6 Minimum-Corporate-Income-Tax (1).pdf - Minimum Corporate Income Tax de los Reyes Siscar Sun In General Under the Tax Code a minimum corporate income

6 Minimum-Corporate-Income-Tax (1).pdf - Minimum Corporate...

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Unformatted text preview: Minimum Corporate Income Tax de los Reyes, Siscar, Sun In General Under the Tax Code, a minimum corporate income tax (MCIT) in the Philippines of two percent (2%) of the gross income is imposed upon any domestic or resident foreign corporation beginning the fourth (4th) taxable year immediately following the taxable year in which such corporation commenced its business operations. The MCIT shall be imposed whenever such corporation has zero or negative taxable income or whenever the amount of minimum corporate income tax is greater than the normal income tax due from such corporation. Corporations Covered DOMESTIC CORPORATIONS RESIDENT FOREIGN CORPORATIONS DOMESTIC CORPORATIONS Sec. 27 (E), NIRC RR No. 9-98 A minimum corporate income tax of two percent (2%) of the gross income as of the end of the taxable year, as defined herein, is hereby imposed on a corporation taxable under this Title, beginning on the fourth taxable year immediately following the year in which such corporation commenced its business operations, when the minimum income tax is greater than the tax computed under Subsection (A) of this Section for the taxable year. NIRC R.R. No. 9-98 For purposes of these Regulations, the term, “normal income tax” means the income tax rates prescribed under Sec. 27(A) and Sec. 28(A)(1) of the Code at 34% on January 1, 1998; 33% effective January 1, 1999; and at 32% effective January 1, 2000 and thereafter. R.R. No. 9-98 In the case of a domestic corporation whose operations or activities are partly covered by the regular income tax system and partly covered under a special income tax system, the MCIT shall apply on operations covered by the regular income tax system. For example, if a BOI-registered enterprise has a “registered” and an “unregistered” activity, the MCIT shall apply to the unregistered activity. Any excess of the minimum corporate income tax over the normal income tax as computed under Subsection (A) of this Section shall be carried forward and credited against the normal income tax for the three (3) immediately succeeding taxable years. NIRC R.R. No. 9-98 Year Normal Income Tax MICT Excess 1998 50,000 75,000 25,000 1999 60,000 100,000 40,000 2000 100,000 60,000 x R.R. No. 9-98 The taxpayer shall pay the MCIT whenever it is greater than the regular or normal corporate income tax which is imposed under Sec. 27(A) of the Code. The comparison between the normal income tax payable by the corporation and the MCIT shall be made at the end of the taxable year. R.R. No. 9-98 Thus, under the example, the taxpayer will pay the MCIT of P75,000.00 since this amount is greater than the normal income tax of P50,000.00 in 1998. R.R. No. 9-98 In 1999, the firm will also pay the MCIT since the MCIT of P100,000.00 is greater than the normal income tax of P60,000.00. In the year 2000, where the normal or regular corporate income tax of P100,000.00 is greater than the MCIT of P60,000.00, the firm will pay the normal income tax. R.R. No. 9-98 The corporation can credit the excess of its MCIT over the normal income tax for 1998 (i.e. P25,000) and 1999 (i.e. P40,000), or a total amount of P65,000 from the amount of normal income tax which is payable by the firm in the year 2000. Thus, the amount of income tax payable by the firm is P35,000 after deducting P65,000 from P100,000. R.R. No. 9-98 The excess MCIT is creditable against the normal income tax within the next three (3) years from payment thereof. R.R. No. 9-98 Thus, in the illustration above where the corporation had an excess MCIT of P25,000 over its normal income tax in 1998, the P25,000 can be claimed as a tax credit against the normal income tax up to the year 2001 and only when the normal income tax is greater than the MCIT. The excess MCIT cannot be claimed as a credit against the MCIT itself or against any other losses. The Secretary of Finance is hereby authorized to suspend the imposition of the minimum corporate income tax on any corporation which suffers losses on account of prolonged labor dispute, or because of force majeure, or because of legitimate business reverses. NIRC The Secretary of Finance is hereby authorized to promulgate, upon recommendation of the Commissioner, the necessary rules and regulation that shall define the terms and conditions under which he may suspend the imposition of the minimum corporate income tax in a meritorious case. NIRC Gross Income Defined The term 'gross income' shall mean gross sales less sales returns, discounts and allowances and cost of goods sold. ‘Cost of goods sold' shall include all business expenses directly incurred to produce the merchandise to bring them to their present location and use. NIRC Gross Income Defined For a trading or merchandising concern, ‘cost of goods sold' shall include the invoice cost