Income Taxation by Enrico Tabag Introduction: Classification of Individual Taxpayers Who are individual taxpayers? - Natural persons with income derived from within the territorial jurisdiction of a taxing authority. - 2 major categories 1. Citizens - Resident Citizens - Nonresident citizens 2. Aliens - Resident Aliens - Nonresident Aliens engaged in trade or business (NRA ETB) - Nonresident aliens not engaged in trade or business (NRA NETB) Sec 22 (E) Who are nonresident citizens? -Physical presence abroad with a definite intention to reside therein. (Immigrant) -If the citizen leaves during taxable year to resides abroad either as immigrant or for employment on a permanent basis. (permanent employee abroad) - A citizen of the Ph who work and derives income abroad and whose employment thereat requires him to be physically abroad most of the time during the taxable year. (OFW/OCW) note: RC - taxable both income derived from within and without Who are Resident Alien taxpayers? (sec 22 F) - An individual whose resident is within the Philippines and who is not a citizen. - Aliens who are present in the Philippines who are not mere transients or sojourners. -Alien who lives in the Philippines with no definite intention as to his stay. (indefinite stay) - Aliens who comes to the Philippines for purpose that requires extended stay. Who are non-resident alien taxpayers? - No residence and not a citizen -They have come for a definite purpose and promptly accomplished -Mere transients or non-residents. 2 types of nonresident alien 1. Engaged in business - aliens who have business income in the Philippines - Alien who stays more than 180 days during the taxable year. 2. Not engaged in business. Interest Income on Bank Deposits subject to FWT Types of Income and applicable tax Basic tax- Sec 24 (a) FWT - Sec 24 (b) 25 (A) (B) CGT - Sec 24(c) (d) Passive income subject to final tax - FWT (will not appear on your income tax return) - derive from Ph sources - Passive income - no active participation to derive that income. 1. Interest income (limited only to bank deposits, mutual funds, other type form investment) 2. Dividend income 3. Royalty income 4. Prizes 5. Other winnings. *applies also to corporate tax payer* Passive income taxpayer subject to FWT Sec 24 B - citizen and resident Sec 25 - citizen and resident alien NOTE: Non-resident alien Not engaged subject to FWT of 25% (general) (Sec 24 B) Interest income derive from Ph - Generally "20%" unless exempt - Bank deposit - Deposit substitute = (debt securities offered to the public, e.g. bonds and treasury bills) -Trust fund - Mutual fund -Other similar arrangements Note: Other interest income not stated above is subject to regular tax if not subject to CGT Note: Resident citizen derived interest income from abroad subject to regular tax not FWT. Note: If interest income is derive in the form of FCDS ( 15 %) applicable only to resident citizen. If not a resident exempt. Unless NRA NET Interest income - from any bank deposit - yield or any other monetary benefit - from trust funds and similar arrangements - from FCDS (15 % applies only to residents) What is deposit substitute? - An alternative form of obtaining funds from the public other than deposits. Through acceptance of debt instruments. - Public = obtain from 20 or more individuals or corporate lender. Long term deposits - investment in the form of deposit with a maturity period of 5 years and above issued by a bank only to its individuals. (exempt) Requirements for exemption - Individual citizen - Long term deposits on the name of an individual not on a corporation. -Form of savings, trust fund, deposit substitute etc. - Issued by a bank only and not by other financial institutions. - Not less than 5 years’ maturity date and should not be terminated. -Exempt those specified by law Short term deposits - investment in the form of deposit with a maturity period of less than 5 yrs. Pre-termination of LT deposit/investment. 4 year to less than 5 years - 5% 3 years to less than 4 years - 12 % Less than 3 years - 20% Income Tax on dividends, royalties, winnings and prizes Royalty Income - 20% generally - except on books as well as other literary works and musical compositions which imposed a final tax of 10%. -Payor has the responsibility to remit the tax on the government Dividend Income - pertains to cash dividend and property dividend receive by an individual from DOMESTIC corporation or other form of business considered as corporation for taxation purposes (partnership, joint venture) - NRA, NRC, RA = 10% / NRA ET = 20% - Dividend income from foreign corporation is subject to basic tax. Note: Generally, partnership is taxable as corporation. Unless GPP. Prizes - Derive from Philippines. - 20% - except if the amount of the prize is not more than 10,000 which is subject to basic tax. Winnings - PCSO and lotto winnings which does not exceed 10,000 (EXEMPT) - More than 10,000 = 20% - RC, NRA, RA but if NRA ET – exempt Capital Gains Tax Types of Income and Applicable tax 1. Ordinary or regular income - Compensation income - Business income - All other income not subject to CGT and FWT 2. Passive income - No direct participation in the gaining of profit. 