Tax Treatment of OFW Income

Overseas Contract Worker (OCW) commonly referred to as Overseas Filipino Worker (OFW) is taxable only on income from sources within the Philippines. This includes a seaman rendering services abroad as a member of the complement of a vessel engaged exclusively in international trade. The income of OCW or OFW’s arising out of his overseas employment is exempt from income tax.

If an OCW or OFW has income earnings from business activities or properties within the Philippines, such earnings are subject to Philippine income tax as follows:

a.      For Regular Income – Tax rate of 5%-32% of taxable income

b.      For Passive Income –

  i.               20% Final Tax on Interest Income from any currency bank deposit and yield or any monetary benefit from deposit substitutes and from trust funds and similar arrangements;

ii.               20% Final Tax on any royalties;

iii.               10% Final Tax on any royalty related on books, as well as literary works and musical compositions;

iv.               20% Final Tax on prizes (except prizes amounting to P10,000 or less which  shall be subject to regular income tax rate of 5 -32%) and other winnings (except Philippine Charity Sweepstakes and Lotto Winnings);

 v.               Exemption from 7.5% Final Tax on Interest Income from a depository bank under the expanded foreign currency deposit system upon presentation of proof of non-residency such as OEC or Seaman's Book. However, If the account is jointly in the name of the overseas contract worker or a Filipino seaman, and an individual (spouse or dependent) who is living in the Philippines, fifty percent (50%) of the interest income from such bank deposit will be treated as exempt while the other fifty percent (50%) shall be subject to a final withholding tax of seven and one-half percent (7.5%);

vi.               10% Final Tax on cash or property dividends

vii.                5%/10% Final Tax on net capital gains realized on sale, barter, exchange or other disposition of shares of stock in a domestic corporation (except shares sold or disposed of through the stock exchange);

viii.               6% Final Tax on capital gains from the sale, exchange or other disposition of real property located in the Philippines classified as capital assets  based on gross selling price or current fair market value whichever is  higher;

ix.                       5% / 12% / 20% Final Tax on interest income from long term deposits or investment in the form of savings, common or individual trust funds, deposit substitutes, investment management accounts and other  investments evidenced by certificates in such form prescribed by the  Bangko Sentral ng Pilipinas which was pre-terminated by the holder before the fifth (5th) year.

Any trade or business of an OCW or OFW, if the gross annual sales or receipts do not exceed one million five hundred thousand pesos and opted not to register as a VAT taxpayer, shall be liable to pay 3% percentage tax on his gross quarterly sales or receipt.

All migrant workers shall be exempt from payment of travel tax and airport fee upon proper showing of proof of entitlement issued by the Philippine Overseas and Employment Administration. Further, the remittances of all OCWs or OFWs are exempt from the payment of documentary stamp tax.

(Revenue Regulations No. 1-2011, February 24, 2011)

Corporate Tax Liability is not Personal to its President/Owner

In 2003, Mr. Gregorio Villamar Araño was the President of Discovery Drug-Las Piñas, Inc. (DDLPI) and as such he received income from his services. He was assessed of deficiency income tax and value-added tax not as a president of a corporation but as the sole proprietor of Discovery Drug and not Discovery Drug-Las Piñas, Inc. The assessments were the result of the computerized matching conducted by the BIR on the sales of the suppliers of Discovery Drug where a discrepancy was discovered against the purchases declared by Discovery Drug in its tax returns which amount was treated as undeclared sales and income.

The Court of Tax Appeals denied the petition of the BIR stating that Mr. Araño as president of DDLPI did not act with malice or bad faith to disregard corporate fiction, such as him. DDLPI had a separate judicial personality distinct from the persons composing it. Thus, it is not proper and legal for the BIR to assess Mr. Araño for the alleged tax liabilities of DDLPI. 

(Commissioner of Internal Revenue vs. Gregorio Villamar Araño, CTA Case No. 7491, June 8, 2011)

eDST Clarified

Filing and payment of documentary stamp tax (DST) will now be thru the internet or the so-called eDST system via BIR website.

The BIR elucidated that there will be no more further extension of the full implementation of the eDST System.

