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Tax planning strategies

Now that the annual tax filing season is over, it is about time to revisit your tax planning strategy for the next year. This becomes more relevant since the deadline for the first quarter income tax return is fast approaching. Tax planning involves weighing various tax options to determine the most beneficial way to conduct a business. One should bear in mind that tax planning aims not only to save on taxes but also to reduce or eliminate tax exposures during tax examinations. These days, the Bureau of Internal Revenue (BIR) is very aggressive in its campaign to increase collections, and it is crucial to employ the right tax planning strategies.

Below are some strategies you may consider:

• Maximize allowable deductions. Deductible expenses must be supported with documents such as official receipts and sales invoices. For example, some deductible expenses require specific documentation like a board resolution for bad debts and a BIR notification for casualty losses. In addition, the correct tax must be withheld if an expense is subject to withholding tax, otherwise such expense may be disallowed as a tax deduction. 

For taxpayers claiming itemized deductions, avail of the net operating loss carry-over (NOLCO) if there is any. This must be properly stated on prior year financial statements and income tax returns. NOLCO can be claimed within 3 taxable years from the year of loss on a first-in, first-out basis.

• Take advantage of available tax credits. Creditable withholding tax certificates are proof of advance income tax payments deductible from annual income taxes. Claims for withholding tax credits should be supported by creditable withholding tax certificates (BIR Form No. 2307) issued by clients or customers. Thus, ensure that these certificates have been secured from clients or customers.

Consider minimum corporate income tax from prior years which may be credited against the normal income tax due. Similar to NOLCO, this can be claimed within 3 taxable years immediately succeeding the year in which the same is paid. 

• Know your donees. Charitable contributions made to accredited donee institutions may be fully deductible subject to certain conditions. Donors claiming charitable contributions as deductions must submit a Certificate of Donation (BIR Form 2322) which contains a donee certification and a donor’s statement of values. Such contributions may also be exempt from donor’s tax subject also to certain conditions.

• Decide which method of deduction is more advantageous, Optional Standard deduction (OSD) or Itemized Deduction. OSD pertains to an amount of deduction not exceeding 40% of the gross income of corporate taxpayers during the taxable year. OSD would be better when there is less cost of sales/service because it uses a higher tax base for OSD computation which would result to lower income tax due. If your proof of allowable deductions is not sufficient or you have no documents at all, OSD is the prudent choice. Note, however, that your choice of method of deduction to adopt in the first-quarter return shall be irrevocable for the same taxable year.

• Decide which option to take with regard to excess income tax payments. Taxpayers who have incurred excess income tax payments may opt to: (1) carry-over the excess credit to the next taxable year/quarter; (2) refund the excess amount of taxes paid or apply for the issuance of tax credit certificate (TCC). Once you choose the option to carry-over it becomes irrevocable. In making the decision to refund, consider the cost of the refund vis-à-vis the amount to be refunded as well as the time it will take to claim the refund. Be aware that any application for refund will expose the taxpayer to an audit investigation.

• Avoid taxing the non-taxable income. Check the proper treatment of the items of income in your gross sales or gross receipts to avoid paying taxes on non-taxable items like unrealized foreign exchange gains and others.

• Monitor unappropriated retained earnings in relation to your paid-up capitalization to avoid penalties. Unappropriated retained earnings are not allowed to exceed paid-up capital. The Tax Code imposes a 10% penalty tax on improper accumulations.

• Avail of Tax Treaty relief for transactions involving residents of tax treaty countries. Transactions covered by a tax treaty may avail of tax exemption or preferential tax rates as the case may be. This however, is subject to the requirement of the tax treaty relief application (TTRA) to confirm the entitlement of the taxpayer to the relief. In exception to this, a recent Supreme Court decision states that the failure to strictly comply with filing a TTRA before the taxable event would not deprive a taxpayer of the benefits of a tax treaty. Despite this, the better practice is still to file a TTRA even after availing of the tax treaty benefit to avoid issues with the BIR.

Despite the importance of tax planning, it has taken a backseat to the costly and burdensome requirements of tax regulations which in reality pass the burden of tax administration. Taxpayers have been busying themselves trying to comply with the countless BIR reportorial requirements and have minimal to nil time to do tax planning. But advance tax planning is vital and may save a taxpayer a lot of needless worry and risk in the long run.

Charity P. Mandap-de Veyra is a tax manager at the Cebu and Davao Branches of Punongbayan & Araullo.

As published in Business World dated 17 May 2016