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10 Tax mistakes on financial statements and

income tax returns Philippines

By: Garry S. Pagaspas, CPA

Comes 2014 calendar year filing season, taxpayers, accountants, and tax agents in the Philippines are on
their respective schedules for the filing of the annual income tax returns with attached audited financial
statements not later than April 15, 2015. During tax seasons in the Philippines, the following tax mistakes on
the audited financial statements (AFS) and annual income tax returns (ITR) in the Philippines should be
avoided:

1. Excessive Retained earnings subject to 10% IAET

Improper accumulation of earnings after tax is subject to 10% and an indicator of the same on the face of
the audited financial statements is the glaring free retained earnings more than the paid-up capitalization.
Under Section 43 of the Corporation Code of the Philippines, as amended, domestic corporations are not
allowed to maintain free retained earnings more than 100%. In Section 29 of the Tax Code, as amended, a
10% improperly accumulated earnings tax is being imposed. This 10% tax could be avoided with proper tax
planning. In case caught up with such scenario, consult with your tax consultant on how to do about it as
their could be a number of remedies.

2. Improper claim of creditable withholding tax credits in the Philippines

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4/5/2019 10 Tax mistakes on financial statements and income tax returns Philippines - Tax and Accounting Center, Inc.

Taxes withheld by your suppliers evidenced by BIR Form No. 2307 are tax credits or deductions from
income tax liability. As such, it is treated as an asset on books. In some instance, financial statements would
show such material asset amount that should have been used. However, in some instances, such asset
reflected in the financial statements are without proper BIR Form 2307 documentations, or if there is, the
same would pertain to prior years. For large taxpayers, please note the new 2307 requirements under
Revenue Regulations No. 2-2015 for attachments.

3. Claim of deductible expenses without withholding applicable taxes

Under Section 34(k) of the Tax Code, as amended, if an expense is subject to withholding tax, the same
shall not be deductible until after the applicable withholding taxes has been made. To ensure that you only
deduct expenses properly withheld, double checking is made with alphalists of payees and employees duly
filed with the BIR and seeing to it that justifications are available to those expenses not withheld taxes.

4. Failure to consider tax deductible NOLCO

Net operating loss carry-over (NOLCO) is another tax asset some simply disregards. To avail NOLCO
deduction for taxpayers claiming itemized deductions, it must have been properly stated on the prior year
financial statements, and income tax returns. Note that it could be claimed within three (3) taxable years
from the year of loss on a first-in, first-out basis.

5. Failure to consider MCIT credits

Minimum corporate income tax (MCIT) of prior year or years is another tax credit some would fail to
consider. Like NOLCO, could be claimed within three (3) taxable years from the year of MCIT during the
year when the corporation becomes liable to the 30% normal corporate income tax. During the year of MCIT
payment, please ensure that the MCIT is indicated in the annual income tax return and on the audited
financial statements in the Philippines.

6. Taxing the non-taxable income

As you will note on books of accounts and on the financial income, other income is one line item. Please do
not be mislead to conclude that the same is automatically subject to 30% corporate income tax or includible
in the 2% MCIT computations. Verify and check each item in such other income account is indeed, taxable
ordinary income to avoid misapplication if the same is not such as those capital gains subjected to capital
gains tax, unrealized gains, and the likes.

7. Incomplete BIR mandated notes to financial statements

Notes to financial statements is not the sole mandate of the rules and regulations of the Securities and
Exchange Commission (SEC) Philippines. BIR has also requires some items and details on taxes to be
indicated in the financial statements such as those in Revenue Regulations No. 15-2010 and Revenue
Memorandum No. 19-2011. See to it that those notes appears in the Notes to the Audited Financial
Statements.

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4/5/2019 10 Tax mistakes on financial statements and income tax returns Philippines - Tax and Accounting Center, Inc.

8. Failure to account year-end DST on debt agreements

If you are on a group of companies, a cash cow company like the holding company is very common and
intercompany mobility of funds are evident on year end balances appearing on the financial statements. See
to it t hat you properly account for the documentary stamp tax (DST) on debt instruments imposed under
Section 179 of the Tax Code, as amended.

9. Failure to account withholding tax on accruals

Under the accrual basis of accounting, expenses incurred during the year are deductible expenses, though,
unpaid as of year-end cut-off. When making accruals of expenses, please ensure that you properly account
withholding taxes so as to fully comply with tax rules on deductibility of expenses. Example of this is
accruals for audit fees, legal fees, management bonus, and the likes.

10. Failure to consider limitations on some expenses

Please not also on the three (3) expenses subject to limitations – interest expense with respect to the
reduction of 33% of interest income subjected to final tax under “tax arbitrage”, the 1% (services) or 0.5%
(goods) on representation expenses, and 5% (corporation) or 10% (individual) on charitable contributions.

Conclusion

While each one of us would want to beat the tax filing timeline, we are likewise bound to ensure that we do it
in a manner in accord with the rules and regulations to avoid tax risks during tax examinations.

Disclaimer: This article is for general conceptual guidance only and is not a substitute for an expert opinion.
Please consult your preferred tax and/or legal consultant for the specific details applicable to your
circumstances. For comments, you may please send mail at info@taxacctgcenter.org.)

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