Income taxation

Global Income Tax System

Schedular Tax System
Certain Passive Income
Interest from Bank Deposit (20% of Gross)
o note: if five years no tax (4years 5%: 3years12% ;less than 3years 20%)
Royalties (20% except books/literary works/musical composition 10%)
Prizes (20% except when P10,000or less)
Winnings (20% except PCSO winnings)
Dividends cash /property (domestic Corp)
Capital gains from sale of Stocks not TRADED (domestic corp)
Capital gains from sale real property (loc. in RP) (6%)
INTEREST
from Bank Deposit (20% of Gross)
note: if five years no tax (4years 5%: 3years 12%; less than 3years 20%)
Sec. 24b in relation to Sec .57(A) & 58(A)
ROYALTIES
(20% except books/literary works/musical composition 10%)
Sec. 24b in relation to Sec .57(A) & 58(A)
WINNINGS
(20% except PCS and Lotto winnings)
PRIZES
(20% except when P10,000 or less)
Sec. 24b(1) in relation to Sec. 57(A) & 58(A)
DIVIDENDS
(received by individual from domestic Corp) 10%
Sec. 24b(2) in relation to Sec .57(A) & 58(A)
Remember stock dividend
INCOME FROM SALE SHARES OF STOCKS OF DOMESTIC CORP
Not traded in stock market
Not over P100,000--- 5%
In excess of P100,000---10%
Sec. 24C in relation to Sec .57(A) & 58(A)
INCOME FROM SALE REAL PROPERTY LOCATED IN PHIL
6% of gross selling price or fair market value whichever is higher
Sec. 24D(1) in relation to Sec .57(A) & 58(A)

Formula for (certain) Passive Income tax

Global System
Gross Income
Less:
Deduction(s)
Exemption(s) (Personal and Additional Personal Exemption)
= Taxable Income
X Tax Rate
= Tax Due
Less:
Creditable withholding tax
= Tax Payable (Tax Refund)
Tax Rate for Global Tax System
"Not over P10,000

5%

"Over P10,000 but not over P30,000

P500+10% of the excess over P10,000

"Over P30,000 but not over P70,000

P2,500+15% of the excess over P30,000

"Over P70,000 but not over P140,000

P8,500+20% of the excess over P70,000

"Over P140,000 but not over P250,000

P22,500+25% of the excess over P140,000

"Over P250,000 but not over P500,000

P50,000+30% of the excess over P250,000

"Over P500,000
P500thousand

P125,000+32% of the excess of

GROSS INCOME Section 32 A and B

Gross Income means all income derived from whatever source including (but not limited
to the following :
Compensation; Business income; Gains derived in dealings in property; Interest; Rents;
Royalties; Dividends; Annuities; Pension; Partners Share in partnership
Excluding those listed in 32B
Income: All wealth that flows into the taxpayer other mere return of capital, within a
specified time .

General Rule in Income Taxation

all income realized (whether legal or illegal) is TAXABLE except excluded by law

For Income to be taxable: There must be (1) income (gain); (2) realized ; (3) not
excluded by law
Note: Illegal income are taxable because
1. Sec 32. says Income derived from whatever source
2. Under claim of right doctrine
Illegal income are to forfeited in favor of the govt or return to the owner but under claim
of right doctrine it is taxable.
What is claim of right doctrine? A taxable gain is conditioned upon the presence of a
claim of right to the alleged gain and the absence of a definite unconditional obligation
to return or repay.

Income that are Taxable

Compensation
Business income
Gains derived in dealings in property
Interest
Rents
Royalties
Dividends
Annuities
Pension
Partners Share in partnership
"Not over P10,000

5%

"Over P10,000 but not over P30,000

P500+10% of the excess over

P10,000

"Over P30,000 but not over P70,000

P2,500+15% of the excess

over P30,000

"Over P70,000 but not over P140,000

P8,500+20% of the excess

over P70,000

"Over P140,000 but not over P250,000

P22,500+25% of the excess

over P140,000

"Over P250,000 but not over P500,000

"Over P500,000

P50,000+30% of the
over P250,000

P125,000+32% of the excess of

P500thousand

excess

Exclusion from gross income

Section 32B NIRC
Income not Taxable
Insurance Proceeds
o Life insurance proceeds
o Return of Premium
o Accidents or Health Insurance
o Workmen Compensation Act
o SSS/GSIS
o Fire insurance

