BUSINESS TAXATION

Topic: Tax credit for tax paid to a foreign country

Members:
Nacino, Grace Joy
Suyo, Rejoy
Barang, Aljean
Udong, Lovely

I. Tax Credit
 refers to amounts allowed as deductions from the tax due in the form of creditable
withholding taxes and foreign income tax paid or accrued.
 it is used in the Tax Code, refers to the taxpayers right to deduct from the income tax due
the amount he/it has paid to a foreign country subject to limitations.
 it is allowed to lessen the harshness of taxation where the same income is subject to both
foreign tax and the Philippine income tax.

Taxpayers entitled to tax credit

 Resident Citizen
 Domestic Corporations
 Members of GPP/General Professional Partnership
 Beneficiaries of Estates and Trusts

Taxapyers not entitled to tax credit

 Non-resident Citizens
 Alien Individuals (resident or non-resident)
 Foreign Corporations (resident or non-resident)

The importance and purpose of taxes paid to a foreign countries are manifold;
1. Avoidance of double taxation
2. Promotion of international trade and investment
3. Support for global mobility
4. Compliance with tax treaties
5. Enhancement of competitiveness

II.
a. Tax credit are designed to provide relief to taxpayer by reducing the amount of tax they
owe.
Types of income eligible for tax credit:
 Earned income
 Investment income
 Retirement income
 Business income
 Rental income
 Social security benefits

b. To claim tax credits, taxpayers typically need to meet certain requirements, which may
vary depending on the specific credit.
Requirements fro claiming the credit:
 Eligibility criteria
 Documentation
 Filing status
 Compliance with tax laws
 Timely filing
 BUSINESS TAXATION

c. Limits and Restriction

 On the ability of the Philippine's to pay taxes to a foreign country are typically imposed
to prevent tax evasion, ensure fair taxation and protect the tax base of the Philippines.
Some reason for these limits and restrictions:
 Prevention of double taxation - aim to prevent the same income from being taxed twice
and ensure that the taxpayer does not end up paying more than the total tax liability on
that income.
 Fair taxation - ensure that taxpayers do not exploit differences in tax rates between
countries yo reduce their overall tax burden unfairly.
 Protection of tax base - designed to protect the tax base of the Philippines by ensuring
that the tax paid to foreign countries is reasonable and does not unduly reduce the tax
revenue that would have been collected in the Philippines.
 Administrative ease - reduce the administrative burden on taxpayers and tax authorities
by providing clear rules for determining the amount of foreign tax credit that can be
claimed.

d. Forms and Schedule required in claiming credit

 The forms and schedule required for claiming tax credits provide necessary
documentation to support tax return and ensure compliance with the tax laws.
Some form and schedule required in claiming credit:
 Verification of foreign tax payments - provide detailed record of the foreign taxes you
have paid, including the amount and natures of taxes.
 Compliance with the tax law - is a legal requirements, failure to comply with these could
result in penalties or other consequences.
 Support for tax credit - serves as the basis for claiming tax credit on tax return.
 Audit trail - used to trace the calculation of tax credit back to original foreign tax
payments.
 Documentation of tax treaty benefits - if you are claiming tax treaty benefits, the form
and schedule provide the documentation required to support your claim.

Forms:
1. Business tax return forms
2. Schedule c
3. Schedule k-l
4. Payroll tax forms
5. Sales tax forms

Tax credit: Advantages and Disadvantages

Advantages Disadvantages
Prevention of double taxation Complexity
Encouragement of international trade and Administrative burden
investment
Promotion of global economic growth Limitations on credit amounts
Enhanced competitiveness Mismatch of tax rates
Mitigation of tax evasion & avoidance Potential for abuse
Facilitation of bilateral tax treaties Limited availability for certain taxes
 BUSINESS TAXATION

III.
Illustration - One Country

A domestic corporation reported the following result of operation:

Taxable income from Philippines P 1,800,000
Taxable income from Japan 1,200,000
Quarterly estimated income tax paid in the Philippines 200,000
Income tax paid in Japan 300,000

A. DEDUCTION APPROACH

The taxable income and income tax liability will simply be computed as;

Taxable income from Philippines P 1,800,000

Taxable income from Japan 1,200,000
Total P 3,000,000
Less: Foreign income tax expense 300,000
Taxable income - World P 2,700,000
Multiply by: Corporate tax rate 30%
Corporate income tax due P 810,000
Less: Philippine quarterly estimated tax payments 200,000
Income Tax Payable P 610,000

Note: Under the deduction approach, the foreign taxes paid are deducted but will not be claimed as tax
credit.

B. TAX CREDIT APPROACH

Taxable income from Philippines P 1,800,000

Taxable income from Japan 1,200,000
Taxable income -world P 3,000,000
Multiply by: Corporate tax rate 30%
Corporate world income tax due P 900,000
Less: Tax credit
Philippines income credit P 200,000
Foreign tax credit 300,000 500,000
Income Tax Payable P 400,000

Limit: (Foreign income/Worldwide income) Corporate world income tax due

: (1,200,000/3,000,000) 900,000
: 360,00

Actual: 300,000
Limit: 360,000