Chapter 15-B - Regular Income Taxation: Regular Corporations CHAPTER 15-B REGULAR INCOME TAXATION: Regular Corporar;, ny Chapter Overview and Objectives This chapter covers taxation of regular domestic and resi ; dene Corporations, the improperly accumulated earnings tax, and the by. remittance tax. Afte 1 in| ‘anch Py ‘er this chapter, readers are expected to have obtained mastery of the fol The regular corporate income tax (RCIT) for domestic and Tesident ge corporations ey 2. The minimum corporate income tax (MCIT) Wy 4.au ove Up u 3. The scope and coverage of Branch profit remittance tax is 4._The procedural computation of Branch Profit Re mittance Tax | = | THE REGULAR CORPORATE INCOME TAX The regular corporate income tax applies to all cor all taxable income of c tax. Porations in genera. egg, orporations that are not subject to final tax or capital oe | | | sl Income tax rules on regular corporations | Domestic 20% or 25% Regular Corporate income tax subject Corporation the Minimum Corporat. porate Income Tax | Resident 25% Regular Corporate Income Tax subject to the} Corporation Minimum Corporate Income Tax | THE MINIMUM CORPORATE INCOME TAX ‘The ‘most peculiar feature of corporate income taxation is the Minima Corporate Income Tax (MCIT). Corporations are subject to a minimum corporse income tax of 2% of gross income. Asa minimum tax, the MCIT is payable when: | a. The corporation has zero or negative taxable income. | b. MCIT is greater than the regular corporate income tax (RIT). | Pandemic adjustment and transition rules | Due to the pandemic, the MCIT rate was temporarily reduced to 1% of sr) income between July 1, 2020 to June 30, 2023 but will revert back to 2% sai July 1, 2023. McIT during transition periods like 2020 and 2023 will be compu | by pro-rating the number of months covered by 1% and those covered by 2% | 672Chapter 15-B - Regular Income Taxation: Regular Corporations Examples: MCIT in Year 2023 1, Corporations on a fiscal year ending every March 31 would have an MCIT of 1.75%, computed as (1% x 3 months + 2% x9 months) / 12 months. 2, Corporations on a fiscal year basis with ending every October 30 would have an MCIT of 1.33%, computed as (1% x 8 mos. + 2% x4 mos.) / 12 months. 3. Corporations under calendar year would have 1.5% MCIT. Scope of the Minimum Corporate Income Tax The MCIT is applicable to every corporation taxable to the regular corporate income tax (25% or 20%) including non-profit, exempt, and special corporations with respect to their taxable income subject to regular corporate income tax, but not to their income subject to special tax rates. MCIT Exempt entities: 1. Real Estate Investment Trusts or REITs under RA 9856 2. Domestic or resident corporations subject to special tax rates a. Proprietary educational institutions, and non-profit hospitals b. FCDUs and EFCDUs c._ International carriers d. Firms under special tax regimes such as PEZA and BCDA locators 3. Allnon-resident foreign corporations Timing of Imposition of MCIT MCIT is imposed beginning on the fourth taxable year immediately following the year in which such corporation commenced its operations, when it is greater than the regular income tax computed for the taxable year. Simply stated, MCIT applies on the X + 4" year of operations. For instance, a corporation which started operations on any day in 2017 will be covered by MCIT in 2021. The rule is apparently intended to enable the business to obtain competitive traction before being subjected to MCIT. MCIT Gross income under the NIRC For corporation involved in: | “Gross income” means 1. Sale of goods Gross sales less sales returns, discounts, allowances, and cost of goods sold 2. Sale of service Gross receipts less sales returns, allowances, discounts, and cost of services Gross sales - means the total consideration agreed upon by the buyer and the seller for the sale of goods. Gross sales include cash (collected) sales and account (uncollected) sales. 673ey Chapter 15-B - Regular Income Taxation: Regular Corporations Gross receipts - means cash collections for services rendered or to be rendered, cy, receipts include reimbursements by the client for out-of-pocket expenses incurs the service provider. y Cost of goods sold (COGS) includes all business expenses directly incurred to prog the merchandise and to bring them to their present location and use. ce a. Fora trading or merchandising concern, COGS shall include the invoice co goods sold, import duties, freight in transporting the goods to the place wi goods are actually sold, and insurance while the goods are in transit b. For a manufacturing concern, COGS shall include all costs of production of finshe goods such as raw materials used, direct labor and manufacturing overheag freight cost, insurance premiums, and other costs incurred to bring the sal materials to the factory or warehouse. Cost of services shall mean all direct costs and expenses necessarily provide the services required by the customers and clients including: a. Salaries and employee benefits of personnel, consultants, rendering the service; and b. Cost of facilities directly utilized in providing the service such as depreciation or rental of equipment used and cost of supplies. St Of the ere the incurred to and specialists directly In the case of banks, ‘cost of services’ shall include interest expense. It is submitted that the “gross income” referred to by the NIRC is