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Philippine Institute of Certified Public Accountants

Northern Metro Manila Chapter

Review of Income Tax Reporting


For Individuals & Corporate
Taxpayers
Alvin II S. Siapian

June 15, 2019


Outline
1. Persons subject to income tax
• Determination of source of income
2. Reportorial Requirements for Individuals and
corporations
3. Gross Income
4. Exclusion from gross income
5. Allowable deductions
• Itemized Deduction
• Optional Standard Deduction
6. General Computation of Income Tax Return
7. Reconciliation of Income per Books Vs. Taxable Income
8. Tax Compliance Review
Persons subject to income tax

A. Citizen

(1) Resident citizen - is a citizen of the Philippines who has a permanent


home or place of abode in the Philippines to which he/she
intends to return whenever he/she is absent for business or pleasure.

(2) Domestic corporation - is one created or organized in the Philippines or


under its laws. (Sec.22(C),NIRC)
Persons subject to income tax

(3) Nonresident citizen - is a citizen of the Philippines who:

(a) establishes the fact of his/her physical presence abroad


with the definite intention to reside therein;

(b) leaves the country to reside abroad, either as an immigrant


or for employment on a permanent basis;
Persons subject to income tax

(c) works and derives income from abroad and whose employment thereat
requires him to be physically present abroad most of the time during the
taxable year; or, who has been considered nonresident citizen previously and
who arrives in the Philippines at anytime during the taxable year to reside
permanently in the Philippines shall be treated as nonresident citizen for the
taxable year in which he arrives in the Philippines with respect to his income
abroad until the date of his arrival in the Philippines.

(4) Resident foreign corporation - Foreign corporation engaged in trade or


business within the Philippines. Generally, it establishes branch or an office
for the purpose of doing business or trade.
Persons subject to income tax
B. Alien

(1) Resident alien - is an individual who is not a citizen of the


Philippines but whose residence is within the Philippines.

(2) Nonresident alien:


a. Non-resident alien engaged in trade and business (NRAETB)
refers to a non-resident alien who shall come to the Philippines and stay for an aggregate
period of more than one hundred eighty (180) days during any calendar year.

b. Non-resident alien not engaged in trade and business (NRANETB)


refers to a nonresident alien who shall come to the Philippines and stay for an aggregate
period of one hundred eighty (180) days or less during any calendar year.
Revenue Memorandum Order No. 28-2019
Subject: Prescribing policies and guidelines on the registration requirements of foreign nationals. (Foreign
individuals not engaged and/or engaged in trade or business or gainful employment in the Philippines).

Salient Features:
1. Foreign nationals who will engage in work outside of an employment arrangement are required to secure a
Special Working Permit (SWP) with the Bureau of Immigrations (BI), provided that performance of work of
service which consists practice of a regulated profession are required to secure to secure Special Temporary
Permit (STP) with the Professional Regulatory Commission (PRC). An SWP allows foreign national to work
under a Tourist Visa (9A), provided that the validity of the contract is for only up to Three Months which
may be extended for another three months.
2. Foreign nationals intending to engage in gainful employment shall apply for an Alien Employment Permit
(AEP) with the DOLE. Pending issuance of their AEP or with valid AEP but pending approval of
Commonwealth Act (CA), 613, Sec 9(g) work visa, foreign nationals shall secure a Provisional Work Permit
(PWP) with the BI.
3. An AEP authorizes a foreign national to engage in gainful employment in the Philippines though not an
exclusive one of the requirements in the issuance of work visa (9g) to legally engage in gainful employment
in the country. Foreign nationals exempted from securing AEP are required to secure a Certificate of
Exclusions with DOLE.
4. Other agencies that issue working permit to foreign workers (DENR, DOJ)
Persons subject to income tax

B. Alien
(3) Non-resident foreign - Foreign corporation not engaged in trade or
business within the Phil.
Determination of Source of Income
A. Citizen
1. Resident citizen - on incomes derived from sources within and
without the Philippines

2. Nonresident citizen - taxed similarly as a resident citizen on incomes


from sources within the Philippines.
Determination of Source of Income
B. Alien
1. Resident alien - taxed similarly as a resident citizen on incomes
received from sources within the Philippines.
2. Nonresident alien:
a. Engaged in trade or business in the Philippines (NRAETB)
taxed similarly as a resident citizen on incomes from sources
within the Philippines.
b. Not engaged in trade or business in the Philippines (NRAETB)
taxed on gross income from sources within the Philippines.
Determination of Source of Income- Within
Interest income – Residence of Obligor
Dividends – Domestic Corporation
Foreign Corporation
Service – Where rendered
Royalties – Where employed
Rents – Location of Property
Gain on sale of real property – Location of prop
Gain on sale of personal property – It depends
Other source: Activity, Property, Service
Exercises – Determination of source
Compute the source derived from within or without: Within Without
1. ABC Finance and Lending Corp. earned Php100,000.00 interest income for the taxable year 2015; 20% of which came from non-residents.

2. Rex Banggawan, the author of tax textbook, earned royalties. The book sales in the Philippines is Php1M and another Php1M in the US. The
royalty rate is 20%.
3. Paris Hilton operates the Azure Hotels located in Alabang Muntinlupa, Philippines. Rentals from bookings amounted to Php1M (50% from
foreigners and 50% from Filipinos).
4. Paris Hilton operates the Hilton Hotels located in New York, USA. Rentals from bookings amounted to Php1M (50% from foreigners and 50%
from Filipinos).

5. SMC, a domestic corporation whose earnings are 100% foreign based, declared dividends. Mr. McDonald Trump, an American based in
Washington is a shareholder. The BOD declared that he shall receive Php 100,000.00.

6. SMC, a foreign corporation whose earnings are 100% foreign based, declared dividends. Mr. McDonald Trump, an American based in
Washington is a shareholder. The BOD declared that he shall receive Php 100,000.00.

7. Mark Zackerberg is an American living in the Philippines. He is an IT expert servicing Peysbook, a popular social media site, home-based and
online. He receives compensation in the amount of Php 1M.

8. Julybee, a popular food giant in the Philippines opened a franchise in Japan. The franchisee paid Php1M pesos.

9. Nickelodeon, a US based media company invested in El Nido Palawan, and opened a new theme park. Gate receipts amounted to Php 1M
(50% from foreigners and the rest from Filipinos)

10. Mark Zackerberg is an American living in Los Angeles, California, US. He is a shareholder of Near Eastern University, a top5 university in the
Philippines. He purchased the share at 1M and sold it for 2M in the US.
INCOME TAX REGIME FOR
INDIVIDUALS
Taxation of Individual Taxpayers under TRAIN Law

Compensation Income Earner Graduated tax

8% Option*
Self-employed
Graduated tax + PT
Compensation Graduated
Mixed Income Earner
Business income 8% Option*
Graduated
8% Optional Income Tax
Criteria: RMO 23-2018 dated May 21, 2018
• Self-employed or Mixed Income earner
• Did not exceed the VAT threshold
• Taxpayer is registered and:
• Subject to Percentage tax under Section 116 of the Tax Code, or
• Exempt from VAT or PTs
• Signified intention to elect 8%

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8% Optional Income Tax
Under RMO 23-2018, Self-employed is:
a. Required to file Quarterly ITR unless exempted
b. Required to file Annual ITR (AFS not mandatory)
c. Not required to file Quarterly Percentage Tax Return
d. Required to signify the intention to avail the 8% every
taxable year
e. Required to maintain books of accounts and issue
receipts/invoices

