1ax

Chapter 7 -

Introduction to Regular Income

CHAPTER 7
INCOME TAX
INTRODUCTION TO REGULAR

Chapter Overview and Objectives:

ofthe regular
income tax intended to
taracquat
overview
This chapter provides an structures of the regular income
readers with the nature and tax
and income tax determination. Suh
discusses regular tax reporting
the regular income tax.
Dsequen
chapters deal with specific aspects of
readers are expected to demonstrate knowledge n te
After this chapter,
followingg tax model
1. The scope of regular income and its
tax
2. The features of the regular income
from gross income
3. The concept of inclusion and exclusions
tax
4. The types of gross income subject to regular
5. The concept of deduction and personal exemption
6. The concept of deductions compared to personal exemptions
7. Measurement of gross income from employment and business and te
treatment of other income
8. The concept of operating income or revenue and the difference in ta
presentation of individuals and corporate taxpayers
9. The procedural computation of taxable income of corporations and dite

individual taxpayers
10. The computation of the regular tax for individuals and corporations
11. The deadline of the regular tax returns
12. Applicability ofthequarterly filing andits deadlines

CHARACTERISTICS OF THE REGULAR INCOME TAX

1. General in coverage
2. A net income tax
3. An annual tax
4. Creditable withholding tax
5. Progressive or proportional tax

General coverage p t thosethat

The regular income tax applies to all items of taxable income excepe
subject to final tax, capital gains tax, and special tax regimes.
Net income taxation fter deductio

The regular tax is an

imposition on residual profits or gains a
expenses and personal exemptions allowable by law.
228
 Introduction to Regular Income Tax
thapter7

Annualincome t a x

The regular income

The r e g u l a r
tax applies on
yearly profits or gains. The gross income and
the taxpayer are measured using the accounting methods adopted by the
expensesof
are reporte
reported to the government over the accounting period selected by
and a r e
taxpayer

the taxpayer.

Creditable withholding taxes

Mos
items of subject to creditable withholding tax (CWT). These
regular income are

erelitable withholding taxes

creditable
are
advanced taxes that must be deducted against regular
the tax still due to the government.
tax due
in computing

tax
Progressive or proportional individuals while it
a progressive tax on the taxable income of
The NIRC imposes
tax of 25% upon the taxable income of corporations.
imposes a flat or proportional

THE REGULAR INCOME TAX MODEL

Grossincome inclusions P XXX,XXXx
Less: Allowable deductions XXXXXX

Taxable Income PXXXXXX

Gross income consists of the major topics: income tax

list of income exempt to regular
Exclusions ofgross income-
to regular income
tax
income list of subject
nclusions in gross income
-

either exclusion or inclusion depending

pecial topics -
covers income that are

on certain circumstances, such as:

a. Fringe benefits
b. Dealings in properties
GROSS INCOME are neither
excluded in gross
Gross
inoncome constitutes all items of income thattax. The items of gross
income

income nor subjected to final taxwill be extensively or capital gains discussed in Chapter 9.
hnor
tO the regular income tax

lusions from Gross Income hence, exempt from regular

are excluded;
These pertain to items
ite of income that
detail in Chapter8.
Come tax. These will be discussed in

cluded income vs. exemnpt

incomne
Excluded income
are those listed by the
Rxcluincome
d is also exempt
income.
exempt income
includes all
RC as exempt income from
regular tax.
The term
tax, capital gains
tax or regular
încom
eXempt from
income tax
whether final

income are
listed in the NIRC. Exemption
from

x Exclusions from gross special laws.

co ne by the NIRC or
ay be provided 229
Chapter 7 Introduction to Regular Income Tax

ALLOWABLE DEDUCTIONS
Allowable deductions, or simply "deductions, are expenses of the con.
business or exercise of profession. They are commonly known as
expenses.
The book sub-divided the vast topic of deductions as follows:
1. Principles
of Deductions-
Chapter 13
2. Regular Allowable Itemized Deductions - Chapter 13-A
3. Special Allowable Itemized Deductions & Net
Operating Loss Carry-0U
Over.
Chapter 13-B
4. The Standard Optional Deductions (OSD) - Chapter 13-C
For individual taxpayers, there is a need to note the
difference between businex
expenses and personal expenses. Personal expenses or those that an individual
spends that are not connected to furtherance, maintenance or
trade, business or profession are non-deductible against development of his
gross income.
Individuals that are not engaged in business cannot claim
deductions from gros
income. Consequently, individuals are classified as
follows:
1. Pure compensation income earner
2. Pure business or
professional income earner
3. Mixed income earner a n
individual earning both compensation and
or professional income busine
Note on Personal Exemptioon
Previously, the law provides for personal exemption of income of
taxpayers. The amount of personal n
dependents who are supported the exemption depends on the
ielie

