GENUINE TAX

MINIMIZATION AND
AUDIT STRATEGIES
Philippine Institute of Certified Public
Accountants

1
 TRUE OR FALSE

Generally, double taxation is allowed in

the Philippines except when the tax is
imposed by the same taxing authority
over the same person in the same
taxable year.

2
 Corporate Income Tax
Gross Sales/Revenue
Less: Cost of
Sales/Service
Cost of Sales/Service
Other Expenses
Expenses
NOLCO
Net Operating Loss Carry Over
Taxable Income
*30%
WT Certificates
Provision for IT
Tax Credits
Less: WT Certificates
Tax Credits
Income Tax Due
3
 Corporate Income Tax

Ordinary Expenses:
Ordinary Expenses:
1. Amortization
7. Interest
2. Bad Debts
8. Representation and
3. Charitable Entertainment
Contributions
9. Salaries and
4. Depreciation Allowances
5. Fringe Benefit
6. Losses *OSD

4
 TRUE OR FALSE

Taxpayers may claim and deduct

expenses lower than the amount
actually incurred.

5
 Rules on Deductibility of Expense

Revenue Regulation 06-2018

- No deduction in case of failure to withhold
Revenue Regulation 14-2002
- No deduction if there is no receipt or if receipt is
void
*Primary and Secondary receipts allowed

- Must be claimed on the year incurred

6
 Rules on Representation and
Entertainment
Limitation:

1% of Gross Revenue for Service Business

½ of 1% of Gross Sales for Sale of Goods

*In case of excess, check possible realignment or

charging to another account.

7
 Rule on Interest

Non-Trade Payables/Receivables
- subject to DST @ P1.50 for every P200.00

Trade Payables/Receivables
- not subject to DST
- subject to income tax on the seller
- may be subject to VAT

8
 Rule on Interest

B Corp. borrows from L Corp. P1,000,000.00

evidenced by an interest bearing promissory note at
6% interest per annum. Compute the tax effect:

Borrower:
Interest Expense - 60,000.00 (subject to tax arbitrage rule;
taxable to lender)
Income Tax Savings – P18,000.00
DST on Loans – 7,500.00
Net Tax Savings – P10,500
9
 Rule on the Deductibility of Bad Debts

Highly Uncollectible

Exerted much effort to collect but futile

Filed Cases

10
 Donation to Charities and Foundation

D Corp. donated P10 million to its foundation which is

accredited by the PCNC. Compute the tax effect of the
donation.

Tax to D Corp:
Donors Tax – exempt
Income Tax Savings – P3 million

Tax to the foundation:

Income from donation – exempt

11
 Salaries and Allowances

Mautak Corp. has 100 employees. Each of these

employees is earning P375.00 per day (minimum
wage in North Luzon). Mautak Corp. however,
declared in its ITR and Alpha List that each of the
employees is earning P500.00 per day. Compute the
tax effect.

Mautak Corp.
Claimed Salary Expense – 500*26*12*100 = P15,600,000.00
Correct Salary Expense – 125*26*12*100 = P11,700,000.00
Difference = P3,900,000.00 *30% = P1,170,000.00

12
 Salaries and Allowances
Mautak Corp. has 100 employees. Each of these
employees is earning P375.00 per day (minimum
wage in North Luzon). Mautak Corp. however,
declared in its ITR and Alpha List that each of the
employees is earning P500.00 per day. Compute the
tax effect.

Employees:
P375*26*12 = 117,000.00 – Below Minimum Wage
P500*26*12 = 156,000.00 – Below Minimum Wage
SSS/Philhealth/Pag-Ibig Contribution

13
 Losses

Revenue Regulation 02-40

- only losses actually sustained and written-off
during the year, not compensated for by insurance
and evidenced by closed and completed transactions
are generally allowed as deduction from gross
income.
Revenue Memorandum Order 06-2012
- issuance of Certificate of Deductibility of Loss

14
Depreciation

Thrifty Corp. acquired the services of XYZ

Construction for the erection of 10-storey building
worth P100M (exclusive of VAT). Believing that
Thrifty Corp. could save from taxes, it forwarded to
the LGU, for real property tax purposes, a much
lower estimated building cost of P10M.
Compute the tax effect.
If 100M as basis:
Income Tax - 100M/30 years *30% = 1M income tax savings per year
VAT – 100M *12% = 12M input VAT
Real Property Tax Due= 100M *80% assessment level*3% = 2.4M

15
 Depreciation

Thrifty Corp. acquired the services of XYZ

Construction for the erection of 10 storey building
worth P100M (exclusive of VAT). Believing that
Thrifty Corp. could save from taxes, it forwarded to
the LGU, for real property tax purposes, a much
lower estimated building cost of P10M. Compute the
tax effect.
If 10M as basis:
Income Tax - 10M/30 years *30% = 100K income tax savings per year
(depreciation)
VAT – 100M *12% = 1.2M input VAT
Real Property Tax = 10M *80% assessment level*3% = 240K

