Tax On Income
Tax On Income
Tax On Income
SEC. 22
INCOME
-is any wealth which flows into the taxpayer other than a mere return of capital.
INCOME TAX
-tax based on income, gross or net.
-tax on the earnings derived by a taxpayer for each taxable year arising from
employment of for services rendered or for engaging in trade or business or for exercising a
profession.
2. RESIDENCE PRINCIPLE
-Basis is the residence of the taxpayer
-All income derived by persons residing in the Philippines, whether citizens or aliens,
whether domestic or foreign corporations, shall be subject to income tax on the income
derived from sources within the Philippines.
-Follows the Territoriality Principle
3. SOURCE PRINCIPLE
-basis is the source of income
-All income derived within the Philippines shall be subject to income tax.
-Follows the Territoriality Principle
GENERAL PRINCIPLES OF INCOME TAXATION I THE PHILIPPINES (Tax Reform Act of 1997)
1. RESIDENT CITIZENS-from sources within and without the Philippines
2. NON-RESIDENT CITIZENS- from sources within the Philippines
-working and deriving income from abroad as an OCW (provided,
citizen is a seaman receiving income from abroad)
3. ALIEN INDIVIDUAL-WON resident- from sources within the Philippines
4. DOMESTIC CORPORATION- from sources within and without the Philippines
5. FOREIGN CORPORATION- from sources within the Philippines
TAX ON INDIVIDUALS
CLASSIFICATION OF CITIZENS OF THE PHILIPPINES FOR PURPOSES OF INCOME TAXATION
1. Resident Citizen-resident in the Philippines residing therein, unless he qualifies as a
non-resident citizen under Section 22(E) of the NIRC
2. Nonresident Citizen- citizen whose physical presence abroad with a definite intention to
reside therein and Commissioner is satisfied of that fact;
-citizen who leaves the Philippines either as immigrant or for
employment on a permanent basis;
- citizen whose employment abroad requires his physical presence
abroad most of the time during the taxable year;
- citizen who has been previously considered as nonresident citizen and
who arrives at the Philippines at any time during the taxable year to
reside permanently in the Philippines
GENERAL RULE: RESIDENT CITIZEN is taxable on all income derived from all sources WITHIN
and WITHOUT the Philippines subject to the following rates:
1. His Regular Taxable Income for each taxable year – subject to scheduler tax rates of
5%-32%
2. His Passive Incomes- subject to FWT depending on the kind of passive income received
GENERAL RULE: The income of a NON-RESIDENT CITIZEN derived from all sources WITHIN the
Philippines for each taxable year shall be subject to the following rates:
1. His Regular Taxable Income for each taxable year – subject to scheduler tax rates of
5%-32%
2. His Passive Incomes- subject to FWT depending on the kind of passive income received
RATES OF THE FWT ON THE PASSIVE INCOMES DERIVED BY CITIZENS AND RESIDENT
ALIENS
B. Net capital gains from sale, barter exchange or other disposition of shares of stocks in a
domestic corporation traded and Listed in the local stock exchange held as capital asset
½ of 1% stock transaction tax
C. If sale is made by a dealer in securities, gain is an ordinary income
Individual- 5%- 32% Corporation-NCIT 30%
TAXATION OF CAPITAL GAINS FROM SALE OF REAL PROPERTY CLASSIFIED AS CAPITAL ASSETS
-Subject to capital gains tax of 6% based on the presumed gain which is the higher value
between the current FMV or the GSP.
-including Pacto de Retro Sale and other conditional sales
Gross Selling Price-Is the actual selling price or the gross value in money which is the sum
stipulated as the equivalent of the thing sold and also every incident taken into consideration
for the fixing of the price.
PACTO DE RETRO SALE
-the title and ownership of the property sold are immediately vested in the vendee a retro,
subject to the resolutory condition of repurchase by the vendor a retro within the stipulated
period.
-failure does not impair ownership
WHEN THE SELLER WHO AVAILED OF THE TAX EXEMPTION ON SALE OF PRINCIPAL RESIDENCE
IS CONSIDERED DEFICIENT IN THE PAYMENT OF THE CAPITAL GAINS TAX
-if within 30 days after the lapse of the aforesaid 18-month period, the seller/ transferor fails to
submit documentary evidence showing that he has utilized the proceeds of the sale.
