MODULE

3 REGULAR INCOME TAXATION: REGULAR

CORPORATIONS

INTRODUCTION

This module covers taxation of regular domestic and resident foreign

corporations, the improperly accumulated earnings tax and filing and payment of
income tax returns.

INTENDED LEARNING OUTCOMES

After the end of this chapter, students are expected to comprehend and
demonstrate knowledge of the following:
1. The regular corporate income tax (RCIT) for domestic and resident foreign
corporations.
2. The minimum corporate income tax (MCIT)
3. Filing and payment of income tax returns

LEARNING CONTENT

THE REGULAR CORPORATE INCOME TAX

The regular corporate income tax applies to all corporations in general. It covers all
taxable income of corporations that are not subject to final tax or capital gains tax.

Income tax rules on regular corporations

Domestic corporations 20% or 25% Regular Corporate income tax subject to the
Minimum Corporate Income Tax

Resident corporations 25% Regular Corporation income tax subject to Minimum

Corporate Income Tax

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 Resident Foreign
Taxpayer Type Domestic Corporation Corporation
MSME corporate taxpayers
With < P5M taxable income 20% 25%
With > P5M taxable income 25% 25%

Large corporate taxpayers

With < P5M taxable income 25% 25%
With > P5M taxable income 25% 25%

MINIMUM CORPORATE INCOME TAX

The most peculiar feature of corporate income taxation is the Minimum Corporate
Income Tax (MCIT). Corporations are subject to a minimum corporate income tax of 2%
of gross income. During the pandemic, the MCIT is temporarily reduced to 1% of gross
income starting July 1, 2020 to June 30, 2023. It reverted back last July 1, 2023.

As a minimum tax, the MCIT is payable when:

a. The corporation has zero or negative income.
b. MCIT is greater than the regular corporate income tax

Scope of the Minimum Corporate Income Tax

The MCIT is applicable to every corporation taxable to the regular corporate income tax
(25% or 20%) including non-profit, exempt and special corporations with respecte to
their taxable income subject to regular corporate income tax, but to their income subject
to special tax rates.

MCIT Exempt entities

1. Real estate investment trusts or REITs under RA9856
2. Domestic corporations which opted to be taxed under the 15% corporate income
tax under the 15% corporate income tax (gross income tax)
3. Domestic or resident corporations subject to special tax rates
a. Proprietary educational institutions and non-profit hospitals
b. FCDUs and EFCDUs
c. International carriers
d. Firms subject to special income tax such as PEZA and BCDA locators
4. All non-resident foreign corporations.

Timing of Imposition of MCIT

MCIT is imposed beginning on the fourth taxable year immediately following the year
in which such corporation commenced its operations, when it is greater than the regular
income tax computed for the taxable year. Simply stated, MCIT applied on the X+4th
year of operations.

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For instance, a corporation which started operations on any day in 2017 will be covered
by MCIT in 2021. The rule is apparently intended to enable the business to obtain
competitive traction before being subjected to MCIT

MCIT Gross income under the NIRC

For corporation involve in: “Gross Income” means

1. Sale of goods Gross sales less sales returns, discounts, allowances, and
CGS
2. Sale of service Gross receipts less sales returns, discounts, allowances and
sales of services
Gross sales – means the total consideration agreed upon by the buyer and the seller for
the sale of goods. Gross sales included cash (collected) sales and account (uncollected)
sales

Gross receipts – means cash collections for services rendered or to be rendered. Gross
receipts include reimbursements by client for out of pocket expenses incurred by the
service provider

Cost of goods sold (COGS) includes all business expenses directly incurred to produce
the merchandise and to bring them to their present location and use.
a. For trading or merchandising concern, COGS shall include the invoice cost of the
goods sold, import duties, freight in transporting the goods to the place where
the goods are actually sold and insurance while the goods are in transit
b. For a manufacturing concern, COGS 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 services shall mean all direct cost and expenses necessarily incurred to provide
the services required by the customers and clients including:
a. Salaries and employee benefits of personnel, consultants and specialists directly
rendering the service; and
b. Cost of facilities directly utilized in providing the service such as depreciation or
rental of equipment used and cost of supplier

In the case of banks, cost of services, shall include interest expense

It is submitted that the gross income referred to by the NIRC is the gross income from
operations

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ILLUSTRATIVE MCIT COMPUTATION

MCIT of a trading concern

A corporate taxpayer subject to MCIT reported the following for 2024.