16
 Depreciation
Tax Type 100M Basis 10M Basis Savings
Income Tax 30M Savings 3M Savings 27M foregone
Value-added 12M Savings 1.2M Savings 10.8M
Tax foregone
Real Property 2.4M Due 240K Due 2.16M savings
Tax
Net 39.6M 3.96M 35.64M
foregone

17
 Other Means of Avoiding/Reducing Tax
Burden

❑ Barangay Micro-Business Enterprise (BMBE)

❑ Board of Investment (BOI)
❑ Tax Treaties
❑ Philippine Economic Zone Authority (PEZA)
❑ Cooperatives

18
 Other Means of Avoiding/Reducing Tax
Burden
❑ Tax Sparring Rule
❑ Tax Free Exchange
❑ Establishment of Holding Corporation and the rule
on Intercompany Dividends
❑ Donation to the government or to an accredited
NGO or Foundation (donation under the
“adopt-a-school program”)

19
 Barangay Micro Business Enterprise
Program (BMBE) - Republic Act No. 9178

Incentives:
Section 7. Exemption from Taxes and Fees – All BMBEs shall be
exempt from tax for income arising from the operations of the
enterprise.
The LGUs are encouraged either to reduce the amount of local
taxes, fees and charges imposed or to exempt BMBEs from local
taxes, fees and charges.
Section 8. Exemption from the Coverage of the Minimum Wage
Law – The BMBEs shall be exempt from the coverage of the
Minimum Wage Law

20
 Barangay Micro Business Enterprise
Program (BMBE) - Republic Act No. 9178

Registration as BMBE:
• The DTI, through the NEGOSYO CENTER (NC) in the city or
municipality level, shall have the SOLE POWER to issue the
CERTIFICATE OF AUTHORITY (COA) for BMBEs to avail of the
benefits provided by RA 9178.
• Upon the approval of registration of the BMBE, the NC shall
issue the COA, renewable every two (2) years.
• The DTI, through the NC, may charge a fee which shall not be
more than P1,000 to be remitted to the National Government.

21
 Barangay Micro Business Enterprise
Program (BMBE) - Republic Act No. 9178
How can I avail the BMBE incentives?
• The BMBE registers with the BIR RDO where the principal office or
place of business is located and shall submit the following
documents:
• Copy of the BMBEs Certificate of Authority
• Sworn Statement of Assets of the BMBE and/or its affiliates,
supported by pertinent documents
• Certified list of branches, sales outlets, places of production,
warehouses and storage facilities
• Certified list of affiliates
• Latest audited FS or Account Information Form or its
equivalent.
22
 Barangay Micro Business Enterprise
Program (BMBE) - Republic Act No. 9178
Tax reportorial compliance with BIR

• In lieu of an Income Tax Return (ITR), an income tax exempt

BMBE is required to submit an ANNUAL INFORMATION
RETURN (AIR).
• AIR is filed on or before the 15th day of the 4th month after
the close of the taxable year with an ACCOUNT
INFORMATION FORM (AIF), which contains data from its
financial statement and Sworn Statement of Assets Owned
and/or Used.
• Non-operating, passive, and capital gains are subject to the
appropriate type of income tax.
23
 Omnibus Investment Code

ARTICLE 27.Investment Priorities Plan. Not later than

the end of March of every year, the Board of
Investments, after consultation with the appropriate
government agencies and the private sector, shall
submit to the President an Investment Priorities
Plan: Provided, however, that the deadline for
submission, may be extended by the President.

24
 Omnibus Investment Code – Investment
Priority Plan
Incentives:
1. Income Tax Holiday
2. Real Property Tax exemption
3. Business Tax exemption
4. Exemption from VAT on importation
5. Exemption from Tariffs and customs duties

25
 Omnibus Investment Code – Investment
Priority Plan
How can I avail the BOI incentives?
1. Register your enterprise with the BOI through submission of
documentary requirements and securing the Certificate of
Registration (COR).
Note: BOI may require the submission of additional documents for
evaluation depending on your classification under the effective IPP.
2. Before filing the ITR for the taxable year, secure Certificate of
ITH Entitlement (COE) from the BOI Legal & Compliance
Division.
3. File your ITR, with the COE as attachment, with the BIR.
4. Go back to BOI to process your ITH and to secure Certificate of
Income
Tax Availment from the BOI Incentives Administration
Services.
26
 TRUE OR FALSE

There is no need to apply for Tax Treaty

Relief Applications (TTRAs) with the
International Tax Affairs Division (ITAD)
because the non-resident taxpayer may
apply the preferential rate outright.

