Income Taxation Principles Estelita C. Aguirre, CPA, MM INCOME TAXATION Lecture No. 3.

Income Taxation Principles

Estelita C. Aguirre, CPA, MM

INCOME TAXATION

Lecture No. 3

NIRC on Income Tax (Title II)

I Definitions VI Gross Income

II General Principles VII Allowable Deductions

III Tax on Individuals VIII Acctg Periods/Methods

IV Tax on Corporations IX Return & Tax Payments

V Taxable Income X Estates & Trusts

XI Other Income Tax Requirements

XII Quarterly Income Tax Returns & Payments

XIII Withholding Tax on Wages

Income Tax

Refers to the tax imposed by the government on

taxable income, whether gross or net, earned by

taxable persons.

It is tax on all yearly profits arising from property, professions, trades or offices.

It is a tax on a person’s income, emoluments, profits and the like.

Income Tax

It is a tax on actual or presumed income of a taxpayer during the year.

Actual: It applies when the income, profit or gain is realized or received (Sec 39B)

Presumed: It applies to gross sales of real property classified as capital asset where the law presumes that there is gain (Sec.24D1, Sec 25A3 and Sec 27D5).

Income Tax, Classification

1) national tax: imposed by the national government

2) excise tax: imposed on a person’s right to earn income

3) direct tax: imposed upon persons who are personally bound by law to pay the tax and

cant be shifted to another

4) general tax: imposed for general purposes, the proceeds of which goes to the national/general funds.

5) progressive tax: rates of tax increases as income increases

Income Tax System, in General

Global Tax System - all items of gross income, deductions, and personal and additional exemptions, if any, are reported in one income tax return, and one set of tax rates are applied on the tax base.

Schedular Tax System - different types of income are subject to different sets of graduated or flat income tax rates.

Income Tax System, In General

Semi-Global, Semi-SchedularUnder this system, the compensation income,

business or professional income, capital gain and other income (not subject to final tax) are added together to arrive at gross income, and after deducting the allowable deductions/exemptions is subjected to one set of graduated rates. The computation therefore is “global”.

On capital gains on sale of shares of stocks stocks and real properties and passive income,

different schedular rates and flat rates apply.

Income Tax System in the Phil

Global Tax System – 1938 to 1981

Schedular Tax System – 1982 to 1985

Semi-Global, Semi-Schedular – 1985 to present

Most Recent R.A. on Income Tax

R.A. 9337 30% Corporate Income Tax effective Jan 1, 2009

R. A. 9504 Minimum wage earners, exempt from Income Tax;Increased Personal and additional exemptions;Increased OSD from 10% to 40%. All effective July 6, 2008

Types of Income Tax in the NIRC(Sections 24-26)

Individuals1. Graduated income tax on individuals;2. Capital gains tax of an individual on sale or

exchange of shares of stocks of classified as capital assets3. Capital gains tax on sale or exchange of real properties classified as capital assets; Final tax 4. Final Tax on certain passive income paid to residents 5. Final Tax income of non-resident aliens6. Final Tax on special individuals7. Fringe benefit tax on fringe benefits of supervisors and managers payable by employer

Types of Income Tax in the NIRC(Sections 27-29)

Corporations1. Normal corporate income tax on corporations;2. Minimum corporate income tax on corporations;3. Special income tax rates on special corporations4. Capital gains tax on sale or exchange of shares of stocks of classified as capital assets;5. Capital gains tax on sale or exchange of real properties classified as capital assets;6. Branch profit remittance tax; and7. Tax on improperly accumulated earnings of corporations

Income Tax, General Principles(Section 23)

1. A citizen of the Phil residing therein is taxable on all income derived from within and without the Phil;2. A nonresident citizen is taxable only on income derived from sources within the Phil;3. An overseas contract worker is taxable only on income from sources within the Phil (including seaman-member of a vessel engaged in international trade).

Income Tax, General Principles (Section 23)

4. An alien individual, whether resident or not of the Phil is taxable only on income derived from sources within the Phil. 5. A domestic corporation is taxable on all income derived from sources within and without the Philippines; and 6. A foreign corporation, whether engaged or not in trade or business in the Phil, is taxable only on income derived from sources within the Philippines.

