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1 | T A X A T I O N 1 A C C O U N T I N G P E R I O D ( E H 4 0 3 )

PART 5
ACCOUNTING PERIOD; METHODS OF ACCOUNTING;
TAX RETURNS AND PAYMENT OF TAX

A. Accounting Period

General Rule: The taxable income shall be computed upon the basis of the taxpayers annual accounting
period in accordance with the method of accounting regularly employed in keeping the books of such
taxpayer.

Question: Whats the purpose of choosing the accounting period? The primary purpose is for you to be
able to synchronize the period of reporting the income with the normal operations of your business.

Exception: Computation shall be made in accordance with such method as in the opinion of the
Commissioner (CIR) clearly reflects the income:
I. If no such method of accounting has been so employed; or
II. If the method employed does not clearly reflect the income. [Section 43, NIRC]

Although, generally, if no method of accounting has been employed, they usually apply the calendar year
method.

B. Taxable year - the calendar year or the fiscal year ending during such calendar year, upon the basis of
which the net income is computed

Accounting periods
i. Calendar year January 1 to December 31
ii. Fiscal year an accounting period of twelve (12) months ending on the last day of any month other
than December.

Calendar year shall be used under the following instance:
1. If the taxpayer chooses the calendar year;
2. If the taxpayer has no annual accounting period;
3. If the taxpayer does not keep books;
4. If the taxpayer is an individual.

We are referring here to an individual taxpayer. For pure compensation income earners, automatically it is
calendar year. For business income earner or professional income earner, you still follow the calendar year
basis even if you have to file your tax returns quarterly.

When Commissioner is authorized to terminate taxable period
1. When a taxpayer retires from business subject to tax
2. When he intends to leave the Philippines
3. When he removes his property from the Philippines
4. When he hides or conceals his property
5. When he performs any act tending to obstruct the proceedings for the collection of the tax for the
past of current quarter or year
6. When he renders the collection of the tax totally or partly ineffective

In short, the CIR can change the taxable period if the taxpayer intends to evade paying or filing his/her
tax return. However, this is more of in theory because in practice it would be very difficult unless of course
someone sends an anonymous letter informing the BIR of such facts.

C. Methods of accounting

i. Cash Basis
Income, profits and gains earned by taxpayer are not included in gross income until received.
Expenses are not deducted until paid within the taxable year.

The income, profits and gains will be recognized when you actually received the cash regardless of
when you earn it. Meaning to say, even if it is advance payment or if you have not yet rendered the
service or delivered the goods, the fact that you already received the cash, you can already recognize
it as income. On the other hand, expenses are to be recognized when they are actually paid (i.e.,
when there is actual outflow of cash) regardless of when they are incurred (e.g., prepayments).


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ii. Accrual Method
Income, gains and profits are included in the gross income when earned, whether received or not.
Expenses are allowed as deduction when incurred, although not yet paid.

Under accrual method, income or profits are to be recognized when they are earned (i.e., when you
have already rendered the service or delivered the goods) regardless of when you actually receive the
payment in cash. On the other hand, expenses are allowed as deduction when they are already
incurred (i.e., when you have already benefitted from the outflow).

iii. Mixed/Hybrid
Combination of the cash and accrual method.

Meaning to say you use cash basis for the income and accrual basis for the expenses or vice versa.

Take note that the BIR uses cash basis for the income. For example, if you avail the services of a
lawyer and the lawyer asks for a deposit, the cash received as deposit will already be taxable because
as far as the BIR is concerned, it is already under your constructive control even you have not yet
earned it. On the other hand, the BIR uses accrual basis for the expenses. For example, you avail the
services of a lawyer on the year 2013 but the lawyer only billed you on year 2014, the legal fees
should be deducted on year 2013 because that is the time when the expense is considered as
incurred.

iv. Any other method which clearly reflects the income

You consider the nature of your business (e.g., long-term construction contracts or farming).

Cash v. accrual method of accounting

Gains, profits and income are to be included in the gross income for the taxable year in which they
are received by the taxpayer, unless they are included when they accrue to him in accordance with
the approved method of accounting followed by him.

