Accounting and Taxation – Page 2

This article has been reviewed and edited by Miguel Dar, a CPA and an experienced tax consultant who specializes in tax audits. Filing taxes is like washing your dishes. It may be unpleasant but it's necessary. If you're one of those who are confused about the whole tax filing process, don't fret. Whether you're a fresh graduate or a first-time business owner, this guide will give you all the basics of the income tax return and how to file for one. Disclaimer: This article is for general information only and is not substitute for professional advice. Go back to the main article: How to File and Pay Taxes: An Ultimate Guide to Philippine Tax What Is an Income Tax Return? An income tax return (ITR) is a document that taxpayers file with the Bureau of Internal Revenue (BIR) every quarter and every year to declare their income, profits, expenses, losses, and other important tax-related information for the past year. These figures allow taxpayers to compute the income tax they owe to the government. Why You Should File and Pay Taxes Filing and paying taxes is a time-consuming and complicated process in the Philippines. For instance, it took about 171 hours to prepare and pay taxes in the country in 2019, based on World Bank data1. That's like spending 21 eight-hour workdays or roughly a month just to comply with the law. Not to mention the amount of effort (and killer math skills) that tax preparation entails. Would you go through the pain of tax filing and payment, or spare yourself the trouble? If you're an employee, you don't have a choice because your taxes are withheld by your employer through salary deduction. But if you're self-employed, ignoring your tax obligations is very much tempting, right? Having second thoughts about fulfilling your taxpayer duties? The benefits of having an ITR in the Philippines might convince you otherwise. 1. Access to loans and credit cards An ITR is one of the financial documents usually required for loan and credit card applications. For self-employed Filipinos without payslips, the ITR can serve as proof of income. Having an ITR shows lenders that you're earning enough income and thus can pay back your debt. A simple document like an ITR can help you meet both your urgent cash needs and long-term financial goals. Even if you don't need a loan right now, you might do it in the future. Someday, you might have to purchase a car through an auto loan from the bank. Or you might need to get a Pag-IBIG housing loan to buy your dream home. 2. Income document for visa application Countries like the US, Japan, South Korea, and those in the Schengen area have strict visa requirements for Filipino visitors. To enter any of these places, you're required to submit documents that show proof of income, including an ITR. Want to explore more places around the world? Raise your chance of getting approved for a visa to your dream destination—file your ITR and pay your income tax. 3. Business growth For B2B businesses, tax documents such as an ITR are usually required for accreditation as an individual contractor or supplier. You can't get more clients without proving that you're filing and paying your company's income taxes properly. Increasing your client base is crucial for growing your business, so make sure you're doing your duties as a taxpayer. For freelancers, the ability to issue an official receipt to clients gives them an edge. High-paying clients, especially large corporations, require an OR from their independent contractors. 4. Compliance with the law If none of the tax filing and payment benefits discussed above matters to you, then the fear of penalties for tax evasion might force you to comply with the law. The BIR fines tax evaders with 25% to 50%2 of the tax due plus a double the legal interest rate (or 12%) annual interest3 on the unpaid tax. This violation can also lead to jail time of one to ten years. There's also the lingering stress and anxiety that the BIR might send you a letter of notice for failure to file and/or pay income tax or worse, order the closure of your business until you've filed and paid the correct taxes. In short, filing and paying taxes properly gives you peace of mind. Instead of constantly worrying, you can focus on running and growing your business. Who Are Required To File an ITR and Pay Taxes? You're required by law to file returns and pay taxes if you belong to any of these taxpayer categories: 1. Individual taxpayers. a. Filipinos living in the Philippines and earning income from sources within and/or outside the country, including the following: Employees with two or more employers (whether at the same time or successively) at any time within the taxable yearEmployees with one employer or multiple employers, whose income tax for the previous year has been withheld incorrectly, resulting in a tax refund or liability, during the calendar yearEmployees with one employer and whose spouse is not qualified