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Tax - Week 6 - B. Income Taxation - III - IV (Taxpayers/Individuals) -…
Tax - Week 6 - B. Income Taxation - III - IV
(Taxpayers/Individuals)
IV. Individuals: Classifications, Bases and Rates
A.
In General
B. Resident Citizens and resident Aliens; Taxation
C. Non-Resident Citizens
D. Non-Resident Aliens (Sec. 25)
E. Special Aliens
- They are now subject to regular income tax rates
XCPN
- Existing Headquarters,etc. Presently availing of preferential tax rates for qualified employees shall continue to be entitled to avail of the preferential tax rate for present and future qualified employees.
HEADQUARTERS
- employed by regional or area headquarters and regional operating headquarters of multinational companies in the Philippines,
OFFSHORE
- employed by offshore banking units, or
PETROLEUM
- employed by petroleum contractors and subcontractors.
Definitions
-
Regional or Area Headquarters
- mean 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 markets.
Regional Operating Headquarters
- a branch established in the Philippines by multinational companies which are engaged in any of the following services: general administration and planning; business planning and coordination; sourcing and procurement of raw materials and components; corporate finance advisory services; marketing control and sales promotion; training and personnel management; logistic services; research and development services and product development; technical support and maintenance; data processing and communications; and business development.
F. Members of General Professional Partnership
Definitions
-
ENGAGED
- in trade or business in the Philippines who come and stay in the Philippines for an aggregate period of more than 180 days during ANY CALENDAR YEAR (Net Taxation)
NOT ENGAGED
- in trade or business in the Philippines, which include non-resident aliens whose stay in the Philippines is 180 days or less (Gross Taxation, which means 25%)
Length of Stay
- Refers to an aggregate period of (180) days IN A CALENDAR YEAR is considered as a non-resident not engaged in business.
Passive Income Rules (25.2)
- Difference is
Engaged in Business - Generally the same as resident individuals.
Not-Engaged in Business - Entire income received from all sources.
Non-Resident Alien Engaged in Business
- Passive income is subject to the following rates.
Requisites
- A citizen of the Philippines who establishes the following requirements:
ESTABLISHES
- the fact of his physical presence abroad with a definite intention to reside therein,
LEAVES
- the Philippines during the taxable years to reside abroad, as immigrant, or for employment on a permanent basis,
WORKS
- and derives income from abroad and whose employment requires him to be physically abroad most of the time (i.e. not less than 183 days) during the taxable year, or
PREVIOUSLY
- considered as nonresident citizen and arrives in the Philippines at any time during the taxable year to reside permanently in the Philippines.
B1. In General
- Only resident PH citizens are taxable on income within and without. Everyone else, income within.
B2. Classifications as to Income Earning
B3. Passive Income
Regular Income Earnings
- need to collate for the taxable year.
Passive Income
- transactional basis, as you accrue, pay tax. This is final taxation.
Interest Income for Residents -
DOMESTIC BANK DEPOSIT
- ANY CURRENCY bank deposit in REGULAR domestic banks, and yield or any other monetary benefit from 20% deposit substitutes, and trust funds and similar arrangements -
20 %
DEPOSITARY BANK
- From a depositary bank under the expanded foreign currency deposit system -
7.5%
2a.
XCPN
- Those received by non-resident individuals
LONG-TERM DEPOSIT
- From a 5-year long term deposit or investment, in the form of savings, common or individual trust funds, deposit substitutes, investment management accounts and other investment certificates prescribed by the BSP
are exempt from taxation
Pre-Termination
- In case of pre-termination of said long-term deposit before the 5th year, rates are based on the remaining maturity as follows:
4a. Four (4) years to less than five (5) years -
5%;
4b. Three (3) years to less than (4) years -
12%;
4c. Less than three (3) years -
20%
Capital Gains on Stocks -
Refers to sale of shares of stock in domestic corporations and if shares of stock are capital assets. These are imposed on net capital gains.
Unlisted Stocks
1a. Those not listed not traded in the stock exchange and not over P100,000 -
5%
1b. Capital gains in excess of P100,000 - 10%
Those Traded and listed in the stock exchange -
½ of 1% (percentage tax)
1 more item...
Royalties
-
On books as well as other literary works and musical compositions - 10%
Regular Royalties - 20%
1 more item...
Loans
- Regular income. Anything not enumerated is considered as regular income.
2 more items...