The deadline in filing DST returns and payment of the taxes should be any time between the actual dates of the transaction (i.e. making, signing, accepting or transferring of documents) up to the 5^th day of the succeeding month.

ATC and DST computation are as follows:

ATC is DS 106 for Tiered Deposits. All debt instruments are subject to DST of One peso (P1.00) on each Two Hundred (P200.00) or fractional part thereof, of the issue price of any such debt instrument.

If the term of the instrument is less than one (1) year, the DST is computed by taking into consideration the number of days that the instrument is outstanding as a fraction of 265 days, DST computation is as follows:

DST = Issue price/200 x P1.00 x term/365 (rounded off to the nearest centavo)

If the debt instrument has a term of one (1) year or longer, the DST due shall be computed based on the issue price of the debt instrument, as follows:

DST = Issue price/P200 x P1.00

For Foreign Dollar or 3^rd currency Telegraphic Transfer (Peso Paid), Local Peso Telegraphic transfer (PDDTS or GSRT) and Local Dollar Telegraphic Transfer (Peso Paid GSRT):

Foreign Dollar or 3rd currency Telegraphic Transfer (Peso Paid)	Section 182 of NIRC	DS108	Foreign Bills or Letters of Credit	P0.30 for every P200
Local Peso Telegraphic transfer (PDDTS or GSRT)	Section 180 of NIRC	DS126	Bills of Exchange or Drafts	P0.30 for every P200
Local Dollar Telegraphic Transfer (Peso Paid GSRT)	Section 181 of NIRC	DS126	Bills of Exchange or Drafts	P0.30 for every P200

The DSTs due on the above fund transfers are not computed based on the fixed rate of P1.50 per transaction imposed on “bank checks, drafts, certificates of deposits not bearing interest and other instruments” under Section 178 of the Tax Code but based on the values of the fund transfers under Sections 180, 181 and 182 of the same Code.

Dollar denominated telegraphic transfer shall be translated to the local currency by using the prevailing exchange rate at the Philippine Dealing System (PDS) at the time of the acceptance of the Bill or Exchange or Draft.

Further, computation of the DST in the eDST System is based on the formula indicated in the Tax Code. Fractional part of the tax base is also considered and the system computes the DST by rounding off first before multiplying by the DST rate and term.

If Principal is Php 366,755.00, the DST rate is 1/200 and the term is 30 days, DST will be computed as follows:

Php 366,755.00/200=1,833.775 rounded to 1,834 then multiplied by the tax rate and term=1,834 x 1.0 x 30/365

       = P150.739 = P 150.74

(Revenue Memorandum Circular No. 24-2011, May 16, 2011)

New Guidelines: Tax on Separation Pay

An official or employee separated from his employer because of death, sickness or other physical disability or for any cause beyond the control of the said official or employee shall be exempted from income tax and withholding tax on the amount received thereof, regardless of age or length of service.

Instead of requesting for rulings confirming that the separation pay received by an employee or by his heirs because of death, sickness or other physical disability are tax exempt, a Certificate of Tax Exemption shall be issued by the Regional Director of the BIR. However, if the reason of separation from the employer is for any other causes beyond the control of the official or employee, a request for ruling confirming tax exemption shall be processed at the Law Division in the National Office.

A letter request from the Official/Employee or by his heirs or the employer for the exemption of separation benefits from income tax and withholding tax must be submitted to the Revenue District Office where the employer is originally registered, together with a certified true copy of Death Certificate or Sworn Affidavits executed by the attending physician and the employer’s representative, clinical record or laboratory examination confirming the illness suffered by such official/employee or medical certificate confirming the physical disability of the official/employee, whichever is applicable. Other documents may also be required by the BIR to prove entitlement to the exemption.

(Revenue Memorandum Order No. 26-2011, June 13, 2011)

PEZA Registered Entity Exempt from Withholding Tax

Q: May an entity be exempted from the payment of creditable expanded withholding tax prescribed under Revenue Regulations No. 2-98, as amended, on account of registration with the Philippine Economic Zone Authority (PEZA)?

