MMCO Continuing Professional Development Training Center (CPDTC)

2F MMCO Building, 8000 Lakeview Ph3 Angela Street, Halang Calamba City Laguna, Philippines
Tel No. (02) 330-8617, (049) 523-6031, (02) 330-6057
CPA REVIEW (Oct 2019 Batch)
MCIT/IAET Ismael R. Cabonse, CPA

2% Minimum Corporate Income Tax (MCIT)

• Tax Base – Gross income is computed as follows: (Note: Passive incomes which have been subject to a final tax at source shall not
form part of gross income for purposes of the MCIT).

For Manufacturing Business:

Gross Sales* P xxx
Less: Sales returns/Discounts/Allowances xxx
Net Sales xxx
Less: Cost of Goods Sold** xxx
GROSS INCOME P xxx
*Gross sales shall include only sales contributory to income taxable under Sec. 27(A) of the Code.
**Cost of goods sold shall include all business expenses directly incurred to produce the merchandise to bring them to their present
location and use. Cost of goods manufactured and sold means 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.

For Merchandising or Trading:

Gross Sales* P xxx
Less: Sales returns/Discounts/Allowances xxx
Net Sales xxx
Less: Cost of Goods Sold** xxx
GROSS INCOME P xxx
*Gross sales shall include only sales contributory to income taxable under Sec. 27(A) of the Code.
**Cost of goods sold 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.

For Services:
Gross Receipts* P xxx
Less: Sales returns/Discounts/Allowances xxx
Net Sales xxx
Less: Cost of Services** xxx
GROSS INCOME P xxx
*Gross receipts means amounts actually or constructively received during the taxable year; Provided, that for taxpayers employing
the accrual basis of accounting, the term "gross receipts" shall mean amounts earned as gross income.
**Cost of services means all direct costs 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 supplies: Provided, however,
that "cost of services" shall not include interest expense except in the case of banks and other financial institutions.

• Covered taxpayers:
i. Domestic corporation subject to the normal corporate income tax;
ii. Resident foreign corporation subject to the normal corporate income tax;
iii. In the case of a domestic corporation or a resident corporation whose operations or activities are partly covered by the
regular income tax system and partly covered under a special income tax system, the MCIT shall apply on operations
covered by the regular income tax system. For example, if a BOI-registered enterprise has a "registered" and an
"unregistered" activity, the MCIT shall apply to the unregistered activity.
• Not covered taxpayers:

 Domestic corporations operating as proprietary educational institutions subject to tax at ten percent (10%) on their
taxable income.
 Domestic corporations engaged in hospital operations which are nonprofit subject to tax at ten percent (10%) on their
taxable income.
 Domestic corporations engaged in business as depository banks under the expanded foreign currency deposit system,
otherwise known as Foreign Currency Deposit Units (FCDUs), on their income from foreign currency transactions with
local commercial banks, including branches of foreign banks, authorized by the Bangko Sentral ng Pilipinas (BSP) to
transact business with foreign currency deposit system units and other depository banks under the foreign currency
deposit system, including their interest income from foreign currency loans granted to residents of the Philippines under
the expanded foreign currency deposit system, subject to final income tax at ten percent (10%) of such income.
 Firms that are taxed under a special income tax regime such as those in accordance with RA 7916 and 7227 (the PEZA law
and the Bases Conversion Development Act, respectively).
Page 1 of 13
  Resident foreign corporations engaged in business as "international carrier" subject to tax at two and one-half percent (2
½%) of their "Gross Philippine Billings“.
 Resident foreign corporations engaged in business as Offshore Banking Units (OBUs) on their income from foreign
currency transactions with local commercial banks, including branches of foreign banks, authorized by the Bangko Sentral
ng Pilipinas (BSP) to transact business with Offshore Banking Units (OBUs), including interest income from foreign
currency loans granted to residents of the Philippines, subject to a final income tax at ten percent (10%) of such income.
 Resident foreign corporations engaged in business as regional operating headquarters subject to tax at ten percent (10%)
of their taxable income.