Remaining Maturity
- Based on remaining years. (5 years, terminated 1 year in, period to be considered is years held, so 20%)
Capital Gains from Sale of Real Property
-
In General
. - The provisions of Section 39(B) notwithstanding, a final tax of six percent (6%) based on the gross selling price or current fair market value as determined in accordance with Section 6(E) of this Code, whichever is higher, is hereby imposed upon capital gains presumed to have been realized from the sale, exchange, or other disposition of real property located in the Philippines, classified as capital assets, including pacto de retro sales and other forms of conditional sales, by individuals, including estates and trusts:
1a.
Government
- Gains from sales to GOCC or government. Taxpayer has the option to choose regular table or, capital gains on real property. Can choose between so 6/table/8% SEP
Exception;Principal Residence
. - The provisions of paragraph (1) of this Subsection to the contrary notwithstanding, capital gains presumed to have been realized from the sale or disposition of their principal residence by natural persons, the proceeds of which is fully utilized in acquiring or constructing a new principal residence within eighteen (18) calendar months from the date of sale or disposition, shall be exempt from the capital gains tax imposed under this Subsection:
2a. Provided, That the historical cost or adjusted basis of the real property sold or disposed shall be carried over to the new principal residence built or acquired:
2b. Provided, further, That the Commissioner shall have been duly notified by the taxpayer within thirty (30) days from the date of sale or disposition through a prescribed return of his intention to avail of the tax exemption herein mentioned:
2c. Provided, still further, That the said tax exemption can only be availed of once every ten (10) years:
2d. Provided, finally, That if there is no full utilization of the proceeds of sale or disposition, the portion of the gain presumed to have been realized from the sale or disposition shall be subject to capital gains tax. For this purpose, the gross selling price or fair market value at the time of sale, whichever is higher, shall be multiplied by a fraction which the unutilized amount bears to the gross selling price in order to determine the taxable portion and the tax prescribed under paragraph (1) of this Subsection shall be imposed thereon.--
2 more items...
In General
Interest, Royalties, Prizes and Other Winnings
Dividends
1 more item...
Generally same lang. Just take note of what are exempted.
Prizes & Awards given to entities recognized with no need for application or subsequent service.
Sports Related Competition - Any awards given are considered exclusion if amateur (sanctioned by the National Sports Association)
1 more item...
Compensation Earners
- Here, compensation tax rate is enforced. (24a), taxed based on net taxable income at 0-35%
Minimum Wage Earners
- as defined in Sec. 22(HH) are exempt from income tax on their taxable income as well as Holiday pay, overtime pay, night shift differential pay and hazard pay received by such minimum wage earners
Rank and File Employee
- employees who are holding neither managerial nor supervisory position as defined under existing provisions of the Labor Code of the Philippines, as amended.
Managerial/Supervisory Employee
Self-Employed/Professionals
- eight percent (8%) tax on gross sales or gross receipts and other non-operating income in excess of Two hundred fifty thousand pesos (P250,000) in lieu of the graduated income tax rates under Subsection (A)(2)(a) of this Section and the percentage tax under Section 116 of this Code.
Mixed Income Earners
- Includes those earning both compensation income and income from business or practice of profession.
Gross Income Taxation -
Here, income is applied first before the SEP. So if P500k, then P250k 0% exemption applies first. Therefore, no 0% exemption in next P250k.
Purely SEP - Minus P250,000
MIXED SEP - No minus P250,000
If Total Gross Sales and/or Gross Receipts and Other Non-Operating Income Do Not Exceed the VAT Threshold as Provided in Section 109(BB) of this Code. –
1a. The rates prescribed under Subsection (A)(2)(a) of this Section on taxable income,
1b. or eight percent (8%) income tax based on gross sales or gross receipts and other non-operating income in lieu of the graduated income tax rates under Subsection (A)(2)(a) of this Section and the percentage tax under Section 116 of this Code.
If Total Gross Sales and/or Gross Receipts and Other Non-operating Income Exceeds the VAT Thresholds Provided in Section 109(BB) of this Code - The rates prescribed under Subsection (A)(2)(a) of this Section.
Married Individuals
- Generally, husband and wife compute their individual income tax separately based on their respective total taxable income.
Qualification (NIRC 51D)
- If married individuals who do not derive income purely from compensation, they must file a return to include income from both of them UNLESS impracticable to file a single return.
Indivisibility (24A2)
- if any income cannot be definitely attributed to or identified as income exclusively earned or realized by either spouses, shall be divided equally for the purpose of determining their respective taxable income
Resident Citizens
- Entities in the Philippines, most of the time physically present. Always intent to return in the Philippines.
Dual Resident/Non-Resident
- Individuals can become resident or non-resident citizen during the same taxable year. During the return or departing year, for the period gone, non-resident. Once returned, considered as resident.
