What is Corporation: Understanding Corporations in the Philippines

In this article, we shall discuss what is corporation. A corporation is a juridical entity that exists by operation of law. It is formed by filing the articles of incorporation with the appropriate government authorities, foremost, the Securities and Exchange Commission (SEC).

The corporation, created under the auspices the Revised Corporation Code, acquires separate juridical personality apart from its stockholders or members from the issuance by the SEC of its Certificate of Incorporation.

In essence, corporations occupy a central position within the business sphere and the economy. They propel innovation, generate employment, nurture economic expansion, and even furnish chances for personal investment. Their legal framework and attributes offer advantages and obligations that shape their functions and reverberate throughout society as a whole.

Legal Definition of a Corporation | What is Corporation

Section 2 of the Revised Corporation Code (RCC) defines a corporation as “an artificial being created by operation of law, having the right of succession and the powers, attributes, and properties expressly authorized by law or incidental to its existence”.¹

Stemming from the definition above, the following are the attributes of a corporation:

1. A corporation treated as an artificial being;²
2. Created by operation of law³
3. Having the right of succession; and³
4. Having the powers, attributes and properties expressly authorized by law or incident to its existence.³

Key Characteristics of a Corporation

Limited Liability. The limitation of the stockholders’ liability to the amount of the investment is one benefit of a corporate form of business organization or association. Simply, the liability of the stockholders is limited only to their capital contribution or in the amount they have invested. Thus, they cannot be held liable on their personal property, and their liability cannot extend beyond their subscription or investment.³

Separate Legal Entity. A corporation has a personality distinct and separate from its stockholders or members. Therefore, being a stockholder or a member of a corporation does not make one’s property a part of the corporation’s property, as they are two distinct legal entities. Furthermore, the mere ownership by a single stockholder of all the capital stocks of a corporation is not by itself a sufficient ground to disregard the separate legal personality.³

Perpetual Existence. The Revised Corporation Code introduces a significant change into the existence of a corporation. Before, a corporation used to have a limited life of 50 years only unless otherwise extended. Now, a corporation shall have a perpetual existence unless limited or provided in the Articles of Incorporation.³

Ability to Raise Capital through Stock Issuance. Stock issuance refers to the process of selling or issuing shares of ownership in the corporation to stockholders, in exchange for capital. This capital infusion can be used by the corporation for various purposes, such as funding new projects, expanding operations, paying off debts, or simply bolstering its financial position.

Legal Framework for Corporations in the Philippines

Republic Act No. 11232, otherwise known as the Revised Corporation Code of the Philippines, provides the formation, registration, operation, and regulations of corporations in the Philippines.

It covers the different classes of corporations, including those created by special laws and charters, the incorporation and organization of private corporations, the power and duties of directors and officers, shareholder rights, and the dissolution of corporate existence.⁴

Other than that, the Republic Act No. 8799, otherwise known as the Securities Regulation Code, outlines the laws governing the foreign ownership of Philippine corporations, as well as the issuance of trading securities.⁵

Meanwhile, the Securities and Exchange Commission (SEC) plays a crucial role in the registration, regulation, and enforcement of corporate laws in the Philippines.

It is mandated to create elaborate rules and regulations to facilitate concerns, such as reservation and registration of corporate names, applications for incorporation, submission of reports, providing notices, providing documents needed under the Revised Corporation Code (RCC), and providing pertinent information with other government agencies.⁶

Steps in Incorporating a Corporation in the Philippines

A corporation commences its registration process by transacting with the Securities and Exchange Commission (SEC), and other relevant government agencies. The incorporation process are as follows:

1] choosing a corporate name;

2] verification of the corporate name;

3] reservation of the corporate name and submission of documents for registration;

4] notarization and payment of fees;

5] clearances and business permit from the municipality or city;

6] Bureau of Internal Revenue (BIR) registration and other registrations with government agencies to fully operate.

The steps for incorporating a corporation in the Philippines are explained in details below:

• Choosing a Corporate Name. The applicant corporation shall decide their corporation name⁷ and principal office address.⁸ The applicant corporation must come up with different corporate names in case their priority choice was already registered or reserved by another corporation, protected by law or against the law, rules and regulations.⁹
• Verification of Corporate Name. The verification of the proposed corporate name may be done online through the Iregister System; or personally at the Name Verification Unit at G/F Secretariat Building, PICC Complex, Roxas Boulevard Pasay City; or Satellite Offices and Securities and Exchange Commission Extension Offices.¹⁰
• Reservation of Corporate Name and Submission of Documents for Registration. The applicant corporation must accomplish the necessary forms for reservation of corporation name with the Securities and Exchange Commission. The accomplished forms must have the following attachments: 1) Articles of Incorporation;¹¹ 2) By-Laws; and 3) Treasurer’s Affidavit. All of these must be duly signed by the incorporators and notarized by the notary public.¹²
• Notarization of the Documents and Payment of Fees. After completing the notarization of the above-mentioned documents, it must be submitted to the Securities and Exchange Commission (SEC) on any of its satellite offices. The applicant must also pay the necessary fees. Upon perusal of the documents, the Securities and Exchange Commission (SEC) may issue a Certificate of Registration provided there are no issues to the submissions. The Certificate of Registration confirms the registration of the corporate name and thus commences the corporate existence.⁹ However, the corporation must still register with the relevant government agencies to operate.¹³
• Clearance and Business Permit with the Municipality or City. The registered corporation is required to secure the following: 1) Barangay Clearance, Mayor’s Permit, and Business Permit from the Municipality or City where they seek to operate.¹⁴
• BIR Certificate of Registration and other government agencies. Thereafter, the corporation must acquire a BIR Certificate Registration from the Bureau of Internal Revenue (BIR) for corporate taxation.¹⁵ They may also be required to apply for registration with the Social Security System (SSS), Philippine Health Insurance Corporation (PhilHealth), or Home Development Mutual Fund (HDMF).¹⁶