A: Yes. Section 2.57.5.(B) (2) of Revenue Regulations No. 2-98, as amended, is explicit in its provisions that the expanded withholding tax does not apply to income payments to persons enjoying exemption from payment of income taxes pursuant to the provisions of any law, general or special. PEZA-registered enterprises are granted certain preferential tax treatment under Section 24 of Republic Act No. 7916 which provides that "any provision of existing laws, rules and regulations to the contrary notwithstanding, no taxes, local and national shall be imposed on business establishments operating within the ECOZONE. In lieu of paying taxes, five percent (5%) of the gross income earned by all businesses and enterprises within the ECOZONE shall be remitted to the national government.

A PEZA-registered enterprise enjoying a 4-year-ITH, income payments made to it, with respect to its registered activity, shall not be subject to 2% expanded creditable withholding tax prescribed in Revenue Regulations No. 2-98, as amended, for the covered period of four (4) years. It must be emphasized, however, that it is constituted as withholding agent for the government. As such, it is required to withhold the tax on compensation income of its employees or the withholding tax on income payments to persons subject to tax pursuant to Section 57 of the Tax Code of 1997, as amended.

(BIR Ruling No. 142-10, December 9, 2010)

Tax Exempt Separation Pay

Q: Are separation benefits to be paid by an employer by reason of the employee’s health condition exempt from income tax and consequently from withholding tax?

A: Yes. Pursuant to Section 32 (B) (6) (b) of the Tax Code, any amount received by an official or employee or by his heirs from the employer as a consequence of separation of such official or employee from the service of the employer because of death, sickness or other physical disability or for any cause beyond the control of the said official or employee is exempt from taxes regardless of age or length of service. The phrase "for any cause beyond the control of said official or employee" connotes involuntariness on the part of the official or employee. The separation from the service of the official or employee must not be asked for or initiated by him.

This requires the presence of two (2) conditions in order that the employee benefits may be granted tax exemption, namely:

(1) the employee is separated from the service of the employer due to death, sickness or other physical disability or for any cause beyond the control of the said official or employee; and

(2) the employer pays benefits to the official or employee or his heirs as a consequence of such separation.

(BIR Ruling No. 131-10, December 1, 2010)

Deadline in Payment of CGT

Q: When is the reckoning date for the payment of capital gains tax?

A: For both large and non-large taxpayers, the withholding tax return, whether creditable or final, shall be filed and payments should be made, within ten (10) days after the end of each month, except for taxes withheld for the month of December of each year, which shall be filed on or before January 15 of the following year; and except for the final capital gains tax on the sale or other onerous disposition of real property considered as capital asset which must be taken/withheld from the seller by the buyer and remitted within thirty (30) days from the date of notarization of the transfer document to the collecting agent of the RDO having jurisdiction over the place where the property is located. Hence, the reckoning date for the payment of capital gains tax is, not the date of bidding, payment nor issuance of certificate of award, but the date of notarization of the transfer document or in this case, the Deed of Sale.

(BIR Ruling [DA-(C-027) 112-10], June 25, 2010)

Income Tax Exemption does not Extend to VAT

Q: Will a non-stock, non-profit corporation under Section 30 of the Tax Code be exempt from payment of VAT?

A: No. A corporation organized for charitable purposes as contemplated under Section 30 of the Tax Code is exempt from the payment of income tax on income received by it as such organization. However, the tax exemption granted to it as a non-stock, non-profit corporation covers only income taxes for which it is directly liable.

It should be noted that VAT is an indirect tax payable by the seller and not by the purchaser of goods. Being an indirect tax, it can be shifted or passed on to the buyer/purchaser, transferee or lessee of the goods, properties or services. Once shifted to the buyer/customer as an addition to the cost of goods or services sold, it is no longer a tax but an additional cost which the buyer/customer has to pay in order to obtain the goods or services.

The shifting of the VAT to a tax-exempt organization does not make it the person directly liable and therefore, said organization cannot invoke its tax exemption privilege under Section 30 (E) of the Tax Code to avoid the passing on or shifting of the VAT. Hence, a charitable organization exempt from tax under Section 30 of the Tax Code, the acquisition of equipment shall nevertheless be subject to the 12% VAT pursuant to Section 108 of the said Code, as amended by Republic Act No. 9337.   

