income tax part ii
DESCRIPTION
income taxation for corporation in the philippinesTRANSCRIPT
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What is a corporation?
Corporation – is an artificial being created by law, having the rights of succession and the powers, attributes and properties authorized by law or incident to its existence.
For taxation purposes, corporation shall include –
Partnerships
Joint-stock companies
Joint accounts
Associations
Insurance companies
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A corporation does not include –
General Professional Partnership
Joint venture or consortium formed for the purpose of undertaking construction projects or engaging in petroleum, coal, geothermal and other energy operations pursuant to an operating or consortium agreement under a service contract with the government
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Classification of Corporation
1.) Domestic corporation - is one created or organized in the
Philippines or under its laws. (Sec.22 (C),NIRC)
2.) Foreign corporation - Those that were formed, organized
orexisting under any law other than those of the Phils. irrespective of
the nationality of its stockholders.
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Foreign Corporation
Foreign corporations are either –
A. Resident foreign - Foreign corporation engaged in trade or business within the Phil. Generally, it establishes branch or an office for the purpose of doing business or trade.
Corporations may be subjected to the following taxes:
1. Normal Corporate Income Tax (NCIT)2. Minimum Corporate Income Tax
(MCIT)3. Gross Income Tax (GIT)4. Capital Gains Tax on sale of real
property or on sale of shares of stock (CGT)
5. Final Tax on Passive income (FT)
Tax Rate Effectivity Basis
34%
33%
32%
35%
30%
Jan 1, 1998
Jan 1, 1999
Jan 1, 2000
Nov 1, 2005
Jan 1, 2009
RA 8424
RA 8424
RA 8424
RA 9337
RA 9337
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Evolution of Corporate Income Tax Rate
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Taxability of Corporations (RA 9337)
Income In General Domestic Resident Foreign
Non-Res. Foreign
All income derived from sources within or outside the Phils.
30% (Net
Taxable Income)
-- --
All income derived from sources within the Phils.
30%(Net
Taxable Income)
30%(Gross
Income)
Optional Corporate Tax Rate 15%(Gross
Income)
15%(Gross
Income) ---
Minimum Corporate Income Tax(MCIT)
2%(Gross
Income)
2%(Gross Income
)
--
The Normal Corporate Income Tax BIR Form 1702 (General Format for Income tax computation on business income)
Sales/ Revenues/ Fees from within and without P xxx
Less: Sales returns, allow., and disc. (if any) P xxx
Cost of Sales xxx xxx
Gross Income from operation P xxx
Add: Non-operating and other income not subjected to final tax or capital gains tax
xxx
Gross Income xxx
Less: Allowable itemized business deductions xxx
Net Taxable Income xxx
Multiply by Normal Corporate Income Tax Rate 30%
Normal Corporate Income Tax xxx ===
Mara Clara Inc. is a domestic corporation engaged in the retail of various household merchandise. For TY 2010, the company had the following account balances:
Sample Problem:
Cost of Sales P 400,000.00Sales Returns allowance and disc.
50,000.00 Administrative Expense 230,000.00Depreciation Expense 20,000.00Rental Expense 100,000.00Light and Water Expense 50,000.00Rental Income 100,000.00Sales 1,050,000.00
Compute for the Normal Income Tax Due:
Solution:Sales/ Revenues P1,050,000.
00
Less: Sales Rets., Allow. & Disc.
50,000.00
Cost of Sales 400,000.00 450,000.00
Gross Income from operation 600,000.00
Add: Non-operating and other income not subjected to Final tax or capital gains tax
100,000.00
Gross Income 700,000.00
Less: Itemized business deductions
400,000.00
Net Taxable Income 300,000.00
X Normal Corp. Income Tax Rate
30%
Normal Corporate Income Tax P90,000.00 =======
How much is the Normal Corporate Income Tax if Mara Clara, Inc. is:
1. A Resident Foreign Corporation?2. A Non-Resident Foreign
Corporation?