under substituted filing, even if the income tax has been correctly withheldSelf-employed individuals (freelancers, single proprietor, professionals, etc.) earning income from their business or professionMixed-income earners receiving salaries from their employers and income from their business or profession (i.e., employees who are freelancing and/or running a side business at the same time) within the taxable yearIndividuals earning income from sources unrelated to a business or profession (i.e., passive income), aside from receiving a salary, that has not been subjected to final withholding tax b. Filipinos living or working abroad, such as OFWs and immigrants, and earning income from sources within the Philippines (Only income earned from the Philippines is taxable.) c. Foreigners earning income from sources within the Philippines, whether they live in the country or abroad (Only income earned from the Philippines is taxable.) 2. Non-individual/Corporate taxpayers Regardless of how they're formed or organized, the following types of corporations and partnerships should file returns and pay income taxes: Domestic corporations earning income from sources within and outside the PhilippinesForeign corporations earning income from sources within the PhilippinesEstates and trusts engaged in trade or business Related: Different Types of Taxpayers in the Philippines Who Is Not Required To File an ITR in the Philippines? Not all income earners have to file an income tax return. The Tax Code4 exempts certain people from income tax filing if they meet any of these conditions: 1. Employed and self-employed individuals with an annual taxable income of Php 250,000 and below The BIR website specifically states that a taxable income—not gross income—of Php 250,000 or below within the taxable year exempts workers from income tax filing. Taxable income and gross income are two different things. Your gross income is your total pay (before deductions are made), while taxable income is the portion of your gross income that's subject to tax. This means your tax due (gross income minus allowable deductions) must be equal to or less than Php 250,000 to be exempted from filing income tax. 2. Employees whose income tax has been withheld correctly You don't have to file an ITR if you have only one employer for the taxable year, and your income tax has been withheld correctly (meaning your tax due at the end of the year equals the tax withheld by your employer). 3. Employees qualified for substituted filing Substituted filing means employers file ITRs on behalf of their employees. Under the TRAIN law (Republic Act 10963), an employee is exempted from filing an annual ITR (BIR Form 1700) if these two requirements are met: The employee received purely compensation income, regardless of amount, from only one employer in the Philippines within the taxable year.The employer has withheld the income tax correctly (tax due equals tax withheld) and filed the BIR Form 2316 (Certificate of Compensation Payment/Tax Withheld). Under the substituted filing system, the BIR Form 2316 with the "received" stamp by the BIR is considered the employee's substitute ITR. 4. Minimum wage earners Employees earning minimum wage (MWE) in the Philippines don’t have to file income tax. Their basic pay—as well as overtime pay, holiday pay, night differential pay, and hazard pay—are all tax-exempt. Meanwhile, MWEs who are also business owners or freelancers are required to file their own taxes. Based on data from the National Wages and Productivity Commission, the daily minimum wage in Metro Manila as of December 2019 is Php 417.36 for agricultural workers or Php 448.25 for non-agricultural workers. For the rest of the country, the daily minimum wage ranges from Php 211.10 to Php 319.71 for the agricultural sector or Php 218.92 to Php 332.23 for non-agricultural sectors. 5. Taxpayers whose sole income has been subjected to final withholding tax People who earn only certain types of income, such as lotto winnings and royalties, are already paying final withholding taxes, so filing income tax is not necessary. Someone who earns income solely through royalties from literary or musical works, for example, must file a different set of returns of final withholding taxes (Appropriate tax forms can be downloaded from the BIR website). 