MINIMUM CORPORATE INCOME TAX (MCIT ) Sec. 27 (E) and Sec. 28 (A) (2) Revenue Regulations No. 9-98

1. MINIMUM CORPORATE INCOME TAX (MCIT) Sec. 27 (E) and Sec. 28 (A) (2) Revenue Regulations No. 9-98 Revenue Memorandum Circular No. 4-2003 Revenue Regulations No. 12-2007 Revenue Memorandum Circular 24-2008

2. M C I T on Domestic Corp. • 2% of the gross income • whether calendar or fiscal year • is imposed beginning the 4th taxable year, • zero or negative income • whenever the MCIT is greater than the normal tax due

3. M C I T on Domestic Corp. • In the case of domestic corporation whose activities are partly covered by the regular tax rate and partly covered under special rate, the MCIT shall apply on operations covered by regular rate. • Ex: BOI-registered and unregistered activity

4. Normal income tax means... • The income tax rates prescribed under Sec. 27(A) and Sec. 28(A)(1) of the the Code • 34% in 1998 • 33% in 1999 • 32% in 2000 until Oct. 31, 2004 • 35% effective Nov. 1, 2005 • 30% effective Jan. 1, 2009

5. Illustration Gross Sales - P1,000,000 Cost of Sales - 800,000 Gross Income - P 200,000 Less Business Expenses 190,000 Net Income P 10,000 Normal Income Tax P 3,500 MCIT P 4,000

6. Gross Income • Means 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.

7. Gross sales…. • Shall include only sales contributory to taxable income under Sec. 27(A) of the Code. • Passive income which have been subject to a final tax at source shall not form part of gross income for purposes of the MCIT.

8. For trading and merchandising concern: • Cost of goods sold - means the invoice cost of the goods sold, plus import duties, freight in transporting the goods to the place where the goods are actually sold.

9. For manufacturing concern: • Cost of goods manufactured and sold means all costs of production of finished goods, such as raw materials used, direct labor and manufacturing overhead, freight cost, insurance premiums and other cost incurred to bring the raw materials to the factory or warehouse.

10. For sales of services • Gross income means gross receipts less sales returns, allowances, discounts and cost of services.

11. Cost of Services • Cost of services means all direct cost and expenses necessarily incurred to provide the services required. • Ex: salaries and employee benefits of personnel, consultants and specialists directly rendering the service • cost of facilities directly utilized in providing the service • Depreciation • Rental of equipment • Cost of Supplies

12. Relief from the MCIT • Whenever the corporation sustained substantial losses from a prolonged labor dispute • strike staged by the employees which lasted for more than six months within a taxable period

13. Relief from the MCIT • Force majeure • caused by irresistible force as by “Act of God” like: • lightning • earthquake • storm • flood • and the like • also include armed conflicts like war or insurgency

14. Relief from the MCIT • Legitimate business reverses due to • fire • robbery • theft or embezzlement • or other economic reason as determined by the Secretary of Finance

15. Determination of Effective Year of MCIT • YEAR COMMENCING EFFECTIVITY OF • BUSINESS OPERATION MCIT • 1994 and prior years 1998 • 1995 1999 • 1996 2000 • x x + 4 Note: MCIT is applied on an annual basis not on a quarterly basis.

16. Manner of Filing and Payment • It shall be applicable at the time of filing the quarterly corporate IT • MCIT shall apply only to domestic corporations subject to the normal corporate income tax

17. Exceptions (Domestic Corp) • Proprietary educational institutions subject to 10% Income Tax Rate • Non-profit hospital subject to 10% tax rate • Depository banks (FCDUs) • Firms taxed under a special income tax regime

18. Resident Foreign Corp. • MCIT rate of 2% • Exceptions: • International carrier - 2.5% • OBU • Regional operating headquarters • firms taxed under special income tax regime

19. Carry forward of excess MCIT • Any excess of the MCIT over the normal income tax as computed under Sec. 27(A) shall be carried forward on an annual basis and credited against the normal income tax for the three (3) immediately succeeding years. • The excess MCIT cannot be clamed as a credit against the MCIT itself or against any other losses.

20. Illustration: YEAR NORMAL IT MCIT EXCESS 1998 25,000.00 100,000.00 75,000.00 1999 130,000.00 150,000.00 20,000.00 2000 200,000.00 190,000.00 - 2001 - 300,000.00 300,000.00 2002 10,000.00 50,000.00 40,000.00 2003 15,000.00 60,000.00 45,000.00 2004 8,000.00 40,000.00 32,000.00 2005 1,000.00 50,000.00 49,000.00

21. Accounting Entries • For 1998 Provision for Income tax P25,000 Income Tax Payable P25,000 To record Income Tax liability - normal rate. Deferred Charges - MCIT P75,000 Income tax payable P75,000 To record excess MCIT

22. Accounting Entries Income Tax Payable P100,000 Cash in Bank P100,000 To record payment of income tax due for 1998. • For year 2000 Provision for Income Tax P200,000 Income Tax Payable P200,000 To record IT liability using the normal rate.

23. Accounting Entries Income Tax Payable P95,000 Deferred Charges-MCIT P95,000 To record application of excess MCIT against normal IT for year 2000. Income Tax Payable P105,000 Cash in bank P105,000 To record payment of income tax due.

24. Accounting Entries Retained Earnings P300,000 Deferred Charges-MCIT P300,000 To record the expired portion of the Deferred Charges-MCIT

25. MCIT on Res. Foreign Corp. • Same rule shall apply except that only income sources within the Phils. shall be considered. • Exceptions: • international carrier; • res. Foreign corporations engaged in OBUs • res. Foreign corp. engaged in regional operating headquarters • firms taxed under special tax regime