National Taxation (Income & Business Tax) OCTOBER 1, 2014

MR. ARNEL O. CRUZADO Certified Public Accountant Licensed Real Estate Broker

Real Estate Service Practitioners

Tax compliance, Avoidance & New Ruling

RESA of the Philippines RA 9646 Sec. 2 Declaration of Policy The State recognizes the vital role of real estate service

practitioners in the social, political, economic development and progress of the country by : promoting the real estate market stimulating economic activity enhancing government income from real property based transaction

- develop and nurture through proper and effective regulation and supervision a corps of technically competent, responsible & respected professional real estate practitioners whose standard of practice and service is globally competitive PENALTIES :

1. 25% Surcharge failure to file; filing out of district; failure to pay the full or part of the

amount. 2. 20% interest per annum on any unpaid amount of tax from the date prescribed for the

payment until it is fully paid. 3. 50% surcharge of the tax deficiency in case of willful neglect to file the return; in case of false

or fraudulent return is made. 4. Compromise penalty

Topic outline INCOME TAX (Graduated rates)

40% Optional Standard Deduction Itemized Deduction BUSINESS TAX

PERCENTAGE TAX (3%) VALUE-ADDED TAX (12%) New Ruling:

Witholding Tax for R.E.S.P. 10% or 15%


REVENUE MEMORANDUM ORDER NO. 4-2013 SUBJECT : Audit of Tax Returns by Revenue District Offices

I. OBJECTIVES 1. To prescribe uniform criteria in the continuing audit of tax returns by the Revenue District

Offices (RDOs); and 2. To enhance taxpayers voluntary compliance by encouraging payment of correct amount of

internal revenue taxes through the exercise of the enforcement function of the Bureau

II. POLICIES AND GUIDELINES The following policies and guidelines shall be observed in the continuing audit of tax returns by

the Revenue District Offices: 1. All taxpayers are considered as possible candidates for audit.

2. Priority shall be given to the following taxpayers:

a. Professionals and sole proprietorships whose: - income tax due is less than two hundred thousand pesos (P200,000.00) per annum; - gross revenue is less than forty percent (40%) compared to the previous years reported gross revenue; - tax payment for each tax type is less than thirty-five percent (35%) as compared to the previous years tax payment;

b. Those engaged in but not limited to these industries : - Importers / manufactures / wholesalers / retailers of wrist watches and jewelry - Petroleum / gasoline dealers - Hotels, motels, pension houses / lodging houses / inns, dormitories / boarding houses - Real estate industry - Schools, particularly for foreigners (e.g. English School for Koreans), review centers. - Contractors of NGAs, LGUs and government owned and controlled corporations GOCCs - Retailers / wholesalers

Restaurants, fastfood chains, catering services, bars, coffee shops Hospitals, clinics, medical/dental laboratories Establishments/clinic for beauty enhancements Manufacturers/dealers of beauty and health supplement Amusement /entertainment / event centers Advertising agencies Business Process Outsourcing (BPO) Companies E-Commerce industry Manpower & other recruitment service agencies Other industries peculiar to the area of jurisdiction of the RDO


c. Those who fall below the established benchmarks of tax compliance; d. Those who maintained an ending inventory with value of 100% or more of its gross

sales.

III. EFFECTIVITY This Order shall take effect immediately. (March 8,2013)

When you dont pay your taxes, youre a burden to those who do.


FUNDAMENTALS OF TAXATION Nature

Taxation is the power by which the sovereign state raises revenue to defray the necessary expenses of government. It is the life and strength of the govt because no govt can survive without it. System of Taxation

Global System applies a uniform rate regardless of the amount of tax base. (CGT, Percentage Tax, VAT) Schedular System applies variable rates which generally behave proportionately with the changes in the tax base. (Income Tax, Donors/Estate Tax) Escape from Taxation (ESCATE)

Exemption grant of immunity, express or implied to a particular person/s or corporations of a particular class from a tax upon property or an exercise which persons and corporations generally within the same taxing district are obliged to pay. (CREDIT) - Credit (tax) (excess Input Tax) - Reciprocity application - Exclusions of certain items from taxable amounts (13th month pay, minimum wage earners) - Deductions allowed from gross taxable amounts (Personal & Additional Exemption; 40% OSD or Itemized Deduction) - Income tax sparing rule observation - Tax Treaty


Shifting refers to the transfer of the tax burden by the person on whom it is imposed by law to another who bears it.