16
8% Optional Income Tax
• In lieu of income tax and percentage tax
• Basis is actual gross sales/receipts and other non-
operating income
• Signify on 1st quarterly income tax return or initial
return
• Irrevocable for the taxable year
• If no intention was made, deemed graduated tax rate
• Audited financial statements is not a requirement
(under Revenue Regulations 8-2018)
• Bookkeeping and Invoicing Rules apply 17
8% Optional Income Tax
Not available to:
• Purely compensation income earners
• VAT-registered Taxpayers
• VAT or PT exempt taxpayers whose gross sales and non-
operating income exceeded the VAT threshold
• Taxpayers subject to Other Percentage Taxes
• Partners of a GPP
• Taxpayers enjoying income tax exemption e.g. BMBE (RMO
23-2018)
• Taxpayers who opted for OSD
• Taxpayers who did not signify their intent to be taxed at 8%
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HOW TO AVAIL 8% OPTIONAL INCOME TAX RATE?
Procedural requirements of availing 8% optional income tax

INITIAL OR NEW REGISTRANT EXISTING BUSINESSES


1. Submit Application for registration by accomplishing ➢ Filing of BIR Form 1905 at the beginning of the
BIR Form No. 1901 to the concerned Revenue District taxable year to end-date the form type of
Office having jurisdiction over the place of residence or quarterly percentage tax rate; or
where the Head Office is located together with the
complete documentary requirements.
➢ Initial filing of BIR Form 2551Q: Quarterly
2. Submit Application for Registration Information Update Percentage Tax Return on the 1st quarter
by accomplishing BIR Form No. 1905 to the concerned indicating the 8% tax rate; and/or
Revenue District Office where the self-employed
individual is registered, together with Certificate of ➢ Initial filing of BIR Form 1701Q: Quarterly
Registration (COR) for replacement or updating. Income Tax Return on the 1st quarter indicating
the 8% tax rate
❑ Note: Under Revenue Memorandum Circular 27-2019,
Annex A, the new BIR Form No. 1901 now includes the
option to avail 8% Income Tax Regime
Reportorial Requirements for
Individuals and Corporations
Reports to be Submitted to BIR
1. Tax Returns
2. Attachments (SAWT, SLS, SLP, QAP)
3. Annual Tax information
BIR Filing
Tax Type Form Deadline
Annual Registration Payment Form 0605 January 31
Income Tax (Annual and quarterly)* 1701/(A)/1702RT/EX/MX (Q) April 15 / 15th day of 4th mo.
following close of taxable year

Value Added Tax 2550M/2550Q 20th / 25th


Percentage Tax* 2551Q 25th of quarter
10th and last day of month after the
EWT/FWT 0619E/F and 1601-EQ/FQ QTR

Withholding - Comp 1601-C 10th / 15th (Dec)


Fringe Benefits Tax 1603Q last day of mo. after QTR
Annual Information Returns 1604 CF/1604E January 31 and March 1
BIR Filing
Attachments to the returns (see e-submission @BIR website):
1. Summary Alphalist of Withholding Agents (SAWT)
2. Quarterly Alphalist of Payees (QAP)
3. Summary List of Sales and Purchases (SLSP)
4. Alphalist of Payees (Annual)
5. Alphalist of Employees (Annual)
• With only one employer during the year
• With multiple employer during the year
• Exempt employees
• Management
6. Inventory List (RMC No. 57-2015)
Penalties for failure to file tax returns
Basic Tax Due ___ + *Surcharge ___ + Interest (12%) ____+
**Compromise Penalty
Penalties for failure to file tax returns
*Surcharge
Imposition of 25% surcharge for amended tax returns that would
require additional tax due payment. (Revenue Memorandum Circular No.
21-2018)

**Compromise
Failure to make/file/submit any return or supply correct information at
the time or times required by law or regulation. (refer to Sec 255 of the
tax code, as amended or Revenue Memorandum Order No. 7-2015)
Gross Income
Definition
Gross income means – all income derived from whatever source
including but is not limited to the following:
1. Compensation for services in whatever form paid
2. Gross income from the conduct of trade or business or practice
of profession
3. Gains derived from dealings in property
4. Interests
5. Rents
6. Royalties
28
Definition
7. Dividends
8. Annuities
9. Prizes and winnings
10.Pensions
11.Partner’s distributive share from the net income of the GPP
✓Excess of Standard input tax over Actual input tax
✓Excess campaign contribution over expenditures
✓Tax Benefit Rule
✓Passed-on Gross receipts tax (for banks)

29
Exclusions from Gross Income
Sec. 32 (B) The following are not included in the computation of the
gross income of taxpayers:
a. Proceeds of life insurance policies but not the interest paid to the
heirs or beneficiaries;

b. Amount received by the insured as return of premium;

c. Value of property acquired by gratuitous transfer but not the income


from such property;

d. Compensation for injuries or sickness including damages received;


Exclusions from Gross Income
e. Income exempt under treaty;

f. Retirement benefits, pensions, gratuities, etc. under certain conditions;

g. Income derived by foreign governments, financing institutions owned,


controlled or enjoying financing from foreign governments, and international
or regional financing institutions established by foreign governments, from
their investments in loans, stocks, bonds or other domestic securities or from
interest on their deposits in banks in the Philippines;

h. Income derived from any public utility or from the exercise of any essential
government function accruing to the Philippine government or to any
political subdivision;
Exclusions from Gross Income
I. Prizes and awards made primarily in recognition of religious, charitable,
scientific, educational, artistic, literary, or civic achievement but only if the
recipient was selected without any action on his part to enter the contest or
proceeding, and is not required to render substantial future services as a
condition to receiving the prize or award;

j. Prizes and awards granted to athletes in local and international sports


competitions and tournaments held in the Philippines or abroad and
sanctioned by their respective national sports associations;

k. 13th Month Pay and Other Benefits. Gross benefits received by officials
and employees of public and private entities: Provided, however, that the
total exclusion under this subparagraph shall not exceed PhP90,000;
Exclusions from Gross Income
l. GSIS, SSS, Medicare and Pag-IBIG contributions, and union dues of
individuals;

m. Gains realized from the sale or exchange or retirement of bonds,


debentures or other certificate of indebtedness, with a maturity of
more than five (5) years; and

n. Gains realized by the investor upon redemption of the shares of


stocks in a mutual fund company.
Allowable Deductions
Revenue Regulations 8-2018
SECTION 8. DEDUCTIONS FROM GROSS INCOME.
In general, there shall be allowed at the option of the taxpayer (individual or
corporations):

1. Itemized deductions; or
2. Optional Standard Deduction(OSD)

Note: No deductions shall be allowed to individual taxpayers earning


compensation arising from personal services rendered under an employer-
employee who opted to be taxed at 8% income tax rate on their income from
business/practice profession.
(MIXED INCOME EARNERS) not allowed to use the P250,000 deductions
General Principles in Deductions
from Gross Income
Rules on Deductibility of Expenses

1. the expense must be ordinary and necessary;


2. it must be paid or incurred within the taxable year;
3. it must be paid or incurred in carrying in a trade or business;
4. it must substantially prove by evidence or records the deductions claimed under the law,
otherwise, the same will be disallowed. The mere allegation of the taxpayer that an item of
expense is ordinary and necessary does not justify its deduction
(Atlas Consolidated Mining v. CIR GR No. L-26911);
5. The applicable withholding tax has been paid to the BIR
(Revenue Regulations No. 06-2018); and
6. Attributable to the development, management or operation of the business or trade
(Sec. 34 (A) (1) (a))
Sec 34 (b) Substantiation Requirements.

