MODULE 10 FOREIGN INCOME TAX PAID by Resident Citizen/Domestic Corp.

Income in Foreign Country P50 x

20% Foreign Income Tax
Resident citizen and domestic corporation are taxable 30% Philippine Income Tax
for income earned within the Philippines and for income
earned outside the Philippines. Two ways of using Foreign Income Tax as Tax Remedy
Option 1 Option 2
It is therefore expected that for the income earned
(Claim as Deduction) (Claim as Tax Credit)
outside the Philippines, there will be indirect double
taxation because that amount of income will be taxed by Gross Business Income 100 100
the foreign country where such income was earned and will
Less
also be collected with Philippine income tax being earned
by Philippine national. Itemized deductions 40 40
Foreign Income tax 10
Foreign income tax paid by resident citizen or by Net taxable income 50 60
domestic corporation could be claimed as either item of Income tax due @30% 15 18
deduction from gross returnable income or tax credit Less
against Philippine income tax due. Foreign tax credit 10
Net tax payable 15 8

EXAMPLE,
Foreign income tax claimed as deduction Gross income within the Philippines P565,000
A resident citizen reported local business income of Income outside the Philippines before tax, (15,000/60%) 25,000
P565,000 and foreign income of P15,000, net of 40% Combined entire income P590,000
foreign income tax. Deductible local business expenses, Less deductible expenses:
P330,000. Local Business expenses 330,000
How much will be the Philippine income tax due if the Foreign income tax (25,000 – 15,000) 10,000 340,000
foreign income tax paid is to be claimed as item of Net income after deductions P250,000
deduction? Income tax due, 0 rate 0
EXAMPLE, Foreign income tax paid by Domestic corporation = P35,000+25,000+60,000 = P120,000
For the year prior to CREATE Law, a domestic corporation reported the following:
 Gross business income earned in the Philippines P900,000
 Deductible local business expenses (Philippines) 400,000
 Income from foreign country A, net of P35,000 foreign income tax 65,000
 Income from foreign country B, net of P25,000 foreign income tax 75,000
 Income from foreign country C, net of P60,000 foreign income tax 240,000

1. How much is the net Philippine income tax if foreign income taxes are claimed as deductions?

ITR 1702 ( assumed it is prior to CREATE Law )

Business income in the Philippines P900,000

Taxable income from foreign country A (65,000+35,000) 100,000
Taxable income from foreign country B (75,000+25,000) 100,000
Taxable income from foreign country C (240,000+60,000) 300,000
Gross income (w/i + w/o) P1,400,000
Less allowable deductions:
local business expenses, P400,000
Foreign income taxes 120,000 520,000
Net taxable P880,000
Income tax due, @ 30 % P264,000
Limitations on Credit. - The amount of the credit taken under this Section shall be subject to each of the following limitations:
(a) The amount of the credit in respect to the tax paid or incurred to any country shall not exceed the same proportion of the tax against
which such credit is taken, which the taxpayer's taxable income from sources within such country under this Title bears to his entire
taxable income for the same taxable year; and
(b) The total amount of the credit shall not exceed the same proportion of the tax against which such credit is taken, which the taxpayer’s
taxable income from sources without the Philippines taxable under this Title bears to his entire taxable income for the same taxable year.

EXAMPLE, Foreign income tax claimed as Tax Credits Foreign Income Tax as Tax Credit calculation
For the year, a domestic corporation reported the following:
 Gross business income earned in the Philippines P900,000 Tax Credit limit A, total foreign countries:
 Deductible local business expenses (Philippines) 400,000  Total foreign income P500,000
 Income from foreign country A, net of P35,000 foreign income tax 65,000  Total foreign income tax paid 120,000
 Income from foreign country B, net of P25,000 foreign income tax 75,000  Proportionate share in Phil. Tax due:
 Income from foreign country C, net of P60,000 foreign income tax 240,000
 300,000 x (500,000/1,000,000) 150,000
Total Foreign income tax P120,000
 Allowable tax credit Limit A, lower amount =120,000

2. How much is the net Philippine income tax if foreign income taxes are Tax Credit limit B, individual foreign countries:
claimed as Tax Credits?  Foreign country A: Allowed
Limit, 300,000 x(100,000/1,000,000) =30,000
ITR 1702 (assuming it is prior to CREATE Law)  Actual foreign tax paid 35,000 30,000
Business income in the Philippines, 900,000 – 400,000 = 500,000
Taxable income from foreign country A, (65,000+35,000) 100,000  Foreign country B:
Taxable income from foreign country B, (75,000 +25,000) 100,000 Limit 300,000 x(100,000/1,000,000) = 30,000
Taxable income from foreign country C, (240,000 +60,000) 300,000  Actual foreign tax paid 25,000 25,000
Total taxable income P1,000,000  Foreign country C:
Income tax due at 30% P 300,000 Limit 300,000 x(300,000/1,000,000) 90,000
Less: tax credit for foreign income tax 115,000  Actual foreign tax paid 60,000 60,000
Net ax payable P 185,000  Total limit 115,000