of the goods sold, plus import duties, freight in transporting the goods to the place where the goods are actually sold including insurance while the goods are in transit. For a manufacturing concern, cost of ‘goods manufactured and sold’ shall include all costs of production of finished goods, such as raw materials used, direct labor and manufacturing overhead, freight cost, insurance premiums and other costs incurred to bring the raw materials to the factory or warehouse. Gross Income Defined In the case of taxpayers engaged in the sale of service, 'gross income' means gross receipts less sales returns, allowances, discounts and cost of services. ‘Cost of services’ shall mean all direct costs and expenses necessarily incurred to provide the services required by the customers and clients including (A) salaries and employee benefits of personnel, consultants and specialists directly rendering the service and (B) cost of facilities directly utilized in providing the service such as depreciation or rental of equipment used and cost of supplies: Provided, however, That in the case of banks, ‘cost of services’ shall include interest expense. NIRC R.R. No. 9-98 “Gross income” means gross sales less sales returns, discounts and allowances and cost of goods sold. “Gross sales” shall include only sales contributory to income taxable under Sec. 27(A) of the Code. "Cost of goods sold" shall include all business expenses directly incurred to produce the merchandise to bring them to their present location and use. Passive incomes which have been subject to a final tax at source shall not form part of gross income for purposes of the minimum corporate income tax. R.R. No. 9-98 In the case of sales of services, the term “gross income” means gross receipts less sales returns, allowances, discounts and cost of services. “Cost of services” means all direct costs and expenses necessarily incurred to provide the services required by the customers and clients including (a) salaries and employee benefits of personnel, consultants and specialists directly rendering the service, and (b) cost of facilities directly utilized in providing the service such as depreciation or rental of equipment used and cost of supplies: Provided, however, that "cost of services" shall not include interest expense except in the case of banks and other financial institutions. R.R. No. 9-98 The term “gross receipts” as used herein means amounts actually or constructively received during the taxable year; Provided, that for taxpayers employing the accrual basis of accounting, the term “gross receipts” shall mean amounts earned as gross income. R.R. No. 9-98 The term “substantial losses from a prolonged labor dispute” means losses arising from a strike staged by the employees which lasted for more than six (6) months within a taxable period and which has caused the temporary shutdown of business operations. R.R. No. 9-98 The term “force majeure” means a cause due to an irresistible force as by “Act of God” like lightning, earthquake, storm, flood and the like. This term shall also include armed conflicts like war or insurgency. R.R. No. 9-98 The term “legitimate business reverses” shall include substantial losses sustained due to fire, robbery, theft or embezzlement, or for other economic reason as determined by the Secretary of Finance. Specific Rules for determining the period when a corporation becomes subject to the MCIT R.R. No. 9-98 For purposes of the MCIT, the taxable year in which business operations commenced shall be the year in which the domestic corporation registered with the Bureau of Internal Revenue (BIR). Firms which were registered with BIR in 1994 and earlier years shall be covered by the MCIT beginning January 1, 1998. Firms which were registered with BIR in any month in 1998 shall be covered by the MCIT three calendar years thereafter (i.e. after the lapse of three calendar years from 1998). For example, a firm which was registered in May 1998 shall be covered by the MCIT in 2002. R.R. No. 9-98 The reckoning point for firms using the fiscal year shall also be 1998. For example, a firm which registered with the BIR on July 1, 1998 shall be subject to an MCIT on his gross income earned for the entire fiscal year ending in the year 2002. Transitory Rule for determining the MCIT for 1998 on firms which are taxable on a fiscal year basis. For firms using fiscal year basis and whose first taxable period under the MCIT covers month/months in 1997 (i.e. prior to the imposition of MCIT under RA 8424), the MCIT which is due for 1998 shall be computed using an apportionment formula. The ratio to be applied is the number of months in 1998 to twelve (12) months (i.e. the total number of months in a fiscal year). Firm A registered with the BIR in July 1994. It becomes subject to the MCIT in 1998. Since it is using a fiscal year as basis of its taxable period, a part of the tax base for the MCIT was earned by the corporation in 1997 prior to the imposition of the MCIT (i.e. gross income from July to December 1997). The MCIT which is due from the