Tax accounting v. financial accounting

While taxable income is based on the method of accounting used by the taxpayer, it will always differ
from accounting income. This is so because of a fundamental difference in the ends the two concepts
serve. Accounting attempts to match cost against revenue. Tax law is aimed at collecting revenue. It
is quick to treat an item as income, slow to recognize deductions as losses. Thus, tax law will not
recognize deducting, on the other hand, requires their recognition. [Consolidated Mines v. CTA, 58
SCRA 618]

Question: Will there be an instance where the tax accounting differs from the financial accounting?
Yes. Under the Generally Accepted Accounting Principles (GAAP), between cash basis and accrual
basis, the latter is favoured both for income and expenses. However, insofar as the Tax Code is
concerned, accrual basis is applied for the expenses or deductions but not for income. This is because
the primary purpose of the tax accounting is to earn income or to collect revenue. But the main focus
of financial accounting is matching your expenses with your income.

D. Long-term contracts

The term long term contract means building, installation or construction contracts covering a period in
excess of one year. [Section 48, NIRC]

i. Treatment of income from long-term contracts

a) Percentage of completion basis you are going to recognize the income based on the percentage
of completion of the project for every taxable year

b) Completed contract basis you are going to recognize the income only when the contract has
entirely been completed

Note: Section 48 of the NIRC provides that Persons whose gross income is derive in the whole or
in part from such (long term) contracts shall report such income upon the basis of percentage of
completion.

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The return should be accompanied by a return certificate of architects or engineers showing the
percentage of completion during the taxable year of the entire work performed under the
contract.

E. Sales of dealers in personal Property

A person who regularly sells or otherwise disposes of personal property on the instalment plan may return
as income there from in any taxable year that proportion of the instalment payments actually received in
that year, which the gross profit realized or to be realized when payment is completed, bears the total
contract price. [Section 49, NIRC]

Treatment of sales of realty and casual sales of personality

These include:
a) Casual sale or other casual disposition of personal property (other than property included in the
inventory at the close of the taxable year) for a price exceeding P1000; and
b) Sale or other disposition of real property.

Treated either on instalment basis or deferred sales basis.

a) Instalment basis if the initial payments do not exceed 25% of the selling price.

Meaning to say, every time you receive a payment, you recognize it as partial income. However, there
is a condition that the initial payment does not exceed 25% of the selling price. For example, the
selling price is 100,000 and the first payment is 10,000 or 10% of the selling price; while, the second
payment is 20,000 or 20%, you will treat it as instalment.

b) Deferred sales basis - if the initial payments exceed 25% of the selling price [Section 49, NIRC and
Section 175, Revenue Regulations 2]

When you say deferred sales, you will delay the recognition of the income.

Initial payments
These include the payments received in cash or property other than evidence of indebtedness of the
purchaser during the taxable period in which the sale or other disposition is made.

The term initial payments contemplates at least one other payment in addition to the initial payment.
[Section 175, Revenue Regulations 2]

One other payment because usually, there is what we call as down payment or earnest money in
contract of sales.

F. Termination of leasehold

This refers to leasehold improvements (i.e., when the lessee makes improvements but at the end of the
lease term, it is given to the lessor).

Lessor who acquires building or improvements made by the lessee after termination of the lease has two
options in reporting said income:
1. Lessor may report as income at the time when such buildings or improvements are completed the fair
market value of such buildings or improvements; or
2. Lessor may spread over the life of the lease estimated depreciated value of such buildings or
improvements at the termination of the lease and report as income for each of the lease an adequate
part thereof. [Section 49, Revenue Regulations 2]

G. Allocation of income and deductions

In the case of two or more organizations, trade or businesses (whether or not incorporated and whether
or not organized in the Philippines) owned or controlled, directly or indirectly, by the same interests, the
commissioner is authorized to distribute, apportion or allocate gross income or deductions between or
among such organization, trade or business if he determines that such distribution, apportionment or
allocation is necessary in order to prevent evasion taxes or clearly to reflect the income of an such
organization, trade or business. [Section 50, NIRC]


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FILING OF TAX RETURN AND PAYMENT OF THE TAX

H. Tax Return A report prepared by the taxpayers showing to internal revenue officers and enumeration of
taxable amounts and description of taxable transactions, allowable deductions, amounts subjects to tax
and the tax payable by the taxpayer to the government (Self-assessment). There is pain of perjury if the
return is not correct.

i. BIR Form No. 1700 and 1701 Annual Income Tax Returns for Individuals
ii. BIR Form No. 1702 Annual Income Tax Returns for Corporations and Partnerships
iii. BIR Form No. 1800 Donors Tax Return
iv. BIR Form No. 1801 Estate tax Return

For quarterly tax returns for a corporate taxpayer, for example, you will have to pay BIR Form No. 1702Q.

