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Minimum Corporate Income

Tax (MCIT), Improperly


Accumulated Earnings Tax
(IAET), and Gross Income Tax
(GIT)
What is Corporation?
• It 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 (Sec. 2, BP No.68-
Corporation Code)
• A corporation does not include –

 General Professional Partnership

 Joint venture or consortium formed for


the purpose of
undertaking construction projects or
engaging in petroleum, coal, geothermal
and other energy operations pursuant to
an operating or consortium agreement
under a service contract with the
government
Kinds of Corporation
• Domestic Corporation- organized and
existing under the laws of the Philippines
• Foreign Corporation- organized and
existing under the laws of foreign country.
-Resident foreign corporation or
- Non- resident foreign corporation
Foreign Corporation are either:
• Resident foreign corporation- engaged in
trade or business in Philippines (Sec.22
(H), NIRC) and normally establishes a
branch or an office for the purpose.
• Non resident foreign corporation- not
engaged in trade or business in the
Philippines but earns income from within.
• Both are taxable from income within the
Philippines only.
Corporations may be subjected to the following
taxes:

1. Normal Corporate Income Tax (NCIT)


2. Minimum Corporate Income Tax (MCIT)
3. Gross Income Tax (GIT)
4. Capital Gains Tax on sale of real property
or on sale of shares of stock (CGT)
5. Final Tax on Passive income (FT)
Kinds of taxable income
• Passive income subject to final taxes
• Capital gains subject to capital gains taxes
(CGT): shares/ real property
• Ordinary income subject to 32/35/30%
• Special income subject to special rates
(e.g. PEZA 5% special tax regime)
Corporate Income Taxes
• Ordinary income tax- 30% starting Jan 1,
2009
• Minimum Corporate Income Tax- 15% of
gross income under certain conditions
• Capital gains tax on share of stocks and
real properties
• Final income tax on certain passive
income
• Branch profit remittance tax- 15%
• Improperly accumulated income tax (IAET)
• Fringe benefit tax (FBT)
The Normal Corporate Income Tax
BIR Form 1702 (General Format for Income tax computation on business
income)

Sales/ Revenues/ Fees from within and P xxx


without
Less: Sales returns, allow., and disc. (if any) P xxx
Cost of Sales xxx xxx
Gross Income from operation P xxx
Add: Non-operating and other income not xxx
subjected to final tax or capital gains tax
Gross Income xxx
Less: Allowable itemized business deductions xxx
Net Taxable Income xxx
Multiply by Normal Corporate Income Tax Rate 30%
Normal Corporate Income Tax xxx
Sample Problem
• Mara Clara Inc. is a domestic corporation
engaged in the retail of various household
merchandise. For TY 2010, the company had
the following account balances:
Cost of Sales P
400,000.00
Sales Returns allowance and disc.
50,000.00
Administrative Expense
230,000.00
Depreciation Expense
20,000.00
Rental Expense
100,000.00
Light and Water Expense
50,000.00
Rental Income
Solution
Sales/ Revenues P1,050,000.00
Less: Sales Rets., Allow. & Disc. 50,000.00
Cost of Sales 400,000.00 450,000.00
Gross Income from operation 600,000.00
Add: Non-operating and other
income not subjected to Final
tax or capital gains tax 100,000.00
Gross Income 700,000.00
Less: Itemized business deductions 400,000.00
Net Taxable Income 300,000.00
X Normal Corp. Income Tax Rate 30%
Normal Corporate Income Tax P90,000.00
===========
Minimum Corporate Income
Taxation
• Applicable on the 4th year of operation
• At a net loss, no taxable income, normal
income tax less than MCIT
• Excess MCIT carried over to the next 3
succeeding years
• Now applied quarterly
• Sec. 27(E) and 28 (A)(2) of the NIRC:
Imposed on:

Domestic & Res. Foreign

2 % on Gross Inc.

if: - in the 4th year of operation


- net loss/zero taxable inc./
MCIT is greater than NCIT
For sale of goods :
Gross sales 1,000,000.00
Less: Sales Ret., Disc & Allow. 25,000.00
Cost of Goods Sold 500,000.00
Gross Income from operation 475,000.00
Add: Other Income not subject to
Final Tax or Capital Gains Tax 100,000.00
Total Gross Income subject to MCIT 575,000.00
• Gross income
include all items of gross income enumerated
under Section 32(A) of the Tax Code, as amended,
except income exempt from income tax and
income subject to final withholding tax.

• 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
• For sale of services

Gross Revenue P 5,000,000.00


Less: Cost of services 950,000.00
Gross Income 4,050,000.00
Add: Other Income not subject
to Final Tax or Cap. Gains Tax ___ --____
Total Gross Income 4,050,000.00
=========
• Gross Revenue”
• shall include income from sale of services,
• likewise, taxable under Sec. 27(A).