No deductions from gross income shall be allowed under Subsection


(A) hereof unless the taxpayer shall substantiate with sufficient
evidence, such as official receipts or other adequate records;

(I) the amount of the expense being deducted, and


(II) the direct connection or relation of the expense being deducted to
the development, management, operation and/or conduct of the
trade, business or profession of the taxpayer.
REVENUE REGULATIONS No. 6 -2018
SUBJECT: Requirements for Deductibility of Expense

A deduction will also be allowed in the following cases where no


withholding of tax was made:

(A) The payee reported the income and pays the tax due thereon
and the withholding agent pays the tax including the interest
incident to the failure to withhold the tax and surcharges, if
applicable, at the time of the audit/investigation or reinvestigation
/reconsideration.
REVENUE REGULATIONS No. 6 -2018
SUBJECT: Requirements for Deductibility of Expense

A deduction will also be allowed in the following cases where no


withholding of tax was made:

(B) The recipient/payee failed to report the income on the due


date thereof but the withholding agent/taxpayer pays the tax,
including the interest incident to the failure to withhold the tax
and surcharges if applicable at the time of audit/investigation or
reinvestigation or reconsideration.
REVENUE REGULATIONS No. 6 -2018
SUBJECT: Requirements for Deductibility of Expense

A deduction will also be allowed in the following cases where no


withholding of tax was made:

(C) The withholding agent erroneously under-withheld the tax but


pays the difference between the correct amount and the amount
of tax withheld including the interest, incident to such error and
surcharges, if applicable at the time of the audit, investigation or
reinvestigation / reconsideration.
REVENUE REGULATIONS No. 6 -2018
SUBJECT: Requirements for Deductibility of Expense

A deduction will also be allowed in the following cases where no


withholding of tax was made:

Items of deduction representing return of capital such as those


pertaining to purchases of raw materials forming part of finished product
or purchases of goods for resale shall be allowed as deductions upon
withholding agent's payment of the basic withholding tax and penalties
incident to non-withholding or under-withholding.
Itemized Deductions
Itemized Deductions
Sec 34. Deductions from Gross Income.
Except for taxpayers earning compensation income arising from
personal services rendered under employer-employee relationship
where no deductions shall be allowed under this sections
24(A);25(A);26; 27(A), (B) and (C); and 28 (A)(1), There shall be allowed
the following deductions from gross income:
Itemized Deductions
1. Ordinary and Necessary Trade, Business or Professional Expenses.

In General – There shall be allowed as deduction from gross income all


the ordinary and necessary expenses paid or incurred during the
taxable year in carrying on or which are directly attributable to, the
development, management, operation and/or conduct of the trade,
business or exercise of a profession.
When is an expense Ordinary and necessary?
• An Expense is “necessary” if reasonable and essential to the
development, management, operation or conduct of the trade,
business or exercises of the profession of the taxpayer.

• It is “ordinary” when it is a payment which is normal in relation to the


business of the taxpayer and surrounding circumstances.
(Atlas vs. CIR)
• An expense is also said to be ordinary if it is normally incurred by
other taxpayers under the same line of business.
Factors in assessing reasonableness
In CIR Vs. General Foods (Phils), Inc. it was held that reasonableness
will be judged on the interplay of many factors such as, but not limited
to the following:
1. Type and size of business;
2. Volume and amount of its net earnings;
3. Nature of the expenditure itself;
4. Intention of the taxpayer; and
5. General economic conditions.
Itemized Deductions
2. Interest Expense
Under Revenue Regulations No. 13-2000, In general, subject to certain limitations, the
following are the requisites for the deductibility of interest expense from gross income:
a) there must be an indebtedness;
b) there should be an interest expense paid or incurred upon such indebtedness;
c) the indebtedness must be that of the taxpayer;
d) the indebtedness must be connected with the taxpayer's trade, business or exercise of
profession;
e) the interest expense must have been paid or incurred during the taxable year;
f) the interest must have been stipulated in writing;
g) the interest must be legally due;
h) the interest payment arrangement must not be between related taxpayers;
i) the interest must not be incurred to finance petroleum operations; and
j) in case of interest incurred to acquire property used in trade, business or exercise of
profession, the same was not treated as a capital expenditure.
Itemized Deductions
2. Interest Expense
The taxpayer's otherwise allowable deduction for interest expense shall be reduced by 33% of
the gross-up value of interest income subjected to final tax.
Example:
Interest Expense of P 250,000 from Loan (recorded in the books);
Interest Income received of P 200,000 from Bank Deposit (Net of 20% Final tax)

Computation
Interest Expense from Loan P 250,000
Less: 33% of interest income from Deposit (250,000 (200,000/80%) *33% ) 82,500
Deductible interest expense P 167,500
Without the rule of Arbitrage Limit
Same facts:

Interest Expense of P 250,000 from Loan (recorded in the books);


Interest Income received of P 150,000 from Bank Deposit (Net of 20%
Final tax)

Tax shield from expense ( P250,000 x 30%) = P(75,000)


Tax paid for final withholding tax ( 250,000 * 20%) = 50,000
Net tax savings P(25,000)
With the rule of Arbitrage Limit
Same facts:

Interest Expense of P 250,000 from Loan (recorded in the books);


Interest Income received of P 150,000 from Bank Deposit (Net of 20% Final
tax)

Tax shield from expense ( P250,000 x 30%) = P(75,000)


Tax paid for final withholding tax ( 250,000 * 20%) = 50,000
Tax arbitrage (250,000 * .33%)*.3 = 24,750
Net tax savings P (250)
Itemized Deductions
Challenge:
A taxpayer had the following interest expense and interest income in
2018:

Interest expense on bank loan P 250,000


Interest from bank deposit, gross 100,000
Interest from promissory notes 40,000

How much is the deductible Interest Expense?


NOT TO SHOW THIS SLIDE
Answer.
Gross interest expense P 250,000
less: Arbitrage limit
(100,000 x 33%) 33,000
Deductible Interest Expense P 217,000
Note: Interest or yield from bank deposits or deposit substitutes is the stated income subject to
final tax
Is Interest from delinquent taxes allowed as
deduction from Gross Income?
SC ( En banc) CIR vs. Consuelo L. VDA. De Prieto, G.R. NO. L-13912

Court Ruling:
In conclusion, we are of the opinion and so hold that although interest
payment for delinquent taxes is not deductible as tax under Section
30(c) of the Tax Code and section 80 of the Income Tax Regulations,
the taxpayer is not precluded thereby from claiming said interest
payment as deduction under section 30(b) of the same Code.
Is Interest from delinquent taxes allowed as
deduction from Gross Income?
Interest incurred or paid on unpaid business-related taxes* shall be
fully deductible ( Revenue Regulations No. 13-2000, Sec. 4 (c))

*Unpaid business-related taxes shall mean Delinquent Taxes.


Itemized Deductions
2. Interest Expense
In case of interest incurred to acquire property used in trade, business or exercise
of profession, the same was not treated as a capital expenditure.

Two options on how to treat interest from acquisition of property


1. Interest expense (outright expense)
2. Capital expenditure wherein the interest is added to the cost of the property
and subsequently avail of deduction as depreciation expense.
(typical example Capitalized Borrowing cost under PAS 23)

Note: the two option are mutually exclusive


(Paper Industries Corp. of the Phil v. Court of Appeals, GR Nos. 106949-50)
Itemized Deductions
3. Taxes
Taxes paid or incurred within the taxable year in connection with the taxpayer’s profession, trade or
business, except:

A. The income tax imposed under this code except, fringe benefit tax;
• Final Income Tax
• Capital Gains Tax
• Regular Income Tax
B. Foreign income tax paid by a taxpayer who did not signify in his/her return his/her desire to have
any refund or credit;
C. Estate and Donor’s taxes; and
D. Taxes assessed against local benefits of a kind tending to increase the value of the property
assessed (Special assessment) – capitalized in the cost of the property most specifically, cost of land.
Other Non-deductible taxes
1. Value added tax
2. Surcharges or penalties on delinquent taxes
Example of deductible Taxes
1. License tax
2. Community tax
3. Local taxes, except special assessment
4. Municipal tax
5. Occupational tax
6. Foreign income tax, if not claimed as tax credit
7. Percentage tax
8. Excise tax
9. Documentary stamp tax
10. Fringe benefit tax
11. Excess of Actual Input Vat over Standard Input Vat (Sale to Gov’t/GOCC)
Sale to Government/GOCC
Vat Registered Entity Creditable Input Tax
Example: Standard Input Tax
Sale to GOCC, net P1,000,000
Purchases of goods sold to GOCC 700,000 7% x P 1,000,000 = 70,000

Entry (Book of the Seller to Gov) Actual Input Tax


Cash P 1,070,000
Withholding Tax (GOCC 5%) 50,000 12% x P 700,000 = 84,000
(BIR FORM 2306)
Sales (GOCC) 1,000,000
Output Vat 120,000 Closed to Expense SIT P 84,000
To record the sale to Government AIT ( 70,000)
14,000
In Accordance with Sec. 4.114-2 of RR-16-2005
Schedule 4
Itemized Deductions
4. Losses
Losses actually sustained by the taxpayer in connection with the taxpayer’s trade, profession, or
business which are charged off within the taxable year and not compensated for by insurance or
other forms of indemnity.

