6 Reminders for 2023 Corporate Annual Income Tax Return (ITR) for Philippine BIR Filing

In the Philippines, the “busy season” commences for taxpayers and practitioners in the field of accounting and taxation, as the year ends. During this season, they begin to prepare for the filing of year-end tax compliance requirements. One of the most common year-end tax compliance requirements in the Philippines is the filing of the Annual ITR. The Annual ITR determines the net taxable income from operations related to the pursuit of business activity during a given taxable year. But what do they need to consider during the preparation of the 2023 Annual ITR in the Philippines?

Here are some points to consider in the preparation of 2023 Annual ITR in Philippines:

I. Income Tax Rate – 20%/ 25% / 2% MCIT/ 5% GIT / ITH

Republic Act (R.A.) No. 11534 otherwise known as Corporate Recovery for Tax Incentives and Enterprises (CREATE) Act, amending further the Tax Code of the Philippines, has changed, among others, the tax rate of corporations from 32% of taxable net income to 25%, in general, for domestic and resident foreign corporations in the Philippines. For domestic corporations however, if the net taxable income does not exceed Five Million Pesos (P5,000,000) and total assets do not exceed One Hundred Million Pesos (P100,000,000) excluding the land on which the business entity’s office, plant, and equipment are located, it shall be taxed at twenty percent (20%) income tax rate, instead of 25%.

Please note as well that the Minimum Corporate Income Tax (MCIT) in the Philippines (for domestic and resident foreign corporations is imposed on corporations, beginning on the fourth (4th) taxable year immediately following the year in which such corporation commenced its business operations if such MCIT is higher than the normal income tax for the taxable year) was generally 2% but was made 1% under CREATE and reverted to 2% by July 1, 2023. Notably, Revenue Memorandum Circular (RMC) No. 69-2023 provides that the MCIT rate has reverted from one percent (1%) to two percent (2%) beginning July 1, 2023, and in Revenue Regulation (RR) No. 5-2021, the BIR provided MCIT matrix rates for the transition period as follows:

For non-resident foreign corporations (NRFC), the income tax rate imposed through the final withholding tax scheme is also 25%, in general, but they are not generally required to file an Annual ITR as the withholding agent payor is the one required to account for the applicable income tax of the NRFC’s income in the Philippines.

II. Applicable Allowable Deductions for income tax purposes

Please be reminded that under the rules, a corporate taxpayer in the Philippines engaged in trade or business has the following options for allowable deductions from gross income in determining its annual income tax returns in Philippines as follows:

Itemized Deductions. This itemized deduction in the Philippines is applicable, in general, the corporate taxpayer in the Philippines engaged in trade or business determines its deductible expenses in the Philippines by identifying each item of expense incurred or paid during the taxable year relative to its conduct of trade, business, or profession. For an expense to be deductible for ITR purposes, the following requirements should be met:

A. It should be ordinary and necessary expenses paid/incurred during the taxable year for the development, management, operation, and/or conduct of the trade, business, or profession;

B. It should be substantiated by adequate proof – documented by official receipts or adequate records which reflect the (a) amount being deducted and (b) connection or relation of expense to business/trade;

C. Not contrary to law, morals, public policy, or order (e.g., bribes, kickbacks, or similar payments); and

D. The taxes required to be withheld, if applicable, have been properly withheld and remitted on time.

Additionally, for some expenses, please be reminded about the limitations or maximum amounts imposed by the rules:

A. Interest expense should be reduced by an amount equivalent to 20% of interest income subjected to final tax unless domestic corporations using 20% income tax rate in which case there will be no reduction of interest expense;

B. Representation expense should not exceed 0.5% of net sales for the seller of goods or 1% of net receipts for the seller of service, and the taxpayer engaged in the sale of goods and services, it should segregate the amounts for goods and services for the purpose; and

C. Charitable contributions should not exceed 5% based on taxable income derived from trade, business, or profession before deducting charitable contribution unless allowed full deductibility, e.g. donations to the government, to certain foreign institutions or international organizations, and to accredited nongovernment organizations are entitled to be deductible in full.

Non-compliance of the above requirements for deductibility or claiming expense beyond the limitations could result in BIR disallowing such expenses during tax examination in the Philippines and imposing income tax that should have been paid had those expenses not been considered in computing income tax and imposing penalties – e.g. 25% surcharge, 12% interest and compromise penalties in the Philippines.

Optional Standard Deduction (OSD) in the Philippines. A corporate taxpayer engaged in trade or business in the Philippines other than non-resident foreign corporations may use OSD for computing its tax due on its annual ITR in the Philippines and should be opted for OSD in its first quarterly ITR. The deduction is an amount not exceeding 40% of gross income, without regard to substantiation and withholding tax on such expenses required above for those under itemized deductions. However, please note that OSD in Philippines is for income tax computation only and does not exempt the taxpayer from maintaining books of accounts and related documentation for bookkeeping purposes along with observance of proper withholding of taxes on expenses, if applicable.

III. Maximize Tax Assets – Net operating loss carry-over (NOLCO), excess MCIT carry-over, Creditable withholding tax certificate (CWTs), Other Deferred Tax Assets (DTA)

In computing income tax due for the 2023 annual income tax return of a corporate taxpayer in Philippines, please note as well to maximize the following tax assets that could be available:

Net Operating Loss Carry-over (NOLCO) in the Philippines. Under the rules, net operating loss for any taxable year immediately preceding the current year, which had not been previously offset as a deduction from gross income shall be carried over as a deduction from gross income for the next three (3) consecutive taxable years following such taxable year of loss. NOLCO is normally presented separately shown in the ITR of the taxpayer and unused NOLCO is likewise presented in the notes to financial statement so the taxpayer can easily identify and properly use it for 2023 corporate annual income tax return in the Philippines.

