Income Tax

General Course for Revenue Officers TB 220 Slide 1
INCOME
TAXES
Topic 220
Objectives
Differentiate gross income, net income, taxable
income and income tax.
Classify the different kinds of income and identify
various sources.
Identify the exemptions and deductions allowed
for the different class of taxpayer.
Compute the income tax due for various kinds
of taxpayer.
Recognize the general rules in the preparation
and filing of income tax returns.
Net Income - the realized gross profit after deducting all the
deductions allowed by law, statutes or generally accepted
accounting principles.
Taxable Income (tax base) - the pertinent items of gross
income specified in the tax code, less the deductions
and/or personal and additional exemptions, if any.
Definition of Terms
Definition of Terms
Gross Income - income derived from all sources, including
(but not limited to) the following items:
Compensation for services in whatever form paid,
including, but not limited to fees, salaries, wages,
commissions, and similar items;
Gross income derived from the business or
exercise of a profession;
Gains derived from dealings in property;
Interests;
Rents;
Royalties;
Dividends;
Annuities;
Prizes and Winnings;
Pensions; and
Partners distributive share from the net income of
the General Professional Partnership.
Gross Income (cont.)
Life Insurance - proceeds paid to the heirs or
beneficiaries upon the death of the insured;
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 (RA 7641); and
Miscellaneous items
Exclusions from Gross Income
Miscellaneous Income
a. Income Derived by Foreign Government;
b. Income Derived by the Government or its Political
Subdivisions;
c. Prizes and Awards;
d. Prizes and Awards in Sports Competition;
e. 13th Month Pay and Other Benefits not exceeding
P30,000;
f. GSIS,SSS, Medicare and other Contributions;
g. Gains from the Sale of Bonds, Debentures or other
Certificate of Indebtedness; and
h. Gains from Redemption of Shares in Mutual Fund
Miscellaneous Items
Taxable
Kind of Taxpayer Source of Income
1. Resident Citizen Within & Without
2. Non-Resident Citizen Within
3. OCW/Seaman in International Vessel Within
4. Alien Individual (Resident & Non-Resident) Within
5. Domestic Corporation Within & Without
6. Foreign Corporation (Resident & Non-Resident) Within
General Principles (Tax Base)
Interests
Dividends
Services
Rentals and Royalties
Sale of properties, real or personal
Sources of Income within the Philippines
A. Individuals
Citizen
Resident
Non-Resident
Alien
Resident
Non-Resident
B. Non - Individual
Classification of Taxpayers
Filipino citizen with permanent/legal residence in the
Philippines
Filipino who migrated and returned to the Philippines
with a definite intention to reside
Filipino whose immigrant visa has been surrendered
to the foreign government. (Rev. Reg. 2-94, Sec. 2c )
Filipino who have stayed outside the Philippines for
less than 183 days
Resident Citizen
They are taxed on all income derived from all sources within
and without the Philippines as follows:
A. On Compensation Income
B. On business or professional income
C. Passive Income
1.) Interest (in general)
2.) Interest (FCDS)
3.) Interest (long term deposits/investment)
4 years to less than 5 years - 5%
3 years to less than 4 years - 12%
Less than 3 years - 20%
Resident Citizen
General Course for Revenue Officers TB 220 Slide 13 General Course for Revenue Officers TB 220 Slide 13
4.) Royalties (in general)
5.) Royalties on books, as well as other literary works and
musical compositions
6.) Winnings and Prizes (in general)
7.) Winnings and Prizes amounting to 10,000.00 or less
except PCSO and lotto winnings
8.) Dividends - gradual phase in at the following rates:
6% beginning January 1998
Resident Citizen
D. On capital gains from the sale or other disposition of real
property located in the Philippines
1.) Final withholding tax of 6% based on
the gross selling price or Current Fair
Market Value, whichever is higher.
The tax is imposed on the sales of
real property classified as capital
assets, including foreclosure sales,
pacto de retro sales and other forms
of conditional sales (Section 24D, NIRC).
Resident Citizen
2.) If sold to the government or any of its political
subdivision or agency or to GOCC, 6% final tax or
normal tax rate, at the option of taxpayer.
Note: Corporate seller has no option.
3.) If proceeds is from disposition of principal residence and
is fully utilized in acquiring or constructing a new
principal residence within 18 months from the date of
disposition
Resident Citizen
The capital gain is exempt from the capital gains tax
subject to the following conditions:
Historical cost or adjusted basis of property sold
is carried over to the new principal residence.
