Tips in Tax Filing

7/29/2019 Tips in Tax Filing

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TIPS IN TAX FILING

By:

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

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Financial Statements

Accompanying the

Income Tax Returns

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REVENUE REGULATIONS

NO. 7 - 2007Additional Procedural and / orDocumentary Requirements in Connectionwith the Preparation and Submission ofFinancial Statements Accompanying theTax Returns.

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CONTENTS AND FORMAT OF FINANCIAL

STATEMENTS TO BE ATTACHED TO THE

ANNUAL INCOME TAX RETURN OR

INFORMATION RETURN.

The account titles to be used must be specific and notcontrol accounts which must be completely enumerated inthe financial statements and these accounts must conform tothe basic framework of the financial reporting standardspromulgated by the Financial Reporting StandardsCouncil (FRSC) of the Philippines which are the

Generally Accepted Accounting Principles in thePhilippines which include Philippine AccountingStandards (PAS) and Philippine Financial ReportingStandards (PFRS) and the refinements introduced thereonin respect to certain types of industries as well as to therules and requirements of regulatory agencies that havesupervision over them such as the Securities and ExchangeCommission (SEC), Bangko Sentral ng Pilipinas (BSP),Insurance Commission IC , etc.


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The Profit and Loss Statement/Income Statementshall show separately by segment (there should beproper labeling), with breakdown of the specificaccounts, the following:

I. Sales/Revenues

II. Cost of Goods Sold (for seller of goods)/Costof 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 fullyexplained in the Notes to the Financial Statements;Items II and III should be supported by Schedules)

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COVERAGE. The Financial Statements

shall be composed of the following :

a) Balance Sheet;

b) Income Statement/Profit and Loss Statement;

c) Statement ofChanges in Equity, showing either:

All changes in equity

Changes in equity, other than those arising fromtransactions with equity holders acting in theircapacity as equity holders;

d) Statement ofCash Flow; Notes, comprising a summaryof significant accounting policies and otherexplanatory notes; and

e) Schedules attached to the afore-cited statements.

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

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It is the responsibility of the taxpayer toreflect in its books of accounts (i.e., general,subsidiary ledgers, and journals) theadopted/accepted year-end adjusting entriesmade corollary to the preparation and filingof its audited financial statements and annualincome tax returns. Correspondingly, all thenecessary working papers prepared by thetaxpayer pertinent to the year-endadjustments shall, nevertheless, be madeavailable to the investigating officers of the

Bureau upon audit and/or verification.

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RESPONSIBILITY OF EXTERNAL

AUDITORS

the independent CPA who audited the recordsand certified the financial statements of thetaxpayer, equally as the taxpayer, has theresponsibility to maintain and preserve copiesof the audited and certified financialstatements for a period of three (3) years fromthe due date of filing the annual income taxreturn or the actual date of filing thereof,whichever comes later.


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REVENUE REGULATIONS NO.

8-2007

Additional Compliance Requirements of

Concerned Taxpayers in the Light of

Mandatory Adoption of the Philippine

Financial Reporting Standards.

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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.

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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.

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Reconciliation of Net

Income per Financial

Statement to TaxableIncome


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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)

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BOARD OF ACCOUNTANCY

CHECKLIST OF REQUIREMENTS FOR

REGISTRATION OF INDIVIDUAL

CPA/FIRMS/PARTNERSHIPS IN

ACCORDANCE WITH RULES AND

REGULATIONS IMPLEMENTINGREPUBLIC ACT NO. 9298 OTHERWISE

KNOWN AS THE PHILIPPINE

ACCOUNTANCY ACT OF 2004

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1. BACC Form No. 02 duly accomplished in

three copies and properly notarized. (affixmetered documentary stamp to the originalcopy).

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 identificationcard(s) of individual CPA sole proprietor,

partners and staff member(s).4. Code of Good Governance of the

individual CPA, Firm on Partnership.

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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.


