Law Summary
Carry Forward and Credit of Excess MCIT
- Excess MCIT over normal income tax can be carried forward for three succeeding taxable years.
- Excess MCIT credited only against normal income tax, not against MCIT or other losses.
- Payment of MCIT is obligatory when it is greater than normal income tax.
- Yearly comparison between MCIT and normal income tax determines which tax is payable.
Relief from MCIT under Certain Conditions
- Secretary of Finance may suspend MCIT imposition upon proof of substantial losses.
- Causes supporting relief include prolonged labor dispute, force majeure events, and legitimate business reverses.
- Certification of loss must be verified by the Commissioner of Internal Revenue’s authorized representative.
Definitions of Key Terms
- Gross Income: Gross sales less returns, discounts, allowances, and cost of goods sold.
- Gross sales pertain only to income taxable under the regular income tax system.
- Cost of goods sold includes direct business expenses to produce and deliver products.
- Passive incomes subject to final withholding tax are excluded from gross income for MCIT.
- Definitions provided for substantial losses (strike > 6 months) and force majeure (acts of God and armed conflicts).
- Legitimate business reverses cover losses from fire, robbery, theft, embezzlement, or economic reasons.
Determining When MCIT Applies
- The taxable year of BIR registration marks commencement of business operations.
- Firms registered before or in 1994 subject to MCIT from January 1, 1998.
- Firms registered in 1998 covered by MCIT starting the fourth calendar year thereafter.
- Special apportionment rule applies to fiscal year taxpayers transitioning to MCIT in 1998.
Filing and Payment Procedures
- MCIT is paid annually and filed with the corporation’s final income tax return.
- Quarterly MCIT payments are not required despite general payment rules under Sec. 75 of the Code.
Accounting Treatment of Excess MCIT
- Excess MCIT is recorded as an asset titled "deferred charges-minimum corporate income tax".
- This asset may be credited against normal income tax for up to three succeeding years.
- Unutilized credits after three years must be derecognized and charged against retained earnings.
- Detailed accounting examples illustrate the recognition, application, and expiration of excess MCIT.
Exceptions to MCIT Imposition on Domestic Corporations
- Educational and nonprofit hospital corporations taxed at 10% exempt from MCIT.
- Domestic corporations as depository banks in Foreign Currency Deposit Units exempt on foreign currency income.
- Firms under special income tax regimes (e.g., PEZA, Bases Conversion Development Act) are excluded.
MCIT on Resident Foreign Corporations
- Imposed at 2% of gross income sourced within the Philippines starting the fourth taxable year after registration.
- Same rules as domestic corporations apply, except MCIT only considers Philippines-sourced income.
Exceptions to MCIT on Resident Foreign Corporations
- International carriers, Offshore Banking Units, and regional operating headquarters taxed under special regimes are exempt.
- Firms under PEZA or Bases Conversion Development Act incentives also excluded.
Effectivity and Transitional Provisions
- Regulations apply beginning January 1, 1998, per RA 8424.
- Fiscal year taxpayers with income covering 1998 months are exempt from penalties for late payment during the transition period.