Gross sales P 3,000,000

Sales discounts & allowances 30,000
Sales returned by customers 20,000
Interest income from bank deposit 20,000
Rental income from vacant premise 20,000

Inventory, at the start of the year 220,000

Gross purchases of merchandise 700,000
Net freight on purchases during the years 25,000
Purchase discounts and allowances
On defective merchandise 40,000
Purchases returned to suppliers 50,000
Inventory, at the end of the year 160,000

Compute for the gross income and MCIT

MCIT of a Manufacturing concern

A foreign corporation had the following data in 2024, its fourth year of operation:

Sales, net of discounts and allowances P 2,400,000

Gain on sale of machineries 100,000
Dividend income from domestic corporations 20,000
Material purchased
Conversion costs incurred:
Direct labor used 350,000
Factory overhead 280,000

Physical counts conducted at the start and end of the year revealed the following
balances in inventory

January 1 December 31
Raw materials P120,000 P180,000
Work-in-process P230,000 P170,000
Finished goods P130,000 P160,000

Compute for the gross income and MCIT

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MCIT of a service provider

Lacoste Corporation provides consultancy services to various clients. It reported the

following in 2024, its fifth year of operation

Collections and billings

Collection on services rendered net of discounts P3,200,000

Uncollected bills for services rendered 800,000
Advanced collections for services to be provided 600,000
Client reimbursements for out-of-pocket expenses
Incurred by consulting staff 400,000
Client reimbursements for client expenses paid or
Advanced by Lacoste 150,000
Royalties from a software developed by Lacoste 30,000

Expenses
Salaries of consulting staff P1,600,000
Salaries of administrative employees 700,000
Office rent and utilities expense 420,000
Office depreciation expense 50,000
Office supplies expense 35,000
Interest expense 20,000
Insurance expense 40,000
Local tax expense 14,000

Compute for the gross income and MCIT

ANNUAL RCIT AND MCIT INTEGRATIVE ILLUSTRATIONS
Integration 1
La View Corp., a MSME, reported the following on its fifth year of operation:

Sales, net of 1% withholding tax P4,950,000

Cost of Sales 2,000,000
Interest from deposit, net of tax 75,000
Gain on sale of domestic stocks directly to buyer 150,000
Casual rent income, net of 5% creditable w/tax 95,000
Interest income from advances to employees 50,000
Business expenses 3,100,000
Estimated quarterly tax payments 10,000

Compute for RCIT and MCIT. Identify how much is the income tax payable.

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Integration 2

PC Repair, a MSME business partnership providing computer repair services, reported the
following on its sixth year of operation.

Service fees, net of P100,000 withholding tax P1,900,000

Salaries of staff, supplies and other direct costs 1,000,000
Interest from bank deposits, net 50,000
Gain on sale of land classified as capital asset 400,000
Gain on sale of used equipment 150,000
Administrative business expenses 500,000
Estimated quarterly income tax payments 25,000

Compute for RCIT and MCIT. Identify how much is the income tax payable.

QUARTERLY FILING OF INCOME TAX RETURN

Corporations shall file their quarterly income tax returns for the first three quarters of
the year due on or before 60 days from the end of each quarter.

Illustration

Henry Inc., a large scale enterprise, had the following quarterly gross income and
deductions in million pesos for the year 2023:

Q1 Q2 Q3 Q4
Gross income P200 P250 P220 P280
Itemized deductions 100 130 120 140
Withholding tax 22 20 18 31

Compute for the quarterly tax payable

QUARTERLY MCIT

Illustration
Binorongan Inc. had the following quarterly RCIT and MCIT during 2021:

Compute for the quarterly tax payable.

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RELIEF FROM THE MINIMUM CORPORATE INCOME TAX
Upon recommendation of the Commission of Internal Revenue, the Secretary of
Finance may suspend the imposition of MCIT upon submission of proof that the
corporation sustained substantial losses on account of:
a. Prolonged labor dispute
b. Force majeure
c. Legitimate business reverses

MODULE ACTIVITY/ASSESSMENT

ACTIVITY

TRUE OR FALSE
1. Domestic corporations are subject to either gross income tax or regular
corporate income tax.
2. A partnership organized under Philippine law is a domestic corporation for
purposes of taxation.
3. Exempt corporations are subject to MCIT with respect to their income subject to
regular corporate income tax.
4. MCIT does not apply to foreign corporations.
5. As a rule, corporations always pay tax even if there is a loss effective from the
fourth year of operations.
6. Resident foreign corporations are subject to either gross income tax or regular
corporate income tax.
7. Foreign MSMEs can claim 20% corporate income tax.
8. Non-resident foreign corporations are subject to MCIT.
9. The 20% corporate income tax cannot apply if the gross profit exceeds
P5,000,000.
10. Large corporations with taxable income not exceeding P5,000,000 can claim the
20% corporate income tax.

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