the gross income from operations. MCIT Gross income under the regulations RR12-2007 included all other items of taxable income not subjected to final tax and capital gains tax as part of gross income. While this may be questioned as an improper introduction of legislation, itis an established rule in taxation that revenue regulations and rulings are presumed | valid interpretations of the law unless challenged and reversed before the courts. Thus, MCIT shall be computed as 1% of the total gross income subject to regular income tax. Needless to say, the MCIT concept of “gross income” is the same with the OSD concept of gross income. ILLUSTRATIVE MCIT COMPUTATION Mlustration 1: MCIT ofa trading concern A corporate taxpayer subject to MCIT reported the following for 2024: Gross sales P 1,000,000 Sales discounts & allowances for defects 30,000 Sales returned by customers 20,000 Interest income from bank deposit 20,000 Rental income from vacant premises 60,000 674Chapter 15-B - Regular Income Taxation: Regular Corporations Inventory, at the start of the year 220,000 Gross purchases of merchandise 700,000 Net freight on purchases during the year 25,000 Purchase discounts and allowances on defective merchandise 40,000 Purchases returned to suppliers 50,000 Inventory, at the end of the year 160,000 The cost of goods sold shall first be computed as follows: Beginning inventory P 220,000 ‘Add: Net purchases Gross purchases P 700,000 Add: Freight in 25,000 Less: Purchase disc. and allowances 40,000 Purchase returns Total goods available for sale P 855,000 Less: Ending inventory 160.000 Cost of goods sold B695,000 The minimum corporate income tax shall be computed as follows: Gross sales P 1,000,000 Less: Sales discounts and allowances P 30,000 Sales returns Net sales ——50,000 P 950,000 Less: Cost of goods sold 0 Gross income from operations P 255,000 Add: Other taxable income not subject to final tax Rental income from vacant premises 60,000 Total gross income P 315,000 Multiply by: MCIT rate __ aH Minimum Corporate Income Tax (MCIT) P6300 Note: The interest income from banks is excluded in total gross income because itis subject to final tax, Illustration 2: MCIT of a Manufacturing Concern A foreign corporation had the following data in 2023, its fourth year of operation: Sales, net of discounts and allowances P 2,400,000 Gain on sale of machineries 100,000 Dividend income from domestic corporations 20,000 Material purchased 980,000 Conversion costs incurred: Direct labor used 350,000 280,000 Factory overhead 675Chapter 15-B - Regular Income Taxation: Regular Corporations Physical counts conducted at the start and end of the year revealed the f balances in inventory: lanuary1_ December 31 Raw materials P 120,000 P 180,000 Work-in-process 230,000 170,000 Finished goods 130,000 160,000 The cost of goods sold shall be determined as follows: Raw materials, beginning P 120,000 Net purchases of materials 980,000 Less: Raw materials, end 180.000 Raw materials used P 920,000 ‘Add: Conversion costs Direct labor P 350,000 Factory overhead 630,000 Total manufacturing costs incurred P 1,550,000 ‘Add: Work in process, beginning 230,000 Total manufacturing costs placed into process P- 1,780,000 Less: Work in process, end 170.000 Cost of goods manufactured or finished P 1,610,000 Add: Finished goods, beginning 130,000 Total cost of goods available for sale P 1,740,000 Less: Finished goods, end —_t60,000 Cost of goods sold P_1.580,000 The minimum corporate income tax shall be computed as follows: Sales, net of discounts and allowances P 2,400,000 Less: Cost of goods sold Gross income from operations P 820,000 Add: Other taxable income not subject to final tax Gain on sale of machineries 100,000 Total gross income P 920,000 Multiply by: MCIT rate 15% Minimum corporate income tax P___13,800 i. 4 following Note: The dividend income from a domestic corporation is excluded in total gross income because itis exempt from tax. Illustration 3: MCIT of a Service Provider Lacoste Corporation provides consultancy services to various clients. It reported the following in 2024, its fifth year of operation: Collections and billings Collections on services rendered net of discounts P 3,200,000 Uncollected bills for services rendered 800,000 Advanced collections for services to be provided 600,000 676- | chapter 15-B - Regular Income Taxation: Regular Corporations Gient reimbursements for out-of-pocket expenses incurred by consulting staff 400,000 gient reimbursements for client expenses paid or advanced by Lacoste 150,000 poyalties from a software developed by Lacoste 30,000 Expenses: salaries of consulting staff P 1,600,000 salaries of administrative employees 700,000 Office rent and utilities expense 420,000 Office depreciation expense 50,000 Office supplies expense 35,000 Interest expense 20,000 Insurance expense 40,000 Local tax expense 14,000 The gross receipts of Lacoste shall be determined as follows: Net collections on services rendered P 3,200,000 Collections on services to be provided (advances) 600,000 Reimbursement for firm's out-of-pocket costs Gross receipts P_4,200,000 The direct cost of services of Lacoste shall be as follows: Consulting salaries expense P 1,600,000 Office rent and utilities expense 420,000 Office depreciation expense 50,000 Office supplies expense ___ 35,000 Direct cost of services P_2,105,000 ‘The minimum corporate income tax shall be computed as follows: Gross receipt P 4,200,000 Less: Cost of services Gross income from operations P 2,095,000 Add: Other gross income not subject to final tax Q Total gross income P 2,095,000 Multiply by: MCIT rate 2% Minimum corporate income tax P__41,900 MCIT AND RCIT: BASIC APPLICATION Mustrative 1 4 big corporate taxpayer started operations in 2021. It had the followi ; ing results of Operations in 2024 and 2025: 677Chapter 15-B - Regular Income Taxation: Regular Corporations cr io! Total gross income P2,100,000 P 4,000,000 Dividend income - domestic 2 50,000 Ge Business expenses 2.600.000 __3,400,000 ec Net income (Net loss) (2500.00) P__650,000 4 The MCIT will commence in 2025 (i.e. 2021 + 4). Since there is no MCIT yet in 29; & the tax payable for 2024 is nil. 24, 4 ‘The 2025 income tax due of the corporation shall be determined as: | : Total gross income P 4,000,000 E Less: Itemized deductions fe Ordinary allowable deductions —P_ 3,400,000 / NOLCO - 2024 500.000 __3,900,000 Taxable net income P 100,000 ; Multiply by: Corporate income tax rate 25% Regular corporate income tax - 2025 P__25,000 Total gross income P 4,000,000 Multiply by: MCIT rate 2% Minimum corporate income tax -2022 (HIGHER) P__ 80,000 ‘The P80,000 MCIT is the income tax due in 2025. Note that the dividend income is exempt from tax. Illustrative 2 A corporation which started operation in 2019 reported the following: —2023__ ___2024 Total gross income P3,000,000 3,200,000 | Less: Ordinary allowable deductions 1,600,000 2,800,000 ! Special allowable deductions © ___400,000 __500,000 Taxable net income P_1,000,000 (P_100,000) The RCIT and MCIT are as follows: 2023 _ __2024 _ RCIT (25% of taxable net income) P 250,000 P 0 MCIT (1.5% or 2% of gross income) P__45,000 P___ 64,000 ‘The income tax due shall be P__250,000 P__64,000 ANNUAL RCIT AND MCIT: INTEGRATIVE ILLUSTRATION Integration 1 La-View Corp, a MSME, reported the following on its fifth year of operation: Sales, net of 1% withholding tax P 4,950,000 Cost of sales 2,000,000 678 eal~ ter 15-B - Regular Income Taxation: Regular Corporations chat interest from deposit, net of tax 75,000 ainon sale of domestic stocks directly to buyer 150,000 {asual rent income, net of 5% creditable withholding tax 95,000 interest income from advances to employees 50,000 usiness expenses 3,100,000 Fstimated quarterly tax payments 10,000 ‘The regular income tax and minimum corporate income tax shall be computed as: sales (P4,950,000/99%) P 5,000,000 Less: Cost of sales 2.000.000 Gross income from operations P 3,000,000 Add: Other gross income not subject to final tax Casual rent income (P95,000/95%) P 100,000 Interest from employee advances 50,000 Total gross income P 3,150,000 Less: Ordinary allowable deductions _ 3.100.000 Taxable net income P 50,000 Multiply by: Corporate income tax rate 20% Regular corporate income tax 210,000 Total gross income P 3,150,000 Multiply by: MCIT rate 2% Minimum corporate income tax P__63,000 The income tax payable of La-View Corp. shall be computed as follows: Income tax due - MCIT P 63,000 Less: Tax credits Creditable withholding tax withheld on gross income: Sales (1% x P5,000,000) P 50,000 Rent income (5% x P100,000) Total creditable withholding tax P 55,000 Estimated quarterly tax payments pee) 000) 65000) (22,000) Income tax payable or (refundable) Mlustration 2 PC Repair, a MSME business partnership providing computer repair services, reported the following on its sixth year of operation: Service fees, net of P100,000 withholding tax P 1,900,000 Salaries of staff, supplies, and other direct costs 1,000,000 Interest from bank deposits, net 50,000 Gain on sale of land classified as capital asset 400,000 Cain on sale of used equipment 150,000 Administrative business expenses 500,000 25,000 Estimated quarterly income tax payments 679OS Chapter 15-B - Regular Income Taxation: Regular Corporations The RCIT and MCIT shall be computed as follows: cr Service fees (P1,900,000+P100,000) P 2,000,000 ul Less: Direct cost of services at Gross income from operations P 1,000,000 io Add: Other gross income not subject to final tax u Ordinary gain on sale of equipment 150.000 Total gross income P 1,150,000 Rv | Less: Ordinary allowable deductions 500,000 pe Taxable net income P 650,000 Multiply by: Corporate income tax rate 20% 5% Regular corporate income tax B__130,000 ‘ Total gross income P 1,150,000 u Multiply by: MCIT rate tins 286) : Minimum corporate income tax B__23,000 A E Income tax due - RCIT P 130,000 Less: Tax credits Withholding tax on gross income P 100,000 ' | Quarterly estimated tax payments ___25.000 __125,000 \ Income tax payable P5000 : | | | | The income tax due and payable of PC Repair shall be computed as: | | EXCESS MCIT CARRY-OVER The excess of the MCIT over the RCIT in any year is a tax credit that is deductible against any RCIT tax due in the immediately succeeding three years, Excess MCIT Carry-Over Rules © Excess MCIT can be used only as a tax credit against RCIT tax due in any of the three subsequent years, Excess MCIT cannot be deducted against MCIT tax due. * Credit for the Excess MCIT from prior years can be taken up to the full amount of RCIT tax due in the next three years. This means that the income tax payable when credit is made can get below the amount of MCIT for that year. ¢ When there are several Excess MCITs from prior years, tax crediting shall be made ina first in-first out basis, * Unused Excess MCIT at the end of the three-year period shall expire and can no longer be used, Mlustration 1: Excess MCIT - Basic Application A corporation had the following MCIT and RCIT data since 2021: 680> (30.000) z . 