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INCOME TAX

Presented by:
LILYBETH A. GANER, CPA, MBA
Revenue Officer
RR-19, Davao City

Business Income
Any income not related to an employeremployee relationship
Generally taxable on the net income
Includes gains, profits and income in
whatever form derived from any source,
legal or illegal, such as

Exercise of profession or vocation


Trade, business or commerce
Dealings in property
Fruits of the ownership or use of property
Interest, rent, dividends, securities
Other transactions of the business for gain or
profit
2

Gross income
All income from whatever source
derived, including but not limited to
the following items:
Compensation for services, including
fees, commissions and similar items
Gross income derived from business or
exercise of profession
Gains from dealings in property
Interest
Rents
3

Gross income (cont.)

Royalties
Dividends
Annuities
Prizes and winnings
Pensions
Partners distributive share in the net
income of general professional
partnership

Net Income
The realized gross profit after deducting all the
deductions allowed by law, statutes or generally
accepted accounting principles.
Exclusions
The total benefits which is not included in the
computation of gross income for the purpose of
determining taxable income.
Deductions
Items or amounts which the law allows to be
deducted from gross income to arrive at the taxable
income.
5

Allowable Deductions
There shall be allowed as deduction
from gross income, other than
compensation income, expenses
incurred in the conduct of trade or
business to arrive at the net income.
At the taxpayers option, deductions
for expenses may either be
Itemized deduction
Optional Standard Deduction (OSD)
40%
6

Requisites for Deductibility of Expenses


Ordinary and necessary
Paid or incurred within the taxable year
Incurred in the conduct of trade or business
Not contrary to law, morals, public policy or
public order
Substantiated by sufficient proof
Subjected to withholding tax, if applicable

Itemized Deduction
1. Ordinary and necessary trade,
business or professional expenses

Salaries & wages


Travel expenses
Rental expenses
Entertainment, amusement and
recreation expenses

2. Interest
3. Taxes
8

Itemized Deduction (cont.)


4. Losses
Net Operating Loss Carry Over (NOLCO)
Capital losses
Losses from wash sales of stocks or
securities
Wagering losses
Abandonment losses

Itemized Deduction (cont.)


5. Bad debts
6. Depreciation
7. Depletion of oil and gas wells and
mines
8. Charitable and other contributions
9. Research and development
10.Pension trusts
10

Interest
There must be a valid and existing
indebtedness;
The indebtedness must be that of the
taxpayer;
The interest must be legally due and stipulated
in writing;
The interest expense must be paid or incurred
during the taxable year;
The indebtedness must be connected with the
taxpayer's trade, business or exercise of
profession;
12

Interest
The interest payment arrangement must not
be between related taxpayers.
The interest is not expressly disallowed by
law to be deducted from the taxpayers
gross income (e.g., interest on indebtedness
to finance petroleum operations); and
The amount of interest deducted from gross
income does not exceed the limit set forth in
the law.

13

Interest
Limitation
The amount of interest expense paid or incurred
from an existing indebtedness shall be reduced by an
amount equivalent the following percentages of the
interest income earned during the year which had
been subjected to final withholding tax
Jan. 1998
Jan. 1999
Jan. 2000
Nov 2005
Jan. 2009

41%
39%
38%
42%
33%

Applies regardless of the date the


interest bearing loan and the date
when the investment was made for
as long as, during the taxable year
there is an interest expense
incurred and an interest income
earned.
14

Interest
EXCEPTIONS
Deductible in full from gross income
Interest on unpaid taxes interest paid or incurred on all unpaid
business-related taxes shall be deductible in full
Not deductible from gross income
a. Interest incurred on indebtedness of taxpayer using cash basis,
where the interest is paid in advance thru discount or otherwise
i. Allowed as a deduction in the year the indebtedness was paid
ii. If amortized amount corresponding to the principal
amortized shall be allowed as deduction during the year
15

Interest

Not deductible from gross income

b. Interest payments between related parties as


specified in Sec. 36(B) of the Tax Code
c. Interest expense paid or incurred by Service
Contractor engaged in the discovery or production
of indigenous petroleum in the Phil.
d. Interest incurred on capital expenditures (optional)
Interest expense
Capital expenditure
16

