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MODULE 4:INCOME TAX ON CORPORATION
LEARNING OBJECTIVES
At the end of this module you are expected to:
1. Define and classify corporate taxpayers;
2. Identify the classification and taxability of
income of a corporation;
3. Discuss the concept of Normal Corporate
Income Tax (NCIT) and Minimum Corporate Income Tax (MCIT);
4. Compute income taxes using the Normal Corporate Income Tax (NCIT);
5. Compute income taxes using the Minimum Corporate Income Tax (MCIT);
6. Discuss the treatment of a Special Corporation;
7. Compute income tax due of Special Corporate Taxpayers
Corporate Taxpayers
- Is an artificial being created by operation of law, having the right of succession and the powers,
attributes and properties expressly authorized by law or incident to its existence.
Classification of Corporation:
1. Domestic
- Organized under the existing laws of the Philippines
- Taxable on income earned within and without the Philippines
2. Foreign
- Organized under the laws of a foreign country
- Taxable on income earned within the Philippines only
- Classification of foreign corporation:
a. Resident foreign corporation
b. Non-resident foreign corporation
Course Module
Classification and Taxability of Income of a Corporation
Capital Gain
CORPORATION
TAXABLE NON-TAXABLE
Course Module
ILLUSTRATION 1
ABC Corporation has the following data for the first year of business operations
Philippines Australia
Gross Sales 8,000,000 7,000,000
Cost of Sales 6,200,000 1,300,000
Allowable business expenses 1,700,000 1,040,000
Required: Compute the amount of corporate tax liability under each of the following cases:
1. Domestic corporation using itemized deduction
2. Domestic corporation using OSD
3. Resident foreign corporation using itemized deduction
4. Resident foreign corporation using OSD
5. Non-resident foreign corporations
Answer:
1. Domestic corporation using itemized deduction
NCIT 1,728,000
MCIT 150,000
Tax to be paid is the NCIT, since it is higher than the calculated MCIT 1,728,000
Domestic corporations are taxable for income earned both in the Philippines and abroad and are subject
to either normal corporate income tax (NCIT) of 30% of net income or minimum corporate income tax
(MCIT) of 2% of gross profit, whichever is higher.
Net Income Tax Rate Income Tax Due
NCIT 5,760,000 30% 1,728,000
NCIT 1,650,000
MCIT 150,000
Tax to be paid is the NCIT, since it is higher than the calculated MCIT 1,650,000
If a corporation opted to use optional standard deduction (OSD), such corporation are no longer allowed to claim
the line by line item of expenses it incurred. The deductions to total income earned will be based on a fixed rate of
40% of gross taxable income (gross profit, as the case maybe).
Philippines Australia Total
Gross Profit 1,800,000 5,700,000.00 7,500,000
OSD rate 40% 40% 40%
Allowable Deductions 720,000 2,280,000 3,000,000
Course Module
PHILIPPINES
Gross Sales P 8,000,000
Less: Cost of Sales 6,200,000
Gross Profit 1,800,000
Plus: Other Income 600,000
Total Income 2,400,000
Less: Allowable Deductions 1,700,000
Net Taxable Income P 700,000
NCIT 210,000
MCIT 36,000
Foreign corporations, whether resident or nonresident, are taxable for income earned in the Philippines only.
Net Income Tax Rate Income Tax Due
NCIT 700,000 30% 210,000
NCIT 504,000
MCIT 36,000
Philippines
Gross Profit 1,800,000
OSD rate 40%
Allowable Deductions 720,000
Tax to be calculated is
only the NCIT 504,000
Non-resident foreign corporations are not subject to 2% minimum corporate income tax. Hence, such
corporate taxpayer will only be liable to the Philippine government for the 30% normal corporate
income tax.
Course Module
Minimum Corporate Income Tax (MCIT)
- 2% tax on gross income imposed on corporations, either domestic or foreign, that are classified as
ordinary
- Guidelines in MCIT:
1. Applicable beginning on the fourth year of business operation
2. Applicable even if a corporation has zero taxable income
3. Applicable even if a corporation incurs a loss
- However, the Secretary of Finance is authorized to suspend the imposition of
MCIT on any corporation which suffers losses because of:
Prolonged labor dispute
Force majeure
4. Applicable only to ordinary domestic and resident foreign corporations
5. NOT applicable to the following domestic corporationssince these groups are not subject to
MCIT:
a. Proprietary educational institutions
b. Non-profit hospitals
c. Banking institutions under the expanded foreign currency deposit system
d. Corporations under a special income tax regime such as PEZA law and the Bases
Conversion Development Act
6. Tax liability is being calculated at 2% based on gross income
7. Starting on the fourth year of operation, the corporate income tax liability shall be based on
o NCIT of 30%
or whichever is HIGHER
o MCIT of 2%
8. Excess of MCIT over NCIT is creditable
- Any excess of the MCIT over NCIT shall be carried forward and credited
(deducted) against the NCIT for the three succeeding taxable years, provided
that, the NCIT should be higher than MCIT in the year to which the excess MCIT
is forwarded.
