INCOME TAX

COMPUTATION FOR
CORPORATE TAXPAYERS
 What is a corporation?
Corporation – is an artificial being created by law,
having the rights of succession and the powers,
attributes and properties authorized by law or
incident to its existence.

For taxation purposes, corporation shall include –

 Partnerships
 Joint-stock companies
 Joint accounts
 Associations
 Insurance companies

2
A corporation does not include –

 General Professional Partnership

 Joint venture or consortium formed

for the purpose of undertaking
construction projects or engaging in
petroleum, coal, geothermal and other
energy operations pursuant to an
operating or consortium agreement
under a service contract with the
government
3
 Classification of Corporation

1.) Domestic corporation

- is one created or organized in the
Philippines or under its laws. (Sec.22
(C),NIRC)

2.) Foreign corporation

- Those that were formed, organized
or existing under any law other than
those of the PH. irrespective of
the nationality of its stockholders.
4
 Foreign Corporation

Foreign corporations are either –

A. Resident foreign

- Foreign corporation engaged in

trade or business within the Phil.
Generally, it establishes branch or an
office for the purpose of doing business or
trade.

5
 B. Non-resident foreign

- Foreign corporation not engaged in

trade or business within the Phil.

6
Corporations may be subjected to the
following taxes:

1. Normal Corporate Income Tax (NCIT)

2. Minimum Corporate Income Tax (MCIT)
3. Gross Income Tax (GIT)
4. Capital Gains Tax on sale of real property
or on sale of shares of stock (CGT)
5. Final Tax on Passive income (FT)
Evolution of Corporate Income Tax Rate

Tax Rate Effectivity Basis

34% Jan 1, 1998 RA 8424

33% Jan 1, 1999 RA 8424

32% Jan 1, 2000 RA 8424

35% Nov 1, 2005 RA 9337

30% Jan 1, 2009 RA 9337

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 Taxability of Corporations (RA 9337)
Income In General Domestic Resident Non-
Foreign Res.
Foreign
All income derived from 30%
sources within or outside the (Net -- --
Taxable
Phils.
Income)
All income derived from 30% 30%
(Net
sources within the Phils. (Gross
Taxable
Income)
Income)
Optional Corporate Tax Rate 15% 15%
(Gross (Gross
Income) Income)
---
Minimum Corporate Income 2% 2%
Tax (Gross (Gross -- 9
The Normal Corporate Income Tax
BIR Form 1702 (General Format for Income tax computation on business
income)

Sales/ Revenues/ Fees from within and without P xxx

Less: Sales returns, allow., and disc. (if any) P xxx
Cost of Sales xxx xxx
Gross Income from operation P xxx
Add: Non-operating and other income not
subjected to final tax or capital gains tax xxx

Gross Income xxx

Less: Allowable itemized business deductions xxx
Net Taxable Income xxx
Multiply by Normal Corporate Income Tax Rate 30%
Normal Corporate Income Tax xxx
===
Sample Problem:

Mara Clara Inc. is a

domestic corporation engaged
in the retail of various
household merchandise. For TY
2010, the company had the
following account balances:
Cost of Sales P 400,000.00
Sales Returns allowance and disc. 50,000.00
Administrative Expense 230,000.00
Depreciation Expense 20,000.00
Rental Expense 100,000.00
Light and Water Expense 50,000.00
Rental Income 100,000.00
Sales 1,050,000.00

Compute for the Normal Income Tax Due:

 Solution:
Sales/ Revenues P1,050,000.00
Less: Sales Rets., Allow. & Disc. 50,000.00
Cost of Sales 400,000.00 450,000.00
Gross Income from operation 600,000.00
Add: Non-operating and other
income not subjected to Final
tax or capital gains tax 100,000.00

Gross Income 700,000.00

Less: Itemized business deductions 400,000.00

Net Taxable Income 300,000.00

X Normal Corp. Income Tax Rate 30%
How much is the Normal Corporate Income Tax if
Mara Clara, Inc. is:
1. A Resident Foreign Corporation?
2. A Non-Resident Foreign Corporation?

