Minimum Corporate Income Tax (MCIT) of 2% Clarified

May 21, 1998 PSE MEMO FOR BROKERS NO. 226-98 SUBJECT : Minimum Corporate Income Tax (MCIT) of 2% Clarified We attach for your information and guidance the letter of our tax consultant, Tan & Venturanza Law Offices, dated 19 May 1998. Mainly they addressed the following queries of one of our Members, Regina Capital Development Corporation: 1. Whether a broker still has to pay the 2% MCIT even if he does not make money; and 2. Whether the broker will be taxed on the rebate given to agents. cdll We hope we have been of assistance to you. (SGD.) JOSE LUIS U. YULO, JR. President 19 May 1998 PHILIPPINE STOCK EXCHANGE, INC . 2/F Philippine Stock Exchange Centre Exchange Road, Ortigas Center Pasig City. Metro Manila Attention: Mr . Jose Luis U . Yulo, Jr . President Gentlemen : We refer to the letter of Regina Capital Development Corporation dated 28 April 1998 which was endorsed to us for reply on 15 May 1998. We confirm that the Comprehensive Tax Reform Program ("CTRP") effective 1 January 1998 has introduced a Minimum Corporate Income Tax ("MCIT") of 2% of the gross income of domestic as well as resident foreign corporations. We quote hereunder Section 27(E) of the CTRP: "(E) Minimum corporate income tax oil 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. LLcd (3) Relief from the minimum corporate income tax under certain conditions . The Secretary of Finance is hereby authorized to suspend the imposition of the minimum corporate income tax on any corporation which suffers losses on account of prolonged labor dispute, or because of force majeure , or because of legitimate business reverses. The Secretary of Finance is hereby authorized to promulgate, upon recommendation of the Commissioner, the necessary rules and regulations that shall define the terms and conditions under which he may suspend the imposition of the minimum corporate income tax in a meritorious case. (4) Gross income defined . For purposes of applying the minimum corporate income tax provided under subsection (E) hereof, the term " gross income " shall mean gross sales less sales returns, discounts and allowances and cost of goods sold. " Cost of goods sold " shall include all business expenses directly incurred to produce the merchandise to bring them to their present location and use. For a trading or merchandising concern, " cost of goods sold " shall include all costs of production of finished goods, such as raw materials used, direct labor and manufacturing overhead, freight cost, insurance premiums and other costs incurred to bring the raw materials to the factory or warehouse. In the case of taxpayers engaged in the sale of service, " gross income " means gross receipts less sales returns, allowances, discounts and cost of services. " Cost of services " shall mean all direct costs and expenses necessarily incurred to prove the services required by the customers and clients including (A) salaries and employee benefits or personnel, consultants and specialists directly rendering the service and (B) cost of facilities directly utilized in providing the service such as depreciation or rental of equipment used and cost of supplies; provided however , that in the case of banks, " cost of services " shall include interest expense." Based on the foregoing, we confirm the observation that whether or not a stockbroker makes money, MCIT will still be due and payable provided that its " gross income " is a positive figure. Also, we would like to call your attention that the MCIT is 2% of gross income in a taxable year. " Gross Income " for a taxpayer engaged in the sale of services, such as stockbrokers, means gross receipts less sales returns, allowances, discounts and cost of services. In turn, " Cost of Services " means all direct costs and necessary expenses incurred to provide the services required which necessarily includes the rebates on gross commissions given to agents of stockbrokers. Accordingly, in the determination of gross income for MCIT purposes, stockbrokers will be allowed to deduct that portion of the gross commission which was given to their agents as rebate. They may also deduct other direct costs and necessary expenses incurred to provide the services required. If it is the consensus that the imposition of the MCIT will be detrimental to the development of the capital markets, the PSE, on behalf of its broker-members, may petition the Secretary of Finance to suspend the MCIT based on meritorious reasons, such as force majeure or legitimate business reverses. Very truly yours, (SGD.) ENRICO G. VALDEZ For the Firm