The Commissioner is notified within 30 days from
the date of disposition of the taxpayers intention
to avail of the tax exemption.
Tax exemption can only be availed of once every
10 years.
Resident Citizen
Unutilized portion of the proceeds is subject
to capital gains tax to be computed
proportionately.
The tax on the unutilized portion shall be
paid within 30 days after expiration of the 18
month period.
E. On capital gains from shares of stock not traded in
the local stocks exchange
F. On Fringe Benefits - (Special Treatment under
Sec. 33)
Resident Citizen
Non-Resident Citizen
A citizen of the Philippines who establishes to
the satisfaction of the Commissioner the fact of his
physical presence abroad with a definite intention to
reside therein. A non-resident citizen is taxable only on
income derived from all sources within the Philippines.
Non-Resident Citizen
Resident Alien
A citizen of a foreign country who is a resident of the
Philippines, (Sec. 22). The term resident is technical in
the sense that the same is not based alone on physical
presence in the Philippines but most importantly by his
intention as to his presence.
Resident Alien
Non-Resident Alien
An individual whose residence is not within the
Philippines and who is not a citizen thereof.
Non-Resident Aliens engaged in trade or business
(ETB)
Non-Resident Alien not engaged in trade or business
(NETB)
Aliens employed by Regional Area Headquarters and
Regional Operating Headquarters of Multinational
Companies.
Aliens employed by Offshore Banking Units
Aliens employed by Petroleum Service Contractor &
Subcontractor
Non-Resident Alien
Multinational Company
A foreign firm or entity engaged in
international trade with affiliates or subsidiaries or
branch offices in the Asia-Pacific Region and other
foreign markets.
A branch established in the Philippines by
multinational companies and which headquarters do
not earn or derive income from the Philippines and
which act as supervisory, communications and
coordinating center for their affiliates, subsidiaries, or
branches in the Asia-Pacific Region and other
foreign markers.
Regional or Area Headquarters
Regional Operating Headquarters
A branch established in the Philippines by multinational
companies which are engaged in any of the following services:
General administrative and planning; business
planning and coordination;
Sourcing and procurement of raw material and
components;
Corporate finance advisory services;
Marketing control and sales promotion;
Regional Operating Headquarters
Training and personnel management; logistic
services;
Research and development services and
product development;
Technical support and maintenance; data
processing and communication; and
Business development (Sec 22EE).
Offshore Banking Units
A branch, subsidiary or affiliate of a foreign
banking corporation which is duly authorized by
the BSP to conduct banking transactions in foreign
currency involving the receipt of funds from
external sources and the utilization of such
funds as provided by the enacting law.
An Alien Employed by Petroleum Service
Contractor and Subcontractor
An alien individual who is a permanent
resident of a foreign country but who is
employed and assigned in the Philippines by a
foreign service contractor or by a foreign
subcontractor engaged in petroleum operations in
the Philippines.
Shall be subject to the following income taxes:
Tax of 15% of the salaries, wages, annuities,
compensation, remuneration and other
emolument, such as honoraria and allowances,
received from such contractor or subcontractor.
Tax of 15% is imposed on the fringe benefits
with special treatment based on the grossed up
monetary value of such fringe benefits with
grossed up divisor of 85 %.
Shall be subject to the following income taxes:
Other income is taxed according to the rates of
resident aliens.
The 15% tax rate is applicable only to
compensation received in consideration of the
service rendered to the petroleum service
contractor and subcontractor.
a. Compensation earners
Resident Citizens
Those not engaged in trade or business
Those employed by regional or area
headquarters of multinational corporation.
Those employed by offshore banking units
Aliens employed by petroleum service
contractors and subcontractors
b. Self-employed and professional
c. Estates and Trusts
d. Non-resident Citizens
Annual Income Tax (Individual)
Corporations
a. Domestic Corporations
Regular Domestic Corporations
Non-regular Corporations
b. Foreign Corporations
Resident Foreign Corporation
International Carrier
- International Air Carrier
- International Shipping
Non-resident Foreign Corporation
Annual Income Tax (Non-Individual)
Taxable - income subject to the rates provided by law.
Non-Taxable - income which are expressly excluded
from gross compensation income and gross
income under the Tax Code and other special
laws.
Classification of Income
Compensation
Fringe Benefit
Business Income
Tax on Certain Passive Income of Individuals
Tax on Certain Passive Income of Domestic and
Tax on Certain Passive Income of Non-Resident
Foreign Corporation
Taxable Income
Proceeds of life insurance
Return of premiums
Gifts, bequests and devises
Prizes and awards in recognition of an achievement
Damages
Income exempt under a treaty
Retirements and other benefits
Separation pay
Social security benefits
Veterans, SSS and GSIS benefits
Miscellaneous items
Non-Taxable Income
Citizens and resident aliens are allowed personal
and additional exemptions.
