Jaypaul Ocampo Acidera, CPA 2016

October 2016

INTRODUCTION TO INCOME TAX

Atty, C Llamado

Concept of Income Tax

An income tax is one levied on the income from property or an occupation. It is a direct
tax upon the thing called income (Cooley on Taxation).

Purpose of income Tax

The imposition of the income tax is intended: •

1. To raise revenue to defray the expenses of the goverment; and

2. _gIesy
To miti ate ti from the inequalities of wealth by a progressive
scheme of taxation which places the burden on those best able to pay (Madrigal v.
Rafferty. & Concepcion, 38 Phil. 414).

Characteristics of Philippine Income Tax

Philippine income tax has the following characteristics:

1. A national tax — It is imposed and collected by the National Goverment throughout

the country.

2. Assatimum - It is levied without a specific or predetermined purpose. Thus, the

revenue from income tax may be appropriated for general public purposes.

1 An excise tax — It is imposed on the right or privilege of a person to receive or earn

income.

4. A direct tax It is payable by the person upon whom it is directly imposed by law. It
—

cannot be shifted or passed on to others.

A ro r
5. _k_amstyslaa -- It is based upon one's ability to pay.

6. The income tax system is asmapiciensivuptem. — It adopts the citizen principle,

the residence principle, and the source principle.

7. Semi global or semi schedukr. sygm.

- - Some types of taxable income are
—

compounded or grouped together without distinction, and after deducting expenses

and other allowable deductions and exemptions therefrom, are then subjected to
graduated (progressive) tax rates. This is known as the global tax system (or net
income tax system).

However, there are some types of taxable income like passive income and certain
capital gains which are not subject to such graduated tax rates. Such income are
classified into different categories, and are accorded different tax treatments. Each
category of income has its own schedule of tax rates. This is known as the schedular
tax system (or gross income tax system).
 October 2016

Meaning of Income

- Income means all wealth which flows into the taxpayer other than a me e return of -
capital. Income is a gain derived from
a) The use or employment of labor or capital, or : both labor d capital;
and/or
b) from the sale or other disposition of assets or property (both o dinary and
capital).

Income Distinguished From "Capital"

Capital is a fund, income is a flow. Capital is wealth, while income is the !service (or
fruit) of wealth. Capital is the tree, income the fruit (Madrigal v. Rafferty, 38 Phil. 414). 1.

Amounts received as a return of capital are not income (Vol. 1 Mertens, Sec. 5..06, p. 17).

Theory of Separability or Severance Test of Income

Under the doctrine of severance test of income, in order that income may exist, it is
necessary that there be a separation from capital of something of exchangeable value.

The concept of income requires a realization of gain.

Examples:

1) Stock dividends do not result in taxable income.

2) Mere-incrpase in the value of property is-not income.

Requisites for Taxability of Income

1.. There must be a gain or profit whether in cash or its equivalen ;

2. The gain must be realized or received; and
3. The gain must not be excluded by law or international treaty fr m taxation.

Classification of Income According to Source I

For income tax purposes, the word source refers to the activity, c4-property, or labor that
gave rise or produced the income.

Based on source, income is classified as follows:

1. Income from sources within the Philippines;

2. Income from sources without the Philippines; and
3. Income from sources partly within and partly without th Philippines (Sec. 42,
NIRC).
•

J. O. A.
October 2016

How To Determine Income Within and Income Without

Income Test Source of Income

(1) Interest income Residence of the debtor

(2) Income from services Place of performance

(3) Rent Location of property

(4) Royalty Place of use of intangible

(5) Gain on sale of real property Location of property

(6) Gain on sale of personal Place of sale

property purchased in one
country and sold in another

(7) Dividend
-From Domestic Corp.
A. Income within
B. From Foreign Corp. (1) Income within, if 50% or more
of the gross income of the foreign
corporation for the preceding three
(3) years prior to the declaration of
dividend or for such part of such
period as the corporation has been in
existence, was derived from sources
within the Philippines.

(Phil. Gross Income/Total Gross

Income) x Dividend = Income
within

(2) Income without, if less than 50%

of the gross income of the foreign
corporation for the preceding three
(3) years prior to the declaration of
dividend or for such part of such
period as the corporation has been in
existence, was derived from sources
within the Philippines.