ILLUSTRATION 2
The records of a domestic corporation which commenced operation in 2010 are as follows:
2015 2016 2017
Gross Income P15,000,000 P17,000,000 P19,000,000
Allowable Deductions (14,500,000) (17,200,000) (17,800,000)
Required: Determine the income tax payable for 2015, 2016 and 2017
PHILIPPINE TAX SYSTEM AND INCOME TAXATION
9
MODULE 4:INCOME TAX ON CORPORATION
Answer:
2015 2016 2017
Gross Income P 15,000,000 P 17,000,000 P 19,000,000
Less: Allowable Deductions 14,500,000 17,200,000 17,800,000
Net Taxable Income P 500,000 P (200,000) P 1,200,000
2015
Net Taxable
Income/ (Net Loss) 500,000
2016
Net Taxable
Income/ (Net Loss) (200,000.00)
Course Module
2017
Net Taxable
Income/ (Net Loss) 1,200,000
ILLUSTRATION 4
XYZ Corporation’s normal corporate income tax, minimum corporate income tax, income taxes withheld
from 1st to 4th quarters including excess MCIT and excess withholding taxes from prior years are as
follows:
Quarter NCIT MCIT Taxes Excess Excess
withheld MCIT Withholding tax
during the prior year prior year
year
1st P250,000 P210,000 P90,000 P110,000 P20,000
2nd 290,000 550,000 110,000
3rd 550,000 250,000 130,000
4th 450,000 250,000 120,000
Required: Determine the following:
1. Income tax payable for the first quarter
2. Income tax payable for the second quarter
3. Income tax payable for the third quarter
4. Annual income tax payable
Answer:
1. Income tax payable for the first quarter
Q1
MCIT 210,000
NCIT 250,000
NCIT 250,000
Withholding tax-Prior Year (20,000)
Withholding tax-Current Year (90,000)
Excess MCIT-Prior Year (110,000)
Tax Paid-Previous Quarter -
The total tax liability of a corporation is either the NCIT or MCIT, whichever is higher. However, on some
instances, there are already payments made to the government that can be deducted to the total amount of
tax liability to arrive at the amount still payable to the government. These amounts are called “tax credits”.
MCIT 760,000
Withholding tax-Prior Year (20,000)
Withholding tax-Current Year 90,000 110,000 (200,000)
Excess MCIT-Prior Year -
Tax Paid-Previous Quarter (30,000) (30,000)
On the second quarter, the corporation is liable to pay the MCIT. On this case, such excess MCIT that has
been carried over from the previous quarter cannot be offset or deducted against MCIT itself. Remember
that any excess of the MCIT shall be carried forward and credited (deducted) against the NCIT only. Hence,
the NCIT should be higher than MCIT in the year or quarter to which the excess MCIT is forwarded.
Q1 Q2 Q3 TOTAL
MCIT 210,000 550,000 250,000 1,010,000
NCIT 250,000 290,000 550,000 1,090,000
NCIT 1,090,000
Withholding tax-Prior Year (20,000)
Withholding tax-Current Year 90,000 110,000 130,000 (330,000)
Excess MCIT-Prior Year (110,000)
Tax Paid-Previous Quarter 30,000 510,000 (540,000)
NCIT 1,540,000
Withholding tax-Prior Year (20,000)
Withholding tax-Current Year 90,000 110,000 130,000 120,000 (450,000)
Excess MCIT-Prior Year (110,000)
Tax Paid-Previous Quarter 30,000 510,000 90,000 (630,000)
Course Module
CLASSIFICATION of CORPORATE TAXPAYERS
ORDINARY SPECIAL
Taxability Tax Tax Tax Taxability Tax Tax Tax
Liability Base Rate Liability Base Rate
Net
NCIT Taxable 30%
Income
Domestic Within Domestic Within
Corporation and MCIT Gross Corporation and
Without Income 2% Without
Whichever
is HIGHER Special Tax Base
between and
NCIT & Special Tax Rate
MCIT
Net Resident
NCIT Taxable 30% Foreign
Resident Income Corporation
Foreign Non-
Corporation Within MCIT Gross resident Within
Income 2% Foreign
Whichever Corporation
is HIGHER
between
NCIT &
MCIT
Special Corporation
Course Module
ILLUSTRATION
Case 1 The following data were reported for 20xx business activities of Students
University, a private educational institution:
Tuition fees 525,000
School business related expenses 325,000
Answer (CASE 1)
Tuition fees P 525,000
School business related expenses (325,000)
Net Taxable Income 200,000
Tax Rate 10%
Income Tax Payable P 20,000
Answer (CASE 2) Gross receipts for flight Manila to Paris P 12,500,000 Commented [e1]: The 3% should be 2.5%
because it automatically rounds off. You may
Gross receipts for flight Manila to Switzerland 6,500,000 open this highlighted text to see the full excel
Gross receipts for flight Manila to England 4,125,000 information of the computation.
Total 23,125,000
Tax Rate 3%
Income Tax Payable P 578,125
End of Module 4
References
National Internal Revenue Code of 1997 . (n.d.). Retrieved from
https://www.bir.gov.ph/index.php/tax-code.html.
Aduana, N. L. (2012). Simplified and procedural handbook on income taxation (2nd Edition
ed.). Quezon City: C & E Publishing Inc.
Course Module
Garcia, E. R., & Tabag, E. D. (2014). Income Taxation (3rd Edition ed.). Quezon City: Good
Dreams Publishing .
Valencia, E. G. (2016). Income Taxation (7th Edition ed.). Baguio City: Valencia Educational
Supply .