INCOME TAX Presented by: LILYBETH A. GANER, CPA, MBA Revenue Officer RR-19, Davao City 1.
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Transcript of INCOME TAX Presented by: LILYBETH A. GANER, CPA, MBA Revenue Officer RR-19, Davao City 1.
INCOME TAX
Presented by:
LILYBETH A. GANER, CPA, MBARevenue OfficerRR-19, Davao City
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Business Income Any income not related to an employer-
employee relationship Generally taxable on the net income Includes gains, profits and income in
whatever form derived from any source, legal or illegal, such as – Exercise of profession or vocation Trade, business or commerce Dealings in property Fruits of the ownership or use of property Interest, rent, dividends, securities Other transactions of the business for gain or
profit2
Gross income All income from whatever source
derived, including but not limited to the following items: Compensation for services, including
fees, commissions and similar items Gross income derived from business or
exercise of profession Gains from dealings in property Interest Rents
3
Gross income (cont.) Royalties Dividends Annuities Prizes and winnings Pensions Partner’s distributive share in the net
income of general professional partnership
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Net Income
The realized gross profit after deducting all the deductions allowed by law, statutes or generally accepted accounting principles.
Exclusions The total benefits which is not included in the
computation of gross income for the purpose of determining taxable income.
Deductions Items or amounts which the law allows to be deducted
from gross income to arrive at the taxable income.
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Allowable Deductions There shall be allowed as deduction
from gross income, other than compensation income, expenses incurred in the conduct of trade or business to arrive at the net income.
At the taxpayers option, deductions for expenses may either be— Itemized deduction Optional Standard Deduction (OSD) –
40%
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Requisites for Deductibility of Expenses
Ordinary and necessary Paid or incurred within the taxable year Incurred in the conduct of trade or business Not contrary to law, morals, public policy or
public order Substantiated by sufficient proof Subjected to withholding tax, if applicable
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Itemized Deduction
1. Ordinary and necessary trade, business or professional expenses Salaries & wages Travel expenses Rental expenses Entertainment, amusement and
recreation expenses
2. Interest3. Taxes
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Itemized Deduction (cont.)
4. Losses Net Operating Loss Carry Over (NOLCO) Capital losses Losses from wash sales of stocks or
securities Wagering losses Abandonment losses
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Itemized Deduction (cont.)
5. Bad debts6. Depreciation7. Depletion of oil and gas wells and
mines8. Charitable and other contributions9. Research and development10.Pension trusts
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Interest
There must be a valid and existing indebtedness;
The indebtedness must be that of the taxpayer;
The interest must be legally due and stipulated in writing;
The interest expense must be paid or incurred during the taxable year;
The indebtedness must be connected with the taxpayer's trade, business or exercise of profession;
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Interest The interest payment arrangement must not
be between related taxpayers. The interest is not expressly disallowed by
law to be deducted from the taxpayer’s gross income (e.g., interest on indebtedness to finance petroleum operations); and
The amount of interest deducted from gross income does not exceed the limit set forth in the law.
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Interest
Limitation
The amount of interest expense paid or incurred from an existing indebtedness shall be reduced by an amount equivalent the following percentages of the interest income earned during the year which had been subjected to final withholding tax
Jan. 1998 - 41%
Jan. 1999 - 39%Jan. 2000 - 38%Nov 2005 - 42%Jan. 2009 - 33%
Applies regardless of the date the interest bearing loan and the date when the investment was made for as long as, during the taxable year there is an interest expense incurred and an interest income earned.
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EXCEPTIONS• Deductible in full from gross income
Interest on unpaid taxes – interest paid or incurred on all unpaid business-related taxes shall be deductible in full
• Not deductible from gross income
a. Interest incurred on indebtedness of taxpayer using cash basis, where the interest is paid in advance thru discount or otherwise
i. Allowed as a deduction in the year the indebtedness was paid
ii. If amortized – amount corresponding to the principal amortized shall be allowed as deduction during the year
Interest
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• Not deductible from gross income
b. Interest payments between related parties as specified in Sec. 36(B) of the Tax Code
c. Interest expense paid or incurred by Service Contractor engaged in the discovery or production of indigenous petroleum in the Phil.
