REVENUE REGULATIONS NO.

7 - 2007

TIPS IN TAX FILING

By: Dr. Ruperto P. Somera, Ph.D, DBA, CPA

Additional Procedural and / or Documentary Requirements in Connection with the Preparation and Submission of Financial Statements Accompanying the Tax Returns.

CONTENTS AND FORMAT OF FINANCIAL STATEMENTS TO BE ATTACHED TO THE ANNUAL INCOME TAX RETURN OR INFORMATION RETURN.

Financial Statements Accompanying the Income Tax Returns

The account titles to be used must be specific and not control accounts which must be completely enumerated in the financial statements and these accounts must conform to the basic framework of the financial reporting standards promulgated by the Financial Reporting Standards Council (FRSC) of the Philippines which are the Generally Accepted Accounting Principles in the Philippines which include Philippine Accounting Standards (PAS) and Philippine Financial Reporting Standards (PFRS) and the refinements introduced thereon in respect to certain types of industries as well as to the rules and requirements of regulatory agencies that have supervision over them such as the Securities and Exchange Commission (SEC), Bangko Sentral ng Pilipinas (BSP), Insurance Commission (IC), etc.

The Profit and Loss Statement/Income Statement shall show separately by segment (there should be proper labeling), with breakdown of the specific accounts, the following: I. Sales/Revenues II. Cost of Goods Sold (for seller of goods)/Cost of Services (for seller of services); III. Selling and Administrative Expenses; IV. Financial Expenses, if any; V. Other Income; and VI. Other Expenses (Note: Items I, IV, V and VI should be fully explained in the Notes to the Financial Statements; Items II and III should be supported by Schedules)
5

It is the responsibility of the taxpayer to reflect in its books of accounts (i.e., general, subsidiary ledgers, and journals) the adopted/accepted year-end adjusting entries made corollary to the preparation and filing of its audited financial statements and annual income tax returns. Correspondingly, all the necessary working papers prepared by the taxpayer pertinent to the year-end adjustments shall, nevertheless, be made available to the investigating officers of the Bureau upon audit and/or verification.
7

COVERAGE. The Financial Statements shall be composed of the following :

a) b) c)

RESPONSIBILITY OF EXTERNAL AUDITORS

the independent CPA who audited the records and certified the financial statements of the taxpayer, equally as the taxpayer, has the responsibility to maintain and preserve copies of the audited and certified financial statements for a period of three (3) years from the due date of filing the annual income tax return or the actual date of filing thereof, whichever comes later.
6 8

Balance Sheet; Income Statement/Profit and Loss Statement; Statement of Changes in Equity, showing either: All changes in equity Changes in equity, other than those arising from transactions with equity holders acting in their capacity as equity holders; Statement of Cash Flow; Notes, comprising a summary of significant accounting policies and other explanatory notes; and Schedules attached to the afore-cited statements.

d) e)

The submission of the above statements is mandatory even if there is no income, retained earnings, etc.

REVENUE REGULATIONS NO. 8-2007

Additional Compliance Requirements of Concerned Taxpayers in the Light of Mandatory Adoption of the Philippine Financial Reporting Standards.

Start of Keeping of Books and Records

The keeping of books and records for the reconciling items shall start for taxable year 2007. For this purpose taxable year 2007 shall mean calendar year ending December 31, 2007 and all fiscal years ending not later than June 30, 2008.

11

Additional Compliance Requirements of Concerned Taxpayers in the Light of Mandatory Adoption of the Philippine Financial Reporting Standards in Recording and Presenting Business Transactions and Results The Philippines has adopted the International Financial Reporting Standards (IFRS) as the Philippine Financial Reporting Standards (PFRS) that should be observed by big corporate taxpayers in the recording of their business transactions and preparation of Financial Statements starting year 2005.
10

Reconciliation of Net Income per Financial Statement to Taxable Income

12

ACCREDITATION AND REPORTORIAL COMPLIANCE

Board of Accountancy (BOA) Bureau of Internal Revenue (BIR) Securities and Exchange Commission (SEC) Insurance Commission (IC) Cooperative Development Administration

