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A. Citizen
(c) 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; or, who has been considered nonresident citizen previously and
who arrives in the Philippines at anytime during the taxable year to reside
permanently in the Philippines shall be treated as nonresident citizen for the
taxable year in which he arrives in the Philippines with respect to his income
abroad until the date of his arrival in the Philippines.
Salient Features:
1. Foreign nationals who will engage in work outside of an employment arrangement are required to secure a
Special Working Permit (SWP) with the Bureau of Immigrations (BI), provided that performance of work of
service which consists practice of a regulated profession are required to secure to secure Special Temporary
Permit (STP) with the Professional Regulatory Commission (PRC). An SWP allows foreign national to work
under a Tourist Visa (9A), provided that the validity of the contract is for only up to Three Months which
may be extended for another three months.
2. Foreign nationals intending to engage in gainful employment shall apply for an Alien Employment Permit
(AEP) with the DOLE. Pending issuance of their AEP or with valid AEP but pending approval of
Commonwealth Act (CA), 613, Sec 9(g) work visa, foreign nationals shall secure a Provisional Work Permit
(PWP) with the BI.
3. An AEP authorizes a foreign national to engage in gainful employment in the Philippines though not an
exclusive one of the requirements in the issuance of work visa (9g) to legally engage in gainful employment
in the country. Foreign nationals exempted from securing AEP are required to secure a Certificate of
Exclusions with DOLE.
4. Other agencies that issue working permit to foreign workers (DENR, DOJ)
Persons subject to income tax
B. Alien
(3) Non-resident foreign - Foreign corporation not engaged in trade or
business within the Phil.
Determination of Source of Income
A. Citizen
1. Resident citizen - on incomes derived from sources within and
without the Philippines
2. Rex Banggawan, the author of tax textbook, earned royalties. The book sales in the Philippines is Php1M and another Php1M in the US. The
royalty rate is 20%.
3. Paris Hilton operates the Azure Hotels located in Alabang Muntinlupa, Philippines. Rentals from bookings amounted to Php1M (50% from
foreigners and 50% from Filipinos).
4. Paris Hilton operates the Hilton Hotels located in New York, USA. Rentals from bookings amounted to Php1M (50% from foreigners and 50%
from Filipinos).
5. SMC, a domestic corporation whose earnings are 100% foreign based, declared dividends. Mr. McDonald Trump, an American based in
Washington is a shareholder. The BOD declared that he shall receive Php 100,000.00.
6. SMC, a foreign corporation whose earnings are 100% foreign based, declared dividends. Mr. McDonald Trump, an American based in
Washington is a shareholder. The BOD declared that he shall receive Php 100,000.00.
7. Mark Zackerberg is an American living in the Philippines. He is an IT expert servicing Peysbook, a popular social media site, home-based and
online. He receives compensation in the amount of Php 1M.
8. Julybee, a popular food giant in the Philippines opened a franchise in Japan. The franchisee paid Php1M pesos.
9. Nickelodeon, a US based media company invested in El Nido Palawan, and opened a new theme park. Gate receipts amounted to Php 1M
(50% from foreigners and the rest from Filipinos)
10. Mark Zackerberg is an American living in Los Angeles, California, US. He is a shareholder of Near Eastern University, a top5 university in the
Philippines. He purchased the share at 1M and sold it for 2M in the US.