d. Interest incurred on capital expenditures (optional)• Interest expense• Capital expenditure
Interest
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RELATED PARTY TRANSACTIONS RELATED PARTY TRANSACTIONS [Sec. 36(B)]
• Between members of the same family• Between a corporation and an individual who owns more than 50% of the outstanding stock of the former• Between 2 corporations more than 50% of the outstanding stock were owned by the same individual• Between grantor and fiduciary of any trust• Between 2 fiduciaries of trust if the same person is the grantor of each trust• Between fiduciary and beneficiary of the same trust
Interest
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Taxes
All business related taxes Non-deductible taxes
Income tax paid in the Phils. Income tax imposed by authority of foreign
country – tax credit with limitation Estate and donor’s taxes Tax assessment which increases the value of the
property assessed Electric energy consumption tax under B.P. 36 VAT
Tax credits Taxes paid in foreign countries subject to
limitation
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Taxes Interest or surcharge imposed on taxes are not
deductible as taxes, but as an item of interest.
Only the person upon whom taxes are imposed may claim them as deduction, except: (1) Taxes upon an individual upon his interest as shareholder of corporation which are paid by corporation without reimbursement; and (2) Corporate bonds or other obligations containing a tax-free covenant clause, the corporation paying the tax or any part of it for someone else (Sec. 80, RR 2).
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TaxesRefund of tax payment
Taxes refunded shall be included in the year of receipt to the extent of the income tax benefit of such deduction (tax benefit rule)
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Taxes
Disclosure requirement on taxes (Notes to FS) RR 15-2010 The notes of f/s shall include info on
taxes, duties and license fees paid or accrued during the taxable yearThe amount of VAT Output tax and the
account title and amount/s upon which the same was based,
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Losses Requisites for deductibility
Incurred in trade, business or profession Not compensated by insurance or other form of
indemnity In case of property, for losses arising from fire,
storm, shipwreck, other casualty, robbery, theft, embezzlement, the property must be used in trade, business or profession and reported within forty-five (45) days from date of occurrence of such loss.
Not claimed as deduction for estate tax purposes
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Net Operating Loss Carry-over (NOLCO) RR 14-2001
Net operating loss - means the excess of allowable deduction over gross income of the business in a taxable year
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Bad Debts Requisites for valid deduction
There must be an existing indebtedness due to the taxpayer
It must be valid and legally demandable It must be connected with the taxpayer’s trade,
business or practice of profession It must not be sustained in a transaction entered
into between related parties It must be actually charged off from the books of
accounts as of the end of the taxable year It must be ascertained to be worthless and
uncollectible as of the end of the year24
Depreciation A reasonable allowance/reduction in service
value for the exhaustion, wear and tear of property used in trade, business or practice of profession.
Methods of depreciation Straight line method Declining balance method Sum of the year’s digit method Any other method which may be prescribed
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Depreciation
Requirements for deductibilityThe allowance for depreciation must be
reasonable; It must be for property arising out of its
use in the trade or business, or out of its not being used temporarily during the year; and
It must be charged off during the taxable year from the taxpayer’s books of accounts.
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Charitable and other Contributions
Donations with limited deductibility For the use of government exclusively for public
purpose To accredited domestic corporation or
association organized and operated exclusively for religious, charitable, scientific, youth and sports development, cultural or educational purposes
For the rehabilitation of veterans For social welfare institutions To non-government organization
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Charitable and other Contributions Rate of deduction
Individual donor - 10% of net income before deducting donations
Corporate donor - 5% of net income before deducting donations
OR
Actual contribution/donation
WHICHEVER IS LOWER
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Charitable and other Contributions
Donations deductible in full Donations to the government exclusively to
finance or to be used in undertaking priority activities in education, health, youth and sports development, human settlements, science and culture and in economic development according to the National Priority Plan determined by NEDA.
Donations to foreign institution or international organizations
Donations to accredited non-government organizations
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Entertainment, Amusement & Recreational (EAR) Expenses
Includes representation expense and/or depreciation or rental expense relating to entertainment facilities.
