Tax Compliance Guide – Income Tax – PTABCP Business Solutions & Coaching

[cs_content][cs_element_section _id=”1″ ][cs_element_layout_row _id=”2″ ][cs_element_layout_column _id=”3″ ][cs_element_text _id=”4″ ][cs_content_seo]TAX COMPLIANCE GUIDE – INCOME TAX
Researched and summarized by easantoscpa.com | ptabcp.com | This is privileged communication\n\n[/cs_content_seo][cs_element_gap _id=”5″ ][/cs_element_layout_column][/cs_element_layout_row][/cs_element_section][cs_element_section _id=”6″ ][cs_element_layout_row _id=”7″ ][cs_element_layout_column _id=”8″ ][cs_element_text _id=”9″ ][cs_content_seo]INCOME TAX TAXPAYERS, FOR INCOME TAX PURPOSES\n\n[/cs_content_seo][cs_element_gap _id=”10″ ][/cs_element_layout_column][/cs_element_layout_row][cs_element_layout_row _id=”11″ ][cs_element_layout_column _id=”12″ ][cs_element_accordion _id=”13″ ][cs_element_accordion_item _id=”14″ ][cs_content_seo]Non-Individuals\n\nKind of Corporate Taxpayers
Domestic – Organized under Philippines laws; taxable on worldwide income
Foreign – Organized under laws of a foreign country; taxable only on income from sources within the Philippines

Resident Foreign Corporation
Non-Resident Foreign Corporation

Classification of Non-Individual Taxpayers

Domestic Corporation
Foreign Corporation
Partnership – taxable as corporation
Joint Venture and Consortium – taxable as corporation

General Professional Partnership – not taxable / exempt
Joint Venture (JV) and Consortium – not taxable as corporation / exempt
if the following conditions are met:

For undertaking of a construction project
Should involve joining or pooling resources by licensed local contracts by PCAB of DTI
Local contractors are engaged in construction business

Local contractors must be enrolled under eFPS

JV is duly licensed as such by PCAB of DTI

For Taxability of Joint Venture or Consortium, click here: https://ptabcp.com/tax-compliance-guide-joint-venture-or-consortium-for-construction/ \n\n[/cs_content_seo][cs_element_accordion_item _id=”15″ ][cs_content_seo]Individuals\n\nIndividual Taxpayers Classification (Sections 24 to 26, NIRC, as amended)

Citizen

Residents
Non-Residents

To be considered physically present abroad – most of the time during the taxable year, a contract worker must have been outside of the Philippines for not less than 183 days during such taxable year.

Aliens

Residents Aliens
Non-Resident Aliens (NRA)

NRA engaged in trade or business

Not a citizen, not a resident but has a sole proprietorship business in the Philippines established and operating within the Philippines.
Not a citizen who comes to the Philippines and stay therein for an aggregate period of more than 180 days during the calendar year

NRA not engaged in trade or business

Special class of individual taxpayers

Alien Individual Employed by Regional or Area Headquarters and Regional Operating Headquarters of Multinational Companies.
Alien Individual Employed by Offshore Banking Units.
Alien Individual Employed by Petroleum Service Contractor and Subcontractor
Alien Individuals Employed by an Offshore Gaming Licensee and Service Providers.

Members of GPPs*
Estates and Trusts
Co-Ownerships

*SEC. 26, NIRC. Tax Liability of Members of General Professional Partnerships. – A general professional partnership as such shall not be subject to the income tax imposed under this Chapter. Persons engaging in business as partners in a general professional partnership shall be liable for income tax only in their separate and individual capacities.\n\n[/cs_content_seo][cs_element_accordion_item _id=”16″ ][cs_content_seo]Non-Residents\n\nNON-RESIDENTS – INDIVIDUALS

NRC – Non-Resident Citizen

Period of stay of contract worker abroad is 183 days or more

NRAETB – Non-Resident Alien Engaged in Trade or Business

Period of stay in the Philippines during any taxable year exceeds 180 days

NRANETB – Non-Resident Alien NOT Engaged in Trade or Business

Period of stay in the Philippines during any taxable year does not exceed 180 days

\n\n[/cs_content_seo][cs_element_accordion_item _id=”17″ ][cs_content_seo]Non-Stock Non-Profit (NSNP) Organizations\n\nSEC. 30, NIRC. Exemptions from Tax on Corporations. – The following organizations shall not be taxed under this Title in respect to income received by them as such:
(A) Labor, agricultural or horticultural organization not organized principally for profit;
(B) Mutual savings bank not having a capital stock represented by shares, and cooperative bank without capital stock organized and operated for mutual purposes and without profit;
(C) A beneficiary society, order or association, operating for the exclusive benefit of the members such as a fraternal organization operating under the lodge system, or mutual aid association or a nonstock corporation organized by employees providing for the payment of life, sickness, accident, or other benefits exclusively to the members of such society, order, or association, or nonstock corporation or their dependents;
(D) Cemetery company owned and operated exclusively for the benefit of its members;
(E) Nonstock corporation or association organized and operated exclusively for religious, charitable, scientific, athletic, or cultural purposes, or for the rehabilitation of veterans, no part of its net income or asset shall belong to or inure to the benefit of any member, organizer, officer or any specific person;
(F) Business league chamber of commerce, or board of trade, not organized for profit and no part of the net income of which inures to the benefit of any private stock-holder, or individual;
(G) Civic league or organization not organized for profit but operated exclusively for the promotion of social welfare;
(H) A nonstock and nonprofit educational institution;
(I) Government educational institution;
(J) Farmers’ or other mutual typhoon or fire insurance company, mutual ditch or irrigation company, mutual or cooperative telephone company, or like organization of a purely local character, the income of which consists solely of assessments, dues, and fees collected from members for the sole purpose of meeting its expenses; and
(K) Farmers’, fruit growers’, or like association organized and operated as a sales agent for the purpose of marketing the products of its members and turning back to them the proceeds of sales, less the necessary selling expenses on the basis of the quantity of produce finished by them;
Notwithstanding the provisions in the preceding paragraphs, the income of whatever kind and character of the foregoing organizations from any of their properties, real or personal, or from any of their activities conducted for profit regardless of the disposition made of such income, shall be subject to tax imposed under this Code.\n\n[/cs_content_seo][cs_element_accordion_item _id=”18″ ][cs_content_seo]Other Exempt Taxpayers\n\n
National government and its instrumentalities, including provincial, city or municipal governments (with respect to governmental but not on proprietary functions).
Corporations registered with the Board of Investments and enjoying exemption from the income tax provided by the Republic Act No. 7916 and the Omnibus Investment Code of 1987
Corporations which are exempt under Sec. 27(C) of the NIRC, to wit: GSIS, SSS, PHIC, LWD and PCSO.*
All Persons enjoying exemption income taxes pursuant to the provisions of any law, general or special.

