Taxation One: Outline with Codals

amdg

Course Outline

Tax I

Based on Atty. Montero’s outline, with integrated notes from Atty. Salvador’s review class, Reyes, some Mamalateo, and the various reviewers in school.

A. In General......

B. General Principles......

C. Income Tax on Individuals......

D. Definitions

E. Income Tax Rates......

F. Proprietary Educational Institutions and Hospitals

G. GOCCs......

H. Passive Income

I. Minimum Corporate Income Tax (MCIT)......

J. Income Tax on Resident Foreign Corporations......

K. Income Tax on Non-resident Foreign Corporations

L. Improperly Accumulated Earnings Tax (IAET)......

M. Tax-exempt Corporations......

N. Taxable Income......

P. Fringe Benefits Tax (FBT! Whut up!)......

Q. Deductions......

R. Capital Gains and Losses (Sale or Exchange of Property)......

S. Determination of Gain or Loss from Sale or Transfer of Property

T. Situs of Taxation......

U. Accounting Periods and Methods......

V. Estates and Trusts......

W. Returns and Payment of Taxes......

W. Withholding Tax......

A. In General

Taxable Income

The essential difference between capital and income is that capital is a fund; and income is a flow. Capital is wealth, while income is the service of wealth.
Property is a tree, income is the fruit. Labor is a tree, income is the fruit. Capital is a tree, income the fruit.
Income means profits or gains. (Madrigal v Rafferty)
Income may be defined as the amount of money coming to a person or corporation within a specified time, whether as payment for services, interest or profit from investment.
A mere advance in the value of property of a person or a corporation in no sense constitutes the ‘income’ specified in the law. Such advance constitutes and can be treated merely as an increase in capital. (Fisher v Trinidad)
Cash dividends is taxed as income because it has been realized/received, while stock dividends is not taxed as income because it is merely inchoate as it is a mere anticipation of income (it becomes income once you sell it).
One is an actual receipt of profits; the other is a receipt of a representation of the increased value of the assets of a corporation. (Fisher v Trinidad)
When dealing with money or property, the questions you should ask are:
Is this capital or is this income?
Has it been realized/received or is it merely inchoate?

B. General Principles

SEC. 23. General Principles of Income Taxation in the Philippines. - Except when otherwise provided in this Code:

(A) A citizen of the Philippines residing therein is taxable on all income derived from sources within and without the Philippines;

(B) A nonresident citizen is taxable only on income derived from sources within the Philippines;

(C) An 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: Provided, That a seaman who is a citizen of the Philippines and who receives compensation for services rendered abroad as a member of the complement of a vessel engaged exclusively in international trade shall be treated as an overseas contract worker;

(D) An alien individual, whether a resident or not of the Philippines, is taxable only on income derived from sources within the Philippines;

(E) A domestic corporation is taxable on all income derived from sources within and without the Philippines; and

(F) A foreign corporation, whether engaged or not in trade or business in the Philippines, is taxable only on income derived from sources within the Philippines.

Who are taxable on income derived from all sources, whether within or outside the Philippines? Taxed worldwide!

Resident citizens.
Domestic corporations.
The other kinds of taxpayers are subject to tax only on income derived from Philippine sources.

Taxable Income / Taxable Income
Citizenship & Residency / Inside RP / Outside RP
Resident Citizen / Yes / Yes
Non-resident Citizen / Yes / No
Overseas Contract Worker / Yes / No
Resident Alien / Yes / No
Non-resident Alien / Yes / No
Domestic Corp / Yes / Yes
Foreign Corp / Yes / No

C. Income Tax on Individuals

Definitions

Resident citizens and resident aliens

Section 22 (F) The term "resident alien" means an individual whose residence is within the Philippines and who is not a citizen thereof.