Representation expense shall refer to expenses incurred in entertaining, providing amusement and recreation to, or meeting with guest or guests at dining place, place of amusement, country club, theater, concert, play, sporting event and similar events or places.
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Expenses NOT considered EAR Expenses treated as compensation or fringe benefits Expense for charitable or fund raising events Expense for bonafide business meeting of stockholders,
partners or directors Expenses for attending or sponsoring employee to a
business league or professional organization meeting Expenses for events organized for promotion marketing
and advertising including concerts, conferences, seminars, workshops, convention, and other similar event.
Other expense of similar nature
Entertainment, Amusement & Recreational (EAR) Expenses
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Entertainment, Amusement & Recreational (EAR) Expenses
The taxpayer should maintain receipts and adequate records that indicate the The amount of expense Date and place of expense Purpose of expense Professional or business relationship of
expense Name of person and company entertained
with contact details
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Entertainment, Amusement & Recreational (EAR) Expenses
Requirements for deductibility Paid or incurred during the taxable year Business connected Not contrary to law, morals, good customs, public policy or public order Does not constitute a bribe, kickback or other similar payment Duly substantiated by adequate proof Subjected to withholding tax, if applicable
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Entertainment, Amusement & Recreational (EAR) Expenses
Imposition of Ceiling [Sec. 34(A)(1)(a)(iv) of NIRC) & RR 10-2001]
Actual entertainment, amusement and recreation expense
OR
.5% of net sales for sellers of goods and properties 1% of net revenues for sellers of services
WHICHEVER IS LOWER
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TAXPAYER ENGAGED IN BOTH TAXPAYER ENGAGED IN BOTH SALE OF GOODS AND SERVICESSALE OF GOODS AND SERVICES
Allowable EAR expense shall be determined based on apportionment formula –
Percentage of net sales/net revenue to the total net sales/net revenue multiplied by the actual EAR expense
Net sales/net revenue x Actual expense Total net sales/revenue
Note:
In no case shall the total EAR exceed the maximum percentage ceiling
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Illustration:ERA Corporation is engaged in the sale of goods and services with net sales/net revenue of P200,000 and P100,000 respectively. The actual EAR for the year 2010 totaled P3,000
Computation:*Apportionment formula
Sale of goods (P200,000/P300,000) x P3,000 = P2,000Sale of service (P100,000/300,000) x P3,000 = P1,000
**Maximum percentage ceiling
Sale of goods P200,000 x 0.50% = P1,000Sale of service P100,000 x 1% = P1,000
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Net sales/ net revenue
EAR expense based on
apportionment formula*
Maximum percentage ceiling of EAR**
Allowable amount to be claimed
as EAR (w/c ever is lower)
Sale of goods
P200,000 P2,000 P1,000 P1,000
Sale of services
P100,000 P1,000 P1,000 P1,000
Total P300,000 P3,000 P2,000 P2,000
Computation:
ERA Corporation can only claim a total of P2,000 as EAR
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In lieu of the itemized deductions enumerated under Sec. 34(A) to (J) and (M) and Sec. 37 of the Tax Code and other special laws (if applicable) .
Optional Standard Deduction
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Optional Standard Deduction
Individuals Resident citizen Non-resident citizen Resident Alien Taxable estates and trusts
Corporations (subject to normal income tax rate) Domestic corporation Resident foreign corporation
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Optional Standard Deduction
Individual CorporationRate 40% of gross
sales/revenues40% Gross income
Tax Base Excluding passive income subject to final withholding tax
Excluding passive income subject to final withholding tax
Cost of sales/services
Not allowed to deduct COS/services
Allowed to deduct COS/services
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Disclosure of election to use the OSD (RMC 16-2010) Taxpayers availing of the OSD are
required to check the appropriate box in the ITR for the first quarter of the taxable year 2009.
Failure to indicate the election to avail of the OSD shall be considered as having availed of the itemized deduction.
Optional Standard Deduction
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Disclosure of election to use the OSD (RMC 16-2010) The same type of deduction must be
consistently applied for all the succeeding quarterly returns and in the final ITR for the taxable year.
