|
Philippines
Accounting and tax differences in the
Philippines
Ma. Lois G. Abad Assurance Partner, PwC Philippines
23 Mar 2018
Time flies
so fast. It’s
now March,
and the first
quarter of
2018 is
about to
end. For
some, this
is just
another
quarter of the year, but for companies in this country, this means their tax
and other regulatory filing deadlines are fast approaching.
As company accountants and auditors find themselves busy during this time
of year, it would be good to look back on common accounting and tax
differences that companies and practitioners typically miss when finalizing
financial statements and income tax returns. One important point that we all
need to be reminded of is that tax does not always follow accounting. If you
recognize expenses in your financials, it does not necessarily follow that all
those expenses are deductible for purposes of your annual income tax
calculation. Some of the usual differences are as follows:
Bad debts written off. Claims that remain outstanding after quite some
time are usually written off by companies and charged as expense on the
year when the management has concluded that the receivables are no
longer collectible. Such expense will be tax deductible, but only if the
company is able to demonstrate with certainty that the accounts are,
indeed, uncollectible, with sufficient proof that all efforts to collect have
been exhausted.
Pension. Pension expense is usually accounted for based on an
estimation made by an actuary, using assumptions such as, average
working lives of employees, expected increase in salaries, discount
rates, etc. For tax purposes, employer pension contributions are
deductible only to the extent of the normal employee retirement or
current employee cost for the year. Any excess of contributions over
current/normal cost should be amortized over a period of 10 consecutive
years for tax deductibility.
Donations. Donation expense is recognized upon actual payment of
money/transfer of goods, or upon having an irrevocable commitment to
donate to an organization. Donation expense would only be tax
deductible (whether in full or subject to limitation) if extended to specific
types of organizations. For example, donations to accredited nongovernment organizations can be fully deductible, provided this is
supported by a certificate of donation and a notice of donation for those
amounting to at least P50,000.
Sales discounts and rebates. Estimation or accrual of sales discounts
and rebates is allowed in accounting, provided that the estimation is
supported by a reasonable basis of calculation, which is usually
established from past experiences of customer claims from the
company. However, only actual sales discounts and rebates extended to
or used by customers during the taxable period are considered allowable
deductions from gross sales for tax purposes.
Depreciation. The most common method of accounting for depreciation
expense is the straight-line method, or amortization of an asset cost over
its estimated useful life. This is also an acceptable method for tax, for as
long as the identified useful lives of properties represent a reasonable
estimation of the asset’s wear and tear. However, we should also be
mindful that if a company uses the fair value method of accounting for its
properties, only the depreciation expense related to the original cost of
the property is deductible for income tax purposes. The depreciation
charge related to any increase in value of the property, as a result of
revaluation, should be considered a temporary tax difference, and can
only be treated as tax deductible on the year of actual realization (upon
sale or disposal) of the asset.
Rent. Rent payments under an operating lease arrangement are
recognized as expense on a straight-line basis over the lease term. Even
if there are rent-free periods, rent expense is still recognized in the
financials. For tax, only the actual rent due for payment or paid for the
period is allowable for deduction.
Gains and losses. Gains are recognized in the period earned, and losses
are recognized in the period incurred. Accounting does not allow net
presentation of gains and losses, unless the gains and losses are results
of a similar transaction. For purposes of taxability of gains and
deductibility of losses, only realized gains and losses during the period
are taxable and deductible. Therefore, companies should be able to
properly monitor actual or realized gains and losses of the company’s
transactions. For example, foreign currency exchange (FOREX)
gains/losses from collection of receivables and payment of liabilities are
considered realized and are considered taxable gains/deductible losses
since these are considered completed transactions, but FOREX
gains/losses resulting from year-end conversion of foreign-currency
denominated receivables and payables are considered unrealized
gains/losses and should be treated as a temporary tax difference.
The points summarized above are just a few of the more common
accounting and tax differences in operating companies in the country. We
expect more tax and accounting differences to arise when companies adopt
the new accounting standards on revenue in 2018, and on leases in 2019.
Meanwhile, as the government aims to improve the ease of doing business
in the country, let’s remain hopeful that local regulators would be able to
eventually work on a convergence project to align the provisions of
accounting and tax. When this happens, finalizing financials and tax filings
would just be a breeze for all.
This content is for general information purposes only, and should not be
used as a substitute for consultation with professional advisors.
Contact us
Ma. Lois G. Abad
Assurance Partner, PwC Philippines
Tel: +63 (2) 8845 2728
Email
PwC Philippines
Our services
>
Research and insights
>
PwC's Needles in a haystack
Our industries
Thought leadership: insights and reports
News and events
Careers
About us
© 2015 - 2021 PwC. All rights reserved. PwC refers to the PwC network and/or one or more of its
member firms, each of which is a separate legal entity. Please see www.pwc.com/structure for further
details.
Transparency notice
Contact us
Cookie information
Legal disclaimer
About site provider