INCOME TAX REGIME FOR
INDIVIDUALS
Taxation of Individual Taxpayers under TRAIN Law
8% Option*
Self-employed
Graduated tax + PT
Compensation Graduated
Mixed Income Earner
Business income 8% Option*
Graduated
8% Optional Income Tax
Criteria: RMO 23-2018 dated May 21, 2018
• Self-employed or Mixed Income earner
• Did not exceed the VAT threshold
• Taxpayer is registered and:
• Subject to Percentage tax under Section 116 of the Tax Code, or
• Exempt from VAT or PTs
• Signified intention to elect 8%
15
8% Optional Income Tax
Under RMO 23-2018, Self-employed is:
a. Required to file Quarterly ITR unless exempted
b. Required to file Annual ITR (AFS not mandatory)
c. Not required to file Quarterly Percentage Tax Return
d. Required to signify the intention to avail the 8% every
taxable year
e. Required to maintain books of accounts and issue
receipts/invoices
16
8% Optional Income Tax
• In lieu of income tax and percentage tax
• Basis is actual gross sales/receipts and other non-
operating income
• Signify on 1st quarterly income tax return or initial
return
• Irrevocable for the taxable year
• If no intention was made, deemed graduated tax rate
• Audited financial statements is not a requirement
(under Revenue Regulations 8-2018)
• Bookkeeping and Invoicing Rules apply 17
8% Optional Income Tax
Not available to:
• Purely compensation income earners
• VAT-registered Taxpayers
• VAT or PT exempt taxpayers whose gross sales and non-
operating income exceeded the VAT threshold
• Taxpayers subject to Other Percentage Taxes
• Partners of a GPP
• Taxpayers enjoying income tax exemption e.g. BMBE (RMO
23-2018)
• Taxpayers who opted for OSD
• Taxpayers who did not signify their intent to be taxed at 8%
18
HOW TO AVAIL 8% OPTIONAL INCOME TAX RATE?
Procedural requirements of availing 8% optional income tax
**Compromise
Failure to make/file/submit any return or supply correct information at
the time or times required by law or regulation. (refer to Sec 255 of the
tax code, as amended or Revenue Memorandum Order No. 7-2015)
Gross Income
Definition
Gross income means – all income derived from whatever source
including but is not limited to the following:
1. Compensation for services in whatever form paid
2. Gross income from the conduct of trade or business or practice
of profession
3. Gains derived from dealings in property
4. Interests
5. Rents
6. Royalties
28
Definition
7. Dividends
8. Annuities
9. Prizes and winnings
10.Pensions
11.Partner’s distributive share from the net income of the GPP
✓Excess of Standard input tax over Actual input tax
✓Excess campaign contribution over expenditures
✓Tax Benefit Rule
✓Passed-on Gross receipts tax (for banks)
29
Exclusions from Gross Income
Sec. 32 (B) The following are not included in the computation of the
gross income of taxpayers:
a. Proceeds of life insurance policies but not the interest paid to the
heirs or beneficiaries;
h. Income derived from any public utility or from the exercise of any essential
government function accruing to the Philippine government or to any
political subdivision;
Exclusions from Gross Income
I. Prizes and awards made primarily in recognition of religious, charitable,
scientific, educational, artistic, literary, or civic achievement but only if the
recipient was selected without any action on his part to enter the contest or
proceeding, and is not required to render substantial future services as a
condition to receiving the prize or award;
k. 13th Month Pay and Other Benefits. Gross benefits received by officials
and employees of public and private entities: Provided, however, that the
total exclusion under this subparagraph shall not exceed PhP90,000;
Exclusions from Gross Income
l. GSIS, SSS, Medicare and Pag-IBIG contributions, and union dues of
individuals;
1. Itemized deductions; or
2. Optional Standard Deduction(OSD)
(A) The payee reported the income and pays the tax due thereon
and the withholding agent pays the tax including the interest
incident to the failure to withhold the tax and surcharges, if
applicable, at the time of the audit/investigation or reinvestigation
/reconsideration.
REVENUE REGULATIONS No. 6 -2018
SUBJECT: Requirements for Deductibility of Expense
Computation
Interest Expense from Loan P 250,000
Less: 33% of interest income from Deposit (250,000 (200,000/80%) *33% ) 82,500
Deductible interest expense P 167,500
Without the rule of Arbitrage Limit
Same facts:
Court Ruling:
In conclusion, we are of the opinion and so hold that although interest
payment for delinquent taxes is not deductible as tax under Section
30(c) of the Tax Code and section 80 of the Income Tax Regulations,
the taxpayer is not precluded thereby from claiming said interest
payment as deduction under section 30(b) of the same Code.
Is Interest from delinquent taxes allowed as
deduction from Gross Income?
Interest incurred or paid on unpaid business-related taxes* shall be
fully deductible ( Revenue Regulations No. 13-2000, Sec. 4 (c))
A. The income tax imposed under this code except, fringe benefit tax;
• Final Income Tax
• Capital Gains Tax
• Regular Income Tax
B. Foreign income tax paid by a taxpayer who did not signify in his/her return his/her desire to have
any refund or credit;
C. Estate and Donor’s taxes; and
D. Taxes assessed against local benefits of a kind tending to increase the value of the property
assessed (Special assessment) – capitalized in the cost of the property most specifically, cost of land.
