Taxation One: Outline with Codals
Course Outline
Tax I
Based on Atty. Montero’s outline, with integrated notes from Atty. Salvador’s review class,
Reyes, some Mamalateo, some CoUntian and the various reviewers in school.
A. In General ... 1
B. General Principles ... 2
C. Income Tax on Individuals ... 2
D. Definitions ... 17
E. Income Tax Rates ... 19
F. Proprietary Educational Institutions and Hospitals ... 21
G. GOCCs ... 22
H. Passive Income ... 22
I. Minimum Corporate Income Tax (MCIT) ... 25
J. Income Tax on Resident Foreign Corporations ... 26
K. Income Tax on Non-resident Foreign Corporations ... 30
L. Improperly Accumulated Earnings Tax (IAET) ... 33
M. Tax-exempt Corporations ... 36
N. Taxable Income ... 40
P. Fringe Benefits Tax (FBT! Whut up!) ... 50
Q. Deductions ... 53
R. Capital Gains and Losses (Sale or Exchange of Property) ... 76
S. Determination of Gain or Loss from Sale or Transfer of Property ... 81
T. Situs of Taxation ... 86
U. Accounting Periods and Methods ... 91
V. Estates and Trusts ... 97
W. Returns and Payment of Taxes ... 101
W. Withholding Tax ... 107
A. In General
Taxable Income
•
The essential difference between capital and income is that capital is a fund; and
income is a flow. Capital is wealth, while income is the service of wealth.
•
Property is a tree, income is the fruit. Labor is a tree, income is the fruit. Capital is a
tree, income the fruit.
•
Income means profits or gains. (Madrigal v Rafferty)
•
Income may be defined as the amount of money coming to a person or corporation
within a specified time, whether as payment for services, interest or profit from
investment.
o A mere advance in the value of property of a person or a corporation in no
sense constitutes the ‘income’ specified in the law. Such advance constitutes
and can be treated merely as an increase in capital. (Fisher v Trinidad)
•
Cash dividends is taxed as income because it has been realized/received, while stock
dividends is not taxed as income because it is merely inchoate as it is a mere
anticipation of income (it becomes income once you sell it).
o One is an actual receipt of profits; the other is a receipt of a representation of
the increased value of the assets of a corporation. (Fisher v Trinidad)
•
When dealing with money or property, the questions you should ask are:
o Is this capital or is this income?
Taxation One: Outline with Codals
B. General Principles
SEC. 23. General Principles of Income Taxation in the Philippines. - Except when otherwise provided in this Code: (A) A citizen of the Philippines residing therein is taxable on all income derived from sources within and without the Philippines;
(B) A nonresident citizen is taxable only on income derived from sources within the Philippines;
(C) An individual citizen of the Philippines who is working and deriving income from abroad as an overseas contract worker is taxable only on income derived from sources within the Philippines: Provided, That a seaman who is a citizen of the Philippines and who receives compensation for services rendered abroad as a member of the complement of a vessel engaged exclusively in international trade shall be treated as an overseas contract worker; (D) An alien individual, whether a resident or not of the Philippines, is taxable only on income derived from sources within the Philippines;
(E) A domestic corporation is taxable on all income derived from sources within and without the Philippines; and (F) A foreign corporation, whether engaged or not in trade or business in the Philippines, is taxable only on income derived from sources within the Philippines.
Who are taxable on income derived from all sources, whether within or outside the
Philippines? Taxed worldwide!
1. Resident citizens.
2. Domestic corporations.
•
The other kinds of taxpayers are subject to tax only on income derived from
Philippine sources.
Taxable Income
Taxable Income
Citizenship & Residency
Inside RP
Outside RP
Resident Citizen
Yes
Yes
Non-resident Citizen
Yes
No
Overseas Contract Worker
Yes
No
Resident Alien
Yes
No
Non-resident Alien
Yes
No
Domestic Corp
Yes
Yes
Foreign Corp
Yes
No
C. Income Tax on Individuals
Definitions
Resident citizens and resident aliens
Section 22 (F) The term "resident alien" means an individual whose residence is within the Philippines and who is not a citizen thereof.
•
Resident alien is an individual:
1. Whose residence is within the Philippines
o Must be actually present in the Philippines for more than 12 months from his
arrival
2. Who is not a citizen
•
Mere physical or body presence is enough. Not intention to make the country one’s
abode. (Garrison v CA)
•
An alien actually present in the Philippines who is not a mere transient or sojourner is a
resident of the Philippines for purposes of the income tax. Whether he is a transient or
not is determined by his intentions with regard to the length and nature of his stay.
o A mere floating intention indefinite as to time, to return to another country is not
sufficient to constitute him a transient.
o If he lives in the Philippines and has no definite intention as to his stay, he is a
resident. One who comes to the Philippines for a definite purpose which in its
nature may be promptly accomplished is a transient.
But if his purpose is of such a nature that an extended stay may be
necessary for its accomplishment, and to that end the alien makes his
Taxation One: Outline with Codals
home temporarily in the Philippines, he becomes a resident, though it may
be his intention at all times to return to his domicile abroad when the
purpose for which he came has been consummated or abandoned. (RR 2)
Non-resident citizens
Sec 22 (E). The term "nonresident citizen" means:
(1) A citizen of the Philippines who establishes to the satisfaction of the Commissioner the fact of his physical presence abroad with a definite intention to reside therein.
(2) A citizen of the Philippines who leaves the Philippines during the taxable year to reside abroad, either as an immigrant or for employment on a permanent basis.
(3) A citizen of the Philippines who works and derives income from abroad and whose employment thereat requires him to be physically present abroad most of the time during the taxable year.
(4) A citizen who has been previously considered as nonresident citizen and who arrives in the Philippines at any time during the taxable year to reside permanently in the Philippines shall likewise be treated as a nonresident citizen for the taxable year in which he arrives in the Philippines with respect to his income derived from sources abroad until the date of his arrival in the Philippines.
