CHAPTER 4 : INCOME TAX SCHEMES, Examples of active income:

1. Compensation income
ACCOUNTING PERIODS, ACCOUNTING 2. Business income
METHODS, AND REPORTING 3. Professional income

INCOME TAXATION SCHEMES CAPITAL GAINS TAXATION

There are three income taxation schemes under the  A capital gains tax is imposed on the capital
NIRC: gain on the sale, exchange and other
a) Final income taxation disposition of certain capital assets.
b) Capital gains taxation  Not all capital gains are subject to capital
c) Regular income taxation gains tax. Most of them are subject to regular
An item of gross income is taxable in any of these tax income tax.
schemes. Capital assets vs. ordinary assets
Mutually exclusive coverage  Capitol assets include all other assets other
 The tax schemes are mutually exclusive. than ordinary assets.
 An item of gross income that is subject to tax  Ordinary assets are assets directly used in the
in one scheme will not be taxed by the other business, trade or profession of t the taxpayer
schemes. inventory, supplies and items of property,
 Items income that are exempted in one plant and equipment.
scheme are not taxable by the other schemes Capital gains vs. Ordinary gains
 Capital gains arise from the sale, exchange
CLASSIFICATION OF ITEMS OF GROSS and other disposition of capital assets
INCOME  Ordinary gains arise from the sale, exchange
Because of the different tax schemes, items of gross and other disposition of ordinary assets
income can be classified as follows: The NIRC identifies capital gains tax as a final tax but
1. Gross income subject to final tax they are not actually finale, similar to those imposed
2. Gross income subject to capital gains tax under final income taxation.
3. Gross income subject to regular tax The taxpayer still files capital gains tax return to
report the gain to the government and pay the
FINAL INCOME TAXATION corresponding tax.
 Final income taxation is characterized by final  Capital gains taxation applies only to two
taxes where taxes are withheld or deducted at types of capital assets domestic stocks and
source. The taxpayer receives income net of real property.
tax. REGULAR INCOME TAXATION
 The payor of the income remits the tax to the The regular income taxation is the general rule in
government. income taxation and covers all other income such as:
 Final taxation is applicable only to certain 1. Active income
passive income. 2. Gains from dealings in properties
 Not all passive income is subject to final tax. a) Dealings in ordinary assets
Passive income vs. active income b) Dealings in other capital asset not subject to
 Passive incomes are earned with very minimal capital gains tax
or even without active involvement of the 3. Other income, active or passive, not subject to
taxpayer in the earning process. final tax
Examples of passive income: Items of gross income from these sources are
1. Interest income from banks measured using an accounting method, accumulated
2. Dividends from domestic corporations over an accounting period and reported through an
3. Royalties income tax return.
 Active or regular income arises from
transactions requiring a considerable degree ACCOUNTING PERIOD
of effort or undertaking from the taxpayer. It  Accounting period is the length of time over
is the direct opposite of passive income. which income is measured and reported
Types of Accounting Periods 2. Dissolution of business - The accounting period
1. Regular accounting period - 12 months in covers the start of the current year to the date of
length dissolution of the business.
Calendar ; Fiscal Illustration:
2. Short Accounting period - less than 12 months Tawi-tawi Inc. is on the fiscal year accounting period
Calendar year ending every March 31. It ceased business operation
 The calendar accounting period starts from on August 15, 2014. Tawi-tawi should file its last
January 1 and ends December 31. income tax return covering April 1 to August 15,
 This accounting period is available to both 2014.
corporate taxpayers and individual taxpayer's.  Under the old N1RC, dissolving corporations shall
Under the NIRC, the calendar year shall be file their return within 30 days from the
used when the: cessation of activities or 30 days from the
1. taxpayer's annual accounting period is approval of merger by the Securities and
other than a fiscal year Exchange Commission in the case of merger.
2. taxpayer has no annual accounting Hence, the return shall be filed on or before
period September 15. 2014.
3. taxpayer does not keep books  For individuals, the return shall be due on or
4. taxpayer is an individual before April 15, 2015. There is no requirement
Fiscal year for early filing under the NIRC.