Requirements and other Necessary Documents and Fees for Registration

A corporation or different business entities under the jurisdiction of the Securities and Exchange Commission (SEC) must submit the following requirements: 1) Articles of Incorporation; 2) By-Laws; 3) Registration Data Sheet; 4) Cover Sheet; 5) Joint Affidavit of Undertaking to Change Name; 6) Clearances from other Government Agencies.¹⁵

For the Articles of Incorporation, Section 13 of the Revised Corporation Code provides that it must contain the following necessary matters:

(a) The name of the corporation;¹⁷

(b) The specific purpose or purposes for which the corporation is being formed. Where a corporation has more than one stated purpose, the articles of incorporation shall indicate the primary purpose and the secondary purpose or purposes: Provided, That a nonstock corporation may not include a purpose which would change or contradict its nature as such;¹⁸

(c) The place where the principal office of the corporation is to be located, which must be within the Philippines;¹⁸

(d) The term for which the corporation is to exist, if the corporation has not elected perpetual existence;¹⁸

(e) The names, nationalities, and residence addresses of the incorporators;¹⁸

(f) The number of directors, which shall not be more than fifteen (15) or the number of trustees which may be more than fifteen (15);¹⁸

(g) The names, nationalities, and residence addresses of persons who shall act as directors or trustees until the first regular directors or trustees are duly elected and qualified in accordance with this Code;¹⁸

(h) If it be a stock corporation, the amount of its authorized capital stock, number of shares into which it is divided, the par value of each, names, nationalities, and residence addresses of the original subscribers, amount subscribed and paid by each on the subscription, and a statement that some or all of the shares are without par value, if applicable;¹⁸

(i) If it be a nonstock corporation, the amount of its capital, the names, nationalities, and residence addresses of the contributors, and amount contributed by each; and¹⁸

(j) Such other matters consistent with law and which the incorporators may deem necessary and convenient. An arbitration agreement may be provided in the articles of incorporation pursuant to Section 181 of this Code.¹⁸

The articles of incorporation and applications for amendments thereto may be filed with the Commission in the form of an electronic document, in accordance with the Commission’s rules and regulations on electronic filing.”¹⁸

For the qualifications of the incorporators, the corporation must not have more than fifteen (15) incorporators, who all must be of legal age. For a stock corporation, the incorporators must be an owner or a subscriber of at least one (1) share of the capital stock.¹⁹

Moreover, the Securities and Exchange Commission requires the submission of four (4) copies of all applications and attached documents in an A4 size bond paper.²⁰

The other necessary documents are the Tax Identification Number (TIN), book of accounts, and authority to print official receipts from the Bureau of Internal Revenue (BIR). The corporation must also secure a business permit from the Mayor’s Office.¹⁶

For the registration and fees, Memorandum Circular No. 3 provides that the name reservation fee is P100. Meanwhile, the fees for Articles of Incorporation is different depending if it is a stock or non-stock.²¹

For a stock corporation with par value, the registration and filing fees is 1/5 of 1% of the authorized capital stock  but not less than P2,000 or the subscription price of the subscribed capital stock whichever is higher.²²

For a stock corporation without par value, it is 1/5 of 1% of the authorized capital stock computed at P100 per share but not less than P2,000 or the issue value of the subscribed capital stock whichever is higher. Meanwhile, for the Articles of Incorporation of Non-Stock corporation, it is P1,000.²²

Role of the Securities and Exchange Commission in the Incorporation Process

Under the Revised Corporation Code (RCC) or R.A. 11232, the Securities and Exchange Commission is the national government regulatory agency that is tasked to supervise and regulate the corporate sector, securities, and capital markets, alongside the protection of investments.

As for the incorporation process, the Securities and Exchange Commission is authorized to promulgate rules pertaining the following:²³

• reservation and registration of corporate names;²⁴
• incorporation process;²⁴
• submission of reports;²⁴
• required documents under the Revised Corporation Code; and²⁴
• information sharing with other government agencies.²⁴

Moreover, according to Section 5 (c) of the Securities Regulation Code or R.A. 8799, the Securities and Exchange Commission has the power to “approve, reject, suspend, revoke, or require amendments to registration statements, and registration and licensing applications.”²⁵

It also has the power to approve, deny, or revoke a certificate of incorporation.²⁶ As the national regulatory agency, the Securities and Exchange Commission is mandated to ensure compliance to the registration requirements.²⁷

In order to ensure compliance, the Securities and Exchange Commission may investigate, impose sanctions, issue cease and desist orders, subpoenas, and hold in contempt erring applicants and corporations.²⁸

Differentiating the Recognized Types of Corporations in the Philippines

Like many other countries, the Philippines recognizes various types of corporations, each with its distinct features. Stock corporations, non-stock corporations, and close corporations are the three well-known types of corporations in the Philippines. Let’s examine their differences in terms of ownership, governance, and objectives.

Stock Corporations

A stock corporation is defined as those which have capital stock divided into shares and are authorized to distribute to the holders of such shares, dividends, or allotments of the surplus profits on the basis of the shares held.²⁹

According to the definition provided by RCC, stock corporations provide shares, dividends, or allotments of the surplus profits to the stockholders,¹⁸ making the latter the corporation’s owners.

Owing to the large number of stockholders and their lack of familiarity with how a corporation conducts its operations, the governance of the stock corporation rests with the Board of Directors (BOD), except for the One Person Corporation (OPC).

The BOD exercises the corporate powers of the corporation, conducts all business, and controls and holds all the property of  the corporation. BOD are elected from among the stockholders. The primary objective of stock corporations is to maximize profits for their stockholders.

Non Stock Corporations

Nonstock corporations are initially defined as all other corporations are nonstock corporations.¹⁸ It is defined further as “one where no part of its income is distributed as dividends to its members, trustees, or officers: Provided, That any profit which a nonstock corporation may obtain incidental to its operations shall, whenever necessary or proper, be used for the furtherance of the purpose or purposes for which the corporation was organized, subject to the provisions of this Title.”³⁰

Members own the nonstock corporations. Unless otherwise provided in its Articles of Incorporation (AOI) or the by-laws, membership in this type of corporation is personal and non-transferable.