Non-resident aliens engaged in trade or business
are entitled to personal exemptions only by way
of reciprocity but not to additional exemption.
Change of status of a taxpayer during the taxable
year generally benefits him. This rule is applicable
only to changes of status expressed by law, i.e.
the taxpayers civil status (marriage), death or his
dependents birth, death or coming of age.
These exemptions must first be credited against
the gross compensation income, the excess, if any,
can be used to offset other income.
Rules on Exemption
P20,000 - for individuals who are single or
married but legally separated with
no qualified dependent, as well as
estates under judicial settlement
and irrevocable trusts
P25,000 - for taxpayers who qualify as
head of the family
P32,000 - for the husband and wife who are
not legally separated
Amount of Personal Exemption
An additional exemption of P8,000 for each qualified
dependent not exceeding four (4) shall be granted.
The additional exemption cannot be divided between
the spouses.
In case of legal separation, the spouse who was
awarded custody of the child may claim the additional
exemption, but in no case will the total exemptions be
exceeded.
Non-resident alien engaged in business in the Philippines
is entitled to a personal exemption equivalent to the
exemption allowed to Filipinos in the country where he
is a citizen/resident, not to exceed the amount fixed as
exemption for a citizen or resident of the
Philippines.
Additional Exemption
Items Not Deductible (General Rule)
In computing for net income, the following are not
deductible:
Personal, living and family expenses; and
Amount paid for new building or for permanent
improvement, or betterment made to increase
the value of the property or the estate;
Amount expended to restore property; and
Premiums on life insurance of employees or
officers;
Losses from sales or exchanges of property
between related parties
- it is defined as any goods, service or other benefit
furnished or granted in cash or in kind by an
employer to an individual in addition to the
salaries such as, but not limited to :
Housing;
Expense account;
Vehicle of any kind;
Household personnel such as maid, driver,
and others;
Interest on loans at least less than the
market rate;
Fringe Benefits
Membership fees, dues and other expenses
borne by the employer;
Expenses for foreign travel;
Holiday and vacation expenses;
Educational assistance; and
Life or health insurance and other non-life
insurance premiums or similar amounts on
excess of what the law allows.
Fringe Benefits
The monetary value of the housing fringe benefit
is equivalent to the following:
MV = [ 5% (FMV OR ZONAL VALUE) ] X 50%
WHERE:
MV = MONETARY VALUE
FMV = FAIR MARKET VALUE
Fringe Benefits
The monetary value of the motor vehicle fringe benefit
is equivalent to the following:
MV = [ (A) / 5 ] X 50%
WHERE:
MV = MONETARY VALUE
A = ACQUISITION COST
Fringe Benefits
32% final withholding tax is imposed on the grossed-up monetary value of the benefit
Benefit Monetary value
1.Housing rented by employer 50% of rental
owned by employer, no transfer of
ownership to employee
50% AV(5% FMV/Tax Dec. or
ZV w/c ever is higher)
employer buys installment, no title transfer 50% AV (5% acquisition cost,
exclusive of interest)
employer buys house, transfers title Entire value of cost or ZV w/c
ever is higher
2.Expense Account-for personal expenses
incurred by employee paid for by employer
Entire value of benefit
3.Vehicle of any kindemployer buys MV, name
of employee
- employer buys car installment in name of
employee
.- Cost partially borne by employer, in name of
employee
- employer owns MV fleet
- employer rents MV fleet
Entire value of benefit
-Cost exclude interest divide by 5 yrs.
-Entire value
-50%(cost personal MVs/5 yrs)
-50%(rental personal MVs)
Tax Imposed on Grossed-up
Monetary Value of Benefits
Tax Imposed on Grossed-up
Monetary Value of Benefits
4. Household expense - household personnel expense
paid for by employer Entire value of benefit
5. Interest on loan less than market (12% standard rate) Foregone interest
equivalent
6. Membership fees in clubs paid for by employer Full value of benefit
7. Expenses for foreign travel 30% of 1
st
class ticket
- travel expenses of family members of employee
Full value of benefit
8.Holiday & vacation expenses expenses of employee
paid for by employer
9. Educational assistance to employee &/or
dependents, except scholarship to employee directly
connected to business
10. Life/health/non-life insurance in excess of allowed Full value of benefit
Fringe benefits which are authorized and exempted
under special laws like the 13th month pay and other
benefits
Contribution of the employer for the benefit of the
employee to retirement, insurance and
hospitalization benefit plans
Benefits given to rank and file employees, whether
granted under a collective bargaining agreement or
not
De minimis benefits
Non-Taxable Fringe Benefits
Benefits granted for the benefit/convenience of
the employer; and
If the grant of fringe benefit to the employee is
required by the nature of, or necessary to the
trade, business or profession of the employer.
