"Minimum corporate tax"
By Raul J. Palabrica
Philippine Daily Inquirer
First Posted 20:55:00 04/08/2010
Filed Under: State Budget & Taxes, Economy and Business and Finance
IT’S INCOME TAX SEASON AGAIN.
This is the time of the year when accountants are busiest preparing (or as some cynics put it, “cooking”) the books of account of their clients to meet their tax obligations.
In doing so, the “bean counters” have to carefully tread the thin line that separates tax avoidance from tax evasion.
If there are gray areas in the law that can be invoked to reduce or avoid the payment of taxes, the taxpayer concerned cannot be faulted for taking advantage of them.
For making some “savings” possible, the tax adviser who spotted the loophole can expect to be rewarded handsomely for his cleverness.
And when word spreads in the industry about it, similarly situated taxpayers follow suit until the regulators get wise to the scheme and adopt the appropriate measures to stem the revenue loss.
Tax evasion, however, is a different story. The refusal to pay taxes that are due and payable can give rise to criminal and civil liabilities to the taxpayer and whoever may have advised him to willfully renege on his tax duties.
Low taxes
Until our lawmakers took notice, it was common practice by unscrupulous businessmen to form corporations that raked in huge profits during the year but reported losses at the end of their fiscal year.
Following the principle that income tax is imposable only on earned income, these companies were not, strictly speaking, obliged to pay taxes.
Behind the scenes, however, the bulk of their earnings went to the pockets of their stockholders and officers (who are also stockholders) by way of dividends, salaries, allowances and other perks and privileges.
With sleight-of-hand accounting techniques, the supposedly employment-based expenses were added to bloated operating costs that resulted, at least in the corporate books, in low income or losses.
The net effect of this slick scheme was low or zero taxes.
Either way it went, these companies availed of the services and facilities that the government made available to all companies regardless of their financial condition.
Thus, supposedly unprofitable companies enjoyed the benefits of public services and facilities without contributing any centavo to the national coffers. It was corporate parasitism and exploitation at their worst.
Taxable year
To even up the balance and to discourage avoidance of taxes by repeated reporting of losses, Republic Act No. 8424 imposed in 1998 a minimum corporate income tax (MCIT) on domestic corporations.
Basically, the law gives new corporations some breathing space by allowing them to invoke business losses to excuse the payment of the standard corporate income tax.
However, on the fourth taxable year immediately following the year in which these corporations started operating, they are required to pay the MCIT which is equivalent to two percent of their gross income as of the end of the taxable year.
The specifics on how the tax shall be computed and paid are spelled out in the regulations that the Bureau of Internal Revenue later issued to implement the law.
The bottom line of the law is, all corporations, regardless of their state of profitability, have to pay income tax using a formula that takes into account their actual income stream during the taxable year.
Understandably, the affected parties complained about the innovative tax regulation. A convenient excuse for avoiding (if not evading) taxes—business losses—was removed from the tax books.
Valid exercise
Last month, the Supreme Court settled the issue on the constitutionality of the MCIT.
Earlier, an association of real estate brokers claimed that the tax imposition is “highly oppressive, arbitrary and confiscatory.”
In its ruling, the tribunal pointedly stated that some companies deliberately manipulate their books to report negative or minimal taxable income by “under declarations in income earned or over deduction in expenses.”
With that premise, the justices said the MCIT is aimed at deterring tax evasion and reducing the incidence of tax avoidance schemes that are “achieved through sophisticated and artful manipulations of deductions and other stratagems.”
Since the MCIT is based on the companies’ gross income (or total earnings before deducting allowable expenses), the tribunal did not see anything wrong with requiring them to contribute a reasonable portion of their money to the national coffers.
The decision couldn’t have come at a more opportune time considering that the BIR is presently engaged in aggressive efforts to meet its revenue target for the year.
It has been said (and with sufficient reason) that government regulation of business activities is a catch-up game.
The regulated parties devise ways and means to go around the rules that restrict their ability to make a lot of money. In turn, the regulators try to anticipate these moves to enable them to take the appropriate remedial measures.
Mercifully, in the tax collection game, the government has in its corner the presumption that “taxes constitute the lifeblood of the State” and therefore all doubts about its power to tax are resolved in its favor.