50,000 Mlustration 2: Expired Excess MCIT lligan, Inc, became subject to MCIT in 2020. MCIT and RCIT data through the years were: 2020 2021 _2022_ _2023_ _2024_ MCIT P 400P 620P 200P 350P 350 RCIT eee S00 200 eee 0 eee 400) Income tax due P__400 P_620 P__300 P__350 P__400 Excess MCIT p400 P_120 P___: B50 B_: Required: Compute the income tax payable in each year. 681Te ee. Chapter 15-B - Regular Income Taxation: Regular Corporations 1 Solution: The income tax payable (still due) in each year is indicated in bold font. 2020. 2021 _2022_ 2023 _2024 Income tax due P_400 P620 P 300 P_350 P 400 Excess MCIT P 400 P 120 P 150 MCIT application (_300) > ( 300) Remaining Excess MCIT P*100 P 120 ___ MCIT application (Expired) (_120) (150) (_279 ‘4 P1309 Note: 1. "The P100 unused Excess MCIT-2020 cannot be used in 2023 since the tax due for tht is the MCIT (ie, P350). Excess MCIT prior year cannot be credited against MCIT tax duo 2, The P100 unused Excess MCIT-2020 expired at the end of 2023 and cannot be carried as tax credit in 2024, Thus, only the 2021 and 2023 excess MCITS are credited in 2024," Illustration 3: NOLCO and MCIT Asmall corporate enterprise which became subject to MCIT in 2024 had the fall 7 lowing statement of income in 2024 and 2025: — 2024 __2025 __ Gross income P 300,000 500,000 Business expenses 420,000 — __250,000 Net income (B.120,000) P.250,000 Required: Compute the income tax payable in each year. Solution: The 2025 taxable net income and RCIT shall be computed as follows: 2024 —2025__ Total gross income P 300,000 — P_500,000 Less: Allowable deductions 420,000 __250,000 Net income (NOLCO) (P 120,000) _P 250,000 Less: NOLCO-2024 application ——___ (_120.000) Taxable income (2.120,000) 2024 __2025 _ Taxable income 0 P 130,000 Multiply by: 20% 20% Regular corporate income tax Bz 0 P_ 26,000 Minimum corporate income tax P3000 P_ 5,000 Excess MCIT P__3,000 The income tax payable in each year is indicated in bold font. 682chapter 15-B - Regular Income Taxation: Regular Corporations és — 2024 __2025 _ Income tax due P3000 P 26,000 tess: Excess MCIT - 2024 (3.000) income tax payable (still due) 23,000 Recall that net operating loss is carried over as a deduction over 3 years after its jncurrence, except losses sustained in Year 2020 and 2021 which will be carried over five years. Excess MCIT is likewise creditable over a 3-year period. QUARTERLY FILING OF INCOME TAX RETURN Corporations shall file their quarterly income tax returns for the first three quarters of the year due on or before 60 days from the end of each quarter. * ilustration Henry, Inc, a large scale enterprise, had the following quarterly gross income and deductions in million pesos for year 2023: / 1stOm _2ndQm ard 4 Onn 3 Gross income P 200 P 250 P 220 P 280 Itemized deductions 100 130 120 140 Withholding tax 22 20 18 31 ‘The quarterly estimated tax payable in million pesos shall be computed as follows: AstOtn 2nd Qt 3rd. Ot, _Annual_ Gross income P 200 P 250 P 220 P 280 Less: Itemized deductions_100 130 ____120 ____140 Net income, this quarter P 100 P 120 P 100 P 140 Net income, prior quarters. 0 100 220 ___320 100 P 220 FP 320 P 460 Taxable income P Multiply by: 25% ___25% ___25% ___25% Income tax due P 23 P ss F 80 P 11s Less: Tax credits: CWT this quarter Pp az) P 20 P 18 P 31 CWT prior quarters ___0 «22, __42, «6 Total credits ba P 30R 13, P 20, P 24 — . . . Less: Estimated tax paid omy Ne M in prior quarters Quarerly axpayble 2d Edd P_7 bo4 QUARTERLY MCIT Mlustration Binorongan Inc. ha g 2024: d the following quarterly RCIT and MCIT durin, 683wens _ Chapter 15-B - Regular Income Taxation: Regular Corporations 4st 2nd 3rd 4th RCIT P80,000P 50,000 P80,000 60,000 P270.995 MCIT 50,000 100,000 40,000 120,000 310.999 Excess MCIT prior year Piopop Creditable withholding Tax 20,000 12,000 10,000 20,000 62,999, Excess withholding tax prior year 30,000 The cumulative balances of RCIT, MCIT, and prior quarter CWT: \ s determined. The income tax due per quarter is indicated in bold italics. Mal fx —Ast Our _2nd Qtr _3rd Qtr RCIT P 80,000 P 130,000 P 210,000 P 270,000 P 270,000 MCIT 50,000 150,000 190,000 310,000 310,000 Excess MCIT prior years 10,000 Excess CWT prior year 30,000 Creditable withholding tax: This quarter P 20,000 P 12,000 P 10,000 P_ 20,000 Prior quarters - 20,000 32,000 42,000 The quarterly income tax payable shall be computed as follows: —AstQtr_ _2ndOtr_ _3rdQtr_ _4th our Quarterly income tax due P 80,000 P 150,000 P 210,000 P 310,000 Less: Tax credits MCIT - prior yeart P 10,000 P =P 10,000 P Excess CWT-prior year? 30,000 30,000 ~—-30,000 ~—-30,000 CWT- current quarter 20,000 12,000 10,000 -—-20,000 CWT- prior quarters - 20,000 32,000 42,000 Estimated tax payments. in prior quarters? —_—- —20,000 __ 88,000 __128,000 Total P_ 60,000 P_82,000 P 170,000 P 220,000 Income tax payable P_20,000 P_68,000 P_40,000 P_90,000 | Note: 1, The Excess MCIT prior year is deductible in any of the quarters of the current year when RCIT is higher than MCIT.1 2. The excess CWT prior year is always deductible this period.? 