presentation of nolco in financial statements

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Nolco from 2020 and 2021 carried over for next 5 years

THE Bureau of Internal Revenue (BIR) has recently issued Revenue Regulations (RR) 25-2020 to inform all concerned on the longer period for claiming net operating losses carry over (Nolco) from taxable years 2020 and 2021.

Pursuant to Section 4 (bbb) of Bayanihan II and as implemented under RR 25-2020, the net operating losses of a business or enterprise incurred for taxable years 2020 and 2021 can be carried over as a deduction from gross income for the next five consecutive taxable years following the year of such loss. Ordinarily, Nolco can be carried over as deduction from gross income for the next three consecutive years only.

For corporate taxpayers who are on fiscal year accounting period, taxable years 2020 and 2021 shall include all those corporations with fiscal years ending on or before June 30, 2021 and June 30, 2022, respectively. The Nolco shall be separately shown in the taxpayer’s income tax return while the unused Nolco shall be presented in the notes to financial statements in detail. The Nolco for the taxable years 2020 and 2021 shall be presented in the notes to financial statements separately from the Nolco for other taxable years. Failure to comply with the reporting requirement will disqualify the taxpayer from claiming the Nolco. Source:

P&A Grant Thornton Certified Public Accountants

As published in SunStar Cebu , dated 14 October 2020

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Easing restrictions on net operating loss carry-over due to effects of COVID-19 measure

Published On - 28 October, 2020

The Philippine government is still implementing quarantine protocols across various regions, including the most significant business district, Metro Manila. In response to the business communities’ prayer for government help from the difficulty of their business operations due to the Covid 19 Pandemic, the government has passed the Republic Act No. 11494, also known as the “Bayanihan to Recover as One Act”.

One of the features to help the businesses’ growing uncertainties and losses is a provision relative to Net Operating Loss Carry-Over (NOLCO) Under Section 34 (D) (3) of the National Internal Revenue Code (NIRC), as Amended and the Bureau of Internal Revenue (BIR) has already issued the Revenue Regulations No. 25-2020 dated September 30, 2020, to put the amendment into effect.

Notwithstanding the provision of existing laws to the contrary, the net operating loss of the business or enterprise for taxable years 2020 and 2021 shall be carried over as a deduction from gross income for the next five (5) consecutive taxable years immediately following the year of such loss; Provided, that this subsection shall remain in effect even after the expiration of this Act.”

Prior to the issuance of RR No. 25-2020, Section 34 (D) (3) of the NIRC, the NOLCO can only be carried over to the next three (3) consecutive taxable years immediately following the year of such loss.

Under the present law RA 11494, this is now extended to the next five (5) consecutive taxable years following the year of such loss.  However, this is only applicable to the registered Corporation and taxable partnerships and not including the businesses operating under a “Sole Proprietor” set up.

NET OPERATING LOSS as defined in Section 3 (3.3) in RR 25-2020, means the excess of the allowable deductions over gross income of the business in a taxable year.

In reporting the NOLCO to the income tax return and Notes to Financial Statements, the taxpayer corporation must be careful to comply with the requirement so as not to disqualify them from claiming the NOLCO.

Presentation of NOLCO in Tax Return and Unused NOLCO in the Income Statement.  – The NOLCO shall be separately shown in the taxpayer’s income tax return (also shown in the Reconciliation Section of the Tax Return) while the unused NOLCO shall be presented in the Notes to the Financial Statements showing, in detail, the taxable year in which the net operating loss was sustained or incurred, and any amount thereof claimed as NOLCO deduction within five (5) consecutive years immediately following the year of such loss.  The NOLCO for taxable years 2020 and 2021 shall be presented in the Notes to Financial Statements separately from the NOLCO of the other taxable years.  Failure to comply with this requirement will disqualify the taxpayer from claiming the NOLCO.

With this, the NOLCO incurred in the taxable year 2020, can be carried over to the next five (5) consecutive taxable years from 2021 to 2025 while the NOLCO incurred in the taxable year 2021 can be carried over to the next five (5) consecutive taxable years 2022 to 2026.

If you have any questions regarding the above, please do not hesitate to leave your inquiry at [email protected] and a member of our team of experts will get back to you shortly.

