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:
• Invoice COGS, 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.
• Includes only those items which are
direct and incidental to the
acquisition of the merchandise
intended for resale.
For manufacturing:
• 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.
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.