Answer: 1. ___________________
2. ____________________
 Minimum Corporate
Income Tax
(MCIT)
(RR No. 9-98 as amended by
RR No. 12-07)

15
Sec. 27(E) and 28 (A)(2) of the NIRC:
Imposed on:

Domestic & Res. Foreign

2 % on Gross Inc.

if: - in the 4th year of operation

- net loss/zero taxable inc./
MCIT is greater than NCIT
 For sale of goods :
Gross sales 1,000,000.00
Less: Sales Ret., Disc & Allow. 25,000.00
Cost of Goods Sold 500,000.00
Gross Income from operation 475,000.00
Add: Other Income not subject to
Final Tax or Capital Gains Tax 100,000.00
Total Gross Income subject to MCIT 575,000.00
========

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Gross income
 include all items of gross income enumerated
under Section 32(A) of the Tax Code, as
amended, except income exempt from income
tax and income subject to final withholding
tax.

“Gross sales”
shall include only sales contributory to
income taxable under Sec. 27(A) of the Code.

“Cost of goods sold”

shall include all business expenses directly
incurred to produce the merchandise to bring
them to their present location and use
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For sale of services

Gross Revenue P 5,000,000.00

Less: Cost of services 950,000.00
Gross Income 4,050,000.00
Add: Other Income not subject
to Final Tax or Cap.Gains Tax ___ --____

Total Gross Income 4,050,000.00

=========

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“Gross Revenue”
shall include income from sale of services,
likewise, taxable under Sec. 27(A).

“Cost of Services or Direct Cost of Services”

shall include business expenses directly
incurred or related to the gross revenue from
rendition of services.

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 Illustration:
Bungga-Bungga Corporation has been operating
since January 1, 2006. Data pertinent to its
operations covering 2008 to 2010 are as follows:
2008 2009 2010
Gross Sales 3,080,000 4,100,000 5,200,000
Sales Ret., Disc. & Allow. 80,000 100,000 200,000
Cost of Sales 1,500,000 2,000,000 2,500,000
Operating Expenses 1,450,000 1,900,000 2,100,000

Determine the appropriate income tax of

Bungga-Bungga Corporation.
 1. Computation of Normal Corporate Income
Tax(NCIT):
2008 2009 2010
Gross Sales 3,080,000 4,100,000 5,200,000
Sales Ret., Disc. & 80,000 100,000 200,000
Allow.
Net Sales 3,000,000 4,000,000 5,000,000
Cost of Sales 1,500,000 2,000,000 2,500,000
Gross Income 1,500,000 2,000,000 2,500,000
Operating Expenses 1,450,000 1,900,000 2,100,000
Net Taxable Income 50,000 100,000 400,000
X Normal Corp. Tax rate 35% 30% 30%
2. Computation of Minimum Corporate Income
Tax (MCIT)

2009 2010
Gross Income 2,000,000 2,500,000
X MCIT rate 2% 2%
MCIT 40,000 50,000

Note: The MCIT for TY 2008 is not applicable

because the company has not yet reached its
fourth year
 3. Determination of Income tax due and
payable: 2008 2009 2010
NCIT 17,500 30,000 120,000
MCIT Not 40,000 50,000
Applicable

2008 2009 2010

NCIT or MCIT, w/ever is 17,500 40,000 120,000
higher
Less: Excess of MCIT over 10,000
NCIT
Income Tax Due and 17,500 40,000 110,000
Payable
 Carry forward of Excess MCIT

 Excess of MCIT over normal income tax shall be

carried forward on an annual basis and credited against
the normal income tax for the 3 immediately succeeding
taxable years

 Excess MCIT can only be credited against the

income tax due if the normal income tax is higher than
the MCIT

25
 Carry forward of Excess MCIT

 Excess MCIT which has not or cannot be so

credited against the normal income tax due for
the 3-year period shall lose its credibility

Excess MCIT cannot be claimed as a credit

against the MCIT itself or against any other
losses

26
 Carry forward of Excess MCIT (cont.)
 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 income tax payment made at the time of
filing of quarterly income tax returns whether this be
MCIT or normal income tax

27
 Rules on crediting of tax payments & taxes withheld
Annual Computation
Normal Income Tax (NIT) MCIT
is higher than MCIT is higher than Normal Income Tax