The De minimis Benefits
generally exempt from the fringe benefit tax
be limited to facilities or privileges furnished or
offered by an employer to his employees that are
of relatively small value
offered or furnished by the employer merely as a
means of promoting the health, goodwill,
contentment, or efficiency of his employees
Non Taxable Fringe Benefits
De minimis Benefits
a. Monetized unused vacation leave credits for
employees not exceeding ten (10) days during the
year.
b. Medical cash allowance to dependents of employees
not exceeding P750 per semester or P125 per month;
c. Rice subsidy of P1,000 per month granted by employer
to employee
d. Uniforms given to employees by the employer;
e. Medical benefits given by employer to employee;
f. Laundry allowance of P300 per month
g. Employee achievement awards, in the form of tangible
personal property other than cash/gift check, monetary
value not exceeding month of basic salary of
recipient;
h. Christmas and major anniversary celebrations;
i. Company picnics and sports tournaments;
j. Flowers, fruits, books given under special occasions.
Applicable preferential rates are to be imposed on
fringe benefits furnished to certain aliens. Gross-up divisor is
the difference between 100% and the applicable rates.
Rates
(Actual Monetary
Value)
Divisor Monetary
Value
1998 P66, 000.00 66% P100,000.00 34% P34,000.00
1999 P67, 000.00 67% P100,000.00 33% P33,000.00
2000 P68, 000.00 68% P100,000.00 32% P32,000.00
YEAR Grossed-Up Tax Rate Tax Due FRINGE BENEFIT Grossed-Up
Special rates on the following employers:
Employers of non-resident alien (NETB) 25%
not engaged in trade or business
Regional or area headquarters and regional 15%
operating headquarters of multinationals
Offshore banking units 15%
Petroleum service contractors 15%
Business Income
Any income not related to an employee-employer
relationship is generally subject to tax on a net income
basis. It includes gains, profits and income in whatever
form derived from any source, legal or illegal such as
those derived from:
a. exercise of profession or vocation
b. trade, business or commerce
c. dealings in property
d. fruits of the ownership or use of property
e. interest, rent, dividends, securities
f. other transactions of a business for gain or profit
Business Income
A partner in a general professional
partnership is liable to income tax on his
distributive share, actually or constructively
received.
Other income
Gross income received by every alien individual
employed by offshore banking units established
in the Philippines as salaries, wages, annuities, 15%
compensation and other emoluments, such as
honoraria and allowances, from such offshore
banking units.
Tax Rates
Rate
Fringe Benefit
15%
based on
the grossed
up monetary
value with
grossed divisor
of 85%.
Same as the
rate of Resident
Alien
1)
2)
3)

Nature of Income Tax Rate
Interest income from :
Philippine bank deposit -

When received by citizens and
Resident aliens is subject to
When received by non-resident
alien doing business in the
Philippines
20% final tax
20% final tax
Tax on Certain Passive Income of Individual
Long-term deposit or
investment with maturity
period of more than 5 years
resident aliens
When received by non-resident
Philippines
Exempt from income tax
However, if the deposit is
pre-terminated before the
5
th
year, interest income
becomes taxable at 5%-
20% depending on the
remaining maturity
Same as above
Foreign currency deposit of:
a.) Resident Citizen/Alien
b.) Non-resident individuals
7.5% final tax
Exempt
HOWEVER, if deposit is pre-
terminated before the 5
th
year, interest
income becomes taxable 5%-20%
depending on the remaining maturity
c.) Interests, royalties, prizes &
other winnings -
When received by citizens
and resident aliens
20% final tax HOWEVER, royalties on
books, literary works and musical
compositions shall be taxable at a
lower rate of 10%.
When received by a non-resident
Philippines
20% final tax HOWEVER, royalties on
books, literary works and musical
compositions shall be taxable at a
lower rate of 10%
Dividends from domestic
Corporations -
Resident aliens
6% effective January 1, 1998
Provided that the tax on dividends
shall be applied only on income
earned on or after Jan. 1, 1998.
