Question

Give and simply explain examples of corporate income and allowable deductions..based on latest "Train" Law

Answer 1

According to the Corporation Code of the Philippines, under section 2- Corporation defined as  A corporation is an artificial being created by operation of law, having the rights of succession and the powers, attributes and properties expressly authorized by law or incident to its existence.“ whereas National internal revenue code (NIRC) as amended under section 22(B) as The word “corporation” shall include partnerships, no matter how created or organized, joint-stock companies, joint accounts (Cuentas en participation), association, or insurance companies, but does not include general professional partnerships and 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 consortium agreement under a service contract with the government."

This follows that for income tax purposes, there are only two (2) main classifications:

• Corporate income taxpayer for juridical entities using BIR Form No. 1702 (annually)/BIR Form No. 1702(Q); and
• Individual income taxpayer for non-juridical entities including estates and trusts using BIR Form No. 1701(annually) and BIR Form No. 1701Q(quarterly for those engaged in a trade or business or practice of a profession.

  Further, for income tax purposes, a corporation is further classified as follows:

• A domestic corporation (DC) means a corporation created or organized in the Philippines or under its laws.
• Resident foreign corporation (RFC) applies to a foreign corporation engaged in trade or business within the Philippines. Examples of this are a Philippine branch of a foreign corporation, regional operating headquarters of multinational companies, regional or area headquarters of multinational companies, representative offices.
• Non-resident foreign corporation (NRFC) applies to a foreign corporation not engaged in trade or business within the Philippines. No need for License to do business as they do not normally have presence in the Philippines but allowed to earn income in a way or another.

• Taxability of income of corporations would depend on the nature of income and the type of corporation. It would be too confusing to discuss them all – DC, RFC and NRFC, so I just limit the discussions to domestic corporations. Income as to nature of income may be classified as follows:

  Income as to nature of income may be classified as follows:

• Exempt income where the law, treaty or the regulations expressly provides that the same is exempt from income. Examples of this would be an inter-corporate dividend from a DC to another DC or RFC, income from a time deposit of more than five (5) years. While not subject to income tax, the details of this income are required to be declared in BIR Form No. 1702.
• Final Income subject to final withholding taxes of varying rates corresponding tax required upon their payment of such income. Examples of income subject to final taxes are interest income on Philippine bank deposits, royalties, and others. The amount withheld constitutes the final payment of the tax and no additional amount shall be due but the details of income are required to be declared in BIR Form No. 1702.
• Capital gains subject to capital gains tax of 6% based on fair market value of the real property sold, or 5%/10% of the net capital gains on sales of shares of a domestic corporation not thru the local stock exchange. Again, details of income are required to be declared in BIR Form No. 1702.
• Ordinary income or those incomes not falling under any of the above classifications that is subject to the normal corporate income tax of 30% starting January 1, 2009.

• The new November 2011 version of Corporate Income Tax Return

  After computing the above, you are now ready to prepare and file the income tax return (ITR). With the revision of the BIR Form No. 1702 last 2011 (Click to Download), the annual ITR seems to be another challenge. I strongly suggest that you exert extra effort and due diligence in the preparation of these returns. Hire a knowledgeable one or educate yourself with the technicalities to save your funds from being wasted on penalties. Unintended and simple errors and misstatements may prove to be costly, if not, much discomfort on your part. You can amend or revise duly field tax returns as a matter of right within three (3) years from filing not later than due date or from late filing (if filed beyond due date) provided there is yet no ongoing examination of the tax authorities. See to it that computations are in order, that substantiations and documents required as a condition for deductibility of expenses are on file, and that the claimed creditable withholding taxes are properly supported with certificates.

  In this post, we will discuss ORDINARY income tax computations so you will be guided comes the ITR deadlines. Mathematically, computation is quite simple:

  Gross Sales/Receipts

  Less Sales returns and allowances

  Equals  Net sales/receipts

  Less Cost of Sales

  Equals Gross Income

  Add Other taxable income

  Equals Total Gross Income

  Less Allowable Deductions

  Equals Taxable income

  Multiplied by 30% rate

  equals Tax Due (compared to minimum corporate income tax (MCIT) 2% of gross income, whichever is higher

  less Tax Credits.

  less Tax Due and Payable.

  The resulting amount will then be the amount that shall be paid to the BIR using BIR Form No 1702Q (Click to download Form)for quarterly filing not later than 60 days from end of the quarter, and BIR Form No. 1702 (Click to download Form) for annual filing not later than the 15th day of the fourth month following the end of taxable year – calendar or fiscal year. If PEZA registered, 2% shall be paid to the municipality where business is located. We will concentrate however on non-PEZA corporations and partnerships for simplicity.

  Net Sales/Receipts refers to the gross sales/receipts less cost of sales for seller of goods, or gross receipts less the sales discounts granted, and sales return actually made buy the buyers.

  Cost of sales or service refers to the direct costs directly traceable to the finished product or service such as the direct materials used, the cost of workforce in the production, and the factory overhead incurred. This however does not mean that other expenses are not deductible. They are deductible under allowable deductions.

  Other taxable income refers to other ordinary income earned during the period on top of the main activity of the corporate taxpayer. Example is interest income from affiliates or subsidiaries, income from sale of assets used in business, and other similar items auxiliary to the operations. Capital gains, exempt income and final income are not included herein.

  Total Gross income is the amount being multiplied by 2% for computing minimum corporate income tax (MCIT), and the base for 40% optional standard deduction. MCIT is required for entities beginning the fourth (4) year of operations, except for certain industries exempted from MCIT like banks, insurance companies, finance companies, and the likes expressly provided in the Tax Code. Total gross income is the amount of taxable income before allowable deductions for other business expenses.

  Allowable deductions refer to the ordinary, necessary and reasonable business expenses of the taxpayers in the conduct of trade or business. For tax purposes, taxpayer has the choice between the itemized deductions and the optional standard deduction (OSD) introduced by Republic Act No. 9504. Itemized deductions are those expenses traceable to the conduct of operations such as salaries, travel, rental and entertainment expenses, interest, taxes, losses, bad debts, depreciation, depletion, charitable and other contributions, research and development, pension trust, and the likes. In itemized deductions, claimed expenses are required to be substantiated with sufficient documents, if any, like official receipts, invoices, and the likes; must observe the limitations on deductibility on certain items, like interest expense, representation and entertainment, and the likes; and must have been withheld the proper amount upon its payment or accrual. For failure to do so, the expense will not be allowed as deduction and the corporate taxpayer maybe assessed with additional income taxes, plus penalties, if owing.

  On the other hand, OSD is an alternative of the taxpayer where 40% is being allowed to be deducted from the gross income without need of substantiation but is irrevocable during the taxable year applied. However, the obligation to withhold on related expenses still remains. As to which is more beneficial between the two, would depend on the circumstances of the corporation because it may be affected by the nature of the industry, the amount of mark-up and other factors. If you would opt for OSD, then, you apply the same on the first quarter of the year and all throughout within the same taxable year.

  For tax due purposes, the amount arrived at above using the 30% of taxable income is being compared with the MCIT of 2% of gross income and the higher amount is the one deducted with the allowable tax credits, if any.

  Tax credits on the other hand refers to those allowed to be deducted from the tax due like creditable withholding taxes (CWTs) supported by Certificates (BIR Form No. 2307) issued by clients and customers who withheld certain amounts of income tax upon payments. Income taxes paid abroad also fall under this category subject to certain conditions. For subsequent taxable years, prior year’s excess tax credits are also deductible, or taxes in the original return filed, if you are filing an amended tax return.