Notably, for taxable years 2020 and 2021, the Net Operating Loss may be carried for the next five (5) consecutive taxable years or until 2025 and 2026, respectively, pursuant to R.A. No. 11494, otherwise known as Bayanihan to Recover as One Act, and as implemented by Revenue Regulations (RR) No. 25-2020.

Excess of MCIT Carry-over. Any excess of the MCIT over the normal income tax (NIT) shall be carried forward and credited immediately against the NIT of the taxpayer for the next succeeding three (3) taxable years.

Creditable Withholding Taxes (CWTs) – e.g. BIR Form No. 2307. Upon payments of clients/ customers of specific income payments during 2023, the rules required them to withhold taxes, e.g. 1-15% of expanded withholding tax (EWT) commonly called creditable withholding tax (CWT) in the Philippines and would issue you withholding tax certificate or BIR Form No. 2307 as proof of such withholding.

The EWT or CWT in Philippines is the taxpayer’s advance income tax payments, a taxpayer can deduct this against the 2023 annual income tax liability. Please ensure that the BIR Form No. 2307s would have complete information such as name, designation, TIN, and signature either wet-signed or e-signed should be reflected in the certificate. Please note also that the information in the claimed CWTs will be reported in the Summary Alphalist of Withholding Taxes (SAWT) to be submitted in the es*********@bi*.ph.

Other Deferred Tax Assets (DTA). Aside from the above, a taxpayer may have to be conscious as well about those items that could be deductible for the 2023 corporate annual ITR in the Philippines. One example is a different treatment of certain expenses for income tax purposes and for accounting purposes where a taxpayer has already taken the expense as deductible for accounting but not for tax purposes. Examples are unrealized loss and NOLCO.

Other deductible non-cash items. In most cases, accounting books only take up cash items as deductible expenses, and absent proper adjustments, non-cash items are missed out as deductions. Unrecorded accrual of expenses is a common item under this – interest expense accruing at year-end, depreciation expense, and year-end purchases with supporting documents becoming available later. If a taxpayer is not conscious of these items, you might end up missing them and losing their tax benefits.

IV. BIR Forms to be used for AITR.

Equally important is to use the proper annual ITR Form for the 2023 corporate annual ITR. In general, a corporate taxpayers subject to regular income tax rate are required to use BIR Form No. 1702-RT; while those corporation whose income is exempt under the Tax Code, as amended and other special Laws are required to use BIR Form No. 1702-EX; and, those who have mixed income subject to multiple income tax rates or with income subject to special/preferential rate are required to use BIR Form No. 1702-MX.

The rules are silent on penalties for using the wrong form but using the wrong one could have some negative implications on the computations of the 2023 corporate annual ITR so it would be best to use the right one.

V. Filing and Payment of AITR

Annual ITR in the Philippines is normally due for filing not later than the 15th day of the 4th month following the end of the taxable year – e.g. April 15, 2024 (Monday) for the December 31, 2023, year-end. Taxpayers should be aware of the mode of filing and payment which may be in eBIRForms or the Electronic Filing and Payment System (EFPS). Taxpayers required to file in the EFPS but have filed in the eBIRForms without duly released advisory on the unavailability of EFPS, shall be tantamount to Wrong Venue Filing which is subject to a twenty-five percent (25%) surcharge.

Payment of the tax due shall be paid through any Accredited Authorized Banks (AABs) in the jurisdiction of the Revenue District Office where the taxpayer is registered (for eBIRForms filers) and EFPS-AABs where the taxpayer is enrolled (for EFPS filers). It should be noted that during 2022 AITR compliance, BIR has issued RMC No. 32-2023 that taxpayers may pay the tax due to any AABs, notwithstanding the RDO jurisdiction, without imposition of penalties for wrong venue filing. Hopefully, BIR will issue the same for 2023 AITR compliance.

VI. Attachments of AITR

Within fifteen (15) days from the deadline for filing of 2023 AITR or on April 30, 2024, a corporate taxpayer should submit the attachments of the AITR either manually or through Electronic Audited Financial Statements (eAFS). Here are the following applicable AITR attachments a corporate taxpayer should submit if applicable:

A. AITR with Tax Return Receipt Confirmation (for eBIR filers) / Filing Reference Number (for EFPS filers), and proof of payment, if any;

B. Audited Financial Statements (If gross sales/receipts exceed P3M and availing itemized deduction) or Financial Statements with Sworn Certification (if gross sales/receipts do not exceed P3M and availing itemized deduction);

C. BIR Form No. 2307 from customers/buyer or Certificate of creditable tax withheld as claimed as Tax credit, if applicable;

D. Summary Alphalist of Withholding Taxes with eSubmission Validation Report, if applicable. (shall be submitted to es*********@bi*.ph);

E. BIR Form No. 1709 or Information Return on Transactions with Related Party, if applicable; and

F. Certificate of Entitlement to Tax Incentives, if any. (For PEZA, BOI, BMBE, etc.)

Summary

The government needs the contribution of its citizens to function and operate. This contribution is from the taxes paid by the taxpayers. Despite the fact that this contribution is indispensable to the existence of government, taxpayers must also prioritize their financial well-being by staying informed about the constantly changing tax regulations, to prevent them from paying huge amounts just for penalties.