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What is Income? Income means all wealth, which flows into the taxpayer other than as a mere return of capital.
Requisites for income to be taxable: • Gain or addition to net worth • Complete dominion • Not be excluded by law or treaty
What is Income Tax? Income Tax is a tax on a person's income, emoluments, profits arising from property, practice of profession, conduct of trade or business or on the pertinent items of gross income specified in the Tax Code of 1997 (Tax Code), as amended, less the deductions and/or personal and additional exemptions, if any, authorized for such types of income, by the Tax Code, as amended, or other special laws.
Types of Income: GENERAL (Part of GI, subject to 5%-32%) SPECIAL (not part, subject to final tax) • Interests, royalties, prizes • Compensation income and other winnings subject • Business income to final tax (Passive income) • Income from profession • • § § § Cash and property dividends, except stock dividends (Passive Income) Capital gains from sale of: Real property; Unlisted shares of stock; and Listed shares of stock (OPT)
Sources of Income: Item Source compensation Place of performance Interest Residence of debtor Rent , royalty, gain from sale of real property Location of property Gain from sale of personal property Place of sale Gain from sale of shares of stock: • Domestic corporation • Foreign corporation Dividend income from: • Domestic corporation • Foreign corporation • From within the Philippines • From within/without the Philippines
TAXPAYER RC, DC RA, NRC, NRAETB, RFC TAX BASE Taxable Income TAXABLE ON INCOME Within/without the Philippines Within the Philippines GPP, ET It depends on IT. NRA-NETB, NFC Gross Income Within the Philippines
CLASSIFICATION OF TAXPAYERS: Ø Individuals citizens aliens • resident citizens (RC) • resident aliens (RA) • non-resident citizens • non-resident aliens - (NRC) engaged in trade or • OCW* business within the Phils. (NRAETB) • non-resident aliens – not engaged in trade or business within the Phils. (NRANETB)
CLASSIFICATION OF TAXPAYERS: Ø Corporations Domestic (DC) Ø Estates Ø Trusts Foreign: • resident foreign corporation (RFC) • non-resident foreign corporation (NRFC)
TYPES OF TAXPAYERS INDIVIDUALS Resident Citizen/Alien Nonresident Citizen Nonresident Alien • Establishes physical presence • Engaged or not in trade abroad and intention to and business in the reside therein. Philippine (stay is more • Leaves Philippines during the /less than 180 days during taxable year to reside the taxable year). abroad, as immigrant or for • Aliens employed by permanent employment. offshore banking units and • Works and derives income petroleum from abroad and whose contractor/subcontractor. employment requires • Aliens employed by physical presence abroad regional/area (not less than 183 days). headquarters and regional • Previously considered as operating headquarters of nonresident and arrives multinational companies. during the taxable year to become a permanent resident.
TYPES OF TAXPAYERS CORPORATION Included: Not included: • Partnerships; • General professional • Joint stock companies; partnership; • Joint accounts; • Joint venture or • Associations; consortium undertaking • Insurance companies construction or energy operation under a service contract with the government
TYPES OF TAXPAYERS ESTATE TRUST • Property, rights, and • Arrangement created by obligations of a person which agreement under which title are not extinguished by his to property is passed to death and those that accrues another for conservation or thereto; investment with the income • Taxed in the same way as an and the corpus/principal individual provided it is distributed in accordance with irrevocable and earns income; the directions of the creator; and • What is taxed is the income • To be taxable as a separate not the property. entity, grantor must have absolute and irrevocable given up control and benefit over the trust.
INCOME TAXATION UNDER NIRC: • Net Income Tax/Taxable Income: GI – Deductions - Exemptions • Gross Income Tax: All income from whatever source. • Final Income Tax On passive income and capital gains • Fringe benefit tax: Benefits to managerial and supervisory employee; Ee is taxed but burden is on Er
INCOME TAXATION UNDER NIRC: • Capital Gains Tax: Real property and stocks not traded in stock market • Optional Corporate Income Tax • Minimum Corporate Income Tax: 2% of GI • Improperly Accumulated Earnings Tax • Branch Profit Remittance Tax • Preferential Rates: for special corporations
Who are required to file the ITRs? As for Individuals • Resident citizens receiving income within/outside – employees deriving purely compensation income: o from 2 or more employers, concurrently or successively at anytime during the taxable year o regardless of the amount, whether from a single or several employers during the calendar year, the income tax of which has not been withheld correctly (i. e. tax due is not equal to the tax withheld) resulting to collectible/refundable return – individuals deriving: o mixed income, i. e. , compensation income and income from the conduct of trade or business and/or practice of profession o other non-business, non-professional related income in addition to compensation income not otherwise subject to a final tax o purely compensation income from a single employer, although the income of which has been correctly withheld, but whose spouse is not entitled to substituted filing – self-employed individuals receiving income from the conduct of trade or business and/or practice of profession – marginal income earners
Who are required to file the ITRs? As for Individuals • Non-resident citizens receiving income from sources within the Philippines • Aliens, whether resident or not, receiving income from sources within the Philippines Corporations no matter how created or organized including partnerships – domestic corporations receiving income from within/outside the Philippines – foreign corporations receiving income from within the Philippines – taxable partnerships Estates and trusts engaged in trade or business
Who are NOT required to file the ITRs? • minimum wage earner • individual whose GI do not exceed his total personal and addt’l exemptions • individual whose compensation derived from one employer do not exceed P 60, 000 and the income tax has been correctly withheld • An individual whose income has been subjected to final withholding tax (alien employee as well as Filipino employee occupying the same position as that of the alien employee of regional headquarters and regional operating headquarters of multinational companies, petroleum service contractors and subcontractors and offshore-banking units, non-resident aliens not engaged in trade or business)
Who are NOT required to file the ITRs? • are qualified under “substituted filing”. However, it applies only if all of the following requirements are present : – the employee received purely compensation income (regardless of amount) during the taxable year – the employee received the income from only one employer in the Philippines during the taxable year – the amount of tax due from the employee at the end of the year equals the amount of tax withheld by the employer – the employee’s spouse also complies with all 3 conditions stated above – the employer files the annual information return (BIR Form No. 1604 -CF) – the employer issues BIR Form No. 2316 (Oct 2002 ENCS version ) to each employee.