*Sec.27(C), NIRC, as amended. Government-owned or –Controlled Corporations, Agencies or Instrumentalities. – The provisions of existing special or general laws to the contrary notwithstanding, all corporations, agencies, or instrumentalities owned or controlled by the Government, except the Government Service Insurance System (GSIS), the Social Security System (SSS), the Home Development Mutual Fund (HDMF), the Philippine Health Insurance Corporation (PHIC), and the local water districts shall pay such rate of tax upon their taxable income as are imposed by this Section upon corporations or associations engaged in a similar business, industry, or activity.

Who are exempt from Income Tax?
a. Income from abroad of a non-resident citizen who is:
i. A citizen of the Philippines who establishes to the satisfaction of the Commissioner the fact of his physical presence abroad with a definite intention to reside therein
ii. A citizen of the Philippines who leaves the Philippines during the taxable year to reside abroad, either as an immigrant or for employment on a permanent basis
iii. A citizen of the Philippines who 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
iv. A citizen who has been previously considered as a non-resident citizen and who arrives in the Philippines at any time during the year to reside permanently in the Philippines will likewise be treated as a non-resident citizen during the taxable year in which he arrives in the Philippines, with respect to his income derived from sources abroad until the date of his arrival in the Philippines.
b. Overseas Filipino Worker, including overseas seaman
An individual citizen of the Philippines who is working and deriving income from abroad as an overseas Filipino worker is taxable only on income from sources within the Philippines; provided, that a seaman who is a citizen of the Philippines and who receives compensation for services rendered abroad as a member of the complement of a vessel engaged exclusively in international trade will be treated as an overseas Filipino worker.
NOTE: A Filipino employed as Philippine Embassy/Consulate service personnel of the Philippine Embassy/consulate is not treated as a non-resident citizen; hence, his income is taxable.
c. General Professional Partnership
d. Government Service Insurance System (GSIS)
e. Social Security System (SSS)
f. Philippine Health Insurance Corporation (PHIC)
g. Local Water Districts (LWD)\n\n[/cs_content_seo][cs_element_accordion_item _id=”19″ ][cs_content_seo]Who Are Required To File Income Tax Returns\n\n

Individuals

Resident citizens receiving income from sources within or outside the Philippines
Employees deriving purely compensation income from two or more employers, concurrently or successively at any time during the taxable year
Employees deriving purely compensation income regardless of the amount, whether from a single or several employers during the calendar year, the income tax of which has not been withheld correctly (i.e. tax due is not equal to the tax withheld) resulting to collectible or refundable return
Self-employed individuals receiving income from the conduct of trade or business and/or practice of profession
Individuals deriving mixed income, i.e., compensation income and income from the conduct of trade or business and/or practice of profession
Individuals deriving other non-business, non-professional related income in addition to compensation income not otherwise subject to a final tax
Individuals receiving purely compensation income from a single employer, although the income of which has been correctly withheld, but whose spouse is not entitled to substituted filing
Non-resident citizens receiving income from sources within the Philippines
Aliens, whether resident or not, receiving income from sources within the Philippines
Estates and trusts engaged in trade or business

Non-Individuals

Corporations including partnerships, no matter how created or organized.
Domestic corporations receiving income from sources within and outside the Philippines
Foreign corporations receiving income from sources within the Philippines
\n\n[/cs_content_seo][cs_element_accordion_item _id=”20″ ][cs_content_seo]Who Are NOT Required To File Income Tax Returns\n\n
1. Those individuals who are qualified for substituted filing
a. An individual earning purely compensation income whose taxable income does not exceed P250,000.00
b. An individual whose income tax has been withheld correctly by his employer, provided that such individual has only one employer for the taxable year
c. An individual who is a minimum wage earner
Notes: Those who are qualified under “substituted filing”. However, substituted filing applies only if all of the following requirements are present:
– the employee received purely compensation income (regardless of amount) during the taxable year;
– the employee received the income from only one employer in the Philippines during the taxable year;
– the amount of tax due from the employee at the end of the year equals the amount of tax withheld by the employer;
– the employee’s spouse also complies with all 3 conditions stated above;
– the employer files the annual information return (BIR Form No. 1604-CF); and
– the employer issues BIR Form No. 2316 to each employee.

2. An individual whose sole income has been subjected to final withholding tax or who is exempt from income tax pursuant to the Tax Code and other special laws.\n\n[/cs_content_seo][/cs_element_accordion][/cs_element_layout_column][/cs_element_layout_row][/cs_element_section][cs_element_section _id=”21″ ][cs_element_layout_row _id=”22″ ][cs_element_layout_column _id=”23″ ][cs_element_text _id=”24″ ][cs_content_seo]INCOME TAX RATES\n\n[/cs_content_seo][cs_element_gap _id=”25″ ][/cs_element_layout_column][/cs_element_layout_row][cs_element_layout_row _id=”26″ ][cs_element_layout_column _id=”27″ ][cs_element_accordion _id=”28″ ][cs_element_accordion_item _id=”29″ ][cs_content_seo]Income Tax Rates for Non-Individuals\n\nLegal References:
Section 27, NIRC – Domestic Corporation
Section 28, NIRC – Foreign Corporation

Here’s the summary of Income Tax Rates for Non-Individuals (under the CREATE Law)
\n\n[/cs_content_seo][cs_element_accordion_item _id=”30″ ][cs_content_seo]Income Tax Rates Options for Individuals \n\n