Source: Inquirer.net
By Raul J. Palabrica
Philippine Daily Inquirer
First Posted 20:55:00 04/08/2010
Filed Under: State Budget & Taxes, Economy and Business and Finance
IT’S INCOME TAX SEASON AGAIN.
This is the time of the year when accountants are busiest preparing (or as some cynics put it, “cooking”) the books of account of their clients to meet their tax obligations.
In doing so, the “bean counters” have to carefully tread the thin line that separates tax avoidance from tax evasion.
If there are gray areas in the law that can be invoked to reduce or avoid the payment of taxes, the taxpayer concerned cannot be faulted for taking advantage of them.
For making some “savings” possible, the tax adviser who spotted the loophole can expect to be rewarded handsomely for his cleverness.
And when word spreads in the industry about it, similarly situated taxpayers follow suit until the regulators get wise to the scheme and adopt the appropriate measures to stem the revenue loss.
Tax evasion, however, is a different story. The refusal to pay taxes that are due and payable can give rise to criminal and civil liabilities to the taxpayer and whoever may have advised him to willfully renege on his tax duties.
Low taxes
Until our lawmakers took notice, it was common practice by unscrupulous businessmen to form corporations that raked in huge profits during the year but reported losses at the end of their fiscal year.
Following the principle that income tax is imposable only on earned income, these companies were not, strictly speaking, obliged to pay taxes.
Behind the scenes, however, the bulk of their earnings went to the pockets of their stockholders and officers (who are also stockholders) by way of dividends, salaries, allowances and other perks and privileges.
With sleight-of-hand accounting techniques, the supposedly employment-based expenses were added to bloated operating costs that resulted, at least in the corporate books, in low income or losses.
The net effect of this slick scheme was low or zero taxes.
Either way it went, these companies availed of the services and facilities that the government made available to all companies regardless of their financial condition.
Thus, supposedly unprofitable companies enjoyed the benefits of public services and facilities without contributing any centavo to the national coffers. It was corporate parasitism and exploitation at their worst.
Taxable year
To even up the balance and to discourage avoidance of taxes by repeated reporting of losses, Republic Act No. 8424 imposed in 1998 a minimum corporate income tax (MCIT) on domestic corporations.
Basically, the law gives new corporations some breathing space by allowing them to invoke business losses to excuse the payment of the standard corporate income tax.
However, on the fourth taxable year immediately following the year in which these corporations started operating, they are required to pay the MCIT which is equivalent to two percent of their gross income as of the end of the taxable year.
The specifics on how the tax shall be computed and paid are spelled out in the regulations that the Bureau of Internal Revenue later issued to implement the law.
The bottom line of the law is, all corporations, regardless of their state of profitability, have to pay income tax using a formula that takes into account their actual income stream during the taxable year.
Understandably, the affected parties complained about the innovative tax regulation. A convenient excuse for avoiding (if not evading) taxes—business losses—was removed from the tax books.
Valid exercise
Last month, the Supreme Court settled the issue on the constitutionality of the MCIT.
Earlier, an association of real estate brokers claimed that the tax imposition is “highly oppressive, arbitrary and confiscatory.”
In its ruling, the tribunal pointedly stated that some companies deliberately manipulate their books to report negative or minimal taxable income by “under declarations in income earned or over deduction in expenses.”
With that premise, the justices said the MCIT is aimed at deterring tax evasion and reducing the incidence of tax avoidance schemes that are “achieved through sophisticated and artful manipulations of deductions and other stratagems.”
Since the MCIT is based on the companies’ gross income (or total earnings before deducting allowable expenses), the tribunal did not see anything wrong with requiring them to contribute a reasonable portion of their money to the national coffers.
The decision couldn’t have come at a more opportune time considering that the BIR is presently engaged in aggressive efforts to meet its revenue target for the year.
It has been said (and with sufficient reason) that government regulation of business activities is a catch-up game.
The regulated parties devise ways and means to go around the rules that restrict their ability to make a lot of money. In turn, the regulators try to anticipate these moves to enable them to take the appropriate remedial measures.
Mercifully, in the tax collection game, the government has in its corner the presumption that “taxes constitute the lifeblood of the State” and therefore all doubts about its power to tax are resolved in its favor.
Source: Inquirer.net
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