General guide in the preparation of Annual Income Tax Return (ITR) for taxpayers, accountants, and tax agents in the Philippines. Annual ITR with accounting period ending December 31 are due for filing with attached Audited Financial Statements (AFS) not later than April 15.
- Gather Certificates of Creditable Tax Withheld at Source (BIR Form 2307)
Withholding tax by Customers must be supported by Certificate of Creditable Tax Withheld at Source (Bir form 2307) which are deductible from Income Tax Due. Moreover, taxpayers are required to electronically submit Summary Alphalist of Withholding Taxes (SAWT) for Income Payments subjected to Withholding Taxes.
- Review Sources of Income
Income from trade or business or practice of profession is subject to income tax from sources within and without the Philippines. However, passive income subjected to final tax are excluded from the income tax, e.g. dividend received from domestic corporation and interest on Philippine currency bank deposit.
- Check appropriate withholding taxes to claim tax deductible expenses
To be deductible, expenses must be: (a) ordinary and necessary; paid and incurred during the taxable year; (b) reasonable (c) substantiated with sufficient evidence, such as Official Receipts or other adequate records[1]; (d) when accrued/deducted must be subjected to withholding tax (if applicable), and the withholding tax should be remitted to the BIR with the due dates provided under the Tax Code and withholding tax regulations[2].
- Tally accounting records with other tax returns
Ensure that accounting records are matched with other tax declarations such as: (a) sales, purchases and expenses recorded in AFS should be reconciled with Vat Returns (2550Q); (b) Salaries and wages declared in AFS with Alphalist in withholding tax on compensation returns (BIR Form 1604CF); (c) Expense amounts of rent, professional fees, advertising, repairs and maintenance and other expenses declared in the expanded withholding tax returns (BIR Form 1604E); (d) Inventory reported per AFS vs. Inventory List submitted with BIR.
- Review limitations on some expenses
Entertainment and Representation Expenses, Interest Expense and Charitable Contributions/Donations has limitation on deductibility; (a) representation expense is limited to 1% of gross receipts (for seller of services) or 0.5% of net sales (for seller of goods); (b) Interest expenses with respect to the reduction of 33% of interest income subjected to final tax under “tax arbitrage”; (c) charitable contributions is limited to 5% (corporation) or 10% (individual) based on respective taxable income. Donations to BIR accredited donee institutions with Certificates of donations and to government priority projects certified by NEDA are 100% fully deductible.
- Consider Minimum Corporate Income Tax (MCIT)
A corporation shall be liable to pay MCIT computed as 2% of gross income (revenue less cost of sales) if it has negative taxable income, or the MCIT is higher than 30% Regular Corporate Income Tax (RCIT). Note that MCIT applies to corporation on its fourth year of operation after the year of its BIR registration. The excess of the MCIT over RCIT could be carried over to three (3) succeeding taxable years until the corporation becomes liable to the 30% RCIT. During the year of MCIT payment, ensure that the MCIT is indicated in the annual ITR and AFS.
- Consider recording NOLCO
Net operating loss carry-over (NOLCO) refers to the excess of deductible expenses over gross income resulting in a Net Loss for the taxable year. NOLCO could be carried over to three (3) succeeding taxable years. To claim it as deduction in succeeding year, it must have been properly stated in the prior year audited financial statements and income tax returns.
- Exposure of Retained Earnings to 10% IAET
Retained Earnings in excess of paid up capital shall be subject to Improperly Accumulated Earnings Tax (IAET) of 10%. Under section 43 of the Corporation Code of the Philippines, as amended, domestic corporations are not allowed to maintain unappropriated retained earnings more than 100% of its paid up capital. This IAET 10% tax could be avoided with proper tax planning.
- Reconciliation of Net Income per books against taxable income
Indicate all the reconciling items to be added or subtracted from the net income reported in the financial statements to arrive at the taxable income reported in the income tax return. For taxpayer subject to regular rate, fill up the non-deductible expenses such as: allowance for bad debts not actually written off, amortization and others which are not deductible for taxation purposes. Also, add other taxable income such as: recovery of bad debts previously written off, adjustment to retained earnings, and other adjustments that are considered as income for tax purposes.
- DST on debt agreements / Intercompany Advances
Properly account for the documentary stamp tax (DST) on debit instruments and Intercompany Advances as prescribed in Section 179 of NIRC, as amended.
- BIR mandated notes to financial statements
BIR requires details on taxes to be indicated in the Notes to audited financial statements as prescribed in Revenue Regulations No. 15-2010 and Revenue Memorandum No. 19-2011.
- Taxpayer’s other relevant information
The taxpayer’s annual income tax return (for self-employed individuals, estates and trusts, subject to regular income tax) shall contain the relevant information of the spouse; qualified dependent children, If wife is claiming for additional exemption, a waiver of the husband must be attached; current address, if current address is different from registered address; and information of the external auditor or accredited tax agent on behalf of a taxpayer.
[1] Section 34(K), NIRC
[2] Section 58 and 81, NIRC; Section 2.57.4 of RR 2-98
This is an important reminder, since taxpayers who must file their returns using eFPS or eBIRForms and who fail to do so, shall be penalized for 25 of the tax due to be paid and P1,000 per return.