TAX1: Finals

Income Taxation Definition: Income Tax VAT - Sec. 114(C), NIRC Percentage Taxes - Title V Revenue Regulations 2-98 Fringe Benefit, Defined: Any good, service or other benefit furnished or granted in cash or in kind by an employer to an individual employee (except rank and file employees as defined herein) such as, but not limited to, the following: (1) Housing; (2) Expense account; (3) Vehicle of any kind; (4) Household personnel, such as maid, driver and others; (5) Interest on loan at less than market rate to the extent of the difference between the market rate and actual rate granted; (6) Membership fees, dues and other expenses borne by the employer for the employee in social and athletic clubs or other similar organizations; (7) Expenses for foreign travel; (8) Holiday and vacation expenses; (9) Educational assistance to the employee or his dependents; and (10)Life or health insurance and other non-life insurance premiums or similar amounts in excess of what the law allows. Fringe Benefits Not Taxable The following fringe benefits are not taxable under this Section: (1) fringe benefits which are authorized and exempted from tax under special laws; (2) Contributions of the employer for the benefit of the employee to retirement, insurance and hospitalization benefit plans; (3) Benefits given to the rank and file employees, whether granted under a collective bargaining agreement or not; and (4) De minimis benefits as defined in the rules and regulations to be promulgated by the Secretary of Finance, upon recommendation of the Commissioner. Fringe Benefit Tax -Grossed-up monetary value (GMV) of fringe benefit (actual monetary value/(1applicable FBT rate)) x FBT rate FBT rates: Generally 32%, Exceptionally - 25%, 15% -deductibility : GMV De minimis benefits Small value but employee. This includes: are beneficial to the

Tax on all yearly profits arising from property, professions, trades or offices, or as a tax on a persons income, pRofits and the like. (Fisher v. Trinidad) Amount of money coming to a person, whether natural or juridical, as either payment for services or interest or profit from investment. not all receipts constitute income Realization income is realized, that is, due and demandable without actually receiving it. Recognition when the law recognizes such income. SCHEDULAR RATE: A system employed where the income tax treatment varies and is made to depend on the kind of category of taxable income of the tax payer. (Tan v. Rosario, 237 SCRA 324) GLOBAL RATE: A system employed where the tax system views indifferently the tax base TAXABILITY OF INCOME Requisites Presence of gain or profit Gain must be realized or received actually or constructively Gain must not be excluded from taxation by law or treaty GROSS INCOME All income derived from whatever source, including but not limited to: Gross Income from Compensation Principal form: salaries, wages, commissions

Other forms: Allowances (usually of a fixed amount)

fringe benefits received by rank and file (not with officers) hazard pay 13th month pay, bonuses

Differentiate from fringe benefits, de minimis benefits, those given for the convenience of the employer . Withholding Taxes All compensation must be subjected to withholding tax, except : Employee with annual compensation not exceeding the minimum wage. Withholding Tax is authorized under: Final Withholding Tax 57(A), NIRC: Creditable Tax at Source. Sec. 57(B), NIRC Tax-free Covenant Bonds. Sec. 57(C), NIRC Wages - Sec. 79-83, NIRC

a) Monetized unused vacation leave credits of private employees not exceeding 10 days during the year and monetized value of leave credits paid to government officials and employees b) Medical cash allowance to dependents of

