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 orexisting under any law other than those of the Phils. irrespective of the nationality of its stockholders.

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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.

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 B. Non-resident foreign - Foreign corporation not engaged in trade or business within the Phil.

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Corporations may be subjected to the following taxes: 1.

2.

3.

4.

5.

Normal Corporate Income Tax (NCIT) Minimum Corporate Income Tax (MCIT) Gross Income Tax (GIT) Capital Gains Tax on sale of real property or on sale of shares of stock (CGT) Final Tax on Passive income (FT)

Evolution of Corporate Income Tax Rate Tax Rate Effectivity Basis 34% 33% 32% 35% 30% Jan 1, 1998 Jan 1, 1999 Jan 1, 2000 Nov 1, 2005 Jan 1, 2009 RA 8424 RA 8424 RA 8424 RA 9337 RA 9337 8

Taxability of Corporations (RA 9337) Income In General All income derived from sources within or outside the Phils. All income derived from sources within the Phils.

Optional Corporate Tax Rate Minimum Corporate Income Tax (MCIT) Domestic Resident Foreign Non Res. Foreign 30% (Net Taxable Income) - 15% (Gross Income) 30% (Net Taxable Income) 15% (Gross Income) 2% (Gross Income) 2% (Gross Income) - 30% (Gross Income) -- - 9

Sales/ Revenues/ Fees from within and without Less: Sales returns, allow., and disc. (if any) Cost of Sales Gross Income from operation Add: Non-operating and other income not Gross Income Less: Allowable itemized business deductions Net Taxable Income Multiply by Normal Corporate Income Tax Rate Normal Corporate Income Tax P xxx xxx P xxx xxx P xxx xxx xxx xxx 30% xxx ===

in Mara the Clara retail Inc.

of following account balances: is a domestic corporation engaged various household merchandise. For TY 2010, the company had the

Cost of Sales P 400,000.00

Sales Returns allowance and disc. 50,000.00 Administrative Expense Depreciation Expense Rental Expense 230,000.00

20,000.00

100,000.00

Light and Water Expense Rental Income Sales 50,000.00

100,000.00

1,050,000.00

Compute for the Normal Income Tax Due

:

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 100,000.00 tax or capital gains tax 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% Normal Corporate Income Tax P90,000.00 =======

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)

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 Sec. 27(E) and 28 (A)(2) of the NIRC: Imposed on: Domestic & Res. Foreign 2 % on Gross Inc.

if: - in the 4 th year of operation - net loss/zero taxable inc./ MCIT is greater than NCIT



For sale of goods : Gross sales Less: Sales Ret., Disc & Allow.

Cost of Goods Sold Gross Income from operation 1,000,000.00

25,000.00

500,000.00 475,000.00

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 income all withholding tax.

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

“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 18

For sale of services Gross Revenue Less: Cost of services Gross Income Add: Other Income not subject P 5,000,000.00

950,000.00

4,050,000.00

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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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 Sales Ret., Disc. & Allow.

Cost of Sales Operating Expenses 3,080,000 80,000 1,500,000 1,450,000 4,100,000 100,000 2,000,000 1,900,000 5,200,000 200,000 2,500,000 2,100,000 Determine the appropriate income tax of Bungga-Bungga Corporation.

1. Computation of Normal Corporate Income Tax(NCIT): Gross Sales 2008 2009 2010 3,080,000 4,100,000 5,200,000 Sales Ret., Disc. & Allow.

Net Sales Cost of Sales 80,000 100,000 200,000 3,000,000 4,000,000 5,000,000 1,500,000 2,000,000 2,500,000 Gross Income Operating Expenses Net Taxable Income X Normal Corp. Tax rate 1,500,000 2,000,000 2,500,000 1,450,000 1,900,000 2,100,000 50,000 100,000 400,000 35% 30% 30% Normal Corp. Income Tax 17,500 30,000 120,000

2. Computation of Minimum Corporate Income Tax (MCIT) Gross Income X MCIT rate MCIT 2009 2,000,000 2% 40,000 2010 2,500,000 2% 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 MCIT 17,500 Not Applicable 30,000 40,000 120,000 50,000 NCIT or MCIT, w/ever is higher Less: Excess of MCIT over NCIT Income Tax Due and Payable 2008 2009 2010 17,500 40,000 120,000 10,000 17,500 40,000 110,000

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)

is higher than MCIT

MCIT

is higher than Normal Income Tax Excess MCIT from prior year

can be deducted

from the NIT due Excess MCIT from prior years

cannot be deducted

from the MCIT due Excess withholding tax from prior year can be deducted from the NIT due Excess withholding tax from prior year can be deducted from the MCIT due 28

Rules on crediting of tax payments & taxes withheld

Annual Computation

Normal Income Tax (NIT)

is higher than MCIT

MCIT

is higher than Normal Income Tax Quarterly taxes withheld can be credited from the NIT due Quarterly taxes withheld can be credited from the MCIT due Quarterly income tax payments whether Normal Income Tax or MCIT can be deducted from the NIT due Quarterly income tax payments whether MCIT or Normal Income Tax can be deducted from the MCIT due

Note: The final comparison between the NIT and MCIT shall be made at

the end of the taxable year

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Rules on crediting of tax payments & taxes withheld (cont.)