Answer: 1. ___________________ 2. ____________________
Sec. 27(E) and 28 (A)(2) of the NIRC:Imposed on:
Domestic & Res. Foreign
2 % on Gross Inc.
if: - in the 4th year of operation - net loss/zero taxable inc./ MCIT is greater than NCIT
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For sale of goods : Gross sales 1,000,000.00 Less: Sales Ret., Disc & Allow. 25,000.00 Cost of Goods Sold 500,000.00 Gross Income from operation 475,000.00 Add: Other Income not subject to Final Tax or Capital Gains Tax 100,000.00 Total Gross Income subject to MCIT 575,000.00 ========
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Gross income include all items of gross income
enumerated under Section 32(A) of the Tax Code, as amended, except income exempt from income tax and income subject to final withholding tax.
“Gross sales” shall include only sales contributory to
income taxable under Sec. 27(A) of the Code.
“Cost of goods sold” shall include all business expenses directly incurred to produce the merchandise to bring them to their present location and use
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For sale of services
Gross Revenue P 5,000,000.00Less: Cost of services 950,000.00Gross Income 4,050,000.00Add: Other Income not subject to Final Tax or Cap.Gains Tax ___ --____ Total Gross Income 4,050,000.00 =========
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“Gross Revenue” shall include income from sale of services, likewise, taxable under Sec. 27(A).
“Cost of Services or Direct Cost of Services” shall include business expenses directly
incurred or related to the gross revenue from rendition of services.
Bungga-Bungga Corporation has been operating since January 1, 2006. Data pertinent to its operations covering 2008 to 2010 are as follows:
Determine the appropriate income tax of Bungga-Bungga Corporation.
Illustration:
2008 2009 2010
Gross Sales 3,080,00
0
4,100,00
0
5,200,000
Sales Ret., Disc. & Allow.
80,000
100,000 200,000
Cost of Sales 1,500,000
2,000,000
2,500,000
Operating Expenses 1,450,000
1,900,000
2,100,000
1. Computation of Normal Corporate Income Tax(NCIT):
2008 2009 2010
Gross Sales 3,080,000 4,100,000 5,200,000
Sales Ret., Disc. & Allow.
80,000 100,000 200,000
Net Sales 3,000,000 4,000,000 5,000,000
Cost of Sales 1,500,000 2,000,000 2,500,000
Gross Income 1,500,000 2,000,000 2,500,000
Operating Expenses 1,450,000 1,900,000 2,100,000
Net Taxable Income 50,000 100,000 400,000
X Normal Corp. Tax rate 35% 30% 30%
Normal Corp. Income Tax 17,500 30,000 120,000
2. Computation of Minimum Corporate Income Tax (MCIT)
Note: The MCIT for TY 2008 is not applicable because the company has not yet reached its fourth year
2009 2010Gross Income 2,000,000 2,500,000X MCIT rate 2% 2%MCIT 40,000 50,000
3. Determination of Income tax due and payable:
2008 2009 2010
NCIT or MCIT, w/ever is higher
17,500 40,000 120,000
Less: Excess of MCIT over NCIT
10,000
Income Tax Due and Payable
17,500 40,000 110,000
2008 2009 2010
NCIT 17,500 30,000 120,000
MCIT Not Applicable
40,000 50,000
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Excess of MCIT over normal income tax shall be carried forward on an annual basis and credited against the normal income tax for the 3 immediately succeeding taxable years
Excess MCIT can only be credited against the income tax due if the normal income tax is higher than the MCIT
Carry forward of Excess MCIT
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Excess MCIT which has not or cannot be so credited against the normal income tax due for the 3-year period shall lose its credibility
Excess MCIT cannot be claimed as a credit against the MCIT itself or against any other losses
Carry forward of Excess MCIT
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Carry forward of Excess MCIT (cont.)