New registrants shall disclose their election to avail OSD in their initial quarterly ITR.
Optional Standard Deduction
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Implication of OSD Option is irrevocable for the taxable year for
which the return is made. Any subsequent amendment of ITR filed for
the first/initial quarter shall not affect the irrevocable character of the election to avail of the OSD or itemized deduction.
Individual claiming the OSD is not required to submit financial statements but shall keep records of his gross sales/receipts
Optional Standard Deduction
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Illustration 1
Mr. Era , a retailer of goods uses the accrual method of accounting in reporting his income and expenses. For the year 2010, the following are his recorded income and expenses
Mr. Era uses the OSD as indicated on his 1st quarter ITR. Compute for the allowable deductions for each of the quarters of 2010 and the net income for the taxable year.
Gross salesCost of sales
Operating exp
Jan-JuneJuly-SeptOct-Dec
P1,000,000700,000900,000
P600,000200,000400,000
P50,000100,000
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Computation 1
a) Allowable deductionsJan. – June July – Sept Oct -
DecGross sales P1,000,000 P700,000 P900,000Less: Cost of sales -0- - 0 - - 0 –Gross sales/income P 1,000,000 P700,000 P900,000X OSD rate 40% 40% 40%
OSD P 400,000 P280,000P360,000
====== ==============
b) Net income for 2010
Gross sales (Jan – Dec) P2,600,000 OSD (40%)
1,040,000 Net income 1,560,000
========
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Illustration 2GSV Corporation, a retailer of goods, uses the accrual method in declaring its income and expenses. For the calendar year 2010, the following are the records of its income and expenses:
GSV Corp. uses the OSD. Compute for the quarterly allowable deductions (cost and expenses) and the net income for 2010.
Gross salesCost of sales
Operating exp
Jan-JuneJuly-SeptOct-Dec
P1,000,000700,000900,000
P700,000300,000600,000
P100,000200,000100,000
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Computation 2
a) Allowable deductionJan – June July – Sept Oct – Dec
Gross sales P1,000,000 P700,000 P900,000 Less Cost of sales 700,000 300,000 600,000 Gross income 300,000 P400,000 P300,000 X OSD rate 40% 40% 40% OSD/Operating expenses P120,000 P160,000 P120,000 Add: Cost of sales 700,000 200,000 100,000
Total deductions P820,000 P360,000 P220,000======= ======= =======
b) Net income Gross sale P2,600,000 Cost of sales 1,600,000 Gross income 1,000,000 OSD (40%) 400,000
Net income P 600,000=======
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Taxation of Mixed Income
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It follows the compartmentalized approach for returnable income.
Personal exemptions are first deducted from compensation income.
Excess of PE over compensation income are deductible from net income from business.
Separate computation of income tax liability for husband and wife.
Only one spouse will claim additional personal exemption.
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Taxable compensation income is added to taxable income from business and the aggregate taxable income is subjected to the graduated tax rates.
Loss from business can not be offset against compensation income but can be carried over as NOLCO.
One consolidated income tax return for husband and wife.
Pay-as-you-file, but installment is allowed if tax due exceeds P2,000 [Sec. 56(A)(2)].
Taxation of Mixed Income
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Taxation of Marginal Income Earners (RR 11-00)
Individuals not deriving compensation income Self-employed Deriving gross sales/receipts not exceeding
P100,000 during any 12-month period Principally earning for subsistence or livelihood Exempt from VAT and any percentage tax Not required to pay the registration fee Required to register as taxpayer Exempt from the invoicing requirements
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Taxation of Marginal Income Earners (RR 11-00)
Exempt from maintaining books of accounts Required to file the Annual Income Tax Return
(Form 1700) but not required to attach Financial Statements or Account Information Form to the filed ITR
May or may not be liable to tax
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Income Tax Computation
Corporate Taxpayer
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What is a corporation?What is a corporation?
Corporation – is an artificial being created by law, having the rights of succession and the powers, attributes and properties authorized by law or incident to its existence.