Excess MCIT from prior year can Excess MCIT from prior years
be deducted from the NIT due cannot be deducted from the
MCIT due

Excess withholding tax from prior Excess withholding tax from prior
year can be deducted from the NIT year can be deducted from the
due MCIT due

28
 Rules on crediting of tax payments & taxes withheld
Annual Computation
Normal Income Tax (NIT) MCIT
is higher than MCIT is higher than Normal Income Tax

Quarterly taxes withheld can be Quarterly taxes withheld can be

credited from the NIT due credited from the MCIT due

Quarterly income tax payments Quarterly income tax payments

whether Normal Income Tax or whether MCIT or Normal
MCIT can be deducted from the Income Tax can be deducted
NIT due from the MCIT due

Note: The final comparison between the NIT and MCIT shall be made at
the end of the taxable year
29
Rules on crediting of tax payments & taxes withheld (cont.)

Quarterly computation
Normal Income Tax (NIT) MCIT
is higher than MCIT is higher than Normal Income Tax

Excess MCIT from prior year Excess MCIT from prior year
can be deducted from the cannot be deducted from the
quarterly NIT due quarterly MCIT due

Excess withholding tax from Excess withholding tax from

prior year can be deducted from prior year can be deducted from
the quarterly NIT due the quarterly MCIT due

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 Rules on crediting of tax payments & taxes withheld (cont.)
Quarterly computation
Normal Income Tax (NIT) MCIT
is higher than MCIT is higher than Normal Income Tax

Quarterly taxes withheld can be Quarterly taxes withheld can be

credited from the quarterly NIT credited from the quarterly
due MCIT due

Payment from previous quarters Payment from previous quarters

of the taxable year can be of the taxable year can be
deducted from the cumulative deducted from the cumulative
tax due (whether NIT or MCIT) tax due (whether NIT or MCIT)

Note: Quarterly comparison to determine whichever is higher between the NIT and MCIT
shall be done on a cumulative basis
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 Illustration 1 - Normal income tax at year end is higher
than MCIT
Panday Corporation’s computed normal income tax and
MCIT, and creditable income taxes withheld from 1st to 4th
quarters including excess MCIT and excess withholding taxes
from prior year/s are as follows:
Excess Excess
Normal Taxes MCIT W/tax
Qtr. Inc. Tax MCIT Withheld Prior Years Prior Years

1st 100,000 80,000 20,000 30,000 10,000

2nd 120,000 250,000 30,000
3rd 250,000 100,000 40,000
4th 200,000 100,000 35,000

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 Computation

1st Quarter

Quarterly corporate income tax due

(higher amount between normal income tax
and MCIT) – normal income tax P100,000
Less : Taxes Withheld – Prior Year 10,000
Taxes Withheld – 1st qtr 20,000
Excess MCIT prior year 30,000 60,000

Net Income Tax Due , 1st quarter

– normal income tax P 40,000
=======

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 Computation (cont.)

2nd Quarter
Excess
Excess
Normal Taxes MCIT W/tax
Qtr. Inc. Tax MCIT Withheld Prior Years Prior Years

1st 100,000 80,000 20,000 30,000 10,000

2nd 120,000 250,000 30,000
Total 220,000 330,000 50,000
====== ====== =====

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 Computation (cont.)

Quarterly corporate income tax due

(higher amount between normal
income tax and MCIT) – MCIT P330,000
Less : Taxes Withheld – Prior Year 10,000
Taxes Withheld – 1st qtr 20,000
Taxes Withheld – 2nd qtr 30,000
Net income tax payment – 1st qtr 40,000 100,000

Net Income Tax Due , 2nd quarter – MCIT P230,000

=======

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Computation (cont.)
3rd Quarter

Excess
Excess
Normal Taxes MCIT W/tax
Qtr. Inc. Tax MCIT Withheld Prior Years Prior Years

1st 100,000 80,000 20,000 30,000 10,000

2nd 120,000 250,000 30,000
3rd 250,000 100,000 40,000
Total 470,000 430,000 90,000
====== ====== ======

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Computation (cont.)