Who are exempt from Income Tax? a. Non-resident citizen who: • establishes to the satisfaction of the Commissioner his physical presence abroad with a definite intention to reside therein; • leaves the Philippines during the taxable year to permanently reside abroad, either as an immigrant or for employment; • works and derives income from abroad and whose employment thereat requires him to be physically present abroad most of the taxable year; • has been previously considered as a non-resident citizen and who arrives in the Philippines at any time during the year to reside permanently in the Philippines will likewise be treated as a non-resident citizen during 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.
Who are exempt from Income Tax? b. Overseas Filipino Worker, including overseas seaman who is working and deriving income from abroad as an OFW is taxable only on income 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 will be treated as an OFW. NOTE: A Filipino employed as Philippine Embassy/Consulate service personnel of the Philippine Embassy/consulate is not treated as a non-resident citizen, hence his income is taxable.
What is Gross Income? Gross income means all income derived from whatever source.
What comprises Gross Income? GI includes, but is not limited to the following: • Compensation for services, in whatever form paid, including not limited to fees, salaries, wages, commissions, etc. • Gross income derived from the conduct of trade or business or the exercise of profession • Gains derived from dealings in property • Interest, Rents, Royalties, Dividends, Annuities, Prizes and winnings, Pensions • Partner's distributive share from the net income of the general professional partnerships
What are exclusions from GI? § § § § Life insurance Amount received by insured as return of premium Gifts, bequests and devises Compensation for injuries or sickness Income exempt under treaty Retirement benefits, pensions, gratuities, etc. Miscellaneous items: • income derived by the government or foreign government • prizes and awards in sport competition/ met conditions of Tax Code • 13 th month pay and other benefits • GSIS, SSS, Medicare and other contributions • gain from the sale of bonds, debentures or other certificate of indebtedness/redemption of shares in mutual fund
Gross Income Formula: Sale of Goods: Sale of Services: Gross Sales XXX Less: Sales Discounts (XXX) Sales Returns and Allowances (XXX) Net Sales XXX Less: Cost of Goods Sold** (XXX) Gross Income XXX Cost of Goods Sold** Gross Sales XXX Less: Sales Discounts (XXX) Sales Returns and Allowances (XXX) Gross Income XXX Trading/Merchandising concern: Manufacturing concern: Invoice cost Import duties Freight-In Insurance while in transit Raw materials Direct labor Manufacturing overhead Freight-in Insurance Other costs to bring RM to the factory
Who are entitled to Exemptions? Individuals who are either earning compensation income, engaged in business or deriving income from the practice of profession are entitled to personal and additional exemptions as follows: Personal Exemptions: For single individual, each married individual or judicially decreed as legally separated with no qualified dependents……………P 50, 000. 00 Additional Exemptions: For each qualified dependent, a P 25, 000 additional exemption can be claimed but only up to 4 qualified dependents
Who can claim additional exemption? • The husband who is deemed the head of the family unless he explicitly waives his right in favor of his wife • The spouse who has custody of the child or children in case of legally separated spouses. Provided, that the total amount of additional exemptions that may be claimed by both shall not exceed the maximum additional exemptions allowed by the Tax Code. • The individuals considered as Head of the Family supporting a qualified dependent
Who can claim deduction for the maximum P 2, 400 on health and/or hospitalization insurance? • Family gross income yearly should not be more than P 250, 000 • For married individuals, the spouse claiming the additional exemptions for the qualified dependents shall be entitled to this deduction
Can a benefactor of a senior citizen claim him/her as additional dependent in addition to his/her 3 qualified dependent children at P 25, 000 each? No, pursuant to Revenue Regulations 2 -94, the benefactor of a senior citizen cannot claim the additional exemption.
What is Taxable Income? Taxable income means the pertinent items of gross income specified in the Tax Code as amended, less the deductions and/or personal and additional exemptions, if any, authorized for such types of income, by the Tax Code or other special laws.
Computation of Taxable Income: Purely compensatory income Gross Compensation Less: Health/Hospital premium payments (P 2400 maximum per year) Exemptions-personal and addtl. Taxable Income ** for individuals Business income Gross Revenue/Sales Less: Cost of Sales Gross Income Less: Allowable Deductions **Exemptionspersonal and addtl. Taxable Income