The governance of such corporations rests with the Board of Trustees (BOT), which the number may or may not be more than 15 as fixed in the AOI or by-laws.

Nonstock corporations may be formed or organized for various purpose, which includes but not limited to the following:

• charitable,³¹
• religious,¹⁸
• educational,¹⁸
• professional,¹⁸
• cultural,¹⁸
• fraternal,¹⁸
• literary,¹⁸
• scientific,¹⁸
• social,¹⁸
• civic service, or¹⁸
• similar purposes, like trade, industry, agricultural and like chambers, or any combination thereof.¹⁸

The mere fact that it earns profit in the course of its business is not strictly prohibited or makes it a stock corporation, especially if it is merely incidental and is used for furtherance of the purpose to which it was organized.

Closed Corporation

Close corporation as “one whose articles of incorporation provides that:³²

• (a) all the corporation’s issued stock of all classes, exclusive of treasury shares, shall be held of record by not more than a specified number of persons, not exceeding twenty (20);¹⁸
• (b) all the issued stock of all classes shall be subject to one or more specified restrictions on transfer permitted by this Title; and¹⁸
• (c) the corporation shall not list in any stock exchange or make any public offering of its stocks of any class”.¹⁸

In a close corporation, the owners, referred to as stockholders, are limited to a specified number, which cannot exceed.

Its governance may rest with the stockholders as provided in its AOI, rather than with the board of directors.

Its primary objective is the same as that of the stock corporation, to generate profit. What distinguished this from the latter is the management by a small group of individuals.

One Person Corporation

A One Person Corporation is a corporation with a single stockholder: provided, however, that a One Person Corporation may be formed only by a natural person, trust, or estate.³³

Banks and quasi-banks, trust, insurance, public and publicly-traded firms, and non-chartered government-owned and controlled corporations are not permitted to organize as One Person Corporations.¹⁸

Furthermore, except as otherwise permitted by special statute, a natural person who is licensed to practice a profession may not form a One Person Corporation to practice that profession.¹⁸

Except as otherwise allowed by special law, a One Person Corporation is not obliged to have a minimum authorized capital stock.³⁴

Corporate Governance and Structure

Philippine corporations have a generally established structure, which creates a division of powers and responsibilities among its key players in order to ensure good governance and safeguard the interests of all stakeholders.

Let us start with the persons who originally form and compose the corporation and are signatories thereof. These are the incorporators, who remain to be as such until the life of the corporation is terminated. They cannot be changed. Their being incorporators is fait accompli or an accomplished fact.

Incorporators are, in essence, the stockholders or members who founded the corporation, whose names are written in the Articles of Incorporation and such fact can never be amended, as mentioned.

On the other hand, corporators refer to the stockholders or shareholders in a stock corporation, or members in cases of non-stock corporations.³⁵

Shareholders, as their designation implies, hold shares in a corporation by virtue of which they are given the power to change the structure of the corporation, and make crucial decisions, provided that the vote of stockholders representing at least 2/3 of the outstanding capital stock of the corporation is needed in order to approve such a change or decision.³⁶

Of course, by the nature of them being holders of shares in the corporation, they also hold an interest over the income and assets of the corporation, besides. Most importantly, perhaps, they are entitled to the control of the corporation by electing the members of the board of directors, who actually manage the corporation.³⁶

Stockholders are also entitled to dividends, subject to the provisions of the Revised Corporation Code and as may be authorized and approved by the corporation in accordance with law.

The directors are in charge of the corporation’s general management and strategic direction. They serve as fiduciaries and owe the company and its shareholders a responsibility of loyalty and care. Important choices are made by directors, including selecting executives, approving budgets, and establishing company guidelines.

They are also in charge of making sure that rules and laws are adhered to. The board of directors normally convenes on a regular basis to deliberate and make decisions about crucial issues impacting the corporation.

Directors, in turn, appoint the officers, such as the president, vice-president, secretary, treasurer, etc., who play different roles for the corporation in its day-to-day operations.

Additionally, duly authorized and empowered officers of the corporation have the power to act on behalf of the company, sign contracts, appoint staff members, and make managerial decisions. They must periodically report on their activity and account to the board of directors.

This established structure of a corporation is designed to have a smooth operation by clearly setting out the respective powers and responsibilities of each key player in order to ensure transparency and accountability.

This plays a crucial role in managing the risks and safeguarding the assets of the corporation for the purpose of perpetuating its business and operations.

Advantages of Incorporation

Setting up a  business into a corporate entity has many distinct advantages, such as  limited liability, access to capital and credibility, to name a few.

As an artificial being created by law and has a juridical personality separate and distinct from its owners, corporations provide a limitation to the liability of its individual shareholders.

The shareholders will not be personally liable to the creditors of the corporation. This is unlike the risks that a sole proprietor faces, wherein his liability extends to all of his personal assets in case of financial difficulties in the management of his own business.

In a corporation, the liability of the shareholders will only be up to the amount that they have invested in the company, although he is personally liable to the extent of his unpaid subscription.³⁷

Another advantage of setting up a corporation is access to capital.  The ownership is divided into shares, which gives the corporation the option to raise money by issuing more shares and pooling individual investors to invest their funds.

Banks and other financial institutions also look favorably to corporations in issuing loans. A corporation is regulated by the SEC which necessarily includes submission of financial statements, book of accounts, ownership structure and other information related to the operation of the business.

This information may be used by banks, financial institutions and potential investors in determining the financial viability for potential investment, thus giving the corporation more access to capital.

Finally, a corporation has more credibility than other types of business organizations.  A corporation is governed by a set of directors and a management team, who have expertise in the field of the business and on operations of the company.

This expertise provides a better framework for better decision making that can help ensure success of the business. A corporation must comply with the requirements of the law and the regulatory body that monitors its existence.

