INCOME TAX FOR INDIVIDUALS
Monday, 8 November 2021
12:30 PM
Notes:
- Primary among the limitations is “the rule of taxation shall be uniform and
equitable.”
- “Uniform and equitable not absolute identity or equality but subject to reasonab
classification.
- General Classification of taxpayers: Individual and Corporate
- Individual Taxpayer further classified into Resident citizen, Non resident citizen,
Resident aliens and Non-resident aliens)
- Corporate Taxpayers further classified as Domestic Corporations, Resident
foreign corporation and Nonresident foreign corporations
- Another reasonable classification we discussed is about situs of income which ar
“income from within the Philippines” and “income from without the Philippines”.
“Only individual taxpayers that are under the Resident citizen classification
and Corporate taxpayers that are under the Domestic corporation
classifications are taxed on their income from within the Philippines and
without the Philippines. All the rest, are only taxed on income from within
the Philippines.(NIRC Section 23)
Individual Tax Payers:
Ø Natural persons with income derived from within the territorial jurisdiction of a
taxing authority.
Under RA 8424 the National Internal Revenue Code (NIRC), also known as the
TAX CODE, individual tax payers are classified as:
1.
2.
3.
4.
RESIDENT CITIZEN (RC)
NON-RESIDENT CITIZEN (NRC)
RESIDENT ALIENS (RA)
NONRESIDENT ALIENS (NRA)
○ Engaged in Trade (NRAET)
○ Not engaged in trade (NRANET)
SOURCES OF TAX LAWS:
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○ Engaged in Trade (NRAET)
○ Not engaged in trade (NRANET)
SOURCES OF TAX LAWS:
A. Primary Tax Laws applicable to Income Taxation
1. CONSTITUTION
Article III, Sec. 1 of Bill of Rights
No person shall be deprived of liberty or property without due process of
law.
Supreme Court decision: between the power of the state to tax and an
individual's right to due process, the scale favors the right of the
taxpayer to due process.
Equal protection of law:
All person subject to legislation shall be treated alike under similar
circumstances and conditions both in the privileges conferred and liabilitie
imposed.
Section 28 (1), Article 6 off the constitution:
The rule of taxation shall be uniform and equitable.
Meaning all taxable articles or properties of the same class shall be
taxed at the same rate.
It requires the uniform application and operation, without
discrimination, of the tax in place where the subject of the tax is
found.
It does not, however require absolute identity or equality under all
circumstances, but subject to reasonable classification.
CLASSIFICATION OF TAXPAYERS:
• Individual Taxpayer
1. Resident Citizen
- a Filipino resided in the Philippines.
- Taxable based on their net-taxable income
2. Non-Resident Citizen
- Filipino but residing abroad.
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1. Resident Citizen
- a Filipino resided in the Philippines.
- Taxable based on their net-taxable income
2. Non-Resident Citizen
- Filipino but residing abroad.
- within the Philippines with their net taxable income.
3. Resident Alien
Foreigners resided in the Philippines
Based on the net taxable income
4. Non-Resident Alien
○ NRA Engaged in Trade or Business (Foreigner with businesses
the Philippines)
§ Based on the net income earned within the Philippines.
○ NRA Not Engaged in Trade or Business
§ Taxable based on their 25% final tax based on their gross
income earned within the Philippines.
• Corporate Taxpayer
1. Domestic
- Registered in SEC
- Incorporated in the Philippines
a. Foreign
- Incorporated abroad
• Resident Foreign Corporation
• Non-Resident Foreign Corporation
• General Professional Partnership
- CPA, Lawyers, etc.
SITUS OF TAXATION (Place of Taxation)
Ø Scope or place of taxation.
Ø State, exercising its taxing power and authority on taxpayers`
income that fall within its jurisdiction.
Includes:
1. Nature/Classification of Tax
2. To determine the nature and factors of objects where
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Includes:
1. Nature/Classification of Tax
2. To determine the nature and factors of objects where
tax was imposed.
3. Subject Matter of Tax
4. Who to tax?
5. Citizenship of Taxpayers
6. If citizen and resident of the Philippines
7. Sources of Income
8. Place of Exercise, Business, or Occupation
9. Place where Income-Producing activity was held or
done
Application of Situs:
1. Persons- residence of taxpayer
2. Community Development Tax- residence or domicile o
taxpayer
3. Business Taxes- place of exercise where business
operates and conduct its operation.
4. Privilege/Occupation Tax- where your rights was
practiced.
5. Real Property Tax- where the property is located.
(immovable)
6. Personal Property – movable property (jewelry, car,
bags)
·
Tangible- physically located.
·
Intangible- patent, copyright, goodwill.
7. Income- place where it is received. (residence/
citizenship)
8. Transfer Taxes- excise tax that has the right to transf
properties, as to location of property.
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·
Intangible- patent, copyright, goodwill.