Sotelo, MS

NOTES |1

TAX1: Finals
employees not exceeding P750 per semester or P125 per month c) Rice subsidy of P1,000 or 1 sack of 50 kg rice amounting to not more than P1,000 d) Uniform and clothing allowance not exceeding P3,000 per year e) Actual yearly medical benefits not exceeding P10,000 f) Laundry allowance of P300 per month g) Employee achievement awards, for length of service or safety achievement in the form of tangible personal property other than cash or gift certificate, with an annual monetary value not exceeding P10,000 received by the employee under an established written plan which does not discriminate in favor of highly paid employees h) Christmas and major anniversary celebrations not exceeding P5,000 per employee per annum i) Flowers, fruits, books or similar items given to employees under special circumstances on account of illness, marriage, birth of a baby, etc j) Daily meal allowance of overtime work not exceeding 25% of basic minimum wage If de minimis benefits paid exceed the ceilings in the regulations, Excess shall be lumped with other benefits which are taxable if the total exceeds P30,000 pursuant to - Sec. 32(B)(7)(e) of the NIRC Gross Income from Conduct of Trade or Business Individual o Subject to schedular tax rates o May avail of the optional standard deduction of 10% under Sec. 34 (L) Corporations o Regular 35% income tax rate o MCIT o 15% Gross income taxation Gross Income from Gains from dealings in property Tax payable dependent on the kind of property o Ordinary assets : those used in trade or business Subject to Income tax o Capital Assets : those not used in the trade or business Subject to Capital Gains Tax Gross Income from Interest Generally subject to final tax o Interest from any currency bank deposit and yield or other monetary benefit from deposit substitutes, trust funds and other similar arrangements : 20% o Interest from expanded foreign currency deposit : 7.5% in case of residents o Interest from pre-terminated long term deposits Except : interest on ordinary loans (subject to ord. income tax rates) Gross Income: Rents Subject to expanded withholding tax of 5%

Covers rental of both real and personal property , but as regards the latter, only with respect to the rental in excess of P10,000

Gross Income - Royalties Definition : Section 42 (A) (4), NIRC It is a passive income Generally subject to final tax 10% : royalties from books, other literary works and musical compositions in case of individuals 20% : all others Gross Income from Dividends Definition: shares of the stockholders to the income of the company. Subject to final tax 10% in case of individuals None in case of domestic and resident foreign corporations 15% in case of non-resident foreign corporations (provided the conditions under the tax-sparing rule are complied with 20% credited) Improperly Accumulated Earnings Tax (IAET) 10% IAET is imposed on every corporation formed for the purpose of avoiding income tax with respect to the shareholder by permitting earnings and profits to accumulate instead of being divided or distributed. Corp. cannot accumulate surplus profits in excess of 100% of paid-in capital Exceptions: o Publicly-held corporation o Banks and other non-bank financial intermediaries o Insurance companies Branch Profit Remittance Tax Any profit remitted by the branch to its head office shall be subject to a tax of 15% based on the total profits applied or earmarked for remittance without any deduction for the tax component thereof (except those activities which are registered with PEZA) Tax Sparing Rule - where the full amount of the taxes reduced or exempted by the source country is credited. Gross Income from Annuities Amount payable yearly or at other regular intervals for a definite or indefinite period.

Sotelo, MS

NOTES |2

TAX1: Finals
(c) Works & derives income from abroad & whose employment requires him to be physically present abroad most of the time (i.e. not less than 183 days) during the taxable year d) Previously considered as nonresident citizen & arrives in the Philippines at any time during the taxable year to reside permanently in the Philippines 3) Resident Alien 4) Nonresident Alien a) Those engaged in trade or business in the Philippines who come and stay in the Philippines for an aggregate period of more than 180 days during any calendar year b) Those not engaged in trade or business in the Philippines, which include nonresident aliens whose stay in the Philippines is 180 days or less 5) Special Individuals

Gross Income from Prizes and Winnings Generally: 20% final tax Prizes not exceeding P10,000 subject to the schedular rate PCSO and Lotto Winnings tax-exempt Prizes and Awards made primarily in recognition of religious , charitable, scientific, educational, artistic literary or civic achievement and prizes and awards in sports competition- tax exempt Gross Income - Pension Fixed sum of money paid regularly to a person as a favor, reward or subsidy Gross Income - Partners Distributive Share Income of General Professional Partnership not taxable Share of the Partners actually or constructively received taxed at schedular rate Exclusions Life insurance proceeds if paid to the heirs and beneficiaries. However, if such amounts are held by the insurer to pay interest thereon, such interest are included in income. Estate is regarded as beneficiary Irrevocable beneficiary NOT subject to ESTATE TAX. Return of premium Gifts, bequests and devises exempt from income but subject to ESTATE TAX Compensation for injuries and sickness Income exempt under treaty Retirement benefits, pension, gratuity Prizes and awards 13th month pay and other benefits not exceeding P30,000 GSIS, SSS, Medicare contributions (MEDICARE should be PhilHealth)

Aliens employed by regional or area headquarters and regional operating headquarters of multinational companies in the Philippines Aliens employed by offshore banking units Aliens employed by petroleum contractors and subcontractors 15% Gross Income Taxation.

