exceed the RCIT for the taxable year. However, domestic corporations may only be subjected to such MCIT in the fourth taxable year immediately following the year in which such corporation commenced its business operations. The commencement of business operations shall be construed as the registration date with the BIR per RR 9-1998.
As such, for a business registered with the BIR which commenced business operations on Jan. 1, 2017, said business will start to pay the MCIT on the taxable year starting Jan. 1, 2021, should it exceed the RCIT.
How should additional labor training expenses be treated?
The Create Act allows for an additional expense of one-half of the value of labor training expenses incurred for skills development of enterprise-based trainees enrolled in public senior high schools, public higher education institutions or public technical and vocational institutions duly covered by an apprenticeship agreement under Presidential Decree 442 s. 1974 or the Labor Code. The company claiming for additional deduction should also be granted an authority to offer training programs for skills development as certified by DepEd, Ched or Tesda, as applicable.
The total labor training expenses, however, must not exceed 10 percent of the total direct labor wages. The direct labor wage is the portion of salaries and wages which can be identified with and charged directly to a product or to a project or service on a consistent basis. Therefore, labor training expenses pertaining to training provided to supervisory, managerial, administrative or support function employees are not included in the computation.
Source: P&A Grant Thornton