How to Prepare Income Tax Return (Corporations and Partnerships in the Philippines)
Previously, we have tackled the steps and guidelines on the computation and preparation of income tax for professionals and individuals who are engaged in business in the Philippines. This time, we will move on to discussing how to compute and prepare income tax return for partnerships and corporations.
Domestic corporations receiving income from sources within and outside the Philippines, foreign corporations receiving income from sources within the Philippines and taxable partnerships are required to file income tax returns. The following are guidelines, instructions and steps to help you compute and prepare your corporate income tax return.
Tax form you will use
BIR Form 1702 – Annual Income Tax Return (For Corporations and Partnerships). Please click here to download a PDF file of the form.
1. Certificate of Income Payments not Subjected to Withholding Tax (BIR Form 2304), if applicable
2. Certificate of Creditable Tax Withheld at Source (BIR Form 2307), if applicable
3. Duly approved Tax Debit Memo, if applicable
4. Proof of Foreign Tax Credits, if applicable
5. Income tax return previously filed and proof of payment, if amended return is filed for the same taxable year
6. BIR Form 1702 – Account Information Form (AIF) and/or the Certificate of the independent CPA with Audited Financial Statements, if the gross quarterly sales, earnings, receipts or output exceed P150,000.00 *
7. Proof of prior year’s excess tax credits, if applicable
NOTE: Pursuant to Revenue Memorandum Circular No. 6 – 2001, corporations, companies or persons whose gross quarterly sales, earnings, receipts or output exceed P 150,000.00 may not accomplish BIR Form 1702 – Account Information Form (AIF). In lieu thereof, they may file their annual income tax returns accompanied by balance sheets, profit and loss statement, schedules listing income-producing properties and the corresponding income therefrom, and other relevant statements duly certified by an independent CPA.
Computation of income tax due and payable
The following are the steps to compute the income tax due and payable for taxable partnerships and corporations:
1. Compute normal income tax.
Total Gross Income (a)
Less: Deduction (Optional Standard Deduction OR Itemized Deduction) (b)
Equals: Taxable Income
Tax Rate (except MCIT Rate) (c)
Equals: Normal Income Tax
a. Total gross income equals to your gross income from operation (Sales/Revenues/Receipts/Fees minus cost of sales/services) plus non-operating and other taxable income.
b. A corporation shall choose either the itemized or optional standard (described below) deduction. It shall indicate the choice by marking with “X” the appropriate box, otherwise, the corporation shall be considered as having availed of the itemized deduction. The choice made in the return is irrevocable for the taxable year for which the return is made.
Optional Standard Deduction (OSD) – A maximum of 40% of the gross income shall be allowed as deduction in lieu of the itemized deduction. However, a corporation who availed and claimed this deduction is still required to submit its financial statements when it files its annual tax return and to keep such records pertaining to its gross income.
Itemized Deduction – There shall be allowed as deduction from gross income all the ordinary and necessary trade and business expenses paid or incurred during the taxable year in carrying on or which are directly attributable to the development, management, operation and/or conduct of the trade and business. Itemized deduction includes also interest, taxes, losses, bad debts, depreciation, depletion, charitable and other contributions, research and development and pension trust.
c. In general, domestic corporations and taxable partnerships are taxed at 30% on its net taxable income from all sources effective January 1, 2009. Other types of corporations such as, non-stock non-profit hospitals, educational institutions and general professional partnerships are taxed differently. As provided in the Philippine tax code under Sec. 26, any general professional partnership, is exempted or shall not be subject to income tax. But the person engaging in business as partner in a general professional partnership shall be liable for income tax only in their separate and individual capacities. General professional partnerships are exempt, but still required to file their income tax return with the BIR.
To see the complete list of different tax rates for different types of corporations and partnerships, please refer to page 4 of BIR form 1702.
2. Compute aggregate tax due
Tax on Transactions under Regular Rate (a)
Less: Unexpired Excess of Prior Year’s MCIT over Normal Income Tax Rate (b)
Add: Tax Due to the BIR on transactions under Special Rate, if applicable (c)
Equals: Aggregate Tax Due
a. The tax on Transactions under Regular Rate is equal to Normal Income Tax or Minimum Corporate Income Tax (MCIT), whichever is higher. Thus, you need to determine your to compare it to your Normal Income Tax – whichever is higher will be your Tax on Transactions under Regular Rate. However, a corporation only starts to be covered by the MCIT on the 4th year of its business operations. The period of reckoning which is the start of its business operations is the year when the corporation was registered with the BIR. This rule will apply regardless of whether the corporation is using the calendar year or fiscal year as its taxable year.
