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INCOME TAXATION

What is Income?

Income means all wealth,


which flows into the taxpayer
other than as a mere return of
capital.
Requisites for income to be
taxable:
• Gain or addition to net worth
• Complete dominion
• Not be excluded by law or
treaty
What is Income Tax?
Income Tax is a tax on a person's income,
emoluments, profits arising from property,
practice of profession, conduct of trade or
business or on the pertinent items of gross
income specified in the Tax Code of 1997 (Tax
Code), as amended, less the deductions
and/or personal and additional exemptions,
if any, authorized for such types of income,
by the Tax Code, as amended, or other
special laws.
Types of Income:
GENERAL (Part of GI, subject to 5%-32%) SPECIAL (not part, subject to final tax)

• Compensation income • Interests, royalties, prizes


• Business income and other winnings subject
to final tax (Passive
• Income from profession
income)
• Cash and property
dividends, except stock
dividends (Passive Income)
• Capital gains from sale of:
 Real property;
 Unlisted shares of
stock; and
 Listed shares of stock
(OPT)
Sources of Income:
Item Source
compensation Place of performance
Interest Residence of debtor
Rent , royalty, gain from sale of real Location of property
property
Gain from sale of personal property Place of sale
Gain from sale of shares of stock:
• Domestic corporation • From within the Philippines
• Foreign corporation • From within/without the
Philippines
Dividend income from:
• Domestic corporation • From within the Philippines
• Foreign corporation • From within/without the
Philippines
TAXPAYER TAX BASE TAXABLE ON
INCOME
RC,DC Taxable Within/without
Income the Philippines
RA, NRC, NRA- Within the
ETB, RFC Philippines

GPP, ET It depends on IT.


NRA-NETB, Gross Income Within the
NFC Philippines
CLASSIFICATION OF TAXPAYERS:
 Individuals
citizens aliens
• resident citizens (RC) • resident aliens (RA)
• non-resident citizens • non-resident aliens -
(NRC) engaged in trade or
• OCW* business within the
Phils. (NRAETB)
• non-resident aliens –
not engaged in trade
or business within the
Phils. (NRANETB)
CLASSIFICATION OF TAXPAYERS:
 Corporations
Domestic (DC) Foreign:
• resident foreign corporation
(RFC)
• non-resident foreign
corporation (NRFC)

 Estates
 Trusts
TYPES OF TAXPAYERS
INDIVIDUALS
Resident Citizen/Alien Nonresident Citizen Nonresident Alien
• Establishes physical • Engaged or not in trade
presence abroad and and business in the
intention to reside therein. Philippine (stay is more
• Leaves Philippines during /less than 180 days during
the taxable year to reside the taxable year).
abroad, as immigrant or for • Aliens employed by
permanent employment. offshore banking units
• Works and derives income and petroleum
from abroad and whose contractor/subcontractor.
employment requires • Aliens employed by
physical presence abroad regional/area
(not less than 183 days). headquarters and
• Previously considered as regional operating
nonresident and arrives headquarters of
during the taxable year to multinational companies.
become a permanent
resident.
TYPES OF TAXPAYERS
CORPORATION
Included: Not included:
• Partnerships; • General professional
• Joint stock companies; partnership;
• Joint accounts; • Joint venture or
• Associations; consortium undertaking
• Insurance companies construction or energy
operation under a
service contract with
the government
TYPES OF TAXPAYERS
ESTATE TRUST
• Property, rights, and • Arrangement created by
obligations of a person which agreement under which title
are not extinguished by his to property is passed to
death and those that accrues another for conservation or
thereto; investment with the income
• Taxed in the same way as an and the corpus/principal
individual provided it is distributed in accordance
irrevocable and earns income; with the directions of the
and creator; and
• What is taxed is the income • To be taxable as a separate
not the property. entity, grantor must have
absolute and irrevocable
given up control and benefit
over the trust.
INCOME TAXATION UNDER NIRC:
• Net Income Tax/Taxable Income:
GI – Deductions - Exemptions
• Gross Income Tax:
All income from whatever source.
• Final Income Tax
On passive income and capital gains
• Fringe benefit tax:
Benefits to managerial and supervisory
employee; Ee is taxed but burden is on Er
INCOME TAXATION UNDER NIRC:
• Capital Gains Tax:
Real property and stocks not traded in stock
market
• Optional Corporate Income Tax
• Minimum Corporate Income Tax: 2% of GI
• Improperly Accumulated Earnings Tax
• Branch Profit Remittance Tax
• Preferential Rates: for special
corporations
Who are required to file the ITRs?
As for Individuals
 Resident citizens receiving income within/outside
 employees deriving purely compensation income:
o from 2 or more employers, concurrently or successively at anytime
during the taxable year
o regardless of the amount, whether from a single or several employers
during the calendar year, the income tax of which has not been withheld
correctly (i.e. tax due is not equal to the tax withheld) resulting to
collectible/refundable return
 individuals deriving:
o mixed income, i.e., compensation income and income from the conduct
of trade or business and/or practice of profession
o other non-business, non-professional related income in addition to
compensation income not otherwise subject to a final tax
o purely compensation income from a single employer, although the
income of which has been correctly withheld, but whose spouse is not
entitled to substituted filing
 self-employed individuals receiving income from the conduct of trade or
business and/or practice of profession
 marginal income earners
Who are required to file the ITRs?
As for Individuals
 Non-resident citizens receiving income from sources within the Philippines
 Aliens, whether resident or not, receiving income from sources within the
Philippines

Corporations no matter how created or organized including partnerships


 domestic corporations receiving income from within/outside the
Philippines
 foreign corporations receiving income from within the Philippines
 taxable partnerships

