Accounting for Income Tax Returns (ITR) Filings Philippines

By: Seala Marie O. Asis, CPA

Filing income tax returns in Philippines is a recurring obligation of every taxpayer and made quarterly and annually for registered individuals in trade or business or practice of profession/ sole proprietorship or freelancers in Philippines (BIR Form No. 1701Q and/or 1701 ) and corporations that includes partnerships, one person corporations, resident foreign corporations, etc. (BIR Form No. 1702Q or 1702). Notably, annual ITR for corporations have made variations for regular (BIR Form No. 1702RT), exempt (BIR Form No. 1702EX), and those with incentives or mixed (BIR Form 1702MX) but this article would concentrate more on regular taxation for corporations or BIR Form No. 1702RT. Needless to say, accounting entries are more for accounting rules than for tax rules but could relate to taxpayer’s internal rules and preferences.

Under this filing and payment periods, a bookkeeper in Philippines would have to make corresponding journal entries on its books of accounts in Philippines. To miss-out these accounting entries for filing and/or payment of income tax returns in the Philippines would be to ruin your accounting books a bit or to overburden your year-end works for adjustments from unrecorded tax transactions, and worst, headache with tax authority during tax examination. Accordingly, this article aims to discuss the basic entries in recognizing income tax expense and payment of income tax returns in Philippines that could serve as your ready reference.

Incidentally, bookkeepers in Philippines may have to choose whether to take up accounting entries on a quarterly basis upon filing and payment of applicable income tax returns or annually as presented below.

1. Quarterly basis recording for filing and payment of ITR Philippines

Under this approach, accounting entries are made for every filing and payment of ITR in Philippines – quarterly and annual. From the accounting reports, an income tax computation applicable for the taxable quarter is being prepared and would either show up a tax liability or no tax liability brought about by excess tax credits from previous year or quarter/s, tax assets from previous year/s, or just simply a loss during the quarter. Below are sample journal entries:

With tax liability: Setting-up liability account before filing:

• Debit: Income tax expense – current (quarter)
• Credit: Income tax payable

With tax liability: Payment of income tax liability upon filing:

• Debit: Income tax payable
• Credit: Cash or cash in bank

With tax liability: Payment of income tax liability using tax credits:

• Debit: Income tax payable
• Credit: Creditable withholding tax certificate

With tax liability: Payment of income tax liability using prior year’s/ quarter’s NOLCO or MCIT:

• Debit: Income tax payable
• Credit: Deferred tax asset

Notably, some bookkeeper in Philippines would prefer to take up deferred tax asset entries at the end of the year.

Without tax liability on account of period loss:

• Debit: Deferred tax asset
• Credit: Deferred income tax benefit

Please note that the above are entries for quarterly filing and payment and with the three (3) quarterly filings for an annual income tax return, those entries could be made over again or may variate depending on the circumstances availing during the quarter. On the same token, these quarterly entries could also apply for annual filing and payment of income tax in Philippines which’s figures for accounting entries would relate to fourth (4^th) quarter but using applicable annual income tax returns except for some accounting entries to take up deferred tax assets such as the following:

Setting up deferred tax assets:

• Debit: Deferred tax asset – NOLCO or MCIT
• Credit: Deferred income tax benefit

Setting up current deferred tax asset on current year’s excess tax credits

• Debit: Deferred tax asset – CWT
• Credit: Deferred income tax benefit

2. Annual basis recording for filing and payment of ITR in Philippines

Under this approach, accounting entries would normally be recorded on an annual basis and quarterly filings would simply be noted for annual considerations. For annual filing and payment of ITR in the Philippines, figures would normally be taken from audited financial statements and would take into considerations the previous year’s annual ITR filed specially for deferred tax assets on NOLCO, MCIT, and etc., and the quarterly income tax returns filed for payments and creditable withholding taxes (CWT).

Income tax liability during the year represents the taxable income multiplied by the income tax rate but may not necessarily mean that the entire amount is income tax payable because it could be reduced by income tax payments during the first three (3) quarters, the creditable withholding taxes during the year, and the tax credits from previous year – NOLCO, MCIT, CWTs. Below are sample entries taken on the premise that accounting entries are made during the quarterly filing and payment of ITR in Philippines:

With tax liability: Setting-up liability account for the entire year before filing

• Debit: Income tax expense – current (annual)
• Debit: Creditable withholding tax – current year
• Debit: Deferred tax assets – previous year’s NOLCO, MCIT, CWT, etc.)
• Credit: Income tax payable

With tax liability: Payment of income tax liability upon filing

• Debit: Income tax payable
• Credit: Cash or cash in bank

Without tax liability on account of period loss or MCIT

• Debit: Deferred tax asset – NOLCO or MCIT
• Credit: Deferred income tax benefit

Setting up current deferred tax asset on current year’s excess tax credits

• Debit: Deferred tax asset – CWT
• Credit: Deferred income tax benefit

Summary:

The above journal entries on accounting for filing and payment of income tax returns in Philippines are just samples provided for easy reference. They are not dictated by any specific tax regulations or financial reporting standards but taxpayers could simply adopt as reference or make necessary variations in keeping with their internal policies and procedures.

About the Author: Seala Marie O. Asis is a certified public accountant from the Bicol Province, Philippines and worked as the team lead of Financial reporting Team of G. Pagaspaspas Partner’s & Co. CPAs (a full service arm accounting firm based in Makati City, Metro Manila, Philippines).

Disclaimer: This is for purposes of academic discussions only as personally summarized by the author, not of Tax and Accounting Center, Inc. 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 also please send mail at info(@)taxacctgcenter.ph, or you may post a question at Tax and Accounting Center Forum and participate therein.