Prepared by: Lilybeth A. Ganer Revenue Officer

1. Prepared by:Lilybeth A. Ganer Revenue Officer INCOME TAX COMPUTATION FOR CORPORATE TAXPAYERS

2. 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

3. 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

4. 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 orexistingunder any law other than those of the Phils. irrespective of the nationality of its stockholders.

5. Foreign Corporation • Foreign corporationsare 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.

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

7. Corporations may be subjected to the following taxes: • 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)

8. Evolution of Corporate Income Tax Rate

9. Taxability of Corporations (RA 9337)

10. The Normal Corporate Income Tax BIR Form 1702 (General Format for Income tax computation on business income)

11. 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:

12. 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:

13. Solution:

14. 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. ____________________

15. Minimum Corporate Income Tax (MCIT) (RR No. 9-98 as amended by RR No. 12-07)

16. 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

17. 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 • ========

18. 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

19. 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 =========

20. “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.

21. Illustration: Bungga-Bungga Corporation has been operating since January 1, 2006. Data pertinent to its operations covering 2008 to 2010 are as follows: Determine the appropriate income tax of Bungga-Bungga Corporation.

22. 1. Computation of Normal Corporate Income Tax(NCIT):

23. 2. Computation of Minimum Corporate Income Tax (MCIT) Note: The MCIT for TY 2008 is not applicable because the company has not yet reached its fourth year

24. 3. Determination of Income tax due and payable:

25. 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

26. 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

27. 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

28. Rules on crediting of tax payments & taxes withheld Annual Computation

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

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

31. Rules on crediting of tax payments & taxes withheld (cont.) Quarterly computation Note: Quarterly comparison to determine whichever is higher between the NIT and MCIT shall be done on a cumulative basis

32. Illustration 1 - Normal income tax at year end is higher than MCIT PandayCorporation’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 4th200,000 100,000 35,000

33. 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 30,00060,000 Net Income Tax Due , 1st quarter – normal income tax P 40,000 =======

34. Computation (cont.) 2ndQuarter Excess Excess Normal Taxes MCIT W/tax Qtr. Inc. Tax MCIT Withheld Prior Years Prior Years 1st100,000 80,000 20,000 30,000 10,000 2nd 120,000250,00030,000 Total 220,000 330,000 50,000 ====== ====== =====

35. 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 40,000100,000 Net Income Tax Due , 2nd quarter – MCIT P230,000 =======

36. 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 3rd250,000100,00040,000 Total 470,000430,000 90,000 ====== ====== ======

37. 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 30,000400,000 Net Income Tax Due , 3rd quarter – Normal Income Tax P 70,000 =======

38. 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 200,000100,00035,000Total 670,000 530,000 125,000 ====== ====== ======

39. 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 30,000505,000 Annual Net Income Tax Due – NCIT P 165,000 =======

40. 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 30,00010,000 2nd 120,000 250,000 30,000 3rd 250,000 100,000 40,000 4th 50,000120,00035,000 Total 520,000 550,000 125,000 ====== ====== ======

41. 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 230,000475,000 Annual Net Income Tax Due – MCIT P 75,000 =======

42. 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.

43. Illustration: YEAR NORMAL IT MCIT EXCESS 2004 25,000.00 2008 130,000.00 2009 200,000.00 2010 150,000.00 2011 100,000.00 250,000.00 150,000.00 2002 125,000.00 100,000.00 25,000.00 2013 8,000.00 5,000.00 3,000.00 2014 5,000.00 4,000.00 1,000.00 2015 100,000.00 98,000.00 2,000.00

44. 2012 2013 2014 2015 NCIT or MCIT 125T 8T 5T 100T Less: Excess of MCIT 125T8T5T -_ Income tax - - - 100T ==== === === ====

45. Accounting Entries • For 2011 Provision for Income tax P250,000 Income Tax Payable P250,000 To record Income Tax liability - normal rate. Deferred Charges – MCIT P150,000 Income tax payable P150,000 To record excess MCIT

46. Accounting Entries Income Tax Payable P250,000 Cash in Bank P250,000 To record payment of income tax due for 2011. • For year 2012 Provision for Income Tax P125,000 Income Tax Payable P125,000 To record IT liability using the normal rate.

47. Accounting Entries Income Tax Payable P125,000 Deferred Charges-MCIT 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.

48. Accounting Entries 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 P12,000 Deferred Charges-MCIT P12,000 To record the expired portion of the Deferred Charges-MCIT

49. 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

50. 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