The final comparison between the normal income tax payable and the MCIT shall be made at the end of the taxable year
The payable or excess payment in the Annual Income Tax Return shall be computed taking into consideration income tax payment made at the time of filing of quarterly income tax returns whether this be MCIT or normal income tax
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Normal Income Tax (NIT) is higher than MCIT
MCIT is higher than Normal Income Tax
Excess MCIT from prior year can be deducted from the NIT due
Excess withholding tax from prior year can be deducted from the NIT due
Excess MCIT from prior years cannot be deducted from the MCIT due
Excess withholding tax from prior year can be deducted from the MCIT due
Rules on crediting of tax payments & taxes withheldAnnual Computation
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Normal Income Tax (NIT) is higher than MCIT
MCIT is higher than Normal Income Tax
Quarterly taxes withheld can be credited from the NIT due
Quarterly income tax payments whether Normal Income Tax or MCIT can be deducted from the NIT due
Quarterly taxes withheld can be credited from the MCIT due
Quarterly income tax payments whether MCIT or Normal Income Tax can be deducted from the MCIT due
Rules on crediting of tax payments & taxes withheldAnnual Computation
Note: The final comparison between the NIT and MCIT shall be made at the end of the taxable year
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Normal Income Tax (NIT)is higher than MCIT
MCIT is higher than Normal Income Tax
Excess MCIT from prior year can be deducted from the quarterly NIT due
Excess withholding tax from prior year can be deducted from the quarterly NIT due
Excess MCIT from prior year cannot be deducted from the quarterly MCIT due
Excess withholding tax from prior year can be deducted from the quarterly MCIT due
Rules on crediting of tax payments & taxes withheld (cont.)
Quarterly computation
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Normal Income Tax (NIT)is higher than MCIT
MCIT is higher than Normal Income Tax
Quarterly taxes withheld can be credited from the quarterly NIT due
Payment from previous quarters of the taxable year can be deducted from the cumulative tax due (whether NIT or MCIT)
Quarterly taxes withheld can be credited from the quarterly MCIT due
Payment from previous quarters of the taxable year can be deducted from the cumulative tax due (whether NIT or MCIT)
Rules on crediting of tax payments & taxes withheld (cont.)
Quarterly computation
Note: Quarterly comparison to determine whichever is higher between the NIT and MCIT shall be done on a cumulative basis
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Panday Corporation’s computed normal income tax and MCIT, and creditable income taxes withheld from 1st to 4th quarters including excess MCIT and excess withholding taxes from prior year/s are as follows: Excess Excess Normal Taxes MCIT W/tax Qtr. Inc. Tax MCIT Withheld Prior Years Prior Years
1st 100,000 80,000 20,000 30,000 10,0002nd 120,000 250,000 30,0003rd 250,000 100,000 40,0004th 200,000 100,000 35,000
Illustration 1 - Normal income tax at year end is higher than MCIT
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Computation
1st Quarter
Quarterly corporate income tax due (higher amount between normal income tax and MCIT) – normal income tax P100,000Less : Taxes Withheld – Prior Year 10,000 Taxes Withheld – 1st qtr 20,000 Excess MCIT prior year 30,000 60,000
Net Income Tax Due , 1st quarter – normal income tax P 40,000
=======
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2nd Quarter
Excess Excess Normal Taxes MCIT W/taxQtr. Inc. Tax MCIT Withheld Prior Years Prior Years
1st 100,000 80,000 20,000 30,000 10,000 2nd 120,000 250,000 30,000Total 220,000 330,000 50,000
====== ====== =====
Computation (cont.)
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Quarterly corporate income tax due (higher amount between normal income tax and MCIT) – MCIT P330,000
Less : Taxes Withheld – Prior Year 10,000 Taxes Withheld – 1st qtr 20,000 Taxes Withheld – 2nd qtr 30,000 Net income tax payment – 1st qtr 40,000 100,000
Net Income Tax Due , 2nd quarter – MCIT P230,000 =======
Computation (cont.)
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3rd Quarter
Excess Excess Normal Taxes MCIT W/taxQtr. Inc. Tax MCIT Withheld Prior Years Prior Years
1st 100,000 80,000 20,000 30,000 10,0002nd 120,000 250,000 30,0003rd 250,000 100,000 40,000Total 470,000 430,000 90,000
====== ====== ======
Computation (cont.)
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Quarterly corporate income tax due (higher amount between normal income tax and MCIT) – Normal Income Tax P470,000
Less : Taxes Withheld – Prior Year 10,000 Taxes Withheld – 1st qtr 20,000 Taxes Withheld – 2nd qtr 30,000 Taxes Withheld – 3rd qtr 40,000 Net income tax payment – 1st qtr 40,000 MCIT paid in the 2nd quarter 230,000 Excess MCIT in prior year 30,000 400,000 Net Income Tax Due , 3rd quarter – Normal Income Tax P 70,000
=======
Computation (cont.)