BUT DISTRIBUTIVE SHARES OF PARTNERS IN THE NET PROFIT OF A GPP TAXABLE IN THE
HANDS OF THE PARTNERS
DETERMINATION OF OPTIONAL STANDARD DEDUCTIONS (OSD) OF GPPs
CLAIM OF THE PARTNERS OF GPP OF THEIR DEDUCTIONS FROM THEIR SHARE IN THE TAXABLE
INCOME OF THE PARTNERSHIP
1. If the GPP availed of the itemized deduction in computing the net income, the partners
may still claim itemized deductions from said share, provided, that, in claiming itemized
deductions, the partner is precluded from claiming the same expenses already claimed
by GPP.
2. If the GPP avails of the OSD in computing its net income, the partners comprising it can
no longer claim further deduction from their share in the sad net income for the
following reasons:
a.
3. If the partners derived other GI from trade, business, or practice of profession apart and
distinct from his share in the net income of the GPP, the deduction that he can claim
from his gross income would follow the same deduction availed of from his partnership
income as explained in the foregoing rules: Provided, however, that if GPP opts for the
OSD, the individual partner may still claim 40% of its GI but not to include his share from
the net income of the GPP.
GENERAL CO-PARTNESHIPS- are partnerships, which by law are assimilated to be within the
context of, and so legally contemplated as corporations
Note: Joint ventures involving foreign contractors may also be treated as a non-taxable
corporation only if member foreign contractor is covered by a special license as contractor by
the PCAB of the DTI.
EXEMPTIONS:
1. When there is an absence in any of the abovementioned requirements;
2. If JV is engaged in any other line of business with operating agreement under a service
contract with the government;
3. When two corporations enter into a JV under one management, the joint operations
shall be separately taxable as a corporation.
TAX ON CORPORATIONS
DOMESTIC CORPORATION-are those corporations created or organized in the Philippines under
its laws.
Section 27(B) of the NIRC: 10% preferential tax rate on the income of:
1. Proprietary non-profit educational institutions; and
2. Proprietary non-profit educational hospitals
PAGCOR NO LONGER EXEMPT FROM CORPORATE INCOME TAX; IT IS THE LEGISLATIVE INTENT
THAT PAGCOR BE SUBJECTED TO THE PAYMENT OF CORPORATE INCOME TAX
PHIC EXEMPT FROM INCOME TAX BUT ITS PAYMENTS TO MEDICAL PRACTITIONERS AND/OR
HOSPITALS PERTAINING TO PHIC MEMBERS’ BENEFITS ARE SUBJECT TO THE EWT
-rates of 10% and 15%, whichever is appropriate, based on the medical practitioner’s declared
gross income in a year.
-payment of hospitals for medical services provided to PHIC members are subjected to EWT
rate of 2%
PAYMENTS OF PHIC OF THE MEMBERS’ MEDICAL BENEFITS GIVEN DIRECTLY TO THE SERVICE
PROVIDER SUBJECT TO EWT
If the GI of the professional does not exceed P720,000 in a year-10%
If the GI of the professional exceeds P720,000 in a year-15%
APPLICABLE EWT RATES THAT PHIC SHALL WITHOLD FROM THE PAYMENT TO THE HOSPITAL
(constituting of facility fees and professional fees), WHICH IN TURN SHALL PAY THE
PROFESSIONAL FEES OF THE MEDICAL PRACTITIONERS
-payments made to medical practitioner-10% or 15%, whichever is applicable
-facility fees paid to hospitals or clinic-2%
MCIT shall be imposed whenever such corporation has zero or negative taxable income or
whenever the amount of MCIT is greater than the normal corporate income tax.
SPECIFIC RULES FOR DETERMINING THE PERIOD WHEN A CORPORATION BECOMES SUBJECT
TO THE MCIT
-the year in which the domestic corporation registered with the BIR
SECTION 28
I. TAXATION OF INCOME OF RESIDENT FOREIGN CORPORATIONS
RESIDENT FOREIGN CORPORATION-is a corporation organized, authorized, or existing under
the laws of any foreign country, but engaged in trade or business within the Philippines.