(5) The taxpayer shall submit proof to the Commissioner to show his intention of leaving the Philippines to reside permanently abroad or to return to and reside in the Philippines as the case may be for purpose of this Section.
•
Meaning of non-resident citizen:
1. Citizen who establishes to the satisfaction of the Commissioner the fact of his
physical presence abroad with a definite intention to reside therein
2. Citizen who leaves the Philippines during the taxable year to reside abroad, either
as an immigrant or for employment on a permanent basis
3. Citizen who works and derives from abroad and whose employment thereat
requires him to be physically present abroad most of the time during the taxable
year
4. Citizen who
has been previously considered as nonresident citizen and who
arrives in the Philippines at any time during the taxable year to reside
permanently in the Philippines shall likewise be treated as a nonresident citizen
for the taxable year in which he arrives in the Philippines with respect to his
income derived from sources abroad until the date of his arrival in the
Philippines.
•
Who are non-resident citizens? (RR 1-79)
1. Immigrant – one who leaves the Philippines to reside abroad as an immigrant for
which a foreign visa has been secured
2. Permanent employee – one who leaves the Philippines to reside abroad for
employment on a more or less permanent basis
3. Contract worker – one who leaves the Philippines on account of a contract of
employment which is renewed from time to time under such circumstance as to
require him to be physically present abroad most of the time (not less than 183
days)
•
Non-resident citizens who are exempt from tax with respect to income derived from
sources outside the Philippines shall no longer be required to file information returns
from sources outside the Philippines beginning 2001. (RR 5-2001)
•
The phrase “most of the time” shall mean that the said citizen shall have stayed abroad
for at least 183 days in a taxable year.
•
The same exemption applies to an OCW but as such worker, the time spent abroad is
not material for tax exemption purposes all that is required is for the worker’s
employement contract to pass through and be registered with the POEA. (BIR Ruling
33-2000).
Non-resident aliens engaged in business in the Philippines
Sec 22. (G) The term "nonresident alien" means an individual whose residence is not within the Philippines and who is not a citizen thereof.
Taxation One: Outline with Codals
•
Who are non-resident aliens?
1. An individual whose residence is not within the Philippines
2. Not a citizen of the Philippines
o Determination is by his intention with regard to the length and nature of his stay.
(Sec 5, RR 2)
o Alien can either:
•
Be deriving income in the Philippines, or
•
Stays in the Philippines for more than 180 days during any calendar year
(deemed to be a non-resident alien engaged in the Philippines)
•
Loss of residence by alien
o An alien who has acquired residence in the Philippines retains his status until he
abandons the same and actually departs from the Philippines.
o A mere intention to change his residence does not change his status. An alien who
has acquired a residence is taxable as a resident for the remainder of his stay in the
Philippines. (Sec. 6, RR 2)
Minimum wage earner
Sec 22. (GG) The term ‘statutory minimum wage’ earner shall refer to rate fixed by the Regional Tripartite Wage and Productivity Board, as defined by the Bureau of Labor and Employment Statistics (BLES) of the DOLE.
(HH) The term ‘minimum wage earner’ shall refer to a worker in the private sector paid the statutory minimum wage; or to an employee in the public sector with compensation income of not more than the statutory minimum wage in the non-agricultural sector where he/she is assigned.
•
Fixed by the Regional Tripartite Wage and Productivity Board.
•
Minimum wage earner:
o Private sector – paid the statutory minimum wage
o Public sector – not more than the statutory minimum wage in the
non-agricultural sector where he/she is assigned
Dependent
Sec 35. (B) For purposes of this Subsection, a "dependent" means a legitimate, illegitimate or legally adopted child chiefly dependent upon and living with the taxpayer if such dependent is not more than twenty-one (21) years of age, unmarried and not gainfully employed or if such dependent, regardless of age, is incapable of self-support because of mental or physical defect.
•
Dependent is a…
o Legitimate, illegitimate or legally adopted child, living with the taxpayer, and
chiefly dependent upon the taxpayer
o Who must be:
Not more than 21,
Unmarried, and
Not gainfully employed, OR
Dependent, regardless of age, is incapable of self-support because of
mental or physical defect.
To summarize, individual taxpayers are classified into:
1. Citizens, who are divided into:
o Resident citizens – those citizens whose residence is within the Philippines; and
o Non-resident citizens – those citizens whose resident is not within the Philippines.
2. Aliens, who are divided into:
o Resident aliens – those individuals whose residence is within the Philippines and
are not citizens thereof; and
Taxation One: Outline with Codals
o Non-resident aliens – those individuals whose residence is not within the
Philippines but temporarily in the country and are not citizens thereof. They are:
Those engaged in trade or business within the Philippines; and
Those who are not so engaged. (see Sec 23-25)
Kinds of income and income tax of individuals
Tax formula
SEC. 24. Income Tax Rates. -
(A) Rates of Income Tax on Individual Citizen and Individual Resident Alien of the Philippines. (1) An income tax is hereby imposed:
(a) On the taxable income defined in Section 31 of this Code, other than income subject to tax under Subsections (B), (C) and (D) of this Section, derived for each taxable year from all sources within and without the Philippines be every individual citizen of the Philippines residing therein;
(b) On the taxable income defined in Section 31 of this Code, other than income subject to tax under Subsections (B), (C) and (D) of this Section, derived for each taxable year from all sources within the Philippines by an individual citizen of the Philippines who is residing outside of the Philippines including overseas contract workers referred to in Subsection(C) of Section 23 hereof; and
(c) On the taxable income defined in Section 31 of this Code, other than income subject to tax under Subsections (b), (C) and (D) of this Section, derived for each taxable year from all sources within the Philippines by an individual alien who is a resident of the Philippines.
(2) Rates of Tax on Taxable Income of Individuals. - The tax shall be computed in accordance with and at the rates established in the following schedule: (just see chart below, it’s the same thing)
For married individuals, the husband and wife, subject to the provision of Section 51 (D) hereof, shall compute separately their individual income tax based on their respective total taxable income: Provided, that if any income cannot be definitely attributed to or identified as income exclusively earned or realized by either of the spouses, the same shall be divided equally between the spouses for the purpose of determining their respective taxable income.