 A fiscal accounting period is any 12-month 3. Change of accounting period by corporate
period that ends on any day other than taxpayers-
December 31. The accounting period covers the start of the
 The fiscal accounting period is available only previous accounting period up to the designated
to corporate income taxpayers and is not ear-end of the new accounting period.
allowed to individual income taxpayers.  Note that BIR approval is required in changing
Deadline of Filing the Income Tax Return an accounting period. It is not automatic.
 Under the NIRC, the return is due for filing on the Illustration 1
fifteenth day of the fourth month following the Effective February, 2014, Sulu Corporation changed
close of the taxable year of the taxpayer. its calendar accounting period to a fiscal year ending
 The regular tax due is payable upon filing of the every June 30.
income tax return. Sulu Corporation shall file an adjustment return
Illustration: Due date of the annual income return covering the income from January 1 to June 30, 2014
1. Taxpayers under the calendar year must file their on or before October 15, 2014.
annual income tax return for the current period Illustration 2
not later than April 15 of the following year. Effective August 2014, Zamboanga Company changed
2. A corporate taxpayer with fiscal year ending June its fiscal year accounting period ending every June 30
30, 2014 must file its annual income tax return to the calendar year.
not later than October 15, 2014. Zamboanga Company should file an adjustment
INSTANCES OF SHORT ACCOUNTING PERIOD return covering July 1 to December 31, 2014 on or
1. Newly commenced business- The accounting before April 15, 2015.
period covers the date of the start of the business 4. Death of the taxpayer -The accounting period
until the designated year-end of the business. covers the start of the calendar year until the
Illustration: death of the taxpayer.
Palawan Inc. started business operation on June 30, Illustration
2014 and opted to use the calendar year accounting Mr. Jacob died on November 2, 2014.
period. Palawan should file its first income tax return The heirs of Mr. Jacob or his estate administrators or
covering June 30 to December 31, 2014 for the year executors shall file his last income tax return covering
2014.The return must be filed on or before April 15, his income from January 1 to November 2, 2014.
2015. There is no requirement for early filing in case of
death of taxpayers. Hence, the income tax return
shall be filed on or before the usual deadline, April  Income received in advance is taxable upon
15, 2015. receipt in pursuant to the Lifeblood Doctrine
5. Termination of the accounting period of the and the Ability to Pay Theory.
taxpayer by the Commissioner loner of internal  The subsequent taxation of advanced income
Revenue - The accounting period covers the start in the period earned will expose the
of the current Year until the date of the government to risk of non-collection.
termination of the accounting period. 2. Prepaid expense is non-deductible.
Illustration  Prepaid expenses are advanced payment for
The accounting period of a taxpayer under the expenses of future taxable Periods.
calendar terminated by the Cllt oh August 2, 2014.  These are not deductible against gross income
Year basis was in the year paid.
 The taxpayer must file an income tax return  They are deducted against income in the
covering January 1 to August 2, 2014. future period they expire or are used in the
 The income tax return and the tax shall be business, trade or profession of the taxpayer.
due and payable Immediately Normally, the expensing of prepayments does not
ACCOUNTING METHODS properly reflect the income the taxpayer. It also
 Accounting methods are accounting contradicts the Lifeblood Doctrine as it effectiveness
techniques used to measure income. defers the recognition of income
Types of Accounting Methods 3. Special tax accounting requirement must be
1. The general methods followed.
a. Accrual basis  There are cases where the tax law itself
b. Cash basis provides for a specific accounting treatment
2. Installment and deferred payment method of an income or expense. The specified
3. Percentage of completion method meethod must be observed even if it departs
4. Outright and spread-out method from the basis regularly employed by the
5. Crop year basis taxpayer on keeping his books.
General Methods for income from sale of goods or The tax accrual basis income is determined as
service follows:
1. Accrual basis Cash income
 Under the accrual basis of accounting, Income Accrued (uncollected) income
is recognized when earned regardless of when Advanced income
received. Gross income
 Expense is recognized when incurred
regardless of when paid. The tax accrual basis expense is determined as
 Income is said to have accrued when the right follows:
to receive is established or when an Cash expenses
enforceable right to secure payment is Accrued (unpaid) expense
created against the counterparty. Amortization of prepayments and
2. Cash basis depreciation of capital expenditures
 Under the cash basis of accounting, Income is Deductions
recognized when received and expense is
recognized when paid. The tax cash basis income is determined as follows:
Tax and accounting concepts of accrual basis and Cash income
cash basis distinguished Advanced income
 The financial accounting concept of accrual Gross income
basis and cash basis are similar to their tax
counterparts, except only for the following tax
rules:
1. Advanced income is taxable upon receipt.
The tax cash bosis expense is determined as follows: Net income
Cash expenses Note: P800,000 + P470,000 = P1,270,000*; P600,000
Amortization of prepayments and depreciation of + P100,000 = P700,000**
capital expenditures
Points to consider in converting GAAP cash basis to
Illustration: A taxpayer providing services reported Tax cash basis
the following in 1. Under the accounting cash basis, income is
Collections from services rendered recognized when received not when it is
Accrued income from services rendered earned.
Collection from accrued income of 2015  Advanced income is inherently recognized as
Collection tor services not yet rendered income. Hence, no adjustment is necessary on
Payment afar of current period income.
Accrued expenses 2. Under accounting cash basis, expense is
Payment of accrued expenses or 2015 deducted when paid including prepaid
Payment for expenses of the following year expenses. Hence, the deducted prepaid
Tax Accrual Basis expenses must be reversed for purposes of
Cash income taxation.
Accrued income Sellers of goods
Collection for future The gross income of taxpayers selling goods is
services - advances determined as follows:
Total gross income Sales
Less: Deductions Less: Cost of goods sold
Cash expenses Gross income
Accrued expense
Amortization of 2015 The cost of sales is computed using inventory
prepaid expense method:
Total deductions Beginning inventory
Net income Add: Purchases
Points to consider in converting GAAP Accrual Basis Total goods available for sale
to Tax Accrual Basis Less: Ending inventory
1. In accounting accrual basis, income is Cost of goods sold
recognized when earned even if not yet  The expensing of the purchase cost of goods
received. Advanced income is inherently not does not properly and fairly reflect income of
included in net income. the taxpayer particularly when there are
 For purposes of taxation, advanced income is significant fluctuations in inventory levels
taxable. Hence, it must be added to accrual between accounting periods. This could
basis gross income. expose the taxpayer to risk of BIR assessment.
2. In accounting, expense is recognized when  The use of the accrual method is suggested
accrued even if not yet paid. but of course subject to practical and cost
 Prepaid expenses are inherently not considerations.
deducted. Hence, no adjustment for Hybrid basis
prepayments is necessary under accrual basis.  The hybrid basis is any combination of accrual
Tax Cash Basis basis, cash basis and ther or o methods of
Collection from services rendered accounting.
Collection for future  It is used when the taxpayer has several
services - advances businesses which employ different accounting
Total gross income methods.
Less: Deductions Payments
of expenses
Amortization of 2015 prepayments
Total deductions Illustration
Mr. Roxas has two proprietorship businesses: a agreement whereby the debtor assumes
service business which uses cash basis and a trading indebtedness on the property.
business which uses accrual basis.  Comprehensive Illustration
The gross income as determined by cash basis in the Canlubang Company, a car dealer, sold a
service business and the gross income as determined machine with a tax basis of P1,200,000 on
by the accrual basis in the trading business are simply installment on January 3, 2016. Canlubang
combined. There is no requirement to measure the received a P200,000 cash downpayment and a
income of different businesses under a single P1,800,000 promissory note for the balance
accounting method. payable in six installments of P300,000 every
Sale of goods with extended payment terms July 3 and January 3 thereafter.
 The sale of goods with extended payment
terms may be reported using the accrual The selling price and gross profit on the sale is
basis, basis, installment method, or deferred computed as follows:
payment method. Cash downpayment
Installment method Notes receivables
 Under the installment method, gross income Selling price P
is recognized and reported in proportion to Less: Tax basis of machine sold
the collection from the installment sales. Gross profit
Installment method is available to the following
taxpayers: Accrual basis
1. Dealers of personal property on the sale of  Under the accrual basis, the entire P800,000
properties they regularlysell. gross profit shall be reported as gross income
2. Dealers of real properties, only if their initial in 2016, the year of sale.
payment does not exceedll 25% of the selling Installment basis
price  Canlubang cannot readily use the installment
3. Casual sale of non-dealers in property, real or method because it is a dealer of cars rather
personal, when their selling price exceeds than a dealer of machineries. The sale of
P1,000 and their initial payment does not properties of which the seller is not a dealer is
exceed 25% of the selling price referred to as a "casual sale." Hence, the ratio
Initial payment of initial payment shall be tested first.