Tax on Certain Passive Income of Domestic and
a. Interest income from :
Philippine bank deposit
Long-term deposit or investment
more than 5 years
Foreign currency deposit
b. Dividends from a domestic
c. Capital gains from sale of shares of stock
not traded in the stock exchange,
exchange on other disposition of
unlisted shares of stocks
d. Capital gains from sale, exchange on
disposition of real property treated as
capital assets
20% final tax
20% (exemption applies only to individuals.)
7.5% final tax
Exempt
Not over P=100,000 - 5% Final Tax
In excess of P=100,000 - 10% Final Tax
6% final tax on the gross selling price or fair
market value, whichever is higher.
a) Interest income on foreign
loans contracted on or after
August 1, 1986
b) Dividends from a domestic
Corporation
Final tax of 20%
Final tax of 15% subject to the
condition that the country where
the non- resident foreign
corporation is domiciled allows a
credit for taxes deemed paid in the
Philippines equivalent to:
(Tax Sparing Provision)
20% for 1997
19% for 1998
18% for 1999
17% for the year 2000
and thereafter
Tax on Certain Passive Income of
Non - Resident Foreign Corporation
Allowable Deductions (Definition of Terms)
Deductions - items or amounts which the law allows
to be deducted from gross income to arrive at taxable
income.
Revenue expenditures - refer to those that benefit
one accounting period and is deductible from gross
income in the year it was paid or incurred.
Capital expenditures - expenses usually incurred in
the acquisition, betterment, or permanent
improvement of an asset, benefits more than one
accounting period and is not deductible from gross
income in the year it was paid.
Allowable Deductions (Definition of Terms)
Ordinary expense - expenses which are
normal or usual, although not necessarily
recurring.
Necessary expense - refers to those which are useful
and reasonable such as salaries and other
compensation for personal service actually rendered
to the taxpayer, cost of supplies, transportation
expense ( not from the residence to office or
back which is personal in nature), reasonable and
legitimate representation and ordinary repair and
maintenance due to wear and tear.
Business expenses
Entertainment, Amusement and Recreational Expenses
Interest
Taxes
Tax Credit
Losses
Bad Debts
Depreciation
Depletion
Charitable and other contribution
Research and Development
Contribution to pension trust
Other deductions subject to withholding tax
Allowable Itemized Deductions
Representation Expenses
Expenses incurred by a taxpayer in connection with
the conduct of his trade, business or exercise of
profession, in entertaining, providing amusement
and recreation to, or meeting with, a guest or
guests at a dining place, place of amusement,
country club, theater, concert, play, sporting event,
and similar events or places.
It does not refer to fixed representation allowances
that are subject to withholding tax on wages
pursuant to appropriate revenue regulations.
Persons or entities with which the taxpayer
has direct business relations, such as but not
limited to,clients/customers or prospective
clients/customers.
It does not include employees, officers, partners,
directors, stockholders, or trustees of the
taxpayer.
Guests
Entertainment, Amusement and
Recreation Expenses
It includes representation expenses
and/or depreciation or rental expense
relating to entertainment facilities.
Entertainment Facilities
a yacht, vacation home or condominium; and
any similar item of real or personal property
used by the taxpayer primarily for the
entertainment, amusement, or recreation of
guests or employees.
To be considered an entertainment facility, such
yacht, vacation home or condominium, or item of
real or personal property must be owned or
form part of the taxpayers trade, business or
profession, or rented by such taxpayer, for
which the taxpayer claims a depreciation or
rental expense.
a. Individuals engaged in business, including taxable
estates and trusts;
b. Individuals engaged in the practice of profession;
c. Domestic corporations;
d. Resident foreign corporations; and
e. General professional partnerships, including
its members.
Coverage
a. Expenses which are treated as compensation or
fringe benefits for services rendered under an
employer-employee relationship, pursuant to
Revenue Regulations 2-98, 3-98 and amendments
thereto;
b. Expenses for charitable or fund raising events;
c. Expenses for bonafide business meeting of
stockholders, partners or directors;
Exclusions
d. Expenses for attending or sponsoring an employee
to a business league or professional organization
meeting;
e. Expenses for events organized for promotion,
marketing and advertising including concerts,
conferences, seminars, workshops, conventions,
and other similar events; and
f. Other expenses of a similar nature.