Requisites for the deduction of losses


1. It must be incurred in trade, profession or business of the taxpayer.
2. It must pertain to the property connected with the trade, business or profession, if the loss
arises from fires, storms, shipwrecks, or other casualties, or from robbery, theft or
embezzlement.
3. The must not be compensated by insurance or indemnity contract.
4. A declaration of loss must have been filed by the taxpayer within 45 days from the date of
discovery of the casualty or robbery, theft or embezzlement giving rise to the loss.
5. The loss must not have ben claimed as a deduction for estate tax purposes in the estate tax
return
Types of Losses
1. Ordinary Loss
• Are deemed normal to the taxpayer’s trade business or profession, hence, deductible
in full.

2. Casualty Loss
• Incurred by property connected with trade, business, or profession, if the loss arises
from fire, storm, shipwreck or other casualties, or from robbery, theft or
embezzlement.
Illustration
A taxpayer engaged in farming incurred the following losses:

Loss on destruction of residence by a storm P 2,000,000


Loss on sale of old farm equipment 100,000
Loss on assignment of receivables to BPI 30,000
Purchase cost of a bull lost during a storm 50,000
Value of animal offspring killed by black leg disease 15,000

How much is the allowable Loss expense?

Loss on sale of old farm P 100,000


Purchase cost of a bull 50,000
Total Allowable Deductions P 150,000
Itemized Deductions
Guidelines in claiming Losses on Inventories.

Under RMO-06-2012:
An application for inventory assets disposal/destruction loss shall
be filed with and processed with the concerned LT or RDO.

A certificate of deductibility of the inventory or asset


destructed/disposed/lost will be prepared by LT or RDO.
Itemized Deductions
Guidelines in claiming Casualty Loss

Under RMO-31-2009:

Requirements:
1. Sworn declaration (Annex A) 45 days after the date of the event
2. Financial statements for the year immediately preceding the event and copies of insurance, if any
3. Proof of the elements of the losses claimed, such as but not limited to the following:
• Photograph taken showing the property(ies) Before the typhoon; and
• Photograph taken showing the property(ies) After the typhoon, showing the extent of the damage sustained;
4. Documentary Evidence for determining the cost valuation of the damaged property(ies)
5. Insurance policy, in the event that there is an insurance coverage for the property(ies)
6. Police report, in case of robbery/ theft during the typhoon and/ or as a consequence of looting.
Itemized Deductions
Net Operating Loss Carry Over (NOLCO)
Pertains to the amount of net operating loss that may be allowed by the law to be carried
over as tax deduction against available NET INCOME in the following THREE YEARS

Available to:
All taxpayers subject to tax on taxable income whether regular income tax or at
preferential rate.

Not available to:


1. Taxpayer who are exempt;
2. Taxpayer who are enjoying tax holiday; and
3. Income subject to final tax
Itemized Deductions
Requisites for the deductibility of NOLCO: ( RR 14-2001)
1. The taxpayer must not be exempt from income tax during the taxable
year when the NOLCO was incurred
2. There has been no substantial change* in ownership of the business or
enterprises.
• A change of at least 75% of either the paid-up capital or nominal value of
the outstanding shares of a corporation is deemed a substantial change in
business ownership.

Treatment of NOLCO
Separate ITEM OF DEDUCTION in the next three (3) consecutive taxable
years to the extent of the available net income in those periods.
Itemized Deductions
5. Bad debts
Refers to debts due to the taxpayer which were actually ascertained to be worthless and were
charged off within the Philippines.

Requisites of claim for deduction of bad debt:

1.There must be a valid and existing debt. (Payables on the other party)
2. The debt must have been ascertained to be worthless.
3. It must be charged off within the taxable year.
4. It must be connected with taxpayer's profession, trade or business.
5. Not sustained in a transaction between related parties defined under Section 36 (B) of the 1997
Tax Code, as amended
Itemized Deductions
Pointers to consider:
1. Before a debt can be considered worthless, the taxpayer must also show
that it is indeed uncollectible even in the future.
2. There are steps outlined to be undertaken by the taxpayer to prove that
he exerted diligent efforts to collect the debts
(Philippine Refining Company v. Court of Appeals, GR No, 118794)
3. Mere recording in the books of accounts of estimated uncollectible
accounts does not constitute WRITE-OFF of the said receivable. In no
case may any bad debt reduction be allowed unless the facts pertaining
to the money or property lent and its cancellation or write-off from the
taxpayer’s accounting records, after having been determined that the
same has ACTUALLY become worthless, have been complied with by the
taxpayer. ( RR No. 05-99, Sec 2)
Itemized Deductions
Examples of reasonable steps (steps outlined) which may be
undertaking of diligent efforts to collect debt:
1. Sending statement of accounts;
2. Sending collection letter;
3. Giving the account to a lawyer for collection; or
4. Filling a collection case in court (Phil Refining Co. V. Court of
Appeals, GR No. 118794)
Itemized Deductions
Related taxpayer Sec. 36(b)
1. Between members of a family

2.Between an individual and corporation more than 50% in value of the


outstanding capital stock of which is owned, directly or indirectly, by or for
such individual (except in the case of distributions in liquidation)

3. Between two corporations more than 50% in value of the outstanding


capital stock of each of which is owned, directly or indirectly, by or for the
same individual if either one of such corporations, with respect to taxable
year of the corporation preceding the date of the sale of exchange was,
under the law applicable to such taxable year, a personal holding company
or a foreign personal holding company (except in the case of distributions in
liquidation)
74
Itemized Deductions
4. Between a grantor and a fiduciary of any trust.

5. Between fiduciary of a trust and a fiduciary of another trust if the


same person is a grantor with respect to each trust

6. Between a fiduciary of a trust and a beneficiary of such trust.


Itemized Deductions
Example:
GoT Corporation, an accrual basis taxpayer, estimates additional probable
uncollectible accounts of P 800,000 aside from the following accounts which
were ascertained to be worthless and were written off during the year:

1. Receivable from sale of goods to a bankrupt clients P 300,000


2. Investment in a subsidiary liquidated at a loss 2,000,000
3. Receivable from sale of services to the subsidiary 150,000
4. Advances to the President, set-off against his salaries 700,000

How much of the following is the Bad debts expense allowable as deduction?
Itemized Deductions
Answer:

Receivable from a bankrupt client P 300,000


Receivable from a liquidated subsidiary 150,000
Total Allowable Bad Debts Expense P 450,000
Itemized Deductions
Subsequent recovery of bad debts
under Section 34 (E) (1) of the NIRC, the recovery of bad debts
previously allowed as deduction in the preceding years shall be
included as part of gross income in the year if recovery to the extent of
the income tax benefit of said deduction.
Itemized Deductions
Illustration:
2017 2018
Net income before bad debt expense P100,000 P 100,000
(Bad debts expense)/Recoveries (60,000) 35,000
Net income after bad debt expense 40,000 ???

