Objectives of Effective Tax Management

Last year, I had attended a seminar somewhere in Mandaluyong City about Effective Tax Management (Tax Avoidance).

The speaker has shared about the Objectives of Effective Tax Management as follows:

1. To maximize Tax Benefits
2. To optimize Tax Deductions
3. To minimize Taxable Income
4. To avail all Tax Incentives
5. To avail Tax Remedies under the code
6. To comply all the requirements of the Bureau of Internal Revenue

Compliance (preventive)

1. Know the tax rules
2. Know how the rules
3. Maintain a high level of tax compliance
4. Secure your Tax
5. Get professional help

Assessments

1. Know your rights and remedies
2. Know the rules and process the assessment
3. Know best practices of handling assessment
4. Study and define your strategy
5. Get professional help

Collection

1. Know your rights and remedies
2. Know the rules and process of collection
3. Know your options

Favorable Settlement

1. Amnesty
2. Abatement
3. Compromise Settlement

Types of Withholding Taxes and Duties and Obligation of a Withholding Agent

Types of Withholding Taxes:

1. Withholding Tax on Gross Compensation
2. Expanded or Creditable Withholding Tax (Service Income / Purchases of Goods)
3. Final Withholding Tax (Passive Investment Income) - Interest, Dividends, Royalties, Prizes, Winnings and Capital Gain
4. Withholding Tax on Government Money Payment - Income Tax; VAT; Percentage Tax
5. Quarterly Withholding Tax - Individual Engage in Business or Profession; Corporation

Duties and obligations of Withholding Agent:

1.To deduct and withhold
2. To remit the tax withheld
3. To file withholding tax returns
4. To register
5. To issue withholding tax certificate

Duties and Privileges of employer and employee with regards to withholding tax on gross compensation:

Employer - Issues the proper withholding statement (BIR Form 2316) and include the employees in the Alphalist under Schedule 7.2 of BIR form no. 1604 CF. Salaries allowed as deductible expenses even without WT.

Employee - File ITR and pay income tax. If any, on or before April 15. Shall not qualify for Substituted Filing even if no tax payable at year end.

Deductibility of Charitable and Other Contribution from Gross Income

Charitable and other contribution were Corporation or association to whom contributions or gifts may be made or paid and claimed as deduction, the amount of which is subject to limitations.

The limitation is 5% for corporations and 10% for individuals, of the taxable income derived from trade, business or profession.

Besides, the valuation of deductible contributions is the amount of property other than money shall be based on the acquisition cost of the said property.

Contribution is deductible in full of the following:

1. Donation to the Government
2. Donation to Certain Foreign Institutions or Internal Organizations
3. Donation to Accredited Nongovernment organization

The term Nongovernment organization means a nonprofit domestic corporation

a. Organization operation exclusively for scientific research, educational, character-building and youth and sports development. Health, social welfare, cultural or charitable purposes.

Under Section 30 of the National Internal Revenue Code (NIRC), the following items are not deductible:

1. Personal, living or family expenses.
2. Any  amount paid out of new building or for permanent improvements, or betterment made to increase the value of any property or estate;
3. Any amount expanded in restoring property or in making good the exhaustion thereof for which an allowance is or has been made.

References: National Internal Revenue Code, Chapter VII Allowable Deductions, Section 34 (H); RR 13-1998

Requisites for Valid Deduction of Bad Debts from Gross Income

Bad debts are deductible from gross income if the following requisites are met:

1. There must be an existing indebtedness due to the taxpayer which must be valid and legally demandable;
2. The same must be connected with the taxpayer's trade, business or practice of profession;
3. The same must not be sustained in transaction entered into between related parties;
4. The same must be actually charged off the books of accounts of the taxpayer as of the end of the taxable year;
5. The same must be actually charged off the books of accounts of the taxpayer as of the end of the taxable year;

* Debt s charged-off within the taxable year. Partial writing-off is not allowed, it must be charged-off in full or not at all. (Fernandez Hermanos, Inc. vs. Comm.2DCRA552)

Loss which are Not Allowed by Law to be Deducted from Gross Income

For taxation purposes, we have to consider loss which are not allowed by law to be deducted from Gross Income as follows:

1. Loss on voluntary removal of building on land with the view to erecting another building;

2. Wagering losses not covered by wagering gains;

3. Capital losses not covered by capital gains

4. Losses from exchanged of property in corporate readjustment;

5. Losses from illegal transactions;

Requirement for the Substantiation of a Loss

The taxpayer bears the burden of proving and substantiating his claim for deduction for loss and should comply with the following substantiation requirements:

1. A sworn declaration of loss must be filed within the period prescribed; and

2. Proof of the elements of the loss claimed, such as the actual nature and occurrence of the event and the amount of the loss.