the
by taxpayer. Personal
exemption r s
personal, living, and family expenses of an individual
exemption is repealed effective January 1, 2018. taxpayer
In effort to simplify the tax
an P25000

annual income of the individual system, the TRAIN law simply exempl T
t
income
exemption is embedded in the income taxtaxpayer from regular inco S u c t

there is no table for individual taxpay

need to separately deduct personal exemption.
DETERMINATION OF TAXABLE INCOME
Taxable Income of Individual Income sifcati
The taxable income of TaxpayerIS Classijic

and Globalization rule. individual taxpayers is computed using u

 toRegular
hapter
7-Introduction Income Tax
usification Rule
first classified into:
ssincomeis
Gressincome

Compensation income
Businessorprofessional income

Compe apedsation income vs. Business income

(ompensation
income arises from an employer-employee relationship.
relationship is characterized by a power to retrench giving the This
e purchaser of
terminate the arrangement when he is losing in business. Business the
c income
ar from selling of goods or rendering of services for a
here the chaser of the service has profit. In service
arrangements no power to retrench, the
income realized thereon is a business income.

Treatment of other income

Income that are neither compensation income nor business income such as those
passive income are simply classified as "other taxable income" and are added to
gross income from business and profession.

Allowable deductions
buSiness expenses are deducted against gross income from business or
profession. No deduction is allowed against compensation income since personal
n the
of individuals for cost of are deemed to be included
living
penses
FES0,000 blanket exemption in the income taX table.

business or professional income

er income which is neither compensation nor as
Non
added to total income from business or profession
nply gross
business or professional
income, the
n g income." If the taxpaver has no
Slal be added to taxable compensation income as "otherincome.

axable income of pure compensation incomeis computed earner

follows:
The taxable compensation income of employees as

P XXX,XXX
utoss compensation income XXX.XXX
Non-taxable compensation
able compensation income PXXX.Xx

deductions
and items
salary
Non-taxable compensation
PhDle includes legally mandated
law,
contracts,
or
o r treaty
treaty
from
from
compe sation income
discussed

that are exempted by income

will be
Co compensation

Chapter 10
cdetalled
taxrules on

231
 Incomé ldX
Introduction to Regular
Chapter 7
-

income earner
or professional
of pure business
Taxable income businessmen or professionals is computed mputed as fau
follows
as
net income of
The taxable
P XXX,XXX
Gross Income from business/profession
Add: Non-operating income
XXX.XXX
P XXX,XXX
Total Gross income
Less: Allowable deductions XXXXXXK
Taxable net income P XXXXXX

Globalization rule for mixed income earner

The income of mixed income earner from both sources is simply globalizedar
totaled. A negative net income or net loss when deductions exceed gross incoma
from business or profession shall not be offset against taxable compensatign
income because deductions are expenses of business or profession and ae
properly deductible only against gross income thereto, whereas no expenseis
deductible against taxable compensation income.

Mlustration: Individual income taxpayer

Case1 Case 2 Case 3 Case 4

Compensation income P 300,000 P P 300,000 P 300,000
Non-taxable compensation_ 30,000 30,000 30,000
| Gross businessincome P400,000 400,000 200,000
Deductions 250,000 250,000 250,000
Other income 20,000 20,0000 20,000 20,000
Taxable income shall be determined in each of the above case as follows:
Case 1:A compensation
earner with other income
Gross compensation income
P 300,000
Less: Non-taxable compensation
Taxable compensation income 30.000
Add: Other gross income P 270,000
Taxable income 20.000
Case
P 290,000
2:A business income earner with other
income
Gross business income
Add: Other P 400,000
gross income
Total gross income 20.000
Less: Allowable deductions P 420,000
Net income 250.000
P 170.000
 hapter IntrUu e TaX

mixed in
mixed
income earner with other income
3:A
2se
Grdsscompensation income P 300,000
Less Non-taxable compensation
30.000
Taxable compensation income
P 270,000
Taxable compensation income
P 270,000
Gross business income P 400,000
Othergrossincome 20.000
Total gross income P 420,000
Less: Deductions 250.000
Taxable net income
170.000
Taxable Income P 440,000
Case 4: Mixed income earner - with net loss on business or profession

Gross compensation income P 300,000

Less: Non-taxable compensation 30.000
Taxable compensation income P 270,0000

Gross business income P 200,000

Add: Other gross income 20.000
Total gross income P 220,000
Less: Deductions 250.000
Net loss P 30.000)
Taxable income P 270.000
three
deduction against net income of the succeeding
Anet loss may be carried over as a
or NOLCO.
This will be discussed under
to as net operating loss carry-over
dad IS referred
deductions in Chapter 13-B.

