Change is good

By Revelino R. Rabaja, 6 February 2014

IT IS said that progress is impossible without change, and those who cannot change their minds cannot change anything. Worse, those unable to cope with change make themselves obsolete.

In this frame of mind, the BIR’s Revenue Regulation No. 2-2014 dated 24 January 2014 (“Regulations”) is a welcome and laudable act of the BIR as it introduces a big improvement to the corporate and individual income tax returns being filed in the Philippines.

Income tax returns are now bar-coded and can be easily read by an optical character reader for ease in scanning the tax returns. Qualitatively, the new tax forms are easier to understand compared to the old tax returns. For example, the general information on the taxpayer -- its name and tax identification number (TIN) -- is duplicated on every page of the returns. This means that the BIR can better safeguard the integrity of filed returns, and the risk of switching tax returns is more or less reduced, if not absolutely prevented.

Readers should note that these new returns have to be used by corporate and individual income taxpayers when reporting income taxes for the year ended Dec. 31, 2013.
For starters, the Regulations retained the old BIR Form Nos. 1700 and 1701 but expanded BIR Form No. 1702 into three. Hence, there are now three types of corporate (partnership) income tax returns: BIR Form Nos. 1702-RT, 1702-EX and 1702-MX.

With this, there are now five income tax returns:

1. BIR Form No. 1700 version June 2013 -- Annual Income Tax Return for Individual Earning Purely Compensation Income
2. BIR Form No. 1701 version June 2013 -- Annual Income Tax Return for Self-Employed Individuals, Estates and Trusts
3. BIR Form No. 1702 -- RT version June 2013 -- Annual Income Tax Return for Corporations, Partnerships and Other Non-Individual Taxpayers Subject Only to the Regular Income Tax Rate
4. BIR Form No. 1702 -- EX version June 2013 -- Annual Income Tax Return for Use Only by Corporations, Partnerships and Other Non-Individual Taxpayers Exempt Under the Tax Code, as amended
5. BIR Form No. 1702 -- MX version June 2013 -- Annual Income Tax Return for Corporations, Partnerships and Other Non-Individuals with Mixed Income Subject to Multiple Income Tax Rates or with Income Subject to Special/Preferential Rate.
The new BIR Form Nos. 1700/1701 do not require new schedules nor information, but the new BIR Form Nos. 1702 RT and 1702-MX have introduced:
(a) Part VI -- Information -- External Auditor/Accredited Tax Agent
(b) Schedule 4 -- Ordinary Allowable Itemized Deductions. This was not required in the Interactive Form, November 2011 version.
(c) Schedule 10 -- Balance Sheet. This would duplicate the information from the audited financial statements.
(d) Schedule 11 -- Stockholders/Partners/Members Information. This requirement enumerates the Top 20 stockholders, partners or members of the tax filer.

The BIR has also deleted the requirement of incorporating centavos and just required that the same be rounded off. With this issuance, the BIR needs to give strong support, guidance and clarification to taxpayers in order for them to keep abreast of the changes introduced in the new forms and in the Regulations. Otherwise, taxpayers may erroneously report their income and expenses because of confusion and lack of guidance.

It will be recalled that, in February 2012, there was confusion and anxiety among taxpayers when the BIR introduced BIR Form 1702 Interactive Form, version November 2011 as they had limited time in studying how to accomplish the interactive forms.

In particular, the BIR has to provide much-needed clarification and guidance on whether individuals, domestic corporations and resident foreign corporations which are subject to two income tax regimes -- (i) regular corporate taxes and (ii) preferential tax rates -- are required only to adopt the Mandatory Itemized Deduction for both their income streams.
This may have to be done as Section 5 (A) (3) of the Regulations categorically states that those taxpayers which have income subject to tax under Section 27 (A) and Section 28 (A) (1) of the Tax Code are mandated to use the itemized deductions.

Does this mean, then, that all taxpayers with mixed income are barred from claiming the 40% Optional Standard Deduction (OSD) in the new returns even for their income subject to regular taxes? It should be noted that Section 34 (L) of the Tax Code does not contain such limitation on the OSD.As with everything new, there will surely be errors in the implementation of these new forms. This column just earnestly wishes that the BIR will be open to suggestions, and make the necessary clarifications and assistance at the appropriate time.

Mr. Rabaja is a senior manager at the tax services department of Isla Lipana & Co., the Philippine member firm of PricewaterhouseCoopers global network. Readers may send feedback via e-mail to

Views or opinions presented in this article are solely those of the author and do not necessarily represent those of Isla Lipana & Co. The firm will not accept any liability arising from such article; the author will be personally liable for any consequent damages or other liabilities.