Choosing Between Net Income Tax and Minimum Corporate Income Tax (MCIT)
Context
In the Philippines, corporations are subject to Corporate Income Tax (CIT) at 25% (or 20% for certain SMEs). However, a Minimum Corporate Income Tax (MCIT) of 2% applies in some cases, beginning in the fourth taxable year following the year of commencement of business operations. Each year, companies must compare CIT on net taxable income and MCIT on gross income and pay whichever is higher.
Net Income Tax (CIT)
– Computed on net taxable income after deductions and depreciation,
– Rate: 25% on net income from all sources
– Rate: 20% on net income from all sources for corporations with total assets not exceeding Php 100M and total net taxable income not exceeding Php 5M.
– Allows carry-over of net operating losses (NOLCO) for three consecutive years.
Minimum Corporate Income Tax (MCIT)
– Computed at 2% of gross income,
– Defined as gross sales less direct costs,
– Applies from the 4th year of operations,
– Does not allow deduction of operating expenses.
How to anticipate
CIT is preferable when the company is profitable with a positive net margin. MCIT applies when profits are low or absent but gross income exists. The BIR automatically imposes whichever is higher.
✅ Strategies and tips
– Optimize deductible expenses to reduce CIT,
– Monitor gross income to anticipate MCIT exposure,
– Plan investments to influence net taxable income,
– Properly document direct costs to minimize MCIT,
– Apply MCIT credits (carry forward for 3 consecutive years).
– Apply NOLCO (carry forward for 3 consecutive years).
In summary
The choice between CIT and MCIT depends on profitability and cost structure. The BIR always imposes the higher amount, but tax planning helps reduce the impact.
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