Other Non-deductible taxes
1. Value added tax
2. Surcharges or penalties on delinquent taxes
Example of deductible Taxes
1. License tax
2. Community tax
3. Local taxes, except special assessment
4. Municipal tax
5. Occupational tax
6. Foreign income tax, if not claimed as tax credit
7. Percentage tax
8. Excise tax
9. Documentary stamp tax
10. Fringe benefit tax
11. Excess of Actual Input Vat over Standard Input Vat (Sale to Gov’t/GOCC)
Sale to Government/GOCC
Vat Registered Entity Creditable Input Tax
Example: Standard Input Tax
Sale to GOCC, net P1,000,000
Purchases of goods sold to GOCC 700,000 7% x P 1,000,000 = 70,000
2. Casualty Loss
• Incurred by property connected with trade, business, or profession, if the loss arises
from fire, storm, shipwreck or other casualties, or from robbery, theft or
embezzlement.
Illustration
A taxpayer engaged in farming incurred the following losses:
Under RMO-06-2012:
An application for inventory assets disposal/destruction loss shall
be filed with and processed with the concerned LT or RDO.
Under RMO-31-2009:
Requirements:
1. Sworn declaration (Annex A) 45 days after the date of the event
2. Financial statements for the year immediately preceding the event and copies of insurance, if any
3. Proof of the elements of the losses claimed, such as but not limited to the following:
• Photograph taken showing the property(ies) Before the typhoon; and
• Photograph taken showing the property(ies) After the typhoon, showing the extent of the damage sustained;
4. Documentary Evidence for determining the cost valuation of the damaged property(ies)
5. Insurance policy, in the event that there is an insurance coverage for the property(ies)
6. Police report, in case of robbery/ theft during the typhoon and/ or as a consequence of looting.
Itemized Deductions
Net Operating Loss Carry Over (NOLCO)
Pertains to the amount of net operating loss that may be allowed by the law to be carried
over as tax deduction against available NET INCOME in the following THREE YEARS
Available to:
All taxpayers subject to tax on taxable income whether regular income tax or at
preferential rate.
Treatment of NOLCO
Separate ITEM OF DEDUCTION in the next three (3) consecutive taxable
years to the extent of the available net income in those periods.
Itemized Deductions
5. Bad debts
Refers to debts due to the taxpayer which were actually ascertained to be worthless and were
charged off within the Philippines.
1.There must be a valid and existing debt. (Payables on the other party)
2. The debt must have been ascertained to be worthless.
3. It must be charged off within the taxable year.
4. It must be connected with taxpayer's profession, trade or business.
5. Not sustained in a transaction between related parties defined under Section 36 (B) of the 1997
Tax Code, as amended
Itemized Deductions
Pointers to consider:
1. Before a debt can be considered worthless, the taxpayer must also show
that it is indeed uncollectible even in the future.
2. There are steps outlined to be undertaken by the taxpayer to prove that
he exerted diligent efforts to collect the debts
(Philippine Refining Company v. Court of Appeals, GR No, 118794)
3. Mere recording in the books of accounts of estimated uncollectible
accounts does not constitute WRITE-OFF of the said receivable. In no
case may any bad debt reduction be allowed unless the facts pertaining
to the money or property lent and its cancellation or write-off from the
taxpayer’s accounting records, after having been determined that the
same has ACTUALLY become worthless, have been complied with by the
taxpayer. ( RR No. 05-99, Sec 2)
Itemized Deductions
Examples of reasonable steps (steps outlined) which may be
undertaking of diligent efforts to collect debt:
1. Sending statement of accounts;
2. Sending collection letter;
3. Giving the account to a lawyer for collection; or
4. Filling a collection case in court (Phil Refining Co. V. Court of
Appeals, GR No. 118794)
Itemized Deductions
Related taxpayer Sec. 36(b)
1. Between members of a family
How much of the following is the Bad debts expense allowable as deduction?
Itemized Deductions
Answer:
How much of the P 35,000 recovery of in 2018 has tax benefit and thus
be reverted back to gross income?