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Tax Notes: Nolco from 2020 and 2021 carried over for next 5 years

THE Bureau of Internal Revenue (BIR) has recently issued Revenue Regulations (RR) 25-2020 to inform all concerned on the longer period for claiming net operating losses carry over (Nolco) from taxable years 2020 and 2021. Pursuant to Section 4 (bbb) of Bayanihan II and as implemented under RR 25-2020, the net operating losses of a business or enterprise incurred for taxable years 2020 and 2021 can be carried over as a deduction from gross income for the next five consecutive taxable years following the year of such loss. Ordinarily, Nolco can be carried over as deduction from gross income for the next three consecutive years only. For corporate taxpayers who are on fiscal year accounting period, taxable years 2020 and 2021 shall include all those corporations with fiscal years ending on or before June 30, 2021 and June 30, 2022, respectively. The Nolco shall be separately shown in the taxpayer’s income tax return while the unused Nolco shall be presented in the notes to financial statements in detail. The Nolco for the taxable years 2020 and 2021 shall be presented in the notes to financial statements separately from the Nolco for other taxable years. Failure to comply with the reporting requirement will disqualify the taxpayer from claiming the Nolco. Source: P&A Grant Thornton Certified Public Accountants

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2020 and 2021 Carry-over of Net Operating Losses Extended

• November 1st, 2020

Keeping in mind the general welfare of the people in response to the COVID-19 pandemic, the government has set forth quarantine measures in major areas of the country. Not only the movement of the people became limited, it also halted the operations of many businesses thus resulting to a net loss especially to those who are not engaged in providing essential goods or services.

To provide the taxpayers time to recover from the losses incidentally being carried by the pandemic, the Bureau of Internal Revenue (BIR) has extended the period to claim Net Operating Loss Carry-Over (NOLCO) as tax deduction to five (5) years from the previous three (3) years. This is for the losses incurred for taxable years 2020 and 2021.The NOLCO is the excess of deductible expenses over gross income of the business. This extension is in conformance with Section 4 (bbbb) of Republic Act No. 11494 otherwise known as “Bayanihan to Recover As One Act”, which states that:

“Notwithstanding the provision of existing laws to the contrary, the net operating loss of the business or enterprise for taxable years 2020 and 2021 shall be carried over as a deduction from gross income for the next five (5) consecutive taxable years immediately following the year of such loss; Provided, That this subsection shall remain in effect even after the expiration of this Act;”

As to presentation requirement for government reporting, the NOLCO should be separately shown in the income tax return of the taxpayer. In the reconciliation section of the same tax return, it must also be shown independently. The NOLCO for taxable years of 2020 and 2021 should appear separate from the NOLCO of the other taxable years in the Notes to the Financial Statements. These presentation requirements must be observed as failure to do so will disqualify the taxpayer from claiming the NOLCO as a deduction.

At this time when most are having financial difficulty, businessmen are looking for ways on how to recuperate and pivot their businesses. This regulation will not only help taxpayers to maximize tax benefits but most importantly, this will help them in getting back on track.

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What Is the RR 25-2020 and What This Revenue Regulation Means for Business Owners

• Updated 4 years ago

The Bureau of Internal Revenue (BIR) recently issued Revenue Regulations (RR) No. 25-2020 on September 30, 2020 prescribing the Rules and Regulations to implement Sec. 4 (bbbb) of Republic Act (RA) No. 11494 (Bayanihan to Recover as One Act) relative to Net Operating Loss Carry-Over (NOLCO) under Section 34 (D)(3) of the National Internal Revenue Code (NIRC) of 1997, as amended.

Unless otherwise disqualified from claiming the deduction, the business or enterprise which incurred net operating loss for taxable years 2020 and 2021 shall be allowed to carry over the same as a deduction from its gross income for the next five (5) consecutive taxable years immediately following the year of such loss.

The net operating loss for said taxable years may be carried over as a deduction even after the expiration of RA No. 11494 provided the same are claimed within the next five (5) consecutive taxable years immediately following the year of such loss.

Here’s what it means in plain English

When you incur a net operating loss in years 2020 and 2021, you may use that (carry over) as an additional expense for the next 5 years. Initially, this net operating loss carry over (NOLCO) is only for a period of 3 years, which was amended by RA 11494.

But first, let’s clarify a few things first:

The numbers here apply to your income statement and applicable to income taxes. VAT or percentage taxes aren’t applicable.

In income statements, there are a couple of important line items there:

• Sales or revenues
• Cost of goods sold or cost of sales
• Revenues minus cost of goods sold equals gross income
• Operating expenses which includes your rent, utilities, and other expenses
• Gross income minus operating expenses equals Net Taxable Income or Net Operating Loss.

Sample scenarios and computations

Let’s say Mang Juan Restaurant has a net income of PhP 50,000. So, no NOLCO applicable.

For 2021, here’s how their income statement looks like:

• Sales = 1,000,000
• Cost of Services = 700,000
• Gross Income = 300,000 (sales – cost of services)
• Expenses = 500,000
• Net loss = 200,000

Then in 2022, Mang Juan Restaurant had a good year and earned a net income of 300,000.

Based on RR 25-2020, they may carry over the NOLCO of 200K from 2022 2026 as further deduction from the subsequent net income. Here’s what that may look like in their 2022 income statement:

• Net income = 300,000
• NOLCO = 200,000
• Net taxable income = 100,000 (300k – 200k)

If Mang Juan Restaurant is not able to use the NOLCO up to 2026, then it expires and it can no longer use it in 2027 onwards. This only happens if they incur net loss until 2026.

