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, is imposed on domestic and resident foreign corporations beginning on the fourth taxable year from the start of the corporation’s commercial operation. The MCIT will be paid whenever such corporation has zero or negative taxable income, or whenever the amount of MCIT is greater than the normal income tax due from such corporation. The term "normal income tax" refers to the regular income tax rates imposed under the Tax Code, which is set at the rate of 34% for 1998; 33% for 1999 and 32% for 2000 and thereafter.

MCIT shall not be imposed on any of the following:

• Domestic corporations subject to the 10% preferential income tax rate under the NIRC, e.g., proprietary educational institutions; hospitals; and 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 and other depository banks under the foreign currency deposit system.

• Firms that are taxed under a special income tax regime, e.g. PEZA law and the Bases Conversion Development Act.

• International carriers subject to tax at 2 ½% of their gross Philippine billings

• Offshore banking units (OBUs) on their income from foreign currency transactions with local commercial banks, including foreign banks, other OBUs and residents.

• Regional operating headquarters subject to tax at 10% of their taxable income.

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 purposes of determining when a corporation shall first be subject to MCIT, the year in which the corporation registered with the BIR is deemed as the year when its business operations started. This rule will apply regardless of whether the corporation is using the calendar year or fiscal year as its taxable year.

The Secretary of Finance, upon the recommendation of the BIR Commissioner, may suspend the imposition of the MCIT on a corporation upon submission of proof that the corporation sustained substantial losses due to prolonged labor dispute, force majeure, or legitimate business reverses. "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 reasons as determined by the Secretary of Finance.

The MCIT is equal to two percent (2%) of the gross income of the corporation as 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 salaries and employee benefits of personnel, consultants and specialists directly rendering the service; cost of facilities directly utilized in providing the service such as depreciation or rental of equipment used; and cost of supplies.

In case a corporation which is on a fiscal year basis is already subject to MCIT but portions of its income covers months in 1997, the MCIT which is due for the fiscal year 1998 is computed using an apportionment formula. The ratio to be applied is the number of months in 1998 to twelve (12) months.

The MCIT will be paid on a taxable year 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. Note that corporations are not required to pay the MCIT on a quarterly basis.

Carry Forward of Excess MCIT

The MCIT, being an estimate of the normal income tax, cannot be claimed as deduction from gross income.

However, the excess of the MCIT paid by the company 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, it cannot apply such credit since MCIT is higher than the normal income tax.

In 2000, the normal income tax will be imposed, and 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).

Assume that a corporation is subject to the MCIT beginning taxable year 1998 and that its income taxes during the years from 1998 to year 2005 are as follows:

In this case, ABC Corporation will 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. Thus, the income tax payable is computed as follows:

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, since the normal income tax liabilities for these years are lesser than the respective MCITs, the excess MCIT for the year 2001 of P300,000 loses its creditability by the year 2005.

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".

For 1998,

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

Debit: Retained Earnings 300,000

Credit: Deferred Charges-MCIT 300,000

To record the expired portion of Deferred Charges - MCIT.