 Installment payment means total payments
by the buyer, in cash or property, in the The initial payment of Canlubang can be computed as
taxable year the sale was made. follows:
 The term "initial payment" is broader than Cash downpayment (January 3, 2016)
down payment. It also includes the First installment (July 3, 2016)
installment payments in the year of sale. Initial payment
Selling price Ratio of initial payment)
 Selling price means the entire amount for  Canlubang can use the installment method.
which the buyer is obligated to the seller. It is The contract price or the amount due shall be
computed as follows: determined next. Since there is no mortgage
Cash received and/or receivable assumed by the buyer, the selling is the
Fair market value of property contract price.
received or receivable  The gross profit will be reported in gross
Mortgage or any indebtedness income throughout the installment period the
assumed by the buyer formula: (Collection/Contract price) x Gross
Selling Price profit
Contract price Canlubang shall recognize the following gross
 The contract price is the amount receivable in income:
cash or other property from the buyer. It is At the date of sale:
usually the selling price in the absence of an Upon every installment:
If Canlubang is a dealer in machinery, it can avail of Tagaytay shall recognize the following gross income:
the installment method even if* ratio of its initial At the date of sale:
payment over selling price exceeds 25% so long as Upon every installment:
the selling prig on the installment sale exceeds
P1,000. Indebtedness assumed exceeds tax basis of property
sold
With indebtedness assumed by the buyer  When the indebtedness assumed by the
The application of the installment method will slightly buyer exceeds the tax basis of the property
vary when the buyer assumes indebtedness on the sold, the excess is an indirect receipt realized
property sold. by the seller.
In this case, the selling price is no longer the contract  This is an indirect downpayment which must
price. The contract price is the residual amount after be added as part of the contract price and the
deducting the mortgage from the selling price. Thus, initial payment.
Selling price  Note also that under this condition, all
Less: Mortgage assumed by buyer collection from the contract including the
Contract price excess mortgage is a collection of income.
Illustration
On January 3, 2016, Tagaytay, Inc., a real property The contract price shall be computed as follows:
dealer, sold a lot costing P1,400.000 for P2,000,000. Selling price
The lot was encumbered by a P1,000,000 mortgage Less: Mortgage assumed by buyer
which WO assumed by the buyer. The buyer paid Cash collectible
P200,000 downpayment. The balance is dui over four Add: Excess indebtedness - constructive receipt
installments of P200,000 every July 3 and January 3 Contract price
thereafter.
The initial payment shall be computed as follows:
The gross profit can be computed as follows: Downpayment
Selling price Installment in the year of sale
Less: Tax basis of lot sold Excess of mortgage over tax basis
Gross profit Initial payment

Note that dealers of real properties are subject to Illustration

limitation on the use of installment method The ratio On July 1. 2016, a taxpayer made a casual sale of
of initial payment shall he determined first. property with a tax basis of P1 300 000 for
January 3, 2016 cash downpayment P2,000,000. The property was subject to a P1,500,000
June 3.2016, installment Initial payment mortgage which was agreed to be assumed by the
Ratio of initial payment buyer. The buyer paid a P100,000 down payment,
with the balance due in two installments of P200,000
Tagaytay is qualified to use the installment method. on December 31, 2016 and July 1,2017.
The contract price should be determined next. The gross profit on the sale is determined as follows:
Selling price Selling price
Less: Mortgage assumed by buyer Less: Tax basis of property sold
Contract price Gross profit

Alternatively, the contract price can be computed The initial payment shall be determined first:
directly as follows: Downpayment
Cash downpayment December 31,2016 installment
Collectible balance Excess mortgage
Contract price Initial payment
Ratio of initial payment (P500K/P2,000,000)
The contract price shall be computed as: Under the deferred payment method, the reportable
Selling price gross income for each year shall be:
Less: Mortgage assumed by buyer Cash downpayment
Cash collectible Present value of the note
Excess mortgage Selling price
Contract price Less: Tax basis of the property
Gross income
Note that the gross profit on the sale is the same as Interest income
the contract price. Hence, a, collection from the Note:
contract including the excess mortgage shall be 1. The difference between the face value and the
recognized gross income upon collection. present value of the note, known as discount, will not
be recognized in gross income at the date of sale but
Canlubang shall recognize the following gross will be deferred and recognized as interest income.