Here’s another example:

If Company A in 2022 has only 150k net income instead of 300k, then the NEW net income is 150k net income less 150k net loss from 2021 = zero.

The unused balance of 50k (200k less 150k used in 2021) may be further used as deduction in 2022 to 2026.

In 2022, you can not use the whole 200k since you only have 150k from where you can deduct the NOLCO. After 2026, the remaining 50Kk if still unused shall expire.

Other relevant reading

• RA 11494 — An Act Providing for COVID-19 Response and Recovery Interventions and Providing Mechanisms to Accelerate the Recovery and Bolster the Resiliency of the Philippine Economy, Providing Funds Therefor, and for Other Purposes

Where can I learn more?

You can learn more about the RR 25-2020 from the BIR website. Here are some important links:

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Availment of Nolco Deduction

Written on October 22, 2021 . Posted in MTF Articles .

By Euney Marie Mata-Perez on October 21, 2021

First of two-part

Having incurred losses during the Covid-19 pandemic, companies can avail of the net operating loss carry-over deduction (Nolco) pursuant to the National Internal Revenue Code (Tax Code), as amended, as well as certain special laws.

Section 34(D)(3) of the Tax Code provides that the net operating loss of a business or enterprise for any taxable year immediately preceding the current taxable year and not previously offset as a deduction from gross income can be carried over as a deduction from gross income for the next three consecutive taxable years immediately following the year of the loss. However, any net loss incurred in a taxable year during which the taxpayer was exempt from income tax will not be allowed as a Nolco deduction.

“Net operating loss” means the excess of allowable deductions over the gross income of the business in a taxable year.

Republic Act (RA) 11494 or the Bayanihan to Recover as One Act extended the allowable Nolco period to the next five consecutive taxable years following the years of the loss for losses incurred during taxable years 2020 and 2021. The Nolco for such can be carried over as a deduction even after the expiration of the Bayanihan Act, provided that the same are claimed within the next five consecutive taxable years immediately following the year of the loss.

For this purpose, “taxable year” means the calendar year or fiscal year (FY) ending during such calendar year, on the basis of which net income is computed under the Tax Code, and includes, in the case of a return made for a fractional part of a year, the period for which such return is made. For Nolco purposes, the term taxable year 2020 and 2021 includes all corporations with fiscal years ending on or before June 30, 2021 and June 30, 2022, respectively. (Revenue Regulations 25-20, September 30, 2020).

Under existing revenue issuances, an FY will fall on a particular taxable year depending on the number of months it has in the two years involved. Thus, an FY ending on March 31, 2020 will fall in taxable year 2019 since it has nine months in 2019 and only three months in 2020. In the case of an FY ending on June 30, 2021 and the beginning of which is July 1, 2020, it is considered as taxable year 2020 since it has more days in 2020 (184) than in 2021 (181). (Revenue Memorandum Circular 138-20).

The Corporate Recovery and Tax Incentives for Enterprises Act (Create) or RA 11534, meanwhile, amended Section 294(C)(8) of the Tax Code to provide that the net operating loss of the registered project or activity during the first three years from the start of commercial operation, which has not been previously offset as a deduction from the gross income, can be carried over as a deduction from gross income within the next five consecutive taxable years immediately following the year of the loss.

Nolco is also available under several special laws:

The Financial Institutions Strategic Transfer Act (Fist) or RA 11523, passed early this year, provides that a loss incurred by a financial institution as a result of the transfer of non-performing loans and real and other properties acquired within the two-year period from Fist’s effectivity will be treated as ordinary loss and may be carried over for a period of five consecutive taxable years immediately following the year of the loss. However, any accrued interest and penalties will not be included as a loss on said loss carry-over from operations. (Fist Act, Section 17[a]).

The Renewable Energy (RE) Act of 2008 or RA 9513 also provides that the net operating losses of a renewable energy developer during the first three years from the start of commercial operation, which have not been previously offset as a deduction from gross income, will be carried over as a Nolco deduction from gross income for the next seven consecutive taxable years immediately following the year of the loss.

Further, the Philippine Mining Act of 1995 (RA 7942) provides that net operating loss without the benefit of incentives incurred in any of the first 10 years of operations can be carried over as a deduction from taxable income for the next five years immediately following the year of such loss. (RA 7942, Sec. 92).

There are conditions imposed in the availment of Nolco. Under Section 34(D)(3) of the Tax Code, Nolco will be allowed only if there has been no substantial change in the ownership of the business or enterprise. There is deemed no substantial change if not less than seventy-five percent (75 percent) in the nominal value of a corporation’s outstanding issued shares is held by or on behalf of the same persons or (ii) not less than seventy-five percent (75 percent) of the corporation’s paid-up capital is held by or on behalf of the same persons. We will discuss these conditions in part two of this article.