A corporation has its Articles and Bylaws which governs its creation and internal operation, and which provides for the processes and accountability in running the business.

All of these means that a corporation follows a more rigid structure and processes and thus, the public, its investors,  banks and financial institutions, and other stakeholders view the corporation as more credible than the other types of business organization.

Potential Challenges and Considerations when Establishing Corporations

Incorporating a business in the Philippines offers various advantages, such as limited liability, easy-access to capital, and perpetual existence. Nevertheless, it also comes with several disadvantages and potential challenges, particularly related to regulatory compliance and taxation.

In deciding whether to incorporate or not, the following matters should first be considered:

Complex Registration Process

Setting-up a corporation in the Philippines can be very complex and time-consuming. Before one can set-up a corporation in the Philippines, persons planning to incorporate need to obtain first a certificate or license from different government agencies.

Below are some of the government agencies certificates or licenses one needs to obtain when desiring to establish a corporation.

1] Securities and Exchange Commission – Certificate of Incorporation

2] Local Government Units where your business is located:

2.1] Barangay for the Barangay Business Permit

2.2] City or Municipal Mayor’s Office – Mayor’s Business Permit

3] Bureau of Internal Revenue – Business Registration

4] Other required regulatory agency certificates depending on the primary purpose of the corporation being set-up.

Reportorial Requirements

Corporations also need to comply with various reportorial requirements from different regulatory agencies. Failure to do so may result in penalties or even dissolution of the corporation.

Corporations must of course comply with the annual reporting requirements, including filing financial statements and tax returns in order for the regulatory agencies to assess the financial capacity and stability of the business in continuing its operation.

Under Revised Corporation Code, it states that unless otherwise provided in the same code or in the rules issued by the Commission, corporations, either domestic or foreign, doing business in the Philippines shall submit to the Commission:³⁸

• Annual financial statements audited by an independent CPA. If the total assets or total liabilities are less than Php600,000, the financial statements shall be certified under oath by the corporation’s treasurer or chief financial officer;¹⁸
• General Information Sheet;¹⁸
• Other required documents if corporations are vested with public interest.¹⁸

The reportorial requirements shall be submitted annually and within such period as may be prescribed by the Commission.¹⁸

The Commission may place the corporation under delinquent status in case of failure to submit reportorial requirements three times, consecutively or intermittently, within a period of five years.³⁹

High Corporate Income Tax Rate

One of the potential challenges that corporations in the Philippines are facing is having a high corporate income tax rate. The Philippines had one of the highest corporate income tax rates in Southeast Asia, at 30%.

To address this, President Duterte signed into law the Corporate Recovery and Tax Incentives for Enterprises (CREATE) Act on 26 March 2021, reducing the tax rate from 30% to 25%. This intended to make the Philippine corporate tax system globally competitive and attractive to foreign investors.⁴⁰

Nevertheless, corporations are still the business form with the highest tax rate.

Considerations When Deciding Whether to Incorporate

In deciding whether to incorporate, individuals and entrepreneurs must consider factors such as corporation’s liability and capital.

Limited Liability

When deciding whether to incorporate  the limited liability of stockholders in Philippine corporations plays an important role. As a general rule, liability of a corporation is limited only to the extent of the capital contribution.⁴¹

It is an important note that when individuals and entrepreneurs become stockholders their properties, holdings or assets of are not within the reach of corporate creditors.

The Securities and Exchange Commission (SEC) imposes certain reportorial requirements,⁴² which should be complied with on a regular basis such as submission of General Information Sheet and Audited Financial Statements.

It is important that individuals and entrepreneurs know the nature of a corporation’s liability upon incorporation because it will give them an idea how much corporate assets are available to the creditors.

Knowing the limited liability of a corporation significantly helps in determining the risk of entering into contracts with third parties. Another advantage of being a separate legal entity of the corporation is that income corporate taxes are only paid based on the corporation’s profit.

Capital

Another significant factor in considering whether to incorporate is the amount of capital stock. Knowing how much must be invested provides the incorporators about the viability of the corporation.

Under the Revised Corporation Code, no minimum capital stock is required on stock corporations except when specifically provided by law.⁴³

Thus, under the Philippines laws, individuals and entrepreneurs can easily incorporate without worrying much about the minimum capital stock as a general rule.

Tax Implications for Corporations

Registered corporations in the Philippines are required to file national taxes to the Bureau of Internal Revenue and local taxes to Local Government Unit (LGU) where their business is located.

National taxes include income tax, value-added tax, excise tax and documentary stamp tax. Meanwhile, local taxes consist of real property tax and local business tax.

“Fiscal year” means an accounting period for twelve months ending on the last day of any month other than December.⁴⁴ In the Philippines, most companies follow the fiscal year that ends in December or March.

In this regard, taxpayers such as corporations should compute their income and file their returns based on said accounting period.

Corporate taxpayers are required to use the Electronic Filing of Tax Returns and Payment of Taxes (eFPS) in filing tax returns.⁴⁵

This (eFPS) refers to the system developed and maintained by the Bureau of Internal Revenue (BIR) for electronically filing tax returns, including attachments, if any, and paying taxes due thereon, specifically through the internet.⁴⁶

However, those that are not covered by the eFPS may use the Electronic Bureau of Internal Revenue Forms (eBIRForms) in accordance with Revenue Memorandum Order No. (RMO) 24-2013 which was developed primarily to provide taxpayers with an alternative mode of preparing and filing tax returns that is easier and more convenient.

The eBIRForms also known as the “offline package” covers thirty-six (36) BIR Forms comprised of Income Tax Returns, Excise Tax Forms, VAT Forms, Withholding Tax Forms, Documentary Stamp Tax Forms, Percentage Tax Forms, ONETT Forms and Payment Form. The offline package allows taxpayers and agents to fill up tax returns offline and submit it to the BIR through the Online eBIRForms System.⁴⁷

According to Revenue Regulations No. 5-2015, failure to comply with the eFPS and eBIRForms shall be subject to a penalty of One Thousand Pesos (Php1,000) per return. Moreover, failure to file tax returns shall incur a civil penalty of 25% of the tax due paid in accordance with Sec. 248 (A) of the National Internal Revenue Code of 1997.