Resident alien is an individual:

Whose residence is within the Philippines
Who is not a citizen

Mere physical or body presence is enough. Not intention to make the country one’s abode. (Garrison v CA)
An alien actually present in the Philippines who is not a mere transient or sojourner is a resident of the Philippines for purposes of the income tax. Whether he is a transient or not is determined by his intentions with regard to the length and nature of his stay.
A mere floating intention indefinite as to time, to return to another country is not sufficient to constitute him a transient.
If he lives in the Philippines and has no definite intention as to his stay, he is a resident. One who comes to the Philippines for a definite purpose which in its nature may be promptly accomplished is a transient.
But if his purpose is of such a nature that an extended stay may be necessary for its accomplishment, and to that end the alien makes his home temporarily in the Philippines, he becomes a resident, though it may be his intention at all times to return to his domicile abroad when the purpose for which he came has been consummated or abandoned. (RR 2)

Non-resident citizens

Sec 22 (E). The term "nonresident citizen" means:

(1) A citizen of the Philippines who establishes to the satisfaction of the Commissioner the fact of his physical presence abroad with a definite intention to reside therein.

(2) A citizen of the Philippines who leaves the Philippines during the taxable year to reside abroad, either as an immigrant or for employment on a permanent basis.

(3) A citizen of the Philippines who works and derives income from abroad and whose employment thereat requires him to be physically present abroad most of the time during the taxable year.

(4) A citizen who has been previously considered as nonresident citizen and who arrives in the Philippines at any time during the taxable year to reside permanently in the Philippines shall likewise be treated as a nonresident citizen for the taxable year in which he arrives in the Philippines with respect to his income derived from sources abroad until the date of his arrival in the Philippines.

(5) The taxpayer shall submit proof to the Commissioner to show his intention of leaving the Philippines to reside permanently abroad or to return to and reside in the Philippines as the case may be for purpose of this Section.

Meaning of non-resident citizen:

Citizen who establishes to the satisfaction of the Commissioner the fact of his physical presence abroad with a definite intention to reside therein
Citizen who leaves the Philippines during the taxable year to reside abroad, either as an immigrant or for employment on a permanent basis
Citizen who works and derives from abroad and whose employment thereat requires him to be physically present abroad most of the time during the taxable year
Citizen who has been previously considered as nonresident citizen and who arrives in the Philippines at any time during the taxable year to reside permanently in the Philippines shall likewise be treated as a nonresident citizen for the taxable year in which he arrives in the Philippines with respect to his income derived from sources abroad until the date of his arrival in the Philippines.

Who are non-resident citizens? (RR 1-79)

Immigrant – one who leaves the Philippines to reside abroad as an immigrant for which a foreign visa has been secured
Permanent employee – one who leaves the Philippines to reside abroad for employment on a more or less permanent basis
Contract worker – one who leaves the Philippines on account of a contract of employment which is renewed from time to time under such circumstance as to require him to be physically present abroad most of the time (not less than 183 days)

Non-resident citizens who are exempt from tax with respect to income derived from sources outside the Philippines shall no longer be required to file information returns from sources outside the Philippines beginning 2001. (RR 5-2001)
The phrase “most of the time” shall mean that the said citizen shall have stayed abroad for at least 183 days in a taxable year.

The same exemption applies to an OCW but as such worker, the time spent abroad is not material for tax exemption purposes all that is required is for the worker’s employement contract to pass through and be registered with the POEA. (BIR Ruling 33-2000).

Non-resident aliens engaged in business in the Philippines

Sec 22. (G) The term "nonresident alien" means an individual whose residence is not within the Philippines and who is not a citizen thereof.

Who are non-resident aliens?

An individual whose residence is not within the Philippines
Not a citizen of the Philippines

Determination is by his intention with regard to the length and nature of his stay. (Sec 5, RR 2)

Loss of residence by alien

An alien who has acquired residence in the Philippines retains his status until he abandons the same and actually departs from the Philippines.
A mere intention to change his residence does not change his status. An alien who has acquired a residence is taxable as a resident for the remainder of his stay in the Philippines. (Sec. 6, RR 2)

Minimum wage earner

Sec 22. (GG) The term ‘statutory minimum wage’ earner shall refer to rate fixed by the Regional Tripartite Wage and Productivity Board, as defined by the Bureau of Labor and Employment Statistics (BLES) of the DOLE.