3. The balance of the estimated tax payments in prior quarters is the total of the quartety payments in the prior quarters.? RELIEF FROM THE MINIMUM CORPORATE INCOME TAX Upon recommendation of the Commissioner of Internal Revenue, the Secretary e Finance may suspend the imposition of MCIT upon submission of proof that corporation sustained substantial losses on account of: 684Chapter 15-B - Regular Income Taxation: Regular Corporations a. prolonged labor dispute b. force majeure c._ legitimate business reverses REPORTING FOR CORPORATIONS SUBJECT TO REGULAR TAX Regular corporations, domestic or resident foreign, may choose either itemized deductions or optional standard deductions in reporting their income using BIR Form 1202-RT. If they also derive income subject to special tax rates, they shall report their income using BIR Form 1702-MX. BRANCH PROFIT REMITTANCE TAX Any profit remitted by a branch to its head office abroad shall be subject to a tax of 15% based on the total profits applied or earmarked for remittance without any deduction for the tax component thereof. The 15% branch profit remittance tax is a final tax which is required to be withheld at source by the branch of a foreign corporation. Interest, dividends, rents, royalties, remuneration for technical services, salaries, wages, premiums, annuities, emoluments or other fixed or determinable annual, periodic or casual gains, profits, income, and capital gains received by a foreign corporation during each taxable year from all sources within the Philippines shall not be treated as branch profit unless the same are effectively connected with the conduct of the taxpayer's trade or business in the Philippines. The term “effectively connected with the conduct of the taxpayer's trade, or business” does not necessarily mean that the income must be derived from the actual operation of the taxpayer-corporation’s trade or business, it is sufficient that the income arises from the business activity in which the corporation is engaged (RMC No. 55-80). The income should be an active income or an income from sources that are effectively connected with the conduct of the taxpayer's trade or business of the resident foreign corporation to be subjected to the branch profit remittance tax. Passive investment income and gains are excluded. Scope of the Branch Profit Remittance Tax ; : The tax covers the remittance of all resident foreign corporations including ROHQs of multinational companies, FCDUs or OBUs of foreign banks, and international carriers, except PEZA-registered entities. Naas ea reden foreign enterprise engaged in wholesale of imported goods had the following profit statement for 2022: Gross income from sale of goods Interest income, net of final tax P 5,000,000 80,000 685Chapter 15-B - Regular Income Taxation: Regular Corporations Domestic dividends 120,000 | Less: | Operating expenses P2,500,000 I Corporate income tax —625.000 _ 3.125.000 | Net profit 22,075,000 | Required: Assuming that the corporation earmarked the entire profits fo | abroad, compute the branch profit remittance tax. T Temittance | Solution: Net profit P 2,075,000 | Less: Investment income | Interest income P 80,000 | Dividend income 200,000 Taxable profit P 1,875,000 | Multiply by: portion remitted 100% Actual profit remittance P 1,875,000 Multiply by: Profit remittance tax rate 15% Branch profit remittance tax P_281,250 | Note: Investment income such as interest and dividends are excluded in the tax base. | | IMlustration 2 I Abranch of a foreign corporation engaged in servicing reported the following income \ statement in 2021: | Service fees P 4,000,000 Gain on the sale of fully depreciated properties 400,000 Dividend income 50,000 Capital gain on the sale of stocks, net of tax 90,000 Less: Business expenses 3,600,000 I Profits before income tax P 940,000 | Less: Income tax due - RCIT 200,000 Net profits P_740,000 \ The branch earmarked 40% of the entire profits for remittance to the home office 1 | abroad. | The branch profit remittance tax shall be determined as follows: Net profits P 740,000 Less: Investment income \ Dividend income P 50,000 ' Capital gain on the sale of stocks 90,000 ___140,000 Taxable profit P 600,000 Multiply by: portion remitted _—____40% Profit remittance P 240,000 Multiply by: Branch profit remittance tax P__36,000 686—— chapter 15-B - Regular Income Taxation: Regular Corporations e: ie The gain on sale of equipment is included in the base of the branch profit remittance tax because it is an income effectively connected with the business of the taxpayer: The portion of the branch remittance representing capital gains and dividend income is excluded from the Branch Profit Remittance Tax base. Illustration 3 ‘A resident foreign corporation is engaged in the financial leasing and sale of equipment on a deferred payment basis. The following data relates to its net income for the year: Gross profit on sale P 4,000,000 Interest income on installment notes 600,000 Dividend income 50,000 Rental of equipment —1,800,000 Total income P 6,450,000 Less: Business expense 3,400,000 Corporate income tax 750,000 __4,150,000 Net income P_2,300,000 Assume the branch remitted all its profits to its head office abroad. The branch profit remittance tax shall be computed as follows: Gross profit on sale P 4,000,000 Interest on installment notes 600,000 Rental of equipment Gross income from operations P 6,400,000 Less: Business expenses P3,400,000 Corporate income tax 750,000 __4,150,000 Net income from operations P 2,250,000 Multiply by: Portion remitted ____ 100% Gross remittance P 