Exclusions
Requisites of Deductibility of
EAR Expenses
1. It must be paid or incurred during the taxable year;
2. It must be:
(i) directly connected to the development,
management and operation of the trade,
business or profession of the taxpayer; or
(ii) directly related to or in furtherance of the
conduct of his or her trade, business or
exercise of a profession;
3. It must not be contrary to law, morals, good customs,
public policy or public order;
4. It must not have been paid, directly or indirectly, to an
official or employee of the national government, or any
local government unit, or of any government- owned
or controlled corporation (GOCC), or of a foreign
government, or to a private individual, or corporation,
or general professional partnership (GPP), or a similar
entity, if it constitutes a bribe, kickback or other
similar payment;
EAR Expenses
5. It must be duly substantiated by adequate proof.
The official receipts, invoices, bills or
statements of accounts should be in the name of
the taxpayer claiming the deduction; and
6. The appropriate amount of withholding tax, if
applicable, should have been withheld therefrom
and paid to the BIR.
EAR Expenses
Ceiling on EAR Expenses
Apportionment Formula:
Net sales/net revenue x Actual Expense
Total Net sales and net revenue
Sale of goods or
Properties
Actual EAR expenses but not to exceed 0.5% or
1/2% of Net Sales
Whichever is lower
Sale of Services,
Practice of Profession
& Lease of property
Actual EAR expenses but not to exceed 1% of
Net Revenues
Whichever is lower
Sale of both goods and
services
Apportion EAR expenses to Sales and Revenues
Net Sales/Revenues____ x Actual
Total Sales & Revenues EAR
Whichever is lower
Ceiling on EAR Expenses
Illustration on EAR Expenses
Net Sales/
Net Revenue
(1)
Ent., Amusement
& Recreation
Expense (EAR)
based on
Apportionment
Formula*
(2)
Max. Percentage
Ceiling of
EAR Expense**
(3)
Allowable Amt to be
claimed as EAR
Expense (whichever is
lower of col. 2 and 3)
(4)
Sale of
Goods
P 200,000 P2,000 P 1,000 P 1,000
Sale of
Services
100,000 1,000 1,000 1,000
Total P 300,000 P 3,000 P 2,000 P 2,000
* Apportionment Formula
Sale of Goods (P200,000/P300,000) x P3,000
Sale of Services(P100,000/P300,000) x P3,000
**Maximum Percentage Ceiling
Sale of Goods (P200,000 x 0.50%)
Sale of Services (P100,000 x 1%)
Illustration on EAR Expenses
Partnership
a contract between two or more persons who
bind themselves to contribute money, property or
industry to a common fund, with the intention of
dividing profits among themselves.
Elements of a partnership:
an agreement to contribute money, property
or industry to a common fund
intent to divide the profits among the contracting
parties
Partnership
Kinds of partnership:
General professional partnership
General co-partnership or a partnership
General Co-ownership
Partnership
Kinds of Partnership
General professional partnership
a partnership formed by persons for the sole
purpose of exercising their common profession, no part of
the income of which is derived from engaging in trade or
business.
shall not be subject to income tax, but is
required to file a return setting forth the items of gross
income and of deductions allowed by law and the names,
TIN addresses and shares of each of the partners.
General co-partnership or a partnership
not a general professional partnership.
a partnership other than a general professional
partnership is considered a corporation for tax
purposes and is subject to tax .
.
General Co-ownership
not subject to tax if the activities of the co-
owners are limited to the preservation of the
property and the collection of the income
therefrom in which case each co-owner is taxed
individually on his distributive share.
Should the co-owners invest the income of the
co-ownership in any income producing
properties, they would be constituting
themselves into a partnership which is
consequently subject to tax as a corporation.
Corporation
an artificial being created by operation law having
the rights of succession, the powers, attributes and
properties authorized by law or incident to its existence.
In income taxation, corporation is much broader
and it includes:
Partnership
Joint Stock companies
Joint accounts
Associations
Joint Ventures
Insurance Companies
Corporation
Domestic Corporation
- created or organized in the Philippines or
under its laws.
Foreign Corporation
- a corporation which is not domestic, those that
were formed, organized or existing under any
law other than those of the Philippines.
Classification of Corporations
Foreign Corporation are either:
a.) Resident foreign
- foreign corporation engaged in trade or
business within the Philippines or having
an office or place of business therein.
b.) Non-resident foreign
- foreign corporations not engaged in
trade or business within the
Philippines.