(8) Sale of domestic shares Income within

(9) Sale of foreign shares income without

(10) Income from transportation and Partly within and partly without
other services rendered partly
within and partly without the
Philippines

(11) Income from sale of personal Partly within and partly without
property mduced in whole or J. O. A.
in part by the taxpayer within
the Philippines, and sold
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October 2016

without the Philippines

(12) Income from sale of personal Partly within and partly without
property Roduced in whole or
in part by the taxpayer without
the Philippines, and sold within
the Philippines

•
•
Situs of Income

The situs of the income is the place of taxation of the income or the country which has
jurisdiction to impose the tax. For income tax purposes, income may be taxed in one or
more or all of the following places or countries —

1. The place where the taxpayer is a citizen;

2. The place where the taxpayer is a resident; and
I The place where the income is earned or derived.

Income Tax System of the Philippines

The income tax system of the Philippines may be characterized under two general
categories, namely:

1. Gross income taxation, whereby a final tax is imposed on the gross amount of
specified types of income, such as interest income, royalty, prizes, dividends, and
capital gains. This is also known as the schedular system of taxation.

2. Net income taxation, ,Nhereby certain deductions are allowed and subtracted from the
aggregate of incomes not subject to final tax, and the tax computed is based on the
resulting net income therefrom. This is also known as the global system of taxation.

Types of Taxable Income

_______ _..... _.....,... a
L Ordinarv
,________ , income
a) Compensation income from
— Passive income
Earned without any
1 Capital Gains
Arise from the sale of 2
being an employee active action on the part types of capital assets,
b) Income from trade, of the taxpayer. Ex. namely:
business, or practice of a dividends, interest a) Real property
profession income on bank deposits classified as capital
c) Gain from sale of ordinary asset; and
assets b) Shares of domestic
d) Net capital gain from sale of corporations
"other capital assets" kprovided the seller or
taxpayer is not a
Ordinary Income . dealer in securities)
,

Income Tax Return (1TR) Final Tax Final Tax (Capital J. O. A.

Gains Tax)
 October 2016 ,

TAXATION OF INDIVIDUALS
Atty. Chris Llamado

Steps on How to Compute the Tax of an Individual

Step 1: Type of Ordinary income I Passive income Capital gains

Income

Step 2: Type of "Returnable" — subject to Subject to Final Subject to Capital

Tax Liability Net Income Taxation Tax (FWT) Gains Tax (FWT)

EXC: NRANETB
Step 3: Actual Gross Income Passive income x "Capital gains"
Computation Less: Allowable FT rate • CGT rate
Deductions
Less: Exemptions
Net tax ab le i n com

then
Compute Tax (using table)

EXEMPTIONS
- Arbitrary amounts allowed by law to be deducted from gross income to cover the
personal, living, and family expenses of the taxpayer.

- Individuals Allowed Personal Exemptions: (1) resident citizens; (2) non resident-

citizen; (3) OCWs; (4) resident aliens; and (5) non-resident alien engaged in trade or
business, or the exercise of a profession in the Philippines on the basis of reciprocity.

Note: Personal exemption in number (5) is the exemption(s) allowed by the foreign
country (of which the alien is a citizen) to non-resident Filipinos, or the
exemptions allowed by Philippines, whichever is lower.

Processual presumption — where the foreign law is not proven, the •

presumption is that the foreign law is the same as the Philippine law.

- Individuals Not Allowed Personal Exemptions: (1) non resident alien engaged in
-

trade or business, or the exercise of a profession in the Philippines, and there is no

rec iprocity; (2) non-resident not engaged in trade or business in the Philippines.

Two Kinds of Personal Exemptions

Basic Additional
P50,000 P25,000
a) For single individual For each qualified dependent child, whether
b) For head of family legitimate or illegitimate, including a foster child;
c) For each married individual S and a qualified person with disability (PWD).
d) For married individual judicially decreed as
letally se arated
J. O. A.
Rules: Rules:
 October 2016

1) In case of married individuals where only one I 1) Limit = 4 additional exemptio s .

of the spouses is deriving gross income, only
such spouse shall be allowed the personal 2) In case of married individu. s, the additional 1 .
exemption (Sec. 35(A), NIRC). exemption may be claimed by only one spouse.1

Husband, as a general. rule .shall claim the

additional exemption(s).

EXC: Wife may claim the additional1

exemptions in the following c ; ses: .

a) Husband waives his right to claim tW

additional ex emptions;
b) Husband has no income;
0_ Husband is a non-resident citizen derivingl
income from .abroad;
d) Wife was awarded custody of her children
. in a legal separation case; _ .
e) Husband earns purely business income
while the wife receives purely compensation
income.