2,250,000 { Multiply by: Branch profit remittance tax 15% Branch profit remittance tax P337,500 Note: The interest income and rent income are active from business operations of the taxpayer, not passive income; hence, they are included in the basis of the branch profit remittance tax. Remittance from prior year earnings is still taxable The NIRC used the phrase “Any profit remitted” without limiting the same to current year profit remittance. The branch profit remittance tax therefore is understood to apply to remittance of prior year earnings. Mustration A resident foreign corporation earning purely active income reported the follot since it started operation in 2023: 687 ~_ LaChapter 15-8 - Regular Income Taxation: Regular Corporations Profit after tax P 200,000 P 150,000 Remittance 80,000 300,000 The branch profit remittance tax in 2023 shall be P12,000, computed as (P0,099 , 15%). ‘The 2024 remittance can be analyzed with the branch profit remittance tax as follows, Source of remittance: ——Tax__ 2024 profit P 150,000 x15% P 22,500 2023 unremitted profit balance 120,000 x 15% 18,000 Excess - return of capital® ——30.000 Total remittance a Branch profit remittance tax 240,500 Note: 1. The excess of remittance over accumulated profits is a return of the home office's capital investment in the branch. This is a return of capital not subject to tax. The tax applies only to profit remittance not to capital remittance. 2. The unremitted profit in 2023 Is P120,000, computed as P200,000 profit less P80,000 remittance. Indirect Remittance Even without actual remittance of profits abroad, indirect remittance such as the following are still subject to branch profit remittance tax: 1. Remittance of profits to a resident affiliate or to a Philippine regional operating headquarters of the home office 2. Transfer of net profits to increase the branch assigned capital account (BIR Ruling No. 039-2005). The remittance to affiliates will be construed as indirect profit remittance if the same was used to increase the home office's capital or investment in the affiliate, or when the same was treated as borrowings by the affiliate from the home office. If the remittance to the affiliate constitutes a loan from the branch, it is not an indirect remittance. Branch Capital Accounts In accounting, the capital or equity of a branch is commonly referred to as the “home office” account. This account has two components: a. Assigned capital account - represents the net investment (capital) of the home office to the branch b. Accumulated profits (losses) - contains the net balance of unremitted, retained. or accumulated profits or losses of the branch since inception of operation. Change in assigned capital account This account increases by additional investment of the home office to the branch and decreases by capital withdrawal of the home office. _ |ET chapter 15-B - Regular income Taxation: Regular Corporations Change in accumulated profits account This account increases by the amount of profits and decreases when the branch incurs a net loss or when profit is remitted by the branch to the home office. ‘The transfer of profits from the accumulated profit account to the assigned capital | account of the branch operates as if the branch remitted the profits to the home | office which the latter invested to the branch. This profit capitalization is a form of | indirect remittance subject to the branch profit remittance tax. i ft should be noted, however, that the mere existence of income does not automatically mean there is a branch profit remittance tax. There must be an ‘actual transfer to the assigned capital account or actual earmarking of profits or aemittance before branch profit remittance tax is imposable. (CIR vs. United Parcel | Service Co, CTA, EB No. 721 re CTA Case No. 7667, May 16, 2012) i Mustration ‘A branch of a foreign corporation reports the following comparative figures in its statement of changes in equity in 2024: i —2023__ __2024 _ Assigned capital P 3,000,000 P 3,500,000 Accumulated profits 1,000,000 500,000 ‘The net changes in the 2024 capital accounts were due to the following: | 1. Branch profit of P700,000 in 2023 2. Remittance of a. P400,000 to the home office b. P300,000 to a resident affiliate as an addition to the home office's investment therein 3. Transfer of P500,000 accumulated profit to the assigned capital Required: Determine the branch profit remittance tax. ' Solution: —tax_ Remittance to home office P 400,000 x 15% P 60,000 Remittance to resident affiliate 300,000 x 15% 45,000 | Profit transferred to capital 500,000 x 15% ___75.000 Branch profit remittance tax 2180.00 / | Note that the actual amount to be remitted to the home office and the affiliate shall be net of the branch profit remittance tax. A Differentiation on foreign profit remittance: Remitting entity to its head office Tax Rate ~ Branch of resident foreign corporation | _ 15% of branch remittance Subsidiary of a foreign corporation ~ 25% final tax, 15% if the th dividend declaration tax. rule | Branch of domestic corporation 689—— ¥ = Chapter 15-B - Regular Income Taxation: Regular Corporations CHAPTER 15-B: SELF-TEST EXERCISES Discussion Questions \ Discuss the scope, tax base, and the timing of imposition of the MCIT, What are the conditions for the suspension of the MCIT? Discuss the branch profit remittance tax. What corporations are subject to the branch profit remittance tax? What are the transactions considered indirect remittance? yawns True or False 1 1. Domestic corporations are subject to either 20% or 25% regular corpor; 1 income tax. 3 2. A partnership organized under Philippine law is a domestic coi purposes of taxation. 