Determination of Taxable Incomeof Corporate Income 1axpaye manner as

same manner
as pure
pure
in the
h able income of corporations is computed
h
Dusiness or professional income earner
annual
Accounting Method and Accounting Period basis of the
taxpayer's
The taxabl upon the
income shall be computed
regularly accounting
of
accountina the method of
accounting
emplovoPeriod
in accordance with however, if no such method
clearly
employed inEplng
keepi the books of such taxpayer;
method
employed
does not
with such
if the
unting has been so employed, or
made in
accordance

eflect shall be income.

elect the income, the computation clearly reflects
the
method that in the opinion of the Commissioner,

233
 Chapter 7 - Introduction to Regular Income Tax

In short
Taxpayers using Shall computetaxable income uet
GAAPcash basis on a calendar year Tax cash basis on a calendar yearsing
GAAPcash basis on afiscal year Tax cash basis on a fiscal year
GAAPaccrual basis on a calendar year Tax accrual basis on a calendar
year
GAAPaccrual basis on afiscal year Tax accrual basis on a fiscal year

Determination of Gross Income from Business or Profession

Business sellinggoods
The gross income from business the sale of goods is
on
computed as:
Sales P Xxxxxx
Less: Cost of goods sold (cost of sales)
Gross income XXX,XXX
PXXXXXX
Cost of sales
Cost of sales pertains to the
the manufacturing cost of the
acquisition cost of the goods sold for merchandising or
goods sold in the case of manufacturing.
Cost of sale ofa trading business
The cost of goods sold
may be determined by the
perpetual inventory system with the aid of specific identification using
point-of-sale (POS) machines or by the
periodic inventory system using the following formula:
Beginning inventory
Purchases, net of returns and allowancesS P XXX,XXX
Freight-in XXX,XXX
Total goods available for sale XKXXX
Less: Ending inventory P XXX,XXX
Cost of goods sold XXXXXXx
Under the XXX,XXx
perpetual
codes of the goods soldsystem, the cost of goods sold is bar

Under the periodic

or by stock
cards indicating the determined througald
costs of the
inventories. The costsystem, the cost
of missing itemsofatgoods
everysold
reporting goonting&the
date is consrated
For purposes of
is established by couA Sod
costing, the
all units purchased. freight costs of the goods date is considered
allocate to
purchased are
Cost of sales
of a
goodsmanufacturing
The cost of business
sold of a
same
way with those of manufacturing
trading business. business is
inventories of a The detailedcomputea
a
dures
manufacturing business will be discussed incosting pr13.
234 cnap
 Introduction to Regular Income Tax
Chapter
r 77- -

ustrahad tthe following data during the year

lhustration

had
t a x p a y e r

A P 4,000,000
Gross
sales

S a l e sd i s c o u n t s
100,000
S a l e sr e t u r n
200,000
Beginning inventory 600,000
2,500,000
Purchases

returns and allowances 150,000

Purchase 200,000
Freight-in 800,000
Ending inventory

shall be computed as follows:

The cost ofsales P 600,000
Beginning inventory 2,350,000
P150K)
Net purchases (P2.5M
-

200.000
Freight-in P 3,150,000
for sale
Total goods available 800.0000
Less: Ending inventory P 2.350.000
Cost of sales
as follows:
shall be computed
The business gross income
P 3,700,000
Sales (P4M- P100K- P200K) 2.350.000
Less: Cost of sales P 1350.000
Gross income
measured as
is
Susiness sellingservices or exercise of a profession
încome from sale of services
gross
follows: P XXX,XXX

Revenues or gross receipts XXX,XXX

Less: Cost of services P XXXXXX

the cash
Gross income revenues
while those
using
report
their
basis shall
ServiceI e r s using the accrual
collections.
oasi shall report their gross receipts or cost of
such a s
services
the
Cost of services all direct cost of rendering c e s s h o u l d be
distinguished

of
or
Services pertains to cost of services marel
ar
rk e t i n g
expenses
expenses

costs. The
m
and
abor,
materials, and
overhead

such a s general
i n i s t r a t i o n
a d m i n i s t r a t i o n

under
the
deduction
category

rom the indirect c t costs presented

separately
the
he busin
business. These two are
deductions."
Reol itemized
egular allow
the y e a r :
during