(HH) The term ‘minimum wage earner’ shall refer to a worker in the private sector paid the statutory minimum wage; or to an employee in the public sector with compensation income of not more than the statutory minimum wage in the non-agricultural sector where he/she is assigned.

Fixed by the Regional Tripartite Wage and Productivity Board.
Minimum wage earner:
Private sector – paid the statutory minimum wage
Public sector – not more than the statutory minimum wage in the non-agricultural sector where he/she is assigned

Dependent

Sec 35. (B) For purposes of this Subsection, a "dependent" means a legitimate, illegitimate or legally adopted child chiefly dependent upon and living with the taxpayer if such dependent is not more than twenty-one (21) years of age, unmarried and not gainfully employed or if such dependent, regardless of age, is incapable of self-support because of mental or physical defect.

Dependent is a…
Legitimate, illegitimate or legally adopted child and living with the taxpayer
Who must be:
Not more than 21,
Unmarried, and
Not gainfully employed, OR if such,
Dependent, regardless of age, is incapable of self-support because of mental or physical defect.

To summarize, individual taxpayers are classified into:

Citizens, who are divided into:
Resident citizens – those citizens whose residence is within the Philippines; and
Non-resident citizens – those citizens whose resident is not within the Philippines.

2. Aliens, who are divided into:

Resident aliens – those individuals whose residence is within the Philippines and are not citizens thereof; and
Non-resident aliens – those individuals whose residence is not within the Philippines but temporarily in the country and are not citizens thereof. They are:
Those engaged in trade or business within the Philippines; and
Those who are not so engaged. (see Sec 23-25)

Kinds of income and income tax of individuals

Tax formula

SEC. 24. Income Tax Rates. -

(A) Rates of Income Tax on Individual Citizen and Individual Resident Alien of the Philippines.

(1) An income tax is hereby imposed:

(a) On the taxable income defined in Section 31 of this Code, other than income subject to tax under Subsections (B), (C) and (D) of this Section, derived for each taxable year from all sources within and without the Philippines be every individual citizen of the Philippines residing therein;

(b) On the taxable income defined in Section 31 of this Code, other than income subject to tax under Subsections (B), (C) and (D) of this Section, derived for each taxable year from all sources within the Philippines by an individual citizen of the Philippines who is residing outside of the Philippines including overseas contract workers referred to in Subsection(C) of Section 23 hereof; and

(c) On the taxable income defined in Section 31 of this Code, other than income subject to tax under Subsections (b), (C) and (D) of this Section, derived for each taxable year from all sources within the Philippines by an individual alien who is a resident of the Philippines.

(2) Rates of Tax on Taxable Income of Individuals. - The tax shall be computed in accordance with and at the rates established in the following schedule: (just see chart below, it’s the same thing)

For married individuals, the husband and wife, subject to the provision of Section 51 (D) hereof, shall compute separately their individual income tax based on their respective total taxable income: Provided, that if any income cannot be definitely attributed to or identified as income exclusively earned or realized by either of the spouses, the same shall be divided equally between the spouses for the purpose of determining their respective taxable income.

"Provided, That minimum wage earners as defined in Section 22 (HH) of this Code shall be exempt from the payment of income tax on their taxable income: Provided, further, That the holiday pay, overtime pay, night shift differential pay and hazard pay received by such minimum wage earners shall likewise be exempt from income tax.