income: 2. The discount is amortized as interest income upon
At the date of sale every collection on the balance of the note as
Open receipt of follows: P500,000 installment/P1,000,000 total note
first installment - 12/31/2016 balance x P100,000 discount
Upon receipt of  In the case of interest-bearing notes, the use
second installment - 7/1/2017 of the deferred payment method will bear the
Total gross profit on the contract same result as the accrual basis of accounting.

Deferred payment method The Percentage of Completion Method for

 The deterred payment method is a variant of Construction Contracts
the accrual basis and is ass reporting income  Under the percentage of completion method,
when a non-interest bearing note is received the estimated gross income from construction
as consideration a sale. is reported based on the percentage of
Under the deferred payment method, the gross completion of the construction project.
income Is computed based on the present  There are several methods of estimating
value(discounted value) of a note receivable from the project completion in practice, but the output
contract. The discount interest on the note is method based on engineering survey is
amortized as interest over the installment term. prescribed by the NIRC.

Illustration Illuctration
On December 32, 2015, a taxpayer sold an office In 2015, Cagayan Construction Company accept
building costing P1 400 000 for P 2 000 000. The construction contract. The following shows the
buyer made P1,000,000 downpayment and the details of its construction activities:
balance, evidenced by note, is due in 2 annual Construction expenses
Installments of P500,000 every December 31 starting Engineer's estimate of completion
December 31, 2016.
The reportable gross income on construction will
Note that the Installment method cannot be allowed simply be computed as follow:
since the ratio of initial payment is already 50% (P1
000 000/P2 000 000) Contract price
Multiply by:
Assume the note is non-interest bearing but can be Construction revenue
discounted at a local bank for 900 000. Less: Construction revenue in prior year
Construction revenue this year
Less: Expense during the year
Construction gross income
 Income from Leasehold Improvement The P1 500,000 depreciated value of the
 Leasehold improvements are tangible improvement at the termination of the lease is an
improvements made by the lessee to income from leasehold improvement by the
property of the lessor. lessor.
 Improvements will benefit the lessor when
their useful extends beyond the lease Under the spread-out method, Anderson shall
term. This benefit is referred to as income spread the P1,500,000 income over 20 periods or
from leasehol improvement. recognize an annual income of P75,000 from the
leasehold improvement from Year 2016 through
Under Revenue Regulations No. 2, the income from Year 2035.
leasehold improvement can be reported using either
of the following method at the option of the Note to Readers
taxpayer:  It should be pointed out that this rule
1. Outright method exists only in the regulation and is absent
The lessor may report as income the fair in the NIRC. Some taxpayers are
market value of such buildings or questioning its validity pointing out lack of
improvements subject to the lease at the time legal basis.
when such buildings or improvements are  However, it is fairly proper to consider the
completed. depreciated value of the improvement
2. Spread-out method that remains to the lessor upon
The lessor may spread over the life of the termination of the lease as income
lease the estimated depreciated value of such because it is an actual benefit to the
buildings or improvements at the termination lessor. These are, in effect, additional
of the lease and report as income for each rental consideration in kind.
year of the lease an aliquot part thereof. However, the treatment specified by the outright
The depreciated value of the leasehold method is perceived as unjust and abusive, and is
improvement is computed as: an improper introduction of legislation.
Cost of improvement X Excess useful life over lease term  The depreciated value of the
Useful life of the improvement improvement at the termination of the
lease should be the proper value to be
Illustration On January 1, 2016, Anderson leased a
recognized as gross income under the
vacant lot to Greg under a 20-year lease contract.
outright method. This view is supported
Greg immediately constructed a building on the
by the fact that the spread-out method
lot at a total cost of P4 500 000. The building has
could not have been an option if the
useful life of 30 years.
outright method intended to tax the
entire fair value of the improvement
Outright method
considering the huge disproportion in the
Under the plain wordings of Section 49 of
reportable gross income in the two
Revenue Regulations No. 2. Anderson shall
options.
recognize the entire P4,500,900 fair value of the
 The outright method as mandated by the
improvement as gross income upon completion
regulation will best apply in cases where
of the improvement In 2016. This is not income in
lessees pay the lessor rentals in the form
its totality, but this is the amount referred to by
of leasehold improvements or when
the regulation.
leasehold improvements made by lessees
Spread-out method
are treated as reductions to cash rentals.