Estates and trusts engaged in trade or business


Who are NOT required to file the ITRs?
 minimum wage earner
 individual whose GI do not exceed his total personal and addt’l
exemptions
 individual whose compensation derived from one employer do
not exceed P 60,000 and the income tax has been correctly
withheld
 An individual whose income has been subjected to final
withholding tax (alien employee as well as Filipino employee
occupying the same position as that of the alien employee of
regional headquarters and regional operating headquarters of
multinational companies, petroleum service contractors and sub-
contractors and offshore-banking units, non-resident aliens not
engaged in trade or business)
Who are NOT required to file the ITRs?
 are qualified under “substituted filing”. However, it applies only if
all of the following requirements are present :
 the employee received purely compensation income
(regardless of amount) during the taxable year
 the employee received the income from only one employer in
the Philippines during the taxable year
 the amount of tax due from the employee at the end of the
year equals the amount of tax withheld by the employer
 the employee’s spouse also complies with all 3 conditions
stated above
 the employer files the annual information return (BIR Form
No. 1604-CF)
 the employer issues BIR Form No. 2316 (Oct 2002 ENCS
version ) to each employee.
Who are exempt from Income Tax?
a. Non-resident citizen who:
• establishes to the satisfaction of the Commissioner his
physical presence abroad with a definite intention to reside
therein;
• leaves the Philippines during the taxable year to permanently
reside abroad, either as an immigrant or for employment;
• works and derives income from abroad and whose
employment thereat requires him to be physically present
abroad most of the taxable year;
• has been previously considered as a non-resident citizen and
who arrives in the Philippines at any time during the year to
reside permanently in the Philippines will likewise be treated
as a non-resident citizen during 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 .
Who are exempt from Income Tax?
b. Overseas Filipino Worker, including overseas seaman who is
working and deriving income from abroad as an OFW is
taxable only on income 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 will be treated as an OFW.

NOTE: A Filipino employed as Philippine Embassy/Consulate


service personnel of the Philippine Embassy/consulate is not
treated as a non-resident citizen, hence his income is taxable.
What is Gross Income?

Gross income means all income


derived from whatever source.
What comprises Gross Income?
GI includes, but is not limited to the following:
• Compensation for services, in whatever form
paid, including not limited to fees, salaries,
wages, commissions, etc.
• Gross income derived from the conduct of trade
or business or the exercise of profession
• Gains derived from dealings in property
• Interest, Rents, Royalties, Dividends, Annuities,
Prizes and winnings, Pensions
• Partner's distributive share from the net income
of the general professional partnerships
What are exclusions from GI?
 Life insurance
 Amount received by insured as return of premium
 Gifts, bequests and devises
 Compensation for injuries or sickness
 Income exempt under treaty
 Retirement benefits, pensions, gratuities, etc.
 Miscellaneous items:
• income derived by the government or foreign government
• prizes and awards in sport competition/ met conditions of
Tax Code
• 13th month pay and other benefits
• GSIS, SSS, Medicare and other contributions
• gain from the sale of bonds, debentures or other certificate
of indebtedness/redemption of shares in mutual fund
Gross Income Formula:
Sale of Goods: Sale of Services:
Gross Sales XXX Gross Sales XXX
Less: Sales Discounts (XXX) Less: Sales Discounts (XXX)
Sales Returns and Allowances (XXX) Sales Returns and Allowances (XXX)
Net Sales XXX Gross Income XXX
Less: Cost of Goods Sold** (XXX)
Gross Income XXX

Cost of Goods Sold**


Trading/Merchandising concern: Manufacturing concern:
Invoice cost Raw materials
Import duties Direct labor
Freight-In Manufacturing overhead
Insurance while in transit Freight-in
Insurance
Other costs to bring RM to the factory
Who are entitled to Exemptions?
Individuals who are either earning compensation
income, engaged in business or deriving income
from the practice of profession are entitled to
personal and additional exemptions as follows:
Personal Exemptions:
For single individual, each married individual or
judicially decreed as legally separated with no
qualified dependents………………………P 50,000.00
Additional Exemptions:
For each qualified dependent, a P25,000 additional
exemption can be claimed but only up to 4 qualified
dependents
Who can claim additional exemption?
 The husband who is deemed the head of the
family unless he explicitly waives his right in
favor of his wife
 The spouse who has custody of the child or
children in case of legally separated spouses.
Provided, that the total amount of additional
exemptions that may be claimed by both shall
not exceed the maximum additional exemptions
allowed by the Tax Code.
 The individuals considered as Head of the Family
supporting a qualified dependent
Who can claim deduction for the
maximum P2,400 on health and/or
hospitalization insurance?

 Family gross income yearly should


not be more than P 250,000
 For married individuals, the spouse
claiming the additional exemptions
for the qualified dependents shall be
entitled to this deduction
Can a benefactor of a senior citizen claim him/her as
additional dependent in addition to his/her 3 qualified
dependent children at P 25,000 each?

No, pursuant to Revenue Regulations 2-94, the


benefactor of a senior citizen cannot claim the
additional exemption.
What is Taxable Income?
Taxable income means the pertinent
items of gross income specified in the
Tax Code as amended, less the
deductions and/or personal and
additional exemptions, if any,
authorized for such types of income, by
the Tax Code or other special laws.
Computation of Taxable Income:
Purely compensatory Business income
income
Gross Compensation Gross Revenue/Sales
Less: Health/Hospital Less: Cost of Sales
premium payments Gross Income
(P2400 maximum per Less: Allowable
year) Deductions
Exemptions-personal **Exemptions-
and addtl. personal and addtl.
Taxable Income Taxable Income
** for individuals
-ending-