When choosing OSD becomes crucial

FOR CORPORATE income taxpayers adopting the calendar year, the first-quarter income tax return (ITR) will be due this May 30. Hence, before filing, taxpayers must revisit the rules on the preparation of the first-quarter ITR in which methods or options to be taken become crucial in the subsequent income tax return preparation and irrevocable for the entire taxable year.

For instance, taxpayers who have incurred excess income tax payments may opt to carry over the excess credit for the next taxable year/quarter, refund the excess amount of taxes paid, or apply for the issuance of tax credit certificate (TCC). As clearly specified in the tax code, once the option to carry over is made, it is irrevocable. Hence, taxpayers should ensure that their act for the first quarter of 2014 is consistent with the option taken for the annual ITR for the year 2013. Accordingly, the choice of any option bars or precludes the other.

Similarly, in claiming a tax deduction for an expense, taxpayers should beforehand be decisive on which option will be more advantageous -- optional standard deduction (OSD), or itemized deductions. Note that the method of deduction adopted in the first-quarter return shall be irrevocable for the taxable year for which the return is made. One of the basic rules in choosing between itemized deduction and OSD is to determine which of the two will allow the taxpayer to claim higher deductions.

Under the tax rules, taxpayers are allowed to select OSD or itemized deduction in preparing ITRs. Standard deduction pertains to an amount not exceeding 40% of the gross income of corporate income taxpayers during the taxable year. Accordingly, taxpayers are required to declare in their first-quarter ITR their election, or intention to choose either the OSD or itemized deductions. Once the option to use OSD is made as signified in the return, it shall be irrevocable for the taxable year for which the return is made.

As early as 2010, the Bureau of Internal Revenue (BIR) issued Revenue Regulations No. (RR) 02-2010, which states the irrevocability rule of OSD, to wit:

“The election to claim either the OSD or itemized deduction for the taxable year must be signified by checking the appropriate box in the ITR filed for the first quarter of the taxable year adopted by the taxpayer. 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.”

On the onset of the first-quarter ITR filing for 2014, taxpayers are once again reminded of the importance of choosing the method of deduction based on the said regulation.

RR 2-2014, which prescribes the use of the new income tax forms, specifically states that taxpayers with mixed income are mandated to use itemized deductions. Thus, the new corporate ITR form -- specifically, BIR Form No. 1702-MX, ENCS June 2013 version -- has removed the OSD option for certain corporate taxpayers. The said new form limits the method of deduction only to itemized deductions. BIR Form No. 1702-MX is applicable to taxpayers with mixed income. Taxpayers with mixed income are those who have income subject to special/preferential tax rate and income subject to the regular income tax rate.

Because of the exclusion of the OSD method in the said ITR form, it would seem that the OSD option was effectively removed for taxpayers with mixed income. The tax code allows a corporation subject to regular tax to adopt the OSD. Considering that taxpayers with mixed income are still subject to regular tax on a portion of their income, one wonders why the right to use OSD on this option has been removed.

The taxpayers are then deprived of their option to choose the method of deduction which they determined to be most appropriate and beneficial to them.

Interestingly, in the quarterly ITR forms, OSD is still an option for taxpayers with mixed income, since there is only one quarterly ITR form being used by all corporate taxpayers. Hence, the vagueness of the said ITR form will create confusion among taxpayers in the preparation of their first quarter 2014 ITR.

Since the first-quarter 2014 ITR filing is fast approaching, careful planning should be made for the choice of deduction by the corporate taxpayer subject to the regular income tax rate as this will affect subsequent actions, and taxpayers might lose the benefits lawfully due them. On the other hand, for mixed-income earners, there appears to be confusion because, if their choice is removed in the annual final tax return, this will put them at a disadvantage.

While there is nothing wrong with updating the ITR forms to provide a clearer disclosure of certain tax information about the taxpayer, as the regulators deem necessary, we hope that the BIR will not deviate from rules and rights granted by the Tax Code to avoid confusion.

The author is a senior with the tax advisory and compliance division of Punongbayan & Araullo. P&A is a leading audit, tax, advisory and outsourcing services firm and is the Philippine member of Grant Thornton International Ltd.

source:  Businessworld