 (BIR Ruling [DA-(VAT-019) 119-10], July 9, 2010)

Input Tax may be Charged to Expense or Cost

Q: May input taxes shifted or passed-on to an ROHQ (most of its sales are subject to VAT at 0%) by its local value-added tax (VAT) registered suppliers of goods, properties and services be recognized outright as an expense for income tax purposes, or be added to the acquisition cost upon purchase of the capital asset subject to depreciation?

A: Yes. Since it does not have other sales transactions subject to VAT against which their input taxes may be used in payment, then, it follows, that it is constituted as the final person against which the costs of the tax passed on shall legally stop and rest, hence, in this connection, the said input taxes may already be legally converted as cost available as deduction for income tax purposes.

This treatment shall likewise apply to situations involving input taxes sales already recognized in the books of the ROHQ where:

(1) the two (2) year prescriptive period had already lapsed without any claim for refund or credit having been filed;

(2) the claim for refund or credit was denied or rejected by the BIR for having been filed beyond the 2-year prescriptive period or for non-compliance with invoicing/substantiation requirements; or

(3) a claim for refund or credit is still pending with the BIR but is voluntarily withdrawn by JGC Manila ROHQ.

Provided, that in regard to input taxes attributable to the latter's zero-rated sales which it recognizes outright as an expense or charges to asset account subject to depreciation, as the case may be, (i) the input taxes shifted or passed-on to the ROHQ shall not be recorded as input tax in its books; (ii) the input taxes shifted or passed-on to it shall not be reflected/reported as input tax in its VAT returns; and (iii) the input taxes shifted or passed-on to the ROHQ shall not be claimed by the latter as tax refund or tax credit.

(BIR RULING [DA-(VAT-021) 121-10], July 9, 2010)


NOTE: BIR has new ruling in 2013 reversing this ruling.

Taxes on Foreclosed Property, When to Pay

Foreclosed asset of natural persons may be redeemed within one year from the date of registration of the sale in the Office of the Register of Deeds while those of juridical persons in an extrajudicial foreclosure may be redeemed until the registration of the certificate of foreclosure sale with the applicable Register of Deeds but not more than three (3) months after foreclosure, whichever is earlier.

Capital gains tax or Creditable withholding tax returns and payments are due within 10 days after the end of each month, except for taxes withheld for the month of December of each year which shall be filed on or before January 15 of the following year. Documentary Stamp Tax returns and payments are due within five days after the close of the month when the taxable document was made, signed, accepted, or transferred.

(Revenue Memorandum Circular No. 53-2011, November 4, 2011)

Hotel’s Other Services to Air Transport, Vatable

The BIR revoked its previous ruling in [DA-(VAT-057) 552-08] dated December 18, 2008 stating that services provided by hotels to persons engaged in international airport operations is subject to the value-added tax at zero percent (0%) rate.

The tax authority’s position with regard to this is now elucidated in BIR Ruling 099-2011 dated April 6, 2011 stating that the services provided by the Hotel to its clients engaged in international air transport operations pertain to room accommodations and food and beverage services. As they are rendered within the Hotel’s premises, they have no direct connection with the transport of goods or passengers, and as such, they cannot be considered as services directly attributable to the transport of goods and passengers from a Philippine port directly to a foreign port entitled to zero-rating, but is appropriately subject to 12% VAT.

(Revenue Memorandum Circular No. 31-2011, August 4, 2011)

VAT Threshold Amounts Increased

In compliance with the Consolidated VAT Regulations of 2005, the threshold amounts to be subject to the value-added tax were adjusted to the present value using the Consumer Price Index as published by the National Statistics Office (NSO).

The threshold amounts rounded off to the nearest hundred are as follows:

Section	Amount in Pesos (2005)	Adjusted threshold amounts
Section 109 (P) – sale of residential lot	1,500,000	1,919,500
Section 109 (P) – sale of residential house and lot or other residential dwellings	2,500,000	3,199,200
Section 109 (Q) – lease of residential unit	10,000	12,800
Section 109 (V) – sale or lease of goods or properties or performance of services	1,500,000	1,919,500

This will take effect starting January 1, 2012.