Wlustration auditor had the following

income and expens
enses

acticing 235
Chapter 7 - Introduction to Regular Income Tax

Billing for services rendered and out-of-pocket costs P 4,500,000

Salaries of audit staff 1,400,000
Salaries of administrative 200,000
employees
Transportation expenses to and from clients 12,000
Supplies used in various engagements 250,000
Supplies and general utilities 120,000
Depreciation of office equipment 80,000
Depreciation of laptops issued to audit staff 50,000
Insurance expense on office properties 20,000
Rent expenses allocable to
workspaces 400,000
Rent expenses allocable to administrative offices 50,000
Bad debt expense on non-paying clients
100,000
The cost ofservices shall include only those directly incurred or related gross revenu
from the rendition of services such as:

Salaries of audit staff P 1,400,000

Transportation expenses to and from clients 12,000
Rental expense on staff workspaces 400,000
Supplies used in various engagements
250,000
Depreciation of laptops
Total cost of services
-50.000
P 2.112.000
The gross income shall be computed as follows:
Revenue
P 4,500,000
Less: Cost of services
Gross income 2.112.000
P 2,388.000
INCOME TAX REPORTING FORMAT
Reporting Format for Individuals Engaged in Business or
Profession
Net Sales/Revenues/Receipts/Fees
Add: Other taxable income P XXX,XXX
from operation not subject to final tax
Total sales/revenues/receipts/fees XXXXAA
XXXXXX
Less: Cost of sales or services P XXX,XXX
Gross Income from XXX,XXX
business/profession
Add: Non-operating income P XXX,XXX
Total Gross income XXX,XXX
Less: Allowable deductions P XXX,XXX
Net income XXXXXX

PXXX.XXX

236
 1- Introduction to Regular Income Ta
rapter7 -

es,revenues,.receipts, and fees distinguished

ueis a
general term which pertains to the
from the imary gross inflow of
return) a r i ing

reru the sale of goods while "fees"

operations
of the
business.
benefits (total
Sales
from
revenuefrom
to pertains pertains to
eceipts pertains to cash collection from the sale ofrevenue from the sale of
Service

goods or services.
oc or
Thetermssales fees or simply revenue are commonly used to
The termcing the accrual basis while the term denote the income
o ft a x p a y e r s

using the cash basis. receipts is used to denote the

income of taxpayers
income
Revenue vS. gross
Daenue is a gross concept pertaining to the total return in a
transaction which
includes the return of capital and the return on capital. Gross income is a net
concept pertaining to the return on capital in a transaction. Gross income is net
the cost of sales or cost of services.

Other taxable income from operations

Other taxable income from operations includes revenues or receipts from
ncidental or secondary operations aside from the primary operations.

Examples:
LA School has tuition fees as primary revenue, but its income from its bookstore,
canteen or student dormitories constitutes other operating
revenues.
as its
firm has its gross income from sale of finished goods
A manufacturing sales constitutes other operating
primary revenue, but its income from scrap
revenues. revenue, but may
have
service fees as its primary
Aprivate hospital has patient

rental and sale medicines at its other operating revenues.

of but may have laundry fees
its primary revenue,
ormitory has boarding fees as revenues.
dna canteen income as other operating
earn
revenue, but may
its primary
Tetal store has its sales of merchandise as
consignment commission income as other operating r
p ea
vsesn
eune
g se
. rs and bagg m
as

from
baggage
passengers and w
6. A the receipts
ashrooms
and
bus dnsport
tra company has
bus stop
restaurants

income from
primary revenue, but may earn

other operating revenues

such as:
Non-operating incomne
includes all other
items ofgross
income

-operating in
n gincome
11 Gains from dealings in properties revenue. Theyare
than
rather income."
items
income
Being net of cos
"Non-0perating

a r e gross
but of
s,nese
"Sale/Revenues/Receipts/Fees
part of disposition
of
individual taxpayers exchange
and
other

in
properties
not

to the sale, dealing

ealings in properties
pertain

The rules
on ains
in

operties by
Poperties the taxpayer.
237
 Introduction to Regular Income Tax
Chapter 7
-

tax will be discussed in Chapter 12 na

covered by the capital gains under regla
income taxation.

Income distribution from

a gemeral professional partnershin. t
2.
trust or estate, or from an exempt joint venture taxatle
Income distributions from these entities are not revenue, but items of.
income, hence, included as part of the non-operating income ofindividhagros
xals.
3. Casual active income
This includes active income from isolated or one-time transactions sur
Such a
casual carpentry income of a person not engaged in carpentry business
Any
expense on casual transactions is set off with the casual income. The net oni
or income is a non-operating income.
4. Passive income not subject to final tax
This includes passive income not connected with the business of the taxpae
and is not subjected to final tax such as interest on advances to employeesand
dividends from foreign corporations. Similar to casual income, these do nat
arise from the regular business operations, hence, classified as non-operating
income.