How much of the P 35,000 recovery of in 2018 has tax benefit and thus
be reverted back to gross income?
Itemized Deductions
Solution:
AS-If Approach – As-if subsequent recovery is known.

Under this assumption:


2017
Net income before bad debt expense P100,000
Less: Bad debt expense (P60,000 – 35,000) P 25,000
Net income if recovery is known P 75,000
Itemized Deductions
The tax benefit is the income escaped from 2017 as computed below:

2017
Net income before bad debt expense (recovery known) P 75,000
Less: Net income as reported (recovery is unknow) P 40,000
Tax benefit of the write-off P 35,000
Itemized Deductions
Hence, P 35,000 of the recovery should be reverted as item of gross
income in 2018:
2018
Net income before bad debt expense P100,000
Add: Other taxable income (bad debt recovery) P 35,000
Net income if recovery is known P 135,000
Itemized Deductions
6. Depreciation
Refers to the gradual exhaustion in the value of tangible business
properties brought by ordinary wear and tear through usage or
obsolescence by the passage of time. It is a provision for the periodic
return of the invested capital on the property throughout its useful life.

The term depreciation is also applied to the AMORTIZATION of the


value of the intangible assets, the use of which in trade or business is of
limited duration (specifically applied by PAS 38 Intangible Assets)
( Basilan Estates, Inc V. CIR, GR No. L-22492)
Itemized Deductions
Determination of useful life on which Depreciation rate is based
Section 34 (F) (3)
Agreement as to Useful Life on Which Depreciation Rate is Based. - Where under rules and
regulations prescribed by the Secretary of Finance upon recommendation of the Commissioner,
the taxpayer and the Commissioner have entered into an agreement in writing specifically dealing
with the useful life and rate of depreciation of any property, the rate so agreed upon shall be
binding on both the taxpayer and the national Government in the absence of facts and
circumstances not taken into consideration during the adoption of such agreement. The
responsibility of establishing the existence of such facts and circumstances shall rest with the party
initiating the modification.
Any change in the agreed rate and useful life of the depreciable property as specified in the
agreement shall not be effective for taxable years prior to the taxable year in which notice in writing
by certified mail or registered mail is served by the party initiating such change to the other party to
the agreement:
Provided, however, that where the taxpayer has adopted such useful life and depreciation rate for
any depreciable and claimed the depreciation expenses as deduction from his gross income,
without any written objection on the part of the Commissioner or his duly authorized
representatives, the aforesaid useful life and depreciation rate so adopted by the taxpayer for the
aforesaid depreciable asset shall be considered binding for purposes of this Subsection.
Itemized Deductions
Depreciation Method
1. Straight-line method
2. Declining-balance method
3. Sum-of-the-year-digit method
4. Any other methods which may be prescribed by the Secretary of
Finance upon recommendation of the CIR.
Itemized Deductions
Special rules in Depreciation
1. Life tenancy to a property
• In the case of property held by one person for life remainder to another person, the
deduction shall ne computed as if the life tenant were the absolute owner of the
property and shall be allowed to the life tenant

2. Properties held in trust


• In the case of property held in trust, the allowable deduction shall be
apportioned between the income beneficiaries and the trustees in
accordance with pertinent provisions of the instruments creating the
trust, or in the absence of such provisions, on the basis of the trust
income allowable to each.
Itemized Deductions
3. Depreciation on revalued property
• The depreciation of an asset must be premised on its acquisition cost, and not
on its reappraised value. (Basilan Estates Inc vs. CIR)

• Note: those who use the revaluation model in accounting for the items of PPE
under PAS 16 are not allowed to deduct the depreciation of the revaluations
surplus on the value of the property as this is not am actual cost.
Itemized Deductions
4. Rules on deductibility of depreciation on Passenger Vehicles

Under Revenue Regulations No. 12-2012:


1. Substantiation of the purchase with sufficient evidence such as official receipts and
other documents bearing the total purchase price including specific motor vehicle
identification numbers of vehicles.
2. Substantiation of the direct connection or relation of the vehicle to the development,
operation, and/or conduct of the trade or business or profession of the taxpayer.
3. Only one vehicle for land transportation is allowed for an official receipt and employee
and the value of which shall not exceed P 2,400,000.
4. No depreciation shall be allowed for yacht, helicopter, airplanes or aircraft and land
vehicle which exceed the threshold, unless the main line of business is transport
operation or lease of transportation equipment and the vehicle purchased are used in
said operations.
Itemized Deductions
Repairs Expenses
Classified into two:
1. Minor or ordinary repairs
• The following conditions must be present:
1. The repairs place the property in an ordinarily efficient operating condition;
2. It must not materially add to the value of the property or appreciably prolong its life;
and
3. The plan or property account must not be increased by the amount of such
expenditure ( RR No. 2-40, Sec 68)
Itemized Deductions
2. Major or extraordinary repairs
Not deductible as outright expense since major repair tend to prolong
the life the asset. These are capitalized or added to the cost of the
asset subjected to repair.
Itemized Deductions
7. Charitable and other contributions
• Charitable or gifts made to the government or non-government
organization (NGOs) may be deducted against gross income.

Requisites of claim for deduction contributions:


1. The donee institution must be a domestic institution.
2. No income of the done institution must inure to the benefit of any
private stockholder or individual.
3. The contribution must be valued at the tax basis of the property
donated.
4. The taxpayer must engaged in trade or business.
Itemized Deductions
Those that meet the requisites are either:
A. Fully deductible; or
B. Partially deductible
Itemized Deductions
A. Fully deductible contributions
1. Donations to the government or political subdivisions including fully owned government and
controlled corporations to be used exclusively in undertaking PRIORITY ACTIVITIES, as determined by the
National Economic Development Authority (NEDA), in:
a) Education d) Human settlements
b) Health e) Culture and sports
c) Youth and sport development f) Economic developments

2. Donation to foreign institution or international organization in pursuance of, or in compliance with,


agreement, TREATIES or special laws. (Note: exception to the rule that the done must be a domestic
institution)
Itemized Deductions
3. Donations to ACCREDITED domestic non-government organizations.
In pursuance to EO 671, the NGO must be an accredited done institution with certifications issued by the following
designated accredited entities:
a. Department of Social Welfare and Development – for charitable and or social welfare organizations,
foundations and associations.
b. Department of Science and Technology- for research and other scientific activities.
c. Philippine Sports Commission – for sport development
d. National Council for Culture and Arts – for cultural activities
e. Commission on Higher Education – for educational activities

The accredited done institution shall issue to the donor a certificate of donation in such form prescribed by the BIR.
For donations exceeding P 1,000,000 in value, the donor is required to notify the Revenue District Office (RDO) with
the jurisdiction to his place of business within 30 days from the receipt of the certificate of donations.
Itemized Deductions
Requisites for full deductibility of contributions to NGOs
1. NGO must be organized and operated exclusively for the latter slide purposes
and no income inures to the benefit of any private individuals.
2. The non-profit organization makes utilization of the contribution not later then
the 15th day of the third month after the close its taxable period.
3. The administrative expenses of the NGO do not exceed 30% of its total
expenses.
4. Members of the Board of Trustees must not receive remunerations.
5. In the event of liquidation, the asset of the NGO will be distributed to another
nonprofit domestic corporation organized for similar purpose
6. The amount of contribution of the property other than money must be valued
at acquisition cost.
Itemized Deductions
B Partially deductible or Contributions subject to limit
1. Donations to the Government of the Philippines or political
subdivisions exclusively for public purposes not in accordance with
priority activities.
2. Donation to non-accredited non-government organization or to
domestic corporations organized exclusively for the following
purposes:
a) Religious e) Cultural
b) Charitable f) Educational
c) Scientific g) Rehabilitation of veterans
d) Youth and sports development h) Social welfare
Itemized Deductions
Limit of deduction for contributions:
Based on the taxable income derived from business or profession
before the deduction of any contributions
1. Individuals - 10%
2. Corporations – 5%
Itemized Deductions
Illustration.
Mr. P, a practicing accountant, had the following income and donations during the
year:

Professional fees P 1,000,000


Donations to government priority activities 100,000
Donation in pursuant to treaties 30,000
Donation to accredited charitable institutions 50,000
Donation to a government for public purpose 80,000
Donation to non-accredited charitable institutions 60,000
Donation to a foreign charitable institution 40,000
Donation to street beggars 50,000
Other deductible business expenses 600,000
How much Total Deductible Contributions Expense?
Itemized Deductions
Answer:

Fully deductible contributions:


To government priority activities P 100,000
To accredited charitable institutions 50,000
To treaty-covered entities 30,000
Total P 180,000
Itemized Deductions
Partially deductible contributions:
To government non-priority activities P 80,000
To non-accredited charitable institutions 60,000
Total actual partially deductible contributions P 140,000
Deduction limit (LOWER)
Professional fees P 1,000,000
Less: Other deductible expenses 600,000
Net income before contributions 400,000
Multiply by: Individual limit percentage 10%
Deduction Limit 40,000
Total deductible contribution expense (P180,000 + 40,000) P 220,000
Itemized Deductions
8. Contributions to pension and trusts

The employer’s contributions or funding to an employee pension trust fund is


either or both:
1. Funding of current service cost
2. Funding of prior service cost

Current service cost - the pension expense of the employer accruing under the
term of the pension plan for services rendered by employees during the year.

Past service cost – the pension expense of the employer accruing in prior years for
services rendered by employees before the establishment of the pension fund and
additional pension expense accruing in prior years arising from improvements in
the benefit offering of the plan.
Itemized Deductions
Requisites if deductibility of pension expense
1. The employer must have established a pension or retirement fund to
provide for the payment of reasonable pension to employees.
2. The actuarial assumptions used by the fund must be sound and
reasonable.
3. The fund assets must be independent with and not subject to control or
disposal of, the employer.
4. The fund asset must be actually funded by the employer.
5. Contribution for current service cost is deductible in full.
6. Contributions for past service cost is amortized over a period of 10 years.
Itemized Deductions
Rules in computing the deductible pension expense
1. The contribution to the fund is first attributable to current service
cost.
2. The excess funding is attributed to any unfunded past service cost.
The funding of past service cost is amortized over 10 years
regardless of the actual vesting period of covered employees.
3. Overfunding if the fund is a prepaid pension expense deductible in
the future as funding of future current service cost.
Itemized Deductions
ABC Corporation established a pension plan for its employees in 2016. existing
employees have average vesting period of six years. The data from the actuary
together with ABC’s annual funding is as follows:
2016 2017
Past service cost P1,200,000
Current service cost 300,000 310,000
Contribution to the fund 800,000 500,000
2016 deductible pension expense shall be:
Pension contribution P 800,000
Funding of current service cost 300,000 P300,000
Excess funding of past service cost 500,000
Divided by: Amortization period 10 50,000
Deductible pension expense P 350,000
Itemized Deductions
The 2017 deductible expense shall be:

Pension contribution P 500,000


Funding of the current service cost 310,000 310,000
Excess- funding of past service cost P 190,000
Divided by: amortization period 10 19,000
Amortization from 2016 funding prior service cost 50,000
Total deductible pension expense P 379,000
Other Itemized Deductions
Revenue Regulations 10-2002
SECTION 5. CEILING ON ENTERTAINMENT, AMUSEMENT, AND
RECREATION EXPENSE

the actual entertainment, amusement and recreation expense paid or incurred


within the taxable year by the taxpayer, but in no case shall such deduction exceed:

• 0.50 percent (%) of net sales (i.e., gross sales less sales returns/allowances and
sales discounts) for taxpayers engaged in sale of goods or properties; or

• 1.00 percent (%) of net revenue (i.e., gross revenue less discounts) for taxpayers
engaged in sale of services, including exercise of profession and use or lease of
properties
Revenue Regulations 10-2002
However, if the taxpayer is deriving income from both sale of
goods/properties and services, the allowable entertainment,
amusement and recreation expense shall in all cases be determined
based on an apportionment formula taking into consideration the
percentage of the net sales/net revenue to the total net sales/net
revenue, but which in no case shall exceed the maximum percentage
ceiling provided in these Regulations.
Illustrations
Kuya P, a restaurant has a net revenue of P 500,000 and has incurred
actual entertainment, amusement and recreation of P 8,500 during the taxable
year 2018.

How much is the allowable Entertainment, Amusement and Recreation Expense?

Maximum Ceiling of Expense


[.01(1%) x P 500,000] = 5,000
Actual Expense incurred = 8,500
Allowable Expense 5,000
Illustrations
ABC Corporation is engaged in the sale Maximum ceiling
of goods and services with net sale and Goods [ .05% of 200,000] = 1,000
net revenue of P 200,000 and P 100,000
respectively. The actual entertainment, Services [ 1% of 100,000] = 1,000
amusement and recreation expense for Maximum allowable deduction P 2,000
the taxable year totaled P 3,000.
How much is the allowable
Entertainment, Amusement Actual Expense Apportionment Formula
and Recreation Expense? Goods [*200/300 x P3,000 ] = 2,000
Services [ 100/300 x P3,000] = 1,000
Total Expense Incurred P 3,000

* Total sales ( P200,000 + 100,000) =


300,000 as denominator
Illustrations

Actual Expense based Allowable Deduction


on Apportionment Maximum (Lower of Actual and
formula ceiling Maximum)

Sale of Goods 2,000 1,000 1,000


Sale of Services 1,000 1,000 1,000
Total 3,000 2,000 2,000

Total Allowable Entertainment, Amusement and Recreation Expense


= P 2,000
Other Itemized Deductions
Research and Development (R&D) Costs
Research and Development are geared towards discovery of new knowledge.
Development activities are geared on determining application of research
knowledge which could provide income and benefits for the business.
Tax Treatment of R&D costs
1. Research and development costs related to capital accounts such as property
used in business are CAPITALIZED as part of the cost research knowledge which
could provide income and benefits for the business.
2. Research and development costs not related to capital accounts are claimable as
follows at the option of the taxpayer:
a) Outright expense; or
b) Deferred expense and is amortized over a period not less than 60 months beginning from
the month the taxpayer realize benefits from the R&D expenditures.
Other Itemized Deductions
Travelling/Transportation Expenses
Requisite for deductibility
1. In the pursuit of trade or business;
2. Incurred or paid while *away from home; and
3. Reasonable and necessary.

*Away from home means away from location of the employee’s principal place of employment
regardless of where the family residence is maintained like business trip.