\n\n[/cs_content_seo][cs_element_accordion_item _id=”31″ ][cs_content_seo]Income Tax Rates for Individuals – Graduated Income Tax (GIT) rates\n\nLegal Reference: Section 24(A)(2), NIRC

\n\n[/cs_content_seo][cs_element_accordion_item _id=”32″ ][cs_content_seo]Income Tax Rates for Individuals – 8% Straight Income Tax option\n\n

\n\n[/cs_content_seo][/cs_element_accordion][/cs_element_layout_column][/cs_element_layout_row][/cs_element_section][cs_element_section _id=”33″ ][cs_element_layout_row _id=”34″ ][cs_element_layout_column _id=”35″ ][cs_element_text _id=”36″ ][cs_content_seo]INCOME TAX AND TAXABLE INCOME\n\n[/cs_content_seo][/cs_element_layout_column][cs_element_layout_column _id=”37″ ][/cs_element_layout_column][cs_element_layout_column _id=”38″ ][cs_element_accordion _id=”39″ ][cs_element_accordion_item _id=”40″ ][cs_content_seo]Income Tax\n\n
It is the tax imposed by the government on taxable income, whether gross or net, earned by taxable persons.

It is a tax on the yearly profits arising from property, professions, trades or offices, or as a tax on a person’s income, emoluments, profits and the like – Fisher v. Trinidad, G.R. No. L-17518 [October 30, 1922]

It is a direct tax on actual or presumed income, gain or profit (gross or net) of a taxpayer received, accrued or realized during the taxable year that is not exempt.

Actual: It applies when the income, profit or gain is realized or received (Sec.39(B), NIRC)

Presumed: It applies to gross sales of real property classified as capital asset where the law presumes that there is a gain (Sec.24(D)(1), Sec.25(A)(3) and Sec.27(D)(5), NIRC)

The law existing at the time of the transaction shall be applied.
\n\n[/cs_content_seo][cs_element_accordion_item _id=”41″ ][cs_content_seo]Income Tax in the NIRC for Individuals (Secs. 24 to 26) \n\n
Graduated Income Tax on individuals
8% Straight Income Tax option on individuals
Capital Gains Tax of an individual on sale or exchange of shares of stocks of classified as capital assets*
Capital Gains Tax on sale or exchange of real properties classified as capital assets*
Final Tax on certain passive income paid to residents
Final Tax income of non-resident aliens
Final Tax on special individuals
Fringe Benefit Tax on fringe benefit of supervisors and managers payable by employer

*Section 39(A)(1), NIRC. Capital Assets. – The term ‘capital assets’ means property held by the taxpayer (whether or not connected with his trade or business), but does not include stock in trade of the taxpayer or other property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year or property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business, or property used in the trade or business, of a character which is subject to the allowance for depreciation provided in Subsection (F) of Section 34; or real property used in trade or business of the taxpayer.
Ordinary Assets vs Capital Assets
Ordinary Assets

Inventory if on hand at end or taxable year
Stock-in-trade primarily held for sale or for lease in the course of trade or business
Asset used in trade or business, subject to depreciation
Real property used in trade or business

Capital Assets

All other assets, whether or not used in trade or business, other than the above-stated ordinary assets (Sec.39, NIRC)

\n\n[/cs_content_seo][cs_element_accordion_item _id=”42″ ][cs_content_seo]Income Tax in the NIRC for Non-Individuals (Sections 27 to 29)\n\n
Normal Corporate Income Tax (NCIT) or Regular Corporate Income Tax (RCIT) on corporations
Minimum Corporate Income Tax (MCIT) on corporations
Special Income Tax rates on special corporations
Capital Gains Tax on sale or exchange of shares or stocks of classified as capital assets*
Capital Gains Tax on sale or exchange of real properties classified as capital assets*
Branch profit remittance tax
Tax on improperly accumulated earnings on corporations (repealed under CREATE Law)**

Ordinary Assets vs Capital Assets
Ordinary Assets

Capital Assets

All other assets, whether or not used in trade or business, other than the above-stated ordinary assets (Sec.39, NIRC)

**The entire Sec. 29 (Imposition of Improperly Accumulated Earnings Tax) of the Tax Code, as amended, was repealed by Sec. 8 of the CREATE.
\n\n[/cs_content_seo][cs_element_accordion_item _id=”43″ ][cs_content_seo]What is Taxable Income\n\nSEC. 31, NIRC. Taxable Income Defined. -The term ‘taxable income’ means the pertinent items of gross income specified in this Code, less the deductions, if any, authorized for such types of income by this Code or other special laws.*
*As amended by Sec. 8 of the TRAIN. Personal and additional exemptions were removed.
\n\n[/cs_content_seo][/cs_element_accordion][/cs_element_layout_column][/cs_element_layout_row][/cs_element_section][cs_element_section _id=”44″ ][cs_element_layout_row _id=”45″ ][cs_element_layout_column _id=”46″ ][cs_element_text _id=”47″ ][cs_content_seo]FORMULAS – HOW TO DETERMINE INCOME TAX DUE (FOR INDIVIDUALS)\n\n[/cs_content_seo][/cs_element_layout_column][cs_element_layout_column _id=”48″ ][/cs_element_layout_column][cs_element_layout_column _id=”49″ ][cs_element_accordion _id=”50″ ][cs_element_accordion_item _id=”51″ ][cs_content_seo]Formula : Income Tax Due (for 8% IT option)\n\n
\n\n[/cs_content_seo][cs_element_accordion_item _id=”52″ ][cs_content_seo]Formula : Income Tax Due (for GIT – OSD option)\n\n
\n\n[/cs_content_seo][cs_element_accordion_item _id=”53″ ][cs_content_seo]Formula : Income Tax Due (for GIT – AID option)\n\n
\n\n[/cs_content_seo][cs_element_accordion_item _id=”54″ ][cs_content_seo]Formula: Income Tax Due (Mixed Income Earner)\n\n
\n\n[/cs_content_seo][/cs_element_accordion][/cs_element_layout_column][/cs_element_layout_row][/cs_element_section][cs_element_section _id=”55″ ][cs_element_layout_row _id=”56″ ][cs_element_layout_column _id=”57″ ][cs_element_text _id=”58″ ][cs_content_seo]FORMULAS – HOW TO DETERMINE INCOME TAX DUE (FOR NON-INDIVIDUALS)\n\n[/cs_content_seo][/cs_element_layout_column][cs_element_layout_column _id=”59″ ][/cs_element_layout_column][cs_element_layout_column _id=”60″ ][cs_element_accordion _id=”61″ ][cs_element_accordion_item _id=”62″ ][cs_content_seo]Formula: Income Tax Due for Non-Individuals\n\n