Itemized Deductions
Solution:
AS-If Approach – As-if subsequent recovery is known.
2017
Net income before bad debt expense (recovery known) P 75,000
Less: Net income as reported (recovery is unknow) P 40,000
Tax benefit of the write-off P 35,000
Itemized Deductions
Hence, P 35,000 of the recovery should be reverted as item of gross
income in 2018:
2018
Net income before bad debt expense P100,000
Add: Other taxable income (bad debt recovery) P 35,000
Net income if recovery is known P 135,000
Itemized Deductions
6. Depreciation
Refers to the gradual exhaustion in the value of tangible business
properties brought by ordinary wear and tear through usage or
obsolescence by the passage of time. It is a provision for the periodic
return of the invested capital on the property throughout its useful life.
• Note: those who use the revaluation model in accounting for the items of PPE
under PAS 16 are not allowed to deduct the depreciation of the revaluations
surplus on the value of the property as this is not am actual cost.
Itemized Deductions
4. Rules on deductibility of depreciation on Passenger Vehicles
The accredited done institution shall issue to the donor a certificate of donation in such form prescribed by the BIR.
For donations exceeding P 1,000,000 in value, the donor is required to notify the Revenue District Office (RDO) with
the jurisdiction to his place of business within 30 days from the receipt of the certificate of donations.
Itemized Deductions
Requisites for full deductibility of contributions to NGOs
1. NGO must be organized and operated exclusively for the latter slide purposes
and no income inures to the benefit of any private individuals.
2. The non-profit organization makes utilization of the contribution not later then
the 15th day of the third month after the close its taxable period.
3. The administrative expenses of the NGO do not exceed 30% of its total
expenses.
4. Members of the Board of Trustees must not receive remunerations.
5. In the event of liquidation, the asset of the NGO will be distributed to another
nonprofit domestic corporation organized for similar purpose
6. The amount of contribution of the property other than money must be valued
at acquisition cost.
Itemized Deductions
B Partially deductible or Contributions subject to limit
1. Donations to the Government of the Philippines or political
subdivisions exclusively for public purposes not in accordance with
priority activities.
2. Donation to non-accredited non-government organization or to
domestic corporations organized exclusively for the following
purposes:
a) Religious e) Cultural
b) Charitable f) Educational
c) Scientific g) Rehabilitation of veterans
d) Youth and sports development h) Social welfare
Itemized Deductions
Limit of deduction for contributions:
Based on the taxable income derived from business or profession
before the deduction of any contributions
1. Individuals - 10%
2. Corporations – 5%
Itemized Deductions
Illustration.
Mr. P, a practicing accountant, had the following income and donations during the
year:
Current service cost - the pension expense of the employer accruing under the
term of the pension plan for services rendered by employees during the year.
Past service cost – the pension expense of the employer accruing in prior years for
services rendered by employees before the establishment of the pension fund and
additional pension expense accruing in prior years arising from improvements in
the benefit offering of the plan.
Itemized Deductions
Requisites if deductibility of pension expense
1. The employer must have established a pension or retirement fund to
provide for the payment of reasonable pension to employees.
2. The actuarial assumptions used by the fund must be sound and
reasonable.
3. The fund assets must be independent with and not subject to control or
disposal of, the employer.
4. The fund asset must be actually funded by the employer.
5. Contribution for current service cost is deductible in full.
6. Contributions for past service cost is amortized over a period of 10 years.
Itemized Deductions
Rules in computing the deductible pension expense
1. The contribution to the fund is first attributable to current service
cost.
2. The excess funding is attributed to any unfunded past service cost.
The funding of past service cost is amortized over 10 years
regardless of the actual vesting period of covered employees.
3. Overfunding if the fund is a prepaid pension expense deductible in
the future as funding of future current service cost.