Note: Personal and additional exemptions are available only to business income and compensation income earners. > Non-resident aliens engaged in trade or business (NRAETB) may be entitled to personal exemptions subject to reciprocity: 1. country from which he is a citizen has an income tax law; and 2. the income tax law of his country allows personal exemption to citizens of the Philippines not residing therein but deriving income therefrom and not to exceed the amount allowed in NIRC. 3. the personal exemption shall be equal to that allowed by the income tax law of the country to a citizen of the Philippines not residing therein, or the amount provided in the NIRC, whichever is LOWER. Corporate Taxpayers Domestic Corporations Resident Foreign Corporation Non Resident Foreign Corporations

TYPES OF TAXPAYERS A. Individuals Kinds of Individuals 1) Resident Citizen Subject to Schedular Tax Rates 5-32% Except non-resident alien not engaged in trade and business 2) Nonresident Citizen = citizen of the Philippines who: (a) Establishes the fact of his physical presence abroad with a definite intention to reside therein (b) Leaves the Philippines during the taxable year to reside abroad, as immigrant or for employment on a permanent basis.

Sotelo, MS

NOTES |3

TAX1: Finals
You can be temporarily exempt if you sustained substantial losses on account of : a prolonged labor dispute - strike by employees lasting for more than 6 months resulting to temporary shut down of business Relief from MCIT: force majeure - an irresistible force such as lightning, earthquake, storm, flood, war or insurgency legitimate business reverses - substantial losses due to fire, robbery, theft or embezzlement, or other economic reasons as determined by the Sec. of Finance

Corporate Taxpayers Regular/normal income tax at the global rate of 35% Minimum Corporate Income Tax Optional 15% Gross Income Taxation

Domestic corporations Domestic corporations not subject to normal income tax: Proprietary educational institutions Non-profit hospitals FCDUs Firms under special income tax regimes (PEZA, BCDA, BOI ITH)

Resident foreign corporations Resident foreign corporations not subject to normal income tax: International carriers Offshore banking units Regional Operating Headquarters Firms under special income tax regimes Non-resident foreign corporations Non-Resident foreign corporations not subject to normal income tax: q Lessor of cinematographic film q Lessor of vessel chartered by Fil. q Lessor of Aircraft, Machinery and Equipment

Allowable Deductions: General requisites Must be ordinary and necessary Paid or incurred in carrying on a trade or business Paid or incurred within the taxable year There is evidence or records on the deductions claimed under the law Not be contrary to law, public policy or morals It was subjected to the applicable withholding tax, if any.

Substantiation Requirements Official receipts or other adequate records showing the amount of the expense the nature of the expense incurred - to ascertain the direct relation of the expense with the trade, business or profession

Minimum Corporate Income Tax (MCIT) Withholding Tax Requirement Tax must be withheld at the time the expense is paid or becomes payable.

Did you start business operations prior to or in 1996? You will be subject to MCIT on income. year 2000

Payable refers to the time when the payment is legally demandable or enforceable When do you become liable to MCIT? Beginning on the 4th taxable year immediately after the corporation commenced business. Start of business operations shall be the year in which the corporation registered with the BIR. MCIT applies to... Domestic corporations Business partnerships Joint ventures Associations Resident foreign corporations

If you failed to withhold: Deduction can still be claimed/allowed if you pay the tax, including interest and surcharges (on failure to withhold), before or at the time of audit and investigation.

Wages: Payment for personal services actually rendered; Includes the grossed-up monetary value of fringe benefits, provided that final tax on such benefit has been paid.

