FIRST CITY PROVIDENTIAL COLLEGE

Brgy. Narra, Francisco Homes, City of San Jose Del Monte, Bulacan

Subject: PCA6 Taxation Lecture # 5

Topic: Income Taxation Part 2 Instructor: Diana T. Cad

Corporation part 2

F. MINIMUM CORPORATE INCOME TAX (MCIT)

Section 27(E)(1) and Section 28(2) [for DCs and RFCs, respectively], as amended, under CREATE Law, provide:

A Minimum Corporate Income Tax MCIT of two percent (2%) of the gross income as of the end of
taxable year is composed upon any domestic corporations and resident foreign corporations beginning on the
4th taxable year immediately following the taxable year in which such corporation commenced its business
operations, when the MCIT is greater than RCIT, Provided: That effective July 1, 2020 until June 30, 2023, the
rate shall be one percent (1%).

THE MCIT SHALL BE IMPOSED WHENEVER:

 The corporation has zero taxable income; or

 The corporation has negative taxable income; or
 Whenever the amount of MCIT is greater than the regular corporate income tax (RCIT) due from such
corporation. Hence, MCIT is always computed and compared to RCIT starting on the fourth year of
operations.

NOTE:

 RULES FOR DETERMINING THE PERIOD WHEN A CORPORATION BECOMES SUBJECT TO MCIT (RR 2-98
as amended under RR 9-98)

Meaning of “…. In the 4th taxable year, immediately following the taxable year in which such
corporation commended its business operations”
o In determining the 4th taxable year, the year the Corporation was registered shall be
disregarded
 Under RR 12-2007, MCIT shall be computed not only on a yearly basis but also in the computation of
quarterly income tax due.
 MCIT rates:

Period MCIT Rate

On or before June 30, 2020 : 2%

July 1, 2020 to June 30, 2023 : 1%

Beginning July 1, 2023 2%

CARRY FORWARD OF EXCESS MCIT (MCIT CARRY-OVER)

Any excess of MCIT over RCIT shall be carried forward and credited against the RCIT for the Three (3)
immediately succeeding taxable years.

GROSS INCOME FOR MCIT PURPOSES:

1. Seller of Goods
Gross Sales Pxx
Sales Discounts (xx)
Sales Returns and Allowances (xx)
Cost of Sales (xx)
Gross Income Pxx
Add: Other Income subject to RCIT xx
Total Gross Income for MCIT purposes Pxx

Cost of Goods Sold:

a. Trader or Merchandiser
Invoice cost of goods sold Pxx
Import duties xx
Freight xx
Insurance xx
Total Pxx

b. Manufacturing Concern
Raw materials used Pxx
Direct Labor xx
Manufacturing overhead xx
Freight Cost xx
Insurance premiums xx
Other cost of production xx
Total Pxx

2. Seller of Services
Gross Receipts Pxx
Sales Discounts and Allowances (xx)
Cost of Services (xx)
Gross Income Pxx
Add: Other income subject to RCIT xx
Total Gross Income for MCIT purposes Pxx
COST OF SERVICES:
Salaries/Employee benefits of personnel, consultants and specialist directly rendering the service PXXX

Cost of facilities directly utilized in providing the service (e.g. rentals and cost of supplies) XXX

Other direct costs and expenses necessarily incurred to provide the services XXX

TOTAL PXXX

o In case of banks, “cost of services” shall include internet expense.

RELIEF FROM THE MCIT

The Secretary of Finance is authorized to suspend the imposition of the MCIT on any corporation which suffers losses
on account of:

1. Prolong labor dispute

2. Force majeure
3. Legitimate business reverses

CORPORATIONS EXEMPT FROM MCIT:

1. Special Corporations such as:

a. Proprietary educational institutions and hospitals
b. International carrier
c. Regional Operating Headquarters (up to Dec. 31, 2021 only)
2. Non-resident Foreign Corporations (NRFCs)
3. Corporations that are tax exempt under the law such as Regional or Area Headquarters
4. Firms that are taxed under special tax regime (e.g. Covered by PEZA law & Bases Conversion Development Act)

NET OPERATING LOSS CARRY-OVER (NOLCO)

“Net Operating Loss (NOL)” means the excess allowable deduction over gross income of the business in a taxable year.

The net operating loss of the business or enterprise for any taxable year shall be carried over as a deduction from gross
income for the next three (3) consecutive taxable years immediately following the year of such loss. However, under RA
11494, also known as the Bayanihan Act II, the NOLCO of the business or enterprise for taxable years 2020 and 2021 shall
be carried over as a deduction from gross income for the next five (5) consecutive taxable years immediately following
the year of loss. The net operating loss for said taxable years may be carried over as a deduction even after the expiration
of RA No. 11494, provided the same are claimed within the next five (5) consecutive taxable years immediately following
the year of such loss (RR 25-2020).

GUIDE:

Taxable year NOL was incurred Deductible as NOLCO within

Prior to 2020 3 consecutive years

2020 and 2021 5 consecutive years

Beginning 2022 3 consecutive years

  For corporations adopting Fiscal Year period, taxable year 2020 and 2021 shall include all those corporations
with fiscal years ending on or before June 30, 2021 and June 30, 2022, respectively (RR 25-2020).