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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

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Revenue Regulations No. 1-2006

(June 15, 2006)

ACCREDITATION AS

TAX AGENTS

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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.

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A. Tax Agents or Tax Practitioners

Those who are engaged in the regular

preparation, certification, audit and filing of

tax returns, information returns or other

statements.


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The accreditation requirements shallspecifically apply to the following:

a) Individual tax practitioners engaged inprivate practice who are Certified PublicAccountants (CPA); CPA-Lawyers

b)Partners of a General ProfessionalPartnership engaged in the practice oftaxation, accountancy, and/or auditing;

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B. Exceptions

a) Individual taxpayers acting on their

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;

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B. Exceptions

c) Other individuals presenting satisfactory proof ofidentification or authority in any one of thefollowing :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 employer-corporation, association or organized group;

d) A trustee, receiver, guardian, administrator,executor

e) An officer or a regular employee of a

government unit, agency, or instrumentalityrepresenting said unit,

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Minimum Qualifications of

Applications

A. For Individual Tax Agents (other than a member

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, hemust 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


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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.

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SECURITIES AND EXCHANGE

COMMISSION

Accreditation and Reportorial

Requirements of Auditing Firm

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Auditing Firm (SEC Form AuF-002)

1. Photocopy of Privilege Tax Certificate.

2. Certificate of Registration issued by BOA/PRCto the firm which is current and effective.

3. Pro forma Audit Engagement Letter.

4. Summary of Contracts/agreements with auditclients involving services other than statutoryaudit of Financial Statements.

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5. Notarized Certification in compliance withSections 5.2 and 8.1 of the Circular.

6. Quality Assurance Manual.

7. Copy of the firms Audited FinancialStatements for immediately preceding two

(2) years.

8. Undertaking to preserve working papersfor a period of seven (7) years and makingthem available to the Commissionsrepresentatives when required to do so.


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Filling of Returns1. Filling of tentative Income Tax

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

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DEDUCTIONS FROM

GROSS INCOME

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THERE ARE ELEVEN CATEGORIES OF

DEDUCTIONS WHICH MAY BE BROADLYCLASSIFIED INTO THOSE THAT ARE:

A. Connected with the taxpayers trade orbusiness (business related deductions).

1. Expenses 6. Depreciation

2. Interest 7. Depletion

3. Taxes 8. Research and4. Losses Development

5. Bad Debts 9. Contributions topension trusts

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B. Not connected with the taxpayers tradeof business (non-business deductions).

10. Charitable and other contributions

11. Optional standard deduction

12. Premium payment on health and/or

hospitalization insurance.


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DEDUCTIONA 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.

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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)/FinancialStatements.

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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.

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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,


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BRIBES, KICKBACKS KICKBACKS PAID TO A PRIVATE

CORPORATION, GENERALPROFESSIONAL PARTNERSHIP.

The expenses must be duly substantiated.No deduction will be allowed from grossincome UNLESS IT IS SUBSTANTIATEDWITH SUFFICIENT EVIDENCE, SUCHAS OFFICIAL RECEIPTS OR OTHERADEQUATE RECORDS,

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Reasonable Expenses

1. A reasonable allowance for salaries,

wages, and other forms of compensation

for personal services actually rendered

2. A reasonable allowance for travel

expenses, here and abroad3. A reasonable allowance for rentals

4. A reasonable allowance for entertainment,

amusement and recreation expenses

during the taxable year

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REVENUE REGULATIONS NO. 10-2002Authorizing the Imposition of a Ceiling on

Entertainment, Amusement and RecreationalExpense

Coverage:

Individuals engaged in business, includingtaxable estates and trusts;

Individuals engaged in the practice ofprofession;

Domestic corporations

Resident Foreign Corporations

General Professional Partnership

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REQUISITES OF DEDUCTIBILITY OF

ENTERTAINMENT, AMUSEMENT

AND RECREATION EXPENSES

a. 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;


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c. It must not be contrary to law, morals,good customs, public policy or publicorder;

d. It must not have been paid, directly orindirectly, to an official or employee ofthe national government, if it constitutesa bribe, kickback;

e. It must be duly substantiated byadequate proof.