#nolco #netoperatinglosscarryover #netoperatingloss #taxcarryover #tax #taxcode #philippinetaxlaw #taxlawphilippines 

Euney Marie J. Mata-Perez is a CPA-lawyer and the managing partner of Mata-Perez, Tamayo & Francisco (MTF Counsel). She is a corporate, M&A, and tax lawyer and has been ranked as one of the top 100 lawyers of the Philippines by Asia Business Law Journal. This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. If you have any question or comment regarding this article, you can email the author at [email protected] or visit the MTF website at www.mtfcounsel.com.

https://www.manilatimes.net/2021/10/21/business/top-business/availment-of-nolco-deduction/1819138

BIR Revenue Regulations No.25-2020

August 10, 2021 By Management

REVENUE REGULATIONS NO. 25-2020 issued on September 30, 2020 prescribes the Rules and Regulations to implement Section 4 (bbbb) of Republic Act (RA) No. 11494 (Bayanihan to Recover as One Act) relative to Net Operating Loss Carry-Over (NOLCO) under Section 34 (D)(3) of the National Internal Revenue Code (NIRC) of 1997, as amended. Unless otherwise disqualified from claiming the deduction, the business or enterprise which incurred net operating loss for taxable years 2020 and 2021 shall be allowed to carry over the same as a deduction from its gross income for the next five (5) consecutive taxable years immediately following the year of such loss. The net operating loss for said taxable years may be carried over as a deduction even after the expiration of RA No. 11494 provided the same are claimed within the next five (5) consecutive taxable years immediately following the year of such loss. The NOLCO shall be separately shown in the taxpayer’s Income Tax Return (also shown in the Reconciliation Section of the Tax Return) while the unused NOLCO shall be presented in the Notes to the Financial Statements showing, in detail, the taxable year in which the net operating loss was sustained or incurred, and any amount thereof claimed as NOLCO deduction within five (5) consecutive years immediately following the year of such loss. The NOLCO for taxable years 2020 and 2021 shall be presented in the Notes to the Financial Statements separately from the NOLCO for other taxable years. Failure to comply with this requirement will disqualify the taxpayer from claiming the NOLCO.

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When tax cannot follow accounting

08 Aug 2019

Tax rules are constantly subject to change. Whether covered by new laws or new administrative issuances, these changes are deemed sound policy if they contribute to the efficiency and fairness of our tax system, are uncomplicated to comply with, and ultimately, serve the interest of both the citizenry and the government.

A new tax law goes through intensive review as it passes through both houses of Congress before being signed by the President. In the case of administrative issuances, revenue regulations, in particular, are issued by the Secretary of Finance upon the recommendation of the Commissioner of Internal Revenue. Since RRs are the main administrative issuances that implementing tax statutes, I would like to believe that they are meticulously evaluated for compliance with the Constitution and the Tax Code, as well as for their sensibleness in achieving their objectives.

However, over the years, I have come across some tax rules which are too rigid or impractical to follow, and at times are even inconsistent with the objectives the government is trying to achieve. An example is RR No. 21-2002, which details the additional procedural and documentary requirements for the preparation and submission of financial statements that accompany the tax returns under Section 6(H) of the Tax Code.

Under this RR, the line items in the FS must be indicated with sufficient detail to ensure that the nature of the transactions is clear to the reader of the FS. The account titles to be used must be specific and enumerated completely in the FS. These accounts must also conform to the rules and requirements of regulatory agencies that have supervision over them such as the Securities and Exchange Commission, Bangko Sentral ng Pilipinas, and the Insurance Commission, among others.

Further, if applicable, the following items must be shown separately in the income statement:

A) Cost of goods sold (for seller of goods)/Cost of services (for seller of services);

B) Selling and administrative expenses;

C) Financial expenses;

D) Special deductions (e.g., net operating loss carry-over or NOLCO); and

E) Deductions under special laws.

Deductions under items (C), (D) and (E) should be fully explained in the Notes to the audited FS.

This RR was the basis used by the Court of Tax Appeals (CTA) in ruling against the deductibility of a taxpayer’s NOLCO for being unsupported in the FS. In that fairly recent case, one of the reasons cited by the CTA is that NOLCO should be shown as a special deduction and as a separate item in the income statement for the years in which it is claimed, despite the disclosure in the Notes to the audited FS.

With all due respect, I believe that it is not appropriate to require the presentation of NOLCO as a special deduction in the audited FS because it is inconsistent with Philippine Accounting Standards (PAS).

NOLCO, being the excess of the allowable deductions over the gross income, is considered as a deferred tax asset (DTA) as it is a ‘carryforward’ of unused tax losses consistent with paragraph 5 (b) of PAS 12, Income Taxes. However, this DTA is recognized only to the extent that it is probable that taxable profit will be available against which the unused tax losses can be utilized.

