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When should the chosen income tax deduction mode be declared?

When should the chosen income tax deduction mode be declared? by Rolando T. Devesa

Under the Tax Code, individuals and corporations have the option to either avail of the itemized deductions or the Optional Standard Deduction (OSD) in computing their taxable income. 

Section 34(L) of the Tax Code, as amended by Republic Act (RA) No. 9504, allows individual taxpayers to select a standard deduction in an amount not exceeding 40 percent of gross sales or gross receipts during the taxable year. 

Initially, the Bureau of Internal Revenue (BIR) issued Revenue Regulations (RR) No. 16-08 to clarify the irrevocability of a taxpayer’s election to avail of the OSD (as signified in his return) for the taxable year when the return was made.  Moreover, the same regulation provides that a taxpayer may opt to use either the itemized deductions or the OSD in filing the quarterly income tax returns. 

However, in filing the final adjustment tax return, a taxpayer must choose which method of deduction to use for determining his taxable net income for the entire year. 

The BIR recently changed the rules with its issuance of RR 02-10, and Revenue Memorandum Circular (RMC) No. 16-10.  This new regulation requires taxpayers to declare in their 1st quarter income tax return their election, or intention to elect either the OSD or itemized deductions.  Once the election is made, the same type of deduction must be consistently applied in all the succeeding quarterly returns and in the final income tax return for the taxable year.

This new requirement by the BIR has raised issues on whether this is in accordance with existing laws. It is clear that Section 34 (L) requires that an election must be made by a taxpayer and must be signified in the “return”. Once made, such election becomes irrevocable for the taxable year when the said return was made.  

The underlying issue that must be resolved is this: When Section 34 (L) required that the election must be made by a taxpayer in the “return”, does it refer to the “quarterly income tax return” or the “final adjustment tax return”.   If Section 34 (L) refers to quarterly income tax return, then there should be no objection to RR 02-10 nor to RMC 16-10, as far as this issue is concerned.

The answer may lie in the Tax Code itself. 

The obligation of corporations regarding  their quarterly and annual payment of income taxes can be found in Sections 75, 76, and 77 of Chapter XII of the Tax Code.

A closer examination of the these provisions would reveal that what everyone refers to as “quarterly income tax returns” is actually referred to in Section 75, not as a tax return, but a “declaration” of gross income and deductions. 

This is evident under Section 75 of the Tax Code, which reads:

“x x x.  Section 75. Declaration of Quarterly Corporate Income Tax.  Every corporation shall file in duplicate a quarterly summary declaration of its gross income and deductions on a cumulative basis for the preceding quarter or quarters upon which the income tax, as provided in Title II of this Code, shall be levied, collected and paid.  The tax so computed shall be decreased by the amount of tax previously paid or assessed during the preceding quarters and shall be paid not later than sixty (60) days from the close of each of the first three (3) quarters of the taxable year, whether calendar or fiscal year… x x x”

Sections 77 (A) and (B) still referred to a “quarterly income tax declaration”, as they read in part:

“Section 77. Place and Time of Filing and Payment of Quarterly Corporate Income tax. –

(A)   Place of Filing. – Except as the Commissioner otherwise permits, the quarterly income tax declaration required in Section 75 and the final adjustment return required in Section 76 shall be filed with the authorized agent banks&he llip ;x x x

(B)    Time of filing the income tax return. -  The corporate quarterly declaration shall be filed within (60) days following the close of each of the first three (3) quarters of the taxable year. The final adjustment return shall be filed on or before the fifteenth (15th) day of April, or on or before the fifteenth (15th) day of the fourth (4th) month following the close of the fiscal year, as the case may be.” 

Thus, Sections 75 obligates the declaration of quarterly income tax (not a “return’), while Section 77 (A) provides where  the “declaration” (not a “return”) shall be filed. Section 77 (B) requires the time within which the “quarterly declaration” (not a quarterly “return”) must be filed.  Even Section 77 (C)  declared that the income tax due on the “corporate quarterly returns” must be paid at the time the  “declaration” is made.

On the other hand, Section 76 of the Tax Code requires the filing of a final adjustment return covering the total taxable income for the preceding calendar or fiscal year.  Section 76 reads in part:

“Section 76. Final Adjustment Return. – Every corporation liable to tax under Section 27 shall file a final adjustment return covering the total taxable income for the preceding calendar or fiscal year…x x x”

Moreover, Sections 77 (A), (B), and (C) consistently referred to the final adjustment return imposed by Section 76.

It is quite apparent that when Section 34 (L) uses the word “return”, it is referring to a final adjustment return contemplated under Sections 76, and 77 (A), (B), and (C), and not the “quarterly declaration of income tax” imposed by Section 75.   Now, shall we go back to RR 16-2008?

This article is not intended to be a substitute for professional advice.  For comments and inquiries, you may e-mail the author at Rolando.Devesa@ph.gt.com.  For other tax concerns, please check out our other tax services.