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*********@*****ov.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*********@*****ov.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.

Under the advent of Republic Act No. 8424 otherwise known as “The Tax Reform Act of 1997” (RA 8424), OSD is applicable only to individual taxpayers engaged in trade or business, or engaged in the practice of profession. It is computed at ten percent (10%) based on the gross profit after deducting the cost of sales or cost of service like the illustration below based on assumed figures:

Gross sales/receipts                                                       P220,000

Less: Sales returns, discounts & allowances             20,000

Net Sales                                                                             P200,000

Less: Cost of sales/service                                               70,000

Gross profit                                                                        P130,000

OSD rate                                                                                      10%

Allowable deduction – OSD                               P  13,000

Based on the amendment of Republic Act No. 8424 introduced by Republic Act No. 9337 (RA 9337), OSD is now applied at forty percent (40%) of net sales without deducting cost of sales or service for individuals, or forty percent (40%)  based on gross profit after deducting cost of sales or service for corporations. In short, the amendment made the following changes:

Individual taxpayers:

1. Increase the applicable rate from 10% to 40%; and,
2. Change the tax base to gross sales/receipts without deducting cost of sales;

Corporate:

1. Included corporation in the coverage of OSD; and,
2. Deduction of cost of sales/service in arriving the tax base.

Applying the above figures, OSD for INDIVIDUAL will now be as follows:

Gross sales/receipts                                                       P220,000

Less: Sales returns, discounts & allowances             20,000

Net Sales                                                                             P200,000

OSD rate                                                                                      40%

Allowable deduction – OSD                            P  80,000

On the other hand, OSD for CORPORATE taxpayer will be computed like individual taxpayer under RA 8424, except that the rate is 40% and not 10% illustrated below:

Gross sales/receipts                                                       P220,000

Less: Sales returns, discounts & allowances             20,000

Net Sales                                                                             P200,000

Less: Cost of sales/service                                               70,000

Gross profit                                                                        P130,000

OSD rate                                                                                      40%

Allowable deduction – OSD                             P 52 ,000

You may try to work on other figures to master the above OSD formulas. I likewise suggest that you consult a professional to ensure correct application of OSD on your quarterly and annual income tax returns.

Note: Article published before TRAIN or R.A. No. 10963 effective January 2018.

Related post:

Tax Savings under OSD.

Disclaimer: This article is for general conceptual guidance only 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.

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By this post, let us answer the question of SMEs on whether or not financial statements to be attached to their annual income tax returns (ITR) in Philippines are mandated to be audited by an independent Certified Public Accountant.

Section 232 of the Tax Code, as amended provides, and hereunder quoted:

“Section 232. Keeping of Books of Accounts. – (A) Corporations, Companies, Partnerships or Persons Required to Keep Books of Accounts. – All Corporations, Companies, Partnerships or persons required by law to pay internal revenue taxes shall keep a journal and a ledger or their equivalents: Provided, however, That those whose quarterly sales, earnings, receipts, or output do not exceed Fifty thousand pesos (P50,000) shall keep and use simplified set of bookkeeping records duly authorized by the Secretary of Finance where in all transactions and results of operations are shown and from which all taxes due the Government may readily and accurately be ascertained and determined any time of the years: Provided, further, That corporations, companies, partnerships or persons whose gross quarterly sales, earnings, receipts or output exceed One Hundred Fifty Thousand Pesos (P150,000) shall have their books of accounts audited and examined yearly by an independent Certified Public Accountants x x x.”(Emphasis supplied)

Under the Section 71 of the TRAIN Law, Section 232 has been amended to update amount to PhP3M as follows:

Section 71. Section 232 of the NIRC, as amended, is hereby further amended to read as follows:

“Sec. 232. Keeping of Books of Accounts.—

“(A) Corporations, Companies, Partnerships or Persons Required to Keep Books of Accounts.— All corporations, companies, partnerships or persons required by law to pay internal revenue taxes shall keep and use relevant and appropriate set of bookkeeping records duly authorized by the Secretary of Finance wherein all transactions and results of operations are shown and from which all taxes due the Government may readily and accurately be ascertained and determined any time of the year: Provided, That corporations, companies, partnerships or persons whose gross annual sales, earnings, receipts or output exceed Three million pesos (₱3,000,000), shall have their books of accounts audited and examined yearly by independent Certified Public Accountants xxx. (Emphasis supplied)

From the above, individual and corporate taxpayers with gross quarterly sales, earnings, receipts or output exceeding P150,000.00 (Updated by TRAIN Law:  exceeding P 3,000,000 gross annual sales) are mandated to file a FINANCIAL STATEMENTS audited by an INDEPENDENT CERTIFIED PUBLIC ACCOUNTANT (CPA). It does not however require each of all the four (4) quarters in a year to reach more than the P150,000 (Updated by TRAIN Law:  exceeding P 3,000,000 gross annual sales) for mandatory audit to apply. For as long as one quarter exceeded the P150,000 (Updated by TRAIN Law:  exceeding P 3,000,000 gross annual sales), then, it becomes mandatory. Bureau of Internal Revenue (BIR) may refuse filing unaudited financial statements as an attachment to the income tax return (ITR) if it would not comply, and may impose penalties upon failure to file or late filing, or worst, if a taxpayer will fraudulently fail to file, BIR may assess based on presumptive fraud within the period of ten (10) years from discovery.

