Legal basis and regulatory coverage
- BIR Regulations No. 9-98 is issued pursuant to Section 244, in relation to Section 27(E) and Section 28(A)(2) of the National Internal Revenue Code.
- These Regulations govern the imposition, computation approach, and key operational rules for MCIT under Section 27(E) for domestic corporations and under Section 28(A)(2) for resident foreign corporations.
- The Regulations define how to compute MCIT by reference to concepts tied to the “normal income tax” and how to apply MCIT when it exceeds the normal income tax.
Policy purpose of MCIT rules
- The Regulations impose a minimum corporate income tax mechanism that applies beginning the 4th taxable year after the corporation commences business operations.
- The Regulations require MCIT payment whenever zero or negative taxable income results or whenever MCIT is greater than the corporation’s normal income tax for the taxable year.
- The Regulations provide a credit mechanism for excess MCIT over normal income tax and establish conditions for when such excess credit is available.
Core MCIT imposition rules
- For domestic corporations, a minimum corporate income tax (MCIT) of 2% is imposed on gross income as of the end of the taxable year. (Section 2.27(E)(1)(a))
- For domestic corporations, MCIT is imposed beginning the 4th taxable year immediately following the taxable year in which the corporation commenced business operations.
- MCIT applies for a domestic corporation whenever it has zero or negative taxable income or whenever the MCIT is greater than the normal income tax due from the corporation.
- For resident foreign corporations, MCIT is imposed at 2% on gross income from sources within the Philippines, beginning on the 4th taxable year immediately following the taxable year in which the corporation commenced business operations, whenever MCIT is greater than the normal income tax due for such year.
Normal income tax rates; comparison rule
- For purposes of these Regulations, “normal income tax” refers to the income tax rates prescribed under Sec. 27(A) and Sec. 28(A)(1) of the Code for 34% on January 1, 1998, 33% effective January 1, 1999, and 32% effective January 1, 2000 and thereafter.
- The MCIT comparison is made at the end of the taxable year.
- For domestic corporations with mixed coverage, the MCIT applies to operations covered by the regular income tax system.
- For example, if a BOI-registered enterprise has both “registered” and “unregistered” activity, MCIT applies to the “unregistered” activity.
Credit of excess MCIT over normal tax
- A domestic corporation may carry forward the excess MCIT over normal income tax computed under Sec. 27(A) of the Code. (Section 2.27(E)(2)(a))
- The excess must be carried forward on an annual basis and is credited against the normal income tax for the three (3) immediately succeeding taxable years.
- The excess MCIT credit is applied by reducing normal income tax only when the normal income tax exceeds MCIT for the relevant succeeding year.
- The excess MCIT credit cannot be claimed against MCIT itself or against any other losses.
- Any portion of excess MCIT that reaches the end of the 3-year reglementary period without being credited loses creditability and must be removed from the deferred charges account and charged to retained earnings.
Relief from MCIT by suspension
- The Secretary of Finance, upon recommendation of the Commissioner, may suspend imposition of MCIT when the applicant-corporation submits proof that is duly verified by the Commissioner’s authorized representative.
- The proof must show that the corporation sustained substantial losses due to any of the following conditions:
- a prolonged labor dispute;
- force majeure; or
- legitimate business reverses.
- Suspension of MCIT is based on the applicant’s submitted proof satisfying these specified loss causes.
Definitions for MCIT computation
- For MCIT purposes, “gross income” means gross sales less sales returns, discounts and allowances and cost of goods sold. (Section 2.27(E)(4)(a))
- “Gross sales” includes only sales contributory to income taxable under Sec. 27(A) of the Code.
- Passive incomes subject to final tax at source do not form part of gross income for MCIT purposes.
- For a trading or merchandising concern, “cost of goods sold” includes invoice cost of goods sold plus import duties, freight to the place where sold, and insurance while goods are in transit.
- For a manufacturing concern, “cost of goods manufactured and sold” includes all costs of production such as raw materials, direct labor, manufacturing overhead, freight, insurance premiums, and other costs to bring raw materials to the factory or warehouse.
- For sales of services, “gross income” means gross receipts less sales returns, allowances, discounts and cost of services.
- “Cost of services” means direct costs and expenses necessarily incurred to provide the services, including (a) salaries and employee benefits of personnel, consultants, and specialists directly rendering the service, and (b) cost of facilities directly utilized such as depreciation or rental of equipment and cost of supplies.
- “Cost of services” excludes interest expense, except for banks and other financial institutions.
