Imposition of Minimum Corporate Income Tax on The Manila Banking Corp.

February 22, 2001 BIR RULING NO. 007-01 Sec. 27 (E) 000 Puyat Jacinto & Santos Attorneys at Law 12th Flr. Manilabank Bldg. 6772 Ayala Avenue Makati City Attention: Mr . David B . Puyat Gentlemen: This refers to your letter dated 28 December 1999 requesting for a ruling on the following: a) that The Manila Banking Corporation (TMBC) is entitled to the 4-year leeway period reckoned from 1999 relative to the imposition of Minimum Corporate Income Tax (MCIT); or in the alternative b) that TMBC is entitled to the suspension of the imposition of the MCIT in view of the cessation of its business operations from 1987 to June 1999. As per representations, the facts of the case are as follows: TMBC is a banking institution duly incorporated under Philippine laws in 1961. In the year 1987, it was placed under receivership by the Central Bank of the Philippines. All business operations of the bank were accordingly suspended, despite opposition thereto by TMBC, which even contested the bank's closure in court. For almost twelve (12) years, from 1987 to June 1999, TMBC did not conduct any business activity. During the receivership proceedings, TMBC did not have control over its remaining assets since everything was placed under the control of the receivership committee created by the Central Bank. It was only in the year 1999 that TMBC was reopened and allowed to resume banking operations by the now Bangko Sentral ng Pilipinas (BSP). For this purpose, TMBC filed an amended Articles of Incorporation which was approved by the SEC on June 22, 1999. Thus, like a newly started corporation, TMBC has been undertaking acts necessary for new companies, i.e., searching, interviewing, training employees, examining business locations, constructing and equipping new branches, etc. With the resumption of its banking activities, TMBC now finds itself confronted by the operations of the Minimum Corporate Income Tax. Under the National Internal Revenue Code of 1997 (NIRC), a minimum corporate income tax (MCIT) of two percent (2%) of gross income is imposed upon a taxable corporation, when such minimum income tax is greater than the normal tax due from such corporation. Such MCIT shall be imposed on a corporation on the fourth taxable year immediately following the year in which the corporation commenced its business operations . [Section 27(E)(1), NIRC] For corporations registered with the Bureau of Internal Revenue (BIR) in 1994 or earlier, Revenue Regulations No. 9-98 implementing the MCIT, provides that the MCIT shall be imposed beginning on 1 January 1998. It would therefore appear that TMBC is currently subject to the MCIT, considering that it was registered with the BIR even prior to 1994. But to be imposed the MCIT on TMBC's gross income is too burdensome at this point for a corporation that has just come out of receivership proceedings, with no business activities for the past twelve years, which has just paid off its several obligations to its depositors and which is just placing its business back in order. Hence, the instant request for ruling. In reply, we hereby confirm that the law and regulations allow new corporations as well as existing corporations a leeway or adjustment period of four years counted from the year of commencement of business operations (reckoned at the time of registration by the corporation with the BIR) during which the MCIT does not apply. If new corporations, as well as existing corporations such as those registered with the BIR in 1994 or earlier, are granted a 4-year grace period, we see no reason why TMBC, a corporation that has ceased business activities due to involuntary closure for more than a decade and is now only starting again to place its business back in order, may not be given the same opportunity. It should be stressed that although TMBC had been registered with the BIR before 1994, yet it did not have any business from 1987 to June 1999 due to its involuntary closure. This Office is therefore of an opinion, 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. EIDATc Likewise, we find merit in your position that for having just come out of receivership proceedings, which not only resulted in substantial losses but actually brought about a complete cessation of all businesses, TMBC may be qualified to ask for suspension of the MCIT. The law provides that the Secretary of Finance, upon the recommendation of the Commissioner, may suspend the imposition of the MCIT on any corporation which suffers losses on account of prolonged labor dispute, or because of force majeure , or because of legitimate business reverses . [NIRC, Sec. 27(E)(3).] Revenue Regulations 9-98 defines the term "legitimate business reverses" to include substantial losses sustained due to fire, robbery, theft or embezzlement, or for other economic reasons as determined by the Secretary of Finance. Cessation of business activities as a result of being placed under involuntary receivership may be one such economic reason. But to be a basis for the recognition of the suspension of MCIT, such a situation should be properly defined and included in the regulations, which this Office intends to do. Pending such inclusion, the same cannot yet be invoked. Nevertheless, it is the position of this Office that the counting of the fourth taxable year, insofar as TMBC is concerned, begins in the year 1999 when TMBC reopened such that it will be only subject to MCIT beginning the year 2002. This ruling is being issued on the basis of the foregoing facts as represented. If upon investigation, it will be disclosed that the facts are different, then this ruling shall be deemed null and void. Very truly yours, (SGD.) RENE G. BAEZ Commissioner of Internal Revenue