3) In cases of legal separation, additional

exemptions may be claimed by the spouse who
has custody of the child or children. Provide,
the total additional exemptions for both spouse's
shall not exceed four (4).

Change of Status Rules

1) If during the taxable year, the taxpayer marries, 1) If during the taxable year, the taxpayer shoul
the taxpayer may consider himself as married have additional dependents, the taxpayer ma,
during the whole year, claim the corresponding additional exemptio
in full for such year;
2) If during the taxable year, the spouse dies, the
spouse is considered to have died at the close of 2) If during the taxable year, any of the dependent
the year; • dies, marries, becomes 21, or becomes gainfu*
employed, the tacpayer may still claim the full
additional exemptions as if such dependerit
died, married, bOcame 21, or became gainfully
employed at the close of the year;

3) If during the taxable year, the taxpayer dies, he 3) If during the taxable year, the taxpayer dies, he
is considered to have died at the close of the is considered to have died at the close of th'e
year. His estate may claim his personal year. His estate may claim his addition41
exemption for the taxable year (year of death); exemptions for the taxable year (year of death);I

Notes:
1) Definition of Head of Family:
An unmarried or legally separated man or woman with —
cii i (a) One or both parents, or
(b) One or more brothers or sisters, or
(c) One or more legitimate, recognized natural, or legally adopted children, and • *

such dependent must be — (a) Living with the taxpayer, and J. O. A.

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•
•
October 2016

In case of brothers, sisters, or children, they must be —

I (a) Not more than 21 years of age,
.a., (b) Unmarried, and .
AVIII (c) Not gainfully employed, or
(d) Where such children, brothers, or sisters, regardless of age, are incapable of
self-support because of mental or physical defect.

,4 Chief
• support" — principal or main support. Must be regular and continuing
support. Quantitatively, chief support means > 'A of the
requirements for support.

"Not gainfully employed" — dependent is not engaged or is not engaging in

employment or work where the compensation will
remove him from the status of chiefly depending
upon the taxpayer.

"Living with the taxpayer"
— does not necessarily mean that the taxpayer and the
dependent(s) live under one roof. The character of the
separation must be considered. If, without necessity,
the dependent makes his home elsewhere, the
taxpayer cannot be considered head of family.

2) Qualified Dependent is a:

a) Legitimate, legally adopteLpLilleitirr

_a d
- chiefly dependent upon and living with taxpayer, if such dependent is —
(a) not more than 21 years of age; .
(b) unmarried, and
(c) not gainfully employed; or
(d) if such dependent, regardless of age, is incapable of self-support because of
mental or physical defect (Sec. 35 (B), NIRC).

OR

b) Foster child, A foster child can be treated as a qualified dependent for an

additional exemption provided:

(a) the period of foster care is at least a continuous period of one (1) taxable
year; and
(b) Only (1) foster parent can treat the foster child as a dependent for a
particular taxable year As such, no other parent or foster parent can claim
the said child as a dependent for that period.

"Foster child" refers to a child placed under foster care. "Foster parent" refers to
a person duly licensed by the DSWD to provide foster care (R.A. No. 10165;
RMC 41-2013).

OR

c) Persons with disability (PWD) or those suffering from restrictions in

performing an activity in a manner considered normal because of a mental,
physical, or sensory impairment, and who are .:

(a) within the 4th civil degree of consanguinity or affinity to the taxpayer,J. O. A.
regardless of age; and
(b) not gainfully employed, and chiefly dependent upon the taxpayer.
 October 2016

3. The Court of Tax Appeals has ruled in CTA Case No 5280 that senor citizens
(resident citizens at least sixty (60) years of age) shall be treated as de endents for
purposes of qualifying for both personal and additional exemptions in accordance
with R.A. 7432.

The BIR, in several rulings, has taken the position that senior citizens do not qualify
as "dependents" for purposes of the additional exemption. However, the /R. has not
been able to successfully assail and overturn the above CTA decision.

