Corporate - Income determination

Inventory valuation

Inventories are generally stated at the lower of cost or net realisable value. Last in first out (LIFO) is not allowed for tax purposes. Generally, the inventory valuation method for tax purposes must conform to that used for financial reporting purposes.

Capital gains

Capital gains are not generally subject to CIT but may be subject to capital gains tax. See Capital gains tax in the Other taxes section for more information.

Dividend income

Dividends received by a domestic or resident foreign corporation from another domestic corporation are not subject to tax. These dividends are excluded from the taxable income of the recipient.

Dividends received by a non-resident foreign corporation from a domestic corporation are subject to a general final WHT at the rate of 30%. A lower rate of 15% applies if the country in which the corporation is domiciled either does not impose income tax on such dividends or allows a tax deemed paid credit of 15%. Treaty rates ranging from 10% to 25% may also apply if the recipient is a resident of a country with which the Philippines has a tax treaty (see the Withholding taxes section).

Stock dividends

A Philippine corporation can distribute stock dividends tax-free, proportionately to all shareholders. The subsequent cancellation or redemption of such stocks, however, shall be taxable to the extent that it represents a distribution of earnings.

Interest income

Interest on bank savings, time deposits, deposit substitutes, and money market placements received by domestic or resident foreign corporations from a domestic corporation are subject to a final tax of 20%, while interest income derived from FCDU deposits is subject to a final tax of 15% under the TRAIN law. Such income is excluded from gross income reportable in CIT returns.

Interest income of OBUs and FCDUs from foreign currency loans granted to residents other than OBUs or local commercial banks shall be subject to 10% tax.

Royalty income

Royalties received by domestic or resident foreign corporations from a domestic corporation are subject to a final tax of 20%. However, if the royalties are derived from the active conduct of business, they shall be subject to 30% CIT.

Other significant items

Other items exempt from CIT include the following:

  • Proceeds of life insurance policies.
  • Return of policy premium.
  • Gifts, bequests, and devises.
  • Interest on certain government securities.
  • Income exempt under a treaty.
  • Gains from sale, exchange, or retirement of bonds, with a maturity of five years.
  • Gains from redemption of shares of stock in mutual fund companies.

Foreign income

A Philippine (domestic) corporation is taxed on its worldwide income. A domestic corporation is taxed on income from foreign sources when earned or received, depending on the accounting method used by the taxpayer.

Income earned through a foreign subsidiary is taxed only when paid to a Philippine resident shareholder as a dividend. Meanwhile, income earned through a foreign branch is taxed as it accrues. The losses incurred by the foreign branch are deductible against other income earned by the Philippine corporation.

Foreign taxes may either be credited against income tax due or claimed as a deduction against gross income for income tax purposes.