Citizens
-
Those who are citizens of the Philippines at the time of the adoption of this Constitution;
Those whose fathers or mothers are citizens of the Philippines;
Those born before January 17, 1973, of Filipino mothers, who elect Philippine citizenship upon reaching the age of majority; and
Those who are naturalized in accordance with law
Natural Born Citizens
-
Citizens of the Philippines from birth without having to perform any act to acquire or perfect their Philippine citizenship.
Those who elect Philippine citizenship in accordance with paragraph (3), Section 1 hereof shall be deemed natural-born citizens.
Overseas Filipino Workers Sec. 23(C), NIRC
- Individual citizen of the Philippines who is working and deriving income from abroad as an overseas contract worker is taxable only on income derived from sources within the Philippines.
Seaman
- a seaman shall be treated as an overseas contract worker if he:
is a citizen of the Philippines, and
receives compensation for services rendered abroad as a member of the complement of a vessel engaged exclusively in international trade;
Payor of Seaferers
- the local company. Thus, if non of the requisites are present, they are considered as resident-citizens.
Dual Citizenship
- Not categorized as aliens, but non-residents or non-residents, depending on their circumstances.
OFWs
- those who have acquired permanent status in the foreign companies are considered non-residents. Determining factor is if they are abroad most of the time.
Tax Bases/Tax Rates for Passive Income
- This governs passive income.
Resident Citizens and Aliens -
Tax Rate Schedule
- Basic amount + (Additional rate x amount of excess) - These are earned from the E-E.
Jan. 1, 2018 until Dec. 31, 2022
P250,000 and less - 0%
P400,000 and less - 20% of the excess over P250,000
P800,000 and less - P30,000 + 25% of the excess over P400,000
P2M and less - P130k + 30% of excess over P400k.
P8M and less - P490,000 + 32% of the excess over P2M.
Over P8M - P2,410,000 + 35% of the excess over P8M
From Jan 1, 2023 Onwards
P250,000 and less - 0%
P400,000 and less - 15% of the excess over P250,000
P800,000 and less - P22,500 + 20% of the excess over P400,000
P2M and less - P102,500k + 25% of excess over P400k.
P8M and less - P402,500 + 30% of the excess over P2M.
Over P8M - P2,202,500 + 35% of the excess over P8M
Fringe Benefit Tax
- The tax herein imposed is payable by the employer which tax shall be paid in the same manner as provided for under Section 57 (A) of this Code.
Tax on Income of Purely Self-employed Individuals and/or Professionals
- IF Gross Sales or Gross Receipts and Other Non-operating Income Does Not Exceed P3M in a year under Sec. 116 (VAT-registrable)
Can choose 8% Taxation OR the regular tax bracket.
Here, collate the deductions first to determine the tax base.
Employer
- Exposed to business tax and income tax. Payment of the 8% gross receipts tax serves as payment for income tax.
Non-Excess
- if non-excess, then tax Rate Schedule under Sec. (a) shall apply.
Partnership Income
- Partnerships cannot apply 8% option, as their base income is Net, not gross income.
If no deductions and net is close to gross, then preferable to avail of the 8%, as P3M under the graduated table is 32% tax.
III. Taxpayers
A. General Principles (NIRC 23)
B. Scope of Income Taxation
C. Person Liable to Tax(NIRC 22k)
- (K) The term 'withholding agent' means any person required to deduct and withhold any tax under the provisions of Section 57.
Withholding agent
- In case the taxpayer does not file a claim for refund, the withholding agent may file the claim. The withholding agent of a non-resident foreign corporation may file the claim.
Rationale
- withholding agent, who is made personally liable for the withholding tax, is a “taxpayer” under the NIRC. He is directly and independently liable for the correct amount of tax that should be withheld and for deficiency assessments, surcharges and penalties.
Withholding Tax
- method of collecting income tax in advance from the tax
When Witholding Agent Improper
- When the foreign company sought to be represented by the withholding agent was subjected to indirect taxation. In indirect taxation, this means that the foreign company may not be the one who should file the claim.
A "person liable for tax"
- "person subject to tax" and properly considered a "taxpayer." The terms "liable for tax" and "subject to tax" both connote legal obligation or duty to pay a tax. By any reasonable standard, such a person should be regarded as a party in interest, or as a person having sufficient legal interest, to bring a suit for refund of taxes he believes were illegally collected from him. [CIR v. P&G]
Taxpayer (NIRC 22N)
- Any person subject to tax imposed under Title II “Tax on Income” of NIRC. Classified into:
Individuals
Corporations
Partnerships
Estates and trusts
Person (NIRC 22A)
- means an individual, a trust, estate or corporation.