I. Persons Required to File Income Tax Return

A. Individual

1) Resident Citizen;
2) Non-resident citizen on income from within the Phil;
3) Resident alien on income from within the Phil.
4) NRA-ETB on income from within the Phil.
5) An individual (citizens/aliens) engaged in business or practice of a profession within the Phil.
regardless of the amount of gross income;
6) Individual deriving compensation income concurrently from two or more employers at any time
during the taxable year;
7) Individual whose pure compensation income derived from sources within the Phil. exceeds
P60,000

Take note that the NRA-NETB is not included because they are not required to file the ITR since
whatever income they receive here in the Philippines will be subject to final withholding tax. It will be
the person withholding the tax for the income of the NRA-NETB who will remit the same to the BIR.

B. Taxable Estate and Trust

Bar Question: Mr. X is earning compensation income; while, his wife earns business income. During
the taxable period, Mr. X died.
1. Does Mr. X need to file income tax return for the taxable year during his death? Yes, although, of
course, it will not be Mr. X who will have to sign it but it will be the representative of Mr. X. He
can still claim personal and additional exemption. Basis for this is the status-at-the-end-of-the-
year rule. Thus, it is as if Mr. X died at the end of the year.
2. How about the wife, does she need to file income tax return? Yes but she can only claim for
personal exemption and not additional exemption since it is already being claimed by the
husband.
3. Is the estate of Mr. X required to file income tax return for the same taxable year when Mr. X
died? No. As a rule, when it comes to estate income taxation, you will only file tax return for the
estate if there is judicial settlement of the estate (i.e., if there is a court appointing the executor
or administrator); otherwise, if the problem is silent, the presumption is there is only extrajudicial
settlement of the estate (i.e., there is no court appointed executor or administrator who will file
the income tax return for the estate).

C. General Professional Partnership

Although the General Professional Partnership (GPP) is not subject to tax, it still needs to file the ITR
because it needs to declare the amount of net income. That is already considered as constructively
received income of the partners of the GPP.

D. Corporation
1) Not exempt from income tax;
2) Exempt from income tax under Sec. 30 of NIRC but has not shown proof of exemption.





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J. Individuals Exempt From Filing Income Tax Return

1) Individual whose gross income does not exceed total personal and additional exemptions;
2) Individual with respect to pure compensation income derived from sources within the Philippines, the
income tax on which has been correctly withheld;
3) Individual whose sole income has been subjected to final withholding income tax;
4) Individual who is exempt from income tax.

Question: How will you know if your income tax has been correctly withheld? If the income tax withheld is
equal to the income tax due resulting to a zero income tax payable.

Difference between final withholding tax and creditable withholding tax: The final withholding tax will be
reported in a separate tax return. This will not be deducted from your income tax due because it is
considered as full and final payment (e.g., interest income on bank deposits).

K. Substituted filing of Income tax Returns by Employees Receiving Purely Compensation Income
[Section 4, RR 3-2002]

Requisites:
1) The employee receives purely compensation income (i.e., there is no other income received by the
employee), regardless of amount, during the table year;
2) The employee receives the income only from one employer during the taxable year;
Note: If the taxpayer is employed by two employers, both the employers will have to withhold
income tax due but at the end of the taxable year, the employee or the taxpayer needs to file a
consolidated income tax return declaring the income from both employers.
3) The amount of tax due from the employee at the end of the year equals the amount of tax withheld
by the employer;
Note: You can check BIR Form No. 2316 which provides a summary of the income received from
the employer, the deductions, etc.
4) The employees spouse also complies with all three (3) conditions stated above;
If you are married, while your income tax due are computed separately, you must file
consolidate income tax return. For you not to file consolidated income tax return (i.e., for you to
fall under substituted filing), you and your spouse should meet the first three requirements.
If the husband is earning pure compensation income and the wife is earning business income,
you have to file consolidated income tax return.
5) Employer files the annual information return (BIR From No. 1604-cf); and
6) Employer issues BIR Form No. 2316 to each employee.