27
 Tax Treaty Relief Application
To date, the Philippines has concluded tax treaties
with 43 countries.
USA

Austria Czech Indonesia Mexico Qatar Switzerland Australia

Bahrain Denmark Israel Netherlands Romania Thailand China

Bangladesh Finland Italy New Zealand Russia Turkey India

Belgium France Japan Nigeria Singapore UAE Malaysia

Brazil Germany Korea Norway Sri Lanka UK Poland

Canada Hungary Kuwait Pakistan Spain Vietnam Sweden

28
Tax Treaty Relief Application
Who can apply for a tax treaty relief?

Non-resident individuals or corporations with income

derived from sources within the Philippines and whose
country of residence has an effective Double Taxation
Agreement (DTA) with the Philippines or their duly
authorized representatives may apply for a tax treaty
relief.

29
 Tax Treaty Relief Application
How can I avail of Tax Treaty Relief?
• For dividends, interests and royalties –
The preferential tax treaty rates for these incomes
shall be applied and used outright by the withholding
agents upon submission of a Certificate of Residence for
Tax Treaty Relief (CORTT) Form by the non-resident
pursuant to Revenue Memorandum Order (RMO) No.
8-2017, which took effect on 26 June 2017.

30
 Tax Treaty Relief Application

How can I avail of Tax Treaty Relief?

• For dividends, interests and royalties –
Tax Treaty Relief Applications (TTRAs) are no
longer required to be filed with the International Tax
Affairs Division (ITAD) for dividends, interests and
royalties only.
Revenue Memorandum Order No. 8- 2017, April 05,
2017

31
 Tax Treaty Relief Application
How can I avail of Tax Treaty Relief?
• For any other income, such as, but not limited to,
business profits, capital gains tax, income from
services, et. al. –
For Philippine-source income other than dividends,
interests and royalties, the provisions of RMO No.
72-2010, which prescribes the guidelines on the
processing of Tax Treaty Relief Applications (TTRAs)
pursuant to existing Philippine tax treaties, shall apply;
thus, securing a ruling is still required.

32
 Tax Treaty Relief Application
Covered Taxes under Tax Treaty Relief:
a. Preferential Rates:
- Dividends;
- Interest;
- Royalties;
- Profits of shipping and air transport in
international traffic; and
- Remitted branch profits.

33
 Tax Treaty Relief Application
Covered Taxes under Tax Treaty Relief:
b. Exemption:
- Business profits;
- Capital gains;
- Income from employment;
- Income from independent professional services;
- Income of athletes and performers supported by
public funds;
- Income from government service;
34
 Tax Treaty Relief Application
- Pensions;
- Income of visiting teachers and researchers;
- Allowances and remuneration of visiting
students and trainees; and
- Other income.

35
 Tax Treaty Relief Application
Rule on Permanent Establishment
• Under most of the Philippine tax treaties, the BIR
can tax the business profits of a foreign enterprise
if it maintains a permanent establishment in the
Philippines.
• The PE concept is defined as a "fixed place of
business through which the business of an
enterprise is wholly or partly carried out".

36
 Tax Treaty Relief Application
Rule on Permanent Establishment
• The presence of a branch office of a foreign entity is
one of the instances that results in the creation of PE.

• Apparently, a foreign corporation that gets a Philippine

Securities and Exchange Commission (SEC) license to
transact business in the Philippines, though a just
branch, is considered a resident foreign corporation.

37
 Tax Treaty Relief Application
Rule on Permanent Establishment
• There are decisions by the Tax Court holding that a PE
should still be treated as nonresident foreign
corporation for income-taxation purposes, in the
absence of registration. As such, income taxes due on
their income derived from Philippine sources shall still
be subject to the final withholding taxes.

38
 Tax Treaty Relief Application
Rule on Permanent Establishment
In one case (Court of Tax Appeal Case 6388, August 22,
2005), the Tax Court ruled that a foreign corporation with a PE
is still treated as NRFC for income-taxation purposes. In this
case, the Court took note of the fact that the foreign
corporation was not issued a license to transact business in
the Philippines by the SEC, and neither was it registered with
the Bureau of Internal Revenue (BIR) and paid its taxes.
Accordingly, the withholding of final tax by the Philippine
customer/payor was proper.