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CEILING ON ENTERTAINMENT,

AMUSEMENT, AND RECREATION EXPENSE

Actual entertainment, amusement andrecreation expenses paid or incurred withinthe taxable year by the taxpayer, but in nocase shall such deduction exceed of 1% ofnet sales (i.e., gross sales less sales

returns/allowances and sales discounts) fortaxpayers engaged in sale of goods or

properties; or 1% of net revenue for taxpayersengaged in sale of services, including exerciseof profession and use or lease of properties.

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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.

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APPOTIONMENT FORMULA:

NET SALES/NET REVENUE X ACTUAL EXPENSE

TOTAL NET SALES AND NET REVENUE


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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.

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*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%)

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REPORTING

The taxpayer is hereby required to use in

its financial statements and income tax

return the account title entertainment,

amusement and recreation expense

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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 hereinprescribed, the amount shifted shall be

disallowed in its totality.


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REQUISITES for DEDUCTABILITY of

INTEREST EXPENSE:

A. These must be an indebtedness;B. There should be an interest expense paid

or incurred upon such indebtedness;C. The indebtedness must be that of the

taxpayer;D. The indebtedness must be connected with

the taxpayers trade, business or exerciseof profession;

E. E. The interest expense must have beenpaid or incurred during the taxable year;

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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;

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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:

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Fourty two percent (42%) beginning

November 1, 2005

Thirty three percent (33%) beginning

January 1, 2009


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Example:

Assume that a taxpayer incurred in 2006, interestexpense amounting to P100,000. This isOTHERWISE ALLOWABLE DEDUCTION FORINTEREST EXPENSEbut it will be reduced by anamount equal to the prescribed percentage of interestincome subjected to the final tax. Thus, if in 2006,the taxpayer received P60,000 interest income onwhich the final tax was withheld and remitted to theBIR by the payor of such income, then thedeductible amount of interest will be computed asfollows:

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Total interest expense P100,000

Less: 42% of P60,000 25,200

AMOUNT DEDUCTIBLE P 74,800

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ExceptionsNo deduction shall be allowed in respect ofinterest under the following:

a) If within the taxable year an individualtaxpayer reporting income on the cash

basis incurs an indebtedness on which aninterest is paid in advance throughdiscount.

b) If both taxpayer and the person to whomthe payment has been made or is to bemade are person

Between member of the family.

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TAXES

All taxes are deductible except:

1. Income

2. Estate Tax

3. Energy Tax4. Special Assessment Tax

5. Value Added Tax


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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

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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.

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Requirement for the substantiation of a

loss.

The taxpayer bears the burden of proving andsubstantiating his claim for deduction forloss and should comply with the followingsubstantiation requirements:

1. A sworn declaration of loss must be filedwithin the period prescribed; and

2. Proof of the elements of the loss claimed,such as the actual nature and occurrenceof the event and the amount of the loss

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NET OPERATING LOSS CARRY

OVER (NOLCO)

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 adeduction from gross income for the next

three (3) consecutive years immediately

following the year of such loss.


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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

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Bad Debts

Requisites for valid deduction of bad debts fromgross income. The requisites for deductibilityof bad debts are:

1. There must be an existing indebtedness due to

the taxpayer which must be valid and legallydemandable;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;

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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;

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DEPRECIATION

Requisites that must concur the deduction orDepreciation from Gross Income

The allowance for depreciation must bereasonable;

It must be for property used in the trade orbusiness; It must be charged off during the taxable

year; andA statement on the allowance must be

attached to the return.