"Provided, That minimum wage earners as defined in Section 22 (HH) of this Code shall be exempt from the payment of income tax on their taxable income: Provided, further, That the holiday pay, overtime pay, night shift differential pay and hazard pay received by such minimum wage earners shall likewise be exempt from income tax.
Not over P10,000
5%
Over P10,000 but not over P30,000
P500 + 10% of the excess over
P10,000
Over P30,000 but not over P70,000
P2,500 + 15% of the excess over
P30,000
Over P70,000 but not over P140,000
P8,500 + 20% of the excess over
P70,000
Over P140,000 but not over P250,000
P22,500 + 25% of the excess over
P140,000
Over P250,000 but not over P500,000
P50,000 + 30% of the excess over
P250,000
Over P500,000
P125,000 + 32% of the excess over
P500,000
Gross Income
Less: Deductions
Taxable Income
Tax Rate
Tax Due
Know the tax base and the tax rate!
Taxation One: Outline with Codals
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Only resident citizens and domestic corporations are taxed on income derived from
abroad. Worldwide taxable!
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The tax is imposed upon taxable compensation or employment income, business
income, and income derived from the practice of professions derived by citizens and
resident aliens.
•
Married individuals shall compute separately their individual income tax based on their
respective total taxable income.
o If any income cannot be definitely attributed to, or identified as income
exclusively earned or realized by either of the spouses, the same shall be divided
equally between them for the purpose of determining their respective taxable
income.
•
Minimum wage earners are exempt from the payment of income tax on their taxable
income. Holiday pay, overtime pay, night shift differential pay, and hazard pay received
by them are likewise exempt from income tax.
•
A non-resident alien individual engaged in trade or business in the Philippines is subject
to the income tax in the same manner as an individual citizen and a resident alien on
taxable income received from sources within the Philippines.
•
For non-resident aliens not so engaged, the tax is
o 25% of the entire or gross income received from sources within the Philippines
and
o 15% of the gross income received as compensation, salaries, and other
emoluments by reason of his employment by:
regional or area headquarters and regional operating headquarters of
multinational corporations;
offshore banking units established by a foreign corporation in the
Philippines; or
by foreign petroleum service contractor or subcontractors operating in the
Philippines. (Sec 25 (A-E))
Final income tax – interests, royalties, awards, dividends, capital gains on sale of shares,
realty
Sec 24. (B) Rate of Tax on Certain Passive Income.
(1) Interests, Royalties, Prizes, and Other Winnings. - A final tax at the rate of twenty percent (20%) is hereby imposed upon the amount of interest from any currency bank deposit and yield or any other monetary benefit from deposit substitutes and from trust funds and similar arrangements; royalties, except on books, as well as other literary works and musical compositions, which shall be imposed a final tax of ten percent (10%); prizes (except prizes amounting to Ten thousand pesos (P10,000) or less which shall be subject to tax under Subsection (A) of Section 24; and other winnings (except Philippine Charity Sweepstakes and Lotto winnings), derived from sources within the Philippines: Provided, however, That interest income received by an individual taxpayer (except a nonresident individual) from a depository bank under the expanded foreign currency deposit system shall be subject to a final income tax at the rate of seven and one-half percent (7 1/2%) of such interest income: Provided, further, That interest income from long-term deposit or investment in the form of savings, common or individual trust funds, deposit substitutes, investment management accounts and other investments evidenced by certificates in such form prescribed by the Bangko Sentral ng Pilipinas (BSP) shall be exempt from the tax imposed under this Subsection: Provided, finally, That should the holder of the certificate pre-terminate the deposit or investment before the fifth (5th) year, a final tax shall be imposed on the entire income and shall be deducted and withheld by the depository bank from the proceeds of the long-term deposit or investment certificate based on the remaining maturity thereof:
Four (4) years to less than five (5) years - 5%; Three (3) years to less than (4) years - 12%; and Less than three (3) years - 20%
(2) Cash and/or Property Dividends - A final tax at the following rates shall be imposed upon the cash and/or property dividends actually or constructively received by an individual from a domestic corporation or from a joint stock company, insurance or mutual fund companies and regional operating headquarters of multinational companies, or on the share of an individual in the distributable net income after tax of a partnership (except a general professional partnership) of which he is a partner, or on the share of an individual in the net income after
Taxation One: Outline with Codals
tax of an association, a joint account, or a joint venture or consortium taxable as a corporation of which he is a member or co-venturer:
Six percent (6%) beginning January 1, 1998; Eight percent (8%) beginning January 1, 1999; and Ten percent (10% beginning January 1, 2000.
Provided, however, That the tax on dividends shall apply only on income earned on or after January 1, 1998. Income forming part of retained earnings as of December 31, 1997 shall not, even if declared or distributed on or after January 1, 1998, be subject to this tax.
(C) Capital Gains from Sale of Shares of Stock not Traded in the Stock Exchange. - The provisions of Section 39(B) notwithstanding, a final tax at the rates prescribed below is hereby imposed upon the net capital gains realized during the taxable year from the sale, barter, exchange or other disposition of shares of stock in a domestic corporation, except shares sold, or disposed of through the stock exchange.
Not over P100,000………... 5% On any amount in excess of P100,000………… 10%
(D) Capital Gains from Sale of Real Property. -
(1) In General. - The provisions of Section 39(B) notwithstanding, a final tax of six percent (6%) based on the gross selling price or current fair market value as determined in accordance with Section 6(E) of this Code, whichever is higher, is hereby imposed upon capital gains presumed to have been realized from the sale, exchange, or other disposition of real property located in the Philippines, classified as capital assets, including pacto de retro sales and other forms of conditional sales, by individuals, including estates and trusts: Provided, That the tax liability, if any, on gains from sales or other dispositions of real property to the government or any of its political subdivisions or agencies or to government-owned or controlled corporations shall be determined either under Section 24 (A) or under this Subsection, at the option of the taxpayer.
