BIR Ruling [DA-082-05]

March 11, 2005 BIR RULING [DA-082-05] Section 34 (D) & RR 14-01 3H International, Inc . E1602B Tektite East Tower Exchange Road, Ortigas Center Pasig City Attention: Ms. Lydia V. Vasquez Accountant Gentlemen : This refers to your letter dated November 4, 2004 requesting for a clarificatory ruling on certain issues, to wit: "1. Are we entitled to NOLCO although Peza registered but under normal income tax? Are these accumulated losses be applied as NOLCO in our 2004 income statement? 2. NOLCO in relation to MCIT (RR 14-2001 Sec. 6.5). MCIT is applicable when it is greater than normal income tax due (computed with the benefit of NOLCO). Thus, such corporation cannot enjoy the benefit of NOLCO for as long as it is subject to MCIT. This is a very confusing statement. Please clarify.'' It is represented that 3H International, Inc. is a corporation engaged in the leasing of warehouse building located inside the Economic Zone in the Laguna International Industrial Park, Bian, Laguna; that it is registered with the Philippine Economic Zone Authority (PEZA);that although it is a PEZA-registered company, it is not enjoying tax holiday, 5% gross income tax or any preferential tax treatment; that it is under the normal income tax rate of 32%;that it was registered with PEZA only in 2003 although it was incorporated way back 1991; and that it has accumulated net operating losses from taxable years 2001 to 2003 which were losses incurred during regular operation. THaCAI We reply as follows: 1. Since 3H International, Inc. is a PEZA-registered enterprise under a normal income tax regime, Section 34(D)(3) of the Tax Code of 1997 shall apply to it, viz : "SEC. 34. Deductions from Gross Income . ... xxx xxx xxx (D) Losses. (3) Net-Operating Loss Carry-over. The net operating loss of the business or enterprise for any taxable year immediately preceding the current taxable year, which had not been previously offset as deduction from gross income shall be carried over as a deduction from gross income for the next three (3) consecutive taxable years immediately following the year of such loss: Provided, further, That a net operating loss carry-over shall be allowed only if there has been no substantial change in the ownership of the business or enterprise in that (i) Not less than seventy-five percent (75%) in nominal value of outstanding issued shares, if the business is in the name of a corporation, is held by or on behalf of the same persons; or (ii) Not less than seventy-five percent (75%) of the paid up capital of the corporation, if the business is in the name of a corporation, is held by or on behalf of the same persons." Pursuant to Section 4(2) of Revenue Regulations No. 14-2001 implementing Section 34(D)(3) of the Tax Code of 1997, the accumulated net operating losses incurred or sustained during the period of ITH by a BOI-registered enterprise with respect to its BOI-registered activity shall not qualify for purposes of the NOLCO. Since it is covered by the regular income tax regime and likewise since there was no representation that there has been a change in the ownership of 3H International, Inc., substantial or otherwise, NOLCO is preserved and, therefore, may be claimed as a deduction from your gross income for purposes of computing the income tax using the normal income tax rate without prejudice to the applicability of the rule on the MCIT. The NOLCO may be carried over as deduction for the next three (3) consecutive taxable years immediately following the year of such loss. Accordingly, the above-mentioned NOLCO may be deducted against your gross income beginning taxable year 2002. Section 27(E)(2) of the Tax Code of 1997 reads "(2) Carry Forward of Excess Minimum Tax. Any excess of the minimum corporate income tax over the normal income tax as computed under Subsection (A) of this Section shall be carried forward and credited against the normal income tax for the three (3) immediately succeeding taxable years. Thus, any excess minimum corporate income tax (MCIT) shall be carried forward and credited against the normal income tax due for the three (3) immediately succeeding taxable years pursuant to Section 27(E)(2) of the Tax Code of 1997. 2. When the corporation is subject to the normal income tax rate of 32%, certain deductions from gross income are allowed to arrive at the regular income tax due from the corporation. NOLCO is one of those allowable deductions prescribed under Section 34(D) of the Tax Code of 1997. On the other hand, the MCIT is equal to two percent (2%) of the gross income of a corporation at the end of the year. At the end of the taxable year, the MCIT is compared with the regular income tax which is due from a corporation. Being a minimum income tax, a corporation should pay the MCIT whenever its regular (normal) income tax is lower than the MCIT, or when the firm reports a net loss in its tax return. Conversely, the regular income tax is paid when it is higher than the MCIT. ASHEca This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be disclosed that the facts are different, then this ruling shall be considered as null and void. Very truly yours, (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal & Inspection Group