INCOME TAXATION: BASIC PRICIPLES

Taxation is the process or means by which the sovereign, through its lawmaking body, raises income to defray the necessary expenses of the government. Taxes are the lifeblood of the government. State Powers 1. Taxation. The power of the state by which the sovereign raises revenue to defray the necessary expenses of the government. 2. Eminent Domain. The power of the state to take private property for public use upon payment of just compensation. 3. Police Power. The power of the state to enact laws to promote public health, public morals, public safety and the general welfare of the people. Basic Principles of a Sound Tax System 1. Fiscal Adequacy. Sources of revenue are sufficient to meet government expenditures; 2. Equally or Theoretical Justice. The tax imposed must be proportionate to taxpayers ability to pay; and 3. Administrative feasibility. The law must be capable of convenient, just and effective administration. Limitations on the Power of Taxation 1. Constitutional Limitations are those provided for in the constitution or implied from its provisions. 2. Inherent Limitations are restrictions attached to its nature. a. Purpose. Taxes may be levied only for public purpose; b. Territoriality. The state may tax persons and properties under its jurisdiction; c. International Comity. The property of a foreign state may not be taxed by another; d. Exemption. Governmental agencies performing government functions are exempt from taxation.

e. Non-delegation. The power to tax being legislative in nature may not be delegated. Situs of Taxation is the place of Taxation. 1. Subject matter or what is being taxed (person / property) 2. Nature of Tax or which tax to impose 3. Citizenship of the taxpayer 4. Residence of the taxpayer Tax, in general sense, is any contribution imposed bu the government upon individuals, for the use and service of the state, whether under the name of toll, tribute, tallage, gabel, impost, duty, custom, excise, subsidy, aid, supply, or other name Essential Characteristics of a Tax 1. 2. 3. 4. 5. It is an enforced contributions It is levied by the lawmaking body It is proportionate in character It is generally payable in money It is imposed for the purpose of raising revenues, and 6. It is to be used for public purpose Types of Tax Rate Structure 1. Regressive. Average rate decreases as tax base increases. 2. Proportional. The average rate of tax remains constant for all levels 3. Progressive. The average rate increases as the amount of the tax base increases. Classification of taxes 1. As to subject matter or object a. Personal, poll or capitation b. Property c. Excise 2. As to who bears the burden a. Direct b. Indirect 3. As to determination of amount a. Specific b. Ad Valorem 4. As to purpose a. General, fiscal or revenue b. Special or regulatory

5. As to authority imposing the tax or scope a. National b. Municipal or local 6. As to graduation or rate a. Proportional b. Progressive or graduated c. Regressive Tax is different from other fees 1. Toll is a sum of money used or paid for the use of a road, bridge or the like. 2. Penalty is any sanction imposed as a punishment for violation of law or acts deemed injurious. 3. Special assessment is an enforced proportional contribution from owners of lands for special benefits resulting from public improvements 4. Permit or License fee is a charge imposed under the police power for purposes of regulation 5. Debt is generally based on contract, is assignable and may be paid in kind 6. Revenue refers to all funds or income derived by the government taxes included 7. Custom duties are taxes imposed on goods exported from or imported to a country. Philippine Tax Laws and Taxes 1. National Internal Revenue Code of 1997 (PD 1158, as amended) a. Income taxes (individual and corporate) b. Estate and donors tax c. Value-added tax d. Other percentage taxes e. Excise tax f. Documentary stamp tax 2. Tariff and Custom Code of 1978 (PD 1464, as amended) a. Import duties b. Export duties 3. Local Government Code of 1991 (RA 7160) a. Real property tax b. Business taxes, fees and charges

c. Professional tax d. Community tax e. Tax on banks and other financial institutions 4. Special Laws a. Motor Vehicle Law (RA 4136) motor vehicle fees; b. Private Motor Vehicle Tax Law (PD 1958) private motor vehicle tax; c. Philippine Immigration Act 1940 (CA 613, as amended) immigration tax; and d. Travel Tax Law (PD 1183, as amended) travel tax.

TAXATION ON INDIVIDUALS
In a Schedural System, the Income Tax varies depending on the kind of taxable income of taxpayer. Classification of individual income taxpayer 1. Citizen a. Resident b. Non-resident 2. Alien a. Resident b. Non-resident 1. Engaged in trade or business in the Philippines (NRA-ETB) 2. Not engaged in trade or business in the Philippines (NRA-NETB) 3. Employed by: a. RHQs or ROHQs of multinational entities in the Philippines b. Offshore banking units c. Petroleum contractors or subcontractors BIR Ruling 053-2010, September 14, 2011. An alien who holds a special retirement residents visa is considered a resident alien subject to PH Income tax under sec 24(4) of the tax code

BIR Ruling DA-056-2005, February 16 2005. A non-resident alien who stays in the Philippines for an aggregate period of more than 180 days during any calendar year shall be considered a NRA-ETB and shall be subject to income tax at 5% to 32% graduated rate. Sources of Income Individual Resident Citizen Non-resident Citizen Resident Alien Non-resident Alien Sources of Income Taxable w/in the PH w/out the PH