6. Income tax-exempt individuals Filipinos who are exempted from paying income tax (under the Tax Code and other special laws) are also exempted from filing ITRs. These individuals include OFWs and immigrants whose sole income is earned outside the Philippines. Who Are Exempted From Paying Income Tax? The following individuals and entities are exempted from paying income tax in the Philippines: Filipino immigrants or permanent residents of a foreign country earning income from sources outside the PhilippinesLand-based and sea-based OFWs earning income from sources outside the PhilippinesMinimum wage earners (Aside from the basic wage, the overtime pay, holiday pay, night shift differential pay, and hazard pay are also tax-exempt.)General professional partnerships (created by professionals for the sole purpose of practicing their common profession)5 Corporations enumerated in Section 30 of the Tax Code Those enjoying income tax holidays (i.e. BMBE, PEZA, BOI, etc.) Building and loans associations whose accounts are guaranteed by Home Guaranty Corporation6 Social Security System (SSS) Government Service Insurance System (GSIS) Philippine Health Insurance Corporation (PHIC or PhilHealth) Local Water Districts Related: How to Apply for Tax Exemption in the Philippines What Are the Tax Forms and Requirements Needed When Filing an Income Tax Return? 1. Annual income tax filing using BIR Form 1700 a. What is the purpose of BIR Form 1700? The BIR Form 1700 is the annual income tax return used by employees earning solely compensation income who don't qualify for substituted filing. It should be filed on or before April 15 every year covering income for the previous taxable year. b. Who should file BIR Form 1700? Certain employees are required to file the BIR Form 1700 on their own under any of the following circumstances: The employee receives compensation income from two or more employers (whether at the same time or one after another) within the taxable yearThe income tax has been withheld incorrectly, leading to either a tax refund or tax liability, whether the employee worked for one employer or multiple employers within the taxable yearThe employee earned passive income (aside from employment income) that has not been subjected to final withholding taxThe employee's spouse doesn't qualify for substituted filing, even if the employee has one employer and his/her income tax has been withheld correctlyNon-resident foreign employees sent by a foreign corporation to work for its regional office in the Philippines c. Requirements for filing BIR Form 1700 Three copies of accomplished BIR Form 1700Accomplished BIR Form 2316 (Certificate of Compensation Payment/Tax Withheld)For those paying tax using tax credit certificates: Approved tax debit memoFor non-resident foreigners: Proof of foreign tax creditsFor taxpayers filing an amended return for the same year: Previously filed ITR and proof of tax payment 2. Annual income tax filing using BIR Form 1701 a. What is the purpose of BIR Form 1701? The BIR Form 1701 is the return that self-employed individuals, mixed-income earners, estates, and trusts use to file their annual income tax regardless of gross income. It should be filed on or April 15 every year covering income for the previous taxable year. b. Who should file BIR Form 1701? Self-employed taxpayers (such as freelancers, sole proprietors, and professionals) availing of the itemized deduction under the graduated income tax ratesMixed-income earnersAdministrators or executors of an estate engaged in trade or businessTrustees of trusts, guardians of minors, or anyone who has a fiduciary relationship with a beneficiary engaged in trade or business c. Requirements for filing BIR Form 1701 Three copies of accomplished BIR Form 1701For taxpayers with gross annual sales or receipts of Php 3 million and below: Three copies of accomplished BIR Form 1701 AIF (Account Information Form)For taxpayers with gross annual sales or receipts of over Php 3 million: Certificate of an independent CPA with audited financial statementsAccomplished BIR Form 2316 (Certificate of Compensation Payment/Tax Withheld), if applicableAccomplished BIR Form 2304 (Certificate of Income Payment Not Subject to Withholding Tax), if applicableAccomplished BIR Form 2307 (Certificate of Creditable Tax Withheld at Source), if applicableFor those paying tax using tax credit certificates: Approved tax debit memoFor non-resident foreigners: Proof of foreign tax creditsFor taxpayers filing an amended return for the same year: Previously filed ITR and proof of tax paymentProof of previous year's excess tax credits, if applicable 3. Annual income tax filing using BIR Form 1701A a. What is the purpose of BIR Form 1701A? The BIR Form 1701A is the annual income tax return that taxpayers earning solely business or professional income file on or before April 15 every year covering their income for the previous taxable year. This newly released tax return should not be confused with the BIR Form 1701. Although these tax forms serve the same purpose, the right return to use depends on the taxpayer's choice of the tax rate (whether graduated tax rate or 8% flat rate) and method of deduction (whether itemized deduction or 40% optional standard deduction). b. Who should file BIR Form 1701A? Only self-employed taxpayers who avail of any of the following options may use the BIR Form 1701A: The optional standard deduction under the graduated tax rates, regardless of gross sales/receipts and other non-operating income8% flat income tax rate, whose gross sales/receipts and other non-operating