Quarterly corporate income tax due

(higher amount between normal income tax
and MCIT) – Normal Income Tax P470,000

Less : Taxes Withheld – Prior Year 10,000

Taxes Withheld – 1st qtr 20,000
Taxes Withheld – 2nd qtr 30,000
Taxes Withheld – 3rd qtr 40,000
Net income tax payment – 1st qtr 40,000
MCIT paid in the 2nd quarter 230,000
Excess MCIT in prior year 30,000 400,000
Net Income Tax Due , 3rd quarter
– Normal Income Tax P 70,000
=======
37
 Computation (cont.)
Annual Income Tax (NIT)

Excess Excess
Normal Taxes MCIT W/tax
Qtr. Inc.Tax MCIT W/held Prior Years Prior Years

1st 100,000 80,000 20,000 P30,000 10,000

2nd 120,000 250,000 30,000
3rd 250,000 100,000 40,000
4th 200,000 100,000 35,000 Total
670,000 530,000 125,000
====== ====== ======

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 Computation (cont.)
Annual corporate income tax due
(higher amount between normal income tax
and MCIT) – Normal Income Tax P670,000

Less : Taxes Withheld – Prior Year 10,000

Taxes Withheld – 1st qtr 20,000
Taxes Withheld – 2nd qtr 30,000
Taxes Withheld – 3rd qtr 40,000
Taxes Withheld – 4th qtr 35,000
Net income tax payment – 1st qtr 40,000
Net income tax payment – 3rd qtr 70,000
MCIT paid in the 2nd quarter 230,000
Excess MCIT in prior year 30,000 505,000

Annual Net Income Tax Due – NCIT P 165,000

======= 39
 Illustration 2 - MCIT at year end is higher than the
normal income tax

Excess Excess
Normal Taxes MCIT W/tax
Qtr. Inc. Tax MCIT Withheld Prior Years Prior Years

1st 100,000 80,000 20,000 30,000 10,000

2nd 120,000 250,000 30,000
3rd 250,000 100,000 40,000
4th 50,000 120,000 35,000
Total 520,000 550,000 125,000
====== ====== ======

40
Computation
Annual Income Tax (MCIT)

Annual corporate income tax due

(higher amount between normal
income tax and MCIT) – MCIT P550,000
Less : Taxes Withheld – Prior Year 10,000
Taxes Withheld – 1st qtr 20,000
Taxes Withheld – 2nd qtr 30,000
Taxes Withheld – 3rd qtr 40,000
Taxes Withheld – 4th qtr 35,000
Net income tax payment – 1st qtr 40,000
Net income tax payment – 3rd qtr 70,000
MCIT paid in the 2nd quarter 230,000 475,000
Annual Net Income Tax Due – MCIT P 75,000
=======
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 Illustration 3: - Carry forward of excess MCIT

 Any excess of the MCIT over the normal

income tax as computed under Sec. 27(A)
shall be carried forward on an annual basis
and credited against the normal income tax
for the three (3) immediately succeeding
years.

 The excess MCIT cannot be claimed as a

credit against the MCIT itself or against any
other losses.
 Suspension of MCIT
 Instances when MCIT may be suspended
Substantial losses on account of –
 Prolonged labor dispute
 Force majeure
 Legitimate business reverses

 Who may suspend

 Secretary of Finance upon recommendation of
the CIR

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 Suspension of MCIT
 Required documentation
 Submission of proof by the corporation
 Duly verified by the CIR’s duly authorized
representative

Definition of Terms
Substantial losses from prolonged labor dispute – Losses
arising from strike which lasted for more than 6 months
and which ahs caused the temporary shutdown of business
operations

44
 Definition of Terms

Force majeure – Cause due to an irresistible force as

by “act of God” like lightning, earthquake, storm,
flood. Also includes armed conflicts such as war
or insurgency

Legitimate business reverses – These shall include

substantial losses sustained due to fire, robbery,
theft or embezzlement or for other economic
reason as determined by the Sec. of Finance

