chapter 4 Flashcards
_______ shall mean the income tax rates prescribed under Sections 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. Under R.A. 9337 or the Expanded VAT Act of 2005, effective Nov. 1, 2005, the Income tax rate was 35%. This rate was reduced to 30% effective Jan, 1, 2009. Per R.A. 11534 or CREATE Act, effective July 1, 2020, the income tax rate of domestic corporations, in general, shall be 25% (or 20%, see Chapter 3).
“Normal income tax”
For a trading or merchandising concern, _________ 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.
“cost of goods sold”
For taxpayer employing the accrual basis of accounting, the term ______ shall mean amounts earned as gross income.
“gross receipts”
______ means 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; and
cost of facilities directly utilized in providing the service such as depreciation or rental of equipment used and cost of supplies.
Cost of services
__________ 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.
Substantial losses from a prolonged labor dispute
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.
Force majeure
__________shall include substantial losses sustained due to fire, robbery, theft or embezzlement, or for other economic reason as determined by the Secretary of Finance.
Legitimate business reverses
Domestic Corporations Not Subject to MCIT
The minimum corporate income tax (MCIT) shall apply only to domestic corporations subject to the normal corporate income tax. Accordingly, the minimum corporate income tax shall not be imposed upon any of the following:
a. Proprietary educational institutions.
b. Proprietary hospital operations which are non-profit.
c. Domestic corporations engaged in business as depository banks under the expanded foreign currency deposit system, otherwise known as Foreign Currency Deposit.
Resident Foreign Corporations Not Subject to MCIT
The minimum corporate income tax shall only apply to resident foreign corporations which are subject to NIT. Accordingly, the MCIT shall not apply to the following resident foreign corporations:
a. Resident foreign corporations engaged in business as “international carrier” subject to tax at 2.50% of their “gross Philippine billings.”
b. Resident foreign corporations engaged in business as regional operating headquarters (ROHQ) subject to tax at 10% of their taxable income. Provided that effective Jan. 1, 2022, ROHQ shall be subject to normal income tax and MCIT (Section 7 of R.A. 11534).
c. Firms that are taxed under a special income tax regime such as those in accordance with R.A. 7916 and 7227 (the PEZA law and the Bases Conversion Development Act, respectively).
Minimum Corporate Income Tax (MCIT)
Period and MCIT rates:
On or before June 30, 2020 - 2%
July 1, 2020 to June 30, 2023 - 1%
July 1, 2023. - 2%
Relief From the MCIT Under Certain Conditions
*corporation sustained substantial losses on account of a prolonged labor dispute
*or because of force majeure
*or because of legitimate business reverses.
Gross Income for trading/merchandising and manufacturing concerns
Gross Sales xx
less: sales return (xx)
sales discount (xx)
sales allowances (xx)
Net sales xx
less: Cost of Goods Sold (xx)
“ “ “ manufactured and sold (xx)
Gross Income xx
Multiply by 1% (depending on year)
= Minimum Corporate Income Tax XX
“Gross sales” shall include only sales contributory to income taxable under Section 27(A) of the Code.
“Cost of goods sold” shall include the purchase price or cost to produce the merchandise and all expenses directly incurred to bring them to their present location and use.
For a manufacturing concern, _________ shall include 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.
“cost of goods manufactured and sold”
Gross Income for Sale of Services Under the Cash Basis
Gross Receipts xx
less: sales return (xx)
sales discount (xx)
sales allowances (xx)
Net Receipts xx
Cost of service xx
Gross Income XX
Multiply by 1%
=Minimum Corporate Income Tax XX
“Gross receipts” as used herein means amounts actually or constructively received during the taxable year.
For taxpayer employing the accrual basis of accounting, the term “gross receipts” shall mean amounts earned as gross income.
Gross Receipts xx
multiply by 1%
=Minimum Corporate Income Tax XX
Gross Receipts and Cost of Services Per Industry
Revenue Memorandum Circular 4-2003 and 59-2008 clarified items that should comprise ‘gross receipts’ and the corresponding ‘cost of services’ for purposes of computing the gross income on sale of services which shall be the basis of the 1% MCIT. In said circulars, the BIR explicitly enumerated the items that shall comprise the gross receipts and costs of services of the following entities:
Banks and non-bank financial intermediaries performing quasi-banking activities
Insurance and pension funding companies–refer to those engaged in life and non-life insurance business as defined under the Insurance Code and pre-need companies, including health maintenance organizations.
Finance companies and other financial intermediaries not performing quasi-banking activities–refer to those engaged in the business of extending credit facilities to consumers and to industrial, commercial, or agricultural enterprises, including lending investors.
Brokers of securities (excluding banks)
Customs, insurance, real estate, immigration and commercial brokers
General engineering and/or building contractor–refer to those engaged in contracting business in connection with fixed works requiring specialized engineering knowledge and skill (eg. reclamation works, railroads, highways, street roads, tunnels, airports), or with any Structure built, for the support, shelter and enclosure of persons, animals, chattels, or movable property of any kind, requiring in its construction the use of more than two unrelated building trades or crafts, or do or superintend the whole or any part thereto (eg. sewers and sewerage, disposal plants and systems, parks, playgrounds, refineries).
Common carriers or transportation contractors
Hotel, motel, rest/pension/lodging house and resort operators
Food service establishments
Lessors of property–those engaged in the business of leasing out properties, such as tea properties, equipment, and other movable properties
Telephone and telegraph, electric, gas and water utilities
Radio and/or television broadcasting
