Minimum Corporate Income

Tax (MCIT)
Improperly Accumulated
Earnings Tax (IAET)
Gross Income Tax (GIT)

By: Aireen Joy S. Tiempo

Minimum Corporate Income Tax (MCIT)

2% of the gross income

is imposed upon any domestic
corporation beginning the 4th
taxable year.
imposed to corporation has zero or
negative income
imposed whenever the MCIT is
greater than the normal income tax.

Gross Income:

for trading/manufacturing:
- gross income is equal to net sales
less cost of goods sold.
for service concern business under
cash basis:
- net receipts less cost of services
for service concern under accrual
basis accounting:
- gross income = gross receipts

Example:
Venus Corporation, a resident foreign corporation, is on its 5th
year of operations in 2009. It has the following financial data:
Gross sales
Sales return
Sales Discount
Cost of Goods sold
Deductions
Interest income from Intl bank under FCDS
Interest on Notes receivable
Dividend from a resident corporation
Capital gain on sale of shares of stock to a
domestic corp, a direct buyer

P30,000,000
900,000
1,500,000
10,500,000
15,000,000
3,000,000
50,000
200,000
90,000

Answer: (under MCIT)

Gross sales
Less: Sales Returns
900,000
Sales Discount 1,500,000
Net Sales
Less: Cost of goods sold
Gross Income
Multiply by
MCIT

P30,000,000
2,400,000
P27,600,000
10,500,000
P17,100,000
2%
P
342,000
========

Answer: (under normal tax)

Gross sales
P30,000,000
Less: Sales return
900,000
Sales discount 1,500,000
2,400,000
Net Sales
P27,600,000
Less: Cost of goods sold
10,500,000
Gross profit from sales
P17,100,000
Add: Other gross income
250,000
Gross Income P17,350,000
Less: Deductions
15,000,000
Net Income
P 2,350,000
Multiply by tax rate
30%
Normal Tax
P
705,000
========

Cont.,,,

Other Gross income:

interest on notes
Dividend from resident corp.
Total
Final tax on passive income:
Interest Income From Intl Bank
(P3,000,000 x 7 %)
Capital Gain (90,000 x 5%)
Total

50,000
200,000
P 250,000
=======

P 225,000
4,500
P 229,500
======
Income tax due
P 705,000
=======
The higher between MCIT and normal income tax.

Improperly Accumulated Earnings

Tax (IAET):

Issued by BIR on March 9, 2001, based

on its RR 2-2001
there is imposed for each taxable year
a tax equal to 10% of the improperly
accumulated taxable income of
corporation.
the rationale is that if the earnings and
profits were distributed, the shareholder
would be liable to income tax thereon.

Coverage:

domestic corporation classified as closelyheld corporations.

Not covered:
- banks & other non-bank financial
intermediaries
- insurance companies
- publicly-held corporation
-taxable partnership & GPP
- non-taxable joint ventures

Tax base of IAET:

taxable income plus

- income exempt from tax
- income excluded from gross income
- income subject to final tax; and
- the amount of NOLCO
taxable income will be reduced by:
- income tax paid/payable
- dividends actually/constructively paid
- amounts reserved for reasonable needs
of the business

Example:
Assume that in taxable year 2009, Peace Corp., a domestic
corporation, is subject to IAET after having been assessed
as retaining earnings beyond the reasonable needs of
business. Following are related data:
Gross sales 7,500,000
Sales return & allow.
225,000
Sales discount
375,000
Cost of goods sold 2,625,000
Deduction 3,275,000
Interest income under FCDS
750,000
Interest on notes receivable
50,000
Dividend from resident corp.
100,000
Dividend from domestic corp.
65,000
CG on sale of shares, direct buyer
75,000
Dividend paid
800,000

Answer:
Gross Sales
7,500,000
Less: SR
225,000
SD
375,000 600,000
Net Sales
6,900,000
Less: CGS
2,625,000
GP from sales
4,275,000
Add: other GI
150,000
Gross Income
4,425,000
Less: Deduction
3,275,000
Net Income
1,150,000
Multiply by
30%
Normal tax
P 345,000
======

Gross sales
Less: SR
SD
Net Sales
Less: CGS

7,500,000
225,000
375,000

600,000
6,900,000
2,625,000

Gross Income

4,275,000

Multiply by:
MCIT

2%
P 85,500
======

Cont.,,,
Taxable Income
1,150,000
Add: Income exempt from tax
65,000
Income subject to final tax
Int. Income under FCDS
750,000
CG on sale 75,000
890,000
Total
2,040,000
Less: Dividends paid
800,000
Income tax 2009
345,000
FT in passive income
60,000
1,205,000
Improperly accumulated earnings
835,000
Multiply by
10%
Improperly Accumulated earnings tax
P 83,500
======

Gross Income Tax (GIT)

o
o

15% of gross income

Applicable to firms whose ratio of cost
of sales to gross sales or receipts from
all sources does not exceed 55%.
applicable to domestic and resident
foreign corporation.
the election of the GIT by the
corporation shall be irrevocable for
three consecutive taxable years.

Example: ( For
merchandising/manufacturing)
Dwight Corporation, a domestic merchandising
corp., opts to be taxed under the GIT for the
taxable year 2009. compute the GI and GIT if its
financial records show the following:
Gross Sales
Sales Return and allow.
Sales Discount
Cost of goods sold
Deductions

15,000,000
600,000
450,000
6,750,000
3,375,000

Answer:
Gross Sales
Less: Sales Return
Sales Disc.
Net Sales
Less: Cost of goods sold
Gross income
Multiply by
Gross Income tax

P
600,000
450,000

15,000,000
1,050,000
13,950,000
6,750,000
7,200,000
15%
1,080,000
=======

Note: Ratio of cost of goods sold is 45% (6,750/15,000)

Example: (engaged in sale of services)

For the taxable year 2009, Merit Corporation, a
domestic company providing for art design
services opts for the GIT. It has the ff., data
Gross receipts
Sales Return and allow.
Sales Discount
Cost of services
Deductions

10,000,000
400,000
500,000
4,500,000
2,000,000

Answer:
Gross Receipts
Less: Sales Return
Sales Disc.
Gross income
Multiply by
Gross Income tax

10,000,000
400,000
500,000

900,000
9,100,000
15%
P 1,365,000
=======

Note: Ratio of cost of services is 45% (4,500/10,000)

cost of services is not deducted to arrive at gross

income in case of sale of services using cash basis.