39
 PEZA Registered Enterprises

Who may register with PEZA

• Export Manufacturing
• Information Technology (IT) Service Export
• Tourism
• Medical Tourism
• Agro-industrial Export Manufacturing
• Agro-industrial Bio Fuel Manufacturing
• Logistics and Warehousing Services
• Economic Zone Development and Operation
• Facilities Provider
• Utilities

40
 PEZA Registered Enterprises
Benefits of a PEZA registered entity:
A. Fiscal Incentives
• Income Tax Holiday for a certain number of
years(Pioneer Project: 6 years, Non-Pioneer Project: 4
years, Expansion Project: 3 years), which translate to
100% exemption from corporate income tax;
• Tax and duty free importation of raw materials,
capital equipment, machineries and spare parts;

41
• Exemption from wharfage dues and export tax,
impost or fees;
• VAT zero rating of local purchases subject to
compliance with BIR and PEZA requirements;
• Exemption from payment of any and all local
government imposts, fees, licenses or taxes;
• Exemption from expanded withholding tax.

42
 PEZA Registered Enterprises
• The sale of goods to PEZA-registered enterprises will
no longer be considered export sales subject to 0%
VAT. That said, both existing and new PEZA-registered
enterprises will need to pay 12% VAT and thus, may be
able to file for a refund for any unutilized input VAT.

43
For PEZA Entities – when to opt
for 5% GIT
• After the expiration of ITH, a PEZA Entity may opt for
the five percent (5%) Special Tax on Gross Income in
lieu of all taxes, both national and local, except real
property tax on land owned by developers.

• PEZA entity usually transacts with foreign entity (export

sale) hence there could be no output VAT.

• Business Tax rate normally at 2% of gross sales/receipts

44
 Privileges of Cooperatives
Duly registered cooperatives which do not
transact any business with non-members or
the general public shall not be subject to any
taxes and fees imposed under the internal
revenue laws and other tax laws.

45
 Privileges of Cooperatives

• Cooperatives transacting business with both

members and non-members shall not be subjected
to tax on their transactions with members.

46
 Classification of Cooperatives
According to the Extent of the Tax
Exemption Granted:
a) Cooperatives which transact business with members only;
and
b) Cooperatives which transact business with both members
and non-members which are further sub-classified according
to the following:
i. Cooperatives with accumulated reserves and undivided
net savings of not more than Ten Million Pesos (Php
10,000,000.00); and
ii. Cooperatives with accumulated reserves and undivided
net savings of more than Ten Million Pesos (Php
10,000,000.00);

47
Taxability of Unrelated Income
of
Cooperative
All income of cooperatives not related to the
main/principal business/es under its Articles of
Cooperation shall be subject to all appropriate taxes
under the NIRC, as amended.

This is applicable to all types of cooperatives, whether

dealing purely with members or both members and
non- members.

48
 TRUE OR FALSE

A Corporation should use the 8%

preferential rate if it has no receipts or
documents that would prove its claimed
expenses in its Accounting records.

49
 When to opt for the 8%
Preferential Rate
Revenue Memorandum Order No. 23-2018
The following criteria should all be satisfied to be able to
qualify and avail for this option:
• Individuals earning from self-employment and/or practiced
of profession;
• Taxpayers whose gross sales/receipts and other
non-operating income did not exceed the P3,000,000 VAT
threshold during the taxable year;
• Taxpayers registered and subject only to Percentage Tax
under Section 116 of the NIRC; and
• Taxpayers must have signified his/her intention to elect 8%
Income Tax Rate
50
 When to opt for the 40% OSD
• If you are an individual and you don’t want to
submit Financial Statements (Revenue Regulation
2-2010)
• If your projected total expenses will not reach 40%
of your projected gross sales/receipts
• If your substantiation on expenses is not in
accordance with the regulations, or no
substantiation at all

51
Quantitative Comparison
Sample Computation
(assume maximum level of
Gross Sales/Receipts):
8% Income Tax Rate 40% OSD
Gross Sales/Receipts Gross Sales/Receipts
P3,000,000.00 P3,000,000.00
Less: in excess of Less: 40% OSD
250,000.00 1,200,000.00
Total Taxable Income
2,750,000.00 1,800,000.00
Tax Rate Tax Due (based on tax table)
8% 430,000.00
Tax Due
220,000.00 *plus percentage tax
52
 TRUE OR FALSE

At P7,500,000.00 Taxable Income, it is

better to register as a sole proprietor
rather than as a single person
corporation because tax due to the
government would be lesser.

53
Sole Proprietorship or Single
Person Corporation
0.30X = 490,000 + ((X-2,000,000)*0.32)
0.30X = 490,000 + 0.32X – 640,000
0.30X = -150,000 +0.32X
-0.02X = -150,000
X = 150,000/0.02
X=P7,500,000.00

54
 Sole Proprietorship or Single
Person Corporation
At P7,500,000.00 taxable income, tax due would be
the same regardless of whether registration is single
proprietorship or single person corporation.

In order to save tax, it is better to register as a single

person corporation rather than as a sole proprietor if
taxable income is more than P7,500,000.00

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