The Corporate Development Tax Regulations

October 6, 1977 REVENUE REGULATIONS NO. 11-77 SUBJECT : The Corporate Development Tax Regulations TO : All Internal Revenue Officers and Others Concerned Pursuant to the provisions of Section 326 in relation to Section 4 of the National Internal Revenue Code of 1977, these regulations are hereby promulgated to govern the implementation of the corporate development tax as provided by Section 24(e) of the said Code. SECTION 1. The corporate development tax . In addition to the income tax imposed in paragraph (a) of Section 24 of the Tax Code, a corporation shall be liable to a corporate development tax equivalent to 5% of its taxable net income if any one of the following conditions exists: (a) Rate of return on net worth or net assets (net worth ratio) . The net income for the taxable year exceeds 10% of the net worth (in the case of a domestic corporation) or net assets in the Philippines (in the case of a resident foreign corporation); or (b) Stock ownership and/or control . A corporation which is a closely-held corporation as defined hereinbelow shall always be subject to the 5% corporate development tax, regardless of the rate of return on its net worth. A "closely-held corporation" is a corporation (a) at least 50% in value of the outstanding stock or (b) at least 50% of the total combined voting power of all classes of stock entitled to vote, at any time during the taxable year, is owned directly or indirectly by or for not more than five persons, natural or juridical. For the purpose of determining whether an individual indirectly owns a share of stock in a corporation, the attribution rules prescribed by paragraphs (b) and (c) of Section 66 of the Tax Code shall be applied. SECTION 2. Computation of the rate of return on net worth or net assets . For purposes of determining whether the rate of return on net worth or net assets of a corporation (other than a closely-held corporation) exceeds 10%, the term "net income" (as distinguished from "taxable net income") means the net income computed in accordance with generally accepted accounting principles employed in keeping the books of the corporation, by deducting from revenue derived from the sale of goods or services, the cost of goods sold or of providing services and operating expenses, taking into account other revenue and expense items except the income tax. Income and deductions not recognized in whole or in part for income tax purposes shall also be taken into account in computing the net income. In the case of a resident foreign corporation, "net income" means the net income from sources within the Philippines. cdt "Net worth" means the stockholders' equity represented by the excess of the total assets over liabilities as reflected in the corporation's balance sheet prepared in accordance with generally accepted accounting principles employed in keeping the books of the corporation. Appraisal or other price level adjustments which depart from historical cost of assets shall not form part of the net worth. In the case of partnerships, net worth means the partners' equity consisting of their direct investment in the partnership and their net accumulated share in the partnership profits or losses. In computing the rate of return, the average of the net worth or net assets at the beginning and end of the taxable year should be used. Example: Assume the following contents of the financial statements of a corporation whose taxable year is from August 1st to July 31st and for this example the taxable year involved is August 1, 1976 to July 31, 1977. It is further assumed that the average of the beginning and ending networth amounted to P975,000.00: Sales P1,000,000 Less: Cost of sales 800,000 Gross Profit 200,000 Less: Selling and administrative expenses 90,000 Operating Profit 110,000 Add: Other non-operating income 12,000 Earnings before interest and taxes 122,000 Less: Interest on indebtedness 5,000 Pre-tax net income P117,000 ======== The rate of return is computed by using the pre-tax net income of P117,000 as the numerator and P975,000 representing the average networth during the year. aisa dc Pre-tax net income P117,000.00 = = 12% Average net worth P975,000.00 SECTION 3. Time and manner of payment of the corporate development tax . The corporate development tax imposed in Section 24(e) shall be paid, together with the normal corporate income tax imposed in Section 24(a), on or before the fifteenth day of April if on a calendar year basis or on or before the fifteenth day of the fourth month following the close of the taxable year if on the fiscal year basis, and shall be reported in the final and adjustment return required to be filed under Section 84. If the sum of the quarterly payments made by the corporation during the taxable year is not equal to the total tax (which is the sum of the normal corporate income tax and the corporate development tax) due on the entire net taxable income for that year, the corporation shall either (a) pay the excess tax still due or (b) be refunded the excess amount paid as the case may be. In case the corporation is entitled to a refund of excess quarterly income taxes paid, the refundable amount shown in its final and adjustment return may be credited against its income tax liabilities for the taxable quarters of the succeeding taxable years. SECTION 4. Effectivity and transitory provisions . These regulations shall take effect on taxable years ending after June 3, 1977 and the 5% corporate development tax shall be computed as follows: (a) For taxable years ending after June 3, 1977 but before June 1, 1978 . The tax shall be based on the portion of the entire net taxable income shown in the final and adjustment return for the taxable year which the number of days from June 3, 1977 to the end of the taxable year bears to 365 days. Example: As assumed in the example in Section 2 of these Regulations, the Fiscal Year of the corporation ends on July 31, 1977. It paid quarterly income tax for three quarters in the total sum of P22,000. Its total income tax liability for the taxable year will be computed as follows: Computation of Normal Tax Net income before income tax as per example in Section 2 P117,000 Less: Non-taxable income 500 Total 116,500 Add: Non-deductible expenses 1,800 Taxable net income P118,300 ======= Tax due thereon at 25% & 35% P31,405 ======= Computation of Corporate Development Tax Number of days from June 3, 1977 to July 31, 1977 59 days Number of days of taxable year 365 days 5% x P118,300 x 59 = P956.00 ====== 365 Total Tax Payable By The Corporation Normal corporate income tax P31,405.00 Corporate development tax 956.00 Total tax due 32,361.00 Less: Quarterly income tax paid 22,000.00 Amount still due and payable P10,361.00 ======== (b) For the taxable years beginning January 1, 1978 . The tax shall be based on the entire net taxable income shown in the final and adjustment return for the taxable year. ALFREDO PIO DE RODA Acting Secretary of Finance Recommended by: EFREN I. PLANA Acting Commissioner of Internal Revenue TAN-P4519-F2828-A-8 ANNEX 1st Indorsement October 14, 1977 Respectfully returned to the Commissioner of Internal Revenue, Quezon City, the within proposed Revenue Regulation No. 11-77 to govern the implementation of the corporate development tax as provided in Section 24(e) of National Internal Revenue Code of 1977. After going over the provisions of the said proposed regulations, this Department finds the same to be adequate in the fair and proper implementation of the 5% corporate development tax to be imposed under the conditions stated in the law. In view thereof, the same is herewith returned duly approved. ALFREDO PIO DE RODA, JR. Acting Secretary