3. Capital gains - income derived from shares of stock and sale of capital real property Capital gains subject to capital gains tax. (Sec 24 (c)(d) -Not all capital gains are subject to capital gains tax - For taxes purposes, assets are classified as ordinary and capital. Ordinary Assets - For sale and used in the ordinary course of business. - Included in the inventory - For sale in the ordinary course. - Property used in trade or business subject to depreciation. - Real property used in the trade or business. Note: Once you sell this items they are subject to basic or regular tax. Capital Assets - Include other property held by the taxpayer whether connected with his trade or business. Sale of capital assets subject to CGT (Stocks) - 15% for sale of stock upon the net capital gains. - Share of stock of a domestic corporation not listed publicly. - Sale of stock publicly listed or under foreign corp is subject to basic tax. Note: All classification of taxpayer is subject to 15% Sale of capital assets subject to CGT (real property) - 6% tax based on the gross selling price or current market value whichever is higher. - Real property located in the Philippines classified as capital assets. - BASIS: Selling price, Zonal Value (BIR), Fair market value ( City assessor ) whichever is higher. NOTE: All classes of taxpayer subject to 6% Pacto de recto sale - government is a party. - Taxpayer has the OPTION either to tax it subject to CGT or GR unless exempt. Exempt from CGT. Legal basis for principal residence - RR14-2000 - Actual occupancy shall not be considered interrupted or abandoned by reason of individuals’ absence. - The place where the person tends to return. - Real properties sold is the principal residence. 1. Intention to acquire a new principal residence. 2. There should be a new principal residence after 18 months. 3 Notify the BIR 30 days upon transaction/disposition. 4. Proceeds of the sale or disposition should be FULLY UTILIZE to be exempt. Otherwise, the remaining unused proceed shall be subject to 6% CGT. 5. Can only be availed once every 10 years. 6. Historical cost or adjusted basis must be carried over to the new principal. 7. There is an escrow agreement. NOTE: If requirements are not meet, it will not be exempt. SELF EMPLOYED AND PROFESSIONALS (SEP) by Enrico Tabag Ordinary. /Regular income - they are tax base on graduated rate or basic tax. - compensation income - business income - practice of profession income Note: It has a tax table. Self-employed (train law) - sole proprietor - independent contractor who reports income earned from self-employment - professionals whose income is derived purely from the practice of profession and not under an employer-employee relationship. Professional -person formally certified by a professional body belonging to a specific profession. who’s measured against an established set of standards. - art or sport for money as means of livelihood. Income tax of SEP - amounting to more than 250k Purely SEP - GR: basic tax. (subject to the tax table) - XPN: you have the option to either use a graduated rate or 8% tax on gross sales/receipts and other operating income in excess of 250k in lieu of GR and Sec 116. Note: 8% option is only for earners with 3M and below (more than 3M is for VAT) To apply for 8% - you must be qualified and you signify - when you signify it is irrevocable for that year. Mixed Income Earner 1. Income from SEP - GR or 8% on gross, if income not exceeding 3M. 2. Compensation Income - GR Note: If you're a mixed income earner and sales is above 3M no application of 8% both will be tax for GR. Requirements to avail the 8% preferential Tax: The SEP should be: - Non vat registered - Annual gross rate not exceeding 3M. - Not engaged in VAT exempt-sales/transactions. - Not subject to other OPT other than Sec.116 of the tax code. - Signify intention to be tax at 8% How to signify 8% tax - signify in the 1st Quarter return of the taxable year the intention to elect the 8%. - You must signify in a yearly basis. Important Note: -8% tax is applicable in lieu of tax base on Sec. 116 , other than that NOT APPLICABLE. -If silent, subject to GR eventhough qualify for 8%. Note: Tax table - base on net income. 8% - base on gross sales/receipts. In case that gross receipts exceeded 3M on the MIDDLE of the year that she opted to be tax at 8% - She needs to register to the VAT system after 1 month on being above 3M. - Automatically be subject to GR. - Taxpayer is required to update his registration.