For taxation purposes, corporation shall include – Partnerships
Joint-stock companies
Joint accounts
Associations
Insurance companies
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A corporation does not include –
•General Professional Partnership
•Joint venture or consortium formed for the purpose of undertaking construction projects or engaging in petroleum, coal, geothermal and other energy operations pursuant to an operating or consortium agreement under a service contract with the government
MINIMUM CORPORATE INCOME TAX
(MCIT)RR No. 9-98, as amended by RR no. 12-07
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Sec. 27(E) and 28 (A)(2) of the NIRCImposed on:
Domestic & Resident Foreign
2% on Gross Income
if: - in the 4th year of operation - net loss/zero taxable income/ MCIT is greater than NCIT
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Gross income
Include all items of gross income enumerated under Section 32(A) of the Tax Code, as amended, except income exempt from income tax and income subject to final. withholding tax.
For Sale of goods
“Gross sales” Include only sales contributory to income taxable under Sec. 27(A) of the Code.
“Cost of goods sold” Include all business expenses directly incurred to produce the merchandise to bring them to their present location and use.
Gross sales – (cost of goods sold + sales returns + discounts+ allowances)
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For sale of services
“Gross Revenues” Include income from sale of services, likewise, taxable under Sec. 27(A)
“Cost of services or Direct cost of Services”Include all business expenses directly incurred or related to the gross revenue from rendition of services.
Gross revenue – (cost of services/direct cost + sales returns + discounts + allowances)
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Illustration
Gross sales/ revenues 1,000,000.00 Less: Sales Ret., Disc & Allow. 25,000.00 Cost of Goods Sold/ services 500,000.00 Gross Income from operation 475,000.00 Add: Other Income not subject to Final Tax or Capital Gains Tax 100,000.00 Total Gross Income subject to MCIT 575,000.00 ========
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• Excess of MCIT over normal income tax shall be carried forward on an annual basis and credited against the normal income tax for the 3 immediately succeeding taxable years.
• Excess MCIT can only be credited against the income tax due if the normal income tax is higher than the MCIT
Carry forward of Excess MCIT
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• Excess MCIT which has not or cannot be so credited against the normal income tax due for the 3-year period shall lose its credibility.
• Excess MCIT cannot be claimed as a credit against the MCIT itself or against any other losses
Carry forward of Excess MCIT
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Carry forward of Excess MCIT
• The final comparison between the normal income tax payable and the MCIT shall be made at the end of the taxable year.
• The payable or excess payment in the Annual Income Tax Return shall be computed taking into consideration income tax payment made at the time of filing of quarterly income tax returns whether this be MCIT or normal income tax
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Suspension of MCIT
• Instances when MCIT may be suspended Substantial losses on account of –
Prolonged labor dispute Force majeure Legitimate business reverses
• Who may suspend Secretary of Finance upon recommendation of the CIR
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• Required documentation Submission of proof by the corporation Duly verified by the CIR’s duly authorized representative
Suspension of MCIT
IMPROPERLY ACCUMULATED
EARNINGS TAX (IAET)RA 8424/ RR No. 2-2001/RMC 35-2011
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CONCEPT OF IAETCONCEPT OF IAET
• Taxpayer is a corporation• Improper accumulation of taxable income beyond
the reasonable needs of the business• Non-distribution of earnings/profits to stockholders• The purpose of accumulation is to avoid the
payment of the income tax• Imposition of tax equivalent to 10% of the
improperly accumulated taxable income• The tax imposed is in the nature of penalty to a
corporation for improper accumulation of earnings beyond the reasonable needs of the business
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EVIDENCE OF PURPOSE TO AVOID EVIDENCE OF PURPOSE TO AVOID THE TAXTHE TAX
• The corporation is a mere holding or investment company
• Earnings or profits are permitted to accumulate beyond the reasonable needs of the business
Reasonable vs. Unreasonable Accumulation
Reasonable Needs of Business: Immediate needs of business, including
reasonably anticipated needs (Immediacy Test)
Unreasonable Accumulation Not necessary for the purpose of the
business considering all circumstances of the case
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Reasonable Needs of Business
100% of the paid up capital or the amount contributed to the corporation representing the par value of the shares of stock, hence, any excess capital over & above the par shall be excluded (RMC 35-2011).
