Income Taxes

12 Months Ended

Dec. 31, 2018

7.	Income Taxes

Corporate Income Tax

The major components of consolidated net deferred income tax assets and liabilities recognized in our consolidated statements of financial position as at December 31, 2018 and 2017 are as follows:

	2018			2017
			(in million pesos)
Net deferred income tax assets		27,697			30,466
Net deferred income tax liabilities		2,981			3,366

The components of our consolidated net deferred income tax assets and liabilities as at December 31, 2018 and 2017 are as follows:

	2018				2017
				(in million pesos)
Net deferred income tax assets:
Unamortized past service pension costs		5,252				5,098
Customer list and trademark		4,670				6,760
Pension and other employee benefits		4,296				3,620
Accumulated provision for expected credit losses/doubtful accounts		3,709				3,102
NOLCO		3,231				243
Fixed asset impairment/depreciation due to shortened life of property and equipment		1,870				5,597
Unearned revenues		1,776				1,778
Provision for other assets		1,595				2,523
Unrealized foreign exchange losses		1,092				746
Accumulated provision for inventory obsolescence and write-down		916				669
MCIT		905				607
Derivative financial instruments		(58	)			(30	)
Others		(1,557	)			(247	)
Total deferred income tax assets – net		27,697				30,466
Net deferred income tax liabilities:
Intangible assets and fair value adjustment on assets acquired – net of amortization		2,175				2,387
Unrealized foreign exchange gains		366				269
Investment property		277				207
Undepreciated capitalized interest charges		7				8
Unamortized fair value adjustment on fixed assets from business combination		—				338
Others		156				157
Total deferred income tax liabilities		2,981				3,366

Changes in our consolidated net deferred income tax assets (liabilities) as at December 31, 2018 and 2017 are as follows:

	2018				2017
				(in million pesos)
Net deferred income tax assets – balance at beginning of the year		30,466				27,348
Net deferred income tax liabilities – balance at beginning of the year		(3,366	)			(3,567	)
Net balance at beginning of the year		27,100				23,781
Movement charged directly to other comprehensive income		591				507
Excess MCIT deducted against RCIT due		(370	)			—
Adjustments due to adoption of IFRS 15		(1,166	)			—
Benefit from (provision for) deferred income tax		(1,375	)			2,738
Others		(64	)			74
Net balance at end of the year		24,716				27,100
Net deferred income tax assets – balance at end of the year		27,697				30,466
Net deferred income tax liabilities – balance at end of the year		(2,981	)			(3,366	)

The analysis of our consolidated net deferred income tax assets as at December 31, 2018 and 2017 are as follows:

	2018				2017
				(in million pesos)
Deferred income tax assets:
Deferred income tax assets to be recovered after 12 months		25,163				26,246
Deferred income tax assets to be recovered within 12 months		4,872				5,602
		30,035				31,848
Deferred income tax liabilities:
Deferred income tax liabilities to be settled after 12 months		(1,992	)			(1,206	)
Deferred income tax liabilities to be settled within 12 months		(346	)			(176	)
		(2,338	)			(1,382	)
Net deferred income tax assets		27,697				30,466

The analysis of our consolidated net deferred income tax liabilities as at December 31, 2018 and 2017 are as follows:

	2018				2017
				(in million pesos)
Deferred income tax liabilities:
Deferred income tax liabilities to be settled after 12 months		(2,743	)			(3,026	)
Deferred income tax liabilities to be settled within 12 months		(238	)			(340	)
Net deferred income tax liabilities		(2,981	)			(3,366	)

Provision for income tax for the years ended December 31, 2018, 2017 and 2016 consist of:

	2018		2017			2016
			(in million pesos)
Current		2,467		3,841			6,043
Deferred		1,375		(2,738	)		(4,134	)
		3,842		1,103			1,909

The reconciliation between the provision for income tax at the applicable statutory tax rate and the actual provision for corporate income tax for the years ended December 31, 2018, 2017 and 2016 are as follows:

	2018			2017			2016
				(in million pesos)
Provision for income tax at the applicable statutory tax rate		6,845			4,371			6,621
Tax effects of:
Nondeductible expenses		1,235			784			3,239
Equity share in net losses (earnings) of associates and joint ventures		26			(872	)		(354	)
Difference between Optional Standard Deduction, or OSD, and itemized deductions		(22	)		(22	)		(20	)
Income subject to final tax		(297	)		(2,545	)		(2,879	)
Income subject to lower tax rate		(750	)		(520	)		(168	)
Income not subject to income tax		(1,827	)		(301	)		(35	)
Net movement in unrecognized deferred income tax assets and other adjustments		(1,368	)		208			(4,495	)
Actual provision for income tax		3,842			1,103			1,909