- Forward Shifting transfer of tax from factor of production , to distribution until the burden finally rests with the consumer. (increase in selling price). e.g. VAT paid by the Buyer/Consumer VAT on Prof. Fees paid by the RE Broker - Backward Shifting transfer of tax from the point of consumption through the factors of distribution to the factors of production. (decrease in selling price) e.g. VAT shouldered by the Developer/Seller VAT on Prof. Fees (RESP) paid by the Developer - Onward Shifting occurs when the tax is shifted two or more time either forward or backward. Capitalization is a form of backward shifting whereby future taxes on property sold

are capitalized at the time of purchase and deducted in lump from the selling price. The taxes are shifted backward from the buyer to the seller, resulting in a reduction in price.

AVOIDANCE legal means to lessen or avoid tax by taking advantage of the loopholes of the law. (e.g. Corporate buy-out; Special Power of Atty; Public Auction due to Real Property Tax Delinquency; Tax Free Exchange)

Transformation effected through the process of production where the producer pays the tax and recovers his additional expense by improving his method of production.

EVASION escape from taxation by breaking the law. Ways to register your business

1. As Practitioner Real Estate Broker Get Prof. Tax Receipt

(not later than Jan. 31) a. Register with BIR Book of accounts & Cert. of Reg. b. Authority to Print (ATP) c. Official Receipts d. Ask for Receipt Notice (ARN) e. Same TIN with the professional

City /

Municipality

BIR


2. WITH BUSINESS NAME

Business Name (Valid for 5 years) a. Brgy. Clearance Business Plate b. Application for Business Permit c. Business Permit Plate a. Register with BIR Book of accounts & Cert. of Reg. b. Authority to Print (ATP) c. Official Receipts d. Ask for Receipt Notice (ARN) e. Same TIN with the owner


Barangay Clearance


Business Permit


Same TIN with the Owner

1. As Corporation

Corporate Name Stock & Transfer Books Minimum of 5 Incorporators a. Brgy. Clearance Business Plate b. Application for Business Permit c. Business Permit Plate a. Register with BIR Book of accounts & Cert. of Reg. b. Authority to Print (ATP) c. Official Receipts d. Ask for Receipt Notice (ARN) e. Separate TIN for the Company

SEC

City / Municipality

BPLO

BIR


Separate TIN for the Corporation


Tax Mapping Tax Mapping 1. Certificate of Registration (COR) posted in Office 2. Ask for Receipt Notification (ARN) posted in Office 3. Official Receipt (New Series) 4. Book of Accounts a. Cash Receipt Book b. Cash Disbursements Book c. Journal d. Ledger 5. Number of employees (witholding tax) 6. Lease Contract (witholding tax)


How to secure Official Receipt

& Book of Accounts

w/ the BIR


Identify the Revenue District Office (RDO) of your registered business / residence address.

Prepare requirements to apply for a Certificate of Registration.

1). Accomplished Application for Registration BIR Form 1901.

2). Documentary requirements;

a. NSO Birth Certificate

b. Marriage Contract (if applicant is a married woman)

c. Company Certification (as a Licensed Agent)

d. Mayors permit and DTI Certificate of Registration of Business Name (if applicable)

* Please note that there may be other documents that may be required by the RDO Officer


Submit the following documents to the RDO for the processing of the Certificate of Registration:

1). Accomplished and signed BIR Form 1901

2). Required Documents

3). Photocopy of paid Annual Registration Fee

Register books of accounts with BIR

1). Inquire from the RDO Officer the required books of accounts to be registered.

* Required books of accounts may vary depending on the type of taxpayer

2). Present the books of accounts for stamping and registration

Attend the required taxpayers briefing. Require schedule from the RDO.

Fill out a Request for TIN Card Slip to get a TIN ID Card

Submit a photocopy of your COR (BIR Form 2303) to your printer

Printer will then process the Authority to Print (ATP) and printing of the Official Receipts


I. INCOME TAX base on net income

Taxable Income income derived by self-employed Individuals with both Business & Compensation Income.