3. Exempt corporations are subject to MCIT with respect to their income s Oration for s ubject to regular corporate income tax. 2 } 4. MCIT does not apply to foreign corporations. 5. As a rule, corporations always pay tax even if there is a loss effective from the fourth year of their operations. 6. Resident foreign corporations are subject to either 20% or 2: income tax. 7. Foreign MSMEs can claim 20% corporate income tax. F 8. Non-resident foreign corporation are subject to minimum corporate income tax, 9. The 20% corporate income tax cannot apply if the gross profit exceeds P5,000,000. 10. Large corporations with taxable income not exceeding P5,000,000 can claim the 20% corporate income tax. F 11. The MCIT applies only when income is zero or when there is an operating loss, 12. MSMEs and REITs are exempt from MCIT. 13. Special domestic corporations and special resident foreign corporations are exempt from MCIT. ¥ 14, MCIT is generally computed as 2% of the gross income from operations starting July 1, 2023. F 15. Ifan entity started operations on June 2021, MCIT shall commence on June 2025. 5% regular corporate True or False 2 1. The cost of services of banks includes interest expense. $2. MCITis applied on a quarterly, but not on an annual basis. +3. MCIT excess can be deducted only against the excess of RCIT over the MCIT in any of the succeeding three years. 4. When there are several excess MCIT in prior years, the crediting of MCIT is made ina first-in first-out (FIFO) basis. 5. The MCIT gross income includes only those arising from operations while the 0SD Bross income covers all items of gross income subject to regular income tax. 690 ) » )—- Chapter 15-B - Regular Income Taxation: Regular Corporations £6. For purposes of the MCIT, cost of services includes all direct costs and expenses incurred in acquiring or manufacturing the goods. 17, Items of passive income subject to final tax and capital gains tax are included in the basis of the MCIT, 8, For accrual basis taxpayers, the cost of services shall include unpaid expenses directly incurred in the provision of services. 9, The gross receipts of service providers include advances from clients or customers. 10. Corporations with income subject to special tax are mandatorily required to use the itemized deductions. F 11. Whenever MCIT is payable, there is a Net Operating Loss Carry-Over. +12, An unused excess MCIT will expire on the fourth year of operation. F 43. The excess MCIT of previous years can be deducted against the RCIT of any quarter of the year if RCIT is greater than MCIT. 14. The MCIT rules are applied on the cumulative balances of the RCIT and MCIT during the quarters of the taxable year. ;. MCIT can be suspended for a taxpayer suffering from prolonged labor dispute, force majeure, or legitimate business reverses. F 16. The Commissioner of Internal Revenue may suspend the imposition of MCIT upon submission of the required proof. . The branch profit remittance tax covers remittance of special resident foreign corporations except PEZA-registered entities. Fi 1 SI Multiple-Choices: Theory - Part 1 1. Which is a correct statement? a. Domestic corporations shall elect either MCIT or RCIT. - b. Resident foreign corporations are liable to either 20% or 25% RCIT. r4 i ixable like large corporations. ‘dé Resident foreign corporations are elect either RCIT and MCIT. Resident foreign corporations a. shall elect either RCIT or MCIT. - “6 b. may be subject to 20% RCIT. : . (c:) are limited to 25% RCIT subject to the 2% MCIT. ] d. are required to withhold the dividend tax. Which is gxempt from the corporate income tax? (a) Non-profit corporations ~ b. Joint venture Partnership d. Government-owned and controlled corporations 4. Which of these can claim the corporate OSD against gross income? a. Private schools b. Non-profit hospital c. Exempt corporations w 691Chapter 15-B - Regular Income Taxation: Regular Corporations @) Retail stores 5. Which is subject to or can be subjected to MCIT? a. Private schools b. Non-resident lessors of aircraft or vessels c, Non-profit hospitals @) Exempt corporations 6. Which is not a requisite of the 20% RCIT? - a. Total assets excluding land must not exceed P100M | b. Must not be a foreign corporation } c. Taxable income must be P5,000,000 or less f G Corporation must not be subject to special tax rates 7. The regular corporate income tax is a. 25% of gross income. b. 2% of taxable income. @ 25% of taxable income. 2 of gross income. , 8, The minimum tax for corporate taxpayers is a. 15% of gross income. j b. 2% of taxable income. ©) 2% of gross income. 15% of taxable income. 9. The MCIT applies to ® dome: esident corporations. domestic corporations only. c. special corporations. d. non-resident foreign corporation. 