Income not Taxable

DAMAGES: Any Damages for Physical injuries /sickness
Other Damages
Compensating damages
Moral damages
Temperate / moderate Damages
Exemplary damages/corrective damages
WORK BENEFIT
Separation pay
Retirement benefit
13th month pay and other Benefits
SSS/ GSIS/Philhealth contribution/ Pag-ibig
Prize/ award
Gift, bequest, devises
Income Exempt under a treaty
Gain from sale of Bonds / Mutual Fund
Gain derived from redemption of Mutual fund shares

Exclusion from Gross Income

Proceeds of life insurance paid to the heirs or beneficiaries upon the death of the
insured, whether in a single sum or otherwise, but if such amount is held by the insurer
under an agreement to pay interest. interest is taxable AS INCOME.
What about fire insurance, or property insurance?
What if the beneficiary is a corporation?
Why life insurance is tax exempt, is it true that it is not taxable because it is an
indemnity? Can the concept of indemnity in insurance be applicable for tax purpose?
Return of Premium not taxable

The amount received by the insured, as a return of premiums paid by him under life
insurance, endowment, or annuity contract, either during the term or at the maturity of
the term
Health, accident insurance, workmens compensation
Amount received from insurance company because of sickness or injury
Note: 32(b) Amount received, through Accident or Health Insurance or under
Workmens Compensation Acts, as compensation for personal injuries or sickness, plus
the amount of any damages received, whether by suit or agreement, on account of such
injuries or sickness.
If medical assistance is provided by the employer or third person, is that taxable as
income?
Damages by reason of sickness /injury
32(b)3 Any Damages received by reason of injury/ sickness whether by court order or
by agreement not taxable
Ex. A was injured in a car accident, he was paid the following damages. Compensatory
damages, exemplary damages, punitive damages, moral damages- not taxable bec.
Damages due to injury even the loss salary not taxable.
Ex. A suit B for breach of contract. Court awarded the ff damages in favor of A.
Compensatory damages, moral damages, punitive damages. Not taxable if recoupment
from loss.
Note: Damages that are for indemnification are not taxable
Other Damages:
Compensating Damages
for loss suffered not taxable (no gain)
profit failed to obtain - taxable (gain)
Art. 2200. Indemnification for damages shall comprehend not only the value of
the loss suffered, but also that of the profits which the obligee failed to obtain.
Moral damages not taxable (no gain)
2217. Moral damages include physical suffering; mental anguish, fright,
serious anxiety, besmirched of reputation, wounded feelings moral shock, social
humiliation and similar injury.
Temperate / Moderate Damages (not Taxable- no gain)
Concept Damages are awarded for pecuniary loss, in an amount that from the
nature of the case, cannot be proved with certainty.
Exemplary/ corrective /punitive damages - taxable

Concept damages awarded, not for adequate reparation but by way of

example or correction for the public good.
Example: Juan was driving a car. The car collided with a Jeepney driven by Pedro.
Pedro was injured and had to stay in the hospital for 10 days. The jeepney had to be
repaired for one week. Juan was found negligent and liable to pay. Pedro and Pepita.
Pedro was paid the following as damages:
1) Compensating damages:
for loss of income . P7thousand pesos
for hospitalization and medical expenses- P 50thousand
2) moral damages for physical suffering . P 5thousand pesos
3) exemplary damages for his negligence P 20thousand pesos
Example
Petra the operator was also awarded the following damages.
Compensating damages:
For loss of income for not having able to operate the jeep for 10 days P7thousand
For the repair of the jeep P30thousand
Determine the tax liability of Pedro and Petra:
Gift , Bequest, and Devise
Gift, Bequest, and Devise - not taxable except income from such property or gain from
the sale of such property.
gift because of past service taxable.
Gift subject to donors tax and estate tax for devise
Rember the reason behind the gift.

