CHAPTER 15-B

REGULAR INCOME TAXATION:

Regular Corporations
 THE REGULAR CORPORATION INCOME TAX (RCIT)
Applies to all corporations in general. It covers all taxable income of corporations that
are not subject to final tax or capital gains tax. It is also 30% of taxable income.

● Corporate Tax Schemes on regular corporations

DOMESTIC CORPORATION : gross income tax OR Regular
Corporation tax subject to the Minimum Corporate Income Tax.

RESIDENT CORPORATION : RCIT subject to the Minimum Corporate

Income tax.
● Optional Tax Schemes for Domestic Corporations
Under the NIRC, domestic corporations may opt to be taxed at either:
1. The corporate gross income tax; or
2. The regular corporate income tax subject to be minimum corporate income tax.
 THE CORPORATE GROSS INCOME TAX
Allow domestic corporations the option to be taxed at 15% of gross income
after the following conditions have been satisfied:

1. A tax effort ration of 20% of Gross National Product (GNP);

2. A ratio of 40% of income tax collection to total revenues;
3. A VAT tax effort for 4% of GNP; and
4. A 0.9% ration of the Consolidated Public Sector Financial Position (CPSFP) to
GNP.

● Cost ratio limit

the option to be taxed based on gross income shall be available only to firms whose ratio of
cost of sales to gross sales or receipts from all sources does not exceed 55%.

● Lock-in period
the election of gross income tax shall be irrevocable for 3 consecutive taxable years during
which the corporation is qualified under the scheme.
the 15% gross income tax for domestic corporations still remains in law but not in practice. It
was never implemented because the conditions for its grant were never met.
 THE MINIMUM CORPORATE INCOME TAX (MCIT)
The most peculiar feature of corporate income taxation. Corporations are subject to a
MICT of 3% of gross income.

As a 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 (RCIT).

● Scope of the Minimum Corporate Income Tax

The MCIT is applicable to every corporation taxable to the 30% regular corporate
income tax 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 entitles:

1. Real Estate Investment Trust (REIT)s under RA9856

2. Domestic corporations which opted to be taxed under the 15% corporate income tax (gross income tax)
3. Domestic or Resident corporations subject to special tax rates
a. Proprietary educational institutions, and non-profit hospitals
b. FCDUs and OBUs
c. Regional Operating Headquarters of multinational companies
d. International carriers
e. Firms subject to special income tax such as PEZA and BCDA locators
4. All non-resident corporations

● Timing of Imposition of MCIT

MCIT is imposed beginning on the 4th taxable year immediately following the year in which such
corporation commenced its operations. Simply stated. MCIT applies on the X + 4th year of operations.
 MCIT Gross income under the NIRC

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.

Gross receipts – means cash collections fro services rendered or to be rendered. Gross receipts
include reimbursement by the client for out-of-pocket expenses incurred by the service provider.
Cost of good sold (COGS) – includes all business expenses directly incurred to produce the
merchandise and to bring them their present location and use.

a. For a crading or merchandising concern, COGS shall include the invoice cost of the good
sold, import duties, freight in the transporting the goods to the place where the goods are
actually sold, and insurance while the goods are in transit.
b. For a manufacturing concern, COGS shall include 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 fatory or
warehouse.
Cost of services – shall mean all direct cost 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; and
b. Cost of facilities directly utilized in providing the service such as depreciation or rental of
equipment used and cost of supplies.
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, it is an

established rule in taxation that revenue regulations and ruling are presumed valid
interpretations of the law unless challenged and reversed before the courts.

thus MCIT shall be computed as 2% 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.
ILLUSTRATION MCIT COMPUTATION

Illustration 1: MCIT of a trading concern

A corporate taxpayer subject to MCIT reported the following:

The cost of goods sold shall first be computed as

follows:
The minimum corporate income tax shall be computed as follows:
 Illustration 2: MCIT of a Manufacturing Concern

A foreign corporation had the following data on its 4th year of operation:

Physical counts conducted at the start

and end of the year revealed the
following balance inventory
The minimum corporate income tax shall be computed as follows:
ILLUSTRATION 3: MCIT OF A SERVICE PROVIDER

Lacoste Corporation provides consultancy services to various clients. It reported the

following in 2016. its 5th year of operation:
 MCIT AND RCIT: BASIC APPLICATION

Illustrative 1 Illustrative 2
A corporate taxpayer which started operations in 2012 A corporation which started operation in 2011 reported the
had the following results of operations in 2015 and 2016. following:
 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 in a first in-first out basis.
● Unused Excess MCIT at the end of the three-year period shall expire and will no longer be used.
RELIEF FROM THE MINIMUM CORPORATE INCOME TAX

Upon recommendation of the Commissioner of internal Revenue, the Secretary of Finance

may suspend the imposition of MCIT upon submission of proof that the corporation
sustained losses on account of:

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 sung BIR From 1702-RT. If they also
derive income subject to special tax rates, they shall report their income using BIR Form
1702-MX.
THE IMPROPERLY ACCUMULATED EARNUNG TAX (IAET)

IAET is a 10% penalty tax imposed on the improper accumulation of corporate earnings
beyond the need of business. It is intended as a deterrent for corporations intending to
defeat the 10% dividend tax by mere non-declaration of dividends.

The imposition of the 10% IAET is not automatic. It is due only upon formal assessment by
the BIR upon determination of an improper accumulation of earnings by the corporation.

EXEMPT APPROPRIATIONS OF EARNINGS

1. Mandatory
2. Contractual
3. Reasonable
 ENTITIES PRESUMED IMPROPERLY ACCUMULATING EARNINGS
Improper accumulation is prima facie presumed for the following companies ( Acronym: HIC):

1. Investment companies
2. Holding Companies
3. Closely held corporations

IAET is penalty tax

IAET partakes of the nature of a penalty tax and is not in lieu of dividend tax. Hence,
the declaration of profits already subjected to the IAET will still be subject to dividend tax.

IAET Exempt Entities under the NIRC

1. Publicly-held corporations
2. Finance companies
3. Banks
4. Insurance companies
OTHER ENTITIES EXEMPT FROM IAET

1. Taxable partnerships
2. General professional partnerships
3. Taxable and non-taxable joint ventures
4. ECOZONE-registered entities (PEZA, BCDA, etc)

Period of payment of Dividend or IAET

The dividend must be declared within one year from the close of the taxable year. Any
IAET from the same taxable year will be determined and should be paid within 15 days
from the end of the following year.

BRANCH PROFIT REMITTANCE TAX

Any profit remitted by a branch to its head office abroad shall be subject to a tax of 15%
base on the total profits applied or earmarked for remittance without any deduction fro
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.
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.

INDIRECT REMITTANCE
1. Remittance of profits to resident affiliate or to a Philippines Regional operating
headquarters of the home office.
2. Transfer of net profits to increase the branch assigned capital account (BIR
Ruling No. 039-2005).

Branch Capital Accounts

a. Assigned capital Account
b. Accumulated profits (losses)

 Change in assigned capital account

 Change in accumulated profits account