The depreciated value of the property at the
In such cases, the fair value of the leasehold
termination of the lease is the value of the of
improvements upon comp, unquestionably
usage of the lessor. This can be computed by
income to the lessor for taxation purposes.
splitting the value of the improvement as follows:
 Agricultural or Farming income Proceeds of harvest P- P 750,000 P 1,000,000
 Farming income Is commonly recognized 1st cropping expenses 400,000 200,000
2nd cropping expenses 500,000 300,000
using the cash basis or accrual basis, such
as in the following:
The reportable farming income using crop year
a. Animal husbandry
method would be:
b. Short-term crops
2019 2020 2021
Illustration
Proceeds of harvest
Northern Barn had the following details of its
Less: Cropping expenses
agricultural activity during the year:
Incurred last year
Total sales of fattened pigs, P1,000,000 on credit P 12,000,000
Increase in fair value of pig herd compared last year 2,700,000 Incurred this year
Total costs of farm feeds and supplies bought 7,000,000 Farming gross income
Total costs of farm feeds and supplies used 6,800,000  Crop year basis is an accounting method
Administrative and selling expenses 1,200,000 and is not an accounting period.
Use of different accounting methods
Northern Barn shall compute its net income using  Taxpayers with more than one type of
either method as follows: business using different accounting
Accrual method Cash basis
methods can consolidate the income
Sales P 12,000,000 P 11,000,000
Direct farm costs 6 800 000 6.800 000 reported using the different methods.
Gross profit from operations P 5,200,000 P 5,200,000  There is no need to restate the income to
Less: administrative a common accounting method. However,
and selling expenses 1 200 000 1 200 000 the methods applied to each business
Net income P5 000 000 P4 000 000
should be applied consistently from period
to period.
The accounting for long-term crops depends on the
Change in Accounting Methods and Accounting
harvesting frequency:
Periods
a. Perennial crops - those that yield harvests
 Under the NIRC, the change in accounting
through years
methods by any taxpayer and the change
b. One-time crops - those that are harvested
in accounting period by corporate
once after several years
taxpayers require prior BIR notice.
The initial farm development costs of perennial
INCOME TAX REPORTING
crops like mangoes, mangosteen, coconut and
Types of Returns to the Government
banana are capitalized and amortized over the
1. Income tax returns - provides details of the
expected years of harvest. The harvests are
taxpayer's income, expense, tax due and tax due,
accounted for using cash basis or accrual basis.
tax credit and tax still due the government
One-time crops are accounted for using the crop
2. Withholding tax returns - provides reports of
year basis.
income payments subjected to withholding tax by
Crop year basis
the taxpayer-withholding agent
 Under the crop year basis, farming income
3. Information returns
is recognized as the difference between
 Certain taxpayers are also required to file
the proceeds of harvest and expenses of
information returns. Information returns
the particular crop harvested.
do not involve any a payment or
 The expenses of each crop are
withholding of tax but essential to the
accumulated and deducted upon the
government in its tax mapping efforts and
harvest of the crop.
in its evaluation of tax compliance
Illustration
 The non-filing of income tax returns,
Juan de la Cruz, a farmer, plants a certain crop that
withholding tax returns, or information
takes more than a year to harvest. Juan had the
returns is subject to penalties, fines, and
following data on his farming operations:
or imprisonment.