It includes transportation, meals and lodging ( RR No. 02-40, Secs 65-66) Thus:
1. Transportation expenses from main office to branch or from branch to main office
– deductible.
2. If company car is utilized both for business and personal use - deductible in proportion to the
use for business.
Other Itemized Deductions
Pro-Bono Legal Services
A lawyer or professional partnership rendering actual free legal
services is entitled to an allowable deduction from the gross income, to
the amount that could have been collected for the actual free legal
services rendered or up to ten percent (10%) of the gross income
derived from the actual performance of the legal profession, whichever
is lower: Provided, that the actual free legal services herein
contemplated shall be exclusive of the minimum of the sixty (60) hour
mandatory legal aid services rendered to indigent litigants.
( RA No. 9999, “Free Legal Assistance Act of 2010, Sec 5)
Other Itemized Deductions
Sales Discount to Senior Citizen (RA 9257) and Disabled Persons
(RA7277)

As clarified by RMC-38-2012, Q22 & A22 and Sec. 5 of RR-5-2017


respectively, sales discount shall be treated as a NECESSARY and
ORDINARY EXPENSE duly deductible from the GROSS INCOME of the
seller falling under the category of ITEMIZED DEDUCTION.
Illustration
Tanderz Restaurant provides 20% discount to senior citizen. It recorded
the following receipts during the year:
CUSTOMERS
Senior Non-Senior Total
Receipt P 500,000 P 5,000,000 P 5,500,000
Cost of Services 2,800,000
Other Allowable Expenses 1,100,000
Computation:

Gross Receipts [ (500,000/80%) + 5,000,000] P 5,625,000


Less: Cost of Services 2,800,000
Gross Income P 2,825,000

Less:
Regular Itemized Deductions P 1,100,000
(Other Allowable Expense)
Special Itemized Deductions
(P500,000/80%) x 20% 125,000 1,225,000
Taxable Net Income P 1,600,000
Optional Standard Deduction
Revenue Regulations 8-2018
• Individual taxpayers, computed at the rate of forty percent (40%) of
gross sales/receipts,
• Corporations may elect standard deduction in an amount not
exceeding forty percent (40%) of its gross income.
Revenue Regulations 8-2018
Not applicable to:
• Non-resident alien engaged in trade
• Exempt Taxpayers
• Preferential Rate Taxpayers
• Compensation Income Earners
• Taxpayers who chose 8% optional tax rate
• Those who did not signify or elect to choose in their
first quarter to use Optional Standard Deduction as
mode of deduction.

120
General Computation of Income Tax
Return
General Computation for Individuals

Gross Income xxx Section 32 (A)


Less: Deductions (Itemized or OSD) xxx Section 34
Taxable income xxx Section 31

Tax due xxx


Less: Tax credits xxx
Payable (Overpayment) xxx

122
Computation for Self-employed who availed 8%

Gross Sales/Receipts xxx RR-08-2018


Add: Non-operating income xxx
Total xxx
Less: Deduction 250,000
Taxable income xxx
Multiply by rate 8%
Tax due xxx
Less: Tax credits xxx
Payable (Overpayment) xxx

123
Computation for Mixed Income Earner who availed 8%

Gross Sales/Receipts xxx RR-08-2018


Add: Non-operating income xxx
Taxable income xxx
Multiply by rate 8%
Tax due xxx
Less: Tax credits xxx
Payable (Overpayment) xxx

124
Computation for Normal Corporate Income Tax
Gross Income xxx
Less: Deductions (Itemized or OSD) xxx
Taxable income xxx
Multiply by 30%
Higher of RCIT or MCIT (x + 4 years)
Tax due xxx
Less: Tax credits xxx
Payable (Overpayment) xxx
INCOME TAX REGIME FOR INDIVIDUALS
Compensation Earners / Self-Employed Earners / Mixed Earners
COMPENSATION EARNERS
Mr. P, a minimum wage earner works for ABC., Inc. earned a total
compensation income of P 135,000 (inclusive of 13th Month pay)
(Purely compensation earner)

Additional Information:
1. The company remitted on behalf of Mr. P, the latter’s share of
contribution to SSS, Philhealth and HDMF amounting to 5,000 in a year.
2. Mr. P has received his 13th Month pay of P 11,000.
3. Aside from his basic wage, he received additional pay of P 140,000 which
consists of: Overtime pay-P 80,000, night shift differential- P 30,000,
hazard pay- P 15,000, and holiday pay- P 15,000.
1. How much is his Net Taxable Income?
2. How much is his Tax Due?
Basic Salary
Add: Additional pay
Holiday Pay
Overtime Pay
Night Shift Differential Pay
Hazard Pay
13th Month Pay and other benefits
Total Gross Compensation

Less:
Mandatory Contributions (Employee’s share)
Non-taxable benefits

Total Taxable Income -

Tax Due -
SELF-EMPLOYED EARNERS
Mr. Aladdin an individual taxpayer (Graduated Income Tax regime) reported to you the
following details for the year 2018:

Gross Income P 5,000,000


Cost of Sales 3,000,000
Salaries of employment net of P100,000 withholding tax
and P50,000 SSS, Medicare and Pag-ibig premiums
contribution 800,000
Fringe benefits given to rank and file employees 300,000
Fringe benefits given to managerial employees 130,000
Representation and entertainment expenses (all business
connected) 100,000
Rent expense 120,000
Donation to religious and charitable institutions 500,000
He asked you the following:
1. How much is the net income before tax?
2. How much is the total allowable deductions?
3. How much is my Income tax due and payable?
4. How much is your professional fee?
Sales/Revenue/Receipts/Fees P
Less: Sales Return, Allowances and Discounts
Net Sales/Revenues/Receipts/Fees
Less: Cost of Sales/Services
Gross Income/(Loss) from Operations

Less:
Ordinary Allowable Deductions
OR
Optional Standard Deductions (40%)
Add: Other Non-Operating Income
Taxable Income-Business -Compensation & Business
Total Tax Due-Compensation and Business Income
Less: Total Tax credits/Payments
Amount of Tax Payable P
MIXED INCOME EARNERS
Mr. Mayabang, a Financial Comptroller of Hambog Company, earned
annual compensation in 2018 of P 1,500,000, inclusive of 13th month
and other benefits in the amount of P 120,000 but net of mandatory
contributions to SSS and Philhealth. Aside from employment income,
he owns a convenience store, with gross sales of P 2,400,000. His cost
of sales and operating expenses are P 1,000,000 and 600,000,
respectively, and with non-operating income of P 100,000.
Question:

1. How much is his tax due if he opted to avail the 8% income tax
regime?
2. How much is his tax due if he did not opted to avail the 8% income
tax regime?
Total Compensation Income
Less: Non-taxable income
Taxable Compensation Income

Tax Due on Compensation Income

Gross Sales/Revenue
Add: Non-operating income
Taxable Business Income
Multiply by
Tax due on Business income

Total Income Tax Due (Compensation and Business)


Total Compensation Income
Less: Non-taxable income
Taxable Compensation Income
Add: Taxable Income from Business
Gross Sales/Revenue
Less: Cost of Sales
Gross Income
Less: Opeating Expenses
Net income from Operation
Add: Non-operating Income
Total Taxable Income

Total Income Tax Due


Reconciliation of Net Income per
Books Vs. Taxable Income
Examples of Reconciling items – Non-deductible expenses

Financial (PFRS) Tax


• Impairment losses • Not ordinary, necessary,
• Allowance/Write-off of reasonable expenses
receivables/inventories • Excess/non-deductible portion of
• Equity share in net loss of EAR, interest, donation
subsidiaries or affiliates • Non-deductible taxes
• Unrealized losses • Non-deductible losses
• Unrealized foreign exchange losses • Reduction of interest by 33% of
interest income subject to final tax
New Version
Examples of Reconciling items – Non-taxable income

Financial (PFRS) Tax


• Unrealized gains • Income exempt under
• Equity share in net income Treaty/Special Law
of subsidiaries or affiliates • Income from sales
• Recovery of impairment recognized this year that
loss will be reported under
installment method
• Exclusions from gross
income
Note: Incomes subject to FT
New Version
New Version
Examples of Deductions Under Special Laws
Additional
Law
Deduction
Employment of Senior Citizens RA 9994 15%
Employment of Persons w/ Disability RA 10070 25%
Employment of Learners RA 7796 50% of value*