firm is computed using the gross income of the firm for 1998 (January to June) which is computed on an apportionment basis as follows: Gross income of the firm for the entire fiscal year Multiply: 0.50 (i.e. ratio of 6 months in 1998 to 12 months covering FY 97-98) Equals: Tax base of the MCIT for 1998 Tax base of the MCIT for 1998 Multiply: 2% (i.e. MCIT tax rate) Equals: MCIT for 1998 R.R. No. 9-98 The MCIT shall be paid on a taxable year basis. It shall be covered by a tax return designed for the purpose which will be submitted together with the corporation's annual final adjustment income tax return. Domestic corporations shall not be required to pay the MCIT on a quarterly basis, the provisions of Sec. 75 of the Code notwithstanding. R.R. No. 9-98 Any amount paid as excess minimum corporate income tax shall be recorded in the corporation's books as an asset under account title “deferred charges-minimum corporate income tax.” This asset account shall be carried forward and may be credited against the normal income tax due for a period not exceeding three (3) taxable years immediately succeeding the taxable year/s in which the same has been paid. R.R. No. 9-98 Any amount of the excess MCIT which has not or cannot be so credited against the normal income taxes due for the 3-year reglementary period shall lose its creditability. Such amount shall be removed and deducted from “deferred charges-minimum corporate income tax” account by a debit entry to “retained earnings” account and a credit entry to “deferred charges-minimum corporate income tax” account since this tax is not allowable as deduction from gross income it being an income tax. ABC Corporation commenced business operations in calendar year 1991. It is already more than four (4) years in operation as of calendar year 1998 hence, subject to the minimum corporate income tax beginning taxable year 1998. Assume, further, that its income taxes during the years from 1998 to year 2005 are as follows: Year Normal Income Tax MICT Excess 1998 25,000 100,000 75,000 1999 130,000 150,000 20,000 2000 200,000 190,000 x 2001 x 300,000 300,000 2002 10,000 50,000 40,000 2003 15,000 60,000 45,000 2004 8,000 40,000 32,000 2005 1,000 50,000 49,000 ABC Corporation shall not be allowed to carry forward and credit the 1998 excess MCIT against the income tax liability for 1999 since the 1999 MCIT is greater than the normal income tax for said year. However, for year 2000, where the normal income tax is greater than the computed MCIT, ABC Corporation shall be allowed to apply the excess MCIT of 1998 and 1999 amounting to P95,000 (P75,000 plus P20,000) against the normal income tax liability of P200,000. The excess MCIT for the year 2001 (P300,000) may only be credited against normal income tax liabilities for the succeeding three years from 2002 to 2004. However, since the normal income tax liabilities for these succeeding years are lesser than the respective MCITs, the excess MCIT for the year 2001 of P300,000 loses its creditability by the year 2005 hence, must be removed and deducted from “Deferred charges-MCIT” account and charged to “Retained Earnings” account. For taxable year 1998 when MCIT is greater than the normal income tax liability of the company Debit: Provision for income tax P25,000 Credit: Income tax payable P25,000 To record income tax liability using the normal income tax rate Debit: Deferred Charges-MCIT P75,000 Credit: Income Tax Payable P75,000 To record excess MCIT (P100,000 - P25,000) Debit: Income Tax Payable P100,000 Credit: Cash in bank P100,000 To record payment of income tax due for 1998 For taxable year 2000 when excess MCIT (1998 and 1999) is applied against normal income tax liability Debit: Provision for income tax P200,000 Credit: Income Tax Payable P200,000 To record income tax liability using the normal income tax rate Debit: Income tax payable P95,000 Credit: Deferred Charges-MCIT (P75,000 plus P20,000) P95,000 To record application of excess MCIT against normal income tax liability for taxable year 2000 Debit: Income Tax Payable P105,000 Credit: Cash in Bank P105,000 To record payment of income tax due (P200,000 less P95,000) For taxable year 2005 when the expired portion of excess MCIT (P300,000) for taxable year 2001 is closed to the retained earnings account due to its non-application Debit: Retained Earnings P300,000 Credit: Deferred Charges-MCIT P300,000 To record the expired portion of Deferred Charges-MCIT Exceptions The MCIT shall apply only to domestic corporations subject to the normal corporate income tax prescribed under these Regulations. Domestic corporations operating as proprietary educational institutions subject to tax at ten percent (10%) on their taxable income; or Domestic corporations engaged in hospital operations which are nonprofit subject to tax at ten percent (10%) on their taxable income; Firms that are taxed under a special income tax regime such as those in accordance with RA 7916 and 7227 (the PEZA law and the Bases Conversion Development Act, respectively). Domestic corporations engaged in business as