Illustration
An individual taxpayer who is using the accrual basis in his manufacturing business
reported the following results of operations in the preceding year:

Sales, net of returns, and discounts P 4,000,000

Cost of sales 1,800,000
Dividend income, net of final tax 36,000
Business expenses 1,600,000
Gain on sale of old equipment 100,000
Sale of scrap metals 200,000
Interest income on employee advances 45,000
Gain on sale of domestic stocks directly to a buyer 10,000

The business income of the individual will be presented in the income

follows:

Net Sales/Revenues/Receipts/Fees P 4,000,000

Add: Other taxable income
from operations Scrap sales
- 200.000
Total Sales/Revenues/Receipts/Fees P 4,200,000
Less: Cost of sales or services 1.800.000

Gross Income from

Business/Profession
Add: Non-operating income
P 2,400,000

Gain on sale of
equipment
Interest income on employee advances
P 100,000
145.000
Total Gross Income 45.000
P 2,545,000

238
 7
Introduction to Regular Income Tax
-
I n t r o d u c t

ter

Total
G r o s sl n c o m e

P 2,545,000
deductions (Business expenses)
0 Allowable 1.600.000
less
N e t
i n c o m e

P 945,000
Note:Income.
.ams Subject to final
tax like the dividends and
capital gains on the stocks
Note
are uded in the computation of the gros income subject to regular income tax.

eportingFornmat
forCorporate Taxpayers
Net S a l e s / R e v e n u e s / R e c e i p t s / F e e s P XXX,XXX
or services XXXXXXX
es: Cost of sales
from operations P XXX,XXX
Gross income
income not subject to final tax XXX,XXX
t Other taxable
Total gross income P XXX,XXX
Less: Allowable deductions XXXXXX
P XXXXXX
Net income
or incidental
r e v e n u e s or receipts from secondary
Note: For corporate taxpayers,
classification "Sales/Revenues/Receipts/Fees"
operations will be included under the
Other taxable income not subject to final tax from the
income whether or not arising
ms category includes other items of gross income
such as gains from dealings in properties, to
ruons of the corporation and other passive income not subject
venture,
o n from an exempt joint
final tax.

Wustration illustration except that

the taxpayer
is a

sur same data in the previous

COT e the business income shall be reported asfollows
POdton,
P 4,200,000
CKevenues/Receipts/Fees (P4M+ P0.2M) 1.800.000

s: Cost of sales P 2,400,000

itoss income from
ain on sale of equipmernt
operatuoesbiect
to final tax
Other taxable income not subject to
finapP 100,00
100,000

45.000 145
145.000
rest income on employee advances P 2,545,000

otal gross income 1.600.000

ess. Allowable P 945.000
Net income deductions (Business expenses)
corporationsIs
and for
he differen between
individuals

basis of
basis of the OSD
the OSD tor
in presentation The while the
cesence (OSD).
essitated by the
ted Standard
Optional Standard
Deduction
Deduction from inc ome
come
operations

Vvidual
asis of taxpayer
t a x p a v e r e 0 n a l

ayers is the total

or
receipts
subject
to regular revenues
income

the OSD tor corporations is total

gross
business
operations.

hether or not they arise from the regular

239
Chapter 7 -
Introduction to Regular Income Tax

Separate bookkeeping for business and professional practice

Individual taxpayers engaged in business or exercise of a professi
maintain a separate record of their transactions fromn
business or
transactions. The personal transactions of the individual profes
mixed with the transactions of the business or professional taxpayer must not
practice. he
This is important in the tax treatment of
expenses. The personal expense of.

business Tithe
taxpayer cannot be deducted against the gross income of the
allowable personal exemption fixed by law for individual taxpayers is in lieu of
the actual personal, family, and cost of living expenses of the taxpayer. ofa
TYPES OF REGULAR INCOME TAX
1. Individual income tax
2. Corporate income tax

INDIVIDUAL INCOME TAX

The individual income tax or progressive income tax is determined
by referencet
a tax table of progressive tax ratesS.