When recognized by the taxpayer, only the income tax effect (or the 30% thereof) of the resulting NOLCO is recorded as a debit to the DTA and as a credit to income tax expense. DTA is an account presented in the balance sheet while income tax expense is reflected in the income statement but not as a regular expense.

Moreover, under the relevant accounting standards, expenses do not include losses incurred in the previous years. When NOLCO is applied or claimed as a deduction for tax purposes, it is recorded as a credit to the DTA (if previously recognized) and as a debit entry to income tax expense. That said, the amount of NOLCO in the income tax return can never be reflected in the income statement as required by the RR.

It is a well-settled principle that deductions, such as in the case of NOLCO, are considered tax exemptions and, therefore, are construed in strictissimi juris against the taxpayer. As such, taxpayers are required to establish the factual and documentary bases of their claims with competence.

While this tax principle holds true in most instances, it should not apply to this RR. Since the RR runs contrary to accounting standards issued by the Philippine Financial Reporting Standards Council as approved by the SEC, paradoxically, taxpayers complying with the BIR tax rule will find themselves breaching the SEC accounting rules.

This kind of absurdity in our tax regulations should be revisited, re-evaluated, and corrected. Regrettably, I believe this is only one of the many contentious tax requirements that have been issued and implemented over the years.

The goal of the ongoing comprehensive tax reform program is to develop a simpler, fairer, and more efficient tax system. Thus, this is an appeal to our lawmakers and policymaking bodies to engage in continuing and integrative policy reviews that should open itself to public participation and scrutiny. How best to create and maintain sound policies should be the chief concern of all stakeholders, including the taxpayers.

The views or opinions expressed in this article are solely those of the author and do not necessarily represent those of Isla Lipana & Co. The content is for general information purposes only, and should not be used as a substitute for specific advice.

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10 Tax mistakes on financial statements and income tax returns Philippines

By: Garry S. Pagaspas, CPA

Comes 2014 calendar year filing season, taxpayers, accountants, and tax agents in the Philippines are on their respective schedules for the filing of the annual income tax returns with attached audited financial statements not later than April 15, 2015. During tax seasons in the Philippines, the following tax mistakes on the audited financial statements (AFS) and annual income tax returns (ITR) in the Philippines should be avoided:

1. Excessive Retained earnings subject to 10% IAET

Improper accumulation of earnings after tax is subject to 10% and an indicator of the same on the face of the audited financial statements is the glaring free retained earnings more than the paid-up capitalization. Under Section 43 of the Corporation Code of the Philippines, as amended, domestic corporations are not allowed to maintain free retained earnings more than 100%. In Section 29 of the Tax Code, as amended, a 10% improperly accumulated earnings tax is being imposed. This 10% tax could be avoided with proper tax planning. In case caught up with such scenario, consult with your tax consultant on how to do about it as their could be a number of remedies.

2. Improper claim of creditable withholding tax credits in the Philippines

Taxes withheld by your suppliers evidenced by BIR Form No. 2307 are tax credits or deductions from income tax liability. As such, it is treated as an asset on books. In some instance, financial statements would show such material asset amount that should have been used. However, in some instances, such asset reflected in the financial statements are without proper BIR Form 2307 documentations, or if there is, the same would pertain to prior years. For large taxpayers, please note the new 2307 requirements under Revenue Regulations No. 2-2015 for attachments.

3. Claim of deductible expenses without withholding applicable taxes

Under Section 34(k) of the Tax Code, as amended, if an expense is subject to withholding tax, the same shall not be deductible until after the applicable withholding taxes has been made. To ensure that you only deduct expenses properly withheld, double checking is made with alphalists of payees and employees duly filed with the BIR and seeing to it that justifications are available to those expenses not withheld taxes.

4. Failure to consider tax deductible NOLCO

Net operating loss carry-over (NOLCO) is another tax asset some simply disregards. To avail NOLCO deduction for taxpayers claiming itemized deductions, it must have been properly stated on the prior year financial statements, and income tax returns. Note that it could be claimed within three (3) taxable years from the year of loss on a first-in, first-out basis.

5. Failure to consider MCIT credits

Minimum corporate income tax (MCIT) of prior year or years is another tax credit some would fail to consider. Like NOLCO, could be claimed within three (3) taxable years from the year of MCIT during the year when the corporation becomes liable to the 30% normal corporate income tax. During the year of MCIT payment, please ensure that the MCIT is indicated in the annual income tax return and on the audited financial statements in the Philippines.

6. Taxing the non-taxable income

As you will note on books of accounts and on the financial income, other income is one line item. Please do not be mislead to conclude that the same is automatically subject to 30% corporate income tax or includible in the 2% MCIT computations. Verify and check each item in such other income account is indeed, taxable ordinary income to avoid misapplication if the same is not such as those capital gains subjected to capital gains tax, unrealized gains, and the likes.

