Income Tax Credits PDF

PRE 28 | LESSON 4 Income Tax Credits REAB, CPA Tax Refund ╸ Tax refunds result from the overpayment of taxes. ╸ The usual sources of tax refunds are salaries, the income of freelancers and payments to tax-exempt entities. ╸ Note that whatever the source is, tax refund...

PRE 28 | LESSON 4 Income Tax Credits REAB, CPA Tax Refund ╸ Tax refunds result from the overpayment of taxes. ╸ The usual sources of tax refunds are salaries, the income of freelancers and payments to tax-exempt entities. ╸ Note that whatever the source is, tax refunds must be availed not later than 2 years from supposed filing. 2  Who are eligible? Generally, anyone who pays income tax may apply for tax refunds. This includes: ╸ Employees; ╸ Registered businesses including self-employed individuals and freelancers and; ╸ Juridical Persons like Corporations and Partnerships. 3  How to avail? 1. For employees that are qualified for substituted filing ╸ Employees sometimes overpay their taxes even if they do not have control over their payment because their employers file their tax returns on their behalf. ╸ You are qualified for substituted filing if you are ALL of the following: ╶ Have only one employer for the whole taxable year (January to December); and ╶ When both you and your spouse don’t own a business. 4  How to avail? 1. For employees that are qualified for substituted filing ╸ For those who are qualified for substituted filing, you do not need to apply for a tax refund because your employer will be the one who will return your excess tax payments. ╸ This is called year-end adjustments and the process is automatic (through the usual payroll processing) and will require no additional action from the employee. 5  How to avail? 2. For employees that are not qualified for substituted filing and business owners (including licensed professionals, self- employed individuals, and freelancers) ╸ The taxpayers that are required to file their own taxes, using their respective tax returns, shall provide evidence of their overpayment by presenting withholding tax certificates namely, BIR Form 2307 for businesses and BIR Form 2316 for employees. 6  How to avail? 2. For employees that are not qualified for substituted filing and business owners (including licensed professionals, self- employed individuals, and freelancers) ╸ The total amount indicated in all the certificates shall be their creditable withholding tax (CWT) for the year. If their tax due is lower than their total CWT, the taxpayers have the following options: ╶ avail for tax refund; or ╶ carry it over to the next taxable year, which they can use to pay their taxes for the succeeding year. 7 Foreign Tax Credit ╸ Domestic corporations are allowed to claim a credit for any income taxes paid to a foreign country, provided that the taxes are not claimed as deductions. ╸ Foreign corporations are not allowed foreign tax credits. 8  Foreign Tax Credit ╸ Credits for foreign taxes are determined on a country-by- country basis. ╸ The amount of foreign tax credit in respect of the tax paid in a country shall not exceed the same proportion of the tax against which the tax credit is taken, which the taxpayer’s income from the country bears to its entire taxable income. 9  Foreign Tax Credit ╸ There is, however, a further limitation based on the total amount of foreign-sourced income that the taxpayer earns. ╸ The total amount of foreign tax credits shall not exceed the same proportion of the tax against which the tax credit is taken that the taxpayer’s foreign-sourced income bears to its entire taxable income. 10 Tax Treaty ╸ Aliens deriving income from foreign sources are not allowed a tax credit for foreign income taxes against Philippine income tax. 11  Tax Treaties ╸ Revenue Memorandum Order (RMO) No. 14-2021 provides a withholding agent or income payor may rely on the submitted BIR Form No. 0901 or the “Application Form for Treaty Purposes, Tax Residency Certificate” (TRC) duly issued by the foreign tax authority (and the relevant provision of the applicable tax treaty) for purposes of determining whether to apply a reduced rate of, or exemption from, withholding at source on the income derived by a nonresident taxpayer from all sources within the Philippines. 12  Tax Treaties ╸ Scenario 1: If the withholding agent seeks to apply treaty rates on the income payment to the nonresident, the withholding agent must file with the tax office a “request for confirmation” on the propriety of the withholding tax rates applied. 13  Tax Treaties ╸ Scenario 2: If, however, the withholding agent seeks to apply the regular rates, or the rates as provided under the tax law, the nonresident must file a “Tax Treaty Relief Application” (TTRA) with the tax office. In such case, the nonresident who has been subjected to regular rates may file a claim for refund for the difference between the amount of withholding tax actually paid in the Philippines and the amount of tax that would have been paid under the treaty together with or subsequent to filing the TTRA. The grant of the claim for refund will depend on the issuance of a positive ruling or certificate confirming the nonresident’s entitlement to treaty benefits. 14  Tax Treaties ╸ Under the first scenario when the withholding agent applies the treaty rates, the withholding agent has an obligation to file a request for confirmation with the tax office at any time after the payment of withholding tax but in no case later than the last day of the fourth month following the close of the tax year. For taxpayers adopting the calendar year, this means that the request for confirmation must be filed with the tax office no later than 30 April of the year following the year the withholding was made. 15  Tax Treaties ╸ If the tax authorities determine that the withholding tax rate applied is lower than the rate that would have been applied on an item of income pursuant to the treaty, or that the nonresident taxpayer is not entitled to treaty benefits, it will issue a ruling denying the request for confirmation or TTRA and the withholding agent must pay the deficiency tax plus penalties. 16  Tax Treaties ╸ Countries with which the Philippines currently has double taxation agreements (DTAs): 17 Tax Incentives ╸ Omnibus Incentive Act ╸ Export Development Act ╸ Special Economic Zones 18 Omnibus Incentive Act 19 Export Development Act 20 Special Economic Zones 21 Alternative Forms of Tax Incentives 22 Alternative Forms of Tax Incentives 23 Alternative Forms of Tax Incentives 24 “ Thank you. References: https://taxsummaries.pwc.com/philippines/corporate/t ax-credits-and- incentives#:~:text=Foreign%20tax%20credit,country %2Dby%2Dcountry%20basis. https://filipiknow.net/tax-refund- philippines/#:~:text=What%20Is%20an%20Income% 20Tax,2%20years%20from%20supposed%20filing. https://www.imf.org/external/pubs/ft/wp/2001/wp0118 1.pdf https://bir.gov.ph 25