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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 :

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RESEARCH AND DEVELOPMENT

EXPENDITURES

Methods of treating research and developmentThe Taxpayer has the option to treat research and

development expenditures under one of thefollowing two methods

1. Currently deductible as ordinary and necessaryexpense

Research or Development expenditures paidor incurred by a taxpayer during the taxableyear in connection with his trade, business orprofession and are not chargeable to capitalaccount may be deducted as expenses

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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.

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Pension Plan

REQUISITES FOR DEDUCTIBILITY

1. Employer must have established a pension plan2. Pension plan must be reasonable or actuarially

sound3. Funded by the employee

4. Amount contributed by the employer must notbe subject to his control5. Payment has not been allowable as deduction6. Apportioned over a period of ten (10)

consecutive years beginning with the year inwhich the transfer in payment was made


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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.

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Valuation of deductible contributions

The amount of contributions of property otherthan money shall based on the acquisitioncost of the said property.

CONTRIBUTION DEDUCTIBLE IN FULL

1. Donation to the Government2. Donation to Certain Foreign Institutions or

International Organizations3. Donation to Accredited Nongovernment

organization

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MINIMUM CORPORATE

INCOME TAX

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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 immediatelyfollowing the year in which such

corporation commenced its business


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2. Carry Forward of Excess MinimumTax Any excess of the minimumcorporate income tax over the normalincome tax shall be carried forwardand credited against the normalincome tax for the three (3)immediately succeeding taxableyears.

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Exceptions the minimum corporate incometax shall not be imposed upon any of thefollowing:

Domestic corporations operating aspropriety educational institutions subject to

tax at ten percent (10%) on their taxableincome; or

Domestic corporations engaged in hospitaloperations which are non profit subject totax at ten (10%) on their taxable income;and

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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

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REVENUE REGULATIONS

NO. 12 - 2007


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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

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MINIMUM CORPORATE INCOME TAX

(MCIT) ON DOMESTIC CORPORATIONS

A minimum corporate income tax (MCIT) of twopercent (2%) of the gross income as of the end of thetaxable year (whether calendar or fiscal year,depending on the accounting period employed) ishereby imposed upon any domestic corporationbeginning on the fourth (4th) taxable yearimmediately following the taxable year in whichsuch corporation commenced its business operations.The MCIT shall be imposed whenever suchcorporation has zero or negative taxable income orwhenever the amount of minimum corporate incometax is greater than the normal income tax due fromsuch corporation.

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The computation and the payment of MCIT, shalllikewise apply at the time of filing the quarterlycorporate income tax.

Thus, in the computation of the tax due for the taxablequarter, if the computed quarterly MCIT is higher thanthe quarterly normal income tax, the tax due to be paidfor such taxable quarter at the time of filing the quarterlycorporate income tax return shall be the MCIT which istwo percent (2%) of the gross income as of the end of thetaxable 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 thenormal income tax, and the MCIT paid in the previoustaxable quarter/s are allowed to be applied against thequarterly MCIT due.

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Quarterly MCIT paid on the Quarterly Income TaxReturn shall be credited against the normal incometax at year end if in the preparation and filing of theannual income tax return and in the finalcomputation of the annual income tax due, it appearsthat the normal income tax due is higher than thecomputed annual MCIT. Moreover, in addition to thequarterly MCIT paid and quarterly normal incometax payments in the taxable quarters of the same

taxable year, excess MCIT in the prior year/s(subject to the prescriptive period allowed for itscreditability), expanded withholding taxes in thecurrent year and excess expanded withholding taxesin the prior year shall be allowed to be creditedagainst the annual income tax computed under thenormal income tax rules.


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If in the computation of the annual income tax

due, the computed annual MCIT due appearsto be higher than the annual normal incometax due, what may be credited against theannual MCIT due shall only be the quarterlyMCIT payments of the current taxablequarters, the quarterly normal income tax

payments in the quarters of the current taxableyear, the expanded withholding taxes in thecurrent year and excess expanded withholdingtaxes in the prior year. Excess MCIT from the

previous taxable year/s shall not be allowed tobe credited therefrom as the same can only be

applied against normal income tax.

