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INCOME TAXATION

CONCEPT OF INCOME

Refers to all earnings derived from the service rendered (labor), from capital (business or investment), or both including gain derived from sale or exchange of personal or real property either ordinary or capital asset.
Pertinent items of gross income specified in the tax code less the allowable deductions and personal and additional exemptions authorized by the tax code and other special laws In order for an income to be classified as nontaxable, it should be excluded by the law or treaty from taxation

TAXABLE NONTAXABLE

CONCEPT OF INCOME

Characteristics of the taxable income

There must be a gain A value received in the form of cash or equivalent as a result of rendition of service or earnings in excess of capital invested - cancellation of indebtedness for service rendered - recovery of the amount invested is not an income but the excess over the amount invested - mere expectation for profit is not an income therefore not taxable (deferred income)

CONCEPT OF INCOME

The gain must be realized or received

e.g. In year 1, Mr. Klin, a realtor purchased property for P1M. At the end of year 2, the property had a market value of P1.5M. In year 3, Mr. Klin sold the property for P2M and paid 5% of brokers commission. What is the income of Mr. Klin in year 1, 2, and 3? Year 1 = 0 Year 2 = 0 the increase in the value is not yet realized Year 3 = P900,000 (SP Cost Commission) e.g. Mr. Frank is a real property lessor. During 2011, he collected P200,000 as rent for 2011 and 20112. what is the income of Mr. Frank in 2011? 2012? 2011 = P200,000 2012 = 0

Income may be constructively received


e.g. share in the profit of a partner even if not yet distributed

CONCEPT OF INCOME

The law or treaty does not exclude the income from taxation In general, all items of income, from whatever source, are taxable unless a law or treaty exempt them from taxation. Income derived from illegal activities - taxable if uncovered by the BIR

CONCEPT OF INCOME

Sources of income

Within the Philippines Without the Philippines Partly within and partly without - transportation or other services rendered partly within and partly outside - dividend received by a citizen from resident foreign corporation e.g. a RFC who reported that they do 60% business in the Philippines and 40% outside declared P1,000,000 dividend. A stockholder who receive the dividend shall declare an income within of 60% and without of 40%.

CONCEPT OF INCOME

Classification of income

Graduate Rate p. 2-8

Compensation - derived from labor (employer-employee) Profession or business - from the exercise of profession or doing business Final Tax 2-26 Passive income - income which the taxpayer merely awaits to come e.g. royalty, interest, prizes, winnings Capital Gain Tax p. 2-4 Capital gain - from sale of assets not used in trade or business e.g. sale of family home, sale of personal property
Summary of tax rates on page 2-9

INCOME TAX
Tax on income (whether gross or net) Forced burden on all earnings derived from labor, capital or dealings in property Essential characteristics

A national tax An excise tax A direct tax A general tax Ad valorem tax

income tax is the major source of governments revenue

GROUPS OF INCOME TAXPAYER

INDIVIDUAL

PARTNERSHIP & CORPORATION

ESTATES & TRUSTS

* Resident Citizen * Non-resident Citizen * Resident alien * Non-resident alien - NRAETB - NRANETB

* Domestic * Resident foreign * Non-resident foreign

Taxable as individual taxpayer

INCOME TAX ON IDIVIDUALS


Who are individual taxpayer? - are natural person with income derived within the territorial jurisdiction of a taxing authority
Citizen
born with Filipino father/mother born before Jan. 17, 1973 of Filipino mother who elects citizenship acquired Philippine citizenship in accordance with Philippine laws (naturalized) Resident
permanently/ out < 183 days

Non-resident
out > 183 days Proof-permanent basis

Resident

Alien
a foreign-born who is not qualified to acquire Philippine citizenship

> One year

Non-resident < One year

ETB
> 180 days

NETB
< 180 days

Summary of taxpayer and situs of income


Taxpayer
Citizen RC NRC Alien RA NRAETB Taxable Taxable Non-taxable Non-taxable Taxable Taxable Taxable Non-taxable

Income Within

Income Without

NRANETB
Special Citizen Alien

Taxable
Taxable Taxable

Non-taxable
Taxable Non-taxable

Special taxpayer is a citizen or alien who has special employment contract with : Regional/area headquarter of multinational corporation; petroleum service contractor or sub-contractor; and offshore banking units

PERSONAL EXEMPTION

Basic personal P50,000

RC, NRC, RA, NRAETB-subject to reciprocity

Additional exemption P25,000 for each of the qualified dependent child up to 4 (legitimate, illegitimate, legally adopted ---not married, 21 years old or below)
RC, NRC, RA provided living with him in the Phil. If only 1 spouse is employed or with income If both, husband unless waived, works abroad

Dependent other than children no additional exemption Other exemption premium payment on health/hospitalization insurance if total family gross income is < P250,000 --- P2,400 maximum

CHANGE OF STATUS
Additional dependent during the year Taxpayer die during the year If dependent during the year

Died got married turned 21 gainfully employed