Non Taxable Retirement Benefit 32(b)6

Retirement benefit received under :
1) Retirement Benefit law (R.A.7641)
(2) Retirement Plan
a)Reasonable retirement benefit plan.
b) must be in service for at least 10 years
C) not less than 50 years age at the time of retirement
d) has not availed of this exemption
e) Availed only once

Reasonable Retirement benefit plan

Pension, gratuity, stock bonus, profit sharing plan maintain by the employer, wherein
contribution are made by such employer for the employee for purposes of distributing to
employee the earnings and principal of the fund thus accumulated, wherein it is
provided in the said plan that no time shall any part thereof be used or diverted to any
purpose that for the exclusive benefit of the employee

Separation pay: Amount received by the employee from employer as consequence of

separation of such employee from service of the employer due to death, sickness,
physical disability or any cause beyond the control of the employee
Social Security Benefits, retirement benefits, retirement gratuities, pension, and other
similar benefits RECEIVED by resident or non-resident or alien who come to reside in
the Phil. Permanently from foreign government agencies and
other
institution
private or public .

Prize and Awards

Made in recognition of religious, charitable, scientific, educational, artistic, literary, or
civic achievement but only if:
Recipient was selected without action on his part to enter the contest
not required to render substantial future services as condition to receive the
prize
EXCEPT: Sports award /prize - must be sanction by their national sports association
(Phil. Olympic Committee of NSC)

13th month pay and other bonuses

Gross benefit received by official or employees (public or private)
Christmas Bonus (R.A. 6686) for public employees.
13th month pay (P.D. 851)
Other benefits- productivity and Christmas Bonus
Amount excluded
-P30,000 per year
Employers Contribution
Contribution of the employer to :
Union dues
SSS,
GSIS
Pag-ibig
Philhealth
==================== are EXCLUDED

Gains from sale of bonds

Sale, exchange or retirement of bonds, debentures, other certificate of indebtedness
with maturity of more than 5 years
EXCLUDED See also section 24 (B).
Interest income from long term deposit in the form of savings, trust fund , deposit
substitute, investment management account - not taxable if the maturity is 5 years
and more. Less than 4-5= 5%, 3-4=12%, 3 and less =20%
Remember :
Income of Alien ,OFW, non resident citizen from without the Phil. are excluded.

Compensation Income
All payment in whatever form (Cash or Kind) for services performed by an employee
under an employer- employee relationship .
Compensation in CASH salaries/honoraria/allowance/commission/bonuses/
fees/pension /retirement pay (excluding 32b)
Compensation in KIND
Concept of employers convenience rule
(not income therefore not Taxable )
Concept of De minimis
(income but amount too insignificant to be taxable )
Concept of Fringe benefit
(taxable subject to FBT)

Employers convenience Rule

Facilities granted to benefit principally the employer
Example: Drivers quarters
NOT TAXABLE (no Income)

De minimis
Are limited facilities or privileges furnished by the employer to his employees that are
relatively small value and are offered or furnished by the employer merely as a means
of promoting the health, goodwill, contentment or efficiency of his employees.

List of de minimis
a) Monetized unused vacation leave credits of private employees not exceeding ten (10)
days during the year
b) Monetized value of vacation and sick leave credits paid to government officials and
employees;
c) Medical cash allowance to dependents of employees not exceeding P750 per
semester or P125 per month;
d) Rice subsidy of P1,500 or one (1) sack of 50-kg. rice per month amounting to not
more than P1,500;
e) Uniforms and clothing allowance not exceeding P4,000 per annum;
f) Actual medical assistance, e.g. medical allowance to cover medical and health care
needs, annual medical/executive checkup, maternity assistance, and routine
consultations, not exceeding P10,000 per annum.
List of de minimis
g.) Laundry allowance not exceeding P300 per month;
h.) Employee achievement awards e.g. for length of service or safety achievement,
which must be in the form of a tangible personal property other than cash or gift
certificate, with an annual monetary value not exceeding P10,000 received by the

employee under an established written plan which does not discriminate in favor of
highly paid employees;
i.) Gifts given during Christmas and major anniversary celebrations not exceeding
P5,000 per employee per annum;
j.) Daily meal allowance for overtime work and night/graveyard shift not exceeding
twenty five percent (25%) of the basic minimum wage on a per region basis.

Fringe Benefit
Goods, services or other benefit furnished or granted by an employer , in cash or in
kind, in addition to basic salaries, to an individual employee (except rank and file) such
as, but not limited to the following:
Actual Monetary Value / 68% = Grossed up monetary value x 32% = final withholding
tax
Example of Fringe Benefit
Housing;
Expense account;
Vehicle;
Household personnel;
Interest on loans at less the market value;
Membership fees holiday and vacation expense;
Educational assistance;
Life or health insurance or other nonlife insurance premium;
Foreign travel expenses.