Situs of Income Taxation(Section 23)

Taxpayer Income

Resident citizen within and withoutNonresident citizen withinResident alien withinNonresident alien withinDomestic corporation within and withoutForeign corporation within

Criteria in Determining Situs(Section 23)

1. Citizenship – A citizen residing in the Phil is subject on his worldwide income; a nonresident citizen, on income from within the Phil only.2. Residence – An alien residing in the Phil is taxable on his income from within3. Source – A nonresident alien is subject on his income from sources within the Phil.

Individual Taxpayers, Classification(Sections 24-26)

1. Citizens 1.1 residents 1.2 nonresidents

2. Aliens 2.1 resident aliens 2.2 nonresident aliens

NRA engaged in trade or business NRA not engaged in trade or business

Individual Taxpayers, Classification(Sections 24-26)

3. Special class of individual taxpayers

3.1 Regional or area headquarters and regional operating headquarters of multinational companies in the Phil;

3.2 Offshore banking units established in the Phil; 3.3 Foreign service contractor or sub-contractor engaged in petroleum operations in the Phil.

4. Members of GPPs 5. Estates and Trusts 6. Co-ownerships

Corporations, Classification(Sections 27-28)

1. Domestic Corporations

2. Foreign Corporations

2.1 Resident foreign corporations

2.2 Non-resident foreign corporations

3. Partnership taxable as a corporation

4. Joint Venture and Consortium

Corporations, Classification

Those that do not derive any income from the

Phil and thus exempt from income tax

Ex. Regional or area headquarters of MNC

Those that are subject to the NCIT or MCIT,

whichever is higher

Those that are subject to preferential tax rates

Those that are on income tax holidays

Compensation Taxpayers, Formula

1. Gross Compensation

Less: P/A Exemptions

Health/Hosp Insurance Premium

SSS/GSIS/PHIC/PAG-IBIG Contrib.

2. Equals: Taxable Net Income

Multiply: Income tax Rates

3. Equals: Income Tax Due

Less: Tax Withheld

4. Equals: Tax Payable/Refundable

Self-Employed Taxpayers, Formula

1. Gross Business/Professional Income

Less: Allowable Deductions

2. Equals: Net Income

Less: Reconciliation of PFRS and NIRC)

3. Equals: Net Income after reconciliation

Less: P/A Exemptions and HIP

4. Equals: Taxable Net Income

Multiply: Income tax Rates

5. Equals: Income Tax Due

Less: Tax Credits/Tax paid, if any

6. Equals: Tax Payable

Mixed Income Taxpayers, Formula

BIR Version-ITR form

1. Gross Compensation Income

Less: P/A Exemptions/HIP/SSS, GSIS, etc

Equals: Net compensation Income

2. Gross Business Income

Less: Allowed Business Expenses

Equals: Net Business Income

3. Add 1 and 2 = Net Income

Less : Reconciliation PFRS with NIRC

4. Equals: Net Taxable Income

5. Multiply: Income tax Rates = Income tax Due

Corporations, Formula

DOMESTIC CORPORATION

1. Gross Income Worldwide

Less: Allowed Deductions Worldwide

3. Equals: Net Income Worldwide

Less: Reconciliation of PFRS with NIRC

4. Equals: Taxable Net Income Worldwide

Multiply TNI by 30% = NCIT

Multiply GI by 2% = MCIT

5. Equals: BCIT or MCIT, whichever is higher

Less: Tax Credits (foreign and Phil) if any

6. Equals: Income Tax Payable

Corporations, Formula

RESIDENT FOREIGN CORPORATION

1. Gross Income Phil

Less: Allowed Deductions Phil

2. Equals: Net Income Phil

Less: Reconciliation between PFRS and NIRC

3. Equals: Taxable Net Income

Multiply TNI by 30% = NCIT

Multiply GI by 2% = MCIT

4. Equals: BCIT or MCIT, whichever is higher

Less: Tax Credits (Phil tax w/held or paid, if any)

5. Income Tax Payable

Corporations, Formula

NON RESIDENT FOREIGN CORPORATION

Gross Income Phil

Multiply by 30%

Equals: Income Tax due

Definitions

1. Person - individual, estate, trust or corporation

2. Corporation - includes partnerships, no matter how

created or organized, joint-stock companies,

joint accounts, associations, or insurance cos, but does not include GPPs and a Joint Venture

or consortium formed for the purpose of

2.1 undertaking construction projects and

2.2 engaging in petroleum, coal, geothermal and

other energy operations under a service contract with govt.