Corporate Income Tax Rates and Other Relevant Corporate Taxes

Corporate income tax rates and other relevant corporate taxes play a significant role in shaping a country’s business environment. These taxes are imposed on the profits earned by corporations and impact their financial performance and investment decisions.

The level of these taxes can vary widely across countries, influencing the attractiveness of different jurisdictions for businesses. Understanding and analyzing these tax rates and regulations is crucial for businesses to effectively manage their tax liabilities and optimize their operations.

Corporate Income Tax

Generally, an income tax rate of 25% is imposed on domestic corporations effective July 1, 2020 upon the taxable income derived during each taxable year from all sources within and without the Philippines.⁴⁸

An income tax rate of 20%, however, is imposed on domestic corporations with net taxable income not exceeding Five million pesos (P5,000,000.00) and with total assets not exceeding One hundred million pesos (P100,000,00.00), excluding land on which the particular business entity’s office, plant, and equipment are situated during the taxable year for which the tax is imposed.⁴⁹

It does not mean, however, that a domestic corporation not earning a profit does not have to pay income tax, or that every domestic corporation must pay its income tax based on the 25% or 20% normal corporate income tax rate.⁴⁹

The Minimum Corporate Income Tax (MCIT) is to be observed. MCIT is imposed at a rate of 2% of gross income, but under CREATE Law a 1% rate is effective July 1, 2020 until June 30, 2023. The normal rate of 2% is to be observed thereafter.⁴⁹

As its name suggests, this is the amount of income tax that a corporation has to pay as a minimum. Thus, where the corporation has zero or negative taxable income or whenever the amount of MCIT is greater than the normal corporate income tax, the minimum corporate income tax is applied.

It should not be confused that the normal corporate income tax and MCIT is imposed on different tax bases.

Normal corporate income tax is imposed on a corporation’s taxable income, which is revenue after cost of sales or services to produce the said revenue and after costs of operations.

MCIT, on the other hand, is imposed on a corporation’s gross income, which is revenue after the cost of sales or services or the direct costs necessarily incurred to produce the revenue.

Another thing that has to be observed by a corporation if MCIT is applied instead of the normal corporate tax is the excess minimum tax or that amount of MCIT in excess of the normal tax should the latter be applied.

This excess amount shall be carried forward and credited against the normal income tax for the three (3) immediately succeeding taxable years.

Thus, excess minimum tax cannot be credited against if another MCIT is applied as income tax of a corporation for the succeeding year.

It can still be utilized, however, for the remaining two taxable years against the normal income tax, lest, it is deemed expired. It has to be noted as well that MCIT is not imposed on corporations that have just incorporated.

It is only observed after three years of its business operations or, as worded by the law, ‘beginning on the fourth taxable year immediately following the year in which such corporation commenced its business operations’.

It is not hard to see that MCIT may be seen as too much of a burden as it may be imposed even if a corporation has incurred losses.

To rationalize, this is enforced under the precept that some corporations may manipulate their financial reports to avoid the payment of taxes, and thus avoid sharing in the cost of the government.

The enforcement of MCIT on gross income is a way for the government to ensure that every corporation makes a reasonable contribution to the expenses of the government in its effort in improving the financial market and ensuring a favorable business climate.⁵⁰

It is a way for the government to prevent tax evasion and minimize artful schemes and circumventions resorted by corporations to avoid payment of taxes.⁵¹

Any corporation, however, may suffer legitimate losses on account of prolonged labor dispute, or because of force majeure, or because of legitimate business reverses. Thus, it is provided that a relief from MCIT can be had by any corporation.⁵¹

The necessary rules and regulations that define the terms and conditions under which the imposition of minimum corporate income tax is suspended are defined by the Secretary of Finance upon the recommendation of the Commissioner.⁵¹

To emphasize, a domestic corporation’s income tax is imposed on the greater amount between the normal corporate income tax of 20% or 25%, and Minimum corporate income tax of 2% or 1% as the case may be.

A quarterly and annual report on income taxes are necessary to be filed to the BIR. These are reported in the following prescribed forms:

The filing of Income Tax Returns should be accompanied with attachments showing the details of creditable withholding tax credited against the income tax due.

Value Added Tax

Value Added Tax (VAT) is defined as an indirect tax which may be passed on to the buyer, transferee or lessee of the goods, properties, or services. VAT is applied to all sales relative to a corporation’s ordinary course of business or incidental thereto.

The rate of VAT imposed in the Philippines is 12%. It is imposed against VAT registered taxpayers and those whose annual sales and/or receipts of goods and services exceed the VAT threshold of P3,000,000.00.⁵³

The amount of VAT a corporation is required to pay is simply the excess of Output VAT over the Input VAT. Output VAT is that which is derived from the amount of sales of the corporation.

While Input VAT is that which is calculated from the local purchases of goods and services and importation of goods of the corporation. Otherwise stated, Output VAT is the amount of VAT that is passed on to the end consumers.

Input VAT, on the other hand, is the amount of VAT paid and shouldered by the corporation in its local purchases and imports necessary for its business operations. To arrive at the amount of VAT due to a corporation, Input VAT is deducted from Output VAT.

Formula:

Output VAT – Input VAT = VAT Due and Payable

There may be instances where the Input VAT would exceed the Output VAT. The resulting amount is called the Creditable Input Tax. The resulting Creditable Withholding tax is then amortized against the Output VAT to the succeeding VAT report.

It should be noted, however, that export sales of a VAT-registered person are subject to zero percent (0%) rate. There are also specific transactions that are exempt from the value-added tax as exhaustively provided under Sec. 109 of the NIRC.⁵⁴ Consequently, no tax is imposed against the zero-rated VAT and VAT exempt transactions.