Section 34: Deductions From Gross Income

For deductions to be allowable :
(1) must be moral;
(2) must be legal ;
(3) must be evidenced by receipt;
(4) expenses subject to witholding tax
Persons earning compensation income have no deductions than Sec. 34 M.
Deductions:
A) Ordinary and Necessary Trade, Business or Professional Expenses
B) Interest
C) Taxes
D) Losses
E) Bad Debts
F) Depreciation
G) Depletion of Oil and Gas Wells and Mines
H) Charitable and Other Contributions
I) Research and Development

J) Pension Trust
M) Premium Payment on Health insurance
Ordinary and Necessary
Ordinary means not a Capital Expense
Necessary mean in connection or in relation to the business or profession
Salaries of Employees
Travel Expenses away from Home
Rentals
Entertainment Expenses
No Illegal, Immoral expenses, Evidence by Receipt
Interest
Interest paid or incurred within a taxable year on indebtedness in connection with the
taxpayers profession, trade or business.
Limitation: Reduce by 33% of interest income subject to final withholding tax for cash
basis individual, no advance interest (deductible). No deduction if debtor and creditor
are related persons specified under Section 36 (B)
Borrow 1 million
Interest at 9% per annum
Interest P90thousand
Deposit 1 million
Interest at 7% per annum
Interest P70thousand
LOSS P20,000.
Taxable income of 1million
Tax would be 275thousand
1million less 90,000
910,000 of taxable income
Tax would be 248thousand
Difference of P27thousand
Remember the loss of P20,000 gain P7,000.00
related persons sec 36B
Between members of the family (brothers, sister whether full of half-blood) spouse,
ancestor and lineal descendant
Between individual and corporation where individual owns more than 50% of
outstanding capital stocks of said corp.
Between two corporation where 50% of outstanding capital stock of said corp. is own
by same individual
Between grantor and fiduciary
Between two trust of same person

Between fiduciary and beneficiary of the trust

Taxes (in connection with business, trade , profession )

Not Deductable
Income tax
Estate tax
Donors tax
Foreign Income tax declared as tax
credit
Special Assessment

Deductable: Taxes paid or incurred

within the taxable year in connection
with the taxpayer's profession, trade or
business, shall be allowed as deduction
such as:
Local tax
Business tax
Real property tax
Vehicle registration
VAT (not deductible)

Losses in connection with trade, business, profession

Losses actually sustained during the taxable year and not compensated for by
insurance or other forms of indemnity:
Causality Loss (of property connected to business)
o flood, fires, storms, shipwreck, or other casualties, or from robbery, theft or
embezzlement
Ordinary Loss
o incurred in trade, profession or business
o May be carried over for the next three consecutive years

Losses
Capital Losses - losses incurred from sales or exchange of capital assets
Capital assets - taxpayers assets other than:
1. Stock in trade (which would properly include in the inventory)
2. Property customarily held for sale in the ordinary course of business
3. Property used in business- (personal or real)

Rule on capital losses

Losses can only be deducted to the extent of capital gain (39c) therefore :
No capital gain no capital loss (allowed)
If no gain for current year or losses exceeds gain carried over in the succeeding year
if there exist capital gain

Gain or loss to be recognized

Holding period
12 months or less - 100% of gain or loss
More than 12 months 50% of gain or loss

Basis for determining gain or loss

1. By purchase cost of acquisition
2. By inheritance fair market value as of date of acquisition
3. By Gift basis of the Donor except if the basis is higher than fair market value at the
time of gift, the FMV .
Example: donors bought the car at the cost at 500t in 2007. Gave the car to you on 2010FMV at time 200t. In 2011, you sold it at P300t. Basis is 200t (gain therefore of 100t)

4. If acquired less than fair market value - amount paid .

Losses; special rule on wash sale

Example : Pedro bought 10 shares of xyc company at P1000 per share. Sold it at
P750, therefore he loss P250. if he buys 10 shares of same company within 30 days a
wash sales occur.
Rule:
If capital assets loss not to be recognized
If ordinary assets- loss is deductible (Section 38 in relation to section 34)

Bad Debts connected with profession, trade or business

Debts due to the taxpayer actually ascertained to be worthless and charged off within
the taxable year
Limitation: except those sustained in a transaction entered into between parties
mentioned under Section 36 (B) of this Code:
Provided, that recovery of bad debts previously allowed as deduction in the preceding
years shall be included as part of the gross income in the year of recovery to the extent
of the income tax benefit of said deduction.

