Tax credits can significantly reduce your tax burden for both individuals and businesses. However, the complicated tax system and stringent requirements for claiming credits can be challenging to navigate. To help you better understand the process, we’ll explain what tax credits are, how they differ from tax deductions, who qualifies for credits, and how to claim a Tax Credit Certificate (TCC).
What Are Tax Credits?
In the Philippines, a tax credit is a direct reduction in the tax liability a taxpayer owes to the Bureau of Internal Revenue (BIR). Governed by the National Internal Revenue Code (NIRC) of 1997, as amended by laws like the TRAIN Law (Republic Act No. 10963) and the Ease of Paying Taxes Act (Republic Act No. 11976), tax credits can arise from overpaid taxes, erroneously collected taxes, or specific incentives.
Depending on the type of tax credit, they may be refundable, providing a cash refund if the credit exceeds the tax owed. They could also be nonrefundable, reducing tax liability to zero but without a refund for the excess amount.
Tax Credits vs. Tax Deductions
Tax credits and tax deductions both reduce your tax burden, but they function differently.
- Tax Credits
- Tax credits directly lower the tax you owe and may result in a refund if refundable. For example, a PHP 15,000 tax credit reduces your tax liability by PHP 15,000.
- They typically apply to input VAT, certain tax incentives, or excess withholding taxes.
- Tax Deductions
- Tax deductions reduce your taxable income before the applicable tax rate is applied. For instance, a PHP 15,000 deduction for someone in the 20% tax bracket saves only PHP 3,000 in taxes.
- They normally apply to business expenses like operating costs, utilities, and employee salaries.
Credits of the same amount are generally more valuable as they provide direct cuts to your taxes. Meanwhile, deductions are subtracted before tax rates are applied, typically leading to less savings.
Who Qualifies for Tax Credits?
Eligibility for tax credits depends on the taxpayer’s status and the nature of the credit. Below are key qualifications in the Philippines:
For Individuals
- Excess Withholding Taxes: Employees whose employers over-withheld income taxes, often due to year-end adjustments, can claim a refund or credit.
- Erroneously Paid Taxes: Individuals who paid taxes in error or without legal basis can claim a credit under Section 229 of the NIRC.
- No Personal Credits (Child, Earned Income, etc.): Unlike countries with credits for dependents, education, earned income, and disabilities, the Philippines offers no specific tax credits for these groups. Instead, relief comes through exemptions. For example, people earning below 250,000 annually are generally exempted from income tax while PWD cardholders are exempted from paying VAT on certain goods.
For Businesses
- Input VAT Credits: VAT-registered businesses can claim credits for input VAT paid on purchases against output VAT from sales under Section 110 of the NIRC.
- Tax Incentives: Businesses registered with investment promotion agencies like PEZA or BOI under the Strategic Investment Priority Plan (SIPP) may qualify for incentives through the CREATE Act (Republic Act No. 11534), including income tax holidays or enhanced deductions, which can translate into credits.
- Foreign Tax Credits: Corporations can claim credits for taxes paid on foreign-sourced income, capped at the proportion of foreign income to total taxable income.
- Excess Income Tax Credits: Businesses with excess income tax payments, supported by BIR Form 2307 (Certificate of Creditable Tax Withheld), can claim credits if declared in the Annual Income Tax Return (AITR).
How to Apply for a Tax Credit Certificate
Obtaining a TCC requires strict adherence to BIR procedures and deadlines. Here’s a streamlined guide to the application process:
- Confirm Eligibility: Verify the basis for your claim (e.g., excess VAT, erroneous payment, or CREATE Act incentives).
- Prepare Documentation: Essential documents include:
- BIR Form No. 1914 (Application for Tax Credits/Refunds).
- For VAT refunds: VAT invoices, proof of zero-rated sales, and a summary of purchases.
- For withholding tax credits: BIR Form 2307 and proof of declared income.
- A notarized attestation of document completeness and a Delinquency Verification Certificate from the BIR.
Get assistance from a professional tax consultation service to confirm your eligibility and ensure your requirements are complete.
- File Within Deadlines: Claims must be filed within the designated period, which varies depending on the type of tax credit.
- Submit to the Correct Office: File with the appropriate BIR office based on your registration status. These include the Revenue District Office (RDO), Large Taxpayers Service (LTS), or VAT Credit Audit Division (VCAD). Use the BIR’s Electronic Filing and Payment System (eFPS) for applicable returns.
- Support Verification: Respond promptly to BIR requests for additional documents during the processing period. Incomplete submissions may lead to denial.
- Await Approval or Appeal: If approved, the BIR issues a TCC, which can be used to offset future taxes or get refunded in cash. If denied or unresolved, promptly appeal to the Court of Tax Appeals (CTA).
Summary
Tax credits in the Philippines, such as input VAT credits, certain tax incentives, and excess withholding tax refunds, can reduce tax liabilities. Unlike deductions, which reduce taxable income, credits provide a direct offset to your taxes so are usually more favorable. Securing a Tax Credit Certificate demands careful documentation and timely filing within prescribed periods. Due to the complex and stringent process of claiming tax credits, working with a professional tax consultation service is highly recommended to maximize your savings.
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