INTERNATIONAL CARRIERS- refer to those carriers doing business in the Philippines who shall
pay a tax of 2.5% on its GPB, which could either be:
1. INTERNATIONAL AIR CARRIER-refers to a foreign airline corporation doing business in
the Philippines having been granted landing rights in any Philippine port to perform
international air transportation services/activities or flight operations anywhere in the
world, which is subject to the GPB Tax of 2.5%
2. INTERNATIONAL SHIPPING- refers to a foreign shipping corporation doing business in
the Philippines having been granted landing rights in any Philippine port to perform
international air transportation services/activities or shipping operations anywhere in
the world, which is subject to the GPB Tax of 2.5%
ORIGINATING RULE-means that to form part of the GPB, passenger or cargo must originate
from the Philippines. It includes:
1. Where the passengers, their excess baggage, cargo and/or mail originally commence
their flight from any Philippine port to any port or point outside the Philippines;
2. Chartered flights of passengers, their excess baggage, cargo and/or mail originally
commence their flight from any foreign port and whose stay in the Philippines is for
more than 48 hours prior to embarkation save in cases where the flight of the airplane
belonging to the same airline company failed to depart within 48 hours by reason of
force majeure;
3. Chartered flights of passengers, their excess baggage, cargo and/or mail originally
commence their flight from any Philippine port to any foreign port; and
4. Where the passengers, their excess baggage, cargo and/or mail originally commence
their flight from a foreign port alights or is discharged in any Philippine airline company,
the flight from the Philippines to any foreign port shall not be considered originating
from the Philippines, unless the time intervening between arrival and departure of said
passenger, his excess baggage, cargo and/or mail from the Philippines exceeds 48 hours,
except, however, when the failure to depart within 48 hours is due to reasons beyond
his control, such as, when the only next available flight leaves beyond 48 hours or by
force majeure: Provided, however, that if the second aircraft belongs to a different
airline company, the flight from the Philippines to any foreign port shall be considered
originating from the Philippines regardless of the intervening period between the arrival
and departure from the Philippines by said passenger, his excess baggage, cargo and/or
mail.
CONTINUOUS AND UNITERRUPTED FLIGHT-refer to a flight in the carrier of the same airline
company from the moment a passenger, his excess baggage, cargo and/or mail is lifted from
the Philippines up to the point of final destination of the passenger, his excess baggage, cargo
and/or mail.
DIFFERENT KINDS OF INTERNATIONAL AIR CARRIERS
1. OFF-LINE CARRIER-having no flight operations to and from the Philippines
2. ON-LINE CARRIER- having or maintaining flight operations to and from the Philippines
DIFFERENT TERMS REFFERING TO FLIGHTS OF INTERNATIONAL AIR CARRIER
1. OFF-LINE FLIGHTS-having flight operations outside the territorial jurisdiction of the
Philippines
2. ONLINE FLIGHTS- flight operations carried out between ports or point in the territorial
jurisdiction of the Philippines
3. CHARTERED FLIGHT- flight operations between ports and points in the Philippines and
ports and points outside the Philippines, which includes block charter, placed under
trhe custody and control of a charterer by a contract/charter for rent or hire relating
to a particular airplane.
TAXES IMPOSED ON THE OFF-LINE AIR CARRIER HAVING A BRANCH OFFICE OR SALES AGENT
IN THE PHILIPPINES
-is considered not engaged in business in the Philippines and is therefore, not subject to the
GPB tax of 30% nor the 3% common carrier’s tax
A. For tickets sold inside- the gross revenue shall be the actual amount derived for
transportation, services, for a first class, business class or economy class passage from
any port within the Philippines to any foreign ports.
B. For tickets sold outside-shall be determined using the locally available net fares
applicable to such flight taking into consideration of the seasonal fare rate established
at the time of the flight, the class of passage, classification of passenger, date of
embarkation and the place of destination.
GPB IN THE CASE OF A FLIGHT THAT ORIGINATES FROM THE PHILIPPINES BUT
TRANSSHIPMENT TAKES PLACE ELSEWHERE IN ANOTHER AIRCRAFT BELONGING TO A
DIFFERENT AIRLINE COMPANY
-the GPB shall be the portion of the revenue corresponding to the leg flown from any point in
the Philippines to the point of transshipment
DEPOSITS-are funds in foreign currencies which are accepted and held by an OBU in the regular
course of business, with the obligation to return an equivalent amount to the owner thereof,
with or without interest.
