Ano bang bago dito (CREATE BILL)? -Part 2 – Reduced Minimum Corporate Income Tax Rate

So this is part 2 of our CREATE BILL mini series. If you are reading this let me congratulate you for being interested on the fate of your business (or study if you are a student).

(Missed the part 1 read it here: Ano bang bago dito part 1)

For part two let us discuss another major amendment : the reduction of the Minimum Corporate Income Tax (MCIT).

But what is Minimum Corporate Income Tax (MCIT) in the first place?

Minimum Corporate Tax is a tax on the corporation’s TOTAL GROSS INCOME which is currently at 2%.

Ano! You mean pag corporation dalawang ang tax on income na babayaran?

Hindi naman.

In the first place you are only to compute MCIT beginning in the fourth taxable year following the year of commencement of business operations. So meaning di naman agad agad ay may MCIT ka babayaran.

Second is you are only to pay MCIT WHENEVER the computed tax due using the Regular Corporate Income Tax (RCIT) which is 30% of taxable income is ZERO or less than the MCIT. In short pag MCIT> RCIT dun ka lang liable or need bayaran yung computed MCIT>

Waaaah may math! Malamang TAX to e so may math pero para madali gawa tayo ng example:

Illustration:

X Company, Domestic Corporation, incorporated and registered with the BIR in 2016. When would X Company be liable to MCIT?

In 2020 or 4 years after it commence its operation which was on 2016 (registered with the BIR).

X Company had the following gross income and net income for from 2020-2023:

YearGross Income (GI)Net Income (NI)
20202,000,000140,000
20212,500,000180,000
20223,500,000200,000
20234,000,000350,000

Oops! Ano pla muna ang pinagkaiba ng GROSS INCOME sa NET INCOME?

Gross income is the result when you deduct the cost of sales/cost of services from the total sales/collection plus any other income not subject to final taxes.

Teka ulit ano naman po yung COST OF SALES/COST OF SERVICES?

Cost of sales or cost of service are the necessary and ordinary expenses directly incurred related to the product or service. Meaning if di ka gagastos nito e wala ka mabebenta or magagawang serbisyo.

Example:

Nag bebenta ka ng t-shirt for law school students. Para makabenta ka nun ano need mong gastusin? Syempre yung plain tshirt (either bayad mo sa pagpapatahi o binili mo na gawa na sya) , yung pag papa imprenta ng tshirt yan ang cost of sales mo.

May parlor ka ano ang cost of service? Yung mga gamit mong pang gupit, pang kulot and so on.

E ano naman po yung NET INCOME?

Net Income is the result when you deduct from the TOTAL NET SALES (net of sales returns and cancellations) or TOTAL COLLECTIONS the cost of sales/service add other income not subject to final tax less allowable deductions may it be itemized or optional standard deductions.

Dito sa pag compute NET INCOME ito naman yung ibinawas mo pa yung all other allowable deductions be it itemized deduction (e.g. operating expenses mo tulad ng renta, kuryente , tubig, pasahod etc.) or optional standard deduction(OSD)

(Will have a separate discussion on ITEMIZED vs. OPTIONAL next week siguro)

So para madali ito sya

GROSS INCOMENET INCOME
NET SALES/COLLECTIONNET SALES/COLLECTION
LESS: COST OF SALESLESS :COST OF SALES
ADD : OTHER INCOME NOT SUBJECT TO FINAL TAXADD : OTHER INCOME NOT SUBJECT TO FINAL TAX
GROSS INCOMEGROSS INCOME
LESS ALLOWABLE DEDUCTIONS (ITEMIZED OR OSD)

Ngayon malinaw na (sana) mabalik tayo.

Compute the MCIT and RCIT.

A:

YearMCIT (2% of GI)NCIT (30% of NI)
2016 40,000.00 42,000.00
2017 50,000.00 48,000.00
2018 70,000.00 60,000.00
2019 80,000.00 105,000.00

How much is tax due?

A: Whichever is higher.

YearTax DueMCIT/RCIT
2020 42,000.00 RCIT
2021 50,000.00 MCIT
2022 70,000.00 MCIT
2023 105,000.00 RCIT

So remember this about MCIT:

  1. It only starts beginning on the 4th taxable year of operation of the business (actually reckoned on the date of BIR registration)
  2. You are only liable for MCIT when MCIT is GREATER THAN RCIT (MCIT >RCIT)

Now hopefully you understand now MCIT and how it works! Madami pa kailangan idiscuss sa MCIT and will do it in a separate post 🙂

On to the proposed amendment…

Reduction of MCIT Rate

Under SBN 1357, they proposed to reduce the MCIT rate from 2% to 1%. However it is only for a limited time offer beginning July 1, 2020 (yes retro ulit) until June 30,2023.

Although this is just for a limited time this will be a relief to many of the MSMEs because this will somehow cushion the effects of the recent pandemic hopefully this pushes through.

More of the amendments next week.

Want the full version of the SB 1357? Dowload here:

For questions, comments and or clarifications just drop it on the comments section.

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