Week-14-INCOME-TAX-CREDIT-AND-OPTIONAL-STANDARD-DEDUCTION
Week 14: Income Tax Credit and Optional Standard Deduction
Introduction
Overview of Income Tax Credit (ITC) and Optional Standard Deduction (OSD).
Tax Credit
Definition: An amount that a taxpayer can deduct from income tax due based on taxes paid to foreign countries.
Limitations: Subject to certain limitations as defined by tax regulations.
Concept of Foreign Income Tax Credit
Purpose: To mitigate the adverse effects of indirect double taxation on taxpayers.
Rule: Taxes paid to foreign countries can be deducted from the taxpayer's income tax due.
Calculation of Income Tax Payable with ITC
Formula:
Taxable Income (within and without): Pxxx
Income Tax Rates (CREATE Act): 20% / 25% Tax Table
Tax Due Pxxx
Less: Income Tax Credit: (xxx)
Income Tax Payable: Pxxx
Rules for Claiming ITC
Eligible individuals include:
Members of General Professional Partnerships (GPP)
Beneficiaries of estates or trusts.
The income must be reported for taxation.
Taxpayers Eligible for ITC
Who Can Avail:
Resident citizens
Domestic corporations
Members of GPP
Beneficiaries of estates and trusts
Requisites for ITC Claims
Requirements include:
Total income from sources outside the Philippines must be established.
Income from each foreign country where taxes are paid must be reported.
All necessary information for verification must be provided.
Existence of Tax Liabilities Before Utilizing ITC
Tax liability must exist for the credit to be applicable.
Absence of liability means that the ITC application is ineffective.
Limitations on Tax Credit
Credit for taxes paid to any country is capped at:
The proportion of the tax related to income sourced from that country against the total taxable income outside the Philippines.
Total tax credit also has a cap related to overall income sourced from outside the Philippines.
Illustrations of ITC
Case A: Single Foreign Country
Data Provided:
Gross Income (Philippines and Canada)
Income Tax Paid
Required Calculation after ITC application yields a tax payable of P580,000.
Case B: Multiple Foreign Countries
Data Provided:
Different countries' taxable income and taxes paid.
Income Tax Payable calculation yields P140,000 after applying tax credits.
Optional Standard Deduction (OSD)
OSD vs. Itemized Deductions:
OSD is an option for taxpayers instead of itemized deductions.
OSD is a flat rate of 40%, with no substantiation required.
Itemized Deductions
Applicable on a per-item basis.
Must be substantiated and are not limited in terms of total amount.
Taxpayer Eligibility for OSD
Available to:
Individuals (resident and non-resident)
Corporations (Domestic and resident foreign)
General Partnerships and GPPs
Cost of Goods Sold
Merchandising: Includes all costs plus import duties and transportation.
Manufacturing: Involves all costs related to production.
Sales of Services: Direct costs and expenses incurred during service provision.
Financial Statements Submission
Taxpayers opting for OSD are not required to submit financial statements.
They must keep relevant records showing gross sales or receipts.
Determining OSD Basis
Example Calculation
Retailer Case:
Gross sales and costs provided, leading to a calculation of OSD for individuals and corporations.
Taxable Income Examples
Case A: Corporate Taxpayer
Illustration showing gross sales, costs, and expenses leading to a taxable income of P3,200,000 using itemized deductions.
Case B: Individual Taxpayer
Requirement: Calculating taxable income using both itemized deductions and OSD, yielding results of P3,400,000 and P6,140,400 respectively.
Conclusion
Investment in Tax Knowledge: Understanding tax credits and deductions is crucial for effective tax planning.