Quarterly computation

Normal Income Tax (NIT)

is higher than MCIT

MCIT

is higher than Normal Income Tax Excess MCIT from prior year

can be deducted

from the quarterly NIT due Excess MCIT from prior year

cannot be deducted

from the quarterly MCIT due Excess withholding tax from prior year can be deducted from the quarterly NIT due Excess withholding tax from prior year can be deducted from the quarterly MCIT due 30

Rules on crediting of tax payments & taxes withheld (cont.)

Quarterly computation

Normal Income Tax (NIT)

is higher than MCIT

MCIT

is higher than Normal Income Tax Quarterly taxes withheld can be credited from the quarterly NIT due Quarterly taxes withheld can be credited from the quarterly MCIT due Payment from previous quarters of the taxable year can be deducted from the cumulative tax due (whether NIT or MCIT) Payment from previous quarters of the taxable year can be deducted from the cumulative 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 1 st 100,000 80,000 20,000 2nd 120,000 250,000 30,000 3rd 250,000 100,000 40,000 4 th 200,000 100,000 35,000 30,000 10,000 32

Computation

1 st 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 33

Computation (cont.)

2 nd Quarter

Excess Excess Normal Qtr. Inc. Tax Taxes MCIT W/tax MCIT Withheld Prior Years Prior Years 1 st 100,000 80,000 20,000 2nd 120,000 250,000 Total 220,000 330,000 ====== ====== 30,000 50,000 ===== 30,000 10,000 34

Computation (cont.)

Quarterly corporate income tax due (higher amount between normal income tax and MCIT) – MCIT Less : Taxes Withheld – Prior Year Taxes Withheld – 1st qtr 10,000 20,000 Taxes Withheld – 2nd qtr 30,000 Net income tax payment – 1st qtr 40,000 Net Income Tax Due , 2nd quarter – MCIT P330,000 100,000 P230,000 ======= 35

Computation (cont.)

Excess Qtr. Normal Inc. Tax MCIT

3 rd Quarter

Excess Taxes MCIT W/tax Withheld Prior Years Prior Years 1st 2nd 120,000 3 rd 100,000 80,000 20,000 250,000 250,000 30,000 100,000 40,000 Total 470,000 430,000 90,000 ====== ====== ====== 30,000 10,000 36

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 Net income tax payment – 1st qtr MCIT paid in the 2nd quarter Excess MCIT in prior year Net Income Tax Due , 3rd quarter – Normal Income Tax 40,000 40,000 230,000 30,000 400,000 P 70,000 ======= 37

Computation (cont.)

Annual Income Tax (NIT) Qtr. Normal Inc.Tax

MCIT W/held Excess Excess Taxes MCIT W/tax Prior Years Prior Years 1st 100,000 80,000 20,000 2nd 120,000 250,000 30,000 3rd 4th 250,000 100,000 40,000 200,000 100,000 35,000 Total 670,000 ====== 530,000 125,000 ====== ====== P30,000 10,000 38

Computation (cont.)

Annual corporate income tax due (higher amount between normal income tax and MCIT) – Normal Income Tax Less : Taxes Withheld – Prior Year Taxes Withheld – 1st qtr Taxes Withheld – 2nd qtr Taxes Withheld – 3rd qtr Taxes Withheld – 4th qtr Net income tax payment – 1st qtr Net income tax payment – 3rd qtr MCIT paid in the 2nd quarter Excess MCIT in prior year 10,000 20,000 30,000 40,000 35,000 40,000 70,000 230,000 30,000 Annual Net Income Tax Due – NCIT P670,000 505,000 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 2nd 120,000 250,000 3 rd 250,000 100,000 4th 50,000 120,000 Total 520,000 550,000 ====== ====== 20,000 30,000 40,000 35,000 125,000 ====== 30,000 10,000

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Computation

Annual Income Tax (MCIT)

Annual corporate income tax due

(higher amount between normal income tax and MCIT) – MCIT Less : Taxes Withheld – Prior Year 10,000 Taxes Withheld – 1st qtr 20,000 Taxes Withheld – 2nd qtr Taxes Withheld – 3rd qtr 30,000 40,000 Taxes Withheld – 4th qtr Net income tax payment – 1st qtr 35,000 40,000 Net income tax payment – 3rd qtr 70,000 MCIT paid in the 2nd quarter 230,000 Annual Net Income Tax Due – MCIT P550,000 475,000 P 75,000 ======= 41

 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.