(CDA) Banko Sentral ng Pilipinas (BSP)

1. BACC Form No. 02 duly accomplished in three copies and properly notarized. (affix metered documentary stamp to the original copy). 2. Payment of registration fee. Single Proprietorship P1,500.00 Partnership P2,000.00 3. Photo copy of CPA Board Certificate(s) and current professional identification card(s) of individual CPA sole proprietor, partners and staff member(s). 4. Code of Good Governance of the individual CPA, Firm on Partnership.
13 15

BOARD OF ACCOUNTANCY
CHECKLIST OF REQUIREMENTS FOR REGISTRATION OF INDIVIDUAL CPA/FIRMS/PARTNERSHIPS IN ACCORDANCE WITH RULES AND REGULATIONS IMPLEMENTING REPUBLIC ACT NO. 9298 OTHERWISE KNOWN AS THE PHILIPPINE ACCOUNTANCY ACT OF 2004
14

5. Sworn statement by the individual CPA a. Had a meaningful participation of their respective internal quality review process and b. Had undergone adequate and effective training (from organizations duly accredited by the Board or by its duly authorized representatives) on all the current accounting and auditing standards, code of ethics, laws and their implementing rules and regulations, circulars, memoranda Should be supported with certified copies of certificate (s) of attendance or any proof of meaningful participation in, and proof of adequacy and effectiveness of such training.
16

c. are all of good moral character d. he/she or they had not been found guilty by a competent court and of administrative body of any case involving moral turpitude The requirements imposed by these Regulations shall be mandatory after JUNE 30, 2001. After the said period, all returns, statements, reports, protest, requests for ruling, official correspondence and other papers filed on behalf of a taxpayer shall bear the signature tax representative.

17

19

A. Tax Agents or Tax Practitioners

Revenue Regulations No. 1-2006 (June 15, 2006)
Those who are engaged in the regular preparation, certification, audit and filing of tax returns, information returns or other statements.

ACCREDITATION AS TAX AGENTS

18

20

B. Exceptions
The accreditation requirements shall specifically apply to the following:
a) Individual tax practitioners engaged in
c) Other individuals presenting satisfactory proof of identification or authority in any one of the following : a) An individual representing a member of his or her immediate family; b) A regular full-time employee in representing an individual employer; c) A bonafide officer or a regular full-time employee in representation of this employercorporation, association or organized group; d) A trustee, receiver, guardian, administrator, executor e) An officer or a regular employee of a government unit, agency, or instrumentality representing said unit, 23

private practice who are Certified Public Accountants (CPA); CPA-Lawyers Partnership engaged in the practice of taxation, accountancy, and/or auditing;
21

b) Partners of a General Professional

B. Exceptions
a) Individual taxpayers acting on their

Minimum Qualifications of Applications

A. For Individual Tax Agents (other than a member

own behalf provided they present satisfactory identification; Members of the Philippine Bar not suffering from suspension/disbursement. However, they may at their option, apply for accreditation;

of the Philippine Bar): 1. He must be a Certified Public Accountant (CPA) with current professional license from the Professional Regulations Commission. 2. If he is not a Certified Public Accountant, he must have obtained at least a degree in Arts, Commerce or Business Administration with at least eighteen (18) units in accounting and/or taxation in a college or university
22 24

Auditing Firm (SEC Form AuF-002)

3. He must be of good moral character as certified to under oath by at least two (2) disinterested 4. He must not have been charged with and convicted by final judgment of a crime involving moral turpitude, 5. He must be a citizen of the Philippines.
25

1. 2.

Photocopy of Privilege Tax Certificate. Certificate of Registration issued by BOA/PRC to the firm which is current and effective. Pro forma Audit Engagement Letter. Summary of Contracts/agreements with audit clients involving services other than statutory audit of Financial Statements.
27

3. 4.

SECURITIES AND EXCHANGE COMMISSION Accreditation and Reportorial Requirements of Auditing Firm

5. Notarized Certification in compliance with

Sections 5.2 and 8.1 of the Circular. 6. Quality Assurance Manual. 7. Copy of the firms Audited Financial Statements for immediately preceding two (2) years. 8. Undertaking to preserve working papers for a period of seven (7) years and making them available to the Commissions representatives when required to do so.
26

28

Filling of Returns
1. Filling of tentative Income Tax

THERE ARE ELEVEN CATEGORIES OF DEDUCTIONS WHICH MAY BE BROADLY CLASSIFIED INTO THOSE THAT ARE:
A. Connected with the taxpayers trade or

Returns 2. Filling of NO Tax Carry Over for the next quarter or month
Income tax Returns Value Added Tax Returns 3. File all returns
29

business (business related deductions).

1. Expenses 2. Interest 3. Taxes 4. Losses 5. Bad Debts

6. Depreciation 7. Depletion 8. Research and Development 9. Contributions to pension trusts

31

B. Not connected with the taxpayers trade

DEDUCTIONS FROM GROSS INCOME

of business (non-business deductions). 10. Charitable and other contributions 11. Optional standard deduction 12. Premium payment on health and/or hospitalization insurance.

30

32

DEDUCTION
A taxpayer engaged in business or in the practice of profession shall choose either the optional or itemized deduction. He shall indicate his choice by marking with X the appropriate box, otherwise, he shall be deemed to have chosen itemized deduction. The choice made in the return is irrevocable for the taxable year covered.

ITEMIZED DEDUCTION
There shall be allowed as deduction from gross income all the ordinary and necessary expenses paid 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 including a reasonable allowance for salaries, travel, rental and entertainment expenses.
35

33

OPTIONAL STANDARD DEDUCTION

A maximum of 10% of their gross income shall be allowed as deduction in lieu of the itemized deduction. A taxpayer who opts to avail of this deduction need not submit the Account Information Return (AIF)/Financial Statements.

Requirements for Deductibility

Expenses to be deductible, must be:
Ordinary and necessary; paid and incurred

during the taxable year in carrying on;

The expense must not be contrary to public

policy, such as,

34

36

REVENUE REGULATIONS NO. 10-2002 BRIBES, KICKBACKS KICKBACKS PAID TO A PRIVATE CORPORATION, GENERAL PROFESSIONAL PARTNERSHIP. The expenses must be duly substantiated. No deduction will be allowed from gross income UNLESS IT IS SUBSTANTIATED WITH SUFFICIENT EVIDENCE, SUCH AS OFFICIAL RECEIPTS OR OTHER ADEQUATE RECORDS,
37

Authorizing the Imposition of a Ceiling on Entertainment, Amusement and Recreational Expense Coverage: Individuals engaged in business, including taxable estates and trusts; Individuals engaged in the practice of profession; Domestic corporations Resident Foreign Corporations General Professional Partnership 39

Reasonable Expenses
1. A reasonable allowance for salaries,

REQUISITES OF DEDUCTIBILITY OF ENTERTAINMENT, AMUSEMENT AND RECREATION EXPENSES

It must be paid or incurred during the taxable year; b. It must be: 1. Directly connected to the development, management and operation of the trade, business or profession of the taxpayer; or 2. Directly related to or in furtherance of the conduct of his or its trade, business or exercise or a profession;
a.
38 40

wages, and other forms of compensation for personal services actually rendered 2. A reasonable allowance for travel expenses, here and abroad 3. A reasonable allowance for rentals 4. A reasonable allowance for entertainment, amusement and recreation expenses during the taxable year

c. It must not be contrary to law, morals,

good customs, public policy or public order; d. It must not have been paid, directly or indirectly, to an official or employee of the national government, if it constitutes a bribe, kickback; e. It must be duly substantiated by adequate proof.
41

If the taxpayer is deriving income from both sale goods/properties and services, the allowable entertainment, amusement and recreation expense shall in all cases be determined based formula taking into consideration the percentage of the net sales/net revenue to the total net which in no case shall exceed the maximum percentage ceiling.
43

CEILING ON ENTERTAINMENT, AMUSEMENT, AND RECREATION EXPENSE

Actual entertainment, amusement and recreation expenses paid or incurred within the taxable year by the taxpayer, but in no case shall such deduction exceed of 1% 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% of net revenue for taxpayers engaged in sale of services, including exercise of profession and use or lease of properties.
42

APPOTIONMENT FORMULA:
NET SALES/NET REVENUE X ACTUAL EXPENSE

TOTAL NET SALES AND NET REVENUE

44

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 entertainment, amusement and recreation expense for the taxable quarter totaled to P3,000.

REPORTING
The taxpayer is hereby required to use in its financial statements and income tax return the account title entertainment, amusement and recreation expense

45

47

SHIFTING TO OTHER EXPENSES

If after verification a taxpayer is found to have shifted the amount of the entertainment, amusement and recreation expense to any other expense in order to avoid being subjected to the ceiling herein prescribed, the amount shifted shall be disallowed in its totality.

*Appointment Formula Sales of Goods (P200,000 x 0.50%) Sales of Services (P100,000 x 1%)
**Maximum Percentage Ceiling Sale of Goods (P200,000 x 0.50%) Sale of Services (P100,000 x 1%)
46

48

REQUISITES for DEDUCTABILITY of INTEREST EXPENSE:

A. These must be an indebtedness; B. There should be an interest expense paid C. The indebtedness must be that of the D. The indebtedness must be connected with

INTEREST
The amount of interest paid or incurred within the taxable year on indebtedness in connection with the taxpayer profession, trade or business shall be allowed as deduction from gross income: Provided, however, that the taxpayers otherwise allowable deduction for interest expense shall be reduced by an amount equal to the percentages of the interest income subjected to final tax:

or incurred upon such indebtedness; taxpayer;

the taxpayers trade, business or exercise of profession; E. E. The interest expense must have been paid or incurred during the taxable year;

49

51

F. The interest must have been stipulated

in writing; G. The interest must be legally due; H. The interest payment arrangement must not between related taxpayers; I. The interest must not be incurred to finance petroleum operations;
50

Fourty two percent (42%) beginning November 1, 2005 Thirty three percent (33%) beginning January 1, 2009

52

Example: Assume that a taxpayer incurred in 2006, interest expense amounting to P100,000. This is OTHERWISE ALLOWABLE DEDUCTION FOR INTEREST EXPENSE but it will be reduced by an amount equal to the prescribed percentage of interest income subjected to the final tax. Thus, if in 2006, the taxpayer received P60,000 interest income on which the final tax was withheld and remitted to the BIR by the payor of such income, then the deductible amount of interest will be computed as follows:
53

Exceptions No deduction shall be allowed in respect of interest under the following:

a) If within the taxable year an individual

taxpayer reporting income on the cash basis incurs an indebtedness on which an interest is paid in advance through discount. b) If both taxpayer and the person to whom the payment has been made or is to be made are person Between member of the family.

55

TAXES
Total interest expense P100,000 Less: 42% of P60,000 25,200 AMOUNT DEDUCTIBLE P 74,800

All taxes are deductible except: 1. 2. 3. 4. 5.

54

Income Estate Tax Energy Tax Special Assessment Tax Value Added Tax
56

LOSSES
Requisites for the deductibility of a loss. 1. The loss must be incurred in trade, profession, or business of the taxpayer; 2. It must be actually sustained within the taxable year; 3. It must be evidenced by a closed and completed transaction; 4. It must not be compensated for by insurance or other form of indemnity; and
57

Requirement for the substantiation of a loss.

The taxpayer bears the burden of proving and substantiating his claim for deduction for loss and should comply with the following substantiation requirements:
1. A sworn declaration of loss must be filed 2. Proof of the elements of the loss claimed,

within the period prescribed; and

such as the actual nature and occurrence of the event and the amount of the loss
59

NET OPERATING LOSS CARRY OVER (NOLCO)

5. The taxpayer has filed a sworn declaration

of loss within 45 days after the date of the occurrence of casualty or robbery, theft, or embezzlement. NOTE: No loss shall be allowed as a deduction if at the time of the filing of the return, if such loss has been claimed as a deduction for estate tax in the return.
58

A business or enterprise for any taxable year immediately preceding the current taxable year. Which had not been previously offset as deduction from gross income shall be carried over as a deduction from gross income for the next three (3) consecutive years immediately following the year of such loss.
60

CONDITIONS
Any net loss incurred in a taxable year during which the taxpayer was exempt from tax shall not be allowed A taxpayer: NOT Entitled to deduct a NET operating loss incurred in a taxable year during which He enjoys income tax exemption under incentive or special lows
61

4. The same must be actually charged off the

books of accounts of the taxpayer as of the end of the taxable year;

5. The same must be actually charged off the

books of accounts of the taxpayer as of the end of the taxable year;

63

Bad Debts
Requisites for valid deduction of bad debts from gross income. The requisites for deductibility of bad debts are:
1. There must be an existing indebtedness due to

DEPRECIATION
Requisites that must concur the deduction or Depreciation from Gross Income
The allowance for depreciation must be It must be for property used in the trade or It must be charged off during the taxable A statement on the allowance must be

the taxpayer which must be valid and legally demandable; 2. The same must be connected with the taxpayers trade, business or practice of profession; 3. The same must not be sustained in transaction entered into between related parties;
62

reasonable; business;

year; and

attached to the return.

64

DEPLETION
Depletion is the exhaustion of natural resources like mines and oil and gas wells as a result of production or severance from such mines or wells a result of production or severance from such mines or wells. The Formula is : 2. Treatment as deferred expenses

Deferred expenses are allowable as deduction ratably over a period of no less than 60 consecutive months beginning with the month in which the taxpayer first realizes benefits from the expenditures.

65

67

RESEARCH AND DEVELOPMENT EXPENDITURES

Methods of treating research and development The Taxpayer has the option to treat research and development expenditures under one of the following two methods
1. Currently deductible as ordinary and necessary

Pension Plan
REQUISITES FOR DEDUCTIBILITY
1. 2. 3. 4. 5. 6.

expense Research or Development expenditures paid or incurred by a taxpayer during the taxable year in connection with his trade, business or profession and are not chargeable to capital account may be deducted as expenses
66

Employer must have established a pension plan Pension plan must be reasonable or actuarially sound Funded by the employee Amount contributed by the employer must not be subject to his control Payment has not been allowable as deduction Apportioned over a period of ten (10) consecutive years beginning with the year in which the transfer in payment was made
68

CHARITABLE AND OTHER CONTRIBUTION

Corporation or association to whom contributions or gifts may be made or paid and claimed as deduction, the amount of which is subject to limitations. The limitation is 10% for individual and 5% for corporations, of the taxable income derived from trade, business or profession.
69 71

MINIMUM CORPORATE INCOME TAX

Valuation of deductible contributions

The amount of contributions of property other than money shall based on the acquisition cost of the said property. CONTRIBUTION DEDUCTIBLE IN FULL 1. Donation to the Government 2. Donation to Certain Foreign Institutions or International Organizations 3. Donation to Accredited Nongovernment organization
70

MINIMUM CORPORATE INCOME TAX ON DOMESTIC CORPORATIONS 1. Imposition of Tax A minimum

corporate income tax of two percent (2%) of the gross income as of the end of the taxable year, beginning on the fourth taxable year immediately following the year in which such corporation commenced its business
72

2. Carry Forward of Excess Minimum

Tax Any excess of the minimum corporate income tax over the normal income tax shall be carried forward and credited against the normal income tax for the three (3) immediately succeeding taxable years.
73

c) Corporations engaged in business as

depository banks under expanded foreign currency deposits system d) Firms that are taxed under a special income tax regime such as those in the PEZA law and the Bases Convention Development Act
75

Exceptions the minimum corporate income tax shall not be imposed upon any of the following:
Domestic corporations operating as

propriety educational institutions subject to tax at ten percent (10%) on their taxable income; or Domestic corporations engaged in hospital operations which are non profit subject to tax at ten (10%) on their taxable income; and
74

REVENUE REGULATIONS NO. 12 - 2007

76

The computation and the payment of MCIT, shall likewise apply at the time of filing the quarterly corporate income tax.

Amending Certain Provisions of Revenue Regulations No. 9-98 Relative to the Due Date Within Which to Pay Minimum Corporate Income Tax (MCIT) Imposed on Domestic Corporations and Resident Foreign Corporations

Thus, in the computation of the tax due for the taxable quarter, if the computed quarterly MCIT is higher than the quarterly normal income tax, the tax due to be paid for such taxable quarter at the time of filing the quarterly corporate income tax return shall be the MCIT which is two percent (2%) of the gross income as of the end of the taxable quarter. In the payment of said quarterly MCIT, excess MCIT from the previous taxable year/s shall not be allowed to be credited. Expanded withholding tax, quarterly corporate income tax payments under the normal income tax, and the MCIT paid in the previous taxable quarter/s are allowed to be applied against the quarterly MCIT due.
77 79

MINIMUM CORPORATE INCOME TAX (MCIT) ON DOMESTIC CORPORATIONS A minimum corporate income tax (MCIT) of two percent (2%) of the gross income as of the end of the taxable year (whether calendar or fiscal year, depending on the accounting period employed) is hereby imposed upon any domestic corporation beginning on the fourth (4th) taxable year immediately following the taxable year in which such corporation commenced its business operations. The MCIT shall be imposed whenever such corporation has zero or negative taxable income or whenever the amount of minimum corporate income tax is greater than the normal income tax due from such corporation.

Quarterly MCIT paid on the Quarterly Income Tax Return shall be credited against the normal income tax at year end if in the preparation and filing of the annual income tax return and in the final computation of the annual income tax due, it appears that the normal income tax due is higher than the computed annual MCIT. Moreover, in addition to the quarterly MCIT paid and quarterly normal income tax payments in the taxable quarters of the same taxable year, excess MCIT in the prior year/s (subject to the prescriptive period allowed for its creditability), expanded withholding taxes in the current year and excess expanded withholding taxes in the prior year shall be allowed to be credited against the annual income tax computed under the normal income tax rules.
80

78

If in the computation of the annual income tax due, the computed annual MCIT due appears to be higher than the annual normal income tax due, what may be credited against the annual MCIT due shall only be the quarterly MCIT payments of the current taxable quarters, the quarterly normal income tax payments in the quarters of the current taxable year, the expanded withholding taxes in the current year and excess expanded withholding taxes in the prior year. Excess MCIT from the previous taxable year/s shall not be allowed to be credited therefrom as the same can only be applied against normal income tax.
81

Gross income defined For purposes of the minimum corporate income tax means gross sales less sales returns, discounts, and allowances and cost of goods sold, in case of sale of goods, or gross revenue less sales returns, discounts, allowances and cost of services/direct cost, in case of sale of services. This rule, notwithstanding, if apart from deriving income from these core business activities there are other items of gross income realized or earned by the taxpayer during the taxable period which are subject to the normal corporate income tax, the same items must be included as part of the taxpayers gross income for computing MCIT. This means that the term gross income will also 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 described in the succeeding
83

The final comparison between the normal income tax payable by the corporation and the MCIT shall be made at the end of the taxable year and the payable or excess payment in the Annual Income Tax Return shall be computed taking into consideration corporate income tax payment made at the time of filing of quarterly corporate income tax returns whether this be MCIT or normal income tax
82

Manner of filing and payment The minimum corporate income tax (MCIT) shall be paid in the same manner prescribed for the payment of the normal corporate income tax which is on a quarterly and on a yearly basis.

84

B. Tax on Corporation Subject to Improperly

IMPROPERLY ACCUMULATED RETAINED EARNINGS

Accumulated Earnings Tax

1. In General The improperly accumulated earnings tax imposed shall apply to every corporation formed or availed for the purposes of avoiding the income tax with respect to its shareholders of the shareholders of any other corporation, by permitting earnings and profits to accumulate instead of being divided

85

87

Imposition of Improperly Accumulated Earnings Tax

A. In General In addition to other taxes

imposed, there is hereby imposed for each taxable year on the improperly accumulate taxable income of each corporation, an improperly accumulated earnings tax equal to ten percent (10%) of the improperly accumulated taxable income.

2. Exceptions The improperly accumulated earnings tax shall not apply to: a) Publicity-held corporations; b) Banks and other non-bank financial intermediaries; and c) Insurance companies

86

88

C.

Evidence of Purpose to Avoid Income Tax 1. Prima Facie Evidence the fact that any corporation is a mere holding company or investment company shall be prima facie evidence of a purpose to avoid the tax upon its shareholders of members. 2. Evidence Determinative of Purpose The Fact that the earnings or profits of a corporation are permitted to accumulate beyond the reasonable needs of the business shall be determinative of the purpose to avoid the tax upon its shareholders or members unless the corporation, by the clear.
89

Less:

Dividends actually or constructively paid ------- Pxx Income tax paid for the taxable year --------- Pxx Amount subject to improperly accumulated taxable income P

xx xxx

Rate of Tax 10% Tax on improperly accumulated Taxable Income ------------------------------ P xx

91

IMPROPERLY ACCUMULATED TAXABLE INCOME

Taxable Income P xxxx Add: Income exempt from Tax -------------P xx Income excluded from gross Income xx Income subject to Final Tax ---------- xx The amount of net operating loss carry-over deducted ----------------- xx Total additional Adjustment Pxxx Total Pxxxx
90

The following constitute accumulation of earnings for the reasonable needs of the business: Allowance for the increase in the accumulation of earnings up to 100% of the paid up capital of the corporation as of Balance Sheet date, inclusion of accumulation taken from other years. Earnings reserved for definite corporate expansion projects or programs requiring considerable capital expenditure as approved by the Board of Directors of equivalent body;

92

Time of Withholding
A. Ordinarily, the obligation of the payor to

deduct and withhold arises:

Withholding Taxes

at the time an income payment is paid or payable income payment is accrued or recorded as an expense or asset, whichever is applicable in the payors books, whichever is comes first.

The Term payable refers to the date the obligation becomes due, demandable or legally enforceable
93 95

Types of Withholding Taxes

Withholding Tax on Gross Compensation Expanded or Creditable Withholding Tax

Service Income Purchases of goods Final Withholding Tax (Passive Investment Income) Interest, Dividends, Royalties, Prizes, Winnings and Capital Gain Withholding Tax on Government Money Payment Income Tax VAT Percentage Tax Quarterly Withholding Tax Individual Engage in Business or Profession Corporation

B. When income is not yet paid or

payable but has been recorded as an expense or asset, whichever is applicable, in the payors books:

94

96

Time of Withholding
withholding tax on compensation compensation actually or constructively paid. Constructively paid when it is credited to the account of or set apart for an employee so that it may be drawn upon by him at any time although not then actually reduced to possession.
97

REVENUE REGULATIONS NO. 1-2006

Amendments of Revenue Regulations No. 2-98

99

Payees Claiming or Applying the Creditable Taxes Withheld

Individual Payee BIR Form 1701Q - Quarterly Income Tax Return BIR Form 1701 - Annual Income Tax Return Corporate Payee BIR Form 1702Q - Quarterly Corporate Income Tax Return BIR Form 1702 - Annual Income Tax Return Creditable VAT Withheld BIR Form 2550M - Monthly VAT Declaration BIR Form 2550Q - Quarterly VAT Return
98

Exemption from withholding tax on compensation

Compensation income of individuals that do not

exceed the statutory minimum wage or five thousand pesos (Php 5,000.00) per month (sixty thousand pesos [Php 60,000.00] a year), whichever is higher.

Compensation income of employees of the

government of the Philippines, or any of its political subdivisions, agencies or instrumentalities, with salary grades 1 to 3.

100

Tax Due = Tax Withheld

The aforementioned individuals whose compensation income is not subject to withholding tax shall remain liable for income taxes and shall continue to file their annual income tax returns and pay the income taxes due thereon, if any, not later than April 15 of the year immediately following the taxable year.
Example: Tax Payer Income Tax (Jan. to Dec.) Less Tax Withheld (Jan. to Nov.) Withholding Tax for December Refund Jan. 20 A B C

30,000

30,000

30,000

28,000 2,000 None

33,000 None 3,000

30,000 None None

103

101

Requirement for Deductibility

Compensation income where no income taxes were withheld shall be allowed as a deduction from an employers gross income when the required employees withholding statement have been issued to subject employees and the alphabetical list of the subject employees shall be submitted.