\n\n[/cs_content_seo][cs_element_accordion_item _id=”63″ ][cs_content_seo]Minimum Corporate Income Tax (MCIT)\n\nMCIT Applies to …
(Revenue Regulation 9-98 as amended by RR 12-07)

Domestic Corporations
Business Partnership
Taxable Joint Ventures
Taxable Associations
Resident Foreign Corporations

\n\n[/cs_content_seo][cs_element_accordion_item _id=”64″ ][cs_content_seo]Formula : Income Tax Due (for GIT – AID option)\n\n
\n\n[/cs_content_seo][cs_element_accordion_item _id=”65″ ][cs_content_seo]Formula: Income Tax Due (Mixed Income Earner)\n\n
\n\n[/cs_content_seo][/cs_element_accordion][/cs_element_layout_column][/cs_element_layout_row][/cs_element_section][cs_element_section _id=”66″ ][cs_element_layout_row _id=”67″ ][cs_element_layout_column _id=”68″ ][cs_element_text _id=”69″ ][cs_content_seo]INCOME AND GROSS INCOME\n\n[/cs_content_seo][/cs_element_layout_column][cs_element_layout_column _id=”70″ ][/cs_element_layout_column][cs_element_layout_column _id=”71″ ][cs_element_accordion _id=”72″ ][cs_element_accordion_item _id=”73″ ][cs_content_seo]What is Income and Gross Income\n\nWhat is income?
Income means all wealth which flows into the taxpayer other than as a mere return of capital.
What is Gross Income?
Gross income means all income derived from whatever source.\n\n[/cs_content_seo][cs_element_accordion_item _id=”74″ ][cs_content_seo]According to G.R. 228539\n\n
Income as contrasted with capital or property is to be the test. The essential difference between capital and income is the capital is a fund; income is a flow. A fund of property existing at an instant time is called capital. A flow of services rendered by that capital by the payment of money from it or any other benefit rendered by a fund of capital in relation to such fund through a period of time is called income. Capital is wealth, while income is the service of wealth.

Case law provides that in order to constitute “income,” there must be realized “gain.” Clearly, because of the nature of membership fees and assessment dues as funds inherently dedicated for the maintenance, preservation, and upkeep of the club’s general operations and facilities, nothing is to be gained from their collection.

This stands in contrast to the fees received by recreational clubs coming from their income-generating facilities, such as bars, restaurants, and food concessionaires, or from income-generating activities, like the renting out of sports equipment, services and other accommodations

– Association of Non-Profit Clubs, Inc. v. Bureau of Internal Revenue, G.R. No. 228539, [June 26, 2019]\n\n[/cs_content_seo][cs_element_accordion_item _id=”75″ ][cs_content_seo]According to C.T.A. Case No. 8651\n\nThe imputation of alleged undeclared income is based on a mere presumption that since there were undeclared expenses, there were corresponding undeclared income. Even if these alleged unaccounted expenses are to be treated as unaccounted source of income, the same will be offset by recording the equivalent payments as expenses. As such, no taxable income will result from the said transactions.
– Ritegroup, Inc. v. Commissioner of Internal Revenue, C.T.A. Case no. 8651, [January 25, 2017]\n\n[/cs_content_seo][cs_element_accordion_item _id=”76″ ][cs_content_seo]What are Inclusions in Gross Income\n\nSEC. 32, NIRC. Gross Income. –
(A) General Definition. – Except when otherwise provided in this Title, gross income means all income derived from whatever source, including (but not limited to) the following items:
(1) Compensation for services in whatever form paid, including, but not limited to fees, salaries, wages, commissions, and similar items;
(2) Gross income derived from the conduct of trade or business or the exercise of a profession;
(3) Gains derived from dealings in property;
(4) Interests;
(5) Rents;
(6) Royalties;
(7) Dividends;
(8) Annuities;
(9) Prizes and winnings;
(10) Pensions; and
(11) Partner’s distributive share from the net income of the general professional partnership.\n\n[/cs_content_seo][cs_element_accordion_item _id=”77″ ][cs_content_seo]What are Exclusions of Gross Income\n\n[/cs_content_seo][/cs_element_accordion][/cs_element_layout_column][/cs_element_layout_row][/cs_element_section][cs_element_section _id=”78″ ][cs_element_layout_row _id=”79″ ][cs_element_layout_column _id=”80″ ][cs_element_text _id=”81″ ][cs_content_seo]DEDUCTIONS\n\n[/cs_content_seo][/cs_element_layout_column][cs_element_layout_column _id=”82″ ][/cs_element_layout_column][cs_element_layout_column _id=”83″ ][cs_element_accordion _id=”84″ ][cs_element_accordion_item _id=”85″ ][cs_content_seo]Requirements for Deductibility of Expenses\n\n
Deductibility of Expenses:

Supreme Court decisions (G.R. 173373 H. Tambunting Pawnshop vs. CIR)

When a taxpayer claims a deduction, he must point to some specific provision of the statute in which that deduction is authorized and must be able to prove that he is entitled to the deduction which the law allows
An item of an expenditure, therefore, must fall squarely within the language of the law in order to be deductible
A mere averment that the taxpayer has incurred a loss does not automatically warrant a deduction from its gross income.

Section 34, NIRC. Deductions from Gross Income.

In computing taxable income subject to income tax, there shall be allowed the following deductions from gross income.