Itemized Deductions
ABC Corporation established a pension plan for its employees in 2016. existing
employees have average vesting period of six years. The data from the actuary
together with ABC’s annual funding is as follows:
2016 2017
Past service cost P1,200,000
Current service cost 300,000 310,000
Contribution to the fund 800,000 500,000
2016 deductible pension expense shall be:
Pension contribution P 800,000
Funding of current service cost 300,000 P300,000
Excess funding of past service cost 500,000
Divided by: Amortization period 10 50,000
Deductible pension expense P 350,000
Itemized Deductions
The 2017 deductible expense shall be:
• 0.50 percent (%) of net sales (i.e., gross sales less sales returns/allowances and
sales discounts) for taxpayers engaged in sale of goods or properties; or
• 1.00 percent (%) of net revenue (i.e., gross revenue less discounts) for taxpayers
engaged in sale of services, including exercise of profession and use or lease of
properties
Revenue Regulations 10-2002
However, if the taxpayer is deriving income from both sale of
goods/properties and services, the allowable entertainment,
amusement and recreation expense shall in all cases be determined
based on an apportionment formula taking into consideration the
percentage of the net sales/net revenue to the total net sales/net
revenue, but which in no case shall exceed the maximum percentage
ceiling provided in these Regulations.
Illustrations
Kuya P, a restaurant has a net revenue of P 500,000 and has incurred
actual entertainment, amusement and recreation of P 8,500 during the taxable
year 2018.
*Away from home means away from location of the employee’s principal place of employment
regardless of where the family residence is maintained like business trip.
It includes transportation, meals and lodging ( RR No. 02-40, Secs 65-66) Thus:
1. Transportation expenses from main office to branch or from branch to main office
– deductible.
2. If company car is utilized both for business and personal use - deductible in proportion to the
use for business.
Other Itemized Deductions
Pro-Bono Legal Services
A lawyer or professional partnership rendering actual free legal
services is entitled to an allowable deduction from the gross income, to
the amount that could have been collected for the actual free legal
services rendered or up to ten percent (10%) of the gross income
derived from the actual performance of the legal profession, whichever
is lower: Provided, that the actual free legal services herein
contemplated shall be exclusive of the minimum of the sixty (60) hour
mandatory legal aid services rendered to indigent litigants.
( RA No. 9999, “Free Legal Assistance Act of 2010, Sec 5)
Other Itemized Deductions
Sales Discount to Senior Citizen (RA 9257) and Disabled Persons
(RA7277)
Less:
Regular Itemized Deductions P 1,100,000
(Other Allowable Expense)
Special Itemized Deductions
(P500,000/80%) x 20% 125,000 1,225,000
Taxable Net Income P 1,600,000
Optional Standard Deduction
Revenue Regulations 8-2018
• Individual taxpayers, computed at the rate of forty percent (40%) of
gross sales/receipts,
• Corporations may elect standard deduction in an amount not
exceeding forty percent (40%) of its gross income.
Revenue Regulations 8-2018
Not applicable to:
• Non-resident alien engaged in trade
• Exempt Taxpayers
• Preferential Rate Taxpayers
• Compensation Income Earners
• Taxpayers who chose 8% optional tax rate
• Those who did not signify or elect to choose in their
first quarter to use Optional Standard Deduction as
mode of deduction.
120
General Computation of Income Tax
Return
General Computation for Individuals
122
Computation for Self-employed who availed 8%
123
Computation for Mixed Income Earner who availed 8%
124
Computation for Normal Corporate Income Tax
Gross Income xxx
Less: Deductions (Itemized or OSD) xxx
Taxable income xxx
Multiply by 30%
Higher of RCIT or MCIT (x + 4 years)
Tax due xxx
Less: Tax credits xxx
Payable (Overpayment) xxx
INCOME TAX REGIME FOR INDIVIDUALS
Compensation Earners / Self-Employed Earners / Mixed Earners
COMPENSATION EARNERS
Mr. P, a minimum wage earner works for ABC., Inc. earned a total
compensation income of P 135,000 (inclusive of 13th Month pay)
(Purely compensation earner)
Additional Information:
1. The company remitted on behalf of Mr. P, the latter’s share of
contribution to SSS, Philhealth and HDMF amounting to 5,000 in a year.
2. Mr. P has received his 13th Month pay of P 11,000.
3. Aside from his basic wage, he received additional pay of P 140,000 which
consists of: Overtime pay-P 80,000, night shift differential- P 30,000,
hazard pay- P 15,000, and holiday pay- P 15,000.