• “Cost of Services or Direct Cost of Services”


• shall include business expenses directly
• incurred or related to the gross revenue
from
• rendition of services.
Illustration:
Bungga-Bungga Corporation has been
operating since January 1, 2006. Data pertinent
to its operations covering 2008 to 2010 are as
follows:
2008 2009 2010
Gross Sales 3,080,000 4,100,000 5,200,000
Sales Ret., Disc. & Allow. 80,000 100,000 200,000
Cost of Sales 1,500,000 2,000,000 2,500,000
Operating Expenses 1,450,000 1,900,000 2,100,000
1. Computation of Normal Corporate Income
Tax(NCIT):
• Computation of Minimum Corporate Income
Tax (MCIT)

2009 2010
Gross Income 2,000,000 2,500,000
X MCIT rate 2% 2%
MCIT 40,000 50,000
• Determination of Income tax due and payable:
Carry forward of Excess MCIT
Excess of MCIT over normal income tax shall
be carried forward on an annual basis and
credited against the normal income tax for the
3 immediately succeeding taxable years

 Excess MCIT can only be credited against the


income tax due if the normal income tax is
higher than the MCIT
 Excess MCIT which has not or cannot be so
credited against the normal income tax due for
the 3-year period shall lose its credibility

 Excess MCIT cannot be claimed as a credit


against the MCIT itself or against any other
losses

 The final comparison between the normal


income tax payable and the MCIT shall be made
at the end of the taxable year
• The payable or excess payment in the Annual
Income Tax Return shall be computed taking
into consideration income tax payment made at
the time of filing of quarterly income tax
returns whether this be MCIT or normal
income tax
Rules on crediting of tax payments & taxes
withheld
Annual Computation
Normal Income Tax (NIT) MCIT
is higher than MCIT is higher than Normal
Income Tax
Excess MCIT from prior year can Excess MCIT from prior
be deducted from the NIT due years cannot be deducted
from the MCIT due

Excess withholding tax from prior Excess withholding tax from


year can be deducted from the NIT prior year can be deducted
due from the MCIT due
Quarterly Computation

Normal Income Tax (NIT) MCIT


is higher than MCIT is higher than Normal Income Tax

Excess MCIT from prior year Excess MCIT from prior year
can be deducted from the cannot be deducted from the
quarterly NIT due quarterly MCIT due

Excess withholding tax from Excess withholding tax from


prior year can be deducted from prior year can be deducted from
the quarterly NIT due the quarterly MCIT due
Normal Income Tax (NIT) MCIT
is higher than MCIT is higher than Normal Income Tax

Quarterly taxes withheld can be Quarterly taxes withheld can be


credited from the quarterly NIT credited from the quarterly
due MCIT due

Payment from previous quarters Payment from previous quarters


of the taxable year can be of the taxable year can be
deducted from the cumulative deducted from the cumulative
tax due (whether NIT or MCIT) tax due (whether NIT or MCIT)
Suspension of MCIT
 Instances when MCIT may be suspended
Substantial losses on account of –
 Prolonged labor dispute
 Force majeure
 Legitimate business reverses

 Who may suspend


 Secretary of Finance upon
recommendation of the CIR
IMPROPERLY
ACCUMULATED
EARNINGS TAX (IAET)
RA 8424 / RR 2-2001
CONCEPT OF IAET
 Taxpayer is a corporation
 Improper accumulation of taxable income
beyond the reasonable needs of the
business
 Non-distribution of earnings/profits to
stockholders
 The purpose of accumulation is to avoid the
payment of the income tax
 Imposition of tax equivalent to 10% of the
improperly accumulated taxable income
• IAET is in addition to other taxes
imposed under Title II (Income Tax);
• 10% tax is imposed for permitting the
earnings and profits of the
corporation to accumulate instead of
distributing them to the shareholders;
• As a form of deterrent to the
avoidance of tax upon shareholders
who are supposed to pay dividend tax;
EVIDENCE OF PURPOSE TO AVOID
THE TAX
1.The corporation is a mere holding or
investment company

2. Earnings or profits are permitted to


accumulate beyond the reasonable
needs of the business
Exempt Corporation from
IAET
• Banks and non-bank financial
intermediaries
• Insurance companies
• Publicly held corporations
• taxable partnerships
• GPP
• Non-taxable joint ventures
• Firms registered under RA 7916, 7227,
and other special ecozones
IMPOSITION OF IAET
• Tax rate 10%

• Corporations liable Closely-held


domestic

corporations

• Deadline 15th day


after the end of he
year following the
close of the taxable year
Closely-held corporations:

– are corporations at least 50% in value of


the outstanding capital stock or at least
50% of the total combined voting power of
all classes of stocks entitled to vote is
owned directly or indirectly by or for not
more than 20 individuals
TAX BASE OF IAET
• Taxable income P xxx
• Add: Income subject to final tax Pxxx
• Income exempt from tax xxx
• Income excluded fr gross income xxx
• Amount of NOLCO deducted xxx
xxx
• Total P
xxx
• Less: Div. actually or const. paid/issued xxx
• Income tax paid for the year xxx
• Reserved for the reasonable
• needs of the business xxx
xxx
• Improperly accumulated earnings P xxx
Illustration

Add Tax rates, amount and


(Deduct) accounts
GAAP Income P 100
ND expenses 3
NOLCO (1)
NT income (2)
Base of ITE P 100 30% = P30.00 ITE
TNDE 5 30% = 1.5 0 DT
TNTI (4) 30% = (1.20) DTL
Base of ITP P 101 30% = P30.30 TP
Computation of IAET
Taxable income P 101.00
Add: NOLCO P 1.00
Nontaxable income 2.00
TNTI 4.00 7.00
Total P 108.00
Less: Income tax payable 30.30
Basis of IAET P 77.70
Multiplied by IAET rate 10%
IAET P 7.77
Payment of IAET
• Dividend must be declared and paid not
later than one year following the close of
the taxable year

• Otherwise, IAET should be paid within


15 days thereafter

Effect of the 10%


- Once the profit has been subjected
to IAET, the same shall no longer be
subjected to IAET in later years, even if
not declared as dividend.
Income Tax Forms and Due
Dates
Form Form Name Deadline for No. of
No. Filing Copies

1702Q Quarterly Income Tax 60 days 3 copies


Return following the
(For Corporations, close of the first
Partnerships and 3 taxable
Other Non-individual quarters
Taxpayers)
• Attachments Required:
• 1. Certificate of income payments not
subjected to withholding
• tax (BIR Form 2304), if applicable.
2. Certificate of Creditable withholding
tax withheld at source (BIR Form
2307, if applicable).
3. Summary Alphalist of W/A (SAWT) per
RR 2-2006;
4. Duly approved Tax Debit Memo, if
applicable.
Form Form Name Deadline for Filing No. of
No. Copies

1702 Annual Income Tax On or before April 3 copies


Return 15
(For Corporations,
Partnerships and On or before the
Other Non- 15th day of the
individual month following
Taxpayers) the close of the
fiscal year
Attachments Required:
1. Account Information Form (AIF) BIR
Form 1702-AIF and the Certificate of
the Independent CPA (The CPA Cert. is
req’d. if the Gross sales, earnings,
receipts exceed P150,000.00);
2. Certificate of income payments not
subjected to withholding tax (BIR Form
2304), if applicable;
3. Certificate of Creditable withholding
tax withheld at source (BIR Form
2307, if applicable);
4. Summary Alphalist of W/A (SAWT) per RR
2-2006;
5. Duly approved Tax Debit Memo, if
applicable;
6. Proof of prior year’s excess credits, if
applicable;
7. Proof of Foreign Tax credits, if applicable;
8. For amended return, proof of tax payment and
the return previously filed;
9. For those availing of fiscal incentives, see
RMC No.
21-2007
Shall be filled in triplicate copies
AAB’s (w/ payment)

RDO (w/o payment)


Deductions from the Income Tax Due

 Taxes withheld from current year’s


income
 Tax credits for foreign taxes paid
 Tax credits (tax credit memo)
 Taxes paid in the first 3 quarters
 Excess tax payments in the
preceding year
Stamping of ITRs and
Attachments
Revenue Memorandum
Order No. 6-2010
Policies and Guidelines:

1. All concerned Offices, including


AABs, shall receive the income tax
returns by stamping the official
receiving seal or stamp of receipts of
an internal revenue office where the
said returns are filed on the space
provided for in the three (3) copies of
the returns.
2. The attachments to the income tax returns shall
also be received in the same manner as above, but
for the attached financial statements the same
shall be stamped received only on the page of the
Audit Certificate. Accordingly, the other pages of
the FS and its attachments need not any more be
stamped received.
3. Taxpayer shall only accomplish and file three (3)
copies of tax returns with the AAB and/or the BIR.
Any tax return in excess three (3) shall not be
received by the AAB and/or the BIR.
The contents and representations –
as they are reflected in the tax returns
and information statements filed with
the BIR – made in their behalf by their
tax agents, remain their responsibility
in their capacity as the principals
stated in the aforesaid returns and
information statements.
The taxpayer is under strict obligation to
check , verify and validate:
The authenticity of a tax return
and/or information statement
made in their behalf.
The correctness and validity of
the information contained in such
documents.

The liability to pay the tax


payments remain the
responsibility of the concerned
taxpayers.
Any findings, errors, violations or
infractions noted in the Tax Returns
(together with their necessary
attachments) as a result of the
verification and authentication
procedures made by the BIR shall
render both the taxpayer and his/its
tax agent civilly, and administratively
and criminally liable, pursuant to
existing laws and regulations.