Ordinary and Necessary Expenses – Sec. 34 (A) (1) (a), NIRC
Representation Expense – Sec. 34 (A) (1) (a) (iv), NIRC
Interest – Sec. 34 (B), NIRC
Taxes – Sec. 34 (C), NIRC
Losses – Sec. 34 (D), NIRC
Bad Debts – Sec. 34 (E), NIRC
Depreciation – Sec. 34 (F), NIRC
Depletion of Oil and Gas Wells and Mines – Sec. 34 (G), NIRC
Charitable and Other Contributions – Sec. 34 (H), NIRC
Research and Development – Sec. 34 (I), NIRC
Pension Trusts – Sec. 34 (J), NIRC
Additional Requirements for Certain Payments – Sec. 34 (K), NIRC
Optional Standard Deduction (OSD) – Sec. 34 (L), NIRC

Time for availing deductions

A taxpayer has the right to deduct all authorized allowances for the taxable year.
If he does not within any year deduct certain of his expenses, losses, interest, taxes or other charges, he cannot deduct them from the income of the next or any succeeding year – (Section 76 of Income Tax regulations)
The deductions provided for in this Title shall be taken for the taxable year in which ‘paid or accrued’ or ‘paid or incurred’ – (Section 45, NIRC. Period for which Deductions and Credits Taken)

General Requirements/Requisites of Expenses:

Legal Reference: Section 34, NIRC
Should be ordinary and necessary expenses (COS and Opex)
Paid, incurred or accrued during the taxable year
Directly connected/related/attributable to

Development
Operation
Management
Conduct of trade, business or profession

Substantiated by adequate proof/sufficient evidence which reflect the ff:

Amount being deducted
Nature of expense incurred – Connection or relation of expense to the business/trade of the taxpayer
In the registered name of the Company / Taxpayer

Reasonable* in amount / within the conditions set forth
Not contrary to law, morals, public order or public policy (e.g.: bribes, kickbacks or similar payments)
The taxes required to be withheld (if applicable) have been properly withheld and remitted on time.

*Reasonableness of Ordinary Expenses

Legal Reference: G.R. No. 143672, General Foods, April 24, 2003
Reasonableness – based on the interplay of factors such as

the type and size of the business;
the volume and amount of net earnings;
the nature of the expenditure itself;
the intention of the taxpayer; and
the general economic conditions

Amount incurred must not be a capital outlay/expenditure** to create “goodwill” for the product and/or the business

**Capital expenditures (capex)

Legal Reference: Armco-Marsteel Alloy Corp. vs. CIR, CTA Case No. 4592, July 1, 1993
Included in capital expenditures are amounts spent on:

acquiring fixed assets
organization costs such as incorporation fees, attorney’s fees and account charges
architect’s fees as they constitute part of the building cost
legal costs of establishing or maintaining one’s right of ownership in a piece of property
restoring property or adapting it to a new or different use
the administration of an estate, such as court costs, attorney’s fees, and executor’s commission which is chargeable against the estate

Substantiation Requirements:

Section 34(A)(1)(b), NIRC. Substantiation Requirements

No deduction 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) amount of 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.

Supreme Court decisions (G.R. 173373 H. Tambunting Pawnshop vs. CIR)

proper substantiation requirement to be allowed is the official receipt or invoice
it is the duty of a taxpayer to keep adequate records for each and every transaction entered into the conduct of its business

so that when their books of accounts are subjected to a tax audit examination, all entries could be shown as adequately supported and proven as legitimate business transactions.

Sufficient Evidence: Required written evidence per RR 18-2012/RMO 12-2013/RMC 2-2014:

Sales Invoice (SI) shall be issued as Principal evidence in the sale of goods and/or properties.

Cash Sales Invoices and Charge Sales Invoices falls under this definition

Official Receipt (OR) shall be issued as Principal evidence in the sale of services and/or lease of properties

\n\n[/cs_content_seo][cs_element_accordion_item _id=”86″ ][cs_content_seo]Options for Deductions\n\n[/cs_content_seo][cs_element_accordion_item _id=”87″ ][cs_content_seo]Allowed Itemized Deductions\n\n[/cs_content_seo][cs_element_accordion_item _id=”88″ ][cs_content_seo]Optional Standard Deduction (OSD)\n\n[/cs_content_seo][cs_element_accordion_item _id=”89″ ][cs_content_seo]Mandatory Itemized Deductions (RR 2-2014)\n\nNon-Individuals not entitled to avail of OSD

Those exempt under the Tax Code, as amended, [Sec. 30 and Sec. 27(C)] and other special laws, with no other taxable income
Those with income subject to special / preferential tax rates
Those with income subject to income tax rate under Sec. 27(A) and 28(A)(1) of the Tax Code, as amended, and also with income subject to special/preferential tax rates

Individuals not entitled to avail of OSD

Those exempt under the Tax Code, as amended, and other special laws with no other taxable income [e.g. BMBE]
Those with income subject to special/preferential rates
Those with income subject to income tax rate under Sec. 24 of the NIRC, as amended, and also with income subject to special/preferential tax rates.
\n\n[/cs_content_seo][/cs_element_accordion][/cs_element_layout_column][/cs_element_layout_row][/cs_element_section][cs_element_section _id=”90″ ][cs_element_layout_row _id=”91″ ][cs_element_layout_column _id=”92″ ][cs_element_text _id=”93″ ][cs_content_seo]COST OF SALES / COST OF SERVICE (COS)\n\n[/cs_content_seo][/cs_element_layout_column][cs_element_layout_column _id=”94″ ][/cs_element_layout_column][cs_element_layout_column _id=”95″ ][cs_element_accordion _id=”96″ ][cs_element_accordion_item _id=”97″ ][cs_content_seo]Cost of Goods Sold\n\n[/cs_content_seo][cs_element_accordion_item _id=”98″ ][cs_content_seo]Cost of Goods Manufactured and Sold\n\n[/cs_content_seo][cs_element_accordion_item _id=”99″ ][cs_content_seo]Cost of Service\n\n[/cs_content_seo][cs_element_accordion_item _id=”100″ ][cs_content_seo]Formulas for COS\n\n\n\n[/cs_content_seo][/cs_element_accordion][/cs_element_layout_column][/cs_element_layout_row][/cs_element_section][cs_element_section _id=”101″ ][cs_element_layout_row _id=”102″ ][cs_element_layout_column _id=”103″ ][cs_element_text _id=”104″ ][cs_content_seo]CONDITIONS, LIMITATIONS AND ADDITIONAL REQUIREMENTS ON CERTAIN EXPENSES\n\n[/cs_content_seo][/cs_element_layout_column][cs_element_layout_column _id=”105″ ][/cs_element_layout_column][cs_element_layout_column _id=”106″ ][cs_element_accordion _id=”107″ ][cs_element_accordion_item _id=”108″ ][cs_content_seo]Representation\n\nLegal Basis: Section 34 (A)(1)(a)(iv), NIRC and RR 10-2002
A reasonable allowance for entertainment, amusement and recreation expenses during the taxable year, that are directly connected to the development, management and operation of the trade, business or profession of the taxpayer, or that are directly related to or in furtherance of the conduct of his or its trade, business or exercise of a profession not to exceed such ceilings as the Secretary of Finance may, by rules and regulations prescribe, upon recommendation of the Commissioner, taking into account the needs as well as the special circumstances, nature and character of the industry, trade, business, or profession of the taxpayer: Provided, That any expense incurred for entertainment, amusement or recreation that is contrary to law, morals public policy or public order shall in no case be allowed as a deduction.