The breakdown of our consolidated deductible temporary differences, carryforward benefits of unused tax credits from excess of MCIT over RCIT, and NOLCO (excluding those not recognized due to the adoption of the OSD method) for which no deferred income tax assets were recognized and the equivalent amount of unrecognized deferred income tax assets as at December 31, 2018 and 2017 are as follows:

	2018			2017
			(in million pesos)
NOLCO		4,289			7,151
Accumulated provision for doubtful accounts		3,144			3,014
Provisions for other assets		1,881			3,735
Fixed asset impairment		1,148			43
Gain on disposal of asset		106			—
Unrealized foreign exchange losses		49			105
MCIT		27			111
Unearned revenues		25			1,314
Pension and other employee benefits		13			1,740
Accumulated write-down of inventories to net realizable values		11			303
Asset retirement obligation		—			621
Derivative financial instruments and others		—			139
		10,693			18,276
Unrecognized deferred income tax assets		3,227			5,561

DMPI recognized deferred income tax assets to the extent that it is probable that sufficient taxable income will be available to allow all or part of the deferred income tax assets to be utilized. Digitel’s unrecognized deferred income tax assets amounted to Php1,421 million as at December 31, 2018, while Digitel and DMPI’s unrecognized deferred income tax assets amounted to Php2,798 million as at December 31, 2017.

Our consolidated deferred income tax assets have been recorded to the extent that such consolidated deferred income tax assets are expected to be utilized against sufficient future taxable profit. Deferred income tax assets shown in the preceding table were not recognized as we believe that future taxable profit will not be sufficient to realize these deductible temporary differences and carryforward benefits of unused tax credits from excess of MCIT over RCIT, and NOLCO in the future.

The breakdown of our consolidated excess MCIT and NOLCO as at December 31, 2018 are as follows:

Date Incurred	Expiry Date	MCIT				NOLCO
					(in million pesos)
December 31, 2016	December 31, 2019		108				1,133
December 31, 2017	December 31, 2020		113				2,203
December 31, 2018	December 31, 2021		711				11,724
			932				15,060
Consolidated tax benefits			932				4,518
Consolidated unrecognized deferred income tax assets			(27	)			(1,287	)
Consolidated recognized deferred income tax assets			905				3,231

The excess MCIT totaling Php932 million as at December 31, 2018 can be deducted against future RCIT liability. The excess MCIT that was deducted against RCIT amounted to Php488 million, Php15 million and nil for the years ended December 31, 2018, 2017 and 2016, respectively. The amount of expired portion of excess MCIT amounted to Php1 million, Php72 million and Php232 million for the years ended December 31, 2018, 2017 and 2016, respectively. Due to the loss of control of VIH, excess MCIT amounting to Php8 million was derecognized as at December 31, 2018. See Note 2 – Summary of Significant Accounting Policies – External Funding in VIH.

NOLCO totaling Php15,060 million as at December 31, 2018 can be claimed as deduction against future taxable income. The NOLCO claimed as deduction against taxable income amounted to Php1,094 million, Php4,241 million and Php8,531 million for the years ended December 31, 2018, 2017 and 2016, respectively. The amount of expired NOLCO amounted to Php1,272 million, Php354 million and Php571 million for the years ended December 31, 2018, 2017 and 2016, respectively. Due to the loss of control of VIH, excess NOLCO amounting to Php2,518 million was derecognized as at December 31, 2018. See Note 2 – Summary of Significant Accounting Policies – External Funding in VIH.

Registration with Subic Bay Freeport Enterprise and Clark Special Economic Zone Enterprise

SubicTel and Clarktel are registered with Subic Bay Freeport Enterprise and Clark Special Economic Zone Enterprise, or Economic Zones, respectively, under R.A. 7227 otherwise known as the Bases Conversion and Development Act of 1992. As registrants, SubicTel and ClarkTel are entitled to all the rights, privileges and benefits established thereunder including tax and duty-free importation of capital equipment and a special income tax rate of 5% of gross income, as defined in R.A. 7227.

Our consolidated income derived from non-registered activities within the Economic Zones is subject to the RCIT rate at the end of the reporting period.