BIR Form 1701 Annual Income Tax Return 1701Q Quarterly Income Tax Return Date of Filing :

Quarterly Income Tax Return (1701-Q) 1st Quarter on or before April 15 current year 2nd Quarter on or before Aug. 15 - current year 3rd Quarter on or before Nov 15 current year Annual Income Tax (1701) on or before April 15 of the following year

INCOME TAX

Sole Proprietor Partnership / Corp. 1701 Q 1702 Q

1701 Q Deadline 1702 Q Deadline

1st Qtr. April 15 1st Qtr. May 30

2nd Qtr. Aug. 15 2nd Qtr. Aug. 29 3rd Qtr. Nov. 15 3rd Qtr. Nov. 29

1701 April 15 1702 April 15

New BIR Ruling REVENUE REGULATION NO. 1-2014

o Background o These Regulations are hereby issued for purposes of ensuring that information

on all income payments paid by employers/payors, whether or not subject to the witholding tax except on cases prescribed under existing international agreements, treaties, laws and revenue regulations, regardless on the number of employees and/or payees, are monitored by and captured in the tax payer database of the Bureau of Internal Revenue (BIR), with the end in view of establishing simulation model, formulating analytical framework for policy analysis, and institutionalizing appropriate enforcement activities.


Mandatory

Itemized

Deduction


REVENUE REGULATIONS No. 10-2013 Amending Further Pertinent Provisions of Revenue Regulations (RR) No. 2-98, as Last

Amended by Revenue Regulations No. 30-2003, Providing for the Inclusion of Real Estate Service Practitioners (i.e. Real Estate consultant, Appraiser and Broker) Who passed the Licensure Examination given by the Real Estate Service under the Professional Regulations Commission as defined in Republic Act No. 9646, The Real Estate Service Act of the Philippines as Among Those Professionals Falling Under Section 2.57.2 (A)(1) of RR 2-98, as Amended, and RR 14-2002 as Regards Income Payments to Certain Brokers and Agents.

Section 2.57.2 (A)(1) of RR 2-98, as last amended by RR 30-2003, is hereby further amended to read as follows (A) Professional fees, talent fees, etc., for services rendered by individuals. On the

gross professional, promotional and talent fees or any other form of remuneration for the services of the following individuals Fifteen percent (15%), if the gross income for the current year exceeds P720,000; and Ten percent (10%, if otherwise:

(1) Those individually engaged in the practice of profession or callings: xxx designers, real estate service practitioners (RESPs), (i.e. real estate consultants, real estate appraisers and real estate broker)

Requiring government licensure examination given by the Real Estate Service pursuant

to Republic Act No. 9646 and all other profession requiring government licensure examination regulated by the Professional Regulations Commission, Supreme Court, etc.

SECTION 5. EFFECTIVITY.

These regulations shall take effect June 1, 2013 and shall cover income payments to be paid or payable starting June 1, 2013 which are required to be remitted within the month of July, 2013.

Revenue Regulation No. 12-2013 Requirements for deductibility Any income payment which is otherwise deductible

under the Code shall be allowed as a deduction from the payors gross income only if is shown that the income tax required to be witheld has been paid to the Bureau in accordance to Sec. 57 and 58 of the Code.

No deduction will also be allowed nothwithstanding payments of witholding tax at the time of the audit investigation or reinvestigation/reconsideration in cases where no witholding of tax was made in accordance with Secs. 57 and 58 of the Code.


Revenue Regulation No. 13-2012 VAT Treatment on Sale of Adjacent Residential Lots, House & Lots or other Residential

Dwellings.

Sale of real properties held primarily for sale to customers or held for lease in the ordinary course of trade or business of the seller shall be subject to VAT.

This includes sale, transfer of disposal within a 12-month period of two or more adjacent residential lots, house and lots or other residential dwellings in favor of one buyer from the same seller, for the purpose of utilizing the lots, house and lots or other residential dwellings as one residential area within the aggregate value of the adjacent properties exceeds P1,919,500.00 for residential lots and P3,199,200.00 for residential house and lots or other residential dwellings.

Adjacent residential lots, house and lots or other residential dwellings although covered

by separate titles and/or separate tax declarations, when sold or disposed to one and the same buyer, whether covered by one or separate Deed/s of Conveyance, shall be presumed as a sale of one residential lot, house and lot or residential dwelling.

This however, does not include the sale of parking lot which may or may not be included in the sale of condominium units. The sale of parking lots in a condominium is a separate and distinct transaction and is not covered by the rules on threshold amount not being a residential lot, house & lot or a residential dwelling, thus, should be subject to VAT regardless of amount of selling price.


