Name : ___________________ Score: ____

Section : ___________________
Subject : BA403A Income Taxation
Class Schedule : TTH (6:00 pm – 7:30 pm)
Teacher : Merla A. Tampipi, CPA, MBA
Date : March 24, 2020 (TUESDAY)

MODULE 3
Learning Activity Sheet # 3-Introduction of a new Topic
Lesson / Topic : Minimum Corporate Income Tax
Learning Target(s) : To discuss the concept of minimum corporate income tax (MCIT);and
to compute MCIT for service, merchandising and manufacturing
concerns.
Reference(s) : (Winlu, Ballada. Income Taxation, 2019 Issue, 17th Edition, Made
Easy, p195-220)

Concept/ Digest :
The Minimum Corporate Income Tax (MCIT) was conceived to
Address the problem on the non-declaration and under- declaration of
Corporate income and revenues. Even if the operations of a
Corporation result in a net loss, it will still be subject to the MCIT.

Domestic Corporation

A minimum corporate income tax (MCIT) of two percent (2%) of

gross income as of the end of the taxable year is imposed upon any
Domestic corporation beginning the fourth(4th) taxable nyear (whether
Calendar or fiscal year, depending on the accounting period employed)
Immediately following the taxable year in which such corporation
Commenced its business operations. The MCIT shall be imposed
Whenever:

a. Such corporation has zero or negative taxable income; or

b. The amount of minimum corporate income tax is greater that
the normal income tax due from such corporation.

“normal income tax” shall mean the income tax rates prescribed
under Section 27(A) and 28(A)(1) of the Code at 35% effective Jan. 1,
1997; 34% effective Jan. 1, 1998; 33% effective Jan.1,1999; and
32% effective Jan.1, 2000, and thereafter. Last May 24, 2005, the
president signed into law R.A 9337 or the Expanded Value-Added Tax
Act of 2005, under this law, effective Nov. 1, 2005, the income tax
rate shall be 35%. This rate shall be reduced to 30% effective Jan.1,
2009.

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 Relief from the MCIT Under Certain Conditions

The Secretary of Finance, upon recommendation of the

Commissioner, may suspend the 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 a prolonged labor dispute or
because of “force majeure” or because of legitimate business reverses.

Proforma Computation of Normal Tax Versus Minimum

Corporate Income Tax

Gross income and tax due for trading/merchandising and

manufacturing concerns:

Normal Tax Minimum Corporate Income tax

Gross Sales XX Gross Sales XX

Less: Less:
Sales Returns XX Sales Returns XX
Sales discounts XX Sales discounts XX
Sales Allowances XX XX Sales Allowances XX XX
Net Sales XX Net Sales XX
Less: Less:
Cost of Goods Sold/ Cost of Goods Sold/
Manufactured & Sold XX Manufactured & Sold XX
Gross Profit from XX
Sales
Add: Other gross
income XX
Gross Income XX Gross Income XX
Less: Deductions XX
Net income XX
Multiply by Tax rate 30 Multiply by 2%
%
Minimum Corporate
Normal Tax XX Income Tax XX

Illustration:

Star Corporation, a resident foreign corporation, is on its 5 th year of

operations in 2019. It has the following financial data:

Gross Sales P30,000,000

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 Sales Returns and Allowances 900,000
Sales Discounts 1,500,000
Cost of Goods Manufactured & Sold 10,500,000
Deductions 15,000,000
Other income:
Interest on Notes Receivable 50,000
Dividends from Ceramic Corp.,
A resident foreign Corp. 200,000

Note: The income tax due is computed using the two approaches. The higher
income tax shall be the tax due.

Solution:
Normal Tax Minimum Corporate Income Tax
Gross Sales P30,000,00 Gross Sales P30,000,000
0
Less: Less:
Sales P900,000 Sales P900,000
Returns & Returns &
Allowances Allowances

Sales Sales
Discounts 1,500,000 2,400,000 Discounts 1,500,000 2,400,000
Net Sales P27,600,00 Net Sales P27,600,000
0
Less: Cost of Less: Cost
Goods of Goods
Manufacture 10,500,00 Manufactured
& Sold 0 & Sold 10,500,000
Gross profit
from sales P17,100,00
0
Add: Other
gross income 250,000
GROSS Gross
INCOME P17,350,00 Income P17,100,000
0
Less:
Deductions 5,000,000
Net P2,350,000
Income
Multiply by Multiply
Tax rate 30% by 2%
Normal Tax P705,000 MCIT P342,000

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 Normal Tax P705,000
Due is

Gross Income and Tax due for taxpayers engaged in the sale of service
Under the cash basis:

Normal Tax Minimum Corporate Income Tax

Gross Receipts XX Gross Receipts XX

Less: Sales Less: Sales
Returns XX Returns XX
Sales Discounts XX Sales Discounts XX
Sales Allowances XX XX Sales Allowances XX XX
Net Receipts XX Net Receipts XX
Add: Other gross Less:
income XX Cost of Services XX
Gross Income XX Gross Income XX
Less: Deductions XX
Net income XX
Multiply by Tax Rate 30% Multiply by 2%
Minimum
Normal Tax XX Corporate XX
Income TaX

Illustration: Assume that Festival Corporation, a domestic corporation engaged in

Consulting services, is on its 4th year of operations in 2019. The following data relate to
Its operations for the taxable year 2019:

Gross Receipts P18,000,000

Sales Returns and Allowances 360,000
Sales Discounts 900,000
Cost of Services 5,000,000
Deductions 16,190,000
Interest on Notes Receivable 100,000

The income tax due is computed using the two approaches. The higher
amount shall be the income tax due:
Normal Tax Minimum Corporate Income Tax
Gross Receipts P18,000,000 Gross P18,000,000
Receipts
Less: Less:Sales
Sales Returns P360,000 Returns P360,000
and &Allowances
Allowances

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 Sales
Sales discounts 900,000 1,260,000 discounts 900,000 1,260,000
Net receipts P16,740,000 Net receipts P16,740,000
Add:Other Less:Costof
Gross Income 100,000 Services 5,000,000
Gross Income P16,840,000 Gross P11,740,000
Income
Less:
Deductions 16,190,000
Net Income P650,000
Multiply by
Normal Tax 30% Multiply by 2%
Rate
Normal Tax P195,000 MCIT P234,800

Income Tax Due is P234,800

Other Gross Income: Interest on Notes Receivable is P100,000.

Period Subject to MCIT

For purposes of the MCIT, the taxable year in which business operations
Commenced shall be the year in which the domestic corporation registered with the BIR.
Firms which were registered with BIR in 1994 and earlier years shall be covered by the
MCIT beginning Jan. 1, 1998. Firms which were registered with BIR in any month in
1998 shall be covered by the MCIT in 2002 after the lapse of three calendar year 2002.

Accounting Treatment of Excess MCIT Paid

Any amount paid as excess MCIT shall be recorded in the corporation’s books as
An asset under account title “ Deferred Charges-MCIT”. This asset account shall be
carried forward and may be credited against the NIT 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 MCIT which has not or cannot be so credited against the
Norma Income Tax(NIT) due for the 3-year reglementary period shall lose its creditability.
Such amount shall be remove and deducted from “ Deferred Charges-MCIT” account by a
debit entry to “Retained Earnings” account and a credit entry to “Deferred Charges-MCIT”
account since this tax is not allowable as deduction from gross income it being an income
tax.

……………………………………………………………………

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