Individuals not qualified for substituted filing (still required to file)

1) Individuals deriving compensation from 2 or more employers concurrently or successively during the
taxable year.
2) Employees deriving compensation income, regardless of the amount, whether from a single or several
employers during the calendar year, the income tax of which has not been withheld correctly (i.e. tax
dues is not equal to the tax withheld) resulting to collectible or refundable return.
3) Individuals deriving other non-business, non-profession-related income in addition to compensation
income not otherwise subject to final tax.
4) Individuals receiving purely compensation income from a single employer falls under 1 to 3 above.
Meaning to say, your spouse does not meet the first three requirements for substituted filing.
5) Non-resident aliens engaged in trade or business in the Philippines deriving purely compensation
income, or compensation income and other non-business, non-profession-related income.

Note: The list originally included employees whose monthly gross compensation income does not exceed
P5,000 or the statutory minimum wage. However, upon the passage of RA 9504, if you are a statutory
minimum wage earner, you are not anymore required to file income tax return.

Question: If you are earning business or professional income and during the taxable year your business is
at a loss, do you still need to file income tax return? Yes. You are not considered as a statutory minimum
wage earner because such presupposes the existence of an employer-employee relationship.

L. Place Of Filing

1) Legal residence authorized agent bank (AAB); Revenue District Officer; Collection agent or duly
authorized treasurer

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Note: Your Tax Identification Number (TIN) is registered with a specific Revenue District Office (RDO).
Each of the RDO have their own AABs where you can deposit your payment.

Question: If you paid to the incorrect RDO, will that be considered as paid by your actual RDO? No.
There is a penalty for wrong filing.

2) Principal place of business

This is applicable if the business has different branches.

3) With the office of the Commissioner

You can file with the office of the Commissioner if you are not registered with a specific RDO. We are
referring here to the main office of the BIR in Manila.

M. Due Dates of filing and Payment of Tax

INCOME TAXES DUE DATES
Income Tax Compensation (individual taxpayer) April 15 succeeding year
Income Tax Business or Profession (individual
taxpayer)
a) 1
st quarter
(January March)
b) 2nd
quarter
(April June)
c) 3rd
quarter
(July September)
d) Annual final return


April 15
August 15
November 15
April 15 succeeding year
Income tax (corporate taxpayers)
a) 1st
quarter

b) 2
nd

quarter

c) 3
rd

quarter

d) Annual final return

60
th
day after end of quarter
60
th
day after end of quarter
60
th
day after end of quarter
April 15 succeeding year
Capital Gains Tax on Sale of Real Property
a) Cash Sale
b) Instalment sale

30
th
day after sale
30
th
day after receipt of instalment
Remittance of tax withheld
In general
a) January to November
b) December
c) Large taxpayers


On or before 10
th
day of succeeding month
Not later than January 25 of the succeeding year
On or before 25
th
day of the month following the
month the withholding was made.

For the income tax returns, you will file for the first, second and third quarters and then consolidate it
when you file your annual tax return.

Note: when the tax due is in excess of P2,000 the taxpayer may elect to pay in two (2) equal
instalments:
a) 1
st
instalment April 15
b) 2
nd
instalment on or before July 15

N. Extension Of Time To File Return

The Commissioner may on meritorious cases grant a reasonable extension of time for filing income tax
return and may subject the imposition of twenty (20) percent interest per annum from the original due
date.

O. Return Of Husband And Wife

File one (1) return during the taxable year if following requisites complied;
1) Married individuals (citizens, resident or non-resident aliens)
2) Do not derived income purely from compensation.
Income but the return so filed shall be consolidated by the Bureau for the purposes of verification for
the year.