MODE OF FILING INCOME TAX RETURNS

2021 2019 2020 1. Manual Filing System
 The traditional manual system of filing income 9 Accredited importers, including prospective
tax return is by paper documents where importers required to s Importers Clearance
taxpayers fill up BIR forms to report income, Certificate (ICC) and Custom brokers
expense, or any declaration required to be Certificate (BCC)
filed with the BIR,  In case of unavailability of the ePPS during
maintenance or instances of technical errors,
Under the NIRC, the income tax return shall be eFPS enrolled taxpayers may file manually.
filed to the following in descending order of Grouping of Taxpayers under EFPS
priority, within the revenue district office where Group A
the taxpayer is registered or required to register: a. Banking institutions
1. An authorized agent bank (AAB) b. Insurance and pension funding
2. Revenue Collection Officer c. Non-bank financial intermediation
3. Duly authorized city or municipal treasurer, if d. Activities auxiliary to financial intermediation
there is no BIR office in the locality e. Construction 1
f. Water transport
2. e-BIR Forms g. Hotels and restaurants
 The BIR introduced the e-BIR Forms with an h. Land transport
offline or online version. Group B
 Taxpayers fill up their income tax returns in a. Manufacture and repair of furniture
electronic spreadsheets without the need of b. Manufacture of basic metals
writing on papers returns. c. Manufacture of chemicals, and chemical
 The system ensures completeness of data on products
the return and is capable of online d. Manufacture of coke, refined petroleum, and
submission. fuel products
 If there are no penalties that require e. Manufacture of electrical machinery, and
assessments, taxpayers would have to print a apparatus NEC
hard copy of the filled tax returns and f. Manufacture of fabricated metal products
proceed directly to the bank for payment. g. Manufacture of foods, products, and
3. Electronic Filing and Payment System (eFPS) beverages
 The eFPS is a paperless tax filing system h. Manufacture of machineries, and equipment
developed and maintained by the BIR NEC
 Taxpayers file tax returns including i. Manufacture of medical, precision, and
attachments in electronic format and pay optical instruments
the tax through the Internet. j. Manufacture of motor vehicles, trailers and
Taxpayers mandated to use the eFPS semi-trailers
1 Large taxpayers duly notified by the BIR k. Manufacture of office, accounting, and
2 Top 20,000 private corporations duly notified computing machineries
by the BIR l. Manufacture of other non-metallic mineral
3 Top 5,000 individual taxpayers duly notified products
by the BIR m. Manufacture of other transport equipment
4 Taxpayers who wish to enter into contracts n. Manufacture of other wearing apparel
with government o. Manufacture of papers, and paper products
5 Corporations with paid-up capital of p. Manufacture of radio, TV, and communication
P10,000,000 offices equipment, and apparatus
6 PEZA-registered entities and those located q. Manufacture of rubber and plastic product
within Special Economic Zones r. Manufacture of textiles
7 Government offices, in so far as remittance of s. Manufacture of tobacco products
withheld VAT and business tax are concerned t. Manufacture of wood and wood products
8 Taxpayers included in the Taxpayer Account u. Manufacturing N.E.C.
Management Program a v. Metallic ore mining
w. Non-metallic mining and quarrying
Group C Filing/Submission Manual Electronic Electronic
a. Retail sale Tax payment Manual Manual Electronic
b. Wholesale trade and commission trade PENALTIES FOR LATE FILING OR PAYMENT OF TAX
c. Sale, maintenance, repair of motor vehicle, The late filing and payment of taxes is subject to the
and sale of automotive fuel following additional charges:
d. Collection, purification, and distribution of Surcharge
water a. 25% of the basic tax for failure to tile or pay
e. Computer and related activities deficiency tax on time
f. Real estate activities b. 50% for willful neglect to file and pay taxes
Group D  The non-filing is considered neglect' if the B1R
discovered the non-filing first. This is the case
a. Air transport when the taxpayer received a notice from the
b. Electricity, gas, steam, and hot water supply MR to file return.
c. Postal and telecommunications  If the taxpayer filed a retorts before the
d. Publishing, printing, reproduction of recorded receipt of such notice, the same is considered
media simple neglect subject to the 25% surcharge.
e. Recreational, cultural, and sporting activities Interest - double of the legal interest rate for loans
f. Recycling or forbearance of any money in the absence of any
g. Renting out of goods and equipment express stipulation
h. Supporting and auxiliary transport activities 5. Since the legal interest is currently set at 6% the
Group E interest penalty is therefore 12% per annum until
Dec. 31, 2017
a. Activities of membership organizations Inc.  Under the new rules established by RR21-
b. Health and social work 2018 the interest period shall be computed
c. Private educational services based on actual days divided by 365 days.