45
 IMPROPERLY
ACCUMULATED
EARNINGS TAX (IAET)
RA 8424 / RR 2-2001
 CONCEPT OF IAET
 Taxpayer is a corporation

 Improper accumulation of taxable income

beyond the reasonable needs of the business

 Non-distribution of earnings/profits to
stockholders

 The purpose of accumulation is to avoid the

payment of the income tax

 Imposition of tax equivalent to 10% of the

improperly accumulated taxable income
47
 EVIDENCE OF PURPOSE TO
AVOID THE TAX

1.The corporation is a mere holding or

investment company

2. Earnings or profits are permitted to

accumulate beyond the reasonable needs
of the business

48
 Concept of IAET
 IAET is in addition to other taxes imposed under
Title II (Income Tax);
 10% tax is imposed for permitting the earnings and

profits of the corporation to accumulate instead

of distributing them to the shareholders;
 As a form of deterrent to the avoidance of tax upon

shareholders who are supposed to pay dividend tax;

 Concept of IAET
 Tax is imposed in the nature of penalty to a corporation
for improper accumulation of earnings beyond the
reasonable needs of the business.

Touchstone of Liability
 PURPOSE (NOT CONSEQUENCE) of accumulation
of income
◦ Use of undistributed earnings for reasonable needs of business
◦ Determination of accumulation beyond reasonable needs of
business
Reasonable vs. Unreasonable Accumulation

 Reasonable Needs of Business:

◦ Immediate needs of business, including reasonably
anticipated needs (Immediacy Test)

 Unreasonable Accumulation
◦ Not necessary for the purpose of the business
considering all circumstances of the case
 Reasonable Needs of Business
 Earnings up to 100% of paid-up capital of corp.,
inclusive of accumulation taken from other years
 Earnings Reserved

◦ for definite corporate expansion projects

◦ for building, plant or equipment acquisition
◦ for compliance with loan covenant or pre-
existing obligation established under a
legitimate business agreement.
Unreasonable accumulation of Profits

 Investment of substantial earnings and profits

of the corporation in unrelated business or in
stock or securities of unrelated business;
 Investment in bonds and other long term
securities; and
 Accumulation of earnings in excess of 100%
of paid-up capital.
 Exempt Corporation from IAET
 Banks and non-bank financial intermediaries
 Insurance companies
 Publicly held corporations
 taxable partnerships
 GPP
 Non-taxable joint ventures
 Firms registered under RA 7916, 7227, and other

special ecozones
 IMPOSITION OF IAET

Tax rate 10%

Corporations liable Closely-held domestic

corporations

Deadline 15th day after the

end of he year following the close of
the taxable year

55
Closely-held corporations:

◦ are corporations at least 50% in value of the

outstanding capital stock or at least 50% of
the total combined voting power of all classes
of stocks entitled to vote is owned directly or
indirectly by or for not more than 20
individuals
 TAX BASE OF IAET
Taxable income P xxx
Add: Income subject to final tax Pxxx
Income exempt from tax xxx
Income excluded fr gross income xxx
Amount of NOLCO deducted xxx
xxx
Total P xxx
Less: Div. actually or const. paid/issued xxx
Income tax paid for the year xxx
Reserved for the reasonable
needs of the business xxx
xxx
Improperly accumulated earnings P xxx
=== 57
Illustration
Add Tax rates, amount and
(Deduct) accounts
GAAP Income P 100
ND expenses 3
NOLCO (1)
NT income (2)
Base of ITE P 100 30% = P30.00 ITE
TNDE 5 30% = 1.5 0 DT
TNTI (4) 30% = (1.20) DTL
Base of ITP P 101 30% = P30.30 TP
Computation of IAET
Taxable income P 101.00
Add: NOLCO P 1.00
Nontaxable income 2.00
TNTI 4.00 7.00
Total P 108.00
Less: Income tax payable 30.30
Basis of IAET P 77.70
Multiplied by IAET rate 10%
IAET P 7.77
 Payment of IAET
 Dividend must be declared and paid not later than one
year following the close of the taxable year

 Otherwise, IAET should be paid within 15 days

thereafter

Effect of the 10%

- Once the profit has been subjected to IAET, the
same shall no longer be subjected to IAET in later
years, even if not declared as dividend.
Income Tax Forms
and Due Dates
 Form Form Name Deadline for Filing No. of Copies
No.