Requisites for the Deductibility of a Loss

Losses are deductible for Income Tax purposes if the following requisites are met:

1. The loss must be incurred in trade, profession, or business of the taxpayer, or any transaction entered into for profit;

2. It must be actually sustained within the taxable year;

3. It must be evidenced by a closed and completed transaction;

4. It must not be compensated for by insurance or other form of indemnity; and

5. The taxpayer has filed a sworn declaration of loss within 45 days after the date of the occurrence of casualty or robbery, theft, or embezzlement.

NOTE: No loss shall be allowed as a deduction if a the time of the filing of the return, if such loss has been claimed as a deduction for estate tax in the return.

Taxes that are Not Deductible for Taxation Purposes

All taxes are deductible except:

1. Income Tax
2. Estate Tax
3. Energy Tax
4. Special Assessment Tax
5. Value Added Tax
6. 10% penalty tax on undue accumulation of profit
7. Amnesty tax
8. Penalty 25% surcharge; 50% surcharge & compromise payment.

Requisites for Deductability of Interest Expense

For taxation purposes, interest expense is deductible if it is met with the following requisites: 

1. These must be a valid and existing indebtedness;

2. There should be an interest expense paid or incurred upon such indebtedness;

3. The indebtedness must be that of the taxpayer;

4. The indebtedness must be connected with the taxpayer's trade, business or exercise of profession;

5. The interest expense must have been paid or incurred during the taxable year;

6. The interest must have been stipulated in writing;

7. The interest must be legally due;

8. The interest payment arrangement must not between related taxpayers;

9. The interest must not be incurred to finance petroleum operations;

10. In case of interest incurred to acquire property used in trade, business or exercise of profession, the same was not treated as a capital expenditure.
11. The interest payment arrangement must not be between related taxpayers as mandated in Section 34(B) (2) (b), in relation to Section 36(B), of the NIRC.
12. Is not expressly disallowed by law to be deduced from the taxpayer's gross income (e.g interest on indebtedness to finance petroleum operations); and
13. Shall be reduced by an amount equal to the 33% of the interest income subjected to final tax of 20%, earned during the same period. [Sec. 34(B)(1), NIRC].

Generally, the amount of interest paid or incurred within the taxable year on indebtedness in connection with the taxpayer profession, trade or business shall be allowable deduction from gross income: Provided, however, that the taxpayer's otherwise allowable deduction for interest expense shall be reduced by an amount equal to the following percentages of the interest income subjected to final tax:

Thirty three percent (33%) beginning January 1, 2009

Assuming that a taxpayer incurred in 2013, interest expense amounting to P100,000. This is "Otherwise Allowable Deduction for Interest Expense" but it will be reduced by an amount equal to the prescribed percentage of interest income subjected to the final tax.

Thus, if in 2013, the taxpayer received P60,000 net interest income on which the final tax was withheld and remitted to the BIR by the payor of such income, then the deductible amount of interest will be computed as follows:

Total Interest Expense                                     P100,000

Less: 33% of P60,000/.80                                    24,750

AMOUNT DEDUCTIBLE                             P  75,250

References: RMC 13-2009; RR No. 13-2000.

Ceiling on Entertainment, Amusement, and Recreation Expense

The bureau has issued the Revenue Regulations No. 10-2002 authorizing the Imposition of a Ceiling on "Entertainment, Amusement and Recreational Expense".

Coverage:

1. Individuals engaged in business, including taxable estates and trust;

2. Individuals engaged in the practice of profession;

3. Domestic corporations;

4. Resident foreign corporations;

5. General professional partnerships, including its members

Actual entertainment, amusement and recreation (EAR) expenses paid or incurred with the taxable year by the taxpayer, but in no case shall such deduction exceed 1/2 of 1% of net sales (i.e., gross sales less sales returns/allowances and sales discounts) for taxpayers engaged in sale of goods or properties; or 1% of net revenue (i. e., gross revenue less discounts) for taxpayers engaged in sale of services, including exercise of profession and use or lease of properties.

APPOINTMENT FORMULA:

NET SALES/NET REVENUE                         X ACTUAL EXPENSE

TOTAL NET SALES AND NET REVENUE

ILLUSTRATION: EAR Corporation is engaged in the sale of goods and services with net sales/net revenue of P200,000 and P100,000, respectively. The actual entertainment, amusement and recreation expense for the taxable quarter totaled to P3,000.

Appointment Formula:

Sales of Goods (P200,000 / P300,000  x P3,000) = P2,000

Sale of Services (P100,000 / P300,000 x P3,000) = P1,000

Maximum Percentage Ceilings:

Sales of Goods (P200,000 x .50%) = P1,000

Sales of Services (P100,000 x 1%) = P1,000

Allowable amount to be claimed as Entertainment, Amusement, and Recreation (EAR) Expense (Whichever is lower of Appointment Formula and Maximum Percentage Ceilings):

Sales of Goods = P1,000

Sales of Services = P1,000

However, if after verification a taxpayer is found to have shifted the amount of the entertainment of the entertainment, amusement and recreation expense to any other expense in order to avoid being subjected to the ceiling herein prescribed, the amount shifted shall be disallowed in its totality.