LECTURE OUTLINE/NOTES and GUIDE QUESTIONS

MINIMUM CORPORATE INCOME TAX (MCIT)

INSTRUCTIONS:

REFER TO THE FIRST LECTURE OUTLINE. SAME INSTRUCTIONS

APPLY.

STUDY GUIDE:

A. GENERAL PRINCIPLES:

Under the Tax Code, a corporation shall be liable for the regular
corporate income tax or the minimum corporate income tax (MCIT)
whichever is higher.

B. MINIMUM CORPORATE INOCME TAX (MCIT)

READ:

Rev Regs. No. 9-98

Rev Regs. No. 12-07
RMC No. 04-03- Gross receipts; cost of services
RMC No. 24-08
CHAMBER OF REAL ESTATE AND BUILDERS'
ASSOCIATIONS, INC., petitioner, vs. THE HON. EXECUTIVE
SECRETARY ALBERTO ROMULO, THE HON. ACTING
SECRETARY OF FINANCE JUANITA D. AMATONG, and THE
HON. COMMISSIONER OF INTERNAL REVENUE GUILLERMO
PARAYNO, JR., respondents.
BIR Ruling No. 51-01, November 7. 2001

GUIDE QUESTIONS:

After reading the materials and the lecture notes, you should be
able to answer the following questions:

1. What is the minimum corporate income tax (MCIT)?

2. When is the MCIT required to be paid?

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 3. Who are liable for the payment of the MCIT?
4. When does a corporation start paying the MCIT?
5. How is the tax base computed for purposes of computing the
MCIT?
6. What is the treatment of the excess MCIT over the regular
corporate income tax?

B.1 Persons liable to the MCIT

Domestic and Resident Foreign Corporations

-Whenever such corporation has zero or negative taxable

income or

-Whenever the amount of MCIT is greater than the normal

income tax due from such corporation.

• The MCIT shall apply only to domestic and resident foreign

corporations subject to the normal corporate income tax.

• In the case of a domestic corporation whose operations or

activities are partly covered by the regular income tax
system and partly covered under a special income tax
system, the MCIT shall apply on operations covered by the
regular corporate income tax system.

• In computing the MCIT due from a resident foreign

corporation, only the gross income from sources within the
Philippines shall be considered for such purpose.

B.2. When does MCIT commence

• MCIT is imposed upon any domestic corporation beginning

the fourth taxable year in which such corporation
commenced its business operations.

• The taxable year in which business operations commenced

shall be the year when the corporation registers with the BIR.

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 • For purposes of the MCIT, the taxable year in which the
business commenced shall be the year in which the
domestic corporation registered with the BIR (not in which
the corporation started commercial operations).

B.3. Tax Base for the MCIT is Gross Income

Section 27 (E) (4), 1997 Tax Code, as amended by RR No. 12-2007

• The term ‘gross income’ shall be equivalent to 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.

• If apart from deriving income from core business activities

there are other items of gross income realized or earned by
the taxpayer which are subject to the normal corporate
income tax, must be included as part of gross income for
computing MCIT.

Section 27 (E) (4), 1997 Tax Code, as amended by RR No. 12-2007

This means that the term “gross income” will also include all
items of gross income enumerated under Section 32 (A) of the
1997 Tax Code, except:

- Income exempt from income tax and

- Income subjected to final withholding tax.

RMC No. 24-2008

• For SELLERS OF SERVICES, “gross income” means gross

receipts less sales returns, allowances, discounts and cost of
services.

• “Cost of services” shall mean all direct costs and expenses

necessarily incurred to provide the services required by the
customers and clients including:
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 - Salaries and employee benefits of personnel,
consultants and specialists directly rendering the
service and

- Cost of facilities directly utilized in providing the

service such as depreciation or rental of equipment
used and cost of supplies.

- "DIRECT COSTS AND EXPENSES" shall only pertain

to those costs exclusively and directly incurred in
relation to the revenue realized by the sellers of
services. These refer to costs which are considered
indispensable to the earning of the revenue such that
without such costs, no revenue can be generated.

- Expenses and other costs dispensed other than

"direct costs and expenses" are not items allowed for
inclusion to "cost of services“.

B.3.1. Gross Income Per Type of Business

A. Trading or Merchandising

GROSS INCOME COST OF SALES

Gross sales less Invoice cost of the goods sold, plus

sales returns, import duties, freight in transporting the
discounts and goods to the place where the goods are
allowances and cost actually sold, including insurance while
of goods sold. the goods are in transit.

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 B. Manufacturing

GROSS COST OF SALES

INCOME
Same All cost 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.

Services

GROSS INCOME GROSS

SALES/RECEIPTS

Gross receipts less Gross receipts means amounts actually or

allowances, constructively received during the taxable
discounts and cost year; Provided, that for taxpayers employing
of services. the accrual basis of accounting, the term shall
mean 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:
a) Salaries and employee benefits of personnel, consultants
and specialists directly rendering the service,

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 b) Cost of facilities directly utilized in providing the service
such as depreciation or rental of equipment used and cost of
supplies.

Provided, that “cost of services” shall not include interest

expense except in the case of banks and other financial
institutions.

B.4. Quarterly Computation of the MCIT

Rev. Regs. No. 12- 2007

• The computation and the payment of MCIT, shall likewise

apply at the time of filing the quarterly corporate income
tax return.

• In the computation of the tax due for the taxable quarter, if

the quarterly MCIT is higher than the quarterly normal
income tax, the tax due to be paid for such taxable quarter at
the time of filing the quarterly corporate income tax return
shall be the MCIT.

B.5. Annual Income Tax Computation

• 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 corporate
income tax payment made at the time of filing of quarterly
corporate income tax returns whether this be MCIT or
normal income tax.

• If in the computation of the annual income tax due, the

computed annual MCIT due is higher than the annual
normal income tax due, the following may be credited
against annual MCIT due:

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 • Quarterly MCIT payments of current taxable quarter
• Quarterly normal income tax payments in current
year
• Creditable Withholding Taxes (CWT) in the current
year
• Excess CWTs in the prior year

• Excess MCIT from the previous taxable year/s SHALL NOT

BE ALLOWED to be credited against the annual MCIT due as
the same can only be applied against normal income tax.

• Any excess of MCIT over the normal income tax can be

carried forward on an annual basis.

• The excess can be credited against the normal income tax

due in the next three succeeding taxable years.

B.4. Manner of Filing and Payment

• The MCIT shall be paid in the same manner prescribed for the
payment of the normal corporate income tax which is on a
quarterly and on a yearly basis.

• The MCIT shall be indicated in BIR Form 1702Q and 1702.

B.5. Relief From MCIT

Section 27 (E) of 1997 Tax Code

The Secretary of Finance, upon the recommendation of the

Commissioner, may suspend the imposition of the MCIT upon
submission of proof by the applicant-corporation that the
corporation sustained substantial losses on account of the
following:

- Prolonged labor dispute;

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- Force majeure; and
- Legitimate business reverses.

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