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TAXATION REVIEW Module II – INCOME TAX

GUIDE 1. Is this income? If not, then it’s not really an income tax problem. 2. Who’s the taxpayer? And what’s the source of income? 3. What’s the Specific Rate?

Income Tax Systems • Global (Unitary) Tax System –all items of GI, deductions and exemptions are reported in one income tax return and a single tax is imposed on all income received or earned, regardless of the activities which produced the same.

• Schedular – different types of activities are subjected to different types of tax rates. (depends on classification of TI and the activities which produced the same.

• Semi-global and semi-schedular

Who is a Taxpayer

a. Kris Konejero is a resident citizen; taxable within and without b. Klaus Kloner is a resident alien; taxable for income derived within; c. Krisanto is a nonresident citizen; taxable for income derived within the Phils (Section 22 (E) (2) d. Kamilo is a nonresident citizen; taxable for income derived within the Phils regardless of payment; (Section 22 (E ) (3). Hence, income derived from Taipei Taiwan is not taxable in the Philippines. e. Karen is a nonresident citizen for the taxable year in which he arrives in the Philippines with respect to income derived from abroad until the date of his arrival in the Phils (Section 22 (E ) (3) SEE SECTION 51 FOR FILING OF RETURNS

SOURCE OF INCOME • It is the place of activity creating the income which is controlling and not the place of business or residence of a corporation.

• When the sale is consummated within the Philippines (as in the title to the property was transferred in the country), the situs of the sale is in the Philippines and is therefore taxable here. ( A. Soriano Y. Cia vs CIR, GR No. L-5896, August 31, 1955)

Income

Test of Source of Income

Interest Income

Residence of Debtor

Dividend Income: 1.) From Domestic Corporation

Income within

2.) From Foreign Corporation

Income within, if 50% or more of the gross income of the FC (for the past 3 years) was derived from sources within the Philippines. Otherwise, income within

Service Income

Place of Performance

Rent Income

Location of Property

Royalty Income

Place of use of Intangible

Gain on Sale of Real Property

Location of Property

Gain on Sale of Personal Property

Place of Sale

Gain on Sale of Domestic Shares of Stock

Income within

WHAT IS INCOME? WHAT IS CAPITAL? • Capital is a fund. Income is a flow. • Income is all wealth which flows to the taxpayer other than a mere return of capital. It includes earnings,

lawfully or unlawfully acquired, without consensual recognition, express or implied, of an obligation to repay and without restriction as to their disposition.

Tests

1. 2. 3. 4. 5.

Realization Principle Claim of Right Doctrine Economic Benefit Theory Severance Test Theory

All-events Test (Accrual)

Gross Income = Income less Exclusions Net or Taxable Income = Gross Income less Allowable Deductions Taxable Compensation Income = Gross compensation less Personal and Additional Exemptions

Income Tax Due = Taxable or Net Income multiplied by Income Tax Rate Income Tax Payable = Income Tax Due less Creditable Withholding Tax or Tax Credit

Doctrine of Constructive Receipt of Income: Income which is credited to the account of and set apart for a taxpayer and which may be drawn by him at any time is subject to tax for the year during which it was so credited or set apart although not yet then actually received or reduced to his possession. To constitute receipt in such case, the income must be credited to the taxpayer, without any substantial limitation or condition upon which payment is to be made.

GROSS INCOME (Sec 32) • Except when otherwise provided in this Title, gross income means all income derived from whatever source, including (but not limited to) the following items:

a.

Compensation for services in whatever form paid

b.

Gross income from the conduct of trade or business or the exercise of profession

c.

Gains from dealings in property

d.

Interests

e.

Rents

f.

Royalties

g.

Dividends

h.

Annuities

i.

Prized and winnings

j.

Pensions

k.

Partners distributive share from the net income of the general professional partnershipa

Income from Whatever Source • • • • • • •

Treasure found or punitive damages representing profits lost Amounts received by mistake

Cancellation of the taxpayer’s indebtedness Payment of usurious interest Illegal gains Tax Refund Bad Debt Recovery (Take note of Tax Benefit Rule)

Exclusions 1. 2. 3. 4. 5. 6. 7.

Proceeds of life insurance Amount received as return of premium

Gifts, bequests and devises Compensation for injuries and sickness (except recovery for lost profits) Income Exempt Under Treaty Retirement Benefits, pensions, gratuities Other Miscellaneous Items

Retirement Benefits, Pensions, Gratuities 1.

Retirement Benefits Received by Officials and Employees of Private Firms, Individuals or Corporations

2.

Retirement benefits paid to employees who have reached the age of 60 or more but not beyond 65 years with at least 5 years of credited service

3.

Separation benefits due to death, sickness or other physical disability or for any cause beyond the control of the said official or employee

4.

Social Security benefits, retirement gratuities received by resident or non-resident citizens from foreign government agencies and other private or public institutions.

5.

Benefits received from US Veterans Administration by veterans residing in the Philippines

6.

Payment of Benefits under the SSS

7.

Benefits received from the GSIS under RA 8291

Other Exclusions (Miscellaneous) 1. 2.

Income received by foreign governments from their investments in the Philippines

3. 4.

Prizes and awards (under certain conditions)

5. 6. 7.

13th month pay and other benefits ( up to 90,000)

Income derived by the Government of the Phils or any political subdivision from any public utility r from the exercise of any essential governmental function

Prizes and awards in sports competition granted to athletes whether held in the Philippines or abroad and sanctioned by their national sports associations GSIS, Medicare and other contributions Gains from redemption shares in Mutual Fund Company

(Note: There are also ta-exempt income under special law.

 Classifications of Income Subject to Philippine Income Tax 1. Compensation Income – income which is derived from the rendering of services under an employer-employee relationship. 2. Professional Income – fees derived from engaging in an endeavor requiring special training as professional as a means of livelihood, which includes, but is not limited to, the fees of CPAs, doctors, lawyers, engineers and the like. 3. Business Income – gains or profits derived from rendering services, selling merchandise, manufacturing products, farming and long-term construction contracts 4. Passive Income – income in which the taxpayer merely waits for the amount to come in. It includes, but is not limited to, interest income, royalty income, dividend income, winnings and prizes. 5. Capital Gain – gain from dealings in capital assets

THREE KINDS OF INCOME 1. CAPITAL GAINS SUBJECT TO CAPITAL GAINS TAX 2. PASSIVE INCOME SUBJECT TO FINAL TAX 3. OTHER INCOME (RESIDUAL INCOME) WHICH IS NEITHER CAPITAL GAIN NOR PASSIVE INCOME a. Compensation Income b. Business Income c. Professional Income d. Sale or Exchange of Property which is not subject to the capital gain tax

CAPITAL GAINS SUBJECT TO CAPITAL GAINS TAX

PASSIVE INCOME SUBJECT TO FINAL TAX Final tax means tax withheld from source, and the amount received by the income earner is net of tax already

INDIVIDUAL INCOME TAXATION