Interest
RELATED PARTY TRANSACTIONS
[Sec. 36(B)]

Between members of the same family


Between a corporation and an individual who owns more
than
50% of the outstanding stock of the former
Between 2 corporations more than 50% of the outstanding
stock were owned by the same individual
Between grantor and fiduciary of any trust
Between 2 fiduciaries of trust if the same person is the
grantor of each trust
Between fiduciary and beneficiary of the same trust

17

Taxes
All business related taxes
Non-deductible taxes
Income tax paid in the Phils.
Income tax imposed by authority of foreign
country tax credit with limitation
Estate and donors taxes
Tax assessment which increases the value of the
property assessed
Electric energy consumption tax under B.P. 36
VAT
Tax credits
Taxes paid in foreign countries subject to
limitation
18

Taxes
Interest or surcharge imposed on taxes are not
deductible as taxes, but as an item of interest.
Only the person upon whom taxes are imposed
may claim them as deduction, except: (1) Taxes
upon an individual upon his interest as
shareholder of corporation which are paid by
corporation without reimbursement; and (2)
Corporate bonds or other obligations containing
a tax-free covenant clause, the corporation
paying the tax or any part of it for someone else
(Sec. 80, RR 2).

19

Taxes
Refund of tax payment
Taxes refunded shall be included in the
year of receipt to the extent of the income
tax benefit of such deduction (tax benefit
rule)

20

Taxes
Disclosure requirement on taxes
(Notes to FS) RR 15-2010
The notes of f/s shall include info on
taxes, duties and license fees paid or
accrued during the taxable year
The amount of VAT Output tax and the
account title and amount/s upon which the
same was based,

21

Losses
Requisites for deductibility
Incurred in trade, business or profession
Not compensated by insurance or other form of
indemnity
In case of property, for losses arising from fire,
storm, shipwreck, other casualty, robbery, theft,
embezzlement, the property must be used in
trade, business or profession and reported
within forty-five (45) days from date of
occurrence of such loss.
Not claimed as deduction for estate tax purposes
22

Net Operating Loss Carry-over


(NOLCO) RR 14-2001
Net operating loss - means the

excess of allowable deduction over gross


income of the business in a taxable year

23

Bad Debts
Requisites for valid deduction
There must be an existing indebtedness due to
the taxpayer
It must be valid and legally demandable
It must be connected with the taxpayers trade,
business or practice of profession
It must not be sustained in a transaction entered
into between related parties
It must be actually charged off from the books of
accounts as of the end of the taxable year
It must be ascertained to be worthless and
uncollectible as of the end of the year
24

Depreciation
A reasonable allowance/reduction in service
value for the exhaustion, wear and tear of
property used in trade, business or practice
of profession.
Methods of depreciation

Straight line method


Declining balance method
Sum of the years digit method
Any other method which may be prescribed
25

Depreciation
Requirements for deductibility
The allowance for depreciation must be
reasonable;
It must be for property arising out of its
use in the trade or business, or out of its
not being used temporarily during the year;
and
It must be charged off during the taxable
year from the taxpayers books of
accounts.
26

Charitable and other Contributions


Donations with limited deductibility
For the use of government exclusively for public
purpose
To accredited domestic corporation or
association organized and operated exclusively
for religious, charitable, scientific, youth and
sports development, cultural or educational
purposes
For the rehabilitation of veterans
For social welfare institutions
To non-government organization
27

Charitable and other Contributions


Rate of deduction
Individual donor
before deducting

10% of net income


donations

Corporate donor
deducting donations

5% of net income before


OR

Actual contribution/donation
WHICHEVER IS LOWER
28

Charitable and other Contributions


Donations deductible in full
Donations to the government exclusively to
finance or to be used in undertaking priority
activities in education, health, youth and sports
development, human settlements, science and
culture and in economic development according
to the National Priority Plan determined by
NEDA.
Donations to foreign institution or international
organizations
Donations to accredited non-government
organizations
29

Entertainment, Amusement &


Recreational (EAR) Expenses
Includes representation expense and/or
depreciation or rental expense relating to
entertainment facilities.
Representation expense shall refer to
expenses incurred in entertaining,
providing amusement and recreation to, or
meeting with guest or guests at dining
place, place of amusement, country club,
theater, concert, play, sporting event and
similar events or places.
30