depository banks under the expanded foreign currency deposit system, otherwise known as Foreign Currency Deposit Units (FCDUs), on their income from foreign currency transactions with local commercial banks, including branches of foreign banks, authorized by the Bangko Sentral ng Pilipinas (BSP) to transact business with foreign currency deposit system units and other depository banks under the foreign currency deposit system, including their interest income from foreign currency loans granted to residents of the Philippines under the expanded foreign currency deposit system, subject to final income tax at ten percent (10%) of such income. CIR v. PAL (2009) PAL is a domestic corporation organized under the corporate laws of the Philippines. It allegedly incurred zero taxable income for fiscal year ending on March 31, 2001 which left it with unapplied creditable withholding tax amounting to P2,334,377.95. PAL didn’t pay any MCIT for the period. PAL sent a letter to CIR requesting for the refund of its unapplied creditable withholding tax for FY 2000-2001. CIR v. PAL (2009) LTAID 1 of BIR LTS authorized Revenue Officer Jacinto Cueto, Jr. to verify the supporting documents and pertinent records regarding PAL’s claim for refund. LTAID 1 invited PAL to an informal conference to discuss the results. BIR officers and PAL representatives attended the conference, where BIR informed PAL that it was denying the claim for refund and instead assessing PAL for deficiency MCIT for FY 2000-01. CIR v. PAL (2009) LTAID 1 assessed PAL for P262,474,732.54 deficiency MCIT for FY 2000-01 plus interest and compromise penalty. A few months after PAL protested, LTAID 1 sent PAL a formal letter of demand for the deficiency MCIT in the amount of P271,421,886.58. CIR v. PAL (2009) ISSUE: W/N PAL is liable for deficiency MCIT for FY 2000-01 No. CIR v. PAL (2009) Income tax on domestic corporations is covered by Section 27 of NIRC, which says that a domestic corporation must pay whichever is higher: 1. Income tax under Section 27 (A), computed by applying the tax rate therein to the taxable income of the corporation; or 2. MCIT under Section 27 (E), equivalent to 2% of the gross income. CIR v. PAL (2009) Although this is the general rule for income tax of domestic corporations, it can only be applied to PAL to the extent allowed by the provisions of its franchise. Looking at Section 13 of P.D. No. 1590 in relation to the provisions of NIRC, the Court concluded that PAL cannot be subjected to MCIT for FY 2000-01. P.D. No. 1590 prevails over the NIRC, as a special law. CIR v. PAL (2009) P.D. No. 1590, the franchise of PAL, states two fundamental rules: 1. PAL shall pay the Government either basic corporate income tax or franchise tax, whichever is lower; and 2. Tax paid by PAL, under either of these alternatives, shall be in lieu of all other taxes, duties, royalties, registration, license, and other fees and charges, except only real property tax. MBC v. CIR (2006) MBC was incorporated in 1961 and was engaged in the commercial banking industry until 1987. The Monetary Board of BSP issued Res. No. 505 pursuant to Section 29 of R.A. No. 265 which prohibited MBC from engaging in business by reason of insolvency. MBC ceased operations that year and its assets and liabilities were placed under the charge of a government-appointed receiver. MBC v. CIR (2006) R.A. No. 8424, Comprehensive Tax Reform Act of 1997 which became effective on January 1, 1998, imposed MCIT on domestic and resident foreign corporations. R.R. No. 9-98, which implements this law, allows a 4-year period from the time the corporations were registered with the BIR during which the MCIT should not be imposed. MBC v. CIR (2006) BSP allowed MBC to operate as a thrift bank. The following year, it filed its annual ITR and paid P33,816,164.00 for the taxable year 1999. Prior to filing the ITR, MBC sent a letter to the BIR requesting a ruling on whether the 4-year grace period is to be reckoned from 1999. BIR said that since it reopened in 1999, the MCIT may be imposed “not earlier than 2002, i.e. the fourth taxable year beginning 1999.” MBC filed a claim for refund. MBC v. CIR (2006) ISSUE: W/N MBC is entitled to refund of the MCIT paid to BIR for the taxable year 1999 Yes. MBC v. CIR (2006) The intent of Congress relative to MCIT is to grant a 4-year suspension of tax payment to newly formed corporations. Corporations still starting their business operations have to stabilize their venture in order to obtain a stronghold in the industry. It does not come as a surprise then when many companies reported losses in their initial years of operations. MBC v. CIR (2006) Congress enacted the “Thrift Banks Act of 1995.” BIR issued R.R. No. 4-95 implementing certain provisions of said R.A. It stated that the “date of commencement of operations” was to be understood as the date when the thrift bank was registered with the SEC or the date when the Certificate of Authority to Operate was issued by the Monetary Board of the BSP, whicheve...
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