income don't exceed Php 3 million c. Requirements for filing BIR Form 1701A Three copies of accomplished BIR Form 1701AAccomplished BIR Form 2316 (Certificate of Compensation Payment/Tax Withheld), if applicableAccomplished BIR Form 2304 (Certificate of Income Payment Not Subject to Withholding Tax), if applicableAccomplished BIR Form 2307 (Certificate of Creditable Tax Withheld at Source), if applicableFor those paying tax using tax credit certificates: Approved tax debit memoFor non-resident foreigners: Proof of foreign tax creditsFor taxpayers filing an amended return for the same year: Previously filed ITR and proof of tax paymentProof of previous year's excess tax credits, if applicable 4. Annual income tax filing using BIR Form 1701Q a. What is the purpose of BIR Form 1701Q? The BIR Form 1701Q is the income tax return that self-employed individuals, mixed-income earners, estates, and trusts file every quarter in addition to their annual ITR. It's filed on or before May 15 (for the first quarter), August 15 (for the second quarter), and November 15 (for the third quarter) of the current taxable year. The first quarterly ITR is crucial because it's where you'll indicate your preferred income tax rate (graduated rates or 8% flat rate). If you opt for the graduated rates, you'll also have to choose between two methods of deduction (itemized deduction or optional standard deduction). Once you've made a choice, it can no longer be changed within the taxable year, except for when your gross sales/receipts exceed Php 3 million (which will automatically change to the graduated rates if you initially chose the 8% flat rate). Your chosen tax rate (and deduction method, if you avail of graduated rates) is what you'll also indicate in your annual ITR. If you change your mind, you'll have to wait another year to switch to a different tax rate option, which you can do only when filing the first quarterly ITR for the next year. b. Who should file BIR Form 1701Q? Self-employed taxpayersMixed-income earnersAdministrators or executors of an estate engaged in trade or businessTrustees of trusts, guardians of minors, or anyone with a fiduciary relationship with a beneficiary engaged in trade or business c. Requirements for filing BIR Form 1701Q Three copies of accomplished BIR Form 1701QAccomplished BIR Form 2307 (Certificate of Creditable Tax Withheld at Source), if applicableFor those paying tax using tax credit certificates: Approved tax debit memoProof of other payment/s made, if applicableSummary Alphalist of Withholding Agents of Income Payments Subjected to Withholding Tax at Source (SAWT), if applicable (downloadable from the BIR website) How To File Income Tax Return in the Philippines: 3 Ways There are three ways to pay taxes and file ITR for taxpayers in the Philippines: eFPS, eBIRForms, and manual. 1. Manual filing Manual filing involves personally submitting your accomplished ITR. This tax-filing method is the alternative option when eFPS and eBIRForms are down or unavailable. Also, if the latest version of a specific ITR is not yet available in the eFPS and eBIRForms facilities, taxpayers must file it manually. How To file and pay ITR manually Download the PDF file of the appropriate ITR from the BIR website (see the previous section).Print three copies of the ITR.Fill out the applicable fields.Go to the nearest authorized agent bank (AAB) under the jurisdiction of the Revenue District Office (RDO) where you're registered. If there's no AAB in your area, visit the Revenue Collection Officer or authorized city/municipal treasurer in your RDO.Submit your accomplished ITR plus the requirements.Pay your tax due.Receive your copy of the stamped and validated ITR and deposit slip from the teller (or Electronic Revenue Official Receipt or eROR if you paid tax in the RDO). 2. Electronic Filing and Payment System (eFPS) Only available to specific types of taxpayers (excluding freelancers and small business owners), the BIR eFPS provides a convenient way of filing and paying taxes online. It eliminates not just the hassle of manual filing but also the risk of human error as it validates all the taxpayers' data before transmitting them to BIR. Read more about eFPS here. 3. Electronic BIR Forms (eBIRForms) eBIRForms is basically a tax preparation software you can download on your computer. It enables taxpayers, specifically those who aren't qualified to use the eFPS, to file their tax returns either offline or online. Read more about eBIRForms here. Tips and Warnings 1. File and pay taxes at least three days before the deadline Usually, the BIR does not extend tax deadlines. So if you miss the due date, you're bound to pay the penalties for late filing7. We all know about the April 15 deadline for paying annual income tax. However, there are loads of deadlines for other types of taxes that all taxpayers need to remember. So that you won't file and pay your taxes late, keep a calendar of tax deadlines at hand. The BIR has an official tax calendar, which you can find on the BIR website's homepage. For the 2020 BIR Tax Calendar, click here. Why should you file and pay taxes at least three days ahead of the due date? Chances are, you'll encounter problems using the BIR's e-filing facilities (eFPS and eBIRForms) due to network congestion when you file and pay your tax at the last minute. Doing it manually doesn't get any better on the last day of filing—you'll be lining up at the RDO for hours without an assurance that you'll make it to the deadline. Thus, it's important to file and pay your tax returns as early as possible to avoid inconveniences and penalties. 