CORPORATION ITEMIZED


Optional Standard Deduction (40%) Maximum of 40% of Gross Sales or Gross Receipts shall be allowed as deduction in lieu of the

itemized deduction. Not allowed to Non-resident aliens Advantage:

individual availing of this deduction need not submit the Account Information Form (AIF) & Financial Statements.

Official Receipts for Expenses INDIVIDUAL OSD


Itemized deduction Ordinary and necessary expenses paid or incurred during the taxable year in carrying on

or directly attributable to the devt, management, operation of the trade, business or exercise of a profession including reasonable allowance for

a. Salaries b. Travel c. Rental d. Entertainment Expenses

o Other allowed deductions: Interest, taxes, losses, bad debts, depreciation, depletion, charitable contributions, research & devt, pension, premium payments-health and/or hospital insurance Personal Exemptions (Year 2009 & onwards)

Single / Married P 50,000.00 Additional Exemption

Single / Married P25,000.00 for every qualified dependent child not exceeding 4 Dependent child legitimate or illegitimate or legally adopted child chiefly dependent

upon and living with the taxpayer not more than 21 years old, unmarried, not gainfully employed, or if such dependent regardless of age is incapable of self-support because of mental or physical defect.

In case of legally separated spouses, additional exemption may be claimed only by the spouse who has custody of the child or children. Provided that the total amount of additional exemption shall not exceed the maximum allowed by the Tax Code.


I. INCOME TAX

If Taxable Income Is: Tax Due Is:

Not Over P10,000 5%

Over P 10,000 but not over P 30,000 P 500 + 10% of the excess over P 10,000

Over P 30,000 but not over P 70,000 P 2,500 + 15% of the excess over P 30,000




Over P 500,000 P 125,000 + 32% of the excess over P 500,000

II. CORPORATE TAX

III. BUSINESS TAX

CORPORATE INCOME TAX 30% of Net Income

Percentage (3%) Value-Added Tax (12%)

Gross Receipts up to Gross Receipts exceeds

P1,919,500 & below P1,919,500 (mandatory registration)

Form 2551-M Form 2550-M & Q

20th day of the ff. month 20th day of the ff month = M

25th day of the ff quarter = Q

or (Optional Registration to VAT) lock for 3 years.


Real Estate Service Practitioners Professional Fee is subject to:

1. INCOME TAX 2. BUSINESS TAX (Base on Net Income) (Base on Gross Income) Sample Illustration : PERCENTAGE TAX

Tax Witheld To be Brokers Prof. Fee at source Paid by Broker

Date Income 10% W.T. 3% Percentage

Jan. P200,000.00 P20,000.00 P 6,000.00*

Feb. No commission - -

Mar. P50,000.00 P5,000.00 P 1,500.00*

* Based on Official Receipts issued (gross of witholding tax)

Even if you did not earn any income or prof. fee in a particular month you are required to file a

monthly return stating /declaring no income for that particular month

The total tax witheld at source shall be used as deduction to the Annual Income Tax due upon

filing.

HOW TO COMPUTE PERCENTAGE TAX?

Net amount received : (amount on Official Receipt) Php xxx Add: 10% or 15% Witholding Tax xxx Total Professional Fee Php xxx Multiply by 3% Percentage Tax 3% Percentage Tax Due Php xxx === Note: the Witholding Tax being deducted by the Witholding agent is merely an advance payment and NOT THE FULL PAYMENT of the Income Tax Due, if any, from the Professional.


Marketing Set-up

DOUBLE TAXATION

Developer witheld 10% Tax

Marketing Co. pays 3% Percentage Tax based on PF received (Official Receipt)

Marketing Co. witheld 10% Tax for the account of the Broker

Broker pays 3% Percentage Tax based on PF received (Official Receipt)

Avoidance of Double Taxation

Developer will issue separate payments to the Mktg. Co. and to the

Broker where it will witheld the respective 10% Witholding Taxes.

Marketing Company will pay for its 3% Percentage Tax

Broker will pay for its

3% Percentage Tax


I. TAX AVOIDANCE THRU INCOME RECOGNITION / DISTRIBUTION

(VAT TRESHOLD = P 1,919,500.00)

TOTAL: II.