Expenses incurred in connection with the conduct of trade, business or exercise of profession
In entertaining, providing amusement and recreation to or meeting with a guest or guests
At a dining place, place of amusement, country club, theater, concert, play, sporting event and similar event or places

Ceiling:

Seller of Goods/properties

½ of 1% of net sales or 0.50% of net sales
Net Sales = gross sales less returns/allowances and sales discounts

Seller of Service/s

1% of net revenue
Net Revenue = gross revenue less discounts

Excluded from Ceiling:

Expenses treated as compensation or fringe benefits
Expenses for charitable or fund raising events
Expenses for a bona fide meeting of stockholders, partners or directors
Expenses for attending or sponsoring a professional organization meeting
Expenses for events organized for promotion, marketing, and advertising including concerts, conference, seminars, workshop, and conventions.
\n\n[/cs_content_seo][cs_element_accordion_item _id=”109″ ][cs_content_seo]Interest\n\n[/cs_content_seo][cs_element_accordion_item _id=”110″ ][cs_content_seo]Taxes\n\n[/cs_content_seo][cs_element_accordion_item _id=”111″ ][cs_content_seo]Losses\n\n[/cs_content_seo][cs_element_accordion_item _id=”112″ ][cs_content_seo]Bad Debts\n\n[/cs_content_seo][cs_element_accordion_item _id=”113″ ][cs_content_seo]Depreciation\n\n[/cs_content_seo][cs_element_accordion_item _id=”114″ ][cs_content_seo]Contributions and Donations\n\n[/cs_content_seo][cs_element_accordion_item _id=”115″ ][cs_content_seo]Research and Developments\n\n[/cs_content_seo][cs_element_accordion_item _id=”116″ ][cs_content_seo]Pension Contributions\n\n[/cs_content_seo][cs_element_accordion_item _id=”117″ ][cs_content_seo]Pension Contributions\n\n[/cs_content_seo][/cs_element_accordion][/cs_element_layout_column][/cs_element_layout_row][/cs_element_section][cs_element_section _id=”118″ ][cs_element_layout_row _id=”119″ ][cs_element_layout_column _id=”120″ ][cs_element_text _id=”121″ ][cs_content_seo]RULES ON FILING INCOME TAX RETURNS\n\n[/cs_content_seo][cs_element_gap _id=”122″ ][/cs_element_layout_column][/cs_element_layout_row][cs_element_layout_row _id=”123″ ][cs_element_layout_column _id=”124″ ][cs_element_accordion _id=”125″ ][cs_element_accordion_item _id=”126″ ][cs_content_seo] TAX RETURNS/BIR FORMS TO BE USED\n\nFORMS TO BE USED BY INDIVIDUALS

Quarterly Income Tax Return

BIR Form No. 1701Q

Latest version – 1701Qv2018

Annual Income Tax Return

BIR Form No. 1700

for individual Earning Purely Compensation Income
Latest version – 1700v2018

BIR Form No. 1701A

for those who opted for 8% Income Tax Rate
for Purely Self-Employed Individuals/Practitioners of Profession
for those who opted for OSD
Latest version – 1701A

BIR Form No. 1701

for Mixed Income Eaners – Self-Employed Individuals and with Compensation
for those who opted for AID
for Estates and Trust
Latest version – 1701v2018

FORMS TO BE USED BY NON-INDIVIDUALS

Quarterly Income Tax Return

BIR Form No. 1702Q

Latest version – 1702Qv2008C

Annual Income Tax Return

BIR Form No. 1702RT

for Corporations, Partnerships and Other Non-Individual TP Subject only to the REGULAR Income Tax Rate
Latest version – 1702RTv2018C

BIR Form No. 1702EX

for Corporations, Partnerships and Other Non-Individual TP Subject EXEMPT Under the Tax Code
Latest version – 1702EXv2018C

BIR Form No. 1702MX

for Corporations, Partnerships and Other Non-Individual with Income Subject to Multiple Income Tax Rates or with Income Subject to Special/Preferential Rate

Latest version – 1702MXv2018C

MANDATED TO FILE AND PAY ELECTRONICALLY
– WHO SHOULD USE EBIRFORMS AND EFPS FORMS

SIZE OF PAPER TO USE WHEN PRINTING AITR FORMS

RMO 24-2013 states that Forms to use is FOLIO, but clarified by RMC 19-2015 which states that use Folio for ALL Tax Forms, EXCEPT AITR which shall be printed in A4

Note that for those using Manual Forms (non-eBIR/eFPS), it shall be printed in Folio/Long size.