Classifications of Income and Tax Rates 1. Compensation Income. In general, the term compensation means all remuneration for services performed by an employee for his employer under an employer-employee relationship, unless specifically excluded by the code. 2. Business income arises from selfemployment or practice of profession. 3. Passive Income are subject to final tax ranging from 5% - 25%. 4. Capital Gains Tax a. CGT from sale of shares of stocks not traded through the local stock exchange b. CGT from sale of Real Property subject to final tax of 6% based on the Gross Selling price or FMV at the time of sale whichever is higher. 5. Fringe Benefits means any good, service, or other benefit furnished or granted by an employer in cash or in kind in addition to basic salaries to an individual employee taxed at 32% final tax based on Grossed up monetary value. Monetary value Divide by Grossed up monetary value Multiply by Fringed Benefit Tax XXX 68% XXX 32% XXX

All income received by NRA-NETB except capital gains are included as gross income taxed at 25% FT. All income received by NRA employed by RHQs and ROHQs , offshore banking units, petroleum contractors and sub-contractors are included as gross income taxed 15% FT These NRA referred to above are employees occupying managerial, confidential or highly technical positions or the so called expatriate employees The option to be taxed at 15% preferential rate shall be available to the Filipino employee of an RHQ or ROHQ if meets the requirements: a. position and function test; a. compensation threshold test of P 975 000; c. exclusivity test Income from cinematographic films and similar works by a NRA-NETB is taxed at 25% FT

Graduate Income Tax Schedule (revise sec 24(A)) If taxable income is over 10 000 30 000 70 000 140 000 250 000 500 000 But not over 10 000 30 000 70 000 140 000 250 000 500 000 Of the excess over 10 000 30 000 70 000 140 000 250 000 500 000

Tax due 5% 500 2 500 8 500 22 500 50 000 125 000

Plus

10% 15% 20% 25% 30% 32%

Income Tax and Tax Rates Resident Citizen Nonresident Citizen 5% - 32% Resident Alien Non-resident Alien ETB 5% - 32% NETB FT 25%

INCOME ON TAXBLE INCOME except NRA-NETB ON PASSIVE INCOME* 1. In general, interests, royalties, prizes and other winnings 2. Cash and/or property dividends ON CAPITAL GAIN 1. Sale of share of stock not traded in stock exchange 2. Sale of real property

20% 6%, 8%, 10%

20% 20%

FT 25% FT 25%

5% - 10% 6%

5% - 10% 6%

*PASSIVE INCOME AND TAX RATES Resident Citizen NR Citizen Resident Alien

ON PASSIVE INCOME Interests 1. Interests from any currency bank deposit and yield or any other monetary benefit from trust funds and similar arrangements 2. Interest income from a depository bank under the Expanded Foreign Currency Deposit System (FCDS) 3. Interest income from long-term deposit or investment in the form of savings, common or individual trust funds, deposit substitute, investment management accounts and other investment evidenced by certificate in such form prescribed by the BSP w/ 5-yr term or longer. If deposit is pre-terminated before the 5th year, the corresponding FT shall be: 4 years to less than 5 years 3 years to less than 4 years Less than 3 years Royalties 1. Royalties in general 2. Royalties on books, literary works and musical composition Prizes and Winnings Prizes and Winnings in general Prizes amounting to P10 000 or less are subject to graduated income tax schedule. PCSO and lotto winnings are tax exempt

NRA-ETB

20% 7.5% NRC is tax exempt

20% exempt

Exempt

Exempt

5% 12% 20% 20% 10%

5% 12% 20% 20% 10%

20%

20%

Cash and/or Property Dividends Actually or constructively received from a domestic corporation, joint stock company, insurance, mutual fund companies and regional operating HQ of a multinational companies or Share of an individual in the distributable income after tax of a taxable partnership or Share of an individual in the net income after tax of an association , joint account or a joint venture or consortium taxable as a corporation 6% - 1998 8% - 1999 10% - 2000 20%

ALLOWABLE DEDUCTIONS are items or amounts, which the law allows to be deducted from gross income in order to arrive at the taxable income. 1. From compensation income a. Basic personal and/or additional exemptions; and b. Premium payments on health and/or hospitalization insurance 2. From business income a. Basic personal and/or additional exemptions; b. Premium payments on health and/or hospitalization insurance c. Itemized deductions under the tax code d. Optional Standard Deduction. The individual taxpayer may opt for the OSD not to exceed 40% of his gross sales or gross receipts, as the case maybe. Personal Exemptions are arbitrary amounts allowed as deductions from gross income of the individual taxpayer from compensation, business or practice of profession. 1. Basic Personal Exemption. RA 9504 which amended RA 8424 allows P50 000 for each individual taxpayer regardless of status. 2. Additional Exemption. An individual, whether single or married, shall be allowed an additional exemption of P25 000 for each dependent child not exceeding 4.