Classification of Corporations
Taxable from all sources within 1998 - 34%
and without the Philippines 1999 - 33%
2000 - 32%
Optional Corporate Tax Rate 15%
a. Tax Effort Ratio 20%(GNP)
b. Income Tax Collection 40%
c. VAT Effort of 4%(GNP)
d. CPSFP ratio 0.9%
Minimum Corporate Income Tax 2%
Taxability of Corporations
Rate
Preferential Rates
a. Proprietary Educational Institutions
and Hospitals 10%
b. GOCCs (GSIS,SSS,PCSO,
PAGCOR, and PHIC) exempt
On certain passive income
a. Interest and Royalties 20%
b. Interest (FCDS) 7.5%
c. Capital gains from the sales of
shares of stocks not traded in
the stock exchange
not over P 100,000 5%
over 100,000 10%
d. Income derived under the expanded
foreign currency deposit system 10%
e. Capital Gains from the sale, exchange
or disposition of land and buildings 6%
On improperly accumulated earnings 10%
Resident Foreign Corporations
(doing business in the Philippines)
Corporations are taxed only on taxable income from all
sources within the Philippines
Tax Rate
International air carriers 2 1/2%
International Shipping 2 1/2%
Offshore Banking Units 10%
Tax on Branch Profit Remittance 15%
Regional or area headquarters of exempt
multinational companies
Regional operating headquarters of 10%
multinational companies
These corporations are taxed on the gross income
received from all sources within the Philippines.
Tax Rate
Reinsurance premium exempt
Cinematographic film owners, lessors
or distributors 25%
Owners or lessors of Vessels chartered by
Philippine Nationals 4 1/2%
Non-Resident Foreign Corporations
Tax Rate
On certain Income, the following taxes are
imposed:
- Interest on foreign loans 20%
- Inter-corporate dividends 15%
- Capital gains from sale of shares of
stocks not traded in the stock exchange 5%
10%
Non-Resident Foreign Corporations
Estate - refers to all property, rights and obligations
of a person which are not extinguished
by his death and also those which
have accrued thereto since the opening
of the succession.
Decedent - refers to the person whose property
is transmitted through succession, whether
or not he left a will. If he left a will,
he is called a testator
Heir - is a person called to succession
whether by the provision of a will or by
operation of law.
Estates and Trusts (Definition of Terms )
Trustor or grantor - a person who established a trust.
Trust - an agreement created by will or an
agreement under which title to property
is passed to another for conservation
or investment with the income therefrom
and ultimately the corpus (principal) to be
distributed in accordance with the direction
of the creator as stated in the instrument.
Trustee -one in whom confidence is proposed as
regards property for the benefit of another
person.
Beneficiary - the person for whose benefit the
trust is created.
Fiduciary - applies to all persons or corporations
that occupy positions of peculiar confidence
towards other, such as trustee, executors,
or administrators. For income tax
purposes, it refers to a person or
corporation that holds in trust an estate of
another person/s.
The taxpayer is hereby required to use in its financial
statements and income tax return the account title
entertainment, amusement and recreation
expenses,
In the alternative, to disclose in the notes to
financial statements the amount corresponding
thereto when recording expenses paid or incurred
by the nature as defined in Section 2 of RR 10-
2002.
Such expense should be reported in the taxpayers
income tax return as a separate expense item.
Reporting
a sworn instrument in which the taxpayer discloses
the nature and extent of his tax liability by formally
making a report of his income and allowable
deductions for the taxable year.
The Income Tax Return
Persons Required to File Income Tax Return
= Every Filipino citizen, whether residing in the
Philippines, or abroad;
= Every alien residing in the Philippines, on the gross
income derived from sources within or outside the
Philippines;
= Every non-resident alien engaged in trade or
business in the Philippines.
Individual Income Tax Return
1. Those whose gross income does not exceed their total
personal and additional exemptions.
2. Individuals whose income consists solely of interest,
prizes, winnings, royalties, dividends, share of an
individual person in a taxable partnership;
3. Alien employees of regional or area headquarters or
multinational corporations with respect to income
received from such corporation;
4. Aliens employed by offshore banking units with respect
to income received by them from such units;
Persons Not Required/Exempted to
File Income Tax Return
5. Alien employees of service contractors and
subcontractors engaged in petroleum exploration in the
Philippines with respect to income received by them as
such; and
6. Other individuals not required to file an income tax return,
pursuant to other provisions of the Tax Code and other
laws, general or special. (Sec.44 NIRC)
Persons Not-Required/Exempted to
File Income Tax Return
General Rules in the Preparation and
Filing of Individual Income Tax Returns
O l d F o r m N o .
N o n -
C o m p u t e r i z e d
R e d e s i g n e d /
N e w F o r m
N o .