Unmarried Minor
Income of unmarried minors derived from property received by the living parent shall be included in the
return of the parent, except:
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a) When donors tax has been paid on such property or
b) When transfer of such property is exempt from donors tax (i.e., when it does not exceed
200,000)

P. Persons Under Disability

If a taxpayer is unable to make his own return, it may be made by his
i. duly authorized agents;
ii. representative (there must be Special Power of Attorney at the very least);
iii. by guardian (the least, there should be judicial declaration);
iv. other person charged with the care of his person or property;
who will assume the responsibility of making the return and incurring penalties provided for erroneous,
false or fraudulent return.

Question: Can you be held liable for a criminal case for perjury by the BIR? Yes because at the bottom
part of the ITR, there is a declaration that the information is correct to the best of your knowledge.

Q. Return Of Estate And Trust And Partnership

Estate and trust with gross income of P20, 00 or more and partnership (whether professional or business)
shall file their income tax return on or before April 15.

R. Tax Returns of General Professional Partnerships (GPP)

Each GPP shall file in duplicate, a return of its income (except those income exempt)
Shall set forth:
1) Items of gross income or deductions allowed
2) Names of partners
3) TIN
4) Share of each partner

S. Self-employed Individuals

Every individual subject to income tax, who is receiving self-employment income, whether it constitutes
the sole source of his income or in combination of salaries, wages and other fixed or determinable income,
shall make and file a declaration of his estimated income for the current taxable year on or before April 15
of the same taxable year.

Non-resident Filipino citizens with respect to income from without the Philippines and non-resident aliens
not engaged in trade or business in the Philippines are not required to render a declaration of estimated
income tax.

Self-employment income
Self-employment income consists of the earnings derived by the individual from the practice of profession
or conduct of trade or business carried on by him as a sole proprietor or by a partnership of which he is a
member.

Return and payment of estimated income tax by individuals
The amount of estimated income shall be paid in four (4) instalments.

Estimated tax
Estimated tax means the amount which the individual declared as income tax in his final adjusted and
annual income tax return for preceding taxable year minus the sum of the credits allowed against the said
tax.

If, during the current taxable year, the taxpayer reasonably expects to pay a bigger income tax. He shall
file an amended declaration during any interval of instalment payment dates.

T. Corporate returns

Every corporation subject to income tax, except foreign corporations not engaged in trade or business in
the Philippines, shall render, in duplicate, a true and accurate:

1) Quarterly income tax return; and
2) Final or adjustment return.
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The return shall be filed by the president, vice president or other principal officer, and shall be sworn
to by such officer and by the treasurer or assistant treasurer.

A corporation may employ either the calendar year or fiscal year as basis for filing its annual income
tax return.

Every corporation deriving capital gains from the sale or exchange of shares or stock not traded
through a local stock exchange shall file a return within thirty (30) days after each transaction and a
final consolidated return of all transactions during the taxable year on or before the fifteenth (15
th
)
day of the fourth month following the close of the taxable year.

Declaration of quarterly corporate income tax
Every corporation shall file in duplicate a quarterly summary declaration of its gross income and
deductions on a cumulative basis for the preceding quarter or quarters upon which the income tax
shall be levied, collected and paid.

The tax computed shall be decreased by the amount of tax previously paid or assessed during the
preceding quarters and shall be paid not later than sixty (60) days from the close of each of the first
three (3) quarters of the taxable year, whether calendar or fiscal year.

Fiscal adjustment return
Every corporation liable for tax 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:

1) Pay the balance of tax still due; or
2) Carry over the excess credit; or
3) Be credited or refunded with the excess amount paid, as the case may be.

This is applicable, for example, if business earns profit on the first three quarters and you already
paid income tax for the first three quarters but you incur losses in the fourth quarter resulting to a
loss for the taxable year. In this case, you can claim the excess income tax payments as carry over or
as refund, as the case may be. It is also applicable when you incur losses in the first two quarters and
you earn income in the last two quarters resulting to income for the taxable year. Thus, you will have
to pay the balance of the tax still due.

U. Computation of income tax

Formula:
All income for taxable year less exclusions = Gross Income
Less Allowable deductions = Net Income or Taxable Income
Less personal and additional exemptions = Taxable Net Income
Multiply with appropriate tax rate = Income Tax Due
Less Creditable Withholding tax or Tax Credits = Net Income Tax Payable

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