7. Income- place where it is received. (residence/
citizenship)
8. Transfer Taxes- excise tax that has the right to transf
properties, as to location of property.
9. Franchise Taxes- state that grants the franchise.
10. Corporate Taxes- where the corporation was
incorporated.
·
Domestic- Philippines
·
Multinational- other countries
Equitable means to minimize burden of taxation:
These are legal means allowed to taxpayers in order for them to
minimize the tax burden.
1. Shifting- the transfer of the burden of a tax by the original payor to
someone else.
Example:
○ VAT
○ percentage taxes
○ excise taxes
○ Ad valorem taxes
2. Transformation- producer or a manufacturer recoups the tax
through improvement in production processes.
Example:
○ Value Chain Re-engineering
3. Tax avoidance (also called tax minimization) - this is the
exploitation by the taxpayer of legally permissible alternative taxation
or methods of assessing taxable property or income in order to
minimize or reduce tax liability.
4. Exemption- is the grant of immunity two particular person or
corporations of a particular class from a tax which persons and
corporations generally within the same state or taxing district where
obliged to pay.
No law granting tax exemptions passed without the concurrence of
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4. Exemption- is the grant of immunity two particular person or
corporations of a particular class from a tax which persons and
corporations generally within the same state or taxing district where
obliged to pay.
No law granting tax exemptions passed without the concurrence of
majority of all members of the Congress.
5. Capitalization- the reduction in the selling price of income-producing
property by an amount equal to the capitalizable value of future taxes tha
may be made by the purchase.
Equitable means to minimize burden of taxation:
1. Tax evasion- the use of illegal or fraudulent means to defeat or
lessen the payment of tax
○ It is a criminal offense.
○ such as deliberately not reporting a taxable income or property
or making deliberate reduction of tax to person or corporation
not uniform and equitable.
2. Direct double taxation (taxing twice)
Ø violates the constitutional concept off equal protection uniformity an
equitableness.
Ø there is direct double taxation when tax is:
a. done by the same taxing authority
b. for the same purpose
c. in the same period
d. With the same subject or object
e. same kind of tax
Equitable remedies for settlement of tax obligations:
These are the legal means allowed to both the BIR and taxpayer for the
settlement of tax obligations:
1. Distraint or distress- seizure by the government of personal
property tangible or intangible do any forced the payment of taxes.
○ actual distraint- involves physical transfer
○ constructive distraint- is when the payer retains possession of
the property but it's not allowed to dispose the property.
2. Levy- same act of seizure but off real property.
3. Forfeiture- selling of a property without compensation in consequen
of a default or offense.
4. Compromise- contract entered into between the BIR and taxpayer
avoid litigation.
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the property but it's not allowed to dispose the property.
2. Levy- same act of seizure but off real property.
3. Forfeiture- selling of a property without compensation in consequen
of a default or offense.
4. Compromise- contract entered into between the BIR and taxpayer
avoid litigation.
The concept of equity in taxation requires that the apportionmen
of the tax burden be more or less, just in the light of the taxpayer
ability to shoulder the tax burden, and if warranted, on the basis
of the benefits received from the government. (taxpayers ability
pay)
• progressive system of taxation:
~ Section 28(1). Article 6 of the constitution:
the Congress shall evolve a progressive system of taxation.
meaning tax loss shall place emphasis on direct taxes (such as incom
taxes in property taxes rather than on indirect taxes (ex. VAT), with
ability to pay as the principal criterion.
• Prohibition against imprisonment for nonpayment of poll taxes:
~ Article 3, Bill of Rights, section 21:
section 20. No person shall be imprisoned for debt or non-payment o
a poll tax.
Poll Tax- tax levied as a fixed sum when every liable individual,
usually adult, without reference to income already sources.
Example: community tax certificate (also called cedula, residence
certificate)
• Prohibition against impairment of obligation of contracts:
~ Article 3 section 10 contains the non-impairment clause:
These safeguard the integrity of contracts against unwarranted
interference by the state. As a rule, contracts should not be tampere
with by subsequent loss that would change or modify the rights and
obligations of the parties.
Impairment is anything that diminishes the efficacy of the contract.
• prohibition against infringement of religious freedom:
~ Article 3, Bill of Rights, Section 5
no law shall be made respectively for establishment of religion or
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Impairment is anything that diminishes the efficacy of the contract.
• prohibition against infringement of religious freedom:
~ Article 3, Bill of Rights, Section 5
no law shall be made respectively for establishment of religion or
prohibiting the free exercise thereof. the free exercise and enjoymen
of religious profession and worship without discrimination or
preference, shall forever be allowed.
No religious test shall be required for the exercise of civil or political
rights.