1. How much is his Net Taxable Income?
2. How much is his Tax Due?
Basic Salary
Add: Additional pay
Holiday Pay
Overtime Pay
Night Shift Differential Pay
Hazard Pay
13th Month Pay and other benefits
Total Gross Compensation
Less:
Mandatory Contributions (Employee’s share)
Non-taxable benefits
Tax Due -
SELF-EMPLOYED EARNERS
Mr. Aladdin an individual taxpayer (Graduated Income Tax regime) reported to you the
following details for the year 2018:
Less:
Ordinary Allowable Deductions
OR
Optional Standard Deductions (40%)
Add: Other Non-Operating Income
Taxable Income-Business -Compensation & Business
Total Tax Due-Compensation and Business Income
Less: Total Tax credits/Payments
Amount of Tax Payable P
MIXED INCOME EARNERS
Mr. Mayabang, a Financial Comptroller of Hambog Company, earned
annual compensation in 2018 of P 1,500,000, inclusive of 13th month
and other benefits in the amount of P 120,000 but net of mandatory
contributions to SSS and Philhealth. Aside from employment income,
he owns a convenience store, with gross sales of P 2,400,000. His cost
of sales and operating expenses are P 1,000,000 and 600,000,
respectively, and with non-operating income of P 100,000.
Question:
1. How much is his tax due if he opted to avail the 8% income tax
regime?
2. How much is his tax due if he did not opted to avail the 8% income
tax regime?
Total Compensation Income
Less: Non-taxable income
Taxable Compensation Income
Gross Sales/Revenue
Add: Non-operating income
Taxable Business Income
Multiply by
Tax due on Business income
Review:
1. Income recorded per books that is subject to final tax;
2. Income recorded per books that is non-taxable or exempted by tax code, revenue issuances
or special laws;
3. Expenses recorded per books that is non-deductible and check the appropriate
limitations or ceiling, if applicable per tax code, revenue issuances or special laws; and
4. Completeness and accuracy of recording required by regulations or laws (e.g. NOLCO as
deferred tax asset)
Tax Compliance Review
Match the Audited F/S (income statement) with the returns filed and its attachments.
Review its compliances (e.g. expenses claimed vs. withholding tax remitted)
ABC, CORPORATION.
INCOME STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 2017
Expenses Without Invoices and Receipts Taxable Amount WTX Rate Withholding Tax
Transportation Expense 600,000.00
Representation 400,000.00
Total Expenses without invoices and receipts 1,000,000.00
Expenses Vs. Withholding Tax
Expenses With Invoices and Receipts Taxable Amount WTX Rate Withholding Tax
Raw Materials Used 30,000,000.00 1% 300,000.00
Professional Fee 5,000,000.00 10% 500,000.00
Utilities Expense 4,000,000.00 2% 80,000.00
Expenses Without Invoices and Receipts Taxable Amount WTX Rate Withholding Tax
Transportation Expense 600,000.00 2% 12,000.00
Representation 400,000.00 2% 8,000.00
Total Expenses without invoices and receipts 1,000,000.00 20,000.00
Draft Annual Income Tax Return
Net Sales/Revenues/Receipts/Fees
Less: Cost of Sales/Services
Gross Income/(Loss) from Operations
Less:
Allowable Deductions
Salaries Expense
Professional Fee
Utilities Expense
Rent Expense
Transporatation Expense
Depreciation Expense
Representation Expense
Total Allowable Deductions
Net Taxable Income
Income Tax Rate 0.30
Amount of Tax Payable
Draft Annual Income Tax Return
Net Sales/Revenues/Receipts/Fees 60,000,000.00
Less: Cost of Sales/Services 45,000,000.00
Gross Income/(Loss) from Operations 15,000,000.00
Less:
Allowable Deductions
Salaries Expense 3,000,000.00
Professional Fee 2,500,000.00
Utilities Expense 1,000,000.00
Rent Expense 1,000,000.00
Transporatation Expense 600,000.00
Depreciation Expense 500,000.00
Representation Expense 400,000.00
Total Allowable Deductions 9,000,000.00
Net Taxable Income 6,000,000.00
Income Tax Rate 0.30
Amount of Tax Payable 1,800,000.00
Compliance Check
Total Expenses per Books with Total Expenses per Income Tax Return with
corresponding recorded withholding tax corresponding withholding tax