Written by Genevieve M. Limbo, 3 January 2008
With the start of another taxable year, corporate taxpayers are encouraged to revisit their past year’s accounts to ascertain that all necessary year-end adjustments are recorded and appropriate tax considerations are evaluated before finally closing their books of accounts.
Likewise, in preparation for the filing of the income tax returns (ITR) for 2007, worth reviewing are the following areas:
- Philippine Financial Reporting Standards (PFRS)
PFRS, aligned with the International Financial Reporting Standards adopted in 2005, introduced a lot of changes on the way the income and expenses have been customarily reported for financial reporting perspective.
However, taxpayers must bear in mind that PFRS does not have an impact as far as tax reporting is concerned since the existing tax law has not been changed. In fact, the Bureau of Internal Revenue (BIR) in Revenue Regulations No. 8-2007 clearly acknowledged that the recording and the recognition of business transactions for financial accounting purposes generally differ from the application of tax rules thereby resulting to disparity of reports on the same business transaction for financial accounting vis-a-vis tax accounting. Accordingly, all PFRS-related entries/adjustments are required to be reflected as reconciling items in the income tax calculation.
With this requirement, concerned taxpayers must therefore maintain books and records reflecting the reconciling items between PFRS figures with those reflected in the ITR for taxable year 2007 to avoid unnecessary controversies between the taxpayers and tax examiners during a tax audit.
To avoid disallowance of expenses which could give rise to deficiency income tax assessments, taxpayers must see to it that all the requirements for deductibility have been complied with, i.e., (a) the expenses are properly substantiated with sufficient evidence and (b) the corresponding taxes have been withheld and remitted to the BIR.
However, compliance with requirement (b) often times had been difficult especially for taxpayers who have voluminous transactions with various suppliers and thus has created practical problems in terms of expense accruals.
Consequently, certain taxpayers resort to cash basis reporting of expenses for income tax purposes (i.e., taxpayers deduct only the expenses which were subjected to withholding tax and treat the other accruals not subjected to withholding tax as non-deductible).
Such practice, however, may be questioned by the BIR and accordingly disallow the out of period claims as the law and regulations provide that deductions shall be taken during the taxable year in which the expense was "paid or accrued" or "paid or incurred." In other words, expenses accrued in the books must already be subjected to the required withholding tax.
In addition, certain types of expenses are likewise subject to specific requirements to qualify for deduction, namely:
- For inventories written-off, there must be proof of actual disposal or physical destruction of inventories, i.e., a written notice to the BIR requesting the presence of a BIR representative prior to actual destruction and an affidavit or certification of the BIR representative attesting to the actual destruction, or if the BIR fails to send a representative, a certification from independent parties supported by photos of the inventories before and after the destruction.
- For bad debts expense, the creditor taxpayer must provide sufficient proof that he has exhausted all efforts to collect the receivables, e.g., collection letters, statements of account, proof of filing of court cases.
- In the case of head office charges, deductibility shall be supported by a certification issued by the external auditor of the taxpayer’s foreign head office containing information on the extent of examination done by the auditors as well as the nature and amount of allowable overhead expenses.
- Donations, whether partial (i.e., 10% for individuals or 5% for corporations) or full deduction, shall be supported by corresponding certificates of donation issued by qualified donee-institutions.
- As to pension costs, the current service cost and the 10% past service cost must be properly supported by a valid actuarial valuation.
- Representation expense (RE) deductions are capped at 0.50% of net sales, for taxpayers engaged in sale of goods or properties, or 1% of net revenue, for taxpayers engaged in sale of services. For taxpayers engaged in both activities, the RE shall be the lower of the maximum percentage ceiling of said expense (i.e., 0.50% or 1.00%) and the computed RE based on an apportionment formula.
- Deductible interest expense must be net of 43% of the interest income subjected to final tax.
Creditable withholding taxes (CWTs)
CWTs may be credited against the taxpayer’s income tax liability provided the related income is reported during the year and they are properly supported by corresponding Certificates of Withholding Tax issued by customers.
Excess or unapplied credits Excess or unapplied withholding tax credits shown in the final ITR may either be refunded or carried over and credited against the taxpayer’s estimated quarterly income tax liabilities for the succeeding taxable years.
If the second option is availed of, such option, which must be clearly indicated in the ITR, shall be irrevocable for the taxable period.
Thus, no application for cash refund or issuance of a tax credit certificate shall be thereafter be allowed for such amount, regardless of the taxpayer’s tax position in the succeeding years.
With the above guidelines, we hope we have provided our readers sufficient information that would help them manage their tax position for 2007.
We wish you the best of 2008!
