The document defines and explains Minimum Corporate Income Tax (MCIT) in the Philippines. MCIT is 2% of a corporation's gross income imposed starting in the 4th year of business operations whenever taxable income is zero or negative. It is greater than the normal income tax due. Relief from MCIT is provided in cases of substantial losses from labor disputes, force majeure events, or legitimate business reverses. Excess MCIT paid can be carried forward for credit against taxes due in the next 3 years.
The document defines and explains Minimum Corporate Income Tax (MCIT) in the Philippines. MCIT is 2% of a corporation's gross income imposed starting in the 4th year of business operations whenever taxable income is zero or negative. It is greater than the normal income tax due. Relief from MCIT is provided in cases of substantial losses from labor disputes, force majeure events, or legitimate business reverses. Excess MCIT paid can be carried forward for credit against taxes due in the next 3 years.
The document defines and explains Minimum Corporate Income Tax (MCIT) in the Philippines. MCIT is 2% of a corporation's gross income imposed starting in the 4th year of business operations whenever taxable income is zero or negative. It is greater than the normal income tax due. Relief from MCIT is provided in cases of substantial losses from labor disputes, force majeure events, or legitimate business reverses. Excess MCIT paid can be carried forward for credit against taxes due in the next 3 years.
The document defines and explains Minimum Corporate Income Tax (MCIT) in the Philippines. MCIT is 2% of a corporation's gross income imposed starting in the 4th year of business operations whenever taxable income is zero or negative. It is greater than the normal income tax due. Relief from MCIT is provided in cases of substantial losses from labor disputes, force majeure events, or legitimate business reverses. Excess MCIT paid can be carried forward for credit against taxes due in the next 3 years.
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What is MCIT?
Minimum Corporate Income Tax (MCIT)
Two percent (2%) of the gross income as of the end of the taxable year imposed upon any domestic corporation beginning the fourth (4th) taxable year (whether fiscal or calendar year) immediately following the taxable year in which such corporation commenced its business operations MCIT shall be imposed whenever: • Such corporation has zero or negative taxable income • The amount of minimum corporate income tax is greater than the normal income tax due from such corporation Relief from the MCIT • Substantial losses from a prolonged labor dispute – 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. • Force majeure – a cause due to an irresistible force as by “Act of God” such as lightning, earthquake, storm, flood and the like. • Legitimate business reverses – substantial losses sustained due to fire, robbery, theft or embezzlement, or for other economic reason as determined by the Secretary of Finance. Normal Tax vs. MCIT Normal Tax MCIT Gross Sales xxx Gross Sales xxx Less: Sales Returns xxx Less: Sales Returns xxx Sales Discounts xxx Sales Discounts xxx Sales Allowances xxx xxx Sales Allowances xxx xxx Net Sales Net Sales Less: Cost of Goods Sold/ Less: Cost of Goods Sold/ Manufactured and Sold xxx Manufactured and Sold xxx Gross Profit from Sales xxx Gross Income xxx Add: Other Gross Income xxx Multiply by 2% Gross Income xxx Minimum Corporate Income Tax xxx Less: Deductions xxx Net Income xxx Multiply by Tax Rate 30% Normal Tax xxx Accounting Treatment of Excess MCIT Paid • Any amount paid as excess MCIT shall be recorded in the corporation’s books as an asset under account title “Deferred Charges-MCIT”. This asset account shall be carried forward and may be credited against the NIT due for a period not exceeding three (3) taxable years immediately succeeding the taxable year/s in which the same has been paid. Domestic Corporations Not Subject to MCIT • Domestic corporations operating as proprietary educational institutions subject to tax at ten percent (10%) on their taxable income • Those engaged in hospital operations which are non-profit subject to tax at ten percent (10%) on their taxable income • Those engaged in business as depository banks under the expanded foreign currency deposit system, otherwise known as Foreign Currency Deposit Units (FCDUs) • Real estate investment trusts in accordance Suspension of the MCIT • In order that cessation of business activities as a result of being placed under involuntary receivership may be a basis for the recognition of the suspension of the MCIT, such a situation should be properly defined and included in the regulations. *Resident Foreign Corporation • In computing for the MCIT due from a resident foreign corporation, the rules prescribed on domestic corporations apply provided that only the gross income form sources within the Philippines shall be considered for such purposes. Resident Foreign Corporations Not Subject to MCIT