GROSS OFFSHORE INCOME- shall mean all income arising from transactions allowed by the BSP
conducted by and between-
a. In the case of an OBU with another OBU or with an expanded FCDU or with a
nonresident;
b. In the case of expanded FCDU with another expanded FCDU or with an OBU or with a
nonresident.
GROSS ONSHORE INCOME-gross interest income arising from foreign currency loans and
advances to and/or investments with residents made by OBUs or FCDUs.
RATIONALE FOR IMPOSITION- to equalize the tax burden of foreign corporations maintaining,
on one hand, local branch, offices, and organizations, on the other hand, a subsidiary domestic
corporation.
BASIS:
-the 15% BPR tax shall be based on the total profits applied or earmarked for remittance
without any deduction for the tax component thereof (except activities which are registered
with the PEZA, SBMA, AND CDA), provided that interests, dividends, rents, royalties, etc.
received by a foreign corporation during each taxable year from all sources within the
Philippines shall not be treated as branch profits
EXEMPTION: if the same are effectively connected with the conduct of its trade or business in
the Philippines
EFFECTIVELY CONNECTED WITH THE CONDUCT OF ITS TRADE OR BUSINESS IN THE
PHILIPPINES
Marubeni vs. CIR-only profits remitted abroad by a branch office to its head office which are
effectively connected with the conduct of its trade or business in the Philippines are subject to
15% BPR tax.
CIR VS. PROCTER AND GAMBLE PMC-The court denied Procter and Gamble’s claim for refund
for its parent company in the USA since it failed to meet the conditions necessary for the
availment of the preferential tax rate of 15%.
TAX SPARING RULE- connotes that the 15% represents the difference between the regular
income of 30% on corporation and the 15% tax on dividends. It is the amount of tax forgone by
the Philippines Government in favor of the nonresident foreign corporation the purpose of
which is to encourage foreign investors to conduct business in the country.
CLOSELY-HELD CORPORATIONS- those corporations at least 50% of the total combined voting
power of all classes of stocks entitled to vote is owned directly or indirectly y or for not more
than 20 individuals.
Rules:
1. Stock Not owned by individuals;
2. Family and partnership ownership;
3. Option to acquire stocks;
4. Constructive ownership as actual ownership
REASONABLE NEEDS OF THE BUSINESS- immediate needs of the business, including reasonably
anticipated needs.
Immediacy Test-it is applied to determine the “reasonable needs of business” in order to justify
an accumulation of earnings.
TAX EXEMPTION
-construed strictly against the grantee and liberally in favor of the government.
REASON WHY TAX EXEMPT CORPORATION SHOULD PRESENT PROOF OF TAX EXEMPTION
-to relieve the taxpayer from filing return and paying the tax.
1. Income- all wealth which flows into the taxpayer other than as a mere return of capital
2. Gross income- income less income which is by statutory deductions or otherwise is
exempt from tax imposed by law.
3. Taxable income-gross income less statutory deductions
BASIS OF COMPUTATION:
-all items of gross income shall be included in the gross income for the taxable year in which
they are received by the taxpayer and deductions taken accordingly, unless in order to clearly
reflect income, such amounts are to be properly accounted for as of a different period.
SECTION 32
COMPUTATION OF GROSS INCOME
GROSS INCOME-all income from whatever source derived, including, but not limited to the
following items:
1. Compensation for services in whatever form paid, including, but not limited to fees,
salaries, wages, commissions, and similar fees;
2. Gross income derived from the conduct of trade or business or the exercise of a
profession;
3. Gains derived from dealings in property;
4. Interest;
5. Rents;
6. Royalties;
7. Dividends;
8. Annuities;
9. Prizes and winnings;
10. Pensions;
11. Partner’s distributive share from the net income of the general professional partnership.
INCOME CAPITAL
Any wealth which flows into the taxpayer Constitutes investment which is the source of
other than a mere return of capital income
Flow Fund
Service of wealth wealth
Fruit Tree
All income derived from whatever source, Gross income less allowable deductions
whether derived from legal or illegal sources and/or personal and additional expenses