YEAR NORMAL IT MCIT

2004 25,000.00 2008 2009 130,000.00 200,000.00

EXCESS

2010 2011 150,000.00

100,000.00 250,000.00 150,000.00 2002 2013 2014 125,000.00 100,000.00 8,000.00 5,000.00 25,000.00 3,000.00 5,000.00 4,000.00 1,000.00

2015 100,000.00 98,000.00 2,000.00

2012 2013 2014 2015 NCIT or MCIT 125T 8T 5T 100T Less: Excess of MCIT 125T 8T 5T -_ Income tax 100T ==== === === ====

 For 2011 Provision for Income tax Income Tax Payable P250,000 To record Income Tax liability - normal rate.

P250,000 Deferred Charges – MCIT P150,000 Income tax payable To record excess MCIT P150,000

Income Tax Payable P250,000 Cash in Bank To record payment of income tax due for 2011.

P250,000  For year 2012 Provision for Income Tax P125,000 Income Tax Payable P125,000 To record IT liability using the normal rate.

Income Tax Payable Deferred Charges-MCIT P125,000 P125,000 To record application of excess MCIT against normal IT for year 2012.

For 2013 Provision for Income Tax P8,000 Income Tax Payable P8,000 To record IT liability using the normal rate.

For 2013 Income Tax Payable P8,000 Deferred Charges-MCIT P8,000 To record application of excess MCIT against normal IT for year 2013.

For 2015 Retained Earnings Deferred Charges-MCIT To record the expired portion of the Deferred Charges-MCIT P12,000 P12,000

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 49

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 50

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 51

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 stockholders of earnings/profits to  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 53

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 54

 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;

 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 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

 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.

 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.

 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

Tax rate IMPOSITION OF IAET 10% Corporations liable corporations Deadline Closely-held domestic 15 th day after the end of he year following the close of the taxable year 61

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 Add: Income subject to final tax Income exempt from tax Income excluded fr gross income xxx Amount of NOLCO deducted Pxxx xxx xxx xxx P xxx Total Less: Div. actually or const. paid/issued xxx Income tax paid for the year xxx P xxx Reserved for the reasonable needs of the business xxx xxx Improperly accumulated earnings P xxx === 63

GAAP Income ND expenses NOLCO NT income Base of ITE TNDE TNTI Base of ITP Add (Deduct) Tax rates, amount and accounts P 100 3 (1) (2) P 100 30% = P30.00 ITE 5 30% = 1.5 0 DT (4) 30% = (1.20) DTL P 101 30% = P30.30 TP

Taxable income Add: NOLCO Nontaxable income TNTI Total Less: Income tax payable Basis of IAET Multiplied by IAET rate IAET P 101.00

P 1.00

2.00

4.00

7.00

P 108.00

30.30

P 77.70

10% P 7.77

 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 No.

Form Name Deadline for Filing No. of Copies

1702Q Quarterly Income Tax Return (For Corporations, Partnerships and Other Non-individual Taxpayers) 60 days following the close of the first 3 taxable quarters 3 copies 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 4.

source (BIR Form 2307, if applicable).

3. Summary Alphalist of W/A (SAWT) per RR 2-2006; Duly approved Tax Debit Memo, if applicable.

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Income Tax Forms

Form No.

1702

Form Name Deadline for Filing

Annual Income Tax Return On or before April 15 (For Corporations, Partnerships and Other Non individual Taxpayers) On or before the 15 th day of the month following the close of the fiscal year

No. of Copies

3 copies 69

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.

6.

Duly approved Tax Debit Memo, if applicable; 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 74

NOTE: Installment Payments ** Applicable to individual taxpayer only and NOT ON CORPORATIONS.

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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 stamped received.

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 3.

Taxpayer shall only

(3) copies of tax returns with the AAB and/or the BIR.

BIR.

accomplish and file three

Any tax return in excess three (3) shall not be received by the AAB and/or the

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 taxpayers.

of the concerned

Any findings, 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 and regulations.

, errors, violations or pursuant to existing laws

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%] be An exception to the last priority status hall 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 ….