• Prohibition against appropriation of proceeds of taxation for use, benefit o
support of any church:
~ Article 6, section 29, paragraph 2
• prohibition against taxation of religious, charitable and educational entities
~ Article 6, Section 28, paragraph 3
2. National Internal Revenue Code of 1997, as amended
> organization and functions of the BIR
> tax on income, estate and donors taxes; VAT; Other percentage
taxes; excise taxes on certain goods
> documentary stamp tax; remedies; compliance required
> statutory offenses and penalties; allotment of Internal Revenue
> oversight committee; tax incentives
3. BIR`s Revenue Rules and Regulations/ Administrative Rulings an
opinions
> issuance to understand BIR interpretation and application of tax
laws:
a. Revenue Regulations (RRs)
Ø Issuance signed by the secretary of finance upon recommendation o
the commissioner of Internal Revenue, that specify, prescribe or
define rules and regulations of the effective enforcement of the
provisions of the national Internal Revenue Code (NIRC) and related
statutes.
b. Revenue Memorandum Circulars (RMCs)
Ø Are issuances that provides pertinent and applicable portions, as wel
as amplifications, of the rules, regulations and precedents issued by
the BIR and other agencies or officers.
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b. Revenue Memorandum Circulars (RMCs)
Ø Are issuances that provides pertinent and applicable portions, as wel
as amplifications, of the rules, regulations and precedents issued by
the BIR and other agencies or officers.
c. Administrative rulings or opinions BIR rulings:
Ø are the official position of the Bureau to queries raised by taxpayers
and other stakeholders relative to clarification an interpretation of ta
laws:
> legal and legislative division
> internal tax affairs division (ITAD)
d. Revenue Memorandum Orders (RMOs)
Ø issuances that provide directives or instructions; describe guidelines;
and outlining processes operations, activities, workflows, methods an
procedures necessary in the implementation of stated policies, goals
objectives, plans and programs of the Bureau in all areas of
operations, except auditing.
e. Revenue Administrative Orders (RAOs)
Ø Issuances that cover subject matters dealing strictly with the
permanent administrative setup of the Bureau, more specifically, the
organizational structure statement our functions and/or responsibiliti
of BIR offices.
f. Revenue Delegation of Authority Orders (RDAOs)
Ø refer to functions delegated by the commissioner to revenue officials
in accordance with law.
4. Decisions of Supreme Court nd Court of Tax Appeals
> Supreme Court decisions form part of the law of the land.
> worth of appeals in court of tax appeals decisions which have
become final and executory are also recognize interpretations of
Philippine tax law.
B. Secondary Tax Laws
1. Special Laws
2. Tax Treaties and international agreements
C. Other Tax Laws
1. Tariff and Customs Code
2. Local Governement Code (Book II)
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2. Tax Treaties and international agreements
C. Other Tax Laws
1. Tariff and Customs Code
2. Local Governement Code (Book II)
3. Local Tax Ordinances/ City or Municipal Tax Codes
SUMMARY:
1. taxation laws are enacted by the legislative branch, implemented by
executive branch and adjudicated by the judicial branch of the
government.
2. The primary tax laws applicable to income taxation are the constitution,
national Internal Revenue Code (NIRC), BIR issuances and final and
executory decisions of Supreme Court and the court of tax appeals.
3. The constitution provides taxation limitation provisions most notably the
right to due process of law, uniformity and equity in taxation an exemptio
of not for profit charitable, educational and religious institutions.
TYPES OF INCOME
1. Ordinary or Regular Income
○ (Applicable Income Tax: Graduated Rate/Regular Rate)
Compensation (salaries, wages and other benefits arising from
employment)
Business income (including the practice of profession and other income
not subject to Final Withholding Tax and Capital Gains Tax). (Section 24 A
2)
2. Passive Income
○ (Applicable Income Tax: Final Withholding Tax or Final Tax)
○ Incomes that you earn without active involvement. In other words, it is
income
that isn’t attached to an hourly wage or annual salary.
Specific Passive incomes recognized and subject to final withholding ta
(NIRC Sec. 24 B )
- Interest
on
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income
that isn’t attached to an hourly wage or annual salary.
Specific Passive incomes recognized and subject to final withholding ta
(NIRC Sec. 24 B )
- Interest
- Dividends
- Royalties
- Prizes, winnings
3. Capital Gains
○ (Applicable Income Tax: Capital Gains Tax)
○ Profit or income arising from the sale of property or an investment. These
capital gains from:
- The sale of shares of stock which was not done through the Philippin
Stock Exchange
- sale of real property
○ are the two capital gains which are subject to capital gains tax, also a fina
tax.
Important Considerations: Types of income and final Tax and Capital Gains Tax
- Certain passive incomes are subject to final withholding tax.
- Capital gains are subject to capital gains tax.
- Unless exempt under the law, incomes not subject to Final Withholding Tax and
Capital Gains Tax are classified as ordinary income and are subject to graduated
tax rate. (NIRC Sec. 24 C D)
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