3. Domestic Corporation – created or organized

in the Phil or under its laws

Definitions

3. General Professional Partnership is a partnership formed by persons for the sole purpose of exercising their common profession, no part of the income of which is derived in any trade or business

4. Estate is a taxable entity that comes into existence

upon death of a taxpayer, that includes all his properties and rights, and remains in existence until the assets are distributed to the heirs.

5. Trust is a legal arrangement whereby a person delivers properties to another person who manages or administers the same for the benefit of a designated beneficiary.

Definitions

3. Domestic Corporation – created or organized

in the Phil or under its laws

4. Foreign Corporation – created and organized

under foreign laws; a Corp which is not domestic.

4.1 Resident foreign corporation – foreign corp

engaged in trade or business in the Phil.

4.2 Non-Resident Foreign-foreign corp

not engaged in trade or business in the Phil

Definitions

5. Regional or Area Headquarters – a branch in

the Phil of multinational companies which do

do not derive income from within

6. Regional Operating Headquarters – branch

established in the Phil by multinational co (engaged in services enumerated under

Section 21EE)

Definitions

7. Nonresident citizen is a citizen of the Phil who

7.1 establishes to the satisfaction of the CIR the fact of his physical presence abroad

7.2 leaves the Phil during the taxable year for abroad as an immigrant or for a permanent permanent employment

7.3 works and derives income from abroad and whose employment thereat requires him to be physically present abroad most of the time during the taxable year

Definitions

Notes:

A nonresident Filipino citizen who comes back to reside permanently to reside in the Phil is

exempt on income from abroad until his return.

A taxpayer should show proof of his intention to leave/reside within or without the Phil.

Definitions

8. An Alien is one who is not a citizen of the Phil.

8.1 Resident alien – an individual whose residence

is within the Phil and is not a citizen thereof.

8.2 Nonresident alien – one whose residence is not

within the Phil and is not a citizen thereof.

Definitions

9. Fiduciary – a guardian, trustee, executor,

receiver, conservator or any person acting

in any fiduciary capacity for any person.

10. Withholding Agent – any person required to

withhold any tax under Section 57.

Definitions

11. Rank and File employee – is one holding neither management nor supervisory position

as defined under existing provisions of the Labor Code of the Phil.

12. Managers and Supervisors – is one holding

management or supervisory position (not a rank and file)

Definitions

13. Fringe Benefit – any good, service or other benefit furnished or granted in cash or in kind by an employer to an individual employee

14. De Minimis Benefits - Benefits which are relatively of small value which helps promote health,welfare and satisfaction of employees.

Definitions

15. Minimum Wage Earner refers

to a worker in the private sector paid the

statutory minImum wage; or

to an employee in the public sector with

compensation income of not more than the

statutory minimum wage in the non-agri

sector where he/she is assigned

Definitions

16. Statutory Minimum Wage refers

to the rate fixed by the Regional Tripartite

Wage and Productivity Board, as defined

by the Bureau of Labor and Employment

Statistics (BLES) of the Department of

Labor (DOLE)

Definitions

17. Taxable year means a calendar year or fiscal

year, upon the basis of which is computed.

17.1 Calendar Year means any taxable or accounting period of 12 months ending

Dec 31

17.2 Fiscal year means an accounting period of 12 months ending on any month other than

Dec 31

18. Trade, business or profession shall not include

performance of services of an employee.

Definitions

19. Shares of stock includes

19.1 shares of stocks of a corporation

19.2 warrants and/or options to purchase shares of stocks of a corp

19.3 units of participation in a partnership (except GPPs), joint stock companies, joint

accounts, joint ventures taxable as corporations, associations, recreation

and amusement clubs ( such as golf, polo or similar clubs)

19.4 mutual fund certificate

Definitions

20. Shareholder includes a

20.1 holders of share/s of stocks and warrants and/ or option/s to purchase corp shares of stocks

20.2 holder of a unit of participation in a partnership (except GPPs), joint stock cos, joint accounts, joint ventures taxable as corps, associations, recreations and amusement clubs (such as golf, polo or similar clubs)

20.3 holder of a mutual fund certificate

20.4 member in any association, joint stock company

or insurance company

- -mutual fund certificates

Income Taxation

End of presentation . . .

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