Who are these individuals and how is their firrilimy incpme taxed?
Definition Source of
• Taxable Tax Base Tax Rates
- Income
. R-esident Under Sec. 1, Art IV of the 1987 Constitution,
Citizen the following are citizens of the Philippines: '
(1) Those who are citizens at the time of the
adoption of the 1987 Constitution; •
(2) Those whose fathers and mothers are
citizens;
(3) Those born before January 17, 1973 of Within and Taxable
Progressive
. Filipino mothers, and who elect - Without the Net -
rates
Philippine citizenship upon reaching , Phils. Income 4
majority age; •
, 1i ,
(4) Those who are naturalized in accordance !
with law.
AND ,
,
Whose residence is within the Philippines
,. . . ,. . .
2. Non-Resident a) Citizen who establishes the fact of his
Citizenl physical presence abroad with a definite
intention to reside therein;
b) Citizen who leaves for abroad either as an
• •

immigrant, or for employment on a Within the Taxable Progressiv e

permanent basis; - Fillil. Net rates
) Citizen who derives income from abroad Income
. which requires him to be physically
present abroad most of the time (> 183
days) during the year (Sec. 22(E))
. OCW a) Citizen working or deriving . income from
abroad. Must be registered with the i
POEA; • Within the Taxable Progressive
b) Seaman who is a citizen and works as a Phil& Net rates '
member of the complement of a vessel i Income
engaged exclusively in international trade ! ,,
(Sec. 22(F)) ;,•
4. Resident Not a citizen but whose residence is within Withinithe Taxable Progressive
Alien the Philippines. Philg. Net rates
, - Not a mere transient or sojourner 2 Income
5. Non-resident Not a citizen, not a resident of Phils.
alien
a) ETB3 - If stay in the Philippines is for > 180 days Within the Taxable Progressive
during the year Phils. Net ratesJ. O. A.
Income
 October 2016

b) NETB If stay in the Philippines is for 180 da y s Within the Gross 25% •
Phils. Income

6. Special 15% !
Individual
taxpayers 15%
c) Aliens and Filipinos employed by 15%
foreign petroleum contractors and
Gross
d) Nonresident alien cinematographic film Income
25°/0
owner, lessor, or distributor
e) Subcontractor, whether citizen, resident 8%
alien, or NRAETB, of service contractors
...• a s erations
7. MWEs •
'
sector, who is paid not more than the statutory

Notes:
1) A non-resident citizen who arrives in the Philippines at any time during the taxable
year to reside permanently in the Philippines shall be treated as a non-resident citizen
for the taxable year in which he arrives in the Philippines with respect to his income
from sources abroad !wad the dateofhsarrival in the Philippines

2) Whether the alien is a transient or not is determined by his intentions with regard to
the length and nature of his stay.

3) "Trade or business" includes functions of public office, performance of personal

services, but does not include performance of services as an employee.

4) Taxable Net Income — Gross income less deductions less personal exemptions.

Special Individuals
- shall be generally taxed a FWT on income enumerated below. However, any income
from all other sources will be taxed accordingly.

(1) Aliens and Filipinos Employed by "RiKis" and "ROHQs" of Multinational

Companies (Sees. 25 (C), (E), NIRC)

a) Must occupy managerial and technical positions .

b) FWT — 15% of Gross Income (all income earned as salaries, annuities,

allowances, commissions, fees, taxable bonus and fringe benefits,
except those fringe beiwfits subject to FBT)

c) The 15% tax on gross income is one of the incentives provided by the E.O.
No. 226, otherwise known as the "Omnibus Investments Code of 1997" to
expatriate employees haVing managerial and technical expertise to work in the
Philippines. .
J. O. A.
October 2016

Notes:

Man agerial n ee is one who is vested with powers or prerogatives to lay

down and execute management policies and/or to hire, transfer, or lay-off
employees.
- Acts in the interest of the employer, and uses independent judgment -

"Teel
_a_ fig1..0,Att)A" is limited only to positions which are highly technical in
nature or where there are no Filipinos who are competent, able, and ,willin.g to
perform the services for which the aliens are desired (RMC No. 41-2009)

2. Filipinos occupying such positions shall have the option to be taxed at either
fifteen percent (15%) of gross income or at the regular rate on their taxable
income, provided they meet the following tests:

(a) Position and function test — working as a manager or technical person.

(b) _compensation threshold test — gross income (all income received except
fringe benefits subject to FBT, de minimis fringe benefits, and retirement
or separation pay) under the contract of employment P975,000 per year.

(c) Exclusivity Test — being employed by only 1 employer.

(2) Miens and Filipinos Employed by Offshore Banking Units ("OBUs")

A final ._g.....1.
withholdin ta 1.et to fifteen aarcent (15%) shall be withheld
by the withholding agent from the gross income of individuals occupying
managaial and technical ositions in OBUs established in the Philippines.
Such gross income shall include salaries, wages, annuities, compensation,
remuneration, and other emoluments, such as honoraria and allowances received
from such OBUs (Rev. Regs. No. 6-2001).