(Revenue Regulations No. 16-2011, October 27, 2011)

REVENUE REGULATIONS NO. 9-98

August 25, 1998

REVENUE REGULATIONS NO. 09-98

SUBJECT         :          Implementing Republic Act No. 8424, "An Act Amending the National Internal Revenue Code, as Amended" Relative to the Imposition of the Minimum Corporate Income Tax (MCIT) on Domestic Corporations and Resident Foreign Corporations

TO                   :           All Internal Revenue Officers and Others Concerned

Pursuant to Section 244, in relation to Section 27(E) and Section 28(A)(2), these Regulations are hereby promulgated to govern the imposition of the minimum corporate income tax on domestic and resident foreign corporations.  

Sec. 2.27(E) MINIMUM CORPORATE INCOME TAX (MCIT) ON DOMESTIC CORPORATIONS —

(1)        Imposition of the Tax — A minimum corporate income tax (MCIT) of two percent (2%) of the gross income as of the end of the taxable year (whether calendar or fiscal year, depending on the accounting period employed) is hereby imposed upon any domestic corporation beginning the fourth (4th) taxable year immediately following the taxable year in which such corporation commenced its business operations. The MCIT shall be imposed whenever such corporation has zero or negative taxable income or whenever the amount of minimum-corporate income tax is greater than the normal income tax due from such corporation.

For purposes of these Regulations, the term, "normal income tax" means the income tax rates prescribed under Sec. 27(A) and Sec. 28(A)(1) of the Code at 34% on January 1, 1998; 33% effective January 1, 1999; and at 32% effective January 1, 2000 and thereafter.

In the case of a domestic corporation whose operations or activities are partly covered by the regular income tax system and partly covered under a special income tax system, the MCIT shall apply on operations covered by the regular income tax system. For example, if a BOI-registered enterprise has a "registered" and an "unregistered" activity, the MCIT shall apply to the unregistered activity.

(2)        Carry forward of excess minimum corporate income tax — Any excess of the minimum corporate income tax (MCIT) over the normal income tax as computed under Sec. 27(A) of the Code shall be carried forward on an annual basis and credited against the normal income tax for the three (3) immediately succeeding taxable years.       

Illustration on how to carry forward excess minimum corporate income tax —

                                                                                                                        Excess of MCIT

                                                               Normal Income                                  Over the Normal

Year                             Tax                  MCIT                Income Tax

1998                                         P50,000            P75,000            P25,000

1998     amount of tax payable                           P75,000

1999                                         P60,000            P100,000          P40,000

1999     amount of tax payable                           P100,000

2000                                         P100,000          P60,000

Computation of Net Amount of Tax Payable in 2000:

Amount of tax payable                                                   P100,000

Less:

1998 excess MCIT                                (25,000)

1999 excess MCIT                                (40,000)            P65,000

Net amount of tax payable                                             P35,000

The taxpayer shall pay the MCIT whenever it is greater than the regular or normal corporate income tax which is imposed under Sec. 27(A) of the Code. The comparison between the normal income tax payable by the corporation and the MCIT shall be made at the end of the taxable year. Thus, under the example, the taxpayer will pay the MCIT of P75,000.00 since this amount is greater than the normal income tax of P50,000.00 in 1998.

In 1999, the firm will also pay the MCIT since the MCIT of P100,000.00 is greater than the normal income tax of P60,000.00.

In the year 2000, where the normal or regular corporate income tax of P100,000.00 is greater than the MCIT of P60,000.00, the firm will pay the normal income tax.

The corporation can credit the excess of its MCIT over the normal income tax for 1998 (i.e. P25,000) and 1999 (i.e. P40,000), or a total amount of P65,000 from the amount of normal income tax which is payable by the firm in the year 2000. Thus, the amount of income tax payable by the firm is P35,000 after deducting P65,000 from P100,000.

The excess MCIT is creditable against the normal income tax within the next three (3) years from payment thereof. Thus, in the illustration above where the corporation had an excess MCIT of P25,000 over its normal income tax in 1998, the P25,000 can be claimed as a tax credit against the normal income tax up to the year 2001 and only when the normal income tax is greater than the MCIT. The excess MCIT cannot be claimed as a credit against the MCIT itself or against any other losses.

