By: Garry S. Pagaspas, CPA
Comes 2014 calendar year filing season, taxpayers, accountants, and tax agents in the Philippines are on their respective schedules for the filing of the annual income tax returns with attached audited financial statements not later than April 15, 2015. During tax seasons in the Philippines, the following tax mistakes on the audited financial statements (AFS) and annual income tax returns (ITR) in the Philippines should be avoided:
1. Excessive Retained earnings subject to 10% IAET
Improper accumulation of earnings after tax is subject to 10% and an indicator of the same on the face of the audited financial statements is the glaring free retained earnings more than the paid-up capitalization. Under Section 43 of the Corporation Code of the Philippines, as amended, domestic corporations are not allowed to maintain free retained earnings more than 100%. In Section 29 of the Tax Code, as amended, a 10% improperly accumulated earnings tax is being imposed. This 10% tax could be avoided with proper tax planning. In case caught up with such scenario, consult with your tax consultant on how to do about it as their could be a number of remedies.
2. Improper claim of creditable withholding ax credits in the Philippines
Taxes withheld by your suppliers evidenced by BIR Form No. 2307 are tax credits or deductions from income tax liability. As such, it is treated as an asset on books. In some instance, financial statements would show such material asset amount that should have been used. However, in some instances, such asset reflected in the financial statements are without proper BIR Form 2307 documentations, or if there is, the same would pertain to prior years. For large taxpayers, please note the new 2307 requirements under Revenue Regulations No. 2-2015 for attachments.
3. Claim of deductible expenses without withholding applicable taxes
Under Section 34(k) of the Tax Code, as amended, if an expense is subject to withholding tax, the same shall not be deductible until after the applicable withholding taxes has been made. To ensure that you only deduct expenses properly withheld, double checking is made with alphalists of payees and employees duly filed with the BIR and seeing to it that justifications are available to those expenses not withheld taxes.
4. Failure to consider tax deductible NOLCO
Net operating loss carry-over (NOLCO) is another tax asset some simply disregards. To avail NOLCO deduction for taxpayers claiming itemized deductions, it must have been properly stated on the prior year financial statements, and income tax returns. Note that it could be claimed within three (3) taxable years from the year of loss on a first-in, first-out basis.
5. Failure to consider MCIT credits
Minimum corporate income tax (MCIT) of prior year or years is another tax credit some would fail to consider. Like NOLCO, could be claimed within three (3) taxable years from the year of MCIT during the year when the corporation becomes liable to the 30% normal corporate income tax. During the year of MCIT payment, please ensure that the MCIT is indicated in the annual income tax return and on the audited financial statements in the Philippines.
6. Taxing the non-taxable income
As you will note on books of accounts and on the financial income, other income is one line item. Please do not be mislead to conclude that the same is automatically subject to 30% corporate income tax or includible in the 2% MCIT computations. Verify and check each item in such other income account is indeed, taxable ordinary income to avoid misapplication if the same is not such as those capital gains subjected to capital gains tax, unrealized gains, and the likes.
7. Incomplete BIR mandated notes to financial statements
Notes to financial statements is not the sole mandate of the rules and regulations of the Securities and Exchange Commission (SEC) Philippines. BIR has also requires some items and details on taxes to be indicated in the financial statements such as those in Revenue Regulations No. 15-2010 and Revenue Memorandum No. 19-2011. See to it that those notes appears in the Notes to the Audited Financial Statements.
8. Failure to account year-end DST on debt agreements
If you are on a group of companies, a cash cow company like the holding company is very common and intercompany mobility of funds are evident on year end balances appearing on the financial statements. See to it t hat you properly account for the documentary stamp tax (DST) on debt instruments imposed under Section 179 of the Tax Code, as amended.
9. Failure to account withholding tax on accruals
Under the accrual basis of accounting, expenses incurred during the year are deductible expenses, though, unpaid as of year-end cut-off. When making accruals of expenses, please ensure that you properly account withholding taxes so as to fully comply with tax rules on deductibility of expenses. Example of this is accruals for audit fees, legal fees, management bonus, and the likes.
10. Failure to consider limitations on some expenses
Please not also on the three (3) expenses subject to limitations – interest expense with respect to the reduction of 33% of interest income subjected to final tax under “tax arbitrage”, the 1% (services) or 0.5% (goods) on representation expenses, and 5% (corporation) or 10% (individual) on charitable contributions.
While each one of us would want to beat the tax filing timeline, we are likewise bound to ensure that we do it in a manner in accord with the rules and regulations to avoid tax risks during tax examinations.
Disclaimer: This article is for general conceptual guidance only and is not a substitute for an expert opinion. Please consult your preferred tax and/or legal consultant for the specific details applicable to your circumstances. For comments, you may please send mail at firstname.lastname@example.org.)
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