The Income Tax Table for Individual Taxpayers (Year 2018- Year 2022)
Taxable Income per Year IncomeTax Rate
P 250,000 and below
Above P250,000 to P400,000
0%
20% of the excess over P250,000
Above P400,000to P800,000 P30,000 +25% of the excess over P400,000
Above P800,000to P2,000,000 P130,000+ 30% of the excess over P800,000
Above P2,000,000 to P8,000,000 P 490,000+32% of the excess over P2,000,000
Above P8,000,0000 P2,410,000+35% of the excess over P8,000.00
Note: Examinees are not required to memorize this tax table for Board Exam
purposes
Scope of the progressive tax
trus
The progressive tax covers all individuals including taxable estates ana
except NRA - NETB which is subject to 25% final tax on gross incomne.

Illustration 1: Income Tax Computation

A resident citizen with has within

compensation income of P1,250,00

a
Philippines and P150,000 from abroad.

The income tax due shall be

computed as follows:
 Chapter7-Intr
Introduction to gular Income Tax

xable compensation income

1,400,000 Tax Due
ax Due_
T a x a d

L o w e r
the
limit of income bracket
the taxable income qualifies
less:

here
P
800.000
600,000
P
130,000
Excess

by: bracket marginal

rate
Multiply
tax due
30% 180.000
income
Total P 310.000
Above P400,000 to P800,000 P30,000+25% of the excess over P400,000
hae P800,000 to P2,000,000 P30,000 + 30% of the excess over P800.000
AboveP2,000,0001 00P490,000+ 32% of the excess over
P8,000,00
P2,000,000
Note: Recall that a resident citizen is taxable on global income (i.e. P1,250,000 + P150,000).

lustration 2: Income Tax Computation

Aresident alien has a net business net income of P2,200,000 in the Philippines and
P1,250,000 from abroad.

The income tax due shall be computed as follows:

Tax Due
Taxable compensation income P 2,200,000
Ls: Lower limit of the income bracket
where the taxable income qualifies 2.000.0000 P 490,000
Excess P 200,000
Aultiply by: bracket marginal rate 32% 64.000
Iotal income tax due P 554.000

excess over P800,000

Above P800,000 to P2,000,000 P130,000+30% of the P2,000,000
Above P2,000,000 to P8,000,000 P490,000+ 32% ofthe excess over over P8,000,000
+ 35% of the excess
Above P8,000,000 P2,410,000

Aote: Recall thata resident alien is taxable only on Philippine income.

The
heEOptional 8% Income Tax
IRAIN law introduced income tax
for self-employed and/or
and
optional
ofsales or receipt
1
Rofessionals n(SEP) an

Wnerein they can opt to be

taxed at 8%

non-operating incomne.
B% incometax shall be in lieu table; and
a. of the: individual tax
Progres income
3% percentage tax, tax on salesunder
business
computed
or receipts
 Income Tax
Chapter 7 - Introduction to Regular Ch
The 8% income tax is a form of a bundled tax which enables one-tima .

for two taxes which would otherwise require separate filing and payments
of this tax system will be extensively
discussed in Chapter 14.
Smphans ASS
be

Ta

CORPORATE INCOME TAX ML

The corporate income tax, commonly referred to as the regular corporate In
tax (RCIT), is a generally a proportional or flat tax at a rate of 25% On
income for domestic or foreign corporation. NO
1
However, a lower 20% proportional tax on taxable income is imposed on damee
micro, small-, and medium-sized enterprises (MSMEs) with not more than Pra omestc
million assets, excluding land, and not more than P5 million taxable income. TL
Co-
The RCIT applies to any corporation other than those: O

a. Subject to final tax such as non-resident foreign corporation and FO re

interest income not subjected to final tax CO

b. Special corporations or those subject to preferential (i.e. lower) tax rateso th-
special regimes
C. Exempt corporations

Illustration
A corporation has a net income of P1,200,000 in the Philippines and P800,000
abroad.

Assuming the corporation is a large domestic corporation, the income tax due hal
computed as follows:

Taxable income (world) P 2,000,000

Multiply by: Tax rate
25%
Income tax due
P 500.000
mpu

Assuming the corporation is a domestic MSME, the income tax due shall DE
as follows:

Taxable income (world) P 2,000,000

Multiply by: Tax rate
Income tax due 20%
P 400.000
Note:
1. Domestic corporations are taxable on regan
2. If the taxable income is global income.
than P5 million, the 25%
cable withouti

more
whether the domestic
corporation is a MSME or a large
tax isapplicaDe
corporation.
 Chapter7- troduction to Regular Income Tax
Assuming the corporation ation is a
resident foreign
he
Computed
as follows:
corporation, the income tax due
shall
Taxable income(Philippines
1Tax rate
P 1,200,000
Multiply by:
Income tax due 25%
P300.000
Note:
Decident foreign corporation Is taxable on
2 There
The ction
is no distinct Philippine incomne.
between large corporation
corporation. The 25% proportional tax simply applies. or MSME when it comes to
foreign
The Minimum Corporate Income Tax (MCIT)
Corporate taxpayers are normally subject to a
total gross income subject to
minimum tax, computed as 2% of
regular tax. This
reduced to 1% this pandemic from July 1, 2020minimum tax is
temporarily
to June 30, 2023.
corporations are losing in business, they are subject to the minimum tax. Even if
the MCIT will be discussed in Details of
Chapter 15-B.
Special Corporations
special corporations are those enjoying lower tax rates but not
0%, such as
private sch0ols, non-profit hospitals and PEZA or TIEZA-registered enterprises.
mne taxation of these corporations will be discussed thoroughly in Chapter 15-A.

empt Corporations
t corporations those enjoving 0% tax rate with no tax dues such as
are
government agencies, non-profit organizations with no taxable income,
0op
ihcome uves, and those registered with the Board of Investments (BO1) enjoying
tax holiday or ITH.

NCOME TAXx RETURNS

ndividual Income Tax Returns
lax Return Form Individual taxpayers
Form 1700 Purely employed axpayer
itemized, OSD
or
Form 1701A profession, using
rurely in business
or
incometax _
the 8% optional
opting to Estates and Trusts
Form 1701 income
MIxedCorporate
earners,

incometaxpayers
income tax
Form 1702-RT Corporations subjectonly to the 25%regular
oftax rates
Form 1702-MX Corporations subjectto
specialor a
combination

tax due
orm 1702-EX exemptwith no
that is
Orporations

243
 Introduction to Regular Income Tax
Chapter 7
-

It should be noted that exempt corporations are required to report their re

do not have taxable
operations through BIR Form 1702-EX even they
if
in their income tax ret
They are mandated to itemized their deductions
rule is apparently intended to assist the BIR in monitoring compliance of
and to provide
corporation with their withholding tax obligations for
mechanism to identify income earned by third parties.

Exempt corporations with gross income subject to the regular corporateine

Cone
tax or special rate shall file BIR Form 1702-MX.
Deadline of filing the income tax return
The annual income tax return is due for filing on the 15th day of the fourth man
following the taxable year of the taxpayer. The income tax due shall be paidupn

filing.
Rounding rules in the income tax returns
The requirement for entering centavos in the latest version of the income t
return (June 2013 version) has been eliminated. If the amount of centavos is 49
less, the centavos are dropped down. If the amount is 50 centavos or more, iti
rounded up to the next peso.

Hence, an amount for P100.49 shall be entered in the income tax return as PI

An amount of P100.50 shall be rounded to P101.

Required Attachment in the Annual Income Tax Return

1. Certificate of Independent CPA - if annual sales, earnings, receipts or 0u

exceed P3,000,000)
2. Supplemental form for taxpayers with multiple activities per tax regime
3. Account information form and financial statements (FS) showing
a. Sales/receipts/fees
b. Cost of sales/services
c. Non-operating and other taxable income
d. Itemized deductions (if taxpayer did not avail of OSD)
e. Taxes and licenses
f. Other information prescribed to be disclosed in the FS
4. Statement of management responsibility (SMR) (BIR
FO
5 Certificate of income payments not subjected to Withholding 1as
2304)
6 Certificate of creditable withheld at source (BIR Form 2307)
7. Duly approved Tax debit
memo, if applicable
8. Proof of prior
year's excess credits, if applicable
9. Proof of foreign tax credits, if
applicable
2 44
 7-Introduction to Regular Income Tax
Chapter7

ed return, proof of tax

1 0 .F o ra m e n d e d

payment and the return

ificate of tax treaty
reliet/Entitlement issued by the previously filed
Promotion Agency (IPA) concerned Investment
TERLY FILING OF INCOME TAX RETURN
QUAR
c and individuals engaged in business
C o r p o r a t i o n s

and those
profession engaged in the
practice of a
are required to file
three
consolidated income tax return.
quarterly returns aside from the
annual