(3)        Relief from the Minimum Corporate Income Tax under Certain Conditions — The Secretary of Finance, upon recommendation of the Commissioner, may suspend imposition of the MCIT upon submission of proof by the applicant-corporation, duly verified by the Commissioner's authorized representative, that the corporation sustained substantial losses on account of a prolonged labor dispute or because of "force majeure" or because of legitimate business reverses.

(4)        Definition of Terms —

(a)        "Gross Income" defined — For purposes of the minimum corporate income tax prescribed under this Subsection, the term "gross income" means gross sales less sales returns, discounts and allowances and cost of goods sold. "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.

Passive incomes which have been subject to a final tax at source shall not form part of gross income for purposes of the minimum corporate income tax.

For a trading or merchandising concern, "cost of goods sold" means the invoice cost of the goods sold, plus import duties, freight in transporting the goods to the place where the goods are actually sold, including insurance while the goods are in transit.  

For a manufacturing concern, "cost of goods manufactured and sold" means all costs of production of finished goods, such as raw materials used, direct labor and manufacturing overhead, freight cost, insurance premiums and other costs incurred to bring the raw materials to the factory or warehouse.

In the case of sales of services, the term "gross income" means gross receipts less sales returns, allowances, discounts and cost of services. "Cost of services" means all direct costs and expenses necessarily incurred to provide the services required by the customers and clients including (a) salaries and employee benefits of personnel, consultants and specialists directly rendering the service, and (b) cost of facilities directly utilized in providing the service such as depreciation or rental of equipment used and cost of supplies: Provided, however, that "cost of services" shall not include interest expense except in the case of banks and other financial institutions. The term "gross receipts" as used herein means amounts actually or constructively received during the taxable year; Provided, that for taxpayers employing the accrual basis of accounting, the term "gross receipts" shall mean amounts earned as gross income.

(b)        The term "substantial losses from a prolonged labor dispute" means losses arising from a strike staged by the employees which lasted for more than six (6) months within a taxable period and which has caused the temporary shutdown of business operations.

(c)        The term "force majeure" means a cause due to an irresistible force as by "Act of God" like lightning, earthquake, storm, flood and the like. This term shall also include armed conflicts like war or insurgency.

(d)        The term "legitimate business reverses" shall include substantial losses sustained due to fire, robbery, theft or embezzlement, or for other economic reason as determined by the Secretary of Finance.

(5)        Specific Rules for Determining the Period When a Corporation Becomes Subject to the MCIT —

For purposes of the MCIT, the taxable year in which business operations commenced shall be the year in which the domestic corporation registered with the Bureau of Internal Revenue (BIR).

Firms which were registered with BIR in 1994 and earlier years shall be covered by the MCIT beginning January 1, 1998.

Firms which were registered with BIR in any month in 1998 shall be covered by the MCIT three calendar years thereafter (i.e. after the lapse of three calendar years from 1998). For example, a firm which was registered in May 1998 shall be covered by the MCIT in 2002.

The reckoning point for firms using the fiscal year shall also be 1998. For example, a firm which registered with the BIR on July 1, 1998 shall be subject to an MCIT on his gross income earned for the entire fiscal year ending in the year 2002.

Transitory Rule for determining the MCIT for 1998 on firms which are taxable on a fiscal year basis. For firms using the fiscal year basis and whose first taxable period under the minimum corporate income tax covers month/months in 1997 (i.e. prior to the imposition of MCIT under RA 8424), the MCIT which is due for 1998 shall be computed using an apportionment formula. The ratio to be applied is the number of months in 1998 to twelve (12) months (i.e. the total number of months in a fiscal year). 