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The final comparison between thenormal income tax payable by thecorporation and the MCIT shall be madeat the end of the taxable year and the

payable or excess payment in the AnnualIncome Tax Return shall be computedtaking into consideration corporate

income tax payment made at the time offiling of quarterly corporate income taxreturns whether this be MCIT or normalincome tax

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Gross incomedefined For purposes of the minimum

corporate income tax means gross sales less salesreturns, discounts, and allowances and cost of goodssold, in case of sale of goods, or gross revenue less salesreturns, discounts, allowances and cost of services/directcost, in case of sale of services. This rule,notwithstanding, if apart from deriving income fromthese core business activities there are other items ofgross income realized or earned by the taxpayer duringthe taxable period which are subject to the normalcorporate income tax, the same items must be includedas part of the taxpayers gross income for computingMCIT. This means that the term gross income willalso include all items of gross income enumerated underSection 32(A) of the Tax Code, as amended, exceptincome exempt from income tax and income subject to

final withholding tax described in the succeeding

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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.


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IMPROPERLY

ACCUMULATED RETAINED

EARNINGS

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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 taxequal to ten percent (10%) of the

improperly accumulated taxable income.

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B. Tax on Corporation Subject to ImproperlyAccumulated Earnings Tax

1. In General The improperly accumulatedearnings tax imposed shall apply to everycorporation formed or availed for thepurposes of avoiding the income tax withrespect to its shareholders of the shareholdersof any other corporation, by permittingearnings and profits to accumulate instead ofbeing divided

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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


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C. Evidence of Purpose to Avoid Income Tax

1. Prima Facie Evidence the fact that anycorporation is a mere holding company orinvestment company shall be prima facieevidence of a purpose to avoid the tax uponits shareholders of members.

2. Evidence Determinative of Purpose TheFact that the earnings or profits of acorporation are permitted to accumulatebeyond the reasonable needs of the businessshall be determinative of the purpose to avoidthe tax upon its shareholders or membersunless the corporation, by the clear.

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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

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Less:Dividends actually

or constructively paid ------- PxxIncome tax paid

for the taxable year --------- Pxx xxAmount subject to improperlyaccumulated taxable income P xxx

Rate of Tax 10%

Tax on improperly accumulatedTaxable Income ------------------------------ P xx

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The following constitute accumulation ofearnings for the reasonable needs of the

business:

Allowance for the increase in theaccumulation of earnings up to 100% ofthe paid up capital of the corporation asof Balance Sheet date, inclusion of

accumulation taken from other years.

Earnings reserved for definite corporateexpansion projects or programs requiringconsiderable capital expenditure asapproved by the Board of Directors ofequivalent body;


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Withholding Taxes

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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

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Time of WithholdingA. Ordinarily, the obligation of the payor to

deduct and withhold arises:

at the time an income payment is paid orpayable

income payment is accrued or recorded as anexpense or asset, whichever is applicable inthe payors books, whichever is comes first.

The Term payable refers to the date theobligation becomes due, demandable orlegally enforceable

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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:


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Time of Withholdingwithholding tax on compensation

compensation actually or

constructively paid.

Constructively paid when it is credited to theaccount of or set apart for an employee sothat it may be drawn upon by him at anytime although not then actually reduced to

possession.

98

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 TaxReturn

BIR Form 1702 - Annual Income Tax Return

Creditable VAT Withheld

BIR Form 2550M - Monthly VAT Declaration

BIR Form 2550Q - Quarterly VAT Return

99

REVENUE REGULATIONS

NO. 1-2006

Amendments of Revenue Regulations

No. 2-98

100

Exemption from withholding tax on

compensation Compensation income of individuals that do not

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

Compensation income of employees of thegovernment of the Philippines, or any of itspolitical subdivisions, agencies orinstrumentalities, with salary grades 1 to 3.