7. Incomplete BIR mandated notes to financial statements

Notes to financial statements is not the sole mandate of the rules and regulations of the Securities and Exchange Commission (SEC) Philippines. BIR has also requires some items and details on taxes to be indicated in the financial statements such as those in Revenue Regulations No. 15-2010 and Revenue Memorandum No. 19-2011. See to it that those notes appears in the Notes to the Audited Financial Statements.

8. Failure to account year-end DST on debt agreements

If you are on a group of companies, a cash cow company like the holding company is very common and intercompany mobility of funds are evident on year end balances appearing on the financial statements. See to it t hat you properly account for the documentary stamp tax (DST) on debt instruments imposed under Section 179 of the Tax Code, as amended.

9. Failure to account withholding tax on accruals

Under the accrual basis of accounting, expenses incurred during the year are deductible expenses, though, unpaid as of year-end cut-off. When making accruals of expenses, please ensure that you properly account withholding taxes so as to fully comply with tax rules on deductibility of expenses. Example of this is accruals for audit fees, legal fees, management bonus, and the likes.

10. Failure to consider limitations on some expenses

Please not also on the three (3) expenses subject to limitations – interest expense with respect to the reduction of 33% of interest income subjected to final tax under “tax arbitrage”, the 1% (services) or 0.5% (goods) on representation expenses, and 5% (corporation) or 10% (individual) on charitable contributions.

While each one of us would want to beat the tax filing timeline, we are likewise bound to ensure that we do it in a manner in accord with the rules and regulations to avoid tax risks during tax examinations.

Disclaimer : This article is for general conceptual guidance only and is not a substitute for an expert opinion. Please consult your preferred tax and/or legal consultant for the specific details applicable to your circumstances.  For comments, you may please send mail at  in**@ta************.org .)

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12 Reminders for Annual Income Tax Preparation in the Philippines

General guide in the preparation of Annual Income Tax Return (ITR) for taxpayers, accountants, and tax agents in the Philippines. Annual ITR with accounting period ending December 31 are due for filing with attached Audited Financial Statements (AFS) not later than April 15.

• Gather Certificates of Creditable Tax Withheld at Source (BIR Form 2307)

Withholding tax by Customers must be supported by Certificate of Creditable Tax Withheld at Source (Bir form 2307) which are deductible from Income Tax Due. Moreover, taxpayers are required to electronically submit Summary Alphalist of Withholding Taxes (SAWT) for Income Payments subjected to Withholding Taxes.

• Review Sources of Income

Income from trade or business or practice of profession is subject to income tax from sources within and without the Philippines. However, passive income subjected to final tax are excluded from the income tax, e.g. dividend received from domestic corporation and interest on Philippine currency bank deposit.

• Check appropriate withholding taxes to claim tax deductible expenses

To be deductible, expenses must be: (a) ordinary and necessary; paid and incurred during the taxable year; (b) reasonable (c) substantiated with sufficient evidence, such as Official Receipts or other adequate records [1] ; (d) when accrued/deducted must be subjected to withholding tax (if applicable), and the withholding tax should be remitted to the BIR with the due dates provided under the Tax Code and withholding tax regulations [2] .

• Tally accounting records with other tax returns

Ensure that accounting records are matched with other tax declarations such as: (a) sales, purchases and expenses recorded in AFS should be reconciled with Vat Returns (2550Q); (b) Salaries and wages declared in AFS with Alphalist in withholding tax on compensation returns (BIR Form 1604CF); (c) Expense amounts of rent, professional fees, advertising, repairs and maintenance and other expenses declared in the expanded withholding tax returns (BIR Form 1604E); (d) Inventory reported per AFS vs. Inventory List submitted with BIR.

• Review limitations on some expenses

Entertainment and Representation Expenses, Interest Expense and Charitable Contributions/Donations has limitation on deductibility; (a) representation expense is limited to 1% of gross receipts (for seller of services) or 0.5% of net sales (for seller of goods); (b) Interest expenses with respect to the reduction of 33% of interest income subjected to final tax under “tax arbitrage”; (c) charitable contributions is limited to 5% (corporation) or 10% (individual) based on respective taxable income. Donations to BIR accredited donee institutions with Certificates of donations and to government priority projects certified by NEDA are 100% fully deductible.

• Consider Minimum Corporate Income Tax (MCIT)

A corporation shall be liable to pay MCIT computed as 2% of gross income (revenue less cost of sales) if it has negative taxable income, or the MCIT is higher than 30% Regular Corporate Income Tax (RCIT). Note that MCIT applies to corporation on its fourth year of operation after the year of its BIR registration. The excess of the MCIT over RCIT could be carried over to three (3) succeeding taxable years until the corporation becomes liable to the 30% RCIT. During the year of MCIT payment, ensure that the MCIT is indicated in the annual ITR and AFS.