10. The gross income for MCIT purposes covers ' i) those from related activities only. i all items of income subject to regular tax. c, all items of income subject to any tax scheme. d. any of these. | 11. What is the tax rate that applies for the calendar year if the tax rate is changing | | from 20% ta 25% effective August 1? i a 25% ( I b. 22.92% 20% 8 . What is the corporate tax rate for a private proprietary school in 2023? a 1% (cB.50% b. 3% 110% 692 ——-:Chapter 15-B - Regular Income Taxation: Regular Corporations 43. The MCIT is not due when MCIT is greater than RCIT, | taxable income is zero, taxable income is negative, @ RCITis greater than MCIT. Multiple Choice: Theory - Part 2 1, Which is included in the MCIT base? || a. Dividend income from domestic corporations I b. Royalty income | c. Interest income from banks | G@> Ordinary gains {| 2. Which taxpayer is subject to the MCIT? 1 a. Private schools t @) Gover = controlled corporations Home Development Mutual Fund d. International carriers 1 3. Exempt corporations are subject to MCIT on their income from related activities, = ~~ i unrelated activities. ¢. both related and unrelated activities if they pass the dominance test. 4. both related and unrelated activities if they fail the dominance test. 4. MCIT shall c¢ onthe a. 5! year of operation. 3 year of operation. @ 4 taxab lowing the year of start of operation. d. 3" taxable year following the year of start of operation. 5. Excess MCIT is a tax credit that can be carried over to the next (@ Feonsecutive years. b. 4 consecutive years. ©. 3years including the year it arises. 4. 3 consecutive years when there is income. 6. Which is deductible in the computation of the MCIT? a. Marketing expenses b. Office utilities ¢. Loss on sale of assets (@& Salaries of employees directly engaged in rendering the service 7. Which of these may grant relief from the MCIT? ( 'y Brant retiet rome 'b. Office of the Commissioner of Internal Revenue 693a Chapter 15-B - Regular Income Taxation: Regular Corporations c. Office of the Revenue District Officer having jurisdiction . d. National office of the BIR 8. ivate |s and non-profit hospitals may be subject to to MCIT when ey are ular corporate incometax. b. they are subject to the 10% preferential rate. their income from related activities exceeds 50% of their total revenue all sources. from d._ they are exempt from income on related activities. 9. If a foreign corporation operates a branch in the Philippines but tran business directly with Philippine residents, the corporation is sects a. taxable on net income. b, automatically reclassified into a non-resident foreign corporation. @ anon- foreign corporation with respect to the transaction only, 4. a non-resident foreign corporation for all transactions, i including those made by its branch in the Philippines. 10. For taxpayers involved in the sale of goods, gros: om {o gross sales less sales returns, discounts and cost of goods sold. b. gross receipts less returns, allowances, discounts and cost of goods sold. c._ gross sales less sales returns, discounts and cost of services. d. gross receipts less returns, allowances, discounts and cost of services. 11. For taxpayers involved in the sale of services, gross income means a. gross sales less sales returns, discounts and cost of goods sold. 5 gross receipts less returns, allowances, discounts and cost of goods sold. gross sales less sales returns, discounts and cost of services. 2) gross receipts less returns, allowan 12. , as compared with gross sales, include cash collections only. b. transactions on account sales only. c. both cash and on account transactions. d. cash collections on completed contracts only. 13. Which is not included in gross receipts? a. Reimbursements for out-of-pocket cost of the service provider ©) Repayment of Joan by the client € Advanced collection of income d. Cash collection for services rendered 14. Which of the following is least likely {ncluded in the “cost of services” for a bank? \@) Bad debt expense on loans b. Interest expense ©. Depreciation of bank premises 4. Salaries of tellers 694 —_— |Chapter 15-8 - Regular Income Taxation: Regular Corporations Multiple Choice: Theory - Part3 1. In the guarterly income tax-return, Excess MCIT prior year is deductible only when annaes a. the MCIT exceeds the RCIT for that quarter. b, the RCIT exceeds the MCIT for that quarter. ¢. the cumulative MCIT exceeds the cumulative RCIT as of the end of that quarter. G : cumulative MCIT as of the at quarter, : » ‘The quarterly incame tax return is due on or before @)_ 60 days following the end of the quarter. 'b. 30 days following the end of the quarter. c, 15 day of the fourth month following the end of the quarter. d. 45 days following the end of the quarter. Ry The optional standard deduction for corporations - & excludes cost of goads sold and cost of sérvices. includes tost of goods sold and cost of sérvices. - c. includes personal exemption. d. excludes actual items deductions. > Which of the following is not a direct cost of service of a corporate car-parking 9 2 . @.° Marketing expenses Sb. Cashier salaries ¢. Depreciation of parking building d. Security guard salaries 5. Which of the following is not a deduction in the computation of the income tax payable or refundable? a. Estimated quarterly income tax payment Final withholding tax on passive income Excess MCIT prior year W) Creditable withholding tax on gross income 6 Which of the following tax credit is not always creditable in the current accounting period? ax) MCIT Excess prior year Exce: sditable withholding tax in prior years cc. Creditable withholding tax in the current year d. Estimated quarterly income tax payment 7. Excess MCIT is valid as a tax credit over a. five years. c.three yea b, fouryears. two years. 695