Requisites of Substituted Filing

The employee receives purely

compensation income (regardless of amount during the taxable year) The employee receives income only from one employer 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 employees spouse also complies with all three conditions stated above
104

102

Persons Not Qualified for Substituted Filing

Individuals deriving compensation income

Final Withholding Tax

Interest Dividend Prizes Winning Royalty Capital Gain

from two or more employers concurrently or successively at any time during the taxable year Employees deriving compensation income regardless of the amount, whether from a single or several employees during the calendar year, the income of which has not been withheld correctly
105

107

Persons Not Qualified for Substituted Filing

Individuals receiving purely compensation

INCOME SUBJECT TO CREDITABLE WITHHOLDING TAX B. Professional Fees, Talents Fees, Etc. for Services of Taxable Juridical Persons
Income Payments to Certain 1. 2. 3. 4.

10%

income from a single employer, although the income tax of which has been correctly withheld, but whose spouse is not entitled to substituted filing Non-resident aliens engaged in trade or business in the Philippines deriving purely compensation income or compensation income and other business or profession related income
106

2%

Contractors: Gen. Engineering Contractors Gen. Bldg. Contractors Specialty Contractors Other Contractors
108

Withholding Taxes Income payments to certain contractors. - Two percent (2%)

Income Payments to Customs, Insurance, Real Estate and Commercial Brokers and Agents of Professional Entertainers 10%

Computer services, computer programmers, software/program developer / designer- internet service providers

109

111

Withholding Tax on Lease of Properties

1. Real properties. - Five percent (5%) 2. Personal properties. - On gross rental or

Service Payment
Income payments to certain contractors

increased to 2% lease in excess of Ten Thousand Pesos (P10,000.00) per payment for the continued use or possession of personal property used in business: - Five percent (5%);
110

Professional fees-juridical persons to 10%

112

M. TOP 10,000 PRIVATE CORPORATIONS

REGULAR SUPPLIERS engaged in business or exercise of profession/calling at least six (6) or more transactions regardless of amount per transaction, either in the previous year or current year CASUAL SUPPLIERS Non-regular or single purchase P10,000 or more - taxable Effective upon receipt of written notice from BIR Cancellation upon receipt of written notice from BIR

REVENUE REGULATIONS NO. 2-2006

Mandatory Attachments of the Summary Alphalist of Withholding Agents of Income Payments Subjected to Tax Withheld at Source (SAWT) to Tax Returns with Claimed Tax Credits

113

115

Mandatory Submission
Hence, UNJUSTIFIABLE REFUSAL OF
A. Summary Alphalist of Withholding Agents of

SELLER-INCOME EARNER TO BE SUBJECTED TO WITHHOLDING TAX shall be a GROUND FOR MANDATORY AUDIT of his income tax liabilities (including withholding tax) upon verified complaint of the BUYER-PAYOR

Income Payments Subjected to Withholding Tax (SAWT) and Monthly Alphalist of Payees (MAP) defined Summary Alphalist of Withholding Agents / Payors of Income Payments subjected to Creditable Withholding Tax at Source (SAWT) submitted by the payee-recipient of income. Monthly Alphalist of Payees (MAP) Annex B is a consolidated alphalist of income earners from whom taxes have been withheld by the payor of income
116

114

B. Persons required to submit Summary Alphalist of

Withholding Agents of Income Payments subjected to Withholding Taxes (SAWT) SAWT in hard copy as attachment to the required tax return. Submit SAWT electronically in a 3.5 inch floppy diskette. All taxpayers required to file the EFPS, regardless of the number of withholding agents/payor of income, are strictly required to attached the electronic copy of the SAWT to the electronic return.

Thank You

117

119

MAP (Monthly Alphalist of Payees)

Reporting CWT or FWT WITHHELD ON INCOME PAYEES
1. Monthly return of creditable income taxes withheld (Form 1601E) 2. Monthly return of final income taxes withheld (Form 1601F) 3. Monthly return of VAT and other percentage taxes withheld (Form 1600)

118