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Annual Income Tax (NIT)
Excess Excess Normal Taxes MCIT W/tax Qtr. Inc.Tax MCIT W/held Prior Years Prior Years
1st 100,000 80,000 20,000 P30,000 10,000 2nd 120,000 250,000 30,000 3rd 250,000 100,000 40,000 4th 200,000 100,000 35,000 Total 670,000 530,000 125,000
====== ====== ======
Computation (cont.)
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Annual corporate income tax due (higher amount between normal income tax and MCIT) – Normal Income Tax P670,000
Less : Taxes Withheld – Prior Year 10,000 Taxes Withheld – 1st qtr 20,000 Taxes Withheld – 2nd qtr 30,000 Taxes Withheld – 3rd qtr 40,000 Taxes Withheld – 4th qtr 35,000 Net income tax payment – 1st qtr 40,000 Net income tax payment – 3rd qtr 70,000 MCIT paid in the 2nd quarter 230,000 Excess MCIT in prior year 30,000 505,000
Annual Net Income Tax Due – NCIT P 165,000 =======
Computation (cont.)
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Illustration 2 - MCIT at year end is higher than the normal income tax
Excess Excess Normal Taxes MCIT W/taxQtr. Inc. Tax MCIT Withheld Prior Years Prior Years
1st 100,000 80,000 20,000 30,000 10,0002nd 120,000 250,000 30,0003rd 250,000 100,000 40,0004th 50,000 120,000 35,000 Total 520,000 550,000 125,000
====== ====== ======
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Annual Income Tax (MCIT)
Annual corporate income tax due (higher amount between normalincome tax and MCIT) – MCIT P550,000
Less : Taxes Withheld – Prior Year 10,000 Taxes Withheld – 1st qtr 20,000 Taxes Withheld – 2nd qtr 30,000 Taxes Withheld – 3rd qtr 40,000 Taxes Withheld – 4th qtr 35,000 Net income tax payment – 1st qtr 40,000 Net income tax payment – 3rd qtr 70,000 MCIT paid in the 2nd quarter 230,000 475,000Annual Net Income Tax Due – MCIT P 75,000
=======
Computation
Any excess of the MCIT over the normal income tax as computed under Sec. 27(A) shall be carried forward on an annual basis and credited against the normal income tax for the three (3) immediately succeeding years.
The excess MCIT cannot be claimed as a credit against the MCIT itself or against any other losses.
Illustration 3: - Carry forward of excess MCIT
YEAR NORMAL IT MCIT EXCESS2004 25,000.00 2008 130,000.00 2009 200,000.00 2010 150,000.002011 100,000.00 250,000.00 150,000.00 2002 125,000.00 100,000.00 25,000.00 2013 8,000.00 5,000.00 3,000.00 2014 5,000.00 4,000.00 1,000.002015 100,000.00 98,000.00 2,000.00
Illustration:
2012 2013 2014 2015
NCIT or MCIT 125T 8T 5T 100T
Less: Excess of MCIT 125T 8T 5T -_
Income tax - - - 100T
==== === === ====
For 2011
Provision for Income tax P250,000 Income Tax Payable
P250,000 To record Income Tax
liability - normal rate.
Deferred Charges – MCIT P150,000 Income tax payable
P150,000 To record excess MCIT
Accounting Entries
Income Tax Payable P250,000 Cash in Bank P250,000 To record payment of income tax due
for 2011.
For year 2012Provision for Income Tax P125,000 Income Tax Payable
P125,000 To record IT liability using the normal
rate.
Accounting Entries
Income Tax Payable P125,000 Deferred Charges-MCIT P125,000
To record application of excess MCIT
against normal IT for year 2012.
For 2013 Provision for Income Tax P8,000 Income Tax Payable P8,000 To record IT liability using the normal
rate.
Accounting Entries
For 2013Income Tax Payable P8,000 Deferred Charges-MCIT P8,000
To record application of excess MCIT against normal IT for year 2013.