TOTAL: BIR Revenue Regulations No. 16-2011 Increasing the amount of threshold amounts for Sale of Residential Lot, House & Lot, Lease of

Residential Unit and sale or lease of goods or properties or PERFORMANCE OF SERVICES Effectivity : starting January 1, 2012*

Subject Up to Y-2011

Adjusted Amounts*

Residential Lot 1,500,000.00 1,919,500.00

House & Lot 2,500,000.00 3,199,200.00

Lease of Residential Units 10,000.00 12,800.00

Sale or lease of goods or properties or Performance of services

1,500,000.00 1,919,500.00

CORP.

BROKER BROKER BROKER

CORP.

BROKER


VALUE ADDED TAX Rate and Base of Tax There shall be levied, assessed and collected, a value-added tax

equivalent to twelve per cent (12%) of gross receipts derived from the sale or exchange of services including the use or lease of properties. The phrase sale or exchange or services means the performance of all kinds of services in the Philippines for others for a fee, remuneration or consideration, including those performed or rendered by construction and service contractors, stock, real estate, commercial, customs and immigration brokers; lessors of property whether personal or real.

Mandatory Registration annual gross receipts exceed P1,919,500.00.

Optional Registration P1,919,500.00 & below but opted to be under the VAT registered entity. Registration is lock-in for 3 years whether the gross receipts fall below the threshold.

Input Tax (VAT on purchases) VAT due on or paid by a VAT registered person or importation

of goods or local purchases of goods, properties or services, including lease or use of properties, in the course of his trade or business.

Sources of Input taxes (R.E. Brokers)

1. Rental 5. Office Equipment 2. Gasoline 6. Hotel Accommodations 3. Food 7. Seminar / Training Fees 4. Utilities To claim Input Tax the taxpayer has to maintain a Report indicating the Establishments name;

VAT Reg./TIN; Amount of O.R. and Input Tax.

Vat Registered Receipts


Formula in computing VAT Liability Output Tax (VAT on Income or Professional Fees) Less : Input Tax (VAT on Purchases) Vat Payable (Excess Output Tax) or Excess Input Tax* *Excess Input Tax is carried over to the next quarter The Excess Output Tax is paid monthly (Form 2550M) not later than 20th day of the following month furthermore a corresponding Quarterly Return (2550Q) is prepared and needs to be filed not later than the 25th day following the close of the taxable quarter.

Value-added Tax

INPUT TAX OUTPUT TAX

(From Purchases) (From Gross Receipts/Income)

book as Asset book as Liability

Excess Input Tax is applied to next qtr. Excess Output Tax is liability to BIR

Sample Computation:

P 1 M paid-up sale at 5% Commission

Output Tax / Vat (P50T/1.12 X .12) P 5,357.00

Less : Input Taxes Gasoline 53.57 + 64.29 P 117.86 Food 186.75 Rental (15T plus Vat) 1,800.00 Total Input Taxes P 2,104.61 VAT Payable (Excess Output Tax) P 3,252.39

======== If Input Taxes exceeds the Output Tax the excess shall be credited or applied to the following taxable quarter


Comparison : Percentage Tax vs. VAT Cash Sale of P1 M with 5% Professional Fee;

Expenses : Gasoline 1,120 & Food 560 paid in Cash

Percentage VAT System

Cash 45,000 Cash 45,000

Tax Witheld 5,000 Tax Witheld 5,000

PF / Comm 50,000 PF / Comm 50,000

Percentage Tax 3% 1,500 PF / Comm 5,357

PT Payable 1,500 Output Tax 12% 5,357 *

Gasoline 1,120 Gasoline 1,000

Food 560 Food 500

Cash 1,680 Input Tax 180

Cash 1,680

(50,000 / 1.12 X ,12) Which is advantageous is it Percentage or VAT? Always bear in mind : Tax Compliance & Avoidance Do you want to comply or not? It will depend on the following: Business Structure (Sole Prop.; Corporation) Accounting System (Percentage is simpler; VAT a bit complicated) Source of Professional Fee (Big Developer or Large Taxpayers versus non-key players) Nature of Business Operation (Part-time or Full-time)

It is the Management responsibility to determine what is best and beneficial to their unique

and distinct type of business operation.

ARNEL O. CRUZADO Licensed Real Estate Broker Certified Public Accountant PAREB-MVRB 2013 President Neo-Upscale Property Specialists Corp. 0917-8961717 / 664-2921 [email protected] Website : www.upproperty.net

VAT INCLUSIVE