The necessary difference between zero-rating of VAT from exempting goods and services is that there is an allowed credit of input vat against zero-rated sales. But if the sale of goods or services is exempt, the corresponding payment on Input VAT cannot be claimed.⁵⁵

A quarterly report on VAT is required of every corporation. These are reported and paid in the following prescribed forms:

Taxpayers registered for value added tax (VAT) are no longer required to file a monthly VAT declaration (BIR Form No. 2550M).⁵⁶

The reporting of quarterly VAT returns is required to be accompanied by SLSP attachment showing the Summary List of Sales and Purchases which is due every 30th of the month following the end of every quarter.⁵⁷

Final Tax on Certain Passive Incomes

Section 27(D) of NIRC provides the rates of tax on certain passive incomes.

Interest from Deposits and Yield or any other Monetary Benefit from Deposit Substitutes and from Trust Funds and Similar Arrangements, and Royalties

A final tax at the rate of twenty percent (20%) is imposed on domestic corporations upon the amount of interest on currency bank deposit and other monetary benefits with the same arrangements, and royalties, derived from sources within the Philippines.⁵⁸

If an interest income is derived from a depositary bank under the expanded foreign currency deposit system, a final tax rate of 15% is imposed on such interest income.⁵⁹

Tax on Income Derived under the Expanded Foreign Currency Deposit System

On the part of the depositary bank, its income derived under the expanded foreign currency deposit system from foreign currency transactions with nonresidents, offshore banking units in the Philippines, local commercial banks, including branches of foreign banks that may be authorized by the Bangko Sentral ng Pilipinas (BSP) to transact business with foreign currency deposit system units and other depositary banks under the expanded foreign currency deposit system are exempt from taxes.

However, a depositary bank’s net income from such transactions as specified by the Secretary of Finance upon recommendation of the Monetary Board are subject to the regular income tax.⁶⁰

When it comes to interest income derived by a depositary bank from foreign currency loans granted to residents other than Offshore Banking Units in the Philippines or other depositary banks under the expanded system, a 10% final tax is imposed.⁴⁹

Intercorporate Dividends

Intercorporate dividends received by a domestic corporation from another domestic corporation or from a resident foreign corporation are not subject to tax.⁴⁸ Foreign-sourced dividends or those received from non-resident foreign corporations, on the other hand, are treated differently.⁴⁹

It is either subject to a 15% tax rate or exempt from tax should it meet all the conditions for its exemption. For foreign-sourced dividends to be exempt, the domestic corporation shall directly hold at least 20% of outstanding shares of the foreign corporation for a period of two (2) years at the time of the distribution.⁴⁹

Further the domestic corporation receiving such must reinvest it in its business operations within the next taxable year from its receipt. Such reinvestment shall be limited to funding the working capital requirements, capital expenditures, dividend payments, investment in domestic subsidiaries, and infrastructure projects.⁴⁹

Capital Gains Tax from the Sale of Shares of Stock

A 15% final tax is imposed on the net capital gains realized by a corporation during the taxable year arising from the sale, exchange or other disposition of shares of stock. This excludes those shares sold or disposed of through the stock exchange.

Capital Gains Realized from the Sale, Exchange or Disposition of Lands and/or Buildings

A 6% final tax is imposed on the gain presumed to have been realized on the sale, exchange or disposition of lands and/or buildings which are treated as capital assets.

This does not pertain to lands or buildings that are part of a corporation’s inventory or those intended for sale in its ordinary course of business, such as those corporations engaged in real estate. The final tax is based on the gross selling price or fair market value whichever is higher.

Reporting and payment of final tax withheld is done monthly and annually under the following prescribed forms:

Withholding Taxes

Withholding taxes play a crucial role in the financial operations of corporations. These taxes are deducted from employees’ wages and paid directly to the government on their behalf.

By ensuring compliance with tax regulations, corporations avoid penalties and legal issues, contributing to their overall financial stability and reputation.

Withholding taxes at source refers to the practice of deducting a certain percentage of income or payments made to an individual or entity by a corporation.

This is done to ensure that the appropriate amount of tax is collected by the government. It is crucial for corporations to comply with this requirement to avoid legal penalties and maintain financial transparency.

Withholding on Wages

Compensation earners are also imposed with income taxes. The computation as well as the payment of these taxes fall under the responsibility of the corporation they are employed with.

As it is impractical and would be chaotic if the payment of income taxes of every individual were under every one’s responsibility, it is just reasonable for the employers to act as agents of the government in collecting and remitting these taxes.

It should be emphasized, however, that this is not an additional expense on the part of the employer. The related expense is the actual amount of compensation of its employees.

From which, an income tax is derived, which is withheld by the employer and is subsequently remitted to the Bureau of Internal Revenue. Accordingly, compensations were distributed to its employees after their income taxes and share on other government remittances.

Reporting and payment of withholding tax on compensation is done monthly and annually under the following prescribed forms:

The filing of the annual return should be accompanied by a copy of every employees’ 2316 form and its summary or Alphalist of Employees as attachment.

Withholding of Tax at Source

Monthly remittances of taxes withheld from certain items of income are required to be remitted to the BIR which is commonly known as the Expanded Withholding Tax (EWT).

Mandatory withholding of income taxes is imposed upon Top 20,000 Corporations and Top 5,000 Sole Proprietors regardless of the type of income.

These entities are mandated to act as agents of the government and are required to withhold 1% on their purchases of goods and 2% on their purchase of services from natural or juridical persons residing in the Philippines. These withheld amounts are regularly reported and remitted to the BIR.

Government offices, agencies, instrumentalities, and GOCCs also act as agents of the national government in collecting income taxes. They withhold from their gross payments 1% on their purchases from local or resident suppliers of goods, and 2% on services.

On the other side of the coin, those entities whose sales of goods and services were reduced by the withholding amount should be provided with a Certificate of Withholding Tax at Source by the withholding agent.

These certificates serve as proof of the withholding and forms part of their Creditable Withholding Tax which is subsequently credited to their income tax due.