For 2015Retained Earnings P12,000 Deferred Charges-MCIT P12,000 To record the expired portion of the Deferred Charges-MCIT
Accounting Entries
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Suspension of MCIT
Instances when MCIT may be suspended Substantial losses on account of –
Prolonged labor dispute Force majeure Legitimate business reverses
Who may suspend Secretary of Finance upon recommendation of
the CIR
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Suspension of MCIT Required documentation
Submission of proof by the corporation Duly verified by the CIR’s duly authorized
representative
Definition of Terms
Substantial losses from prolonged labor dispute – Losses arising from strike which lasted for more than 6 months and which ahs caused the temporary shutdown of business operations
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Definition of Terms
Force majeure – Cause due to an irresistible force as by “act of God” like lightning, earthquake, storm, flood. Also includes armed conflicts such as war or insurgency
Legitimate business reverses – These shall include substantial losses sustained due to fire, robbery, theft or embezzlement or for other economic reason as determined by the Sec. of Finance
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CONCEPT OF IAET Taxpayer is a corporation
Improper accumulation of taxable income beyond the reasonable needs of the business
Non-distribution of earnings/profits to stockholders
The purpose of accumulation is to avoid the payment of the income tax
Imposition of tax equivalent to 10% of the improperly accumulated taxable income
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EVIDENCE OF PURPOSE TO AVOID THE TAX
1.The corporation is a mere holding or investment company
2. Earnings or profits are permitted to accumulate beyond the reasonable needs of the business
IAET is in addition to other taxes imposed under Title II (Income Tax);
10% tax is imposed for permitting the earnings and profits of the corporation to accumulate instead of distributing them to the shareholders; As a form of deterrent to the avoidance of tax upon shareholders who are supposed to pay dividend tax;
Concept of IAET
Tax is imposed in the nature of penalty to a corporation for improper accumulation of earnings beyond the reasonable needs of the business.
Touchstone of Liability
PURPOSE (NOT CONSEQUENCE) of accumulation of income◦ Use of undistributed earnings for reasonable needs of business◦ Determination of accumulation beyond reasonable needs of
business
Concept of IAET
Reasonable Needs of Business:◦Immediate needs of business, including reasonably
anticipated needs (Immediacy Test)
Unreasonable Accumulation◦Not necessary for the purpose of the business
considering all circumstances of the case
Reasonable vs. Unreasonable Accumulation
Earnings up to 100% of paid-up capital of corp., inclusive of accumulation taken from other years
Earnings Reserved◦for definite corporate expansion projects◦for building, plant or equipment acquisition◦for compliance with loan covenant or pre-
existing obligation established under a legitimate business agreement.
Reasonable Needs of Business
Investment of substantial earnings and profits of the corporation in unrelated business or in stock or securities of unrelated business;
Investment in bonds and other long term securities; and
Accumulation of earnings in excess of 100% of paid-up capital.
Unreasonable accumulation of Profits
Banks and non-bank financial intermediaries Insurance companies Publicly held corporations taxable partnerships GPP Non-taxable joint ventures Firms registered under RA 7916, 7227, and other
special ecozones
Exempt Corporation from IAET
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IMPOSITION OF IAET
Tax rate 10%
Corporations liable Closely-held domestic corporations
Deadline 15th day after the end of he year following
the close of the taxable year
Closely-held corporations:
◦are corporations at least 50% in value of the outstanding capital stock or at least 50% of the total combined voting power of all classes of stocks entitled to vote is owned directly or indirectly by or for not more than 20 individuals
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TAX BASE OF IAET
Taxable income P xxxAdd: Income subject to final tax Pxxx Income exempt from tax xxx Income excluded fr gross income xxx Amount of NOLCO deducted xxx xxxTotal P xxxLess: Div. actually or const. paid/issued xxx Income tax paid for the year xxx Reserved for the reasonable needs of the business xxx xxx Improperly accumulated earnings P xxx ===
IllustrationAdd (Deduct)
Tax rates, amount and accounts
GAAP Income P 100
ND expenses 3
NOLCO (1)
NT income (2)
Base of ITE P 100 30% = P30.00 ITE
TNDE 5 30% = 1.5 0 DT
TNTI (4) 30% = (1.20) DTL
Base of ITP P 101 30% = P30.30 TP
Computation of IAET
Taxable income P 101.00Add: NOLCO P 1.00 Nontaxable income 2.00 TNTI 4.00 7.00Total P 108.00Less: Income tax payable 30.30Basis of IAET P 77.70Multiplied by IAET rate 10%IAET P 7.77
Dividend must be declared and paid not later than one year following the close of the taxable year
Otherwise, IAET should be paid within 15 days thereafter
Effect of the 10%- Once the profit has been subjected to IAET,
the same shall no longer be subjected to IAET in later years, even if not declared as dividend.
