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.