COMPUTATION OF COST OF GOODS MANUFACTURED AND SOLD

Raw materials, beginning P xxx,xxx

Add: Net purchases xxx,xxx
Raw materials available for use xxx,xxx
Less: Raw materials, ending xxx,xxx
Raw materials used xxx,xxx
Direct Labor (direct worker’s salaries) xxx,xxx
Factory Overhead (all other plant costs) xxx,xxx
Total manufacturing costs xxx,xxx
Add: Cost of work in-process, beginning xxx,xxx
Total cost of goods placed into process xxx,xxx
Less: Cost of work in-process, ending xxx,xxx
Cost of goods manufactured (finished) xxx,xxx
Add: Cost of finished goods, beginning xxx,xxx
Total cost of goods available for sale xxx,xxx
Less: Cost of finished goods, ending xxx,xxx
Cost of goods sold xxx,xxx

CASH BASIS ACCRUAL BASIS

Cash expenses (paid) P xxx,xxx Accrual expenses (paid or unpaid) P xxx,xxx
Amortization of prepayments xxx,xxx Amortization of prepayments xxx,xxx
Depreciation of properties xxx,xxx Depreciation of properties xxx,xxx
Cash basis deductions P xxx,xxx Accrual basis deductions P xxx,xxx

ARBITRAGE SCHEME
The deductible amount of interest expense is the gross interest expense reduced by the following
percentage of the interest income subject to final tax:
Effectivity Percentage
January 1, 2009 33%
January 1, 2021 20%
Rationale: The limit is intended to recover the tax savings of taxpayers who take advantage of higher
regular tax savings created from interest expense deduction and a lower final tax on deposit interest
income.

DETERMINATION OF THE ARBITRAGE LIMIT

(Corporate income tax rate – final tax on interest income)

Corporate income tax rate

Under current corporate income tax rate, the arbitrage limit is (25-20)/25 or 20%
 FOREIGN TAX CREDIT
The foreign tax credit shall be the lower of the actual foreign income tax paid and the following limit:
Foreign taxable income x Philippine income tax due
World taxable income

Corporate tax rate – 30%

FULLY DEDUCTIBLE CONTRIBUTIONS PARTIALLY DEDUCTIBLE CONTRIBUTIONS

1. Donations to government or political
subdivisions fully owned government and
controlled corporations to be used exclusively in
undertaking Priority activities
2. In pursuance or compliance with agreements,
Treaties or special laws
1. Donations not in accordance with priority
activities
2. Donation to non-accredited non-government
organizations of domestic organizations
Limit of deduction for contributions:

3. Accredited domestic non-government NET INCOME derived from trade, business or

organizations profession multiply by:
1. 10% for individuals
2. 5% for corporations

Entertainment, Amusement, and Recreation (EAR) Expense

Includes representation expense and/or depreciation or rental expense relating to entertainment
facilities.

Ceiling on deduction:

 Taxpayers engaged in the sales of goods or properties – 0.5% of net sales

 Taxpayers engaged in the sales of service – 1% of net revenues
“Net sales” = gross sales less sales returns, allowances and sales discounts
“Net revenue” = gross revenue less sales discounts

Apportionment:

Net sales/Net revenue x Actual EAR

Total net sales and net revenue
 SPECIAL EXPENSES UNDER THE NIRC AND SPECIAL LAWS
1. Income distribution from a taxable estate or trust = FULL

2. Transfer to reserve fund and payments to policies and annuity contracts of insurance companies.
= Required reserves – prior year reserve

3. Dividend distribution of a Real Estate Investment Trust (REIT) under RA 9856

= FULL

4. Transfer to reserves funds of taxable cooperatives. = APPROPRIATED AMOUNT

5. Discounts to senior citizens under RA 9257 = 20% of GROSS SALES from SC

Total gross sales
Less: Cost of sales
Gross income
Less: Regular Itemized Deductions
Special Itemized Deductions
Taxable net income

6. Discounts to persons with disability under RA 9442 = 20% of GROSS SALES from DP

7. Additional expenses on apprenticeship agreement.

DEDUCTION INCENTIVES UNDER THE NIRC AND SPECIAL LAWS

1. Additional compensation expense for senior citizen employees under RA 9257
= 15% of total amount paid as salaries and wages to senior citizens

2. Additional compensation expense for persons with disability under RA 7277, amended by RA 9442
= 25% of total amount paid as salaries and wages to senior citizens

3. Cost of facilities improvements for persons with disability in accordance with RA 7277, as amended by
RA 9442 = 50% of the direct costs

4. Additional training expense under RA 8502 – Jewelry Industry Development Act of 1998
= 50% of the expenses

5. Additional labor training expense under the RA 11534 – CREATE law

= 50% of the value of labor training expenses
= shall not exceed 10% of direct labor wage
6. Additional contribution expense under the Adopt-a-School program under RA 8525
= priority activities FULL
= non-priority activities 50%

7. Additional deductions for compliance to rooming-in and breast-feeding practices under RA 7600, as
amended by RA 10028
= up to twice the actual amount incurred

8. Additional free legal assistance expense under RA 9999

= 10% of gross income from the actual performance of the legal profession whichever is lower

9. Additional productivity incentive bonus expense under RA 6971

= 50% of the total productivity
= 50% of the rank-and-file employees

HOW TO COMPUTE NOLCO

Gross income subject to regular tax P xxx,xxx
Less:
Total deductions excluding NOLCO from prior years and deduction
Incentives under special laws ( xxx,xxx)
Net operating loss carry-over (NOLCO) (P xxx,xxx)

PERCENTAGE OF OPTIONAL STANDARD DEDUCTION

1. Individual taxpayers – 40% of total sales/revenues/receipts/fees

a. Those selling goods under the accrual basis – 40% of gross sales
b. Those selling services under the cash basis – 40% of gross receipts
a. Those selling services under the accrual basis – 40% of revenue

2. Corporate taxpayers – 40% of gross income

OSD BASE FOR AN INDIVIDUAL TAXPAYER

Sales/Revenues/Receipts/Fees P xxx,xxx
Less: Sales returns, allowances and discounts xx,xxx
Net sales/revenues/receipts/fees P xxx,xxx
Multiply by: OSD percentage 40%
Optional standard deduction P xxx,xxx

Other taxable income from operations not subject to final tax

Revenues or receipts arising from incidental or secondary activities of the business or profession are
added as part of sales/revenues/receipts/fees.

OSD BASE FOR A CORPORATE TAXPAYER

Net Sales/Revenues/Receipts/Fees P xxx,xxx

Less: Cost of sales or services xx,xxx
Gross income from operations P xxx,xxx
Add: Other taxable income, not subject to final tax xxx,xxx
Total gross income P xxx,xxx
Multiply by: OSD percentage 40%
Optional standard deduction P xxx,xxx