However, not only the aforementioned top withholding agents and government agencies are mandated to withhold, report, and remit EWT.

There are certain specific income items that are subject to creditable withholding tax in the Philippines that are required to be withheld by any corporation should they pay for them. They are as follows:

The aforementioned withholding taxes at source are reported and paid monthly. A summary of all the withheld EWT for the taxable year is also filed annually to the BIR. These are reported in the following forms:

The filing of these returns should be accompanied with Alphalist of Payees as attachments showing the details as required.

Recent Trends and Developments Related to Corporations in the Philippines

Significant changes and advances in the corporate sector have occurred in the Philippines in recent years.

The country has seen an increase in foreign direct investment, which has resulted in the development of multinational enterprises and the expansion of local businesses.

A greater emphasis has also been placed on corporate social responsibility, sustainability, and ethical business practices.

The government has also undertaken a number of changes and measures to facilitate conducting business and encourage additional investment, making the Philippines an appealing place for firms.

Recent development: Adopting Artificial Intelligence

During the Business World Economic Forum 2023, Peter Maquera, Microsoft Asia Pacific chief executive officer for Philippines said that, “The possibilities that AI presents to the Philippines are many and exciting.⁶⁴

According to the Department of Trade and Industry’s (DTI) predictions, it will be contributing as much as $90 billion to the country’s economy by 2030,”⁶⁵

The use of Artificial Intelligence or AI in the Philippines plays a significant role, not only to individuals but also to various companies.

With this, work efficiency has improved. On the contrary, AI poses a threat to human employees and shall aggravate the country’s unemployment situation.

Artificial Intelligence is programmed to work how humans carry out their tasks. Resulting in employment lay-off.

DICT and telecommunications providers standardize public and private internet connectivity ratings.

On July 21, 2023, the Department of Information and Communications Technology (DICT) and members of the Private Sector Advisory Council (PSAC)-Digital Infrastructure Group —composed of Globe, PLDT, Smart, DITO, and Converge— signed a Memorandum of Understanding (MOU) establishing a standardized Connectivity Index Rating in the Philippines.

The reason for this is that consumers lack an accessible method to assess the quality of internet connectivity in public places such as airports, shopping malls, hotels, etc.

According to DICT Secretary Ivan John Uy, “The Connectivity Index Rating is also seen to push businesses to innovate and invest in quality connectivity solutions that will, among others, increase brand recognition and expand their customer base.

More importantly, the Connectivity Index Rating is aligned with the directive of President Ferdinand R. Marcos, Jr., to accelerate the digital transformation of the country by raising awareness on the availability, quality, and consistency of internet connectivity in buildings used for public purposes.”⁶⁶

Through this rating, not only the public but also the private sector will be able to easily identify the areas that need connectivity improvement, leading to efficient and effective network investments.

Legal or business changes that affect Philippine corporations

With the effectivity of Republic Act No. 11232 or the Revised Corporation Code on February 23, 2019, which amended the Batas Pambansa Blg. 68, several changes on the old corporation law were introduced with the main goal of improving ease of doing business in the Philippines.

The following are some of the major changes in PH legal framework that might impact corporations:

Perpetual Term

Among the most salient changes in the PH legal framework for corporations is the change in the corporate term of corporations.

Under the old BP Blg. 68,⁶⁷ the corporate term of a corporation is up to 50 years. With RA No. 11232, there is now forever for corporations. They are now allowed to have perpetual existence unless their articles of incorporation provide otherwise.⁶⁸

This change to the corporate existence shall apply to corporations with certificates of incorporation issued prior to the new law, as long as they continue to exist.¹⁸

Unless they, upon a vote of the stockholders representing the majority of the outstanding capital stock and upon notification to the SEC, that they wish to retain their own corporate term as provided in their Articles of Incorporation.¹⁸

One Person Corporation (OPC)

With the Revised Corporation Code, one can now build his/her own corporation by himself/herself alone.

Under the old law, the minimum number of incorporators required to form a corporation is at least five persons.⁶⁹ This requirement is now removed with the introduction of “One Person Corporation” or OPC.

As provided under Section 116 of the Revised Corporation Code, a One Person Corporation is a “corporation with a single stockholder”, meaning, from the name itself, a single person can now establish a corporation without having other persons as incorporators.

However, there are limitations to this. An OPC may only be established by a natural person, trust, or an estate.

Moreover, banks and quasi-banks, pre-need, trust, insurance, public and publicly-listed companies, non-chartered government-owned and -controlled corporations, and natural persons licensed to exercise profession may not incorporate as One Person Corporations.³³

Participation via Remote Communications, In Absentia

With the ambit of technology, the RCC introduces participation via remote communications, such as videoconferencing and teleconferencing during stockholder meetings. The RCC also now allows stockholders to participate and vote in absentia.⁷⁰

Digitizing Business in the Philippines

The RCC mandated the Securities and Exchange Commission to develop and implement an Electronic Filing and Monitoring System.⁷¹ This is in line with the main objective of the law to improve ease of doing business in the Philippines.

The SEC Online Facility,⁷² pursuant to this, can be accessed through this link: SEC Electronic Filing and Submission Tool – Securities and Exchange Commission

Conclusion

This article provides an overview to understand the concept of corporation, its significance in business and economy in the Philippines.

A corporation, being a juridical entity that exists by operation of law, plays a crucial role in the business ventures.

In nature, a corporation is a limited liability, a separate legal entity, perpetual existence, and has the ability to raise capital through stock issuance.

In our country, the Revised Corporation Code of the Philippines (RA 11232) is the governing law for formation, registration, operation, and regulations of corporations.

This code provides the steps for incorporating a corporation as well as the fees, requirements, and other necessary documents for registration.

Moreover, another relevant regulation is the Securities Regulation Code or RA 8799, which outlines the laws governing the foreign ownership of Philippine corporations, as well as the issuance of trading securities.

It is also important to differentiate three well-known types of corporations. They are different in terms of their ownership, governance and objectives.