2. File your tax returns at the correct venue Where you file and pay your taxes is just as crucial as when you do it. Filing at a Revenue District Office (RDO) other than where you're registered will cost you a compromise penalty of Php 1,000 – Php 50,000 depending on the gross sales plus a 25% surcharge of the tax due and a 12% annual interest on unpaid tax8 . This means you'll be paying hefty penalties if your tax due is worth hundreds of thousands or millions of pesos. The penalties also apply to taxpayers who are mandated to file tax returns using the eFPS or eBIRForms but filed manually instead. Before filing your ITR, make sure you'll be going to the proper venue. Contact the BIR hotline or visit the nearest RDO to verify which RDO you're currently registered. Once your correct RDO is confirmed, proceed to file your ITR with any authorized agent bank (AAB) within your RDO's area of jurisdiction. If there's no AAB in your area, file your return with the Revenue Collection Officer in your RDO. Tax returns of non-resident foreigners who earn income from the Philippines must be filed with RDO No. 039 in South Quezon City or the Office of the Commissioner at the BIR National Office Building, BIR Road, Diliman, Quezon City. Taxpayers who are required to file through eFPS or eBIRForms should avoid filing manually, except for when the system is down and the BIR has released an advisory on manual filing. Related: How to Get BIR RDO Code: An Updated List of Revenue District Offices in the Philippines 3. Use an online tax preparation service for easier tax filing Every step in the tax preparation process—from computing your tax due and filling out to filing tax returns—is tedious and complicated. For self-employed and mixed-income taxpayers, this can eat away precious time and energy they could have otherwise used for growing their business or improving their skills. Fortunately, you don't have to do everything by yourself. Browser-based platforms and mobile apps for tax filing are now available for taxpayers to use on their computers or smartphones. These online tax preparation services help in filing ITRs by automating the process, saving a busy taxpayer's time, and yes, sanity. This way, self-employed persons can focus on running and growing their businesses. Among the most well-known online tax filing platforms today are Taxumo, Moneygment app, JuanTax, and Tax Whiz app. Generally, here's how an online tax filing service works: You encode your income, expenses, and other relevant tax data on the platform, and it automatically fills out the tax return, computes the tax due, and files your ITR for you. The online platform also enables the scanning and uploading of receipts, bills, invoices, and other supporting documents for easier tracking of business expenses. For the convenience they provide, online tax preparation services charge a fee ranging from Php 100 to Php 5,000 per transaction, depending on the package you're availing. 4. Non-filing of ITR is punishable by the law Failure to file your Income Tax Return has corresponding punishments according to our law. In fact, the Department of Finance highlighted that non-filing of ITR is a crime9. Section 255 of the National Internal Revenue Code states that any person who is required to file an ITR and fails to do so will be fined an amount not exceeding Php 10,000 and will be imprisoned for not less than one year but not more than 10 years. Frequently Asked Questions 1. How can I compute my income tax? 2. What are the different modes of payment that I can choose from to pay my income tax? 3. I'm a freelancer. How can I file my income tax return and pay for my taxes? 4. Can I get an ITR if I'm a freelancer? How? 5. What is tax exemption and how can I apply for one? 6. What is the difference between BIR Form 1701 and BIR Form 1701A? Which ITR should I use? 7. What is BIR Form 2316 and why is it important? 8. How can I get a copy of my ITR? 9. I have no tax payable. Do I still need to file an ITR? How? 10. Can I claim foreign tax credit in the Philippines? How? 11. What are the different types of taxpayer in the Philippines? 12. Is there a tax refund in the Philippines? 13. How is tax refund calculated in the Philippines? 14. When should tax refund be given? 15. How do you claim a tax refund? References