A: The MCIT is an estimate of the income tax that us due a firm. It is equal to two percent (2%) of the gross income of a corporation at the end of the year.

Being a minimum income tax, a corporation should pay the MCIT whenever its regular (normal) income tax is lower than the MCIT, or when the firm reports a net loss in its tax return. Conversely, the regular income tax is paid when it is higher than the MCIT.

A: No, the MCIT is not an additional tax. At the end of the taxable year, the MCIT is compared with the regular income tax which is due from a corporation. If the regular income is higher than the MCIT, then the corporation does not pay the MCIT.

Newly established, or firms which are on their first three years of operations are not covered by the MCIT.

A: The MCIT coves domestic and resident foreign corporations which are subject to the regular income tax. The term "regular income tax" refers to the regular income tax rates under the Tax Code. The tax rate is 33% for 1999 and 32% for 2000 and the years thereafter. Thus, corporations who are subject to a special corporate tax system do not fall within the coverage of the MCIT. These are as follows:

The income of these corporations are subject to a ten percent (10%) preferential tax rate.

For corporations 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, the MCIT does not cover an activity of a firm which is registered with the Board of Investments (BOI) and is granted an income tax holiday. The MCIT shall cover its other activities which are not covered by the BOI tax incentives.

A: The MCIT is a means to ensure that businesses earning positive returns do not regulary avoid paying income tax. It is an answer to the problems of non-declaration and under-declaration of revenues by taxpayers, as well as the overly generous system of deducting expenses. It is an estimate of the tax that should be paid by the taxpayer under an efficient system where incomes are correctly declared and only legitimate deductions are taken.

Other social considerations support the collection of an MCIT. Each firm should pay a contribution to the costs of government in providing infrastructure and social services.

A: A corporation starts to be covered by the MCIT on the fourth (4^th)I year of its business operations. The period of reckoning the start of its business operations is the year when the corporation was registered with the BIR. This rule will apply regardless of whether the corporation is using the calendar year or fiscal year as its taxable year.

For example, a firm which was registered with the BIR on any month in 1998will be subject to MCIT in 2002.

A: The Secretary of Finance, upon the recommendation of the BIR Commissioner, may suspend the imposition of the MCIT on a corporation in any of the following cases:

"Sustained losses from a prolonged labor dispute" means losses arising from a strike staged by employees which lasted for more than six (6) months within a taxable period and which has caused the 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 other natural calamities. This term would also include armed conflicts like war or insurgency.

"Legitimate business reverses" shall include substantial losses due to fire, robbery, theft or embezzlement, or for other economic reason as determined by the Secretary of Finance.

A: The MCIT is equal to two percent (2%) of the gross income of the corporation at of the end of the taxable year.

"Gross income" means sales less sales returns, discounts and allowances and cost of goods sold. Passive income which have been subject to a final tax at source shall not form part of gross income for purposes of the MCIT.

Cost of goods sold will include all business expenses directly incurred to produce the merchandise to bring them to their present location and use. The items of expenses which would constitute cost of goods sold will depend on the nature of business that the taxpayer is engaged in.

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.

For sale of services, gross income means gross receipts less sales returns, allowances, discounts and cost of services which would cover all direct costs and expenses necessarily incurred to provide the services required by the customers and clients including

Interest expense is not included as part of cost of service, except in the case of banks and other financial institutions.

The term "gross receipts" means amounts actually or constructively received during the taxable year. However, for taxpayers employing the accrual basis of accounting, it would mean amounts earned as gross income.

A: The MCIT is paid on n annual year basis. It is not computed nor is it paid on a quarterly basis. It is reported under the Annual Final Adjustment Income tax return which corporations are required to file on the 15^th of the fourth month following the close of its taxable year.

A: Since the MCIT is an estimate of the normal income tax, it cannot be claimed as deduction.

A: Any excess of the MCIT over the normal income tax may be carried forward on an annual basis and credited against the normal income tax for the three immediately succeeding taxable years.

The taxpayer is required to pay the MCIT whenever it is greater than the regular income tax. Thus, in 1998, the taxpayer will pay MCIT of P75,000 since this is greater than P50,000.

In 1999, the taxpayer will pay MCIT of P100,000. While it has an excess MCIT of P25,000 in 1998 (or the difference between the MCIT and the regular income tax in 1998) because its MCIT in 1999 is still higher than the regular income tax.

In 2000, when the regular income tax of P100,000 is higher than the MCIT of P60,000, the taxpayer is allowed to claim as credit the excess MCIT of P25,000 and P40,000 for 1998 and 1999 respectively, or a total credit of P65,000. Hence the taxpayer will pay only P35, 000 (P100, 000 - P65, 000)

Let us sssume that the obligations of a corporation under the MCIT ands the regular income tax are as follows:

The corporation can carry forward the excess MICT which it paid in 1998 and in 1999 in 2000 when the regular income tax is greater than the MCIT. Thus its income tax payable in 2000 is as follows:

For the succeeding years, the corporation will continue to pay the MCIT because it is higher than its regular income tax. The excess MCIT for the year 2001 (P300,000) may only be credited against the normal income tax liabilities for the succeeding three years from year 2002 to 2004. However, the excess cannot be carried forward since the regular income tax liabilities for these years are still lower than the MCI. Should the regular income tax of the corporation be higher than the MCIT in 2006, the excess MCIT for the year 2001 and 2002 can no longer be carried forward. The carry forward proviso is only good within the next three succeeding taxable years.

A: Any amount paid as excess minimum corporate income tax should be recorded in the corporation’s books as an asset under account title "Deferred charges - MCIT".

Using the figures in illustration no. 2, the accounting entries will be as follows:

For 1998,

(1) Debit: Provision for income tax 25,000

Credit: Income tax payable 25,000

To record income tax liability using the normal income tax rate.

(2) Debit: Deferred Charges - MCIT 75,000

Credit: Income Tax Payable 75,000

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

(3) Debit: Income Tax Payable 100,000

Credit: Cash in bank 100,000

To record payment of income tax due for 1998.

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

(1) Debit: Provision for income tax 200,000

Credit: Income tax payable 200,000

To record income tax liability using the normal income tax rate.

(2) Debit: Income tax payable 95,000

Credit: Deferred Charges - MCIT 95,000

To record application of excess MCIT against normal income tax liability

(3) Debit: Income tax payable 105,000

Credit: Cash in bank 105,000

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