BIR Ruling [DA-606-04]

November 25, 2004 BIR RULING [DA-606-04] Sections 27 (E) & 76 SyCip Gorres Velayo & Co. 6760 Ayala Avenue Makati City Attention: Atty. E.C. Alcantara Tax Division Gentlemen : This refers to your letter dated September 27, 2004 requesting on behalf of your client, Mobil Philippines Inc. (Mobil) for a ruling that the Minimum Corporate Income Tax (MCIT) which was paid by Mobil in taxable year 1999 be credited against the revised computation of deficiency income tax due from Mobil. It is represented that Mobil is a domestic corporation duly organized and existing under the laws of the Republic of the Philippines; that on September 4, 2004, Mobil received a Formal Assessment Notice (FAN) issued by the Bureau of Internal Revenue for alleged deficiency taxes in the amount of P341,206,298.56; that within thirty (30) days from the receipt thereof, Mobil filed the administrative protest in order to refute the merit of the said findings for deficiency taxes; that within sixty (60) days from the filing of the administrative protest, Mobil submitted the supporting documents; that in resolving the merit of the administrative protest, the Revenue Officers recomputed the findings of deficiency taxes and resolved to reduce the same; that the amount of P6,531,310.00 representing the MCIT paid by Mobil in taxable year 1999 was not deducted from the initial revised computation of deficiency income tax; that only the regular corporate income tax in the amount of P953,805.00 was considered by the Revenue Officers; that in the three (3) immediately succeeding taxable years 2000, 2001 and 2002, Mobil likewise paid MCIT on the ground that the MCIT was greater than the regular corporate income tax; that accordingly, it was not able to carry forward excess MCIT pertaining to taxable year 1999; that on the Annual Income Tax Return for taxable year 1999, the payment of MCIT was offset against prior year's excess tax credit in the amount of P6,531,310; and that likewise, the creditable tax withheld for the four (4) quarters of taxable year 1999 in the total amount of P6,425,111.00 are taxes paid by Mobil which payment were withheld by its various payors and remitted to the government, thus, Mobil credited the taxes withheld against its MCIT liability. In reply, please be informed that Section 27 (E) (1) and (2) of the Tax Code of 1997 as implemented by Revenue Regulations No. 9-98 reads: "(E) Minimum Corporate Income Tax on Domestic corporations. (1) Imposition of Tax. A minimum corporate income tax of two percent (2%) of the gross income as of the end of the taxable year, as defined herein, is hereby imposed on a corporation taxable under this Title, beginning on the fourth taxable year immediately following the year in which such corporation commenced its business operations, when the minimum income tax is greater than the tax computed under Subsection (A) of this Section for the taxable year. (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." TIHCcA xxx xxx xxx (7) Accounting treatment of the excess minimum corporate income tax paid Any amount paid as excess minimum corporate income tax shall be recorded in the corporation's books as an asset under account title "deferred charges-minimum corporate income tax." This asset account shall be carried forward and may be credited against the normal tax due for a period not exceeding three (3) taxable years immediately succeeding the taxable year/s in which the same has been paid. Any amount of the excess minimum corporate income tax which has not or cannot be so credited against the normal income taxes due for the 3-year reglementary period shall lose its creditability. ..." On the other hand, Section 76 of the same Code provides, viz. : "SEC. 76. Final Adjustment Return. Every corporation liable to tax under Section 27 shall file a final adjustment return covering the total taxable income for the preceding calendar or fiscal year. If the sum of the quarterly tax payments made during the said taxable year is not equal to the total tax due on the entire taxable income of that year, the corporation shall either: (A) Pay the balance of tax still due; or (B) Carry-over the excess credit; or (C) Be credited or refunded with the excess amount paid, as the case may be. In case the corporation is entitled to a tax credit or refund of the excess estimated quarterly income taxes paid, the excess amount shown on its final adjustment return may be carried over and credited against the estimated quarterly income tax liabilities for the taxable quarters of the succeeding taxable years. Once the option to carry-over and apply the excess quarterly income tax against income tax due for the taxable quarters of the succeeding taxable years has been made, such option shall be considered irrevocable for that taxable period and no application for cash refund or issuance of a tax credit certificate shall be allowed therefor." THaCAI In several cases decided by the Court of Tax Appeals (CTA),the CTA held that prior year's tax credit may be offset against the payment for MCIT. In the case of McGeorge Food Industries, Inc. vs. CIR, CTA Case No. 6084 dated September 3, 2001, the CTA held that "After applying the total tax credit of P4,953,367.00 against the MCIT, Petitioner still had an income tax liability in the amount of P845,689.00." In the aforesaid case, petitioner should have paid the remaining income tax liability of P845,689.00 since the prior year's excess tax credit partially covered the payment of MCIT. In ABN Amro Savings Bank vs. CIR, CTA Case No. 6065 dated July 3, 2002, the CTA applied the MCIT of petitioner against its prior year's excess tax credit and ruled that the remaining amount was refundable. In another case involving a claim for refund of overpaid income tax, the Tax Court applied the overpaid amount against the petitioner's income tax liability consisting of the MCIT (Anscor Hegedorn Securities vs. CIR, CTA Case No. 6087 dated November 12, 2001). The same Court held in a similar case that "while Petitioner also had creditable taxes withheld in 1998 of P3,491,015.00 (the sum of P2,927,842.00 and P563,173.00), nonetheless, the prior year's excess (1997) tax credits of P3,633,447.00 shall be utilized first to pay-off its 1998 MCIT of P710,523.00 under the first-in first-out principle, i.e., the oldest credits are to be applied first. (JS Steel Corporation vs. CIR, CTA Case No. 6071 dated February 19, 2002). In view of the foregoing, the prior year's excess tax credit of Mobil has been properly offset against the payment for MCIT in the amount of P6,531,310.00. The MCIT in the amount of P6,531,310.00 which was paid by way of offset against the prior year's excess tax credit and creditable tax withheld for the four (4) quarters of the same taxable year, may be considered as payment of the income tax due. Consequently, the amount of MCIT paid may be deducted from the total revised computation of deficiency income tax. 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 C. BUAG Deputy Commissioner Legal & Inspection Group