Illustration. Firm A registered with the BIR in July 1994. It becomes subject to the MCIT in 1998. Since it is using a fiscal year as basis of its taxable period, a part of the tax base for the MCIT was earned by the corporation in 1997 prior to the imposition of the MCIT (i.e. gross income from July to December 1997). The MCIT which is due from the firm is computed using the gross income of the firm for 1998 (January to June) which is computed on an apportionment basis as follows:

Gross income of the firm for the entire fiscal year

Multiply: 0.50 (i.e. ratio of 6 months in 1998 to 12 months covering FY 97-98)

Equals: Tax base of the MCIT for 1998

Multiply: 2% (i.e. MCIT tax rate)

Equals: MCIT for 1998.

(6)        Manner of filing and payment — The minimum corporate income tax (MCIT) shall be paid on a taxable year basis. It shall be covered by a tax return designed for the purpose which will be submitted together with the corporation's annual final adjustment income tax return. Domestic corporations shall not be required to pay the minimum corporate income tax on a quarterly basis, the provisions of Sec. 75 of the Code notwithstanding.

(7)        Accounting treatment of the excess minimum corporate income tax paid — Any amount paid as excess minimum corporate income tax shall be recorded in the corporation's books as an asset under account title "deferred charges-minimum corporate income tax". This asset account shall be carried forward and may be credited against the normal income tax due for a period not exceeding three (3) taxable years immediately succeeding the taxable year/s in which the same has been paid. Any amount of the excess minimum corporate income tax which has not or cannot be so credited against the normal income taxes due for the 3-year reglementary period shall lose its creditability. Such amount shall be removed and deducted from "deferred charges-minimum corporate income tax" account by a debit entry to "retained earnings" account and a credit entry to "deferred charges-minimum corporate income tax" account since this tax is not allowable as deduction from gross income it being an income tax.  

Illustration on the accounting treatment of the excess minimum corporate income tax paid — Assume that ABC Corporation commenced business operations in calendar year 1991. It is already more than four (4) years in operation as of calendar year 1998 hence, subject to the minimum corporate income tax beginning taxable year 1998. Assume, further, that its income taxes during the years from 1998 to year 2005 are as follows:

                                                                                                            EXCESS OF

                                                                                                            MCIT OVER

                                                NORMAL INCOME                               NORMAL

YEAR                           TAX                 MCIT                INCOME TAX

1998                             P25,000            P100,000          P75,000

1999                             130,000             150,000            20,000

2000                             200,000             190,000                -

2001                                  -                    300,000          300,000

2002                               10,000               50,000             40,000

2003                               15,000               60,000             45,000

2004                                 8,000               40,000             32,000

2005                                 1,000               50,000             49,000

In this case, ABC Corporation shall not be allowed to carry forward and credit the 1998 excess MCIT against the income tax liability for 1999 since the 1999 MCIT is greater than the normal income tax for said year. However, for year 2000, where the normal income tax is greater than the computed MCIT, ABC Corporation shall be allowed to apply the excess MCIT of 1998 and 1999 amounting to P95,000 (P75,000 plus P20,000) against the normal income tax liability of P200,000.

The excess MCIT for the year 2001 (P300,000) may only be credited against normal income tax liabilities for the succeeding three years from 2002 to 2004. However, since the normal income tax liabilities for these succeeding years are lesser than the respective MCITs, the excess MCIT for the year 2001 of P300,000 loses its creditability by the year 2005 hence, must be removed and deducted from "Deferred charges-MCIT" account and charged to "Retained Earnings" account. 

Illustrative accounting entries to record excess MCIT —

(a)        For taxable year 1998 when MCIT is greater than the normal income tax liability of the company

1998

(1)        Debit: Provision for income tax                          P25,000

Credit: Income tax payable                                            P25,000

To record income tax liability using the normal income tax rate

(2)        Debit: Deferred Charges-MCIT                          P75,000

Credit: Income Tax Payable                                          P75,000

To record excess MCIT (P100,000 - P25,000)

(3)        Debit: Income Tax Payable                               P100,000

Credit: Cash in bank                                                     P100,000

To record payment of income tax due for 1998

(b)        For taxable year 2000 when excess MCIT (1998 and 1999) is applied against normal income tax liability

2000

(1)        Debit: Provision for income tax                          P200,000

Credit: Income Tax Payable                                          P200,000

To record income tax liability using the normal income tax rate

(2)        Debit: Income tax payable                                 P95,000

Credit: Deferred Charges-MCIT

(P75,000 plus P20,000)                                                 P95,000

To record application of excess MCIT against normal income tax liability for taxable year 2000

(3)        Debit: Income Tax Payable                               P105,000

Credit: Cash in Bank                                                     P105,000

To record payment of income tax due (P200,000 less P95,000)

(c)        For taxable year 2005 when the expired portion of excess MCIT (P300,000) for taxable year 2001 is closed to the retained earnings account due to its non-application.