Depreciation
Deduction a reasonable allowance for the exhaustion, wear and tear (including
reasonable allowance for obsolescence) of property used in the trade or business.

Contributions and /or Gifts

Contributions or Gifts to:
1) Government of the Philippines or agency or political subdivision for public purpose
2) Accredited domestic corp. organized for
a) religious
b) Charitable
c) Scientific
d) Youth &sports development
e) Cultural and educational
f) Rehab of veterans
g) Social welfare institution.
3) Non-Government Org.

Charitable and other Contributions

Deductable- contributions of a taxpayer engaging in business
Corporation (5 percent of the taxpayers taxable income)
Individual (10 percent of the taxpayers taxable income)
WITHOUT THE BENEFIT OF THIS DEDUCTION

Deductible in full
If donation to the GOVERNMENT or Fully owned GOCC if intended to finance
undertaking in
Education
Health
Youth &sports development
Human settlement
Science and culture
MUST in accordance with the National Priority Plan determined by NEDA

Premium Payments on Health Insurance 34(m)

For health and/or hospitalization insurance taken by the taxpayer for himself, including
his family,
Deduction allowed:
For premiums paid not to exceed Two thousand four hundred pesos (P2,400) per
family or Two hundred pesos (P200) a month paid during the taxable year .
Condition:
That said family has a gross income of not more P250,000 for the taxable year:
Provided, finally, that in the case of married taxpayers, only the spouse claiming
the additional exemption for dependents shall be entitled to this deduction.

Research and Development

Research and development in connection to trade or bussiness may be treated as:
A) Ordinary and necessary expenses
B) Capital Account (to distribute not less than 60 months)

Pension Trust
In addition to deduction as Ordinary and Necessary expenses.
May be deducted over a period of 10 years beginning the date when the fund was
transferred

Personal and additional exemption Section 35

Personal exemption: P50,000 for each taxpayer (R.A. 9504)
Additional Personal exemption: P25,000 for each child not exceeding 4;
Maximum of P100,000

Definition of Dependent (children)

Legitimate
Illegitimate
Legally adopted
Living with the taxpayer
Dependent upon the taxpayer for chief support
Not more than 21 years of age ( except if suffering from mental of physical
defect incapacitating the person of self support .
Unmarried
Ungainfully employed

Corporate Income Tax

Formula for computing corporate income tax
Gross Income
Less:
Deduction (Section 34)
------------------------------Taxable income x Tax rate ( 30% flat )

Minimum corporate income tax

When to be paid: On the fourth year from operation. If the minimum corp. tax is greater
than taxable income then 2% MICT will have to be paid

Gross income
For manufacturing Goods
Gross income means sale return , discount and allowance and cost of goods
(all bussiness expense incurred to produce the merchandize
Trading Goods
Cost of goods means cost of goods, import duties, freight, insurance
Services
Cost of services means all direct cost incurred to provide services plus salaries of
employees, consultant and facilities used in the service.

Income Taxation Foreign Corporation tax of the Corporation

Foreign Corporation doing business in the Phil. (resident)
Tax is 30% of net income
Foreign Corporation not doing business. (Nonresident)
Tax is 30% on Gross Income
Domestic Corporation is tax at 30% of net income

Two ways of investing

Foreign Corp. by creating a Subsidiary (domestic Corp)

Foreign Corp. with branch

Problem A
Mr. Simpson is employed as a chef in a restaurant in Makati with
1) monthly compensation in the amount of Php25,000.00 a month, with
bonus up to 15th month. (he received total amount of P375thousand.
2) He was named as best employee of the restaurant and he received
the amount of Php100,000.00 as reward.
Because of his good performance , he was given a scholarship by the Company
for a training at Culinary Institute of America .
3) Mr. Simpson also operate his own business . For the said taxable
year, he had a total sale of Php4,500,000.00.
4) He also received that following .
a) From the savings deposit with the BPI, he earned
P2,000.
b) He also lent money to his friend for which he earned
P2,000. He also lent money to his brother from
which
he
earned P5,000.00