Difference between Foreign Tax Credits and Foreign Tax Deductions

Illustrative Example A:

Mr. JC, a married resident citizen, derives income from sources within and
without the Philippines. The following are the date on his taxable income and
foreign taxes for the year 2020:

Net Income, Philippines P 1,500,000

Net Income, Country 1 (before P500,000 income tax) 2,000,000
Net Income, Country 2 (1,500,000)
Net Income, Country 3 (after P300,000 income tax) 700,000
Net Income, Country 4 (no income tax paid) 500,000
Net Income, Country 5 (before P320,000 income tax) 1,500,000

Additionally, the taxes paid by Mr. JC when he filed the quarterly declarations
for the first three quarters in 2020 totaled P500,000. How much was the tax
payable in the Philippines when the taxpayer filed his annual return, assuming he
opted to claim foreign income taxes as tax credit?

Step 1. Compute for the Total Taxable Income

Net Income, Philippines P 1,500,000 P 1,500,000
Net Income, Country 1 (before P500,000 income tax) 2,000,000 2,000,000
Net Income, Country 2 (1,500,000) (1,500,000)
Net Income, Country 3 (after P300,000 income tax) 700,000 1,000,000
Net Income, Country 4 (no income tax paid) 500,000 500,000
Net Income, Country 5 (before P320,000 income tax) 1,500,000 1,500,000
Total Taxable Income P 5,000,000

Step 2. Compute for the Income Tax Due

Computation Tax Due
First P 2,000,000 See bracket over P2,000,000 but not over P 490,000
P8,000,000
Next 3,000,000 (5,000,000 – 2,000,000) * 32% 960,000
Tota P5,000,000 Income Tax Due P1,450,000
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Step 3. Compute for the Limit per Country

Limit A Actual Allowed Credit
1: (2M/5M) * 1,450,000 580,000 500,000 500,000
3: (1M/5M) * 1,450,000 290,000 300,000 290,000
5: (1.5M/5M) * 1,450,000 435,000 320,000 320,000
Total P 1,110,000
 Step 4. Compute for the World Limit

World Limit=Total Taxable Income ¿ Foreign Country ¿ × Philippine Income Tax

Worldwide Taxable Income
(5,000,000−1,500,000)
World Limit= × 1,450,00 0
5,000,000
3,500,000
World Limit= ×1,450,00 0
5,000,000
World Limit=1,015,000

Step 5. Compare the actual payment, Limit per Country, and World Limit

Actual Payment Limit per Country World Limit

(5,000,000 + 300,000 +
320,000)
P 1,120,000 P 1,110,000 P 1,015,000

Step 6. Compute for the income tax payable

Income Tax Payable =Total Income Tax Due−Income Tax Credits

Income Tax Payable =Total Income Tax Due−ForeignTax Credit −Prior Quarterly Payments
Income Tax Payable =1,450,000−1,015,000−300,00 0
Income Tax Payable =135,000

Illustrative Example B:

Based in illustrative example A, how much was the tax payable in the
Philippines when the taxpayer filed his annual return, assuming he opted to claim
foreign income taxes as tax deduction?
Net Income, Philippines P 1,500,000
Net Income, Country 1 (before P500,000 income tax) 2,000,000
Net Income, Country 2 (1,500,000)
Net Income, Country 3 (after P300,000 income tax) 700,000
Net Income, Country 4 (no income tax paid) 500,000
Net Income, Country 5 (before P320,000 income tax) 1,500,000
 Step 1. Compute for the Total Taxable Income.
Net Income, Philippines P 1,500,000 P 1,500,000
Net Income, Country 1 (before P500,000 income tax) 2,000,000 1,500,000
Net Income, Country 2 (1,500,000) (1,500,000)
Net Income, Country 3 (after P300,000 income tax) 700,000 700,000
Net Income, Country 4 (no income tax paid) 500,000 500,000
Net Income, Country 5 (before P320,000 income tax) 1,500,000 1,180,000
Total Taxable Income P 3,880,000

Step 2. Compute for the Income Tax Due.

Computation Tax Due
First P 2,000,000 See bracket over P2,000,000 but not over P 490,000
P8,000,000
Next 1,880,000 (3,880,000 – 2,000,000) * 32% 601,600
Tota P3,880,000 Income Tax Due P1,091,600
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Step 3. Compute for the Net Income Tax Payable.

Income Tax Payable =Total Income Tax Due−Prior Quarterly Peyments

Income Tax Payable =1,091,600−300,000
Income Tax Payable =791,600