REQUISITES FOR DEDUCTIBILITY

1. At the time if incurring net loss, the taxpayer must not be exempt from income tax; and
2. There is no substantial change in the ownership of the business or enterprise in that.
a. Not less than seventy-five (75%) in normal value of outstanding issued shares, if the business is in the name
of a corporation, is held by or on behalf of the same persons; or
b. Not less than seventy-five (75%) of the paid-up capital of the corporation, if the business is in the name of a
corporation, is held by or on behalf of the same persons.

 Additional Requirements for NOLCO incurred in 2020 and 2021 under Bayanihan Act II and RR 25-2020:

Presentation of NOLCO in the Income Tax Return (ITR) and Unused NOLCO in the Income Statement

1. The NOLCO shall be separately shown in the taxpayer’s (also known in the Reconciliation Section of the Tax
Return);
2. The unused NOLCO shall be presented in the Notes of Financial Statements showing, in detail, the taxable
year in which the net operating loss was sustained or incurred, and any amount thereof claimed as NOLCO
deduction within five (5) consecutive years immediately following the year of such loss.
3. The NOLCO for taxable years 2020 and 2021 shall be presented in the Notes to the Financial Statements
separately from the NOLCO for other taxable years.

G. OPTIONAL CORPORATE INCOME TAX (15% Gross Income Tax)

Repealed/Deleted under CREATE Law

The provision pertaining to the 15% Optional Corporate Income Tax, also known as Gross Income Tax of 15%,
was deleted under CREATE Law. Consequently, this is no longer allowed upon effectivity of the CREATE Law.

The last paragraph of Sec. 27(A) of the Tax Code PRIOR to amendment under CREATE Law, provides:

“…. The President, upon the recommendation of the Secretary of Finance may, effective January 1, 2000, allow
domestic and resident foreign corporations to be subjected to optional corporation tax of 15% based on gross income.
Election of 15% tax shall be irrevocable for the three (3) consecutive taxable years during which the corporation is
qualified under the scheme.”

REQUISITES

All of the following conditions shall have to be satisfied in the allowance of optional corporate tax:

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

2. A ration of 40% of Income tax collection of total tax revenue;
3. A VAT effort of 4% of GNP; and
4. A 0.9 ratio of Consolidated Public Sector Financial Position to GNP.
5. 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%.
 *One of the apparent inconsistencies under the TRAIN LAW and corrected under CREATE.
 Tax on interest income derived from FCDS/FCDU deposit is not applicable to non-resident taxpayers
 **Dividend Income from DC to NRFC

TRAIN LAW: Generally 30%. However, if the country where the NRFC is domiciled allows a credit for taxes
deemed paid in the Philippines equivalent to 15% (also known as tax sparing) or does not impose tax on
dividends, the tax rate shall be 15%, otherwise, 30% (without tax sparing)

CREATE LAW: Dividend Income received by NRFC from DC:

In general, it is subject to 25% FWT. However, a reduced rate of 15% shall be applied subject to the condition
that the country in which the NRFC is domiciled:
a) Shall allow a credit against the tax due from the said NRFC which are equivalent to taxes deemed to
have been paid in the Philippines equal to ten (10%) effective January 01, 2021, which represents the
difference between the regular income tax rate for NRFC under Sec. 28(B)(1) of the NIRC, as amended,
and the fifteen percent (15%) tax on dividends
b) Does not impose any income tax on dividends received from a domestic corporation.

Situs of Dividend Income from Foreign Corporations (RMC 62-2021; RR 5-2021; Sec.42 NIRC

 Dividend Income received by DC from NRFC – considered as foreign sourced dividend under RR 5-2021.
  Dividend Income received by DC from RFC (RMC 62-2021)
The tax treatment of dividends received by a domestic corporation from RFC will depend on the
sources of income of the RFC. Under Section 42(A)(2)(b) of the Tax Code, as amended, dividend
from a foreign corporation shall be treated as income derived from sources WITHIN THE
PHILIPPINES unless less than 50% of the gross income of the foreign corporation for the three year
period ending with the close of its taxable year preceding the declaration of such dividends (or for
such part of the period as the corporation has been in existence) was derived from sources within
the Philippines.
 *** May be exempt under certain conditions as follows:

Foreign-Sourced Dividends (RR 5-2021 and RMC 62-2021)

Foreign Sourced dividends, if received by a domestic corporation, are exempt under CREATE law subject to the
following conditions:
a) The dividends actually received or remitted into the Philippines are reinvested in the business operations
of the domestic corporation within the next taxable year from the time the foreign-sourced dividends
were received or remitted.
b) The dividends received shall only be used to fund the working capital requirements, capital expenditures,
dividend payments, investment in domestic subsidiaries, and infrastructure project; and
c) The domestic corporation holds directly at least twenty percent (20%) in value of the outstanding shares
of the foreign corporation and has held the shareholdings uninterruptedly for a minimum of two (2) years
at the time of the dividends distribution. In case the foreign corporation has been in existence for less
than two (2) years at the time of dividend distribution, then the domestic corporation must have
continuously held directly at least twenty percent (20%) in value of the foreign corporation’s outstanding
shares during the entire existence of the corporation.

In the absence of the above conditions, the foreign-sourced dividends shall be considered as taxable income
of the domestic corporation in the year of actual receipt or remittance, subject to surcharges, interest and
penalties as applicable (RR-2021).

GUIDE:

FROM TO TRAIN LAW CREATE LAW

DC DC Exempt Exempt
RFC Exempt Exempt
NRFC 30%; 15% 25%; 15%

RFC DC If situs is within Exempt

NRFC DC If situs is without May be exempt under
Consider foreign-sourced under RR 5-2021 Certain conditions***