Entertainment, Amusement &


Recreational (EAR) Expenses
Expenses NOT considered EAR
Expenses treated as compensation or fringe benefits
Expense for charitable or fund raising events
Expense for bonafide business meeting of stockholders,
partners or directors
Expenses for attending or sponsoring employee to a
business league or professional organization meeting
Expenses for events organized for promotion marketing
and advertising including concerts, conferences, seminars,
workshops, convention, and other similar event.
Other expense of similar nature

31

Entertainment, Amusement &


Recreational (EAR) Expenses
The taxpayer should maintain receipts and
adequate records that indicate the
The amount of expense
Date and place of expense
Purpose of expense
Professional or business relationship of
expense
Name of person and company entertained
with contact details

32

Entertainment, Amusement &


Recreational (EAR) Expenses
Requirements for deductibility

Paid or incurred during the taxable year


Business connected
Not contrary to law, morals, good customs, public policy or public order
Does not constitute a bribe, kickback or other similar payment
Duly substantiated by adequate proof
Subjected to withholding tax, if applicable

33

Entertainment, Amusement &


Recreational (EAR) Expenses
Imposition of Ceiling [Sec. 34(A)(1)(a)(iv) of NIRC) & RR 10-2001]
Actual entertainment, amusement and recreation expense

OR

.5% of net sales for sellers of goods and properties


1% of net revenues for sellers of services

WHICHEVER IS LOWER

34

TAXPAYER ENGAGED IN BOTH


SALE OF GOODS AND SERVICES
Allowable EAR expense shall be determined based on
apportionment formula
Percentage of net sales/net revenue to the total net sales/net
revenue multiplied by the actual EAR expense
Net sales/net revenue
Total net sales/revenue

x Actual expense

Note:
In no case shall the total EAR exceed the maximum percentage
ceiling

35

Illustration:
ERA Corporation is engaged in the sale of goods and
services with net sales/net revenue of P200,000 and
P100,000 respectively. The actual EAR for the year 2010
totaled P3,000

Computation:
*Apportionment formula
Sale of goods (P200,000/P300,000) x P3,000 = P2,000
Sale of service (P100,000/300,000) x P3,000 = P1,000
**Maximum percentage ceiling
Sale of goods P200,000 x 0.50% = P1,000
Sale of service P100,000 x 1%
= P1,000
36

Computation:

Net sales/
net revenue

EAR expense
based on
apportionment
formula*

Maximum
percentage
ceiling of
EAR**

Allowable
amount to
be claimed
as EAR (w/c
ever is
lower)

Sale of
goods

P200,000

P2,000

P1,000

P1,000

Sale of
services

P100,000

P1,000

P1,000

P1,000

Total

P300,000

P3,000

P2,000

P2,000

ERA Corporation can only claim a total of P2,000 as EAR


37

Optional Standard Deduction


In lieu of the itemized deductions enumerated under
Sec. 34(A) to (J) and (M) and Sec. 37 of the Tax
Code and other special laws (if applicable) .

38

Optional Standard Deduction


Individuals
Resident citizen
Non-resident citizen
Resident Alien
Taxable estates and trusts
Corporations (subject to normal income tax rate)
Domestic corporation
Resident foreign corporation
39

Optional Standard Deduction


Individual
Rate
Tax Base

Cost of
sales/services

Corporation

40% of gross
sales/revenues
Excluding
passive income
subject to final
withholding tax

40% Gross
income
Excluding
passive income
subject to final
withholding tax

Not allowed to
deduct
COS/services

Allowed to
deduct
COS/services
40

Optional Standard Deduction


Disclosure of election to use the OSD
(RMC 16-2010)

Taxpayers availing of the OSD are


required to check the appropriate box in
the ITR for the first quarter of the
taxable year 2009.
Failure to indicate the election to avail of
the OSD shall be considered as having
availed of the itemized deduction.
43

Optional Standard Deduction


Disclosure of election to use the OSD
(RMC 16-2010)

The same type of deduction must be


consistently
applied
for
all
the
succeeding quarterly returns and in the
final ITR for the taxable year.
New registrants shall disclose their
election to avail OSD in their initial
quarterly ITR.
44

Optional Standard Deduction


Implication of OSD
Option is irrevocable for the taxable year for

which the return is made.