• When to impose:

 It is imposed upon the covered corporations 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.
 Any excess of the MCIT over the normal income tax as computed under Sec. 27(A) of the Code shall be carried forward on
an annual basis and credited against the normal income tax for the three (3) immediately succeeding taxable years.
 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 Bureau of Internal Revenue (BIR).

• When to file and pay (RR 12-07):

 The computation and the payment of MCIT shall likewise apply at the time of filing the quarterly corporate income tax as
prescribed under Section 75 and Section 77 of the Tax Code, as amended.
 Thus, in the computation of the tax due for the taxable quarter, if the computed quarterly MCIT is higher than the
quarterly normal income tax the tax due to be paid for such taxable quarter at the time of filing the quarterly corporate
income tax return shall be the MCIT which is two percent (2%) of the gross income as of the end of the taxable quarter.
 In the payment of said quarterly MCIT, excess MCIT from the previous taxable year/s shall not be allowed to be credited.
Expanded withholding tax, quarterly corporate income tax payments under the normal income tax, and the MCIT paid in
the previous taxable quarter/s are allowed to be applied against the quarterly MCIT due.
 Quarterly MCIT paid on the Quarterly Income Tax Return shall be credited against the normal income tax at year end if in
the preparation and filing of the annual income tax return and in the final computation of the annual income tax due, it
appears that the normal income tax title is higher than the computed annual MCIT.
 However, if in the computation of the annual income tax due, the computed annual MCIT due appears to be higher than
the annual normal income tax due, what may be credited against the annual MCIT due shall only be the quarterly MCIT
payments of the current taxable quarters, the quarterly normal income tax payments in the quarters of the current
taxable year, the expanded withholding taxes in the current year and excess expanded withholding taxes in the prior year.
Excess MCIT from the previous taxable year/s shall not be allowed to be credited therefrom as the same can only be
applied against normal income tax.

• Relief from MCIT:

 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:
I. sustained substantial losses on account of a prolonged labor dispute or
II. because of "force majeure" or
III. because of legitimate business reverses.
 The term "substantial losses from a prolonged labor dispute" 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.
 The term "force majeure" 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.
 The term "legitimate business reverses" shall include substantial losses sustained due to fire, robbery, theft or
embezzlement, or for other economic reason as determined by the Secretary of Finance.
ILLUSTRATIVE MCIT COMPUTATION

Illustration 1: MCIT of a trading concern

A corporate taxpayer subject to MCIT reported the following:

Gross sales P 1,000,000

Sales discounts & allowances for defects 30,000
Sales returned by customers 20,000
Interest income from bank deposit 20,000
Rental income from vacant premises 60,000

Inventory, at the start of the year 220,000

Page 2 of 13
 Gross purchases of merchandise 700,000
Net freight on purchases during the year 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

The cost of goods sold shall first be computed as follows:

Beginning inventory P 220,000

Add: Net purchases
Gross purchases P 700,000
Add: Freight in 25,000
Less: Purchase disc. & allowances 40,000
Purchase returns 50,000 635,000
Total goods available for sale 855,000
Less: Ending inventory 160,000
Cost of goods sold 695,000

The minimum corporate income tax shall be computed as follows:

Gross sales P 1,000,000

Less: Sales discounts and allowances P 30,000
Sales returns 20,000 50,000
Net sales 950,000
Less: Cost of goods sold 695,000
Gross income from operations P 255,000
Add: Other taxable income not subject to final tax
Rental income from vacant premises 60,000
Total gross income P 315,000
Multiply by: MCIT rate 2%
Minimum Corporate Income Tax (MCIT) P 6,300
Note: The interest income from banks is excluded in total gross income because it is subject to final income tax.

Illustration 2: MCIT of a Manufacturing Corporation

A foreign corporation had the following data on 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 980,000
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 P 120,000 P 180,000
Work-in-process 230,000 170,000
Finished goods 130,000 160,000

The cost of goods sold shall be determined as follows:

Raw materials, beginning P 120,000

Net purchase of materials 980,000
Less: Raw materials, end 180,000
Raw materials used P 920,000
Add: Conversion costs
Direct labor P 350,000
Factory overhead 280,000 630,000
Total manufacturing costs incurred P 1,550,000
Add: Work in process, beginning 230,000
Total manufacturing costs placed in process
1,780,000
Less: Work in process, ending 170,000
Cost of goods manufactured or finished P 1,610,000
Add: Finished goods, beginning 130,000
Total cost of goods available for sale 1,740,000
Page 3 of 13
 Less: Finished goods, end 160,000
Cost of goods sold P 1,580,000

The minimum corporate income tax shall be computed as follows:

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

Less: Cost of goods sold 1,580,000
Gross income from operations 820,000
Add: Other taxable income not subject to final tax
Gain on sale of machineries 100,000
Total gross income P 920,000
Multiply by: MCIT rate 2%
Minimum Corporate Income Tax (MCIT) P 18,400

Note: The dividend income from a domestic corporation is excluded in total gross income because it is exempt from tax.

Illustration 3: MCIT of a Service Provider

IRC Corporation provides consultancy services to various clients. It reported the following in 2016, its fifth year of operation:

Collections and billings

Collections on services rendered net of discounts P 3,200,000

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 IRC 150,000
Royalties from a software developed by IRC 30,000

Expenses:

Salaries of consulting staff P 1,600,000

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

The gross receipts of IRC shall be determined as follows:

Net collections on services rendered P 3,200,000

Collections on services to be provided (advances) 600,000
Reimbursements for firm’s out-of-pocket costs 400,000
Gross receipts P 4,200,000

The direct cost of services of IRC shall be as follows:

Consulting salaries expense P1,600,000

Office rent and utilities expense 420,000
Office depreciation expense 50,000
Office supplies expense 35,000
Direct cost of services P2,105,000

The minimum corporate income tax shall be computed as follows:

Gross receipt P 4,200,000
Less: Cost of services 2,105,000
Gross income from operations P 2,905,000
Add: Other gross income not subject to final tax 0
Total gross income P 2,905,000
Multiply by: MCIT rate 2%
Minimum corporate income tax P 41,900

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MCIT AND RCIT: BASIC APPLICATION

Illustrative 1

A corporate taxpayer which started operations in 2012 had the following results of operations in 2015 and 2016:
2015 2016
Total gross income P 2,100,000 P 4,000,000
Dividend income- domestic - 50,000
Business expenses 2,600,000 3,300,000
Net income (loss) (P 500,000) P 750,000

The MCIT will commence in 2016 (i.e. 2012+ 4). Since there is no MCIT yet, the tax payable in 2015 is nil.

The 2016 income tax due of the corporation shall be determined as:

Total gross income P 4,000,000

Less: Itemized deductions
Regular allowable deductions P 3,300,000
NOLCO – 2015 500,000 3,800,000
Taxable net income P 200,000
Multiply by: Corporate income tax rate 30%
Regular corporate income tax- 2016 P 60,000

Total gross income P 4,000,000

Multiply by: MCIT rate 2%
Minimum corporate income tax – 2016 (HIGHER) P 80,000
The P 80,000 MCIT is the income tax
due in 2016. Note that the dividend income is exempt from tax.
Illustrative 2

A corporation which started operation in 2011 reported the following:

2015 2016
Total gross income P 3,000,000 P 3,200,000
Less: Regular allowable deductions 1,600,000 2,800,000
Special allowable deductions 400,000 500,000
Taxable net income P 1,000,000 (P 100,000)
The RCIT and MCIT are as follows:

2015 2016
RCIT (30% of taxable net income) P 300,000 P 0
MCIT (2% of gross income) P 60,000 P 64,000
The income tax due shall be P 300,000 P 64,000

Integration 1

ABC Trading Corporation reported the following on its fifth year of operation:

Sales, net of 1% withholding tax P 4,950,000

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

The regular income tax and minimum corporate income tax shall be computed as follows:

Sales (P 4,950,000/99%) P 5,000,000

Less: Cost of sales 2,000,000
Gross income from operations P 3,000,000
Add: Other gross income not subject to final tax
Casual rent income (P 95,000/ 95%) P 100,000
Interest from employee advances 50,000 150,000
Total gross income P 3,150,000
Less: Regular allowable deductions 3,100,000
Taxable net income P 50,000
Multiply by: Corporate income tax rate 30%
Regular corporate income tax P 15,000
Page 5 of 13
 Total gross income P 3,150,000
Multiply by: MCIT rate 2%
Minimum corporate income tax P 63,000

The income tax payable of ABC Trading shall be computed as follows:

Income tax due – MCIT P 63,000

Less: Tax credits
Creditable withholding tax withheld on gross income:
Sales (1% x P 100,000) P 50,000
Rent income (5% x P 5,000,000) 5,000
Total creditable withholding tax P 55,000
Estimated quarterly tax payments 10,000 65,000
Income tax payable or (refundable) (P 2,000)

Illustration 2

SYTEC, a business partnership providing computer repair services, reported the following in the sixth year of operation:

Service fees, net of P 100,000 withholding tax P 1,900,000

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 60,000

THE RCIT and MCIT shall be computed as follows:

Service fees (P 1,900,000 + P 100,000) P 2,000,000

Less: Direct cost of services 1,000,000
Gross income from operations P 1,000,000
Add: Other gross income not subject to final tax
Ordinary gain on sale of equipment 150,000
Total gross income P 1,150,000
Less: Regular allowable deductions 500,000
Taxable net income 650,000
Multiply by: Corporate income tax rate 30%
Regular corporate income tax P 195,000

Total gross income P 1,150,000

Multiply by: MCIT rate 2%
Minimum corporate income tax P 23,000
The income tax due and payable of SYTEC shall be computed as:

Income tax due – RCIT P 195,000

Less: Tax credits
Withholding tax on gross income P 100,000
Quarterly estimated tax payments 60,000 160,000
Income tax payable P 35,000

EXCESS MCIT CARRY-OVER

The excess of the MCIT over the RCIT in any year is a tax credit that is deductible against any RCIT tax due in the immediately succeeding
three years.

Excess MCIT Carry-Over Rules

• Excess MCIT can be used only as a tax credit against RCIT tax due in any of the three subsequent years. Excess MCIT cannot be
deducted against MCIT tax due.
• Credit for the Excess MCIT from prior years can be taken up to full amount of RCIT tax due in the next three years.
• When there are several Excess MCITs from prior years, tax crediting shall be made in a first- in, first-out basis.
• Unused Excess MCIT at the end of the three-year period shall expire and will no longer be used.

Illustration 1: Excess MCIT – Basic Application

A corporation had the following MCIT and RCIT data since 2013:

Page 6 of 13
 2013 2014 2015 2016
MCIT P 80,000 P 95,000 P 20,000 P 60,000
RCIT 20,000 85,000 40,000 80,000
Income tax due P 80,000 P 95,000 P 40,000 P 80,000
MCIT Excess (MCIT – RCIT) P 60,000 P 10,000 - -

Required: ignoring the effects of creditable withholding tax and estimated tax payments, compute the income tax payable.

Solution:

In 2013, the income tax payable is the P 80,000 MCIT. The P 60,000 Excess MCIT is a tax credit referred as Excess MCIT – 2013 and is valid
until 2016.

In 2014, the income tax payable is the P 95,000 MCIT. The P 10,000 Excess MCIT, referred to as Excess MCIT- 2014, is valid until 2017. No
tax credit shall be made since Excess MCIT cannot be credited against MCIT tax due.

In 2015, the income tax payable is nil.

2013 2014 2015

Excess MCIT prior year P 60,000 P 10,000
Income tax due P 40,000
Tax credit (40,000) (P 40,000)
Adjusted Excess MCIT P 20,000 P 10,000 P 0

Note that full credit against the available RCIT tax due is taken. Since there are two Excess MCITs, first-in first-out (FIFO) crediting is
employed.

In 2016, the income tax payable is P 50,000.

2013 2014 2015 2016

Excess MCIT prior year P 20,000 P 10,000
Income tax due P 80,000
Tax credit (20,000) (10,000) (P 30,000)
Adjusted Excess MCIT P - P - P 50,000

Illustration 2: Expired Excess MCIT

TMIC, Inc. became subject to MCIT in 2012. MCIT and RCIT data through the years were:

2012 2013 2014 2015 2016

MCIT P 400 P 620 P 200 P 350 P 350
RCIT 0 500 300 200 400
Income tax due P 400 P 620 P 300 P 350 P 400
Excess MCIT P 400 P 120 P - P 150 P -

Required: Compute the income tax payable in each year.

Solution:

The income tax payable (still due) in each year is indicated in bold font.

2012 2013 2014 2015 2016

Income tax due P 400 P 620 P 300 P 350 P 400

Excess MCIT P 400 P 120 P 150

MCIT Application (300) (300)
Adjusted Excess MCIT P *100 P 120
P 0
MCIT application (Expired) ( 120) ( 150) ( 270)
P 130
Note:

1. * The P100 unused Excess MCIT-2012 cannot be used in 2015 since the tax due for that year is the MCIT (i.e. P 350). Excess MCIT prior
year cannot be credited against MCIT tax due.

2. the P 100 Excess MCIT-2012 expired at the end of 2015 and cannot be carried over as tax credit in 2016. Thus, only the 2013 and 2015
excess MCITs can be credited in 2016.

Illustration 3: NOLCO and MCIT

A corporation which became subject to MCIT in 2015 had the following statement of income in 2015 and 2016.

2015 2016
Page 7 of 13
 Gross income P 300,000 P 500,000
Business expenses 420,000 250,000
Net income (P 120,000) P 250,000
Required: Compute the income tax payable in each year.

Solution:

The taxable net income and RCIT shall be computed as follows:

2015 2016
Total gross income P 300,000 P 500,000
Less: Allowable deductions 420,000 250,000
Net income (NOLCO) ( P 120,000) P 250,000
Less: NOLCO – 2015 application ( 120,000)
Taxable income ( P 120,000) P 130,000

2015 2016
Taxable income 0
Multiply by: 30% 30%
Regular corporate income tax P0 P 39,000
Minimum corporate income tax P 6,000 P 10,000
Excess MCIT P 6,000

The income tax payable in each year is indicated below.

2015 2016
Income tax due P 6,000 P 39,000
Less: Excess MCIT – 2015 ( 6,000)
Income tax payable (still due) P 33,000

10% Improperly Accumulated Earnings Tax (IAET)

• Tax Base: Improperly accumulated taxable income earned beginning January 1, 1998
• Rationale: If earnings/profits were distributed, the shareholders would then be liable for income tax.
• Nature: A penalty imposed to a corporation for the improper accumulation of earnings and as a form of deterrent to avoid tax
upon shareholders.
• Coverage: Domestic corporations classified as closely-held corporations
1. at least 50% in value of the outstanding capital stock, or
2. at least 50% of the total combined voting power of all classes of stock entitled to vote is owned, directly or indirectly, by
or for not more than 20 individuals.
• Corporations not covered:
1. Banks and other non-bank financial intermediaries
2. Insurance Companies
3. Publicly held corporations
4. Taxable partnerships
5. General professional partnerships
6. Non-taxable joint ventures
7. PEZA-registered enterprises
8. BCDA-registered enterprises
9. Other entities registered under special economic zones enjoying special tax rates on their registered operations on
activities
• Allowable retention of excess surplus. To retain excess surplus (not subject to IAET), the corporation should be able to prove:
1. An immediate need for the accumulation of the earnings and profits; or
2. The direct correlation of anticipated needs to such accumulation of profits
3. Allowance for the increase in the accumulation of earnings up to 100% of the paid-up capital or the amount contributed
to the corporation representing the par value of the shares of stock, hence, any excess capital over and above the par
shall be excluded. (RMC 35-11).
4. Earnings reserved for:
I. Definite corporate expansion projects as approved by the Board of Directors or equivalent body.
II. Building, plants or equipment acquisition as approved by the BOD or equivalent body.
III. Compliance with loan covenants or pre-existing obligations under a legitimate business agreement.
IV. Earnings required by law or applicable regulations to be retained by the corporation or in respect of which
there is legal prohibition against its distribution.
V. For Philippine subsidiaries of foreign corporations, all undistributed earnings intended or reserved for
investments within the Philippines as can be proven by corporate records and/or relevant documentary
evidence.
Page 8 of 13
 • Time of imposition and payment:
1. Dividends must be declared and paid or issued not later than one (1) year following the close of the taxable year.
2. Otherwise, the IAET should be paid within 15 days thereafter.

Statutory Formula:

Taxable income xxx

Add: Income exempt from tax xxx
Income subject to final tax xxx
Income excluded from gross income xxx
Amount of net operating loss carry-over (NOLCO) deducted xxx
Less: Income tax paid/payable for the taxable year (xxx)
Dividends actually or constructively paid/issued for the (xxx)  Profits
applicable year’s taxable income
already
Amount reserved for reasonable business needs emanating from (xxx)
subjected to
the covered year’s taxable income
IAET TAX BASE FOR IAET P xxx will no longer
be subjected to
said tax in later
years even if not declared as dividends.
 Profits which have been subjected to IAET, when finally declared as dividends, shall be subject to tax on dividends, if any.

The IAET under the NIRC

Upon determination of an improper accumulation, the tax is computed as follows:

Taxable income P xxx,xxx

Less: Corporate income tax due xxx,xxx
Add: Net operating loss carry-over xxx,xxx
Earnings from regular income, net of tax P xxx,xxx
Passive income, net of final tax xxx,xxx
Capital gains, net of capital gains tax xxx,xxx
Exempt or excluded income xxx,xxx
Total earnings xxx,xxx
Less: P xxx,xxx
Dividends declared P xxx,xxx
Reasonable appropriations xxx,xxx xxx,xxx
Improperly accumulated earnings P xxx,xxx
Multiply by: IAET rate 10%
Improperly Accumulated Earnings Tax P xxx,xxx

Illustration 1: IAET Basic Application

IDSS, Inc. was assessed by the BIR for improperly accumulating profits. IDSS reported the following in 2014:

Gross income P 500,000

Business expense 200,000
Dividend income- domestic 30,000
Royalties, net of final tax 40,000
Dividends declared 100,000

The improperly accumulated tax shall be computed as follows:

Gross income P 500,000

Less: Regular allowable itemized deductions 200,000
Taxable income P 300,000
Less: Corporate income tax due* 90,000
Profits from regular income P 210,000
Add: Dividend income – domestic 30,000
Royalties, net of tax 40,000
Total profits P 280,000
Less: Dividends declared 100,000
Improperly accumulated earnings P 180,000
Multiply by: IAET rate 10%
Improperly Accumulated Earnings Tax P 18,000

Note: * The higher of the RCIT computed as P 300,000 x 30% = P 90,000, and the MCIT computed as P 500,000 x 2% = P 10,000.

Illustration 2: IAET Advanced application

Page 9 of 13
SNAP Corporation is on its fifth year of business operation when it was assessed by the BIR for improperly accumulating profits.

Gross income P 2,000,000

Business expense 1,400,000
NOLCO prior years 500,000
Dividend income – domestic 30,000
Gross interest income – bank 50,000
Gain on sale of domestic stocks directly to buyer 200,000
Gain on sale of land classified as capital asset
(Selling price = P 2,000,000; fair value = P 2,500,000) 500,000
Dividends declared 100,000
Appropriation for treasury stocks 50,000
Appropriation for plant expansion 150,000
The improperly accumulated earnings tax will be computed as follows:

Note
Taxable income 1 P 100,000
Less: Corporate income tax due - MCIT 40,000
Add: NOLCO prior years P 500,000
Earnings from regular income* 560,000
Dividend income P 30,000
Interest income bank, net of final tax 40,000
Net gain on sale of domestic stocks 185,000
Net gain on sale of land, a capital asset 350,000
Total earnings P 1,165,000
Less:
Dividends declared P 100,000
Reasonable appropriations
Treasury stocks 50,000
Plant expansion 150,000 300,000
Improperly accumulated earnings P 865,000
Multiply by: IAET rate 10%
Improperly Accumulated Earnings Tax P 86,500

Notes to IAET computation:

Gross income P 2,000,000

Less: Business expenses P 1,400,000
NOLCO prior years 500,000 1,900,000
Taxable net income P 100,000
Multiply by: Regular income tax rate 30%
Regular corporate income tax P 30,000

IAET under the Regulations

Under RMC 35-2011, the statutory formula discussed in the previous section is added with the following additional feature in bold font:

Total earnings P xxx,xxx

Less:
Dividends declared P xxx,xxx
Reasonable appropriations xxx,xxx xxx,xxx
Add: Retained earnings from prior years P xxx,xxx
Less: Amount that may be retained
(100% of paid-up capital as of year-end) xxx,xxx
Improperly accumulated earnings xxx,xxx
Multiply by: IAET rate 10%
Improperly Accumulated Earnings Tax P xxx,xxx

While this may be questioned as an improper expansion of the law, it must be noted again that the revenue regulations and rulings are
presumed valid interpretation of the law unless challenged and reversed before the courts. Thus, the IAET shall be computed
incorporating the additional feature.

Illustration 1
Nayari Corp., a domestic corporation, had the following data in 2015:

Total gross income P 1,000,000

Less: Deductions including P 400,000 NOLCO 900,000
Taxable net income P 100,000
Plus: Other income
Income exempt from tax P 100,000
Page 10 of 13
 Capital gains tax, net of tax 140,000
Passive income, net of tax 150,000 390,000
Total income P 490,000
Less: Income tax due 30,000
Accounting net income P 460,000

Nayari Corp., had the following shareholder’s equity on January 1, 2015:

Common stocks P 2,000,000

Additional paid-up capital (share premium) 200,000
Retained earnings 1,700,000
Total stockholder’s equity P 3,900,000

During the year, Nayari Co. declared only P 100,000 dividends and appropriated P 200,000 for a plant expansion for next year. Nayari
assessed by the BIR for improperly accumulating earnings.

The improperly accumulated earnings tax shall be determined as follows:

Note
Taxable income 1 P 100,000
Add: NOLCO 400,000
Less: Income tax due 30,000
Earnings from regular operations 470,000
Add:
Exempt income 100,000
Capital gains, net of tax 140,000
Passive income, net of tax 150,000
Total earnings P 860,000
Less:
Dividends declared P 200,000
Reasonable appropriations 100,000 300,000
Total P 560,000
Add: Retained earnings beginnings 1,700,000
Total P 2,260,000
Less: Amount to be retained
(P 2,000,000 x 100%) 2,000,000
Improperly accumulated earnings P 260,000
Multiply by: IAET rate 10%
Improperly Accumulated Earnings Tax P 26,000

Note: Per RMC 35-2011, the 100% allowed profit accumulation is based on the par value of stocks excluding share premium.

Statement of Stockholders Equity

As of December 31, 2015

Commons Stocks, par P2,000,000

Common stocks, premium 200,000
Retaine Earnings
Beginning, Jan 1, 2015 P1,700,000
Add : Acctg Net Income 860,000
Total Earnings P2,560,000
Deduct : Dividends declared 200,000
Ending, Dec 31, 2015 P2,360,000 P2,360,000

Unappropriated 2,260,000
Appropriated 100,000

Total Stockholders Equity P 4,560,000

Statement of Income
For the Year Ended December 31, 2015

Total gross income P 1,000,000

Less: Deductions excluding NOLCO 500,000
Operating Income P 500,000
Plus: Other income
Income exempt from tax P 100,000
Capital gains, net of tax 140,000
Passive income, net of tax 150,000 390,000
Total income before tax P 890,000
Less: Income tax due 30,000
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 Net income after tax P 860,000

Reconciliation From Accounting Income to Taxable Income

Accounting Income before tax P890,000

Deduct :
NOLCO P400,000
Income exempt from tax 100,000
Capital gains 140,000
Passive income 150,000 P790,000
Taxable Income P100,000

Multiple choice – Problems

1. The following are the composition of the total gross income of a domestic corporation which is subject to MCIT:
Sales, net of discounts and allowances P 4,000,000
Less: Cost of Sales 2,400,000
Gross income from operations 1,600,000
Dividend income 100,000
Royalty income 250,000
Gain on sale of building 150,000
Total gross income P 2,100,000
What is the minimum corporate income tax?
a. P 42,000 c. P 35,000
b. P 40,000 d. P 32,000

2. In the immediately preceding problem, what is the regular corporate income tax rate if the corporation has a total allowable
deduction of P 1,700,000?
a. P 0 c. P 90,000
b. P 15,000 d. P 120,000

3. The Calintaan Corporation had the following historical MCIT and RCIT data:
Basing solely 2013 2014 2015 2016
on the MCIT P 120,000 P 200,000 P 190,0000 P 170,000
information RCIT P 110,000 P 220,000 P0 P 180,000
provided,
what is the tax due and payable respectively in 2013 and 2014?
a. P 120,000; P 220,000 c. P 120,000; P 210,000
4. In the b. P 120,000; P 100,000 d. P 110,000; P 220,000 immediately
preceding
problem, what
is the tax due and payable respectively in 2015 and 2016?
a. P 190,000; P 0 c. P 0; P 0
b. P 190,000; P 180,000 d. P 170,000; P 0

5. A domestic corporation was assessed by the BIR for improperly accumulated earnings tax. Relevant to the determination of the
IAET are the following data:
Gross income P 4,000,000
Allowable deductible expenses 3,200,000
Interest income, net of tax 40,000
Gain on sale of domestic stocks, net of tax 60,000
Dividends declared 400,000
Common stocks, excluding P 200,000 share premium 400,000
Retained Earnings 500,000
What is the improperly accumulated earnings tax?
a. P 75,000 c. P 26,000
b. P 36,000 d. P 170,000; P 0

6. A domestic corporation was assessed on its fifth year of operation for improperly accumulated earnings tax:
Gross income P 4,000,000
Allowable deductions, including P 600,000 NOLCO 3,800,000
Exempt income 240,000
Dividend declared 600,000
At the start of the year, retained earnings exceeded paid up capital by P 120,000.
What is the improperly accumulated earnings tax?
a. P 50,000 c. P 36,000

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 b. P 48,000 d. P 32,000

7. A closely-held corporation which started operation in 2011 reported the following data:
Year 2015:
Gross income from operations P 2,000,000
Less: expenses 2,800,000
Net operating loss (P 800,000)
Year 2016:
Gross income from operations P 6,000,000
Less: expenses 5,000,000
Rent income, gross of 5% withholding tax 100,000
Interest on money market placement,
net of 20% final tax 160,000
Inter-corporate dividends received 800,000
Dividends paid by the corporation 700,000
Tax paid, first three quarters 45,000
The BIR assessed the corporation for improperly accumulated earnings tax. The corporation had P 2,000,000 paid-up capital and P
1,800,000 retained earnings, beginning.
Compute the income tax still due respectively in 2015 and 2016.
a. P 0; P 122,000 c. P 40,000; P 122,000
b. P 0; P 72,000 d. P 40,000; P 50,000

8. Compute the improperly accumulated earnings tax.

a. P 63,000 c. P 103,800
b. P 93,800 d. P 143,800

9. Cubao corporation reported P 4 million paid-up capital, P 1 million in additional paid up capital and P 6 million in retained earnings,
inclusive of P 1.5 million appropriation for plant expansion. Cubao corporation was assessed by the BIR improperly accumulating
profits. Compute for the IAET.
a. P 600,000 c. P 200,000
b. P 450,000 d. P 50,000

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