In today’s business community, corporations abound and are still growing in number. In many cases, entrepreneurs opt to conduct business as a corporate entity because of its obvious advantages. For one, a corporation makes projects requiring huge investments more feasible as it has the ability to pool separate funds from a vast number of investors. A corporation also enjoys continuity of existence, as its life isn’t dependent on the lives of its stockholders. The stockholders, for their part, enjoy limited liability for corporate debts, and can easily transfer their shares of stocks.
In the area of taxation, however, the corporate structure may not seem as enticing. The owner of a sole proprietorship only pays personal income tax for income derived from the conduct of business, while various taxes are levied for income earned by a corporation. (Basically, an individual owner is taxed only once for income — and thus pays fewer taxes — while a corporation is taxed multiple times, and thus pays more.)
Foremost, a domestic corporation is subject to the 30% normal income tax on its taxable income derived from all sources, both within and without the Philippines. For a corporation with a ratio of cost of sales (or cost of services) to gross sales (or gross receipts) not exceeding 55%, there is an option to instead be taxed at 15% of its gross income derived from all sources.
The 30% normal income tax and the 15% tax on the gross income, being the general taxes imposed on corporations, may well be taken as the counterparts of the personal income tax of the sole proprietor. But the corporation’s income tax liability does not end here.
A peculiar feature of corporate taxation is that a corporate entity may still have to pay income tax although it operated at break-even or incurred a loss. Beginning on the fourth taxable year immediately following the year in which it commenced its business operations, a domestic corporation becomes subject to the 2% minimum corporate income tax on its gross income derived from all sources. The minimum corporate income tax sets a floor on the corporation’s tax liability, thereby guaranteeing payment of income tax regardless of the results of its operations.
Still another extraordinary item in the gamut of corporate taxes is the improperly accumulated earnings tax. A domestic corporation cannot accumulate its earnings for as long as it wishes. It has to release such earnings as dividends to its stockholders, or justify the accumulation as necessary to serve the reasonable needs of the business. Otherwise, it will be subjected to the 10% improperly accumulated earnings tax on its income determined to be improperly accumulated.
Hence, while the corporation’s income is taxed at the time it is earned (either under the 30% normal income tax, 15% tax on gross income, or the 2% minimum corporate income tax), it may again be taxed subsequently when it has accumulated beyond what can be justified as necessary to provide for the reasonable needs of the business.
The country witnessed the overhauling of our two decade-old Tax Code when the Tax Reform for Acceleration and Inclusion (TRAIN) law took effect on Jan. 1. The first of the government’s five tax reform packages, the TRAIN law introduced major changes in our tax system, the most notable of which is the significant reduction of the personal income tax.
Following this downward leap in the personal income tax applicable to sole proprietors, there is much anticipation in the corporation-dominated business community as the government sets its eyes on the second tax reform package which, this time, will focus on corporations. Pursuing the same policy as the first tax reform package, the second package is expected to cut corporate income taxes, while, at the same time, modernize tax incentives granted to corporations.
How the second tax reform package will change the current corporate taxation system, especially the expanse of taxes imposed on the corporation’s income, remains to be seen. What is discernible though is that overtaxed or not, corporate entities clamor for the simplification and softening of the income tax measures currently being imposed on them.
The views and opinions expressed in this article are those of the author. This article is for general informational and educational purposes only and is not offered as and does not constitute legal advice or legal opinion.
Christianne Mae C. Balili is an Associate of the Angara Abello Concepcion Regala & Cruz Law Offices (ACCRALAW), Cebu Branch. (6332) 231-4223