BIR Ruling [DA-143-04]

March 29, 2004 BIR RULING [DA-143-04] 24 (E); 007-01 A.M. Sison, Jr. & Associates Suite 2002-A Security Bank Centre 8776 Ayala Avenue Makati City Attention: Atty. Carlito P. Egaa Gentlemen : This refers to your letter dated October 24, 2003 stating that your client, G.D. Searle (Philippines), Inc. (G.D. Searle) was duly incorporated under the laws of the Philippines on October 8, 1968 for a term of 50 years; that it commenced operations in the same year; that its taxable year is on a calendar year basis; that after years of operations or on June 28, 2001, G.D. Searle by at least majority vote of its Board of Directors and the vote of its stockholders owning or representing at least two-thirds (2/3) of the outstanding capital stock, had resolved to shorten the term of its existence, the same to end on June 30, 2001; that G.D. Searle ceased to operate effective July 1, 2001 and thus amended Article IV of its Articles of Incorporation providing for the term of its existence, thereby dissolving the corporation; that pursuant to Section 244 of the Income Tax Regulations (Revenue Regulations No. 2) in relation to Section 52(C) of the Tax Code of 1997, G.D. Searle prepared its short period income tax return, for its last and final business operations for the six-month period ending June 30, 2001 with a resulting net loss, and filed it with the Large Taxpayers Assistance Division, (LTAD) BIR on July 27, 2001; and that in the month of June 2003, the audit of its financial statements for the 6-month period ending June 30, 2001 having been finished by then, G.D. Searle prepared and filed with LTAD its final income tax return for the said period, reflecting/reporting a net loss as a result of its operation therefor. Based on the foregoing representations, you now request for confirmation of your opinion that "1. The Minimum Corporate Income Tax (MCIT), as provided under Section 27(E) of the National Internal Revenue Code is imposable upon, and is intended for, a corporate taxpayer that is still on a status of a going concern; and "2. G.D. Searle because of its dissolution and cessation of its business operations effective June 30, 2001 ceased to be a going concern and therefore the burden, i . e ., MCIT, should not be borne by it in connection with its last and final income tax return for the 6-month period ending June 30, 2001 as the benefit and qualification of the carrying forward and crediting any excess MCIT as provided under Section 27(E)(2) of the Tax Code of 1997 would be unavailing on the part of GD Searle." In reply thereto, please be informed that Section 27(E) of the Tax Code of 1997, as implemented by Revenue Regulations No. 9-98, provides that a minimum corporate income tax (MCIT) of two percent (2%) of the gross income as of the end of the taxable year (whether calendar or fiscal year, depending on the accounting period employed) is hereby imposed upon any domestic corporation 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. It can be gleaned from the foregoing that it contemplates a situation where the corporate taxpayer is a going concern. This is especially true where the latter is mandatorily required to carry forward any excess minimum corporate income tax due and credit the same against its normal income tax for the three (3) immediately succeeding taxable years. ( Sec. 27(E)(2) of the Tax Code of 1997 ) In the same regulations, it was stated that 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. Thus, a MCIT of two percent (2%) of the gross income as of the end of the taxable year, (whether calendar or fiscal year, depending on the accounting period employed) is hereby imposed upon any domestic corporation beginning the fourth (4th) taxable year immediately following the taxable year in which such corporation commenced its business operations. To fortify that the MCIT applies to a newly-formed corporation or existing corporation, this Office in BIR Ruling No. 007-01 dated February 22, 2001 , ruled that ". . . for purposes of justice, equity and consistent with the intent of the law, TMBC's reopening last July 1999 is akin to the commencement of business operations of a new corporation, in consideration of which the law allows a 4-year period during which MCIT, is not to be applied. Hence, MCIT may be imposed upon TMBC not earlier than 2002, i . e .; the fourth taxable year beginning 1999 which is the year when TMBC reopened." The said ruling clearly demonstrates that the imposition of the MCIT is directed towards corporations which are just commencing business operations or those which already existing and was not intended to cover corporations which have ceased operations and are in the process of dissolution. In applying the above-cited laws and regulations, and considering further that G.D. Searle ceased to be a going concern effective June 30, 2001, this Office hereby confirms your opinion that 1. The MCIT provided under Section 27(E) of the Tax Code of 1997, as implemented by Revenue Regulations No. 9-98, applies only to newly formed corporations or existing corporations and not to corporations which have been dissolved or ceased operations, like G.D. Searle. 2. Accordingly, in preparing its (G.D. Searle) short period income tax return for the six (6) month period ending June 30, 2001, no income tax should therefore be due from G.D. Searle as the MCIT does not apply in the instant case. 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 null and void. ScAaHE Very truly yours, (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal & Inspection Group