How to compute income tax for Domestic Corporations and business partnerships?
This article is guest posted by Garry S. Pagaspas, CPA
In this post let us tackle the manner of computing income taxes for domestic corporations in the Philippines. I included ordinary partnerships because under the law, they are taxed similarly as corporations, regardless of their creation, except general professional partnerships and certain joint ventures and consortiums. In this post, I will simply refer them both as corporate taxpayers or corporations.
As we all know, taxable income as to nature of income may be classified as an ordinary income that is subject to the normal corporate income tax of 30% starting January 1, 2009, or a final income subject to final withholding taxes of varying rates which are not required to be declared in the income tax returns (ITR) as the corresponding tax is being withheld upon their payment of such income. Examples of income subject to final taxes are interest income on Philippine bank deposits, dividends from domestic corporations, winnings and prizes, except PCSO and LOTTO winnings, and prizes not exceeding P10,000, royalties, and others. In this post, we will discuss ORDINARY income computations so you will be guided comes the ITR deadlines.
Mathematically, computation is quite simple:
less Allowable Deductions
equals Taxable income
times/multiplied by 30% rate
equals Tax Due (compared to minimum corporate income tax (MCIT), whichever is higher
less Tax Credits.
The resulting amount will then be the amount that shall be paid to the BIR. 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
Gross income refers to the gross sales less cost of sales for seller of goods, or gross receipts less cost of services for seller of services that is being subjected to 30% normal corporate income tax. This also includes other income subject to 30% like interest income from debtors, other gains from auxiliary activities, gains from sales of ordinary assets or assets used in business, service charges and other fees collected in furtherance of the sale of goods or performance of services.
Allowable deductions refer to the ordinary, necessary and reasonable 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 may include salaries, travel, rental and entertainment expenses, interest, taxes, losses, bad debts, depreciation, depletion, charitable and other contributions, research and development, pension trust, premium payments on health and/or hospitalization insurance. 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.
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. This is required for entities beginning the fourth (4) year of operations, except for certain industries exempted from OSD like banks, insurance companies, finance companies, and the likes expressly provided in the Tax Code.
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.
After computing the above, you are now ready to prepare and file the income tax return (ITR). Corporate taxpayers are required to file and pay quarterly returns (BIR Form No. 1702Q), and a final adjusted return (BIR Form No. 1702). The timeline for filing would depend on the end of the accounting cycle. Calendar accounting cycle is required to file quarterly returns not later than March 31, August 30, and November 30 for the first 3 quarters, respectively, and a final adjusted return not later than April 15, along with the financial statements in prescribed form. On the other hand, for fiscal year taxpayers starting on any day of any month other than January 1 and ends 12 months thereafter should file quarterly returns within sixty (60) days from the end of the quarter. Adjusted return is then required to be file not later than the 15th day of the fourth month following the end of the fiscal year.
As a token of advise, I strongly suggest that you exert extra effort and due diligence in the preparation of these returns. Unintended and simple errors and misstatements may prove to be costly, if not, much discomfort on your part. While you can amend or revise entries on the tax returns as a matter of right within three (3) years from filing, the same is not absolute as it cannot be done if the BIR has already issued an authority for the examination of the taxable year. Please 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. I suggest you consult professionals like accountants and tax practitioners to help you determine that you are filing and paying the right taxes at correct amounts. As the saying goes, “prevention is better than cure”.
For more information about computation and filing of corporate income tax return, please feel free to write your comments or send mail.
Garry S. Pagaspas is a Certified Public Accountant from the Philippines. He is currently a taxation instructor at the Polytechnic University of the Philippines (PUP) Taguig Campus, Metro Manila, and had been a faculty member in the College of Commerce and Accountancy of Asian Development Foundation College, Tacloban City, Leyte handling accounting and taxation subjects. You can also contact him via email at firstname.lastname@example.org .