(2) Exception. - The provisions of paragraph (1) of this Subsection to the contrary notwithstanding, capital gains presumed to have been realized from the sale or disposition of their principal residence by natural persons, the proceeds of which is fully utilized in acquiring or constructing a new principal residence within eighteen (18) calendar months from the date of sale or disposition, shall be exempt from the capital gains tax imposed under this Subsection: Provided, That the historical cost or adjusted basis of the real property sold or disposed shall be carried over to the new principal residence built or acquired: Provided, further, That the Commissioner shall have been duly notified by the taxpayer within thirty (30) days from the date of sale or disposition through a prescribed return of his intention to avail of the tax exemption herein mentioned: Provided, still further, That the said tax exemption can only be availed of once every ten (10) years: Provided, finally, that if there is no full utilization of the proceeds of sale or disposition, the portion of the gain presumed to have been realized from the sale or disposition shall be subject to capital gains tax. For this purpose, the gross selling price or fair market value at the time of sale, whichever is higher, shall be multiplied by a fraction which the unutilized amount bears to the gross selling price in order to determine the taxable portion and the tax prescribed under paragraph (1) of this Subsection shall be imposed thereon.
Sec 22 (Y) The term "deposit substitutes" shall mean an alternative from of obtaining funds from the public (the term 'public' means borrowing from twenty (20) or more individual or corporate lenders at any one time) other than deposits, through the issuance, endorsement, or acceptance of debt instruments for the borrowers own account, for the purpose of relending or purchasing of receivables and other obligations, or financing their own needs or the needs of their agent or dealer. These instruments may include, but need not be limited to bankers' acceptances, promissory notes, repurchase agreements, including reverse repurchase agreements entered into by and between the Bangko Sentral ng Pilipinas (BSP) and any authorized agent bank, certificates of assignment or participation and similar instruments with recourse: Provided, however, That debt instruments issued for interbank call loans with maturity of not more than five (5) days to cover deficiency in reserves against deposit liabilities, including those between or among banks and quasi-banks, shall not be considered as deposit substitute debt instruments.
Tax Rate on Certain Passive Income on Citizens and Resident
Aliens
Final Tax
1. Interest under the expanded foreign currency deposit system (see RR
10-98 below) Nonresident citizens: exempt
7.5%
(vs exempt for nonresident aliens engaged in
trade/biz)
2. Royalty from books, literary works, & musical compositions
10%
3. Royalty other than above
20%
Taxation One: Outline with Codals
from deposit substitute, trust fund & similar arrangement
5. Prize exceeding P10,000
20%
6. Other winnings, except Phil Charity Sweepstakes & Lotto
20%
7. Dividend from a domestic corp, or from a joint stock company,
insurance or mutual fund company, & regional operating headquarters of
multinational company or share in the distributive net income after tax o
a partnership (except a general professional partnership), joint stock or
joint venture or consortium taxable as a corporation
•
But what about dividends from foreign corporations for citizens
(not resident aliens)? Well, the income here enters into the
computation for Sec 24 (a) tax calendar. For resident aliens, they
are not taxed since it’s income derived from abroad.
10%
(vs 20% for non-resident aliensengaged in trade/biz)
8. Interest on long-term deposit or investment in banks (with maturity of
5 years or more)
exempt
Prize – the result of an effort (like a prize in a beauty contest)
Winning – the result of a transaction where the outcome depends upon
chance (like betting)
Deposit substitute – a means of borrowing money from the public (20 or
more individual or corporate lenders) other than by way of deposit with
banks through the issuance of debt instruments (like banker’s
acceptances, promissory notes, repurchase agreements, certificates of
assignment or participation)
•
The sources above are derived within the Philippines.
•
Note the situs rules:
o For aliens, the royalties and stuff must come from within the Philippines since
they are only taxed here.
o For resident citizens, the passive income that come from outside the Philippines
goes into their gross income.
Tax Rate on Interest Income from Foreign Currency Deposit (RR
10-98)
1. Interest income actually received by a resident citizen or resident alien
from FCD
7.5%
final
withholding tax
2. If it was deposited by an OCW or seaman or nonresident citizen
Exempt
3. If it was in a bank account in the joint names of an OCW and his
spouse (who is a resident)
50%
50%
exempt/
final
withholding tax
of 7.5%
4. Interest income actually received by a domestic corporation or
resident foreign corporation from FCD
7.5%
withholding tax
final
•
Interest income which is actually or constructively received by a resident citizen of the
Philippines or by a resident alien individual from a foreign currency bank deposit will be
subject to a final withholding tax of 7.5%. The depository bank will withhold and remit
the tax. If a bank account is jointly in the name of a non-resident citizen, 50% of the
interest income from such bank deposit will be treated as exempt while the other 50%
will be subject to a final withholding tax of 7.5%. The Regulations will apply on taxable
income derived beginning January 1, 1998 pursuant to the provisions of Section 8 of RA
8424. In case of deposits which were made in 1997, only that portion of interest which
was actually or constructively received by a depositor starting January 1, 1998 is
taxable. (RR 10-98)
Taxation One: Outline with Codals
1. On sale of shares of stock of a domestic corporation NOT
listed and NOT traded thru a local stock exchange held as
a capital asset,
o Capital gains not over P100,000
o Capital gains in excess of P100,000 (see RR 6-2008
below)
5% of the net capital gains
10% of the net capital gains
2. On sale of real property in the Philippines held as a capital
asset (see RR 8-98 below)
6% of the gross selling
price, or the current market
value at the time of sale,
whichever is higher
Tax Rate on Income from Sale, Barter, Exchange or
other Disposition of Shares of Stock (RR 6-2008)
If shares of stock are listed and traded through the local
stock exchange
½ of 1% (or .005%) of the
gross selling price or gross
value in money of the
shares of stock
If shares not traded through the local stock exchange
o Capital gains not over P100,000
o Capital gains in excess of P100,000
5% of the net capital gains
10% of the net capital gains
•
Who are liable?
1. Individual taxpayer, whether citizen or alien;
2. Corporate taxpayer, whether domestic or foreign;
3. Other taxpayers not falling under (1) and (2) above, such as estate, trust, trust
funds and pension funds, among others.
•
Who are exempt?
1. Dealers in securities
2. Investors in shares of stock in a mutual fund company, as defined in Sec 22 (BB),
and Section 2(s) of these Regulations, in ocnnection with the gains realized by said
investor upon redemption of said shares of stock in a mutual fund companyl and
3. All other persons, whether natural or juridical, who are specifically exempt from
national internal revenue taxes under existing investment incentives and other
special laws.
How to determine the tax base of disposition
of stock (RR 6-2008)
Fair Market Value
Sales of stock listed and traded through the LSE
FMV is the actual selling price
Sales of stock listed but not traded through the
LSE
FMV is the closing price on the day
when the shares were sold, transferred,
etc (if no sale was made on that day in
the LSE, then the closing price on the
day nearest to the date of sale,
transfer, or exchange of the said
shares)
Sales of stock not listed and not traded through
the LSE
FMV is the book value of the shares of
stock as shown in the financial
statements duly certified by an
independent CPA nearest to the date of
Taxation One: Outline with Codals
sale
Final Tax Rate on Sales, Exchanges, or Transfers or Real
Properties Classified as Capital Assets (RR 8-98)
Sale of real property in the Philippines
6% of the gross selling
price, or the current
market value at the time
of sale, whichever is
higher
If sale was made to the government or to GOCCs
Either 6% of the gross
selling
price/current
market value or under
the normal income tax
rate, taxpayer’s option
Creditable Withholding Tax on Sales, Exchanges or
Transfers of Real Properties classified as Ordinary Assets
(RR 8-98)
1. If the seller is habitually engaged in the real estate business
o Selling price is less than P500,000
o Selling price is P500,000 to P2m
o Selling price is above P2m
1.5%
3%
5% of gross selling
price/current market
value, whichever is
higher
2. If the seller is not habitually engaged in the real estate
business
7.5% of gross selling
price/current
market
value,
whichever
is
higher
3. If the seller is exempt from creditable withholding tax as per
RR 2-98
Exempt
•
Conditions to be exempt from capital gains tax of 6% on the sale, exchange, or
disposition of a principal residence (RR 13-99)
1. The proceeds from the sale, exchange, or disposition of his principal residence must
be fully utilized in acquiring or construing a new principal residence within 18
months. There must be proof.
2. This can only be availed of ONLY ONCE every 10 years
3. The historical cost of his old principal residence shall be carried over to the cost basis
of his new residence
4. If there is no full utilization, he shall be liable for the deficiency capital gains tax of
the utilized portion
5. If the principal residence is disposed in exchange for a condo, and if it is used as his
new residence, then he is exempt
6. The 6% capital gains tax otherwise due must be deposited in escrow with an
authorized agent bank, and can only be released when sufficient proof is shown that
the proceeds have been fully utilized within 18 months.
•
What is the principal residence anyway? (RR 14-2000)
o It is the dwelling house, where the husband or wife or unmarried individual
resides; actual occupancy is not interrupted or abandoned by temporary absence
due to travel, studies, or work abroad
Taxation One: Outline with Codals
o If the ownership of the land and the dwelling house belong to different persons,
only the dwelling house shall be treated as principal residence
o It is not necessarily the “family home.”
•
Payment of capital gains tax on foreclosure of mortgaged property (RR 4-99)
o If the mortgagor exercises his right of redemption within 1 year – no capital
gains tax because none has been derived and no transfer of property was
realized
•
In case of non-redemption, the capital gains will be due based on the bid price of the
highest bidder.
o Who pays the capital gains?
If the mortgagee is a bank, then it is the mortgagee bank that pays it, not
the seller.
Personal and Additional Exemptions
SEC. 35. Allowance of Personal Exemption for Individual Taxpayer. -
(A) In General. - For purposes of determining the tax provided in Section 24 (A) of this Title, there shall be allowed a basic personal exemption amounting to P50,000 for each individual taxpayer.
In the case of married individuals where only one of the spouses is deriving gross income, only such spouse shall be allowed the personal exemption.
(B) Additional Exemption for Dependents. - There shall be allowed an additional exemption of twenty five thousand pesos (P25,000) for each dependent not exceeding four (4).
The additional exemption for dependent shall be claimed by only one of the spouses in the case of married individuals.
In the case of legally separated spouses, additional exemptions may be claimed only by the spouse who has custody of the child or children: Provided, That the total amount of additional exemptions that may be claimed by both shall not exceed the maximum additional exemptions herein allowed.
For purposes of this Subsection, a "dependent" means a legitimate, illegitimate or legally adopted child chiefly dependent upon and living with the taxpayer if such dependent is not more than twenty-one (21) years of age, unmarried and not gainfully employed or if such dependent, regardless of age, is incapable of self-support because of mental or physical defect. (Amended by RA 9504)
Personal and additional exemption for individual taxpayer
Basic personal exemption for each individual taxpayer
o If married and only one of the spouses is deriving gross income,
only such spouse shall be allowed the personal exemption.
P50,000
Additional exemption for each dependent, not exceeding four (4)
o Claimed by only one spouse in case of married individuals
o If legally separated, additional exemptions claimed only by
spouse who has custody; should not exceed maximum
additional exemptions allowed
P25,000 per
dependent
•
Exemption statutes are not retroactive. (Pensacola v CIR)
•
Discounts for senior citizens is now treated as tax deductions, as per RA 9257. This
sucks for the taxpayer because he doesn’t get the “peso for peso” benefit which he
would have gotten if it were considered a tax credit as before. (M.E. Holdings Corp v CIR
& CTA)
•
Senior Citizens are
o Resident citizens
o At least 60 years old
They are not exempt from income taxes unless they are considered
minimum wage earners. (RA 9994, which also took out the previous
P60,000 requirement)
Taxation One: Outline with Codals
Change of status
Sec 35. (C) Change of Status. - If the taxpayer marries or should have additional dependent(s) as defined above during the taxable year, the taxpayer may claim the corresponding additional exemption, as the case may be, in full for such year.
If the taxpayer dies during the taxable year, his estate may still claim the personal and additional exemptions for himself and his dependent(s) as if he died at the close of such year.
If the spouse or any of the dependents dies or if any of such dependents marries, becomes twenty-one (21) years old or becomes gainfully employed during the taxable year, the taxpayer may still claim the same exemptions as if the spouse or any of the dependents died, or as if such dependents married, became twenty-one (21) years old or became gainfully employed at the close of such year.
Personal exemption allowable to nonresident alien individuals
Sec. 35 (D) Personal Exemption Allowable to Nonresident Alien Individual. - A nonresident alien individual engaged in trade, business or in the exercise of a profession in the Philippines shall be entitled to a personal exemption in the amount equal to the exemptions allowed in the income tax law in the country of which he is a subject - or citizen, to citizens of the Philippines not residing in such country, not to exceed the amount fixed in this Section as exemption for citizens or resident of the Philippines: Provided, That said nonresident alien should file a true and accurate return of the total income received by him from all sources in the Philippines, as required by this Title.
Personal
Exemptions
allowable
to
nonresident alien individuals
If engaged in trade, business or in the exercise of
a profession
Entitled to a personal exemption in the
amount equal to the exemptions
allowed in the income tax law of his
country for Filipinos, but it shouldn’t
exceed the amount fixed here for
exemptions
If not engaged in trade, business or in the exercise
of a profession
None, because Sec 25 (B) states that
he will be taxed upon his entire
income.
•
De Leon states that nonresident aliens are not entitled to additional exemptions for
dependents. (P. 135, Fundamentals of Taxation 2009)
Optional Standard Deduction
Sec. 34 (L) Optional Standard Deduction. - In lieu of the deductions allowed under the preceding Subsections, an individual subject to tax under Section 24, other than a nonresident alien, may elect a standard deduction in an amount not exceeding forty percent (40%) of his gross sales or gross receipts, as the case may be. In the case of a corporation subject to tax under section 27(A) and 28(A)(1), it may elect a standard deduction in an amount not exceeding forty percent (40%) of it gross income as defined in Section 32 of this Code. Unless the taxpayer signifies in his return his intention to elect the optional standard deduction, he shall be considered as having availed himself of the deductions allowed in the preceding Subsections. Such election when made in the return shall be irrevocable for the taxable year for which the return is made: Provided, That an individual who is entitled to and claimed for the optional standard shall not be required to submit with his tax return such financial statements otherwise required under this Code: Provided, further, That except when the Commissioner otherwise permits, the said individual shall keep such records pertaining to his gross sales or gross receipts, or the said corporation shall keep such records pertaining to his gross income as defined in Section 32 of this Code during the taxable year, as may be required by the rules and regulations promulgated by the Secretary of Finance, upon recommendation of the Commissioner.
•
Optional standard deduction is the deduction which an individual other than a
non-resident alien, or a corporation, subject to income tax, may elect in an amount not
exceeding 40% of his gross sales or gross receipts, as the case may be, or a
corporation, in an amount not exceeding 40% of its gross income, in lie of taking
itemized deductions.
Taxation One: Outline with Codals
o A citizen, whether resident or non-resident
o Resident alien,
o Domestic corp,
o Resident foreign corp,
o Partnerships, and
o Taxable estate and trust.
A non-resident alien cannot claim OSD.
•
The OSD allowed to individual taxpayer shall be a maximum of 40% of gross sales or
gross receipts during the taxable year.
o If one uses the accrual basis of accounting for his income and deductions, the
OSD shall be based on the gross sales during the taxable year.
o If one uses the cash basis, the OSD shall be based on his gross receipts during
the taxable year.
o The law is specific that for individual taxpayers the basis of the 40% OSD shall be
gross sales or gross receipts, not gross income, for which reason the “cost of
sales” and the “cost of services” are not allowed to be deducted for purposes of
determining the basis of the OSD.
o For other individual taxpayers allowed by law to report their income and
deductions under a different method of accounting, the gross sales or gross
receipts shall be determined in accordance with the said acceptable method of
accounting.
o No need to substantiate with receipts!
•
Example:
o Suppose a retailer of goods, an individual, whose accounting method is under the
accrual basis has a gross sales of P1m with a cost of sales amounting to P800k.
the computation of the OSD shall be determined as follows:
Gross Sales
P1,000,000
Less: CoGS
---
Basis of the OSD
P1,000,000
x OSD Rate (max)
.40
OSD Amount
P400,000
If the taxpayer opts to use the OSD in lieu of the itemized deductions allowed
under Sec 34 of the Tax Code, his net taxable income shall be as follows:
Gross Sales
P1,000,000
Less: CoGS
---
Gross Sales/Gross InomeP1,000,000
Less: OSD (max)
400,000
Net Income
P600,000
Premium payments on health and/or hospitalization insurance
Sec. 34 (M) Premium Payments on Health and/or Hospitalization Insurance of an Individual Taxpayer. - The amount of premiums not to exceed Two thousand four hundred pesos (P2,400) per family or Two hundred pesos (P200) a month paid during the taxable year for health and/or hospitalization insurance taken by the taxpayer for himself, including his family, shall be allowed as a deduction from his gross income: Provided, That said family has a gross income of not more than Two hundred fifty thousand pesos (P250,000) for the taxable year: Provided, finally, That in the case of married taxpayers, only the spouse claiming the additional exemption for dependents shall be entitled to this deduction.
•
The taxpayer is allowed a deduction of P2,400/family or P200/month for health and/or
hospitalization insurance premiums, provided:
Taxation One: Outline with Codals
o It must be taken by the taxpayer for himself and his family.
•
If married, only the spouse claiming the additional exemption for dependents can avail
of this.
Exclusions and deductions (discussion from De Leon’s book, see also Sec 61-64 of RR 2)
•
Exclusions are incomes that are exempt from the tax. They are not to be included in the
tax return unless information regarding it is specifically called for.
o Examples:
Life insurance proceeds paid to beneficiaries upon the death of the
insured.
Value of the property acquired by inheritance or donation, because it is
subject to estate or donor’s tax.
Retirement benefits, pensions, etc, received by government officials and
employees from the GSIS and SSS in recognition of their services. So with
retirement benefits of private firms, under certain conditions.
Prizes and awards made primarily in recognition of religious, charitable,
scientific, educational, artistic, etc, competitions and tournaments.
Christmas bonus, 13
thmonth pay, productivity incentives, and other
benefits received up to a max of P30,000.
Gains from the sale or retirement of bonds or other certificates of
indebtedness with a maturity of more than 5 years.
•
Deductions are items or amounts which the law allows to be deducted under certain
conditions from the gross income of a taxpayer in order to arrive at the taxable income.
•
Both reduce actual gross income although exclusions are not included in the income tax
return.
•
Some general principals governing deductions include:
o The taxpayer seeking a deduction must point to some specific provision of the
statute authorizing the deduction; and
o He must be able to prove that he is entitled to the deduction authorized or
allowed.
•
They are allowed only where there is a clear provision in the statute for the
deduction claimed.
•
Taxable gross income is affected by exclusions because the latter are omitted from the
former and are not reported on the income tax return but is not affected by deductions
because they are subtracted after gross income is determined and are reported on the
return.
•
Kinds of deductions:
1. Deductions from compensation income.
2. Deductions from business/professional income.
3. Deductions from corporate income.
4. Special deductions
5. Deductions allowed by special laws.
Tax on non-resident aliens
Non-resident aliens engaged in business in the Philippines
SEC. 25. Tax on Nonresident Alien Individual. -
(A) Nonresident Alien Engaged in trade or Business Within the Philippines. -
(1) In General. - A nonresident alien individual engaged in trade or business in the Philippines shall be subject to an income tax in the same manner as an individual citizen and a resident alien individual, on taxable income received from all sources within the Philippines. A nonresident alien individual who shall come to the Philippines and stay therein for an aggregate period of more than one hundred eighty (180) days during any calendar year shall be deemed a 'nonresident alien doing business in the Philippines'. Section 22 (G) of this Code notwithstanding.
Taxation One: Outline with Codals
(2) Cash and/or Property Dividends from a Domestic Corporation or Joint Stock Company, or Insurance or Mutual Fund Company or Regional Operating Headquarters or Multinational Company, or Share in the Distributable Net Income of a Partnership (Except a General Professional Partnership), Joint Account, Joint Venture Taxable as a Corporation or Association., Interests, Royalties, Prizes, and Other Winnings. - Cash and/or property dividends from a domestic corporation, or from a joint stock company, or from an insurance or mutual fund company or from a regional operating headquarters of multinational company, or the share of a nonresident alien individual in the distributable net income after tax of a partnership (except a general professional partnership) of which he is a partner, or the share of a nonresident alien individual in the net income after tax of an association, a joint account, or a joint venture taxable as a corporation of which he is a member or a co-venturer; interests; royalties (in any form); and prizes (except prizes amounting to Ten thousand pesos (P10,000) or less which shall be subject to tax under Subsection (B)(1) of Section 24) and other winnings (except Philippine Charity Sweepstakes and Lotto winnings); shall be subject to an income tax of twenty percent (20%) on the total amount thereof: Provided, however, that royalties on books as well as other literary works, and royalties on musical compositions shall be subject to a final tax of ten percent (10%) on the total amount thereof: Provided, further, That cinematographic films and similar works shall be subject to the tax provided under Section 28 of this Code: Provided, furthermore, That interest income from long-term deposit or investment in the form of savings, common or individual trust funds, deposit substitutes, investment management accounts and other investments evidenced by certificates in such form prescribed by the Bangko Sentral ng Pilipinas (BSP) shall be exempt from the tax imposed under this Subsection: Provided, finally, that should the holder of the certificate pre-terminate the deposit or investment before the fifth (5th) year, a final tax shall be imposed on the entire income and shall be deducted and withheld by the depository bank from the proceeds of the long-term deposit or investment certificate based on the remaining maturity thereof:
Four (4) years to less than five (5) years - 5%; Three (3) years to less than four (4) years - 12%; and Less than three (3) years - 20%.
(3) Capital Gains. - Capital gains realized from sale, barter or exchange of shares of stock in domestic corporations not traded through the local stock exchange, and real properties shall be subject to the tax prescribed under Subsections (C) and (D) of Section 24.
•
A nonresident alien engaged in trade or business in the Philippines is subject to the
same income tax rate as citizens and resident aliens, on taxable income received from
all sources within the Philippines.
•
A nonresident alien who stays in the Philippines for an aggregate period of more than
180 days shall be deemed as nonresident alien doing business in the Philippines.
Tax Rate on Certain Passive Income on Nonresident Aliens
Engaged in Trade, Business or Exercising a Profession
Final Tax
1. Interest under the expanded foreign currency deposit system
exempt
2. Royalty from books, literary works, & musical compositions
10%
3. Royalty other than above
20%
4. Interest on any current bank deposit, yield or other monetary benefits
from deposit substitute, trust fund & similar arrangement
20%
5. Prize exceeding P10,000
20%
6. Other winnings, except Phil Charity Sweepstakes & Lotto
20%
7. Dividend from a domestic corp, or from a joint stock company,
insurance or mutual fund company, & regional operating headquarters of
multinational company or share in the distributive net income after tax o
a partnership (except a general professional partnership), joint stock or
joint venture or consortium taxable as a corporation
•
What about dividends from foreign corps? Exempt. Nonresident
aliens are not taxed worldwide.