Any subsequent amendment of ITR filed for
the first/initial quarter shall not affect the
irrevocable character of the election to avail
of the OSD or itemized deduction.
Individual claiming the OSD is not required
to submit financial statements but shall keep
records of his gross sales/receipts
45

Illustration 1
Mr. Era , a retailer of goods uses the accrual method of
accounting in reporting his income and expenses. For
the year 2010, the following are his recorded income
and expenses
Gross sales
Jan-June
July-Sept
Oct-Dec

P1,000,000
700,000
900,000

Cost of
sales
P600,000
200,000
400,000

Operating
exp
P50,000
100,000

Mr. Era uses the OSD as indicated on his 1st quarter


ITR. Compute for the allowable deductions for each of
the quarters of 2010 and the net income for the
taxable year.
46

Computation 1
a) Allowable deductions
Jan. June
Gross sales
P1,000,000
Less: Cost of sales
-0Gross sales/income
P 1,000,000
X OSD rate
40%
OSD

P 400,000
======

July Sept
P700,000
-0P700,000
40%

Oct - Dec
P900,000
-0
P900,000
40%

P280,000
=======

P360,000
=======

b) Net income for 2010


Gross sales (Jan Dec)
OSD (40%)
Net income

P2,600,000
1,040,000
1,560,000
========
47

Illustration 2
GSV Corporation, a retailer of goods, uses the accrual
method in declaring its income and expenses. For the
calendar year 2010, the following are the records of its
income and expenses:

Gross sales
Jan-June
July-Sept
Oct-Dec

P1,000,000
700,000
900,000

Cost of
sales
P700,000
300,000
600,000

Operating
exp
P100,000
200,000
100,000

GSV Corp. uses the OSD. Compute for the quarterly


allowable deductions (cost and expenses) and the net income
for 2010.
48

Computation 2
a) Allowable deduction

Jan June
Gross sales
P1,000,000
Less Cost of sales
700,000
Gross income
300,000
X OSD rate
40%
OSD/Operating expenses P120,000
Add: Cost of sales
700,000

July Sept
P700,000
300,000
P400,000
40%
P160,000
200,000

Oct Dec
P900,000
600,000
P300,000
40%
P120,000
100,000

Total deductions

P360,000
=======

P220,000
=======

b) Net income
Gross sale
Cost of sales
Gross income
OSD (40%)
Net income

P820,000
=======

P2,600,000
1,600,000
1,000,000
400,000
P 600,000
=======
49

Taxation of Mixed Income


It follows the compartmentalized approach
for returnable income.
Personal exemptions are first deducted
from compensation income.
Excess of PE over compensation income are
deductible from net income from business.
Separate computation of income tax
liability for husband and wife.
Only one spouse will claim additional
personal exemption.
50

50

Taxation of Mixed Income


Taxable compensation income is added to
taxable income from business and the
aggregate taxable income is subjected to
the graduated tax rates.
Loss from business can not be offset
against compensation income but can be
carried over as NOLCO.
One consolidated income tax return for
husband and wife.
Pay-as-you-file, but installment is allowed if
tax due exceeds P2,000 [Sec. 56(A)(2)].
51

Taxation of
Marginal Income Earners

(RR 11-00)

Individuals not deriving compensation income


Self-employed
Deriving gross sales/receipts not exceeding
P100,000 during any 12-month period
Principally earning for subsistence or livelihood
Exempt from VAT and any percentage tax
Not required to pay the registration fee
Required to register as taxpayer
Exempt from the invoicing requirements
52

Taxation of
Marginal Income Earners

(RR 11-00)

Exempt from maintaining books of accounts


Required to file the Annual Income Tax Return
(Form 1700) but not required to attach
Financial Statements or Account Information
Form to the filed ITR
May or may not be liable to tax

53

Income Tax Computation

Corporate Taxpayer

54

What is a corporation?
Corporation is an artificial being created by law, having
the rights of succession and the powers, attributes and
properties authorized by law or incident to its existence.
For taxation purposes, corporation shall include
Partnerships