2005

Debit: Retained Earnings                                   P300,000

Credit: Deferred Charges-MCIT                                     P300,000

To record the expired portion of Deferred Charges-MCIT

(8)        Exceptions — The minimum corporate income tax (MCIT) shall apply only to domestic corporations subject to the normal corporate income tax prescribed under these Regulations. Accordingly, the minimum corporate income tax shall not be imposed upon any of the following:

(a)        Domestic corporations operating as proprietary educational institutions subject to tax at ten percent (10%) on their taxable income; or

(b)        Domestic corporations engaged in hospital operations which are nonprofit subject to tax at ten percent (10%) on their taxable income; and

(c)        Domestic corporations engaged in business as depository banks under the expanded foreign currency deposit system, otherwise known as Foreign Currency Deposit Units (FCDUs), on their income from foreign currency transactions with local commercial banks, including branches of foreign banks, authorized by the Bangko Sentral ng Pilipinas (BSP) to transact business with foreign currency deposit system units and other depository banks under the foreign currency deposit system, including their interest income from foreign currency loans granted to residents of the Philippines under the expanded foreign currency deposit system, subject to final income tax at ten percent (10%) of such income.

(d)        Firms that are taxed under a special income tax regime such as those in accordance with RA 7916 and 7227 (the PEZA law and the Bases Conversion Development Act, respectively).

Sec. 2.28(A)(2) MINIMUM CORPORATE INCOME TAX (MCIT) ON RESIDENT FOREIGN CORPORATION — A minimum corporate income tax of two percent (2%) of the gross income from sources within the Philippines is hereby imposed upon any resident foreign corporation, beginning on the fourth (4th) taxable year (whether calendar or fiscal year, depending on the accounting period employed) immediately following the taxable year in which the corporation commenced its business operations, whenever the amount of the minimum corporate income tax is greater than the normal income tax due for such year.

In computing for the minimum corporate income tax due from a resident foreign corporation, the rules prescribed under Sec. 2.27(E) of these Regulations shall apply: Provided, however, that only the gross income from sources within the Philippines shall be considered for such purposes.

Exceptions — The minimum corporate income tax shall only apply to resident foreign corporations which are subject to normal income tax. Accordingly, the minimum corporate income tax shall not apply to the following resident foreign corporations:

(a)        Resident foreign corporations engaged in business as "international carrier" subject to tax at two and one-half percent (2 ½%) of their "Gross Philippine Billings";

(b)        Resident foreign corporations engaged in business as Offshore Banking Units (OBUs) on their income from foreign currency transactions with local commercial banks, including branches of foreign banks, authorized by the Bangko Sentral ng Pilipinas (BSP) to transact business with Offshore Banking Units (OBUs), including interest income from foreign currency loans granted to residents of the Philippines, subject to a final income tax at ten percent (10%) of such income; and

(c)        Resident foreign corporations engaged in business as regional operating headquarters subject to tax at ten percent (10%) of their taxable income.

(d)        Firms that are taxed under a special income tax regime such as those in accordance with RA 7916 and 7227 (the PEZA law and the Bases Conversion Development Act, respectively).  

EFFECTIVITY CLAUSE. These Regulations shall apply to domestic and resident foreign corporations on their aforementioned taxable income derived beginning January 1, 1998 pursuant to the pertinent provisions of RA 8424, provided, however, that corporations using the fiscal year accounting period and which are subject to MCIT on income derived pertaining to any month or months of the year 1998 shall not be imposed with penalties for late payment of the tax.

(SGD.) EDGARDO B. ESPIRITU

Secretary of Finance

Recommending Approval:

(SGD.) BEETHOVEN L. RUALO

Commissioner of Internal Revenue