Not over P10,000 / 5%
Over P10,000 but not over P30,000 / P500 + 10% of the excess over P10,000
Over P30,000 but not over P70,000 / P2,500 + 15% of the excess over P30,000
Over P70,000 but not over P140,000 / P8,500 + 20% of the excess over P70,000
Over P140,000 but not over P250,000 / P22,500 + 25% of the excess over P140,000
Over P250,000 but not over P500,000 / P50,000 + 30% of the excess over P250,000
Over P500,000 / P125,000 + 32% of the excess over P500,000

Gross Income

Less: Deductions

Taxable Income

Tax Rate

Tax Due

Know the tax base and the tax rate!

Only resident citizens and domestic corporations are taxed on income derived from abroad. Worldwide taxable!
The tax is imposed upon taxable compensation or employment income, business income, and income derived from the practice of professions derived by citizens and resident aliens.
Married individuals shall compute separately their individual income tax based on their respective total taxable income.
If any income cannot be definitely attributed to, or identified as income exclusively earned or realized by either of the spouses, the same shall be divided equally between them for the purpose of determining their respective taxable income.
Minimum wage earners are exempt from the payment of income tax on their taxable income. Holiday pay, overtime pay, night shift differential pay, and hazard pay received by them are likewise exempt from income tax.
A non-resident alien individual engaged in trade or business in the Philippines is subject to the income tax in the same manner as an individual citizen and a resident alien on taxable income received from sources within the Philippines.
For non-resident aliens not so engaged, the tax is
25% of the entire or gross income received from sources within the Philippines and
15% of the gross income received as compensation, salaries, and other emoluments by reason of his employment by:
regional or area headquarters and regional operating headquarters of multinational corporations;
offshore banking units established by a foreign corporation in the Philippines; or
by foreign petroleum service contractor or subcontractors operating in the Philippines. (Sec 25 (A-E))

Final income tax – interests, royalties, awards, dividends, capital gains on sale of shares, realty

Sec 24. (B) Rate of Tax on Certain Passive Income.

(1) Interests, Royalties, Prizes, and Other Winnings. - A final tax at the rate of twenty percent (20%) is hereby imposed upon the amount of interest from any currency bank deposit and yield or any other monetary benefit from deposit substitutes and from trust funds and similar arrangements; royalties, except on books, as well as other literary works and musical compositions, which shall be imposed a final tax of ten percent (10%); prizes (except prizes amounting to Ten thousand pesos (P10,000) or less which shall be subject to tax under Subsection (A) of Section 24; and other winnings (except Philippine Charity Sweepstakes and Lotto winnings), derived from sources within the Philippines: Provided, however, That interest income received by an individual taxpayer (except a nonresident individual) from a depository bank under the expanded foreign currency deposit system shall be subject to a final income tax at the rate of seven and one-half percent (7 1/2%) of such interest income: Provided, further, That interest income from long-term deposit or investment in the form of savings, common or individual trust funds, deposit substitutes, investment management accounts and other investments evidenced by certificates in such form prescribed by the Bangko Sentral ng Pilipinas (BSP) shall be exempt from the tax imposed under this Subsection: Provided, finally, That should the holder of the certificate pre-terminate the deposit or investment before the fifth (5th) year, a final tax shall be imposed on the entire income and shall be deducted and withheld by the depository bank from the proceeds of the long-term deposit or investment certificate based on the remaining maturity thereof:

Four (4) years to less than five (5) years - 5%;

Three (3) years to less than (4) years - 12%; and

Less than three (3) years - 20%

(2) Cash and/or Property Dividends - A final tax at the following rates shall be imposed upon the cash and/or property dividends actually or constructively received by an individual from a domestic corporation or from a joint stock company, insurance or mutual fund companies and regional operating headquarters of multinational companies, or on the share of an individual in the distributable net income after tax of a partnership (except a general professional partnership) of which he is a partner, or on the share of an individual in the net income after tax of an association, a joint account, or a joint venture or consortium taxable as a corporation of which he is a member or co-venturer:

Six percent (6%) beginning January 1, 1998;

Eight percent (8%) beginning January 1, 1999; and