d. Public administration and defense compulsory  The additional day in February during a leap
social security year will be counted. The yearly-monthly-daily
e. Public educational services counting period method establishment in
f. Research and development prior regulation is already abandoned.
g. Agriculture, hunting, and forestry 30 day month
h. Farming of animals 31 day months
i. Fishing 28 or 29 day month
j. Other service activities
k. Miscellaneous business Note:
l. Unclassified activities a. The period factor shall be multiplied by 20%
interest rate to get interest factor which will
PAYMENT OF INCOME TAXES
be multiplied to the tax due to compute the
 The capital gains tax and regular income tax are
interest penalty.
paid as the taxpayer files his return.
b. A 30-day period in a month Is considered I
 Installment payment of income tax is allowed on
month (i.e. March 1 to March 31), but the 1-
certain conditions.
day excess on 31-day month Is Ignored.
 Taxpayers under the EFPS system shall e-pay
Hence, March 15 to April 15 is still 1 month
their tax online through intern, of taxes to be
even if March has 31 days.
paid. banking service.
 These rules were deducted after careful
 The account of the taxpayer will be auto-debited
examination of the illustrative guidelines on
for the amour of taxes to be paid
interest penalty calculation under RR12-99.

Illustration 1
BASIC COMPARISON OF FILING AND PAYMENT
The tax return of the taxpayer was due on April 15,
SYSTEMS
2017 but was filed on lune 30, 2017. The tax due per
Manual e-BIR Forms eFPS
return of the taxpayer amounts to P100,000.
Data entry Manual Electronic Electronic
April 15, 2017 to June 15, 2017 is 2 months; June 15 2. 2 Interest is computed from the net amount of
to June 30 is 30 days tax due before the 25% surcharge.
3. The compromise penalty is taken from the table
Hence, the period factor shall be [2/12 + 15/365] or of compromise penalties for failure to Elk and or
0.2077626 The interest factor shall be 0.2077626 x pay internal revenue tax at the time or times
20% or 0.04155252. The interest penalty shall be required by law, as follows:*
computed as P100,000 x 0.04155252 = P4,155.25.
if the amount of tax unpaid
This may be computed directly as .2077626 x 20% x Exceeds But not exceed Compromise is
P100,000. ……. …….. …….
10,000 20,000 5,000
Illustration 2 20,000 50,000 10,000
A taxpayer with a tax due of P100,000 late filed on 50,000 100,000 15,000
July 31, 2017. The deadline of the return was on April 100,000 500,000 20,000
15, 2016.
PENALTIES FOR NON-FILING OR LATE FILING OF
April 15, 2016 to April 15, 2017 is 1 year. April 15, INFORMATION RETURN
2017 to JO? 15, 2017 is 3 months July 15 to July 31 is For each failure to file a separate information return,
16 days. statement or list, or keep any record, or supply any
information required by the Code or by the
Hence, the period factor shall be (1 + 3/12 + 16/365) Commission on the date prescribe therefor, unless it
or 1.2938356 x P100,000. The interest penalty shall is shown that such failure is due to reasonable cause
be P25,876. not to willful neglect, shall be subject to a penalty off
Compromise penalty- P1,000 for each such failure. Provided that the
 Compromise penalty is an amount paid in lieu of amount imposed for all such failure during calendar
criminal prosecution over a tax violation. year shall not exceed P25,000.00
 The schedules of compromise penalty related to
income taxes are included in Appendix 4 for your
reference.
INTEGRATIVE ILLUSTRATION
An individual taxpayer filed his 2014 income tax
return with a computed tax due of P100 000 on July
15, 2015. A total of P20,000 withholding taxes was
deducted to various income payors from his gross
income.
The total amount to be paid by the taxpayer including
penalties shall be:
Tax due
Less: Tax credits (withholding taxes)
Net tax due
Net tax due
Plus: Penalties
Surcharge (P80,000 x 25%)
Interest (P80,000 x 20% x 3/12)
Compromise penalty
Total tax due

Note:
1. The deadline of the 2014 income tax return is
April 15, 2015. April 15, 2015 to July Ill 2015 is a
3-month delay.