INCOME TAX COMPUTATION FOR CORPORATE TAXPAYERS. 2 What is a corporation? Corporation – is an artificial being created by law, having the rights of succession

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

5 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.

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

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

9 Taxability of Corporations (RA 9337) Income In General DomesticResident Foreign Non- Res. Foreign All income derived from sources within or outside the Phils. 30% (Net Taxable Income) -- All income derived from sources within the Phils. 30% (Net Taxable Income) 30% (Gross Income) Optional Corporate Tax Rate15% (Gross Income) 15% (Gross Income) --- Minimum Corporate Income Tax (MCIT) 2% (Gross Income) 2% (Gross Income) --

Sales/ Revenues/ Fees from within and withoutP xxx Less: Sales returns, allow., and disc. (if any)P xxx Cost of Sales xxx Gross Income from operationP xxx Add: Non-operating and other income not subjected to final tax or capital gains tax xxx Gross Income xxx Less: Allowable itemized business deductions xxx Net Taxable Income xxx Multiply by Normal Corporate Income Tax Rate 30% Normal Corporate Income Tax xxx ===

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:

Cost of SalesP 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 :

Sales/ Revenues P1,050,000.00 Less: Sales Rets., Allow. & Disc. 50,000.00 Cost of Sales 400,000.00450,000.00 Gross Income from operation 600,000.00 Add: Non-operating and other income not subjected to Final tax or capital gains tax 100,000.00 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. ____________________

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

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

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.

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. 200820092010 Gross Sales 3,080,000 4,100,0005,200,000 Sales Ret., Disc. & Allow. 80,000100,000200,000 Cost of Sales1,500,0002,000,0002,500,000 Operating Expenses1,450,0001,900,0002,100,000

1. Computation of Normal Corporate Income Tax(NCIT): 200820092010 Gross Sales3,080,0004,100,0005,200,000 Sales Ret., Disc. & Allow. 80,000100,000200,000 Net Sales3,000,0004,000,0005,000,000 Cost of Sales1,500,0002,000,0002,500,000 Gross Income1,500,0002,000,0002,500,000 Operating Expenses1,450,0001,900,0002,100,000 Net Taxable Income50,000100,000400,000 X Normal Corp. Tax rate 35%30% Normal Corp. Income Tax 17,50030,000120,000

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 20092010 Gross Income2,000,0002,500,000 X MCIT rate2% MCIT40,00050,000

3. Determination of Income tax due and payable: 200820092010 NCIT or MCIT, w/ever is higher 17,50040,000120,000 Less: Excess of MCIT over NCIT 10,000 Income Tax Due and Payable 17,50040,000110,000 200820092010 NCIT17,50030,000120,000 MCITNot Applicable 40,00050,000

25 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 Carry forward of Excess MCIT

26 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 Carry forward of Excess MCIT

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

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

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 withholding tax 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 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 Payment from previous quarters of the taxable year can be deducted from the cumulative tax due (whether NIT or MCIT) 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) 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 Panday Corporations 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 30,000 10,000 2nd 120,000 250,000 30,000 3rd 250,000 100,000 40,000 4 th 200,000 100,000 35,000 Illustration 1 - Normal income tax at year end is higher than MCIT

33 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 =======

34 2 nd Quarter Excess Excess Normal Taxes MCIT W/tax Qtr. Inc. Tax MCIT Withheld Prior Years Prior Years 1 st 100,000 80,000 20,000 30,000 10,000 2nd 120,000250,000 30,000 Total 220,000 330,000 50,000 ====== ====== ===== Computation (cont.)

35 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 40,000 100,000 Net Income Tax Due, 2nd quarter MCIT P230,000 ======= Computation (cont.)

36 3 rd 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 3 rd 250,000 100,000 40,000 Total 470,000430,000 90,000 ====== ====== ====== Computation (cont.)

37 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 30,000 400,000 Net Income Tax Due, 3rd quarter Normal Income Tax P 70,000 ======= Computation (cont.)

38 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 200,000100,000 35,000 Total 670,000530,000 125,000 ============ ====== Computation (cont.)

39 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 30,000 505,000 Annual Net Income Tax Due NCIT P 165,000 ======= Computation (cont.)

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 30,000 10,000 2nd 120,000 250,000 30,000 3 rd 250,000 100,000 40,000 4th 50,000 120,000 35,000 Total 520,000 550,000 125,000 ====== ====== ======

41 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 230,000 475,000 Annual Net Income Tax Due MCIT P 75,000 ======= Computation

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 MCITEXCESS 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

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 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

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.

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.

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 CIRs 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

51 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

IMPROPERLY ACCUMULATED EARNINGS TAX (IAET) RA 8424 / RR 2-2001

53 CONCEPT OF IAET Taxpayer is a corporation Improper accumulation of taxable income beyond the reasonable needs of the business Non-distribution of earnings/profits to stockholders 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

54 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

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

61 IMPOSITION OF IAET Tax rate10% Corporations liableClosely-held domestic corporations Deadline 15 th day after the end of he year following the close of the taxable year

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

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

Add (Deduct) Tax rates, amount and accounts GAAP IncomeP 100 ND expenses3 NOLCO(1) NT income(2) Base of ITEP 10030% = P30.00 ITE TNDE530% = 1.5 0 DT TNTI(4)30% = (1.20) DTL Base of ITPP 10130% = P30.30 TP

Taxable incomeP 101.00 Add: NOLCOP 1.00 Nontaxable income2.00 TNTI4.007.00 TotalP 108.00 Less: Income tax payable30.30 Basis of IAETP 77.70 Multiplied by IAET rate10% IAETP 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 NameDeadline for FilingNo. of Copies 1702QQuarterly Income Tax Return (For Corporations, Partnerships and Other Non-individual Taxpayers) 60 days following the close of the first 3 taxable quarters 3 copies 68 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 source (BIR Form 2307, if applicable). 3.Summary Alphalist of W/A (SAWT) per RR 2-2006; 4. Duly approved Tax Debit Memo, if applicable.

Form No. Form NameDeadline for FilingNo. of Copies 1702Annual Income Tax Return (For Corporations, Partnerships and Other Non- individual Taxpayers) On or before April 15 On or before the 15 th day of the month following the close of the fiscal year 3 copies 69 Income Tax Forms

Attachments Shall be filed in TRIPLICATE COPIES

AABs (w/ payment) RDO (w/o payment)

74 Deductions from the Income Tax Due Taxes withheld from current years 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

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

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 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 stamped received. 3. Taxpayer shall only accomplish and file three (3) copies of tax returns with the AAB and/or the BIR. Any tax return in excess three (3) shall not be received by the AAB and/or the BIR.

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 of the concerned taxpayers.

Any findings, errors, violations or 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, pursuant to existing laws and regulations.

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

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INCOME TAX COMPUTATION FOR CORPORATE TAXPAYERS. 2 What is a corporation? Corporation – is an artificial being created by law, having the rights of succession