Training Expenses - PEZA RA 7916 50% of value

Training Expenses – Jewelry Act RA 8502 50% of value


Adopt-A-School RA 8525 50% of value
Tax Compliance Review
10 Reminders for the preparation of the Annual
Income tax
1. Review Sources of Income.
2. Check whether the appropriate withholding tax is applied on expenses claimed.
3. Ensure the completeness of the Creditable Tax Withheld at Source (2307) claimed in the books, Quarterly
Income Tax Return, and Annual Income Tax Return.
4. Review or check whether some itemized expenses clamed are within the limitations or ceiling set forth by
law.
5. Check whether MCIT is higher than RCIT and ensure that MCIT is properly recorded in the books.
6. Check whether NOLCO is applied correctly and ensure that it is properly recorded in the books.
7. Consider the exposure of Retained Earnings to 10% Improperly Accumulated Earnings Tax.
8. Check the exposure of the company to Documentary Stamp Tax on Debt Agreements; most specifically,
Intercompany Advances.
9. Check whether the accounting records or audited financial statements matches with: returns filed,
Summary lists of purchases/Summary lists of sales, Inventory lists, Alphalists of payees and employees
etc.
10. Check whether there are reconciling items to be reflected on the books and Reconciliation of Net income
per books and taxable income.
Tax Compliance Review
Start with the Audited Financial Statements particularly, Statement of Comprehensive Income and
Statement of Financial Position or Balance Sheet.

Review:
1. Income recorded per books that is subject to final tax;
2. Income recorded per books that is non-taxable or exempted by tax code, revenue issuances
or special laws;
3. Expenses recorded per books that is non-deductible and check the appropriate
limitations or ceiling, if applicable per tax code, revenue issuances or special laws; and
4. Completeness and accuracy of recording required by regulations or laws (e.g. NOLCO as
deferred tax asset)
Tax Compliance Review
Match the Audited F/S (income statement) with the returns filed and its attachments.
Review its compliances (e.g. expenses claimed vs. withholding tax remitted)
ABC, CORPORATION.
INCOME STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 2017

Notes 2017 1. ANNUAL INCOME TAX RETURN,


QUARTERLY INCOME TAX RETURNS

2. MONTHLY AND QUARTERLY VAT


SALES 9 60,000,000
RETURNS AND WITHHOLDING TAX
RETURNS
COST OF SERVICES 12 45,000,000
3. ATTATCHMENTS SLP, SLS, QAP, ETC.
GROSS PROFIT 15,000,000

Operating & Administrative Expenses 14 9,000,000


Note 13
Income Before Income Tax 6,000,000 IT due (30%x 6M) 1.80M
Less:
Income Tax 13 750,000 QTR PAYMENTS 0.45M
WTX 0.60M
NET INCOME 5,250,000
Income Tax 0.75M
See accompanying notes, an integral part of the financial statements
Exercises
ABC Corp, a service provider entity, VAT registered, and a top
withholding agent provided you the following informations:
Total amount of
Total taxable sales Sales Amount indicated in Compensation per
per Summary list all the Official Receipts and Alphalist of Employees
of Sales Billing Statements in total
P 45,000,000 P 60,000,000 P 10,000,000

Total taxable Total amount of


Total Expenses without
purchases per withholding tax
Sales receipts or Official
Summary List of remitted per Alphalist
Receipts but with other
Purchases of Payees
adequate records (Voucher,
P 42,000,00 P 1,030,000
Delivery Receipts., etc)
P 1,000,000
Additional Information
Summary of Expenses per books:
Cost of Services Operating and Administrative Expenses
1. Raw materials used P 30,000,000 1. Salaries Expense P 3,000,000
2. Salaries Expenses 7,000,000 2. Professional Fee 2,500,000
3. Utilities Expenses 3,000,000 3. Utilities Expense 1,000,000
4. Professional Fee 2,500,000 4. Rent Expense 1,000,000
5. Rent Expense 2,000,000 5. Transportation Expense 600,000
6. Depreciation Expense 500,000 6. Depreciation Expense 500,000
Total Cost of Services P 45,000,000 7. Representation Expense 400,000
Total Oper. and Admin Exp 9,000,000
Expenses Vs. Withholding Tax
Expenses With Invoices and Receipts Taxable Amount WTX Rate Withholding Tax
Raw Materials Used 30,000,000.00
Professional Fee 5,000,000.00
Utilities Expense 4,000,000.00

Rent Expense 3,000,000.00


Total Expenses with invoices and receipts 42,000,000.00

Expenses Without Invoices and Receipts Taxable Amount WTX Rate Withholding Tax
Transportation Expense 600,000.00
Representation 400,000.00
Total Expenses without invoices and receipts 1,000,000.00
Expenses Vs. Withholding Tax
Expenses With Invoices and Receipts Taxable Amount WTX Rate Withholding Tax
Raw Materials Used 30,000,000.00 1% 300,000.00
Professional Fee 5,000,000.00 10% 500,000.00
Utilities Expense 4,000,000.00 2% 80,000.00

Rent Expense 3,000,000.00 5% 150,000.00


Total Expenses with invoices and receipts 42,000,000.00 1,030,000.00

Expenses Without Invoices and Receipts Taxable Amount WTX Rate Withholding Tax
Transportation Expense 600,000.00 2% 12,000.00
Representation 400,000.00 2% 8,000.00
Total Expenses without invoices and receipts 1,000,000.00 20,000.00
Draft Annual Income Tax Return
Net Sales/Revenues/Receipts/Fees
Less: Cost of Sales/Services
Gross Income/(Loss) from Operations

Less:
Allowable Deductions
Salaries Expense
Professional Fee
Utilities Expense
Rent Expense
Transporatation Expense
Depreciation Expense
Representation Expense
Total Allowable Deductions
Net Taxable Income
Income Tax Rate 0.30
Amount of Tax Payable
Draft Annual Income Tax Return
Net Sales/Revenues/Receipts/Fees 60,000,000.00
Less: Cost of Sales/Services 45,000,000.00
Gross Income/(Loss) from Operations 15,000,000.00

Less:
Allowable Deductions
Salaries Expense 3,000,000.00
Professional Fee 2,500,000.00
Utilities Expense 1,000,000.00
Rent Expense 1,000,000.00
Transporatation Expense 600,000.00
Depreciation Expense 500,000.00
Representation Expense 400,000.00
Total Allowable Deductions 9,000,000.00
Net Taxable Income 6,000,000.00
Income Tax Rate 0.30
Amount of Tax Payable 1,800,000.00
Compliance Check
Total Expenses per Books with Total Expenses per Income Tax Return with
corresponding recorded withholding tax corresponding withholding tax

Cost of Services P 45,000,000 Cost of Services


Operating and Administrative Expenses 9,000,000 Allowable Deductions
(depreciation in total amount of Total Expenses per books
P 1,000,000 per lapsing schedule)
Total Withholding tax per audit
Total Expenses per books P 54,000,000
Total Withholding tax remitted P 1,030,000
Compliance Check
Total Expenses per Books with Total Expenses per Income Tax Return with
corresponding recorded withholding tax corresponding withholding tax

Cost of Services P 45,000,000 Cost of Services P 45,000,000


Operating and Administrative Expenses 9,000,000 Allowable Deductions 9,000,000
(depreciation in total amount of Total Expenses per books P 54,000,000
P 1,000,000 per lapsing schedule)
Total Withholding tax per audit P 1,050,000
Total Expenses per books P 54,000,000
Total Withholding tax remitted P 1,030,000
Questions
1. Are expenses without any official receipts and invoices, but with
other adequate records, allowed to be claimed as expenses?
2. What is the remedy for under remittance of withholding tax?
3. What are the consequences or exposures if Audited Financial
Statements are not matched with returns and attachments filed?
4. What are the possible remedies if there are mismatches?

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