C o m p u t e r i z
e d
F o r m N a m e
1 7 0 1 A 1 7 0 0 A n n u a l I n c o m e T a x f o r I n d i v id u a l
E a r n i n g P u r e l y C o m p e n s a t io n
I n c o m e
1 7 0 1 1 7 0 1 A n n u a l I n c o m e T a x R e t u r n f o r
S e l f - E m p lo y e d P r o f e s s io n a l ,
E s t a t e a n d T r u s t
1 7 0 1 Q 1 7 0 1 Q Q u a r t e r l y I n c o m e T a x R e t u r n f o r
S e l f - E m p lo y e d P r o f e s s io n a l ,
E s t a t e a n d T r u s t
1 7 0 1 E / A 1 7 0 6 C a p it a l G a i n s T a x R e t u r n f o r R e a l
P r o p e r t y T r a n s a c t io n s i n c l u d i n g
T a x a b l e a n d E x e m p t
1 7 0 1 E - 2 1 7 0 7 C a p it a l G a i n s T a x R e t u r n f o r
T r a n s a c t io n I n v o l v i n g S h a r e s o f
S t o c k s n o t T r a d e d t h r o u g h t h e
L o c a l S t o c k E x c h a n g e
Partnership
1. General co-partnership (Compania collection)
2. General Professional Partnerships
3. Individual Partner to the above general co-
partnership
4. Exempt Entities
Annual Income Tax
Form to use:
1.) BIR form No. 1702
Number of Copies - Triplicate
Contents
Who shall file - President, Vice-Pres. or other
Principal Officers
Where to file - Accredited Agent Banks
2.) BIR Form No. 1702Q
Number of Copies - Triplicate
Contents
Who shall file - President, Vice-Pres. or other
Principal Officers
Where to file - Accredited Agent Banks
When to file - 60 days following the close
of each first three quarters
General Rules in Corporate Return
BIR Form No. 2316 (formerly W-2) - Certificate of
tax withheld on compensation
BIR Form No. 2304 (formerly 1701-B)- Information
Return for Income Payments not subjected to
Withholding Tax
BIR Form 2307 (formerly 1743-750)-Certificate of
Tax Withheld at Source
BIR Form 2321- Tax Debit Memo
General Rules in Corporate Return
Allowable deductions are as follows :
Tax withheld in the case of individuals
Tax credit for foreign taxes paid
Tax credits
Tax withheld under the expanded withholding tax
system
Tax paid during the preceding quarters
Excess tax paid in prior year(s)
Deductions from the Income Tax Due
Annual income tax return
On or before the 15th day of April of each year
Quarterly income tax return
On or before the following indicated dates:
First quarterly return - April 15 of the
current year
Second quarterly return - August 15 of the
current year
Third quarterly return - November 15 of the
current year
Final Return - April 15 of the
following year
(RR2-93 Jan 4, 1993)
When to File for Individual
Payment in Installments
When the tax due is P2,000 or less, the same shall
be paid in full. When it is in excess of P2,000, the
taxpayer may elect to pay the tax in two (2) equal
installments.
Payment of Income Tax
Modes of Payment
Wholly in cash
Check or bank debit memo
Tax debit memo
A combination of any of the above.
Other mode of payment applicable to government
agency
Other special arrangements duly approved by the
Commissioner or his authorized representative on a
case-to-case basis
Payment of Income Tax
In the case of individuals
On or before April 15, following the close of the
calendar year.
If paid in two equal installments;
First installment due on or before April 15
Second Installment due on or before July 15
In the case of Estates and Trusts
same as individual
Date of Payment
In the case of Corporations
within sixty (60) days from the close of the 1st
three (3) quarters.
Final Payment
On or before the 15th day of the 4th
month following the end of the taxable
year.
Date of Payment
If gross receipts from business do not exceed P5,000 in
any quarter- Statement of Networth and Operation;
If gross receipts from business exceed P5,000 but do not
exceed P25,000 in any one quarter-Balance Sheet and
Profit and Loss Statement;
If gross receipts from business exceed P25,000 in any
one quarter;
a. Balance Sheet c. List of taxes paid
b. Profit & Loss Statement d. Schedule of income
When Old Form is Used (Non Pilot RDOs)
Statement of Cost of Goods Manufactures and Sold;
Statement of Gross Investment Income, if a mutual life
insurance company; and
In appropriate cases copy of the approval of the claim for
incentive granted by the government agency administering
the particular law.
When Old Form is Used (Non Pilot RDOs)

Income Tax

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General Course for Revenue Officers TB 220 Slide 1

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