Written by Catherine T. Manahan, 18 October 2007
While the tax amnesty program is still in a state of flux due to the snail-paced drafting and finalisation of the revenue memorandum circular which seeks to clarify implementation issues concerning the program under Republic Act No. 9480 as regulated by Department Order No. 29-07, the Bureau of Internal Revenue (BIR) is out to launch another tax collection scheme: a quarterly minimum corporate income tax (MCIT). In a public hearing that was held sometime in the first week of October, the draught revenue regulations (RR) seeking to embody this new source of quarterly tax collection were publicised. The draft seeks to amend RR No. 9-98 which implements Tax Code provisions on the MCIT.
To review, Sec. 27(E) of the Tax Code imposes the 2% MCIT on the gross income of a corporation as of the end of the taxable year whenever the MCIT is greater than the normal corporate income tax (CIT) of 35%. This is applied on the fourth taxable year immediately following the year in which such corporation commenced its business operations and any excess thereof can be carried forward and credited against the normal CIT for the three immediately succeeding taxable years.
RR 9-98 interprets the commencement of business operations to coincide with the date of BIR registration of the taxpayer which is the date of issuance of the Certificate of Registration. Sec. 6 of this RR, in faithful compliance with the law, explicitly provides that the MCIT shall be paid on a taxable year basis and that domestic corporations shall not be required to pay the tax on a quarterly basis, notwithstanding Sec. 75 of the Tax Code on quarterly CIT payment. If I may surmise, the rationale for this tax is to segregate the genuinely losing companies from the artificially bleeding or bogus ones and penalize the latter firms, which continue to engage in business but fail to contribute any revenues at all to the government coffers by consistently declaring a taxable loss position in their income tax returns.
The law has likewise authorised the Secretary of Finance to suspend the MCIT imposition on corporations suffering from prolonged labor disputes, force majeure or legitimate business reverses.
Given the brief background information on MCIT, the question now is, does the proposed RR on quarterly collection of MCIT hold any legal water? Does the avowed rationale of aligning the time of payment of the MCIT with the mandatory quarterly filing of CIT returns conform with the letter and spirit of the law?
Some salient features of the proposed RR include:
- quarterly computation and payment of MCIT;
- in the payment of quarterly MCIT, only excess MCIT from previous taxable quarters (but not previous taxable year), expanded withholding tax (EWT) and quarterly CIT shall be credited;
- quarterly MCIT may be credited against the normal CIT at year end if the final computation of the annual CIT due is higher than the annual MCIT; however, if the computed annual MCIT is higher than the normal income tax due, what may be credited against the annual MCIT due shall only be the quarterly MCIT payments made during the preceding taxable quarters, EWT, and quarterly CIT, since the excess MCIT from previous taxable years shall only be allowed to be credited against normal CIT;
- definition of gross income for MCIT computation was expanded to include all items of gross income enumerated under Sec. 32(A) of the Tax Code except income exempt from income tax and passive income; and
- proposed effectivity date for those using the calendar year accounting period is for the third quarter ended September 2007 which is due for filing on or before Nov. 30, 2007.
The foregoing amendments, particularly the expanded definition of gross income is bordering already on administrative legislation because the law is quite clear that for MCIT purposes, a separate definition of gross income has been provided under Sec. 27(E)(4) in contrast with Sec. 32(A) of the Tax Code. Furthermore, the restrictions in the utilisation of excess MCIT whether from previous quarter/s or taxable year/s also have no legal basis.
This latest collection scheme, offhand, looks like a revival of the VAT input cap in disguise, in so far as it now entails more cash outlay (i.e. MCIT quarterly payment) on the part of the corporate business sector, because it now ascribes an artificial, contrived loss position by the simple expediency of computing a 2% MCIT vis-a-vis the 35% normal CIT on your quarterly gross income. The quarterly sales/receipts and costs of goods sold/services are necessarily non-reflective of the overall business performance of the company which ultimately reckons its financial health on an annual basis and submits its financial statements to the regulatory agencies on an annual basis.
Verily, the BIR’s tax collection efforts which, in the past, have already been marked by the rapid and wide expansion of the creditable withholding tax base, must never overlook the potential adverse impact that such avid relentless tax drive could have on the working capital or revenue generating potential of these businesses. Taxes collected are cash forgone for profit generation.
But, as everyone agrees, taxes are the price that we pay for civilized society. However, an equitable balance must always be struck, lest we kill the goose that lays the golden eggs, a trite but always timely reminder.
