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

As the Christmas holiday approaches in the Philippines, many of us are preparing for yearly traditions just like making wish lists, buying gifts, and even setting New Year’s resolutions for 2024. Taxpayers and practitioners in the field of accounting and taxation are also busy making their bucket list in preparation for filing in the year-end tax compliance requirements in the Philippines, specifically, the 2023 annual Income Tax Return (ITR) of an individual taxpayer.

As paying income tax is one imposed by law, let us make sure we do not forget about this important task as we get ready for the upcoming holidays. Here are some points to consider in preparation for the 2023 Individual ITR in the Philippines for your tax liability relative to your trade or practice of profession.

I. 15-32% Individual Income Tax Rate in the Philippines effective January 1, 2023

If you recall, Republic Act No. 10963, otherwise known as the Tax Reform for Acceleration and Inclusion (TRAIN) Law, amending further the Tax Code of the Philippines, has changed, among others, the graduated income tax rates in the Philippines of resident and citizen individuals – from 5-32% after personal exemptions to 20-35% after P250k exemptions, in place of personal exemptions. This 20-35% rate applies until 2022 and by 2023, the rates changed to 15% – 35% so you have to adopt the graduated income tax rate schedule below effective January 1, 2023, and onwards:

The above 2023 graduated income tax rates apply if you are an employee with respect to their taxable salaries and wages. The same graduated tax rates are likewise applicable disqualified purely self-employed individuals who opted to avail eight percent (8%) on gross sales/ gross receipts and other non-operating income instead of using the graduated income tax rates.

II. Applicable Allowable Deductions for income tax purposes

Please be reminded that under the rules, the individual income taxpayer in the Philippines engaged in trade or business, or practice of profession 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 Philippines is applicable, in general, and individual income taxpayer in the Philippines engaged in trade or business, or practice of profession determines its deductible expenses in Philippines 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 or limitations imposed by the rules:

A. Interest expense should be reduced by amount equivalent to 20% of interest income subjected to final tax;

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 that 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 10% 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 considered in computing income tax and imposing penalties – e.g. 25% surcharge, 12% interest and compromise penalties in Philippines.

Optional Standard Deduction (OSD) in the Philippines. An individual taxpayer engaged in trade or business, or the practice of profession in the Philippines other than non-resident alien may use OSD for computing its tax due on its annual ITR in the Philippines should they opted such OSD in their first quarterly ITR. The deduction is an amount not exceeding 40% of individual taxpayer’s gross sales or gross receipts, 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 individual taxpayer from maintaining books of accounts and related documentation for bookkeeping purposes along with observance of proper withholding of taxes on expenses, if applicable.

Reduction for 8% Income Tax Rate. For purely self-employed individuals and/or professionals’ taxpayers who opted to use the eight percent (8%) special income tax rate, there is no further allowed deduction from the gross income other than the P250,000 income tax exempt amount applicable to every individual taxpayer in the Philippines.

III. Maximize Tax Assets – NOLCO, CWT’s DTA’s

In computing income tax due for your 2023 annual income tax return 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 you can easily identify and properly use it for your 2023 individual 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 under 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.

Creditable Withholding Taxes (CWTs) – e.g. BIR Form Nos. 2307 and 2316. 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.

These EWT or CWT in Philippines are your advance income tax payments so you can deduct these against your 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.

BIR Form No. 2316. For those individual taxpayers engaged in trade or business, or the practice of profession in the Philippines and with employment income, their employers are withholding them income taxes on their compensation and will provide them BIR Form No. 2316 on or before January 31, 2024, or if resigned or terminated before December 31, on the day on which the last payment of compensation is made. Compensation income will be included in the 2023 ITR computations and the withheld taxes by the employer as evidenced by BIR Form No. 2316 will be deductible from the duly computed income tax due.

Other Deferred Tax Assets (DTA). Aside from the above, you may have to be conscious as well about those items that could be deductible for your 2023 annual ITR in the Philippines. One example is a different treatment of certain expense for income tax purposes and for accounting purposes where you have 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 deduction. Unrecorded accrual of expenses is a common item under this – interest expense accruing at year-end, depreciation expense, year-end purchases with supporting documents becoming available later. If you will not be 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 proper annual ITR Form for your 2023 annual ITR. In general, individual taxpayer engaged in trade or business, or the practice of profession in the Philippines are required to use BIR Form No. 1701 while those earning purely compensation income is required to use BIR Form No. 1700, unless, qualified for substituted filing where the employer issued withholding tax certificate on compensation or BIR Form No. 2316 would serve as there ITR. However, those individual taxpayers engaged in trade or business, or the practice of profession in the Philippines opting for OSD or under 8% special income tax rate are required to use BIR Form No. 1701A.

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 your 2023 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.

When the tax due of an individual taxpayer is more than Two Thousand Pesos (P2,000), the taxpayer may opt for two (2) equal installment payments signified upon the filing of the return, the first installment is upon filing the return and the second installment is on or before October 15, 2024, through BIR Form No. 0605.

VI. Attachments to AITR

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

*Document may vary depending on the taxpayer

Summary

Getting into the habit of always being prepared for upcoming deadlines can really help a taxpayer avoid added stress and financial burden in the future. The above reminders will help individual taxpayers prepare their AITR for the year 2023. As the saying goes by, “when it is time to get things done, nothing beats early planning and good old diligence,” that is why it is important for taxpayers and practitioners to be updated about constantly changing tax regulations.