It is the tax season in the Philippines which means people who earn an income will have to file their income taxes soon. Failing to prepare for tax filing season can result in undue stress.
Remember, you must file and submit your annual income return and your audited financial statement on or before the 15th of April this year. During this season, there are many mistakes on audited financial statements and income tax returns that you should be aware of and avoid at all cost. Check them out below:
1. Improper claiming of creditable withholding tax
The BIR Form No. 2307 shows that the tax withheld by your suppliers are tax deductions or creditors from income tax liability. On books, it is treated as an asset and sometimes, the financial statements would display such asset amount that could have been used. However, there are instances where the asset amount shown in the financial statements does not have proper documentation. You should be aware and take note of the 2307 requirements when you’re doing bookkeeping.
2. Claiming deductible expenses yet forgetting to factor in applicable withholding taxes
According to the Philippine Tax Code, expenses subject to withholding tax should not be deductible until applicable withholding taxes are made. To make sure you are deducting expenses properly withheld, you should double check with alpha lists of payees and employees filed properly with the BIR and make sure that there is available justification for the expenses. Otherwise, without proper evidence, you could be subject to an audit and investigation
3. Not considering the tax-deductible NOLCO
NOLCO or net operating loss carry-over is a tax asset that some people disregard. If you claim itemized deductions, you can avail of the NOLCO deduction by properly stating it on your previous year’s financial statements and income tax returns. On a first-in and first-out basis, you can claim it within 3 taxable years from the year of loss.
4. Not considering the minimum corporate income tax (MCIT) credits
MCIT credits like NOLCO can be claimed within 3 taxable years from the year the corporation became liable to the normal corporate income tax of 30%. When you pay the MCIT, make sure you indicate the MCIT in your annual income tax return and on your audited financial statements. Setting up a proper accounting system is crucial to prevent mistakes.
5. Taxing the non-taxable income
When you note in your books of accounts and your financial income, the other income is a one-line item. Do not be confused and conclude that the same is automatically subject to the corporate income tax (30%) or the MCIT computations (2%). Double-check and verify each item in your accounting records to make sure that other income account is a taxable ordinary income. This is to avoid misapplication if it is not the same as the capital gains which are subject to capital gains tax, unrealized gains, etc.
6. Not complete BIR-mandated notes to financial statements
The notes to financial statements are not only mandated by the rules and regulations of the SEC or Securities of Exchange Commission. The BIR or Bureau of Internal Revenue also mandates and requires some details on taxes that need to be indicated in the financial statements just like the Revenue Memorandum No. 19-2011 and the Revenue Regulations No. 15-2010. Ensure that those notes appear in your audited financial statements.
7. Not accounting for the account year-end DST on debt agreements
If you belong to a group of companies, a cash cow company is very common and the inter-company mobility of funds is evident on year-end balances that appear on the financial statements. Make sure you account properly for the DST or documentary stamp tax on debt instruments imposed by the Tax Code under Section 179.
8. Not accounting for withholding tax on accruals
When you make accruals, make sure you are accounting properly for the withholding taxes. That is so you are fully complying with the tax rules on the deductibility of expenses. Some examples of accruals include audit fees, management bonuses, legal fees, and such.
9. Not considering the limitations on some expenses
Take note of the following expenses that are subject to limitations:
- Interest Expense with 33% interest income reduction that is subjected to final tax under tax arbitrage
- The 1% for services and the 0.5% for goods on representation expenses
- 5% for corporations and 10% for individuals on contributions to charity
To avoid tax risks and tax examinations, make sure that you abide by the rules and regulations when you file your taxes. Better yet, seek the guidance of a reputable accountant. Call our CPA firm for a free 30-minute consult to ease your tax filing season stress.