1702Q Quarterly Income Tax 60 days 3 copies

Return following the
(For Corporations, close of the first
Partnerships and Other 3 taxable
Non-individual quarters
Taxpayers)

Attachments Required:
1. Certificate of income payments not subjected to
withholding
tax (BIR Form 2304), if applicable.
2. Certificate of Creditable withholding tax withheld at
source (BIR Form 2307, if applicable).
62
 Income Tax Forms

Form Form Name Deadline for Filing No. of

No. Copies
1702 Annual Income Tax On or before April 3 copies
Return 15
(For Corporations,
Partnerships and On or before the 15th
Other Non- day of the month
individual following the close
Taxpayers) of the fiscal year

63
 Attachments Required:

1. Account Information Form (AIF) BIR Form 1702-

AIF and the Certificate of the Independent CPA
(The CPA Cert. is req’d. if the Gross sales, earnings,
receipts exceed P150,000.00);
2. Certificate of income payments not subjected to
withholding tax (BIR Form 2304), if applicable;
3. Certificate of Creditable withholding tax withheld at
source (BIR Form 2307, if applicable);
4. Summary Alphalist of W/A (SAWT) per RR 2-2006;
5. Duly approved Tax Debit Memo, if applicable;
6. Proof of prior year’s excess credits, if applicable;
7. Proof of Foreign Tax credits, if applicable;
8. For amended return, proof of tax payment and the
return previously filed;
9. For those availing of fiscal incentives, see RMC No.
21-2007
 Attachments

Shall be filed in TRIPLICATE COPIES

AAB’s (w/ payment)

RDO (w/o payment)

 Deductions from the Income Tax Due

 Taxes withheld from current year’s income

 Tax credits for foreign taxes paid

 Tax credits (tax credit memo)

 Taxes paid in the first 3 quarters

 Excess tax payments in the preceding year

68
NOTE:

Installment Payments

** Applicable to individual taxpayer

only and NOT ON CORPORATIONS.

69
 Stamping of ITRs and
Attachments
Revenue Memorandum
Order No. 6-2010
 Policies and Guidelines:

1. All concerned Offices, including AABs,

shall receive the income tax returns by
stamping the official receiving seal or
stamp of receipts of an internal revenue
office where the said returns are filed on
the space provided for in the three (3)
copies of the returns.
2. The attachments to the income tax returns shall
also be received in the same manner as above,
but for the attached financial statements the
same shall be stamped received only on the
page of the Audit Certificate. Accordingly, the
other pages of the FS and its attachments need
not any more be stamped received.

3. Taxpayer shall only accomplish and file three

(3) copies of tax returns with the AAB and/or
the BIR. Any tax return in excess three (3)
shall not be received by the AAB and/or the
BIR.
Submission of
STATEMENT OF MANAGEMENT
RESPONSIBILITY
(RMC 82-2007)
 The contents and representations – as they
are reflected in the tax returns and information
statements filed with the BIR – made in their
behalf by their tax agents, remain their
responsibility in their capacity as the
principals stated in the aforesaid returns and
information statements.
The taxpayer is under strict obligation
to check , verify and validate:
The authenticity of a tax return and/or
information statement made in their behalf.
The correctness and validity of the
information contained in such documents.

The liability to pay the tax payments

remain the responsibility of the concerned
taxpayers.
 Any findings, errors, violations or
infractions noted in the Tax Returns
(together with their necessary attachments)
as a result of the verification and
authentication procedures made by the BIR
shall render both the taxpayer and his/its
tax agent civilly, and administratively and
criminally liable, pursuant to existing laws
and regulations.
 Amended Audit Criteria for Taxable
Years 2009 and 2010
Revenue Memorandum Order No. 4-2011
(dated Feb. 3, 2011)

Policies and Guidelines:

1. All taxpayers are considered as possible candidates
for audit.

2. Priority shall be given to the following taxpayers

who render professional services:
* Lawyers; Doctors; Engineers; Accountants;
& Other Professionals.
3. Last priority status for income tax audit shall
be accorded to those taxpayers with an
effective income tax rate for eighteen percent
(18%). [Gross Income x 18%]

An exception to the last priority status hall

be those taxpayers where there are
findings/suspicions of under-declaration of
sales/revenues.
End of Presentation
…. Exercise caution
in your business
affairs, for the world
is full of trickery.
But let not this blind
you to what virtue
there is; many
persons strive for
high ideals, and
everywhere life is
full of heroism ….