- For service transactions, “gross receipts” means amounts actually or constructively received during the taxable year; for taxpayers using the accrual basis, gross receipts means amounts earned as gross income.
- “Substantial losses from a prolonged labor dispute” means losses from a strike staged by employees that lasted for more than six (6) months within a taxable period and caused temporary shutdown of business operations.
- “Force majeure” means a cause due to an irresistible force as by “Act of God” like lightning, earthquake, storm, flood and the like, and includes armed conflicts like war or insurgency.
- “Legitimate business reverses” include substantial losses due to fire, robbery, theft or embezzlement, or for other economic reason as determined by the Secretary of Finance.
When a corporation becomes subject to MCIT
- For purposes of MCIT, the taxable year when business operations commenced is the year the domestic corporation registered with the BIR. (Section 2.27(E)(5))
- Firms registered with BIR in 1994 and earlier years are covered by MCIT beginning January 1, 1998.
- Firms registered with BIR in any month of 1998 are covered by MCIT in the period three calendar years thereafter (after the lapse of three calendar years from 1998).
- For firms using a fiscal year, the reckoning point is also 1998 (e.g., registration on July 1, 1998 subjects the corporation to MCIT on gross income earned for the entire fiscal year ending in 2002).
- For 1998 MCIT computations of fiscal-year taxpayers whose first taxable period under MCIT covers months in 1997 (prior to MCIT under Republic Act No. 8424), MCIT due for 1998 is computed by an apportionment formula using the ratio of months in 1998 to twelve (12) months.
Manner of filing, payment, and account treatment
- MCIT must be paid on a taxable year basis. (Section 2.27(E)(6)(a))
- MCIT is covered by a tax return designed for the purpose submitted together with the corporation’s annual final adjustment income tax return.
- Domestic corporations are not required to pay MCIT on a quarterly basis, notwithstanding Section 75 of the Code.
- Excess MCIT paid is recorded in the books as an asset under the account title “deferred charges-minimum corporate income tax.” (Section 2.27(E)(7)(a))
- The deferred charges account is carried forward and may be credited against normal income tax due for a period not exceeding three (3) taxable years immediately succeeding the taxable year/s in which it was paid.
- Any excess MCIT not or cannot be credited within the 3-year period loses creditability; it must be removed and deducted from “deferred charges-minimum corporate income tax” by debiting “retained earnings” and crediting the deferred charges account.
- Excess MCIT that loses creditability is not allowable as a deduction from gross income because it is an income tax.
MCIT exceptions and exclusions
- MCIT applies only to domestic corporations subject to the normal corporate income tax system under these Regulations. (Section 2.27(E)(8)(a))
- MCIT is not imposed on domestic corporations operating as proprietary educational institutions subject to tax at ten percent (10%) on taxable income.
- MCIT is not imposed on domestic corporations engaged in hospital operations which are nonprofit subject to tax at ten percent (10%) on taxable income.
- MCIT is not imposed on domestic corporations engaged in business as depository banks under the expanded foreign currency deposit system (Foreign Currency Deposit Units or FCDUs), on income from foreign currency transactions with local commercial banks and authorized branches and depository banks under the foreign currency deposit system, including interest income from foreign currency loans granted to residents, subject to final income tax at ten percent (10%).
- MCIT does not apply to firms taxed under special income tax regimes such as those in accordance with RA 7916 and RA 7227.
- For resident foreign corporations, MCIT applies only to those subject to the normal income tax.
- MCIT does not apply to resident foreign corporations engaged in business as “international carrier” subject to tax at two and one-half percent (2 A12%) of “Gross Philippine Billings.”
- MCIT does not apply to resident foreign corporations engaged in business as Offshore Banking Units (OBUs) on income from foreign currency transactions with local commercial banks and authorized branches, including interest income from foreign currency loans granted to residents, subject to final income tax at ten percent (10%).
- MCIT does not apply to resident foreign corporations engaged in business as regional operating headquarters subject to tax at ten percent (10%) of taxable income.
- MCIT does not apply to firms taxed under special income tax regimes such as those in accordance with RA 7916 and RA 7227.
Transitory and compliance timing effect
- Corporations using the fiscal year accounting period that are subject to MCIT on income derived for any month or months of 1998 are not imposed with penalties for late payment.
- MCIT is applied based on the corporation’s taxable year computations and the apportionment method for the 1998 transition period for fiscal-year taxpayers whose first MCIT taxable period includes months in 1997.