• Resident foreign corporations engaged in business as “international
carrier” subject to tax at two and one-half percent (2.50%) of their “gross Philippine billings”. • Resident foreign corporations engaged in business as Offshore Banking Units (OBUs) on their income from foreign currency transactions with local commercial banks • Resident foreign corporations engaged in business as regional operating headquarters subject to tax at ten percent (10%) of their taxable income. • Firms that are taxed under a special income tax regime Improperly Accumulated Earnings Tax (IAET) • A tax equal to 10% of the improperly accumulated taxable income of corporations formed or availed of for the purpose of avoiding the income tax with respect to its shareholders or the shareholders of any other corporation, by permitting the earnings and profits of the corporation to accumulate instead of dividing them among or distributing them to the shareholders. The IAET shall not apply to the following corporations:
• Banks and other non-bank financial intermediaries
• Insurance companies • Publicly-held corporations • Taxable partnerships • General professional partnerships • Non-taxable joint ventures • Enterprises duly registered with the Philippine Economic Zone Authority Computation of IAET Taxable Income for the Year xxx Add: Income Subjected to Final Tax xxx Net Operating Loss Carryover xxx Income Exempt from Tax xxx Income Excluded from Gross Income xxx xxx xxx Less: Income Tax Paid xxx Dividends Declared/Paid xxx xxx Total xxx Add: Retained Earnings from Prior Years xxx Accumulated Earnings, End of the Year xxx Less: Amount That May be Retained (100% of Paid-up Capital, End of the Year) xxx Improperly Accumulated Taxable Income (IATI) xxx IAET Rate 10% Improperly Accumulated Earnings Tax (IAET) xxx Period for Payment of Dividend/Payment of IAET
The dividends must be declared and paid or issued
not later than one year following the close of the taxable year, otherwise, the IAET, if any, should be paid within fifteen (15) days thereafter. Reasonable Needs of Business • Immediate needs of business, including reasonably anticipated needs • Earnings up to 100% of paid-up capital of corp. inclusive of accumulation taken from other years • Earnings Reserved • Earnings required by law or regulation • Undistributed earnings intended or reserved for investment within the Philippines in the case of subsidiary of foreign corporation Gross Income Tax (GIT) For Corporations Corporations are allowed to be taxed at 15% of gross income after the following conditions have been satisfied: 1. A tax effort ratio of 20% of Gross National Product (GNP) 2. A ratio of 40% of income tax collection to total tax revenues 3. A VAT tax effort of 4% of GNP 4. A 0.9% ratio of the Consolidated Public Sector Financial Position (CPSFP) to GNP. Computation for Gross Income and Tax Due (Trading/Merchandising and Manufacturing Concerns) Gross Sales xxx Less: Sales Returns xxx Sales Discounts xxx Sales Allowances xxx xxx Net Sales xxx Less: Cost of Goods Sold xxx Gross Income xxx Multiply by 2% Minimum Corporate Income Tax xxx Definition of terms • Gross sales – only include those sales that are contributory to income taxable under Section 27(A) of the CODE. • Cost of goods sold – include the purchase price or cost to produce the merchandise and all expenses directly incurred to bring them to their present location and use. • Cost of goods sold For trading/merchandising: For manufacturing: • Invoice COGS, plus import duties, • Include all costs of production of freight in transporting the goods to finished goods, such as raw materials the place where the goods are used, direct labor, and manufacturing actually sold, including insurance overhead, freight cost, insurance while the goods are in transit. premiums and other costs incurred to • Includes only those items which are bring the raw materials to the factory direct and incidental to the or warehouse. acquisition of the merchandise intended for resale. Computation for Gross Income and Tax Due (For Sale of Services Under the Cash Basis) Gross Receipts xxx Less: Sales Returns xxx Sales Discounts xxx Sales Allowances xxx xxx Net Receipts xxx Cost of Services xxx Gross Income xxx Multiply by 2% Minimum Corporate Income Tax xxx Definition of terms • Gross receipts – amounts actually or constructively received during the taxable year; amounts earned as gross income. • Cost of services – all direct costs and expenses necessarily incurred to provide the services required by the customers and clients including: 1. Salaries and employee benefits of personnel, consultants and specialists directly rendering the service; and 2. Cost of facilities directly utilized in providing the service such as depreciation or rental of equipment used and cost of supplies. *In the case of banks and other financial institutions, “cost of services” shall include interest expense.