20%
(compare with citizens and resident aliens)8. Gross income from cinematographic films & similar works
25%
9. Interest on long-term deposit or investment in banks (with maturity of
5 years or more)
exempt
Tax Rate on Capital Gains (same with residents, and
nonresident aliens not engaged in business)
Taxation One: Outline with Codals
listed and NOT traded thru a local stock exchange held as
a capital asset,
o Capital gains not over P100,000
o Capital gains in excess of P100,000
5% of the net capital gains
10% of the net capital gains
2. On sale of real property in the Philippines held as a capital
asset
6% of the gross selling
price, or the current market
value at the time of sale,
whichever is higher
Non-resident aliens not engaged in business in the Philippines
Sec. 25 (B) Nonresident Alien Individual Not Engaged in Trade or Business Within the Philippines. - There shall be levied, collected and paid for each taxable year upon the entire income received from all sources within the Philippines by every nonresident alien individual not engaged in trade or business within the Philippines as interest, cash and/or property dividends, rents, salaries, wages, premiums, annuities, compensation, remuneration, emoluments, or other fixed or determinable annual or periodic or casual gains, profits, and income, and capital gains, a tax equal to twenty-five percent (25%) of such income. Capital gains realized by a nonresident alien individual not engaged in trade or business in the Philippines from the sale of shares of stock in any domestic corporation and real property shall be subject to the income tax prescribed under Subsections (C) and (D) of Section 24.
•
Nonresident aliens not engaged in business are taxed 25% of their entire income within
the Philippines.
•
That means they have no deductions!
•
Their capital gains are the same with nonresident aliens engaged in business (see table
above!)
Special aliens
Sec. 25 (C) Alien Individual Employed by Regional or Area Headquarters and Regional Operating Headquarters of Multinational Companies. - There shall be levied, collected and paid for each taxable year upon the gross income received by every alien individual employed by regional or area headquarters and regional operating headquarters established in the Philippines by multinational companies as salaries, wages, annuities, compensation, remuneration and other emoluments, such as honoraria and allowances, from such regional or area headquarters and regional operating headquarters, a tax equal to fifteen percent (15%) of such gross income: Provided, however, That the same tax treatment shall apply to Filipinos employed and occupying the same position as those of aliens employed by these multinational companies. For purposes of this Chapter, the term 'multinational company' means a foreign firm or entity engaged in international trade with affiliates or subsidiaries or branch offices in the Asia-Pacific Region and other foreign markets.
(D) Alien Individual Employed by Offshore Banking Units. - There shall be levied, collected and paid for each taxable year upon the gross income received by every alien individual employed by offshore banking units established in the Philippines as salaries, wages, annuities, compensation, remuneration and other emoluments, such as honoraria and allowances, from such off-shore banking units, a tax equal to fifteen percent (15%) of such gross income: Provided, however, That the same tax treatment shall apply to Filipinos employed and occupying the same positions as those of aliens employed by these offshore banking units.
(E) Alien Individual Employed by Petroleum Service Contractor and Subcontractor. - An Alien individual who is a permanent resident of a foreign country but who is employed and assigned in the Philippines by a foreign service contractor or by a foreign service subcontractor engaged in petroleum operations in the Philippines shall be liable to a tax of fifteen percent (15%) of the salaries, wages, annuities, compensation, remuneration and other emoluments, such as honoraria and allowances, received from such contractor or subcontractor: Provided, however, That the same tax treatment shall apply to a Filipino employed and occupying the same position as an alien employed by petroleum service contractor and subcontractor.
Any income earned from all other sources within the Philippines by the alien employees referred to under Subsections (C), (D) and (E) hereof shall be subject to the pertinent income tax, as the case may be, imposed under this Code.
Taxation One: Outline with Codals
1. Employed by regional or area headquarters & regional
operating headquarters established in the Philippines by
multinational;
15% on gross income
2. Employed by offshore banking units
15% on gross income
3. Permanent resident of a foreign country but who is employed
and assigned in the Philippines by a foreign service contractor or
by a foreign service subcontractor engaged in petroleum
operations in the Philippines
15%
•
Provided the same tax shall apply to Filipinos employed and occupying the same position
as these aliens.
•
These apply only to positions of a highly technical or highly managerial nature. (Atty.
Montero)
•
All income earned from all other sources within the Philippines by the special alien
employees shall be subject to the pertinent income tax imposed by the Code.
Tips on answering
Thought process in answering problems:
1. Is this income? If not, then it’s not really a income tax problem.
2. Who’s the taxpayer? And what’s the source? Refer to Sec 23!
3. What’s the specific rate? See sec 24-25!
For example, what is the tax rate of on income derived from dividends from foreign
corporations for 1. Resident citizens 2. Resident aliens and 3. Nonresident aliens engaged in
trade or business?
1. Resident citizens
a. Yes, it’s income.
b. The source is outside the Philippines. Are they liable for sources from outside
the Philippines? Yes! Citizens are taxed worldwide!
c. What’s the specific tax rate? Hmm… since it’s not in any of the charts, but
they still have to be taxed, then the income they derive from dividends from
foreign corporations will be considered in computing the tax rate based on the
tax calendar of Sec 24(a)
2. Resident aliens
a. Yes, it’s income.
b. The source is outside the Philippines. Are they liable for sources from outside
the Philippines? No! They aren’t taxed worldwide.
3. Nonresident aliens engaged in trade or business
a. Yes, my dear, it’s income.
b. The source is outside the Philippines. Are they liable for source from outside
the Philippines? No! They aren’t taxed worldwide either.
D. Definitions
• Section 22, Tax Code
Definition of corporations
Sec 22 (B) The term "corporation" shall include partnerships, no matter how created or organized, joint-stock companies, joint accounts (cuentas en participacion), association, or insurance companies, but does not include general professional partnerships and a joint venture or consortium formed for the purpose of undertaking construction projects or engaging in petroleum, coal, geothermal and other energy operations pursuant to an operating consortium agreement under a service contract with the Government. "General professional partnerships" are partnerships formed by persons for the sole purpose of exercising their common profession, no part of the income of which is derived from engaging in any trade or business.