However, under the regulations implementing Optional Standard Deduction (OSD), Revenue Regulations No. 16-2008 & 16-2010, individuals who avail of the OSD are no longer required to file audited financial statements. Thus, it becomes optional for sole proprietorships to undergo the audit and if we are to be asked, we would humbly recommend audit for the benefits that it normally brings such as the following:

a. It serves as check and balance over the work of the bookkeeper, in-house or retainer-paid;

b. Proper valuation of the accounts – assets, liabilities, and equity; and,

c. Audited financial statements becomes readily available in case of need (say, securing a loan from banks, presentation to potential clients, and more)

For corporate taxpayers, they are required by the SEC to file audited financial statements regardless of the above rule. This is a mandatory reportorial requirement every year, and SEC will not accept filing unless the same is stamped filed by the BIR. For individuals however, it is only with the BIR that the financial statements are to be prepared and not required to be filed with the SEC so the P150,000 (Updated by TRAIN Law:  exceeding P 3,000,000 gross annual sales) rule applies.

Notably, not all CPA’s can do the audit and sign on the financial statements. In general, a CPA must be duly accredited by the Board of Accountancy-Philippine Regulation Commission (BOA) and by the BIR as tax agent. In some industries like banks and financial institutions, accreditation of the Securities and Exchange Commission (SEC), or cooperatives, accreditation by the Cooperative Development Authority (CDA), or insurance and related companies, accreditation by the Insurance Commission.

If the audited financial statements would be signed by a non-accredited CPA, the taxpayer will be penalized and the CPA may be reprimanded, or worst, license could be revoked. The taxpayer could not rely heavily on the misrepresentation of the CPA, if any that it is duly accredited, so it has to exert effort to assure that the CPA is indeed, duly accredited.

Note: Article published prior to TRAIN or R.A. No. 10963 effective Jan. 2018 and updated based on later amendment/s like the TRAIN law.

Disclaimer: This article is for general conceptual guidance only 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.

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For taxpayers engaged in trade, business, or practice of profession, optional standard deduction (OSD) is a good are to look at for tax savings.  Under Section 34(L) of the Tax Code, as amended by Republic Act No. 9504 dated June 17, 2008, and hereunder quoted:

“Section 34(L) Optional Standard Deduction. – In lieu of the deductions allowed under the preceding Subsections, an individual subject to tax under Section 24, other than nonresident alien, may elect a standard deduction in an amount not exceeding forty percent (40%) of his gross sales or gross receipts, as the case maybe. In the case of a corporation subject to tax under Sections 27(A) and 28(A)(1), it may elect a standard deduction in an amount not exceeding forty percent (40%) of its gross income as defined in Section 32 of this Code. Unless the taxpayer signifies in his return his intention to elect the optional standard deduction, he shall be considered as having availed himself of the deductions allowed in the preceding Subsections. Such election when made in the return shall be irrevocable for the taxable year for which the return is made. Provided, That an individual who is entitled to claim for the optional standard deduction shall not be required to submit with his tax return such financial statements otherwise required under this Code: Provided, further, That except when the Commissioner otherwise permits the said individual shall keep such records pertaining to this gross sales or gross receipts, or the said corporation shall keep such records pertaining to this gross income as defined in Section 32 of this Code during the taxable year, as may be required by the rules and regulations promulgated by the Secretary of Finance, upon recommendation of the Commissioner.”

Based on the above provision, a taxpayer may opt for optional standard deduction (OSD) to be deducted from the gross income instead of itemized deductions, in arriving at the taxable income. Such optional standard deduction, if chosen would have the following features:

• 40% based on gross receipts/sales for individuals or 40% based on gross income for corporate taxpayers,
• Irrevocable for the taxable year of choice, even by amendment on the later years,
• No substantiation is required for claimed allowable deductions and no disallowance of expense for non-withholding, but the taxpayer may nevertheless be held liable for non-withholding,
• Individuals opting for OSD no longer required to attach audited financial statements to its annual income tax return but is still required to maintain books of accounts,
• Corporate taxpayers availing OSD are still required audited financial statements, and,
• To qualify for the OSD, the taxpayer should apply the same at the very first quarter of the taxable year.

The choice between OSD or itemized deductions could not be that easy to make because for a wise entrepreneur, business advantage shall be considered. In short, the determination would lead to finding which option would save taxes or which would be more advantageous to the entrepreneur. Such determination works in many ways, and may not alone be financial. Financial wise, it will be beneficial if OSD computations would be higher than the itemized deductions because this will mean lower income tax due.

• For individuals, OSD would be better if the total expenses will not reach 40% like service concerns, professionals and the likes.
•  For corporate taxpayers, OSD would be beneficial if there is less cost of sales/service because there could be a higher tax based for OSD, and there could be less operating expense.

On the other hand, even if figures would go against OSD, you may still avail of the same because of the following:

•  Your substantiation is not in accordance with the regulations like if they are not in the name of the company, or no substantiation at all;

• You are an individual and you do not want an independent Certified Public Accountant (CPA) to conduct an audit for cost cutting measures.

I leave it now to you good entrepreneurial judgment to determine how OSD works for you. I suggest you seek confirmation of a professional to assure that the anticipated benefits from OSD would turn out to be benefits, indeed.

Note: Article published before TRAIN or R.A. No. 10963 effective Jan. 2018.

Related professional service:

Tax study to determine benefits of OSD availment.

Disclaimer: This article is for general conceptual guidance only 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.

See our quality seminars, workshops, and trainings…

See how we can help you with our other professional services : company registrations; Ph Working Visa; and HR Services

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