Sources:

RMO 24-2013
https://www.bir.gov.ph/…/pdf/75037RMO%20No%2024-2013.pdf

RMC 19-2015
https://www.bir.gov.ph/…/internal…/rmc_no_19-2015.pdf
\n\n[/cs_content_seo][cs_element_accordion_item _id=”127″ ][cs_content_seo]INCOME TAX FILING AND PAYMENT \n\nWhen to File ITR

Quarterly ITR filing

For Individuals – 45 days after end of the Taxable Quarter

Ex. Taxable Quarter Using Calendar Year:

Qtr 1 – May 15 (Coverage Jan, Feb, Mar)
Qtr 2-Aug 15 (Coverage Apr, May, Jun)
Qtr 3 – Nov 15 (Coverage Jul, Aug, Sep)

For Non-Individual – 60 days after end of the Taxable Quarter

Ex. Taxable Quarter Using Calendar Year:

Qtr 1 – May 30 (Coverage Jan, Feb, Mar)
Qtr 2-Aug 29 (Coverage Apr, May, Jun)
Qtr 3 – Nov 29 (Coverage Jul, Aug, Sep)

Annual ITR filing

For Individuals and Non-Individuals

Within 105 days or not later than the 15th day of the 4th month following the close of the Taxable Year.

Ex. April 15

Ways to FILE Returns

eFile and ePay through eFPS
eFile eBIRFORMS and ePAY
eFile EBIRFORMS and Manual Pay
Manual File eBIRFORMS; Manual Pay
Manual File Manual Forms; Manual Pay
Note: Manual Filings are for SCs and PWDs

Channels and Modes of Payment

Over-the-counter Payment / Manual Payment

Thru AABs
Thru RCOs if no AABs

Online / electronic Payment (ePay) Thru AABs

ePay for eBIRforms: LBP, DBP, UB
ePay for eFPS: to enrolled eFPS AABs

Mobile Payment System (ePay)

GCASH
Maya/Paymaya
MyEG

For those paying thru Check:
Indicate the following:

PAY TO THE ORDER OF

Bank where the check for the payment of the taxes due is to be presented

For CY2022, See BIR Bank Bulletin 2023-04: https://www.bir.gov.ph/images/bir_files/collection_programs/BB%202023-04.pdf

FAO Bureau of Internal Revenue

Installment Payment of Income Tax Due
Sec.56 (A)(2), NIRC, as amended
Installment of Payment. – When a tax due is in excess of Two thousand pesos (P2,000), the taxpayer other than a corporation may elect to pay the tax in two (2) equal installments, in which case, the first installment shall be paid at the time the return is filed and the second installment on or before October 15 following the close of the calendar year, if any installment is not paid on or before the date fixed for its payment, the whole amount of the tax unpaid becomes due and payable together with the delinquency penalties.\n\n[/cs_content_seo][cs_element_accordion_item _id=”128″ ][cs_content_seo]ATTACHMENTS TO INCOME TAX RETURNS (ITR)\n\nREQUIRED ATTACHMENTS TO AITR

Complete Set of Financial Statements, as applicable

Certificate of Independent CPA, as applicable – See Sec.232, NIRC
Audited Financial Statements (AFS), as applicable

FS not required to be attached for those who opted for 8% – RMO 23-2018
For those who opted for OSD

That an individual who is entitled to and claimed for the optional standard deduction shall not be required to submit with his tax return such financial statements – Sec.34(L), NIRC

Statement of Management Responsibility (SMR) for AITR

Proof of Tax Credits

BIR Form 2306 – Final Tax Withheld at Source
BIR Form 2307 – Certificate of Creditable Tax Withheld at Source
BIR Form 2316 – Certificate of Withholding Taxes on Compensation – for Individuals
BIR Form 1606 – Sale of Real Property, as applicable
Proof of prior year’s excess credits, if applicable
Proof of Foreign Tax Credits, if applicable
Proof of other tax payment/credit, if applicable

BIR Form 1709, Information Return on Transactions with Related Parties

See RR 19-2020 for details

Registered Export Enterprises,

If enjoying Tax Incentives, Certificate of Entitlement to Tax Incentives (CETI) – See RMC 28-2022

Other Attachments

Certificate of Withholding Taxes not subjected to Withholding Tax (BIR Form 2304)
Duly approved Tax Debit Memo, if applicable
For amended returns, proof of tax payment and the return previously filed.
Summary of Alphalist of Withholding Agents of Income Payments Subjected to Withholding Tax at Source (SAWT), if applicable

Notes:

RR 16-2021/RMC 117-2021 – submissions of BIR Forms 2304, 2306, 2307 and 2316 are in softcopies stored in DVD-R/USB
RR 2-2015 – oath for the softcopies stored in DVD-R/USB are the physical true copies of the electronic/softcopies
\n\n[/cs_content_seo][cs_element_accordion_item _id=”129″ ][cs_content_seo]SUBMISSION AND STAMPING OF ITR AND ATTACHMENTS\n\nFILING AND PAYMENT OF AITR

With Payments

File and Pay with AABs/RCOs of RDOs having jurisdiction over the location of the principal office

For CY2021, click these links:

RMC 44-2022 Guidelines in the Filing and Payment of AITR for CY2021
RMC 44-2022 Annex A

For CY2022 – File and Pay anywhere (Legal Reference: RMC 32-2023)

Taxpayers may file and pay their AITR for CY 2022 to any Authorized Agent Banks (AABs) and Revenue Collection Officers (RCOs) notwithstanding the Revenue District Office (RDO) jurisdiction, without imposition of penalties for wrong venue filing

Important: Should attach required attachments when filing and paying
Stamping of banks is equivalent to BIR Stamping and Receiving

Without Payments

File online
Submit attachments within 15 days from the date of tax filing deadline thru (select one)

RDO, or
eAFS

RECEIVING AND STAMPING

RDOs/LTSs/AABs, shall receive the ITR by stamping on the space provided for in 3 copies of the returns

Any copies of the returns in excess of 3 copies shall not be stamped “Received”
In case of corporations/juridical persons, stamped “Received” additional 2 extra copies of AFS for SEC filing
eAFS submission, proof of acknowledgement receipt of eAFS is equivalent to stamped “Received” by the BIR

Re FS attachments to ITR, only the following shall be stamped received (per RMO 6-2010, RMC 24-2018)

Audit Certificate
Statement of Financial Position / Balance Sheet
Statement of Performance / Income Statement
Statement of Management Responsibility (SMR)

\n\n[/cs_content_seo][cs_element_accordion_item _id=”130″ ][cs_content_seo]RESPONSIBILITY FOR THE ITR \n\nContents and representations – as reflected in the tax returns and information statements filed with the BIR – made by tax agents in behalf of the taxpayers remain the responsibility of the taxpayers in their capacity as the principals stated in the aforesaid returns and information statements.