Payment of IAET
Form No.
Form Name Deadline for Filing No. of Copies
1702Q Quarterly Income Tax Return(For Corporations, Partnerships and Other Non-individual Taxpayers)
60 days following the close of the first 3 taxable quarters
3 copies
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Attachments Required: 1. Certificate of income payments not subjected to withholding tax (BIR Form 2304), if applicable.2. Certificate of Creditable withholding tax withheld at
source (BIR Form 2307, if applicable).3. Summary Alphalist of W/A (SAWT) per RR 2-2006;4. Duly approved Tax Debit Memo, if applicable.
Form No.
Form Name Deadline for Filing No. of Copies
1702 Annual Income Tax Return(For Corporations, Partnerships and Other Non-individual Taxpayers)
On or before April 15
On or before the 15th day of the month following the close of the fiscal year
3 copies
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Income Tax Forms
Attachments Required:
1. Account Information Form (AIF) BIR Form 1702-AIF and the Certificate of the Independent CPA (The CPA Cert. is req’d. if the Gross sales, earnings, receipts exceed P150,000.00);
2. Certificate of income payments not subjected to withholding tax (BIR Form 2304), if applicable;
3. Certificate of Creditable withholding tax withheld at source (BIR Form 2307, if applicable);
4. Summary Alphalist of W/A (SAWT) per RR 2-2006;5. Duly approved Tax Debit Memo, if applicable;6. Proof of prior year’s excess credits, if applicable;7. Proof of Foreign Tax credits, if applicable;8. For amended return, proof of tax payment and the
return previously filed;9. For those availing of fiscal incentives, see RMC No. 21-2007
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Deductions from the Income Tax Due
Taxes withheld from current year’s income
Tax credits for foreign taxes paid
Tax credits (tax credit memo)
Taxes paid in the first 3 quarters
Excess tax payments in the preceding year
Policies and Guidelines:
1. All concerned Offices, including AABs, shall receive the income tax returns by stamping the official receiving seal or stamp of receipts of an internal revenue office where the said returns are filed on the space provided for in the three (3) copies of the returns.
2. The attachments to the income tax returns shall also be received in the same manner as above, but for the attached financial statements the same shall be stamped received only on the page of the Audit Certificate. Accordingly, the other pages of the FS and its attachments need not any more be stamped received.
3. Taxpayer shall only accomplish and file three (3) copies of tax returns with the AAB and/or the BIR. Any tax return in excess three (3) shall not be received by the AAB and/or the BIR.
The contents and representations – as they are reflected in the tax returns and information statements filed with the BIR – made in their behalf by their tax agents, remain their responsibility in their capacity as the principals stated in the aforesaid returns and information statements.
The taxpayer is under strict obligation to check , verify and validate:
The authenticity of a tax return and/or information statement made in their behalf. The correctness and validity of the information contained in such documents.
The liability to pay the tax payments remain the responsibility of the concerned taxpayers.
Any findings, errors, violations or infractions noted in the Tax Returns (together with their necessary attachments) as a result of the verification and authentication procedures made by the BIR shall render both the taxpayer and his/its tax agent civilly, and administratively and criminally liable, pursuant to existing laws and regulations.
Amended Audit Criteria for Taxable Years 2009 and 2010
Revenue Memorandum Order No. 4-2011(dated Feb. 3, 2011)
Policies and Guidelines:1. All taxpayers are considered as possible
candidates for audit.
2. Priority shall be given to the following taxpayers who render professional services:
* Lawyers; Doctors; Engineers; Accountants;
& Other Professionals.
3. Last priority status for income tax audit shall be accorded to those taxpayers with an effective income tax rate for eighteen percent (18%). [Gross Income x 18%]
An exception to the last priority status hall be those taxpayers where there are findings/suspicions of under-declaration of sales/revenues.