A dependent means a legitimate or illegitimate or legally adopted child chiefly dependent upon and living with the taxpayer if such dependent is not more than 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. In case of legally separated spouses, additional exemptions will be claimed by those who have the custody of the child/children. If both have compensation income, the husband shall be the proper claimant for the exemption. If one earns compensation while the other earns from business, the one who earns compensation will be the claimant. Individual Taxpayers Allowed Personal Exemptions 1. Citizens 2. Resident Alien 3. Non-resident Alien a. ETB Basic personal exemption only b. NETB neither basic or additional exemption is allowed 4. Estates and trusts Premium Payments on Health Insurance and/or Hospitalization 1. The insurance shall be taken by the individual taxpayer himself for the family 2. The amount being claimed shall not exceed P2 400 a year or P200 a month 3. The family has gross income of P250 000 or less for the taxable year.

Taxable Income is defined as the pertinent items of gross income less the allowable deductions. It is the amount or tax base upon which tax rate is applied to arrive at Tax Due. 1. Net Compensation Income Gross Compensation Income Less: Allowable deductions Basic Personal Additional Premium on Health XXX Net Compensation income 2. Gross Compensation Income Gross Compensation Income Multiply by tax rate Tax Due 3. Net Income a. Earning purely business or professional income Gross Business Income Gross Compensation Income total Gross Income Less: Allowable deductions itemized or OSD (40%) Basic Personal XXX Additional XXX Premium on Health Net income XXX XXX XXX XXX XXX XXX XXX

4. Entire or Gross Income Gross Income Multiply by FT rate Tax Due XXX 25% XXX

TAXATION OF CORPORATIONS XXX XXX XXX Classification of Income Taxpayers 1. Domestic Corp. those created or organized under and by virtue of the PH laws. a. Domestic Corporation, in general b. Government-owned and controlled corp. c. Taxable partnerships d. Proprietary educational institutions e. Non-profit hospitals 2. Foreign. Those organized in accordance with the laws of their respective countries. a. Resident. Those engaged in trade or business in the PH b. Non-resident. Those not engaged Sources of Income Corporation Domestic Foreign XXX Categories of Income and Tax Rates XXX 1. Business Income is taxed at 30% from year 2009 2. Passive Income is subject to a separate and FT ranging from 5% to 20%. Sources of Income Taxable w/in the PH w/out the PH

XXX

XXX 15% XXX

b. Earning both business/professional income and compensation income Gross Business Income Less: Allowable deductions Itemized or OSD (40%) Basic Personal XXX Additional XXX Premium on Health Net income XXX XXX XXX XXX

XXX XXX

Description DOMESTIC CORPORATION 1. a. in general b. Minimum Corporate Income Tax c. Improperly Accumulated earnings tax 2. Proprietary Educational Institution 3. Non-stock, Non-profit hospital 4. GOCC, Agencies and instrumentalities 5. National Government and LGUs 6. Taxable Partnership 7. Exempt Corporation a. On exempt activities b. On taxable activities 8. General Professional Partnership 9. Corporation covered by special laws RESIDENT FOREIGN CORPORATION 1. a. in general b. Minimum Corporate Income Tax c. Improperly Accumulated earnings tax 2. international Carriers 3. Regional Operating Quarters 4. Corporation covered by special laws 5. Offshore Banking Units (OBUs)

Tax Rate 30% 2% 10% 10% 10% (see 1a-1c) (see 1a-1c) (see 1a-1c) 0% (see 1a) Exempt

Tax Base Taxable Income from all sources Gross Income IA Taxable Income Taxable Income from all sources Taxable Income from all sources

Taxable Income

Rate specified under the respective special laws 30% 2% 10% 10% 10% Taxable Income from w/in PH Gross Income IA Taxable Income Gross PH billings Taxable Income Rate specified under the respective special laws Gross Taxable Income on foreign Currency transactions On Taxable Income other than foreign Currency transactions Gross Taxable Income on foreign Currency transactions On Taxable Income other than foreign Currency transactions RESIDENT FOREIGN 20%

10% 30%

6. Foreign Currency Deposit Units (FCDU)

10% 30%

ON PASSIVE INCOME Interests Interest from deposits and yield or any other monetary benefit from deposit substitutes and from trust funds and similar arrangements Interest income from a depository bank under the expanded foreign currency deposit system Income derived by depository bank under the expanded foreign currency deposit system from foreign currency transactions with local commercial banks, including branches of foreign banks that may be authorized by the BSP, including interest income from foreign currency loans Royalties Dividends received by a domestic/resident foreign corp. from a domestic corporation

DOMESTIC 20%

7.5%

7.5%

10%

10%

20% Exempt

20% Exempt

Description ON PASSIVE INCOME Capital Gains On the net capital gain from sale, exchange or other disposition of shares of stock in a domestic corp. not traded in the stock exchange Not over P100 000 Amount in excess of P100 000 On capital gain presumed to have been realied on the sale, exchange or disposition of lands and/or buildings not actually used in the business and treated as capital asset, the value between Gross Selling price, and FMV as determined by the commissioner

Tax Rate DOMESTIC

Tax Base RESIDENT FOREIGN

5% 10%

5% 10%

6%