Taxpayer is under strict obligation to check, verify and validate:
1.The authenticity of a tax return and / or information statement made in their behalf; and
2.The correctness and validity of the information contained in such documents.

Since the Annual Income Tax Return is primarily the responsibility of the management of the taxpayer, this shall be accompanied by a Statement of Management’s Responsibility (SMR) – RR 3-2010

Declarations made by a taxpayer in his income tax return are for all intents and purposes, presumed to be correct having been prepared under pain of being penalized for perjury
-Paseo Realty and Development Corporation vs CIR, CTA Case Nos. 4528 and 4913, April 30, 1993 and July 29, 1993\n\n[/cs_content_seo][cs_element_accordion_item _id=”131″ ][cs_content_seo]AMENDMENT OF THE ITR \n\nAny taxpayer can easily aver mistake or error in its declaration and amend its return not only once but several times.
However, such right is subject to the following limitation:

Amended is allowed within 3 years from date of filing;
No notice of examination covering said period has been served.
The amendment of returns allowed does not extend to changing taxpayer’s chosen option and actual exercise of such option.
\n\n[/cs_content_seo][cs_element_accordion_item _id=”132″ ][cs_content_seo]WHAT TO DO WHEN THERE ARE EXCESS TAX CREDITS \n\nThe taxpayer’s option over the excess credits-

To be refunded
To be issued a Tax Credit Certification (TCC)
To be carried over as Tax credit next year/quarter

Excess CWT to Refund / TCC
Conditions for claims for refund or tax credit of income tax

Taxpayer must file a written claim with the BIR stating the legal and / or factual basis.

(San Carlos Co. v CA, GR 103379, November 23, 1993)

The claim should be files with the BIR within the prescriptive period under the law.

(San Carlos Co. v CA, GR 103379, November 23, 1993)

There was erroneously or illegal paid taxes to the government.
A petition for review was filed by the taxpayer with the CTA within the prescriptive period.

(Muller & Phipps (Manila) vs Collector, 103 Phils.)

No deficiency tax assessment is issued against the taxpayer.

(Commissioner v. CA and Citytrust Banking Corp., 234 SCRA 348)

Excess CWT to Carry-Over
IRREVOCABLE OPTION
“ Sec. 76. Final Adjustment Return- … Once the option to carry-over and apply the excess quarterly income tax against income tax due for the taxable quarters of the succeeding taxable years has been made, such option shall be considered irrevocable for that taxable period and no application for cash refund or issuance of a tax credit shall be allowed therefor.”\n\n[/cs_content_seo][cs_element_accordion_item _id=”133″ ][cs_content_seo]PENALTIES FOR LATE FILING AND PAYMENT\n\nThe following are the penalties for late filing and payment:

Surcharge (25% or 50%)
Interest (double the legal interest rate)
Compromise Penalty (RMO 7-15)

Surcharge of 25%

Failure to file any return and pay the amount of tax or installment due on or before the due date;
Filing a return with wrong venue;
Failure to pay the full or part of the amount of tax shown on the return, or the full amount of tax due for which no return is required to be filed on or before the due date;
Failure to pay the deficiency tax within the time prescribed for its payment in the notice of assessment

Surcharge of 50%
Shall be imposed in case of willful neglect to file the return within the period prescribed by the Tax Code and / or by rules and regulations or in case a false or fraudulent return is filed

Interest

Interest – Sec.249 A, NIRC

At the rate of double the legal interest rate for loans or forbearance of any money in the absence of an express stipulation as set by the Bangko Sentral ng Pilipinas from the date prescribed for the payment until the amount is fully paid

12% (6% pa, BSP Circular 799, Series of 2013)

Compromise Penalty

\n\n[/cs_content_seo][cs_element_accordion_item _id=”134″ ][cs_content_seo] QUARTERLY ITR (QITR) VS ANNUAL ITR (AITR)\n\n
“payment of quarterly income tax should only be considered [as] mere installments of the annual tax due. These quarterly tax payments which are computed based on the cumulative figures of gross receipts and deductions in order to arrive at a net taxable income, should be treated as advances or portions of the annual income tax due, to be adjusted at the end of the calendar or fiscal year.

Source:
METROPOLITAN BANK & TRUST COMPANY vs. THE COMMISSIONER OF INTERNAL REVENUE G.R. No. 182582 April 17, 2017\n\n[/cs_content_seo][/cs_element_accordion][/cs_element_layout_column][/cs_element_layout_row][/cs_element_section][cs_element_section _id=”135″ ][cs_element_layout_row _id=”136″ ][cs_element_layout_column _id=”137″ ][cs_element_text _id=”138″ ][cs_content_seo]HOW TO FILL-UP BIR FORMS\n\n[/cs_content_seo][cs_element_gap _id=”139″ ][/cs_element_layout_column][/cs_element_layout_row][cs_element_layout_row _id=”140″ ][cs_element_layout_column _id=”141″ ][cs_element_accordion _id=”142″ ][cs_element_accordion_item _id=”143″ ][cs_content_seo] HOW TO FILL-UP QITR (1701Q) – INDIVIDUAL\n\n[/cs_content_seo][cs_element_accordion_item _id=”144″ ][cs_content_seo]HOW TO FILL-UP QITR (1702Q)- NON-INDIVIDUAL\n\n[/cs_content_seo][cs_element_accordion_item _id=”145″ ][cs_content_seo]HOW TO FILL-UP AITR (1701A and 1701) – INDIVIDUALS\n\n[/cs_content_seo][cs_element_accordion_item _id=”146” ][cs_content_seo]HOW TO FILL-UP AITR (1702) – NON-INDIVIDUALS\n\n[/cs_content_seo][/cs_element_accordion][/cs_element_layout_column][/cs_element_layout_row][/cs_element_section][/cs_content]