Joint-stock companies
Joint accounts
Associations
Insurance companies
55

A corporation does not include


General Professional Partnership
Joint venture or consortium formed for the
purpose of undertaking construction projects
or engaging in petroleum, coal, geothermal
and other energy operations pursuant to an
operating or consortium agreement under a
service contract with the government

56

MINIMUM CORPORATE INCOME TAX

(MCIT)
RR No. 9-98, as amended by RR no. 12-07

57

Sec. 27(E) and 28 (A)(2) of the NIRC


Imposed on:
Domestic & Resident Foreign
2% on Gross Income

if: - in the 4th year of operation


- net loss/zero taxable income/
MCIT is greater than NCIT
58

Gross income
Include all items of gross income enumerated under Section
32(A) of the Tax Code, as amended, except income exempt from
income tax and income subject to final. withholding tax.

For Sale of goods


Gross sales (cost of goods sold + sales returns +
discounts+ allowances)
Gross sales
Include only sales contributory to income taxable under Sec.
27(A) of the Code.
Cost of goods sold
Include all business expenses directly incurred to produce the
merchandise to bring them to their present location and use.
59

For sale of services


Gross revenue (cost of services/direct cost + sales
returns + discounts + allowances)
Gross Revenues
Include income from sale of services, likewise, taxable
under Sec. 27(A)
Cost of services or Direct cost of Services
Include all business expenses directly incurred or related
to the gross revenue from rendition of services.

60

Illustration

Gross sales/ revenues


Less: Sales Ret., Disc & Allow.
Cost of Goods Sold/ services
Gross Income from operation
Add: Other Income not subject to
Final Tax or Capital Gains Tax
Total Gross Income subject to MCIT

1,000,000.00
25,000.00
500,000.00
475,000.00
100,000.00
575,000.00
========
61

Carry forward of Excess MCIT


Excess of MCIT over normal income tax shall be
carried forward on an annual basis and credited
against the normal income tax for the 3 immediately
succeeding taxable years.
Excess MCIT can only be credited against the
income tax due if the normal income tax is higher
than the MCIT

62

Carry forward of Excess MCIT


Excess MCIT which has not or cannot be so
credited against the normal income tax due
for the 3-year period shall lose its credibility.
Excess MCIT cannot be claimed as a credit
against the MCIT itself or against any other
losses

63

Carry forward of Excess MCIT


The final comparison between the normal
income tax payable and the MCIT shall be
made at the end of the taxable year.
The payable or excess payment in the
Annual Income Tax Return shall be
computed taking into consideration income
tax payment made at the time of filing of
quarterly income tax returns whether this be
MCIT or normal income tax
64

Suspension of MCIT

Instances when MCIT may be suspended


Substantial losses on account of
Prolonged labor dispute
Force majeure
Legitimate business reverses

Who may suspend


Secretary of Finance upon
recommendation of the CIR

65

Suspension of MCIT

Required documentation
Submission of proof by the corporation
Duly verified by the CIRs duly authorized
representative

66

IMPROPERLY ACCUMULATED
EARNINGS TAX

(IAET)

RA 8424/ RR No. 2-2001/RMC 35-2011

67

CONCEPT OF IAET
Taxpayer is a corporation
Improper accumulation of taxable income beyond
the reasonable needs of the business
Non-distribution of earnings/profits to stockholders
The purpose of accumulation is to avoid the
payment of the income tax
Imposition of tax equivalent to 10% of the
improperly accumulated taxable income
The tax imposed is in the nature of penalty to a
corporation for improper accumulation of earnings
beyond the reasonable needs of the business
68

EVIDENCE OF PURPOSE TO AVOID


THE TAX
The corporation is a mere holding or
investment company
Earnings or profits are permitted to
accumulate beyond the reasonable
needs of the business

69

Reasonable vs. Unreasonable Accumulation


Reasonable Needs of Business:
Immediate needs of business, including
reasonably anticipated needs (Immediacy
Test)
Unreasonable Accumulation
Not necessary for the purpose of the
business considering all circumstances of the
case
70

Reasonable Needs of Business


100% of the paid up capital or the amount
contributed to the corporation representing
the par value of the shares of stock, hence,
any excess capital over & above the par shall
be excluded (RMC 35-2011).

