Features of Minimum Corporate Income Tax in Philippines

By: Tax and Accounting Center Philippines

Under the Tax Code of the Philippines, a minimum corporate income tax (MCIT) in the Philippines of two percent (2%) of the gross income is imposed upon any domestic or resident foreign 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 better appreciation of MCIT in the Philippines, let us share you some of its features as follows:

A corrective measure to ensure minimum contribution

Prior to Republic Act No. 8424 that took effect January 1, 1998, the legislators had noticed the low income tax compliance of corporate taxpayers in the Philippines by simply declaring net loss to evade income tax in the Philippines.  As such, MCIT in the Philippines is devised as a relatively simple and effective revenue-sharing instrument to ensure that corporate taxpayers will make minimum contribution to support the government and finance the cost of the government.

MCIT is not a new tax, but an income tax in lieu of normal 30% corporate income tax only. It is imposed in lieu of the normal net income tax, and only if the normal income tax is suspiciously low. The MCIT merely approximates the amount of net income tax due from a corporation, pegging the rate at a very much reduced 2% and uses as the base the corporation’s gross income.

Imposed beginning the fourth year

The Tax Code recognizes the fact that newly formed corporations will undergo a struggling beginnings and birth pangs. For the first few years, sales could be minimal and the corporation will need to recover its capital expenditures. It is given enough period to establish itself and recover the necessary funding before it is being required to pay minimum corporate income tax in the Philippines. As such, MCIT liability begins only at the fourth year of its operations counted from the year of registration with the BIR. Example, a new corporation registered with the Bureau of Internal Revenue (BIR) last 2009 will become liable on 2012 (2009, 2010, 2011, and 2012 is the fourth year) as the year beginning the fourth year of its operations

Mandatory imposition quarterly and annual

MCIT in the Philippines  is imposed both on a quarterly income tax return or BIR Form No. 1702Q, and on annual income tax return or BIR Form No. 1702.

MCIT rate is 2% based on gross income

In the case of Chamber of Real Estate and Builders’ Associations, Inc. vs. Hon. Executive Secretary, G.R. No. 160756 dated March 9, 2010, the claim that MCIT in the Philippines is a tax on capital is invalidated. The MCIT is imposed on gross income which is arrived at by deducting the capital spent by a corporation in the sale of its goods, i.e., the cost of goodsand other direct expenses from gross sales. Clearly, the capital is not being taxed. Gross income’ shall mean gross sales less sales returns, discounts and allowances and cost of goods sold. ‘Cost of goods sold’ shall include all business expenses directly incurred to produce the merchandise to bring them to their present location and use.

3-year carry-over of excess MCIT

Any excess of the minimum corporate income tax over the normal income tax as computed under Subsection (A) of this Section shall be carried forward and credited against the normal income tax for the three (3) immediately succeeding taxable years. This would also apply to quarterly income tax returns during the said three immediately succeeding taxable years.  The purpose of this is to recover the MCIT paid by taxpayers during the time when it is already liable for normal corporate income tax.

Suspension of MCIT in the Philippines

MCIT in the Philippines is not absolute and it provides suspension during certain instances. 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 the following:

  1. a prolonged labor dispute which 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
  2. because of “force majeure” which 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
  3. because of legitimate business reverses which shall include substantial losses sustained due to fire, robbery, theft or embezzlement, or for other economic reason as determined by the Secretary of Finance.

During the above instances, the corporation shall not be liable for MCIT in the Philippines.

Accounting for MCIT in the Philippines

Revenue Regulations 9-1998 provides an accounting treatment of the excess minimum corporate income tax paid and requires the same to 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 and 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.


Disclaimer: This article is for general conceptual guidance only and is not a substitute for an expert opinion. Please consult your preferred tax and/or legal consultant for the specific details applicable to your circumstances. For comments, you may please send mail at info@taxacctgcenter.org.


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