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Reasonable Needs of Business
Earnings Reserved for definite corporate expansion projects for building, plant or equipment acquisition for compliance with loan covenant or pre-
existing obligation established under a legitimate business agreement.
Required by law to be retained or with legal prohibition
In case of foreign corporation subsidiaries, intended for investments within the Philippines
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Unreasonable accumulation of Profits
Investment of substantial earnings and profits of the corporation in unrelated business or in stock or securities of unrelated business;
Investment in bonds and other long term securities; and
Accumulation of earnings in excess of 100% of paid-up capital or contribution representing the par value of the shares of stock.
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Corporation Exempt from IAET
Banks and non-bank financial intermediaries Insurance companies Publicly held corporations Taxable partnerships GPP Non-taxable joint ventures Firms registered under RA 7916, 7227, and other
special ecozones
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IMPOSITION OF IAETIMPOSITION OF IAET
Tax rate 10%
Corporations liable Closely-held domesticcorporations
Deadline 15th day after the end of he year following the close of the taxable year
Closely-held corporations:
are corporations at least 50% in value of the outstanding capital stock or at least 50% of the total combined voting power of all classes of stocks entitled to vote is owned directly or indirectly by or for not more than 20 individuals
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TAX BASE OF IAET TAX BASE OF IAET (Improperly Accumulated Taxable Income)(Improperly Accumulated Taxable Income)
Taxable income P xxxAdd: (a)Income subject to final tax Pxxx(b)NOLCO xxx(c)Income exempt from tax xxx(d)Income excluded from gross income xxx xxxTotal P xxxLess: Income tax paid for the year xxx
Div. actually or const. paid/issued xxx xxxTotal xxxLess : Amount that can be retained xxx
IATI Pxxx ===
Payment of IAET
Dividend must be declared and paid not later than one year following the close of the taxable year
Otherwise, IAET should be paid within 15 days thereafter
Once the profit has been subjected to IAET, the same shall no longer be subjected to IAET in later years, even if not declared as dividend.
Once the profit has been subjected to IAET, the same shall no longer be subjected to IAET in later years, even if not declared as dividend.
Profits subjected to IAET, when finally declared as dividends, shall be nevertheless be subject to 10% final withholding taxProfits subjected to IAET, when finally declared as dividends, shall be nevertheless be subject to 10% final withholding tax
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Income Tax Forms and Due Dates
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Form No.
Form Name Deadline for Filing No. of Copies
1702 Annual Income Tax Return(For Corporations, Partnerships and Other Non-individual Taxpayers)
On or before April 15
On or before the 15th day of the 4th month following the close of the fiscal year
3 copies
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Income Tax Forms
Form No.
Form Name Deadline for Filing No. of Copies
1702Q Quarterly Income Tax Return
(For Corporations, Partnerships and Other Non-individual Taxpayers)
60 days following the close of the first 3 taxable quarters
3 copies
1704 Improperly Accumulated Earnings Tax Return
On or before the 15th day of the following year following the taxable year
3 copies
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NOTE:
Installment Payments•Applicable to individual taxpayer only and NOT TO CORPORATION
next
New Income Tax Forms
Presented by:
LILYBETH A. GANERRevenue OfficerASSESSMENT DIVISIONRR 19-DAVAO CITY
BIR Form 1700 ( Purely Compensation Income )
BIR Form 1701 (Self-Employed Individual, Estate and Trust)
BIR Form 1702 ( Corporations, Partnership and Other Non- Individual Taxpayer
Revised Forms
-Income tax filing covering and starting with calendar year 2011, due for filing on or before April 15. 2012
- Juridical entities on FY basis are to use starting with those FY ending January 31, 2012
Effectivity
To be read by an optical character reader Use Nov. 2011 version Box Type Shading All information must be written in capital
letters Orientation is landscape (horizontal) e-mail address of taxpayer
Features
Field No. 47 – for filer’s new address With supplemental information
(optional) Schedule of gross income subjected to
final tax
Schedule of gross income/receipts exempt from income tax
features
“Knowing is not enough; we must apply. Willing is not enough; we must do.”
Johann Wolfgang von Goethe
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