71

Reasonable Needs of Business


Earnings Reserved
for definite corporate expansion projects
for building, plant or equipment acquisition
for compliance with loan covenant or preexisting obligation established under a
legitimate business agreement.
Required by law to be retained or with legal
prohibition
In case of foreign corporation subsidiaries,
intended for investments within the
Philippines
72

Unreasonable accumulation of Profits


Investment of substantial earnings and
profits of the corporation in unrelated
business or in stock or securities of
unrelated business;
Investment in bonds and other long term
securities; and
Accumulation of earnings in excess of
100% of paid-up capital or contribution
representing the par value of the shares
of stock.
73

Corporation Exempt from IAET

Banks and non-bank financial intermediaries


Insurance companies
Publicly held corporations
Taxable partnerships
GPP
Non-taxable joint ventures
Firms registered under RA 7916, 7227, and other
special ecozones
74

IMPOSITION OF IAET
Tax rate

10%

Corporations liable

Closely-held domestic
corporations

Deadline

15th day after the


end of he year following the
close of the taxable year

75

Closely-held corporations:
are corporations at least 50% in value
of the outstanding capital stock or at
least 50% of the total combined
voting power of all classes of stocks
entitled to vote is owned directly or
indirectly by or for not more than 20
individuals

76

TAX BASE OF IAET

(Improperly Accumulated Taxable Income)


Taxable income
Add:
(a)Income subject to final tax
(b)NOLCO
(c)Income exempt from tax
(d)Income excluded from gross income
Total
Less: Income tax paid for the year
Div. actually or const. paid/issued
Total
Less : Amount that can be retained
IATI

P xxx
Pxxx
xxx
xxx
xxx
xxx
xxx

xxx
P xxx
xxx
xxx
xxx
Pxxx
===
77

Payment of IAET
Dividend must be declared and paid not later
than one year following the close of the taxable
year
Otherwise, IAET should be paid within 15 days
thereafter
Once the profit has been subjected to IAET, the same shall no
longer be subjected to IAET in later years, even if not declared as
dividend.
Profits subjected to IAET, when finally declared as dividends, shall
be nevertheless be subject to 10% final withholding tax
78

Income Tax Forms and


Due Dates

79

Income Tax Forms


Form
No.

1702

Form Name

Annual Income
Tax Return
(For
Corporations,
Partnerships and
Other Nonindividual
Taxpayers)

Deadline for Filing

On or before
April 15

No. of
Copies

3 copies

On or before the
15th day of the
4th month
following the
close of the
fiscal year
80

Form
No.

Form Name

Deadline for Filing No. of Copies

1702Q

Quarterly Income Tax


Return
(For Corporations,
Partnerships and Other
Non-individual
Taxpayers)

60 days
following the
close of the first
3 taxable
quarters

3 copies

1704

Improperly
On or before the
Accumulated Earnings 15th day of the
Tax Return
following year
following the
taxable year

3 copies

81

NOTE:

Installment Payments
Applicable to individual taxpayer
only and NOT TO CORPORATION

next
82

New Income Tax Forms


Presented by:
LILYBETH A. GANER
Revenue Officer
ASSESSMENT DIVISION
RR 19-DAVAO CITY

Revised Forms
BIR Form 1700 ( Purely Compensation
Income )
BIR Form 1701 (Self-Employed
Individual,
Estate and
Trust)
BIR Form 1702 ( Corporations,
Partnership and Other Non- Individual
Taxpayer

Effectivity
-Income tax filing covering and starting with calendar
year
2011, due for filing on or before April 15. 2012
- Juridical entities on FY basis are to use
starting with those FY ending January 31, 2012

Features
To be read by an optical character reader
Use Nov. 2011 version
Box Type
Shading
All information must be written in capital
letters
Orientation is landscape (horizontal)
e-mail address of taxpayer

features
Field No. 47 for filers new address
With supplemental information
(optional)
Schedule of gross income subjected to
final tax
Schedule of gross income/receipts exempt
from income tax

Knowing is not enough; we must


apply. Willing is not enough; we
must do.
Johann Wolfgang von Goethe

88