Stock corporations have capital stock divided into shares, while any profit which a non-stock corporation may obtain incidental to its operations shall, whenever necessary or proper, be used for the furtherance of the purpose or purposes for which the corporation was organized.

Closed corporation are corporation shall not list in any stock exchange or make any public offering of its stocks of any class. In addition, the recent code provides for the existence of One Person Corporation.

RA 11232 describes the structure of a corporation including the roles of shareholders, directors and officers.

The division of powers and responsibilities among them is to ensure good governance and safeguard the interests of all stakeholders.

Having a smooth operation is to ensure transparency and accountability in managing the risks and safeguarding the assets of the corporation in the conduct of its business and operations.

This article also explains the advantages of incorporation such as limitation to the liability of its individual shareholders and access to capital. Besides these, a corporation has more credibility than other types of business organizations.

Nonetheless, this also gives us potential challenges in establishing corporations such as the complex registration process, reportorial requirements, and high corporate income tax rate.

Taxpayers such as corporations also have tax implications. Tax rates and other relevant taxes that are required to pay were also discussed and tables were provided.

Finally, this article highlights recent trends and developments related to corporations in the country.

The country is adopting artificial intelligence and standardizing rating systems for internet connectivity in the country for the public and private sector.

1. Section 2, Republic Act (RA) No. 11232, otherwise known as the Revised Corporation Code of the Philippines[↩]
2. Chavez, J. (2020). Revised Corporation Law Illustrated & Simplified [A Guide to Passing the Bar][↩]
3. Id.[↩][↩][↩][↩][↩][↩]
4. RA 11232[↩]
5. RA 8799, Securities Code of the Philippines[↩]
6. Id.[↩]
7. Section 17, RA 11232[↩]
8. Section 13 (c), RA 11232[↩]
9. Section 18, RA 11232[↩][↩]
10. FAQs[↩]
11. Section 14, Ra 11232[↩]
12. How to Register a Corporation with the SEC: A Definitive Guide[↩]
13. Company Formation in the Philippines: Step-by-Step Process of Incorporating a Company[↩]
14. Ibid.[↩]
15. Supra., How to Register a Corporation with the SEC: A Definitive Guide[↩][↩]
16. Supra., Company Formation in the Philippines: Step-by-Step Process of Incorporating a Company[↩][↩]
17. Section 13, RA 11232[↩]
18. Id.[↩][↩][↩][↩][↩][↩][↩][↩][↩][↩][↩][↩][↩][↩][↩][↩][↩][↩][↩][↩][↩][↩][↩][↩][↩][↩][↩][↩][↩][↩][↩][↩][↩]
19. Section 10, RA 11232[↩]
20. Primary Registration, Documentary Requirements for Registration of Corporations and Partnerships[↩]
21. Memorandum Circular No. 3, Series of 2017, Securities and Exchange Commission[↩]
22. Id.[↩][↩]
23. Securities and Exchange Commission, Mandate, Mission, Values and Vision[↩]
24. Id.[↩][↩][↩][↩][↩]
25. Section 5 (c), RA 8799[↩]
26. Section 179 (j), RA 11232[↩]
27. Section 179, RA 11232[↩]
28. Sections 179 (f), (g), and (h), RA 11232[↩]
29. Section 3, RA 11232[↩]
30. Section 86, RA 11232[↩]
31. Section 87, RA 11232[↩]
32. Section 95, RA 11232[↩]
33. Section 116, RA 11232[↩][↩]
34. Section 117, RA 11232[↩]
35. Aquino, T.B. & Aquino, M.A. (2020), Commentaries and Jurisprudence on the Revised Corporation Code of the Philippines[↩]
36. Ibid.[↩][↩]
37. Keller vs. Cob Group Marketing, G.R. No. L-68097, January 16, 1986[↩]
38. Section 177, RA 11232[↩]
39. Chavez J. (2021), Revised Corporation Law Illustrated and Simplified (A Guide to Passing the Bar) pages 233-234[↩]
40. Philippines enacts law reducing corporate income tax rates and rationalizing fiscal incentives[↩]
41. Business Organization, At a Glance, Corporation[↩]
42. Corporation with Primary Licenses[↩]
43. Supra., RA 11232[↩]
44. Section 20 (q), RA 8424[↩]
45. Revenue Regulations No. 9-2001[↩]
46. Id.[↩]
47. eBIR Forms, Department of Finance[↩]
48. Section 6, RA 11534[↩][↩]
49. Id.[↩][↩][↩][↩][↩][↩][↩]
50. Chamber of Real Estate and Builder’s Associations, Inc. vs. Romulo, G.R. No. 160756, March 9, 2010[↩]
51. Id.[↩][↩][↩]
52. BIR Tax Deadlines[↩][↩][↩]
53. Ibid.[↩]
54. RA 8424[↩]
55. What is the difference between zero rating and exempting a good in the VAT?[↩]
56. Philippines: Monthly VAT declaration no longer required[↩]
57. RMC No. 5-2023[↩]
58. Section 27 (D) (1), RA 8424[↩]
59. Section 7, RA 11534, amending Section 28 (A) (7) of RA 8424[↩]
60. RA 11534[↩]
61. Tax Alert No. 6 [Revenue Memorandum Circular (RMC) No. 9-2023 dated 26 January 2023][↩]
62. Tax Alert No. 54 [Revenue Memorandum Circular (RMC) No. 119-2021 dated 10 December 2021][↩]
63. BIR Tax Deadlines[↩][↩]
64. AI may help boost PHL economy by $90 billion[↩]
65. Ibid.[↩]
66. DICT, telcos ink agreement to establish standardized internet quality ratings[↩]
67. Section 11, B.P. Blg. 68[↩]
68. Section 11, RA 11232[↩]
69. Section 10, B.P. Blg. 68[↩]
70. Sections 22, 23, 50, and 57, RA 11232[↩]
71. Section 180, RA 11232[↩]
72. SEC Efast[↩]