Ldividual taxpayers engaged

Individual
in business or practice of profession shall file their
rterly income tax returns using BIR Form 1701Q. Corporations shall file their
quarterly income tax returns using BIR Form 17020.
Taxpavers make estimated quarterly tax payments. These quarterly tax payments
are claimed as tax
credit (deductions) to the annual consolidated income tax due
of the taxpayer
CHANGE IN CORPORATE TAX
DETERMINATION OF TAX DUE UNDER INTERIM
RATE
the taxable income of corporations
Under Section 27 of the NIRC, as amended, to
period shall be computed without regard
adopting the fiscal-year accounting occur.
purchases and other transactions
the specific date when specific sales, deemed to have been
fiscal year shall be
neir income and expenses for the is the pro-rata
each month of the period. This
for
arnea and spent equally
method.
corporations reporting on
a calendar year
the
for in using
he
NE NIRC did not specify a method consistent
BIR has been
however, the for any corporate
accounting
hpro-rata
period. In practice,
corporate
tax rate
transitions

calendar or a
fiscal
method in implementing undera

In whether they reporting the tax

rate
axpayer without regard as to RMC16-2006 in implementing
the tax rate
in
accounting
itiPeriod.
This is
observable
RR5-2021 in
implementing

transitions RA9337 and in

tancit under law.
the CREATE
ansition under RA11534 or
November1,

starting tax
lustration 1: Fiscal year basis fiscal year corporate

for the regular

Trans Corp.
Pearned
total of a
P18,000,000
law
changed
the

2019 nding October 31, 2020. The CREATE

2020.
rate from
30% to 25% effective July 1, llows:

fiscal year
as
tono
Thencome tax due shall be computed for the
P 1 8 , 0 0 0 , 0 0 0

iscal year taxable income 12

ided by: months in ayear P 1500.000

Monthly taxable income

Chapter 7 Introduction
-

to Regular Income Tax

Taxable incomecovered by old 30% rate

No. of months (November 1 to June 30) 8
Multiply by: monthly taxable income P 1.500.000
Total
P12,000,000
Multiply by: Old tax rate 30% P 3,600,000
Taxable income covered by the new 25% rate
No. of months (July 1 to October 31) 4
Multiply by: monthly taxable income P 1.500.000
Total P 6,000,000
Multiply by: New tax rate 25%
Total income tax due 1.500.000
P 5,100.000
Alternatively,
Taxable income covered by old 30%rate
Fiscal year taxable income P18,000,000
Multiply by: November June months/12
-

8/12
Total P12,000,000
Multiply by: 0ld tax rate 30% P 3,600,000
Taxable incomecovered by the new 25% rate
Fiscal year taxable income P18,000,000
Multiply by: July - October months/12
4/12
Total P 6,000,000
Multiply by: New rate 25% 1.500.000
Total income tax due
P 5.100.000
Illustration 2: Calendar year basis
0.Te
Assuming Trans Corp. earned a total of P10,000,000 for the calendar year 2020.1
CREATE law changed the regular corporate tax rate from 30% to 25% effectve
2020.

The income tax shall be computed for calendar year 2020 as follows:

Taxable income covered by old 30%rate

Calendar year taxable income P 10,000,000
Multiply by: January - June months/12
6/12
Total P 5,000,000
Multiply by: Old tax rate 30% P 2,500,000
Taxable incomecovered by the new 25% rate
Calendar year taxable income P10,000,000
Multiply by: July - December months/12
6/12
Total P 5,000,000
1.250.000
Multiply by: New rate 25% P 3.750.000
Total income tax due
246
 Chapter7 - Introduction to Regular Income Tax

fQuarterly ncome Tax Return:

eadline

QuarterlyI n c o m e

Individuals
Taxpayers
Tax Returns
1 sQuarter1TR May 15, same year Corporations
60 days end of 1st Qtr
2ndQuarterITR August 15, same year 60 days end of 2nd Qtr
3 uarter1TR November 15, same year 60 days end of 3rd
Qtr
ry income tax returns of individuals engaged in business or profession are
A avs from the end of the first three quarter whereas the quarterly income
due
taxTreturns of corporate taxpayers are due 60 days from the end of the quarter.

Per Taxpayer Type

Frequency of Reporting

Taxpayer Frequency of TaxReporting_

Individuals
Pure compensation income earner Annual
Purely engagéd in business or profession Quarterly &Annual
Mixed incomeearner Quarterly &Annual
Corporations Quarterly &Annual

The substituted filing system for employees

earners may be relieved
from the obligation to file
rure compensation income
income from other sources
annual income tax return if they have no taxable
r
uner from their lone employer. The employee may avail of the substituted Jiung9
income tax of the employee'ss
Em Wherein the emplover shall withhold the
ompensation.
employee through the
fthe correctly withheld the tax due of the Form 1700
nployer not file his
withholding lax
tax the employee need
on compensation, The Form
aymo tax refundable.
anymore since there would be no residual tax due
or
has m o r e than
one

1T100 S required if the employe has other taxable income or

employer, e concurrent or successive, during the year.

yer, either