The MCIT is 2% of the gross income of the corporation at the end of the year. “Gross income” means gross sales less sales returns, discounts and cost of goods sold. Passive income, which have been subject to a final tax at source do not form part of gross income for purposes of the MCIT.
b. Any excess of the MCIT over the normal income tax may be carried forward on an annual basis and be credited against the normal income tax for 3 immediately succeeding taxable years. Any amount paid as excess minimum corporate income tax should be recorded in the corporation’s books as an asset under account title “Deferred charges-MCIT”
c. This is the total tax due on transactions covered by the preferential rate under special law.
3. Compute total amount payable
Aggregate Income Tax Due (see # 2)
Less: Total Tax Credits/Payments (a)
Add: Penalties (b)
Equal: Total Amount Payable/(Overpayment)
a. The following are the tax credits/ payments a corporation can claim:
- Prior Year’s Excess Credits other than MCIT
- Tax Payments for the First Three Quarters
- Creditable Tax Withheld for the First Three Quarters
- Creditable Tax Withheld Per BIR Form No. 2307 for the Fourth Quarter
- Foreign Tax Credits, if applicable
- Tax Paid in Return Previously Filed, if this is an Amended Return
b. The following penalties are imposed on the corporation on the following circumstances:
A. A surcharge of twenty five percent (25%) for each of the following violations:
a) Failure to file any return and pay the amount of tax or installment due on or before the due dates;
b) Unless otherwise authorized by the Commissioner, filing a return with a person or office other than those with whom it is required to be filed;
c) Failure to pay the full or part of the amount of tax shown on the return, or the full amount of tax due for which no return is required to be filed, on or before the due date;
d) Failure to pay the deficiency tax within the time prescribed for its payment in the notice of assessment.
B. A surcharge of fifty percent (50%) of the tax or of the deficiency tax, in case any payment has been made on the basis of such return before the discovery of the falsity or fraud, for each of the following violations:
a) Willful neglect to file the return within the period prescribed by the code or by rules and regulations; or
b) In case a false or fraudulent return is willfully made.
C. Interest at the rate of twenty percent (20%) per annum on any unpaid amount of tax, from the date prescribed for the payment until it is fully paid.
D. Compromise penalty.
Procedures for payment and filing
1. Fill-up BIR Form 1702 in triplicate.
2. If there is payment:
-Proceed to the nearest Authorized Agent Bank (AAB) of the Revenue District Office where you are registered and present the duly accomplished BIR Form 1702, together with the required attachments and your payment.
-In places where there are no AABs, proceed to the Revenue Collection Officer or duly Authorized City or Municipal Treasurer located within the Revenue District Office where you are registered and present the duly accomplished BIR Form 1702 with the required attachments and your payments.
-Receive your copy of the duly stamped and validated form from the teller of the AABs/Revenue Collection Officer/duly Authorized City or Municipal Treasurer.
3. For “No Payment” Returns including refundable/ creditable returns and returns with excess tax credit carry over:
-Proceed to the Revenue District Office where you are registered or to any Tax Filing Center established by BIR and present the duly accomplished BIR Form 1702, together with the required attachments.
-Receive your copy of the duly stamped and validated form from the RDO/Tax Filing Center representative
Final Adjustment Return or Annual Income Tax Return – On or before the 15th day of the fourth month following the close of the taxpayer’s taxable year
For more information, please visit this web page (Tax Info) from the Bureau of Internal Revenue (BIR). Updates to this article will be provided as necessary.
Update: The BIR issued Revenue Regulation No. 19-2011 on November 2011 requiring corporation, partnerships and non-individual taxpayers to use the revised BIR Form 1702 for the income tax return covering and starting December 31, 2011 for filing on or before April 15, 2012. Furthermore, all juridical entities that follow a fiscal year of reporting are also required to start using the new form if they are under the fiscal year ending January 31, 2012. For more information about the instructions and guidelines on filing the said return, please refer to the last page of the new form provided in the link above (in the tax form you will use section).