• Consider recording NOLCO

Net operating loss carry-over (NOLCO) refers to the excess of deductible expenses over gross income resulting in a Net Loss for the taxable year. NOLCO could be carried over to three (3) succeeding taxable years. To claim it as deduction in succeeding year, it must have been properly stated in the prior year audited financial statements and income tax returns.

• Exposure of Retained Earnings to 10% IAET

Retained Earnings in excess of paid up capital shall be subject to Improperly Accumulated Earnings Tax (IAET) of 10%. Under section 43 of the Corporation Code of the Philippines, as amended, domestic corporations are not allowed to maintain unappropriated retained earnings more than 100% of its paid up capital. This IAET 10% tax could be avoided with proper tax planning.

• Reconciliation of Net Income per books against taxable income

Indicate all the reconciling items to be added or subtracted from the net income reported in the financial statements to arrive at the taxable income reported in the income tax return. For taxpayer subject to regular rate, fill up the non-deductible expenses such as: allowance for bad debts not actually written off, amortization and others which are not deductible for taxation purposes. Also, add other taxable income such as: recovery of bad debts previously written off, adjustment to retained earnings, and other adjustments that are considered as income for tax purposes.

• DST on debt agreements / Intercompany Advances

Properly account for the documentary stamp tax (DST) on debit instruments and Intercompany Advances as prescribed in Section 179 of NIRC, as amended.

• BIR mandated notes to financial statements

BIR requires details on taxes to be indicated in the Notes to audited financial statements as prescribed in Revenue Regulations No. 15-2010 and Revenue Memorandum No. 19-2011.

• Taxpayer’s other relevant information

The taxpayer’s annual income tax return (for self-employed individuals, estates and trusts, subject to regular income tax) shall contain the relevant information of the spouse; qualified dependent children, If wife is claiming for additional exemption, a waiver of the husband must be attached; current address, if current address is different from registered address; and information of the external auditor or accredited tax agent on behalf of a taxpayer.

[1] Section 34(K), NIRC

[2] Section 58 and 81, NIRC; Section 2.57.4 of RR 2-98

This is an important reminder, since taxpayers who must file their returns using eFPS or eBIRForms and who fail to do so, shall be penalized for 25 of the tax due to be paid and P1,000 per return.

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Financial Results

Half Year 2024 Earnings

• 2024 Directional [i]  EBITDA guidance increased from around US$1.2 billion to around US$1.3 billion
• 2024 Directional revenue guidance increased from around US$3.5 billion to above US$3.8 billion
• US$3.4 billion net increase of pro-forma Directional backlog to record-level US$33.7 billion
• EUR65 million (US$71 million equiv. [ii] ) additional share repurchase
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First Quarter 2024 Trading Update

• Year-to-date Directional [i]  revenue of US$871 million, in line with expectation
• Full year 2024 Directional revenue and Directional EBITDA guidance maintained
• Cash dividend of US$150 million (equivalent to EUR0.7651 per ordinary share) approved
• Share repurchase program of EUR65 million on track 20.7% completed [ii]
• FPSO  Sepetiba  producing and on hire; FPSO  Prosperity  at full production capacity
• FPSO  Jaguar  contract   award confirmed in April 2024, growing the backlog
• MoU with Technip Energies to create Floating Offshore Wind JV, EkWiL

Full Year 2023 Earnings

• Record-level Directional[i] Revenue of US$4.5 billion (+38%), above guidance
• Record-level Directional EBITDA of US$1.3 billion (+31%), in line with guidance
• US$30.3 billion Directional backlog; US$9.3 billion or EUR46.6/share[ii] Directional net cash from L&O and BOT[iii] backlog[iv]
• Evolving shareholder return policy: flexibility to pay committed annual cash return via dividend and share repurchase
• 12% increase in annual cash return to shareholders of US$220 million
• Cash return composed of US$150 million proposed dividend and EUR65 million (US$70 million equiv.[v]) share repurchase
• 2024 Directional Revenue guidance of around US$3.5 billion
• 2024 Directional EBITDA guidance of around US$1.2 billion
• Successful sale of FPSO Liza Unity, Whiptail FEED award, 10-year OMEA for Guyana FPSO fleet, and FPSOs Prosperity & Sepetiba 1st oil
• 70% FPSO CO2 emissions reduction potential from CO2 capture solution offered in partnership with MHI

Third Quarter 2023 Trading Update

• FEED contracts awarded by ExxonMobil Guyana for Whiptail development project in Guyana
• FPSO Liza Unity purchase option exercised by ExxonMobil Guyana; sale to be completed in November 2023
• 2023 Directional[i] EBITDA guidance increased from above US$1 billion to around US$1.3 billion
• 2023 Directional revenue guidance increased from above US$2.9 billion to around US$4.4 billion
• FPSO Prosperity, delivered on time in Guyana and preparing for first oil
• Successful installation of 3 floaters for the Provence Grand Large offshore wind project

Half Year Earnings 2023

• Record-level US$32.2 billion pro-forma order book
• Record-level US$9.5 billion pro-forma net cash flow from L&O and BOT[i] sales backlog[ii]
• 2023 Directional[iii] revenue and EBITDA guidance maintained
• 2 FPSOs on track for first oil by year-end
• Over US$3.2 billion project financing secured

First Quarter 2023 Trading Update

• Year-to-date Directional revenue of US$742 million, in line with expectation
• Full year 2023 revenue and EBITDA guidance on track
• ~US$3 billion revenue backlog increase following 10-year Operations and Maintenance Enabling Agreement signed with ExxonMobil Guyana
• 8th Fast4Ward® Multi-Purpose Floater (MPF) hull ordered
• Cash dividend of US$1.10 per ordinary share approved, 10% year-on-year increase and representing c. 7% yield

Full Year 2022 Earnings

• Record 2022 Directional[1] underlying EBITDA of US$1,010 million, in line with guidance
• Record year-end Backlog of US$30.5 billion
• 10% increase in dividend proposed to US$1.10 per share, 7% yield[2]
• 2023 Directional revenue guidance of above US$2.9 billion
• 2023 Directional EBITDA guidance of above US$1 billion
• FPSO ONE GUYANA award, MoU for 7th MPF[3] hull with ExxonMobil Guyana
• Defining 2030 intermediate greenhouse gas (GHG) related targets, creating pathway to net-zero by 2050

Third Quarter 2022 Trading Update

• Sustained financial performance in a complex macroeconomic environment
• 2022 Directional [i] EBITDA guidance increased to around US$1 billion
• 2022 Directional revenue guidance increased to above US$3.2 billion
• Memorandum of Understanding signed for exclusivity of seventh MPF hull with ExxonMobil Guyana

Half Year Earnings 2022

First Quarter 2022 Trading Update

• Year-to-date Directional revenue of US$970 million, in line with expectation
• Full year 2022 Revenue and EBITDA guidance maintained
• Cash dividend of US$1 per ordinary share paid, 13% year-on-year increase and representing c. 7% yield
• FPSO Liza Unity delivered on time and on budget
• FPSO ONE GUYANA award confirmed, to be added to the backlog

Full Year 2021 Earnings

• Record order book providing cashflow visibility until 2050 of US$29.5 billion
• Underlying 2021 Directional EBITDA of US$931 million, in line with guidance
• US$343 million returned to shareholders in dividend and share buyback, representing c. 10% total yield
• Proposed c. 13% increase in dividend per share to US$1 per share
• Introduced Float4WindTM, our second-generation offshore wind floater
• 2022 Directional revenue guidance of above US$3.1 billion; Directional EBITDA guidance of around US$900 million
• SBM Offshore’s 2021 Annual Report can be found on its website under: https://2021.annualreport.sbmoffshore.com

Third Quarter 2021 Trading Update

• Strong performance despite ongoing COVID-19 challenges
• Financial results in line with management expectations and the same period last year
• 2021 Directional  [1]  EBITDA guidance maintained at around US$900 million
• 2021 Directional revenue guidance revised from around US$2.6 billion to above US$2.3 billion mainly driven by a deferral in the expected timing of partner entry into an FPSO joint venture
• Year to date US$4.1  [2]  billion project related financings arranged to fund record-breaking order book
• Liza Unity, first Fast4Ward® FPSO, safely arrived in Guyana, 1 of 5 major projects under construction
• [1] Directional view, presented in the Financial Statements under Operating segments and Directional reporting, represents a pro-forma accounting policy, which assumes all lease contracts are classified as operating leases and all vessel investees are proportionally consolidated. This explanatory note relates to all Directional reporting in this document.
• [2] Financing closed at SPV levels with varying SBM Offshore equity ownership; 100% of the financing amount is disclosed.

Half Year Earnings 2021

• Financial results in line with management expectations
• Record-level US$29.5 billion proforma backlog, up by c. US$8 billion
• Launch of EUR150 million (c. US$180 million) share repurchase program
• Scaling-up renewables: 200 MW floating offshore wind development
• 2021 Directional[1] revenue guidance maintained at around US$2.6 billion
• 2021 Directional EBITDA guidance maintained at around US$900 million

First Quarter 2021 Trading Update

• Year-to-date Underlying[1] Directional[2] revenue of US$536 million, in line with expectation
• Full year 2021 Revenues and EBITDA guidance maintained
• Awarded LOI for FPSO Almirante Tamandaré; fourth Fast4Ward® hull allocated to project
• Pro-forma backlog and cashflow visibility extended until 2050
• Cash dividend of US$165 million paid, representing 10% year-on-year increase
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