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101

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.

102

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 thealphabetical list of the subject employees shall

be submitted.

103

Tax Due = Tax Withheld

None

None

30,000

30,000

C

None

3,000

2,000

None

Withholding Tax for

December

Refund Jan. 20

33,00028,000

Less Tax

Withheld (Jan. to

Nov.)

30,00030,000

Income Tax

(Jan. to Dec.)

BATax Payer

Example:

104

Requisites of Substituted Filing

The employee receives purelycompensation income (regardless of amountduring the taxable year)

The employee receives income only fromone employer during the taxable year

The amount of tax due from the employeeat the end of the year equals the amount oftax withheld by the employer

The employees spouse also complies withall three conditions stated above


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105

Persons Not Qualified for

Substituted Filing Individuals deriving compensation income

from two or more employers concurrentlyor successively at any time during thetaxable year

Employees deriving compensation incomeregardless of the amount, whether from asingle or several employees during thecalendar year, the income of which has not

been withheld correctly

106

Persons Not Qualified for

Substituted Filing

Individuals receiving purely compensationincome from a single employer, althoughthe income tax of which has been correctlywithheld, but whose spouse is not entitled tosubstituted filing

Non-resident aliens engaged in trade orbusiness in the Philippines deriving purelycompensation income or compensationincome and other business or professionrelated income

107

Final Withholding Tax Interest

Dividend

Prizes

Winning

Royalty

Capital Gain

108

INCOME SUBJECT TO CREDITABLE

WITHHOLDING TAX

2% Income Payments to Certain

Contractors:

1. Gen. Engineering Contractors

2. Gen. Bldg. Contractors

3. Specialty Contractors

4. Other Contractors

10%B. Professional Fees, Talents Fees, Etc.

for Services of Taxable Juridical Persons


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109

10%Income Payments to Customs,

Insurance, Real Estate and

Commercial Brokers and

Agents of Professional

Entertainers

110

Withholding Tax on Lease of

Properties

1. Real properties. - Five percent (5%)

2. Personal properties. - On gross rental or

lease in excess of Ten Thousand Pesos

(P10,000.00) per payment for thecontinued use or possession of personal

property used in business: - Five percent

(5%);

111

Withholding Taxes Income payments to

certain contractors. - Two percent (2%)

Computer services, computer

programmers, software/program

developer / designer- internet service

providers

112

Service Payment

Income payments to certain contractors

increased to 2%

Professional fees-juridical persons to 10%


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113

M. TOP 10,000 PRIVATE

CORPORATIONS

REGULAR SUPPLIERS

engaged in business or exercise ofprofession/calling at least six (6) or moretransactions regardless of amount

per transaction, either in the previous year orcurrent 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 fromBIR

114

Hence, UNJUSTIFIABLE REFUSAL 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

115

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

116

Mandatory Submission

A. Summary Alphalist of Withholding Agents ofIncome 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-recipientof income.

Monthly Alphalist of Payees (MAP) AnnexB is a consolidated alphalist of incomeearners from whom taxes have beenwithheld by the payor of income


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117

B. Persons required to submit Summary Alphalist ofWithholding Agents of Income Paymentssubjected to Withholding Taxes (SAWT)

SAWT in hard copy as attachment to therequired tax return.

Submit SAWT electronically in a 3.5 inchfloppy diskette.

All taxpayers required to file the EFPS,regardless of the number of withholdingagents/payor of income, are strictly requiredto attached the electronic copy of the SAWT

to the electronic return.

118

MAP

(Monthly Alphalist of Payees)Reporting CWT or FWT WITHHELD ON

INCOME PAYEES

1. Monthly return of creditable income taxeswithheld (Form 1601E)

2. Monthly return of final income taxeswithheld (Form 1601F)

3. Monthly return of VAT and other percentagetaxes withheld (Form 1600)

119

Thank You

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