APRIL 15 is just around the corner. It’s the time of the year when corporate taxpayers are finalizing their annual income tax returns (ITRs) based on their audited financial statements. Income and costs are analyzed as to their taxability and deductibility, to determine a final income levels for tax computation purposes.
The basic formula for regular corporate income tax (RCIT) is sales less cost of sales plus other income less operating expenses multiplied by 30%; while the basic formula for minimum corporate income tax (MCIT) is sales less direct costs plus other income multiplied by 2%.
The tax that is due to be paid is whichever is higher between RCIT and MCIT. In the said formula, a taxpayer may have income tax credits that could arise from a) prior year excess tax credits, b) tax payments made in the previous three quarters, c) excess MCIT as compared to the RCIT in previous years, and d) creditable withholding taxes (CWT). Hence, one of the sources is the creditable taxes withheld by the company’s clients or customers.
Creditable taxes withheld are actually the taxes remitted in advance by the clients or customers on behalf of the income earner. This is the scheme that we commonly call as the expanded withholding tax system. It aims to spread the remittance of the income tax due of the income earner which may be the exact amount due on the submission of the annual ITR or simply an approximation. If the source of revenue is classified as professional services, rental, contractor services and/or sales of goods and services (for those who are classified as Top 20,000/10,000/5,000 Corporations of the Philippines) then these are required to be withheld and remitted by the client or customer.
There are certain rules related to creditable taxes withheld as sources of tax credits. At the time of filing of the income tax return, the taxpayer-income earner is required to submit copies of the certificates or BIR Form 2307 furnished to it by its clients or customers. In the said BIR Forms the information that should be filled out are: a) TIN, Name, and address of payee and payor; b) month or period covered by the transaction; c) ATC classification; d) amount of expense involved (net of VAT and properly classified on the columns marked 1st, 2nd or 3rd month); e) amount of withholding tax; and f) signature of authorized representative.
Recently, the BIR issued another requirement which provided additional compliance rules. The issuance required large taxpayers to submit scanned copies of CWT certificates in pdf format in lieu of the hardcopies previously required. Each certificate must be scanned separately and should follow the required filename format (i.e., Name of Company_TIN including branch code_taxable period). These are to be submitted in Digital Versatile Disk Recordable (DVD-R) format with labeling requirements (i,e,. Name and TIN of the Company claiming the tax credits, period covered, number of scanned copies, and the name and signature of the authorized representative). Non-large taxpayers are also given the option to submit copies in DVD-R format or to retain their practice of submitting hard copy. For non-large taxpayers, once the option to submit in DVD-R format is chosen, they are no longer allowed revert to hard copy.
Moreover, an additional requirement is the attachment of a sworn declaration which states 1) in compliance with the Revenue Regulation the company is submitting DVD-Rs which contain the scanned copies of BIR Form 2307 covering a specific period; b) scanned copies submitted conform to the condition/specification requirements that has been set by the BIR; and c) that the scanned copies are the complete and exact copies of the original.
There are various rules related to creditable withholding tax, and another one has just been added by the BIR. During the assessment periods, we c ould anticipate that different BIR examiners could have different findings on CWT — either disallowance or administrative penalty. Nonetheless, the taxpayer, as a prudent course of action, should observe stricter policies in securing BIR Form 2307 from their clients who have withheld taxes from their income and collect all CWTs in time for the submission on April 15. The timely submissions to the income earners become a crucial element in filing annual ITRs which also include the succeeding quarterly submissions. The income earners should also verify if the details indicated in the certificate are complete (i.e., TIN, Name of payee and payor, month or period covered by the transaction, ATC classification, signature of authorized representative).
For the specific details on the above new rule, the taxpayer should refer to Revenue Regulations 02-2015.
Taxpayers have 36 days to beat the April 15 deadline. In this period, they should be diligent in ensuring that tax credits are fully substantiated and that certificates reflect the complete details before they are scanned in PDF format. The company may assign an individual to directly supervise tax credits to maximize their use.
An informed taxpayer always has the edge. Hence, remember the tax rules on CWT, the most recent one being Revenue Regulation No. 02-2015.