Individuals
-
Resident citizen -
Non-resident citizen
Resident alien
Non-resident alien engaged in trade or business
Non-resident alien not engaged in trade or business
Resident Citizen
- a citizen of the Philippines residing therein. This also covers a PH citizen residing abroad with no intention to reside abroad permanently is a resident citizen.
Residence
- Domicile, or legal residence. So long as animus revertendi, properly a resident.
Non-Resident Citizen
- A citizen of the Philippines who establishes the following requirements:
ESTABLISHES
- the fact of his physical presence abroad with a definite intention to reside therein,
LEAVES
- the Philippines during the taxable years to reside abroad, as immigrant, or for employment on a permanent basis,
WORKS
- and derives income from abroad and whose employment requires him to be physically abroad most of the time (i.e. not less than 183 days) during the taxable year, or
PREVIOUSLY
- considered as nonresident citizen and arrives in the Philippines at any time during the taxable year to reside permanently in the Philippines.
“Most of the time” - interpreted to mean an aggregate stay outside the PH for at least 183 days during a given taxable year [RR 1-79]
Domestic Employer (BIR Ruling 517-2011) -
employees who rendered services abroad for 214 days in a calendar year were not considered as non-resident citizens for income tax despite being out of the country most of the time during the taxable year. Here, local employer is domestic, so employees cannot be non-resident.
Resident Alien
- individual whose residence us within the PH and who is not a citizen thereof. An Alient who is not a mere transient or sojourner.
He lives in PH and has no definite intention as to his stay
He comes to PH for a definite purpose in the nature of an extended stay necessary for its accomplishment to the end that the alien makes his home temporarily in the PH
Transient
- Alien who comes for a definite purpose which in its nature may be promptly accomplished.
Non-resident alien engaged in trade or business
- A non-resident individual who comes to PH and stays therein for an aggregate period of more than 180 days during any calendar year [Sec. 25(A)(1), NIRC]
Trade/Business
- Covers performance of personal service within the Philippines.
“Office or place of business”
- implies a place for the regular transaction of business. Does NOT include a place where casual or incidental transactions might be, or are, effected.
A beneficiary/grantor of a trust (revocable or not) cannot be deemed to be engaged in trade or business in PH or to have an office/place of business therein. The fact that the trustee is engaged in trade or business in PH or has an office/place of business in PH is immaterial [RR 2-1940]
Non-resident alien not engaged in trade or business
- This individual taxpayer is not residing in PH and not engaged in any trade or business in PH BUT STILL has an income from sources within the PH.
Corporations
-
Domestic corporation
Foreign corporation
Partnership
Joint venture
Domestic corporation
- corporation created or organized in the PH or under its laws [Sec. 22 (C), NIRC]
Foreign Corporation
- corporation created or organized under any law except the Philippine law [Sec. 22 (D), NIRC] which may either be resident or non-resident:
Resident foreign corporation - engaged in trade or business within the PH
Non-resident foreign corporation - not engaged in trade or business within the PH but still derives income from the PH.
Partnership
- there are 2 kinds of partnership:
Trade Partnership - engaged in trade or business falling within the definition of a corporation Its tax treatment is the same as that of a corporation.
General Professional Partnership - formed by persons for the sole purpose of exercising their common profession. These are exempt from income tax.
Joint venture
- association of persons or companies jointly undertaking some commercial enterprise. a form of partnership and should be governed by the law of partnership although it is of common law origin.
Estates and Trusts
(NIRC 60A)- Tax imposed upon individuals applied to income of estates or any kind of property held in trust.
“Estate” - created by operation of law when an individual dies, leaving properties to his compulsory or other heirs
“Trust” - a legal arrangement whereby the owner of property transfers ownership to a person who is to hold and control the property belonging to the owner’s instructions for the benefit of a designated person.
Criteria Imposing Philippine Tax
-
Citizenship
- Income tax on:
1a.
Worldwide Income
- If residing in the Philippines
1b.
Non-resident
- only from sources within the Philippines
Residence
- Resident alien liable for income tax only for sources within the PH.
Source
- Alien is subject to income derived from PH sources. This applies regardless of residence.
Generally, only resident citizens and domestic corporations are subject to tax for all income within and without the Philippines. Everyone else liable only for income within the Philippines.
Formulas
Taxable Income
= ( Gross income – Deductions and/or Personal Exemptions)
Tax Due
= ( Taxable Income x Tax Rate )
Definitions
-
Tax Base
- amount to which the tax rate is applied
Tax Rate
- percentage of the Tax Base which must be paid in taxes