Sotelo, MS

NOTES |4

TAX1: Finals
Interest Expense The interest is paid or incurred within a taxable year. It arises from an indebtedness related to the taxpayers profession or business. Documentary stamp tax Local taxes Import duties Deduction Business Taxes Credit Foreign Taxes

Optional treatment of interest expense Interest incurred to acquire property for use in the business- interest expense -Capital expenditure subject to amortization

Bad Debts Valid and subsisting debt Arises from business or trade Worthless and uncollectible during the taxable year. Actually charged off the books of accounts as of the end of the taxable year. Does not arise from a related party transaction

Interest Expense: Limitation Beginning year 2005: Losses Losses in the taxpayer's trade or business Casualty losses Capital losses Securities becoming worthless Losses from wash sales of stock or securities Wagering losses Abandonment losses Net Operating Loss Carry-over

Interest paid Less: 42%* of interest income subjected to final tax Allowable deduction

NOLCO (Net operating loss carry-over) *previously at 38% (2000) Excess of allowable deductions 33%, starting 2009 Over gross income for the taxable year (except NOLCO) Interest Expense: Exception Advance interest Interest between related parties (Sec. 36 B, NIRC) Interest arising from indebtedness to finance petroleum exploration

NOLCO requirements has not been claimed as deduction excludes loss during exempt periods no substantial change in ownership 75% of outstanding issued shares or paid-up capital

TAXES Taxes connected with business Does not include: Philippine income tax Income, war profits and excess profits taxes imposed by foreign country Estate and gift taxes Taxes assessed against local benefits of a kind tending to to increase the value of the property assessed Percentage tax, except VAT Excise Tax

Mode of carry-over: First-in-first-out basis Quarterly basis

Who cannot enjoy NOLCO? OBUs/FCDUs BOI-registered enterprises on losses incurred while under ITH PEZA, SBMA, CDA and CJHA Enterprises (whether under ITH or the 5% special tax regime);

Sotelo, MS

NOTES |5

TAX1: Finals
International shipping and air carriers Foreign contractors and sub-contractors of petroleum corporations with operating contracts with the government. development in accordance with the National Priority Plan Certain foreign institutions or international organizations Accredited non-government organizations Exclusively for scientific, research, educational, character-building, youth and sports development, health, social welfare, cultural, or charitable purpose No part of the net income inures to the benefit of a private individual Makes utilization directly for the active conduct of the activities, not later than 15th day of the 3rd month after the close of taxable year when the contribution was received Level of administrative expense does not exceed 30% of total expense Disposition of assets in the event of dissolution

Depreciation Reasonable allowance for the exhaustion, wear and tear, and obsolesence of property used in business Straight Line Working Hours Method Unit of Production Method Sum of years Digit Method Declining Balance Method

Special Depreciation Properties used in Petroleum Operations Straight Line Method Declining Balance Method

Depletion Exhaustion of natural resources as a result of production or severance from such mines or wells Deduction is computed under the costdepletion method No further deduction when cumulative allowance for depletion equals the capital invested Intangible Exploration and Development Drilling Costs

Donations Government Accredited domestic corporations or associations operated exclusively for religious, charitable, scientific, youth and sports development, cultural or educational purposes or for the rehabilitation of veterans, or Social welfare institutions, Non-government organizations

Research and Development Optional treatment ordinary and necessary business expense or deferred expense (amortized) not less than 5 years

Requirements for deductibility Certificate of Donation Actual receipt of donation Date of receipt Amount of cash donation. If in the form of property, indicate acquisition cost. If more than P1 million, copy of notice of donation submitted to BIR

Charitable Contributions General limitation Individuals- 10%, Corporations- 5% of taxable income from trade, business or profession

Fully deductible if given to: Government Used in undertaking priority activities education, health, youth and sports development, human settlements , science and culture and economic

Pension trusts Requisites Establishment of pension or retirement plan to provide for the payment of reasonable pensions for the employees Reasonable and actuarially sound pension plan Funded by the employer Amount contributed must no longer be subject to the control or disposition of the employer Amount is apportioned equal parts over a period of 10 consecutive years

Sotelo, MS

NOTES |6

TAX1: Finals

Premium Payments For health and/or hospitalization insurance For an individual taxpayer, including his family P2,400 per family Provided that the family has a gross income not exceeding P250,000 Non-deductible Expenses Provision for bad debts Deficiency income tax and VAT Depreciation on appraisal increase Unrealized fx loss Accruals for contingencies Accrual on retirement benefits Provision for inventory obsolescