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)
• Income from profession
• 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, NFC Gross Income Within the
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
 Estates corporation (NRFC)
 Trusts
 TYPES OF TAXPAYERS
INDIVIDUALS
Resident Citizen/Alien Nonresident Citizen
• Establishes physical
presence abroad and
intention to reside therein.
• Leaves Philippines during
the taxable year to reside
abroad, as immigrant or for
permanent employment.
• Works and derives income
from abroad and whose
employment requires
physical presence abroad
(not less than 183 days).
• Previously considered as
nonresident and arrives
during the taxable year to
become a permanent
resident.
Nonresident Alien
• Engaged or not in trade
and business in the
Philippine (stay is more
/less than 180 days during
the taxable year).
• Aliens employed by
offshore banking units
and petroleum
contractor/subcontractor.
• Aliens employed by
regional/area
headquarters and regional
operating headquarters of
multinational companies.
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
• Property, rights, and
obligations of a person which
are not extinguished by his
death and those that accrues
thereto;
• Taxed in the same way as an
individual provided it is
irrevocable and earns income;
and
• What is taxed is the income
not the property.
TRUST
• Arrangement created by
agreement under which title
to property is passed to
another for conservation or
investment with the income
and the corpus/principal
distributed in accordance with
the directions of the creator;
and
• To be taxable as a separate
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
Compensation Income

– Form of Compensation
– Compensation paid in kind- FMV of the thing taken in payment is the amount to be
included as compensation subject to wtx
– Living quarters and meals-the value to such person must be added to compensation
subject to wtx
– Facilities and privileges of relatively small value.
– Tips and gratuities
– Pensions, retirement and separation pay
– Fixed or variable transportation, representation and other allowances
– Vacation and sick leave allowance
– Deductions made by employer from compensation of employee
– Renumeration fro services as employee of non resident alien individual or foreign entity
– Compensation for services performed outside the Philippines.
Business income

– Manufacturing, Merchandising or mining

– Farming
– Income can be reported by
– Cash basis
– Accrual basis
– Crop year basis
Gains derived from dealings
in property

– All income derived from the disposition of property-real,

personal or mixed-for money or for other property or for a
combination of both which resulted in gain (or loss)
Interest

– Gross income derived from interest is only such interest as

arising from indebtedness, that is compensation for the
loan ot forbearance of money, goods or credits.
– Interest from deposits and yield or any other monetary
benefit from deposit substitute and from trust funds and
similar arrangement are subject to 20% final tax.
De minimis Benefits to
Employees

– Not Subject to income tax , not subject to withholding tax

– Example of de minimis benefits page 228-229 Ballada book

Rents

– Advance rental when there is no restriction as to ts disposal by

the lessor is taxable income to the lessor in the year received
regardless of the accounting method employed.
– Security Deposit is not taxable to the lessor unless the lessee
violates the term thus forfeiting the deposit in favor of the
lessor.
– Improvement on the property or leasehold improvements
made by the lessee where both parties agree that theses shall
belong to the lessor must be recognized by the lessor using
either of the two-income over the term of lease basis (spread
out) and income in the year of completion basis (outright)
Royalties

– Earnings from copyrights, trademarks, patents and natural

resources under lease.
A. Acquisition of ownership over a copyright

– Software Payment made to

Local owner of a copyright
Tax rate Tax base

a. resident individual owner of a copyright 5%-32% Gross Income

b. domestic corporation owner 32%Gross Income

Foreign licensor
a. non resident alien individual ETB 5%-32% Gross Income
Resident foreign corporation ETB 32%Gross Income
Non Resident Foreign Corp 32% Final Tax Gross Income

B. Acquisition of Copyrights
Payment made
Tax rate Tax base
By To

1. Local subsidiary /reseller/distributor/retailer

a. Local licensor or reseller. Distributor licensee
1. Domestic corporation owner of a copyright
20% Final Tax Gross amount
2.Reseller/distributor licensee of a copyright of Royalties
Gross amount
b. Non resident foreign licensor/owner of the software 32% Final Tax of Royalties

Net Taxable
2. End user a. local subsidiaries, resellers, distributors of reseller 32% income
Gross amoutn
b. foreign owner and/or licensor of the software 32% of royalties
DIVIDEND

– Cash Dividend. Taxable at 6%, 8% and 10% final tax beg. Jan
1, 1998, 1999 and 2000, respectively
– Property Dividend. Taxable at the same rate as cash
dividend
– Stock Dividend. Not Taxable unless it represents a
distribution of earnings or profits
– Script dividend. Taxable same rate as cash dividend
– Liquidating Dividend.
– Indirect Dividend.
Tax Rates on Dividend
Distribution

– Resident citizen, non resident citizen alien

– 1998 6% final tax
– 1999 8% final tax
– 2000 10% final tax

– Non resident alien engaged in business in Phils. 20% FT

– Not engaged in business in the Phils- 25%FT
– Domestic Corporation and resident foreign corp-income tax
exempt
– Non- Resident foreign corporation-15 Ft
Annuities

– Annuity payment represent return of premium is not

taxable. Portion tat represents interest is taxable.
Prizes and winnings

– 10,000 or less taxable

– Above 10,000 final tax 20%
– Not Taxable if recognition of religious, charitable, scientific
educational, artistic, literary or civic achievement
– The recipient was selected without any action on his part to
enter the contest
– The recipient is not required to render substantial future
services as a condition to receiving the prize or award.
Pensions

– Taxable to the extent of the amount received except if

there is an approved pension plan by the BIR
Income from other sources

– These include all other incomes not expressly exempt

under law
 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 Gross Sales
XXX XXX
Less: Sales Discounts (XXX) Less: Sales Discounts (XXX)
Sales Returns and Allowances (XXX) Sales Returns and Allowances (XXX)
Net Sales Gross Income XXX
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