An "offshore banking unit ("OBU") shall mean a branch, subsidiary, or affiliate of

a foreign banking corporation which is duly authorized by the BSP to transact
offshore banking business in the Philippines (Rev. Regs. No 10-1998).

-
(3) Aliens and Filipinos Employed by Foreign Petroleum Service
Contractors and Subcontractors

A finalwithhojslin ivalen t to fitteezcsst.(15%1 shall be withheld

from the gross income of an individual who is employed and assigned in the
Philippines by a foreign service contractor or by a foreign service subcontractor
who is engaged in petroleum operations in the Philippines. Gross income shall
include salaries, wages, annuities, compensation, remuneration, and other
emoluments, such as honoraria and allowances received from such contractor or
subcontractor (Rev. Regs. No 6-2C01).

J. O. A.

10
October 2016

Minimum Wage Earners CAMEO

Minimum wage earners shall a- exem et from the • a ment of income tax on their
taxable incom e . Holiday pay, overtime pay, night shift differential pay, and hazard pay
received by such minimum wage earner shall likewise be exempted from income tax
(Sec. 24 (A) (2)).

The SMW shall refer to the rate fixed by the Regional Tripartite Wage and Productivity
Board ("RTWPB"), as defined by the Bureau of Labor and Employment Statistics of the
Department of Labor. The RTWPB of each region shall determine the wage rates in the
different regions based on established criteria and shall be the basis of exemption from
income tax for this purpose.

When Income Payments to MWE are Taxable

An MWE shall be taxable in the following situations:

1) When lie._x_cgives or earn s additi on ipensation from his employer such as

commissions, honoraria, fringe benefits, benefits in excess of the allowable statutory.
amount of "13 month pay and other benefits" of P82,000, taxable allowances, and
other taxable income other than the SMW, holiday pay, overtime pay, hazard pay, and
night shift differential pay. In such case, his entire earnings (from the time he ceases
to be are not exempt from income tax and from the requirements of
withholding tax.

2) When he receives other income, such as income from the conduct of trade, business,
or practice of a profession (except income subject to final tax), in addition to
compensation income. In such case, the income earned as a MWE and his other
income shall be subject to income tax. Consequently, the compensation received as a
MWE shall be subject to the requirements of withholding tax (RMC No 91-2010):

3) When he has 2 or more employers each paying him a SMW. Considering that his
total daily wage from all his employers exceed the SMW, the employee ceases to be a
MWE (RMC No 91-2010).

J. O. A.

11
October 2016

Passive Income Subject to Final Withholding Tax

Some types of income, collectively referred to as passive income, like inter st income,
dividends, royalty income, etc. are subject to final withholding taxes.

Notes:

1. The income subject to final withholding tax ("FWT") must be (a) taxable by the
Philippine government 3derWed from sources within the Philippines.

2. The payor of the income must withhold the tax. In the case of interest income on a
bank deposit, the bank must withhold the tax.

3. The income subject to final WT is not returnable. This means that the interest income :
in number 2 does not have to be reported or included in the income tax return of the •

taxpayer.

TAXATION OF PASSIVE INCOME

Passive Income Citizen and NRAETB I NRA.NETB

RA
a) Interest from any currency Generally,
200/0 20%
(usually P bank deposit 25% of gross
b) Yield or monetary benefit from income
deposit substitutes% trust funds, 20% '20% received from
and similar arrangements all sources
c) Royalties, ,,_ .20%: _ _ , 20% within the
Except royalties on books, • 10% 10% Philippines as
literary works, and interest,
musical comiositions dividends,
d) Prizes of more than P10,000 20% 20%1 rents, salaries,
Except prizes of P10,000 or less Progressive Tax Progressive premiums,
Rates Tax Rats annuities,
e) Winnings 20% 20% ! compensation,
Except Philippine Charity Exempt Exempt etc.
Sweepstakes and
Lotto winnings
f) Interest from a depositary bank 7.5%
under the expanded foreign . (EXC: NRC — Exempt
currencyjspsit system exernp03
g) Interest income from long term
Exempt 1
deposit or investment of 5 years Exempt
or more2
h) Cash or property dividend
received from a domestic
corporation, or regional 10% 20%
operating headquarter of an
MNC
i) Share of an individual partner in
the after-tax net income ,
of a business partnership, or an 20%
10%
organization, „TV, or
consortium taxable as a
F9.. goration J. O. A.

12
October 2016

Notes:

1. Deposit substitutes — alternative form of obtaining funds from the public other than
deposits. "Public" means borrowing from 20 or more lenders at any one time. Exs.
Banker acceptances, PNs, repurchase agreements, government debt instruments and
securities.

- If the debt instrument is not a deposit substitute, interest income shall not be
subject to a final withholding tax. Instead, the interest income shall be included
in the taxpayer's ITR, and the same shall be subject to CWT. •

2. Long-term deposit or investment certificate — Certificate of time deposit or

_ak.,_
investment certificates with a ma,tt i of a,1mt_ N issued by a bank, and not
by a non-bank financial intermediary, The exemption only covers interest income,
Any gain from trading such certificates are not covered by the exemption.

NRANETB shall not be exempt •

- the LT deposit or investment certificate must be issued by a bank

- may be in the form of savings, common, or individual trust funds, deposit
substitutes, investment management accounts
- investment must have a maturity of at least 5 years from the time it is held
- investment must be held for at least 5 years for the interest income to be exempt

Pre-termination of investment

If the deposit or investment is pre-terminated before the 5 th year, the entire income
shall be subject to final tax to be withheld by the depositary bank from the proceeds of
the long-terrn deposit or investment based on the holding period of the taxpayer:

Less than 3 years 20%

3 years to less than 4 years • 12%
4 years to les -than 5 years 5%

Ex. A long-term investment instrument with a maturity of 30 years was bought by

Mr. A from a bank. The instrument was sold successively to the other investors.
The holding periods of the investors are as follows:

Holding Period FWT Rate

Mr. A (NRC) 3 years 12% •

Mr. B (RA) 2 years 20%

Mr. C (NRA ETB) 5 years • Exempt
Mr. F (NRA NETB) 5 years 25%

3. Interest on foreign currency bank deposits

Interest on foreign currency deposit is taxable if received by an individual taxpayer,

except a non-resident individual, who may be a non-resident citizen or a non-resident
alien (Sec. 24 (B) (1), NIRC).
J. O. A.
An OCW shall be exempt from the 7.5% final tax on interest income from a foreign
currency bank deposit in the Philippines. However, if the deposit account is jointly in

13
October 2016

the name of an OCW and another individual (spouse or dependent' who is a

Philippine resident, only 50% of the interest income shall be exempt, wh le the other
•50% shall be subject to the 7.5% FWT.

4. Interest income from savings and time deposits of members with heir credit
cooperative — exempt from the 20% FWT.

Capital Gains Subject to Final Tax (also known as Capital Gains Tax)

I. On the Sale of Domestic Shares of Stock

1. Shares of stock in a domestic corporation not traded in the stock exchange.

**includes stock options. •

(a) Tax Base — Net capital gain which is the excess of the amount realized on the sale
(selling price) over the basis or adjusted basis of the shares.

Selling price — the total consideration of the sale consisting of the sum of money
and/or the fair market value of property received, if any.

Miulted basis — the basis of the shares sold plus expenses of sale/disposition

(b) Tax rates on net capital gain.' _ .. . •

. - Not over -P100,000— . - - - - 5% - • --- -- - - ---- - ----•

. Amount in excess of P100,000 - 10%

(c) Withholding agent — The payor of the income who, in this case, is the buyer. • -

(d) Who are subject?' All individual taxpayers, except the foilowing:.
I •
. (1) Dealers in securities. The gains from such sales by dealers shall be included ,
in ordinary income in their income tax returns;
,
I
(2) Investors in shares of stock in a mutual fund company l .

, (3) . All 'other persons, whether natural or juridical, whq are specifically exempt
from national internal revenue taxes under existing iiivestment incentives . and , •
other special laws (Rev. Regs. No 0-2008). . . •; . . '
1.
•
2. Shares of stock listed and traded thru the local stock exchange (Sec. 127 (A), 1
. NIRC). 1
. ,
(a) Rate and Base — One-half of one percent (1/2 of 1%) of the gross selling price or !
gross value in money of the shares of stock sold. • • • • . . . '

(b), Withholding agent L-, The tax must be deducted and wit held by . the stockbroker
who effected the sale at the stockexchange.

(c) Who are i.ituj).1? All individual taxpayers, except the foil owir*: ,
J. O. A.
(1) Dealers in securities (Sec. 127 (A), NIRC); - . .

. 14

,,
• .
October 2016

(2) Investors in shares of stock in a mutual fund company

(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 (Rev. Regs. No. 6-2008).

Ex. Securities Borrowing and Lending ("SBL") — involves the lending of

shares of stocks or securities by a Lender (owner of the shares) to a Borrower
who needs the same to support trading strategies or settlement obligations.

For lending the shares, the Lender receives from the Borrower collateral. He
also receives "manufactured benefits" as if the shares had not been lent.

Tax consequence of the Lending = Not subject to the CGT

Tax consequence of the "manufactured benefits":

a) To Borrower = not a deductible expense
b) To Lender = not taxable income because the same has already been
subjected to the final tax on dividends in the hands of the
Borrower.

(4) Sellers of shares of publicly-listed company which is non-compliant with the

mandatory minimum public ownership ("MPO") — subject to the 5%/10%
capital gains tax.

(5) Sellers of shares of stock in the stock exchange where the transaction excludes
the public by pre-arranging the sale or pre-determining the buyers. Ex. Block
sale - subject to the 5%/I 0% capital gains tax.

(d) Kind of tax — Business tax'

Notes:

(1) Tax on traded shares The tax on the sale of shares traded at the stock exchange
—

is not an income tax, but a percentage tax (stock transaction tax). However, the
imposition of a percentage tax on the selling price of traded shares has the effect
of a final tax because any gain on the sale is not returnable.

(2) Effect of Non Payment of Tax The sale or exchange cannot be registered in the
- —

books of the corporation unless the receipts of payment of the tax imposed is filed
with and recorded by the stock transfer agent or secretary of the corporation. Any
stock transfer agent or secretary of the corporation or the stockbroker, who caused
the registration of transfer of ownership or title on any share of stock in violation
of the aforementioned requirement shall be punished in accordance with the
provisions of the Tax Code (Sec. 11, Rev. Regs. No 6-2008).

(3) Redemption of preferred shares. If redeemed by issuing corporation which is not

contemplating dissolution, any 'capital gain or loss shall be subject to the regular
income tax.
J. O. A.

15
October 2016

IL On the Sale of Real Property Classified as Capital Assets

1. Transaction subject Sale, transfer, or other disposition of real property located in the
—

Philippines, classified as cjigitiliissets, including pacto de retro sales and other forms
of conditional sales.

2. Rate and Base of Tax Six percent (6%) of the gross selling price or current fair
—

market value of the property, whichever is higher. The fair market value of the
property is the higher of zonal value or assessor's value.

4. Final Tax The tax to be withheld by the payor (buyer) is a final tax and the capital
—

gain from the sale is not returnable.

5. Who are Subject? All individual taxpayers.

5. Forced Sale to the State Under Eminent Domain If the sale is made to the
—

government or any of its political subdivisions or agencies, or to government-owned

or —controlled corporations, the taxpayer may choose either to have the gain
therefrom taxed under the progressive rates in Section 24 (A), or to be subject to the
capital gains tax under Section 24 (D).

6. Exemption from the Capital Gains Tg.y:

(a) Sale of raw lands to be used for "socialized housing" projects (R.A. 7279)

(b) Land transfers under the Comprehensive Agrarian Reform Law of 1988.

(c) Sale of principal residence:

1) Sale by a natural person of his principal residen- loa-ate-ctin-the
Philippines;
2) The proceeds of the sale must be fully utilized in acquiring or constructing a
new principal residence within 18 calendar months from the date of sale;
3) 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;
4) The taxpayer must notify the Commissioner within 30 days from the date of
sale or disposition of his intention to avail of the tax exemption;
5) The tax exemption can be availed of only once every 10 years (Sec. 24 (D)
(2), NIRC).

7. Proceeds oisaie c — If the proceeds of the sale are not fully utilized in
the purchase or construction of a new residence, the portion of the gain presumed to
have been realized on the sale shall be subject to capital gains tax. The following
formula is used to arrive at the taxable portion —

Unutilized Amount x (Higher of GSP or FMV) = Taxable

Gross Selling Price ("GSP") Portion

Final Tax on Informer's Reward

Informer — person (except a BM. employee, or other public employee, or his relative
within the 6 th degree of consanguinity) who gives information that leads to the
discovery of frauds or violations of tax laws, which results in the recovery of taxes, or
in the conviction of the tax evader, or in a compromise agreement with the BIR. J. O. A.

16
October 2016

Reward = Ten percent (10%) of the revenues, surcharges, or fees recovered and/or
fine, or penalty imposed and collected, or the value of smuggled and
confiscated goods,
Or
One million pesos (P1,000,000) per case, whichever is lower.

Tax = 10% of the reward.

WITHHOLDING TAX ON INCOME PAYMENTS

Final Withholding Tax ("FWT")

TWO TYPES

Creditable Withholding Tax ("CWT")

CWT

a) The income subject to CWT must be derived from sources within the
Philippines.

b) Not all income payments are subject to creditable WT. On _ley those payments
specified or enumerated in the law or internal revenue re .ulations are subject to
the creditable withholding tax ystem. Refer to page 2 of BIR Form 1601-E for
complete list of income payments subject to creditable WT.

c) The income subject to CWT shall be included in the ITR by the payee of the
income. The amount reported shall be gross of the CWT.

The tax withheld b the I a or shall be allowed as a tax credit against the
income tax liability of the payee in the taxable year or quarter in which the income
was earned or received.

d) Time of withholding. When an income payment is paid or payable, or when it is

accrued or recorded, whichever comes first.

e) If the CWT is notwithh eld, the lose thepayment

.,,La deduction.

Types of CWTs

CWT on Corn ensation CWT on Other Income Expanded WT)

Who Withholds: Who Withholds:

Employer - Files a Form 1601-C monthly Customer or Client - Files a Form 1601E
and remits the WT to the 13IR. At the end of ' monthly and remits the WT to the BIR. At J. O. A.
the year, employer files a Form 1604 CF, the end of the year, customer files a Form
which lists the total WTs on corn sensation 1604-E which lists all the WTs from all its

17
 October 2016

from all its employees for the taxable year. vendors or suppliers, for the en ire taxable
Shall also submit a MAP which is to year.
be attached to the aforementioned Shall also submit a MAP which is to
forms. be attached to the afor mentioned
forms.

Amount of CWT: Amount of CWT:

Depends on the compensation of the Depends on the nature of the income

employee, on his income tax rate, and on his payment and the C*T rate as provided by
exem otions. law (see back of Forri 1601E) 1

Employee: Payee (Vendor or Supplier):

1) Must submit to his employer a WT
Certificate stating his status and
exemptions for the employer to be
able to compute the employee's
correct WT.
1) Will receive a Form 2307 from the
customer or client showing the tax
withheld from the income payment.

2) Will receive from his employer at the

end of the year a Form 2316 stating
his total gross taxable compensation
income, non-taxable payments made
by the employer, and the total taxes
__. A.t1.1
heldx n loyer.
b the ei:_p _

J. O. A.
Illustration of Quarterly ITRs: - I

Christian, single Filipino, had the following data for 2014 from his consultancy services:

Monthly Fees VAT CWT Net Monthly Fees •

P50,000 P6,000 - P5,000 P51,000

Aside from his consultancy business'. he is also employed by 2 employers, in which he

received the following for the year ,

Gross taxable *a CWT I et Pa

Emslo er I. P291,629.07 P47,907.27 P2 3,721.80
Em .lo er 2 P 53,900.00 P 6,085.00 P 47,815.00

He also received P60,000 interest income from his BPI deposit, and P400,000 in royalties
from the publication of his book entitled "The Hungry Games."

Calculate his tax payable in the Quarterly and Annual ri'Rs.

Answer:

i st Quarter 0 '
2nd Quarter: P2,500
3rd Quarter: P8,500
Annual: P49,777

J. O. A.
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 1st Qtr. 2nd Qtr. 4th Qtr. Annual
Consultancy Services 150,000.00 300,000.00 450,000.00 600,000.00
Employer 1 291,629.07
Employer 2 53,900.00
Gross Income 150,000.00 300,000.00 450,000.00 945,529.07
OSD (60,000.00) (120,000.00) (180,000.00) (240,000.00)
Personal Exemption (50,000.00)
Taxable Income 90,000.00 180,000.00 270,000.00 655,529.07

Income Tax Due, per tax table 12,500.00 32,500.00 56,000.00 174,769.30
CWT - Consultancy Services (15,000.00) (30,000.00) (45,000.00) (60,000.00)
CWT - Employer 1 (47,907.27)
CWT - Employer 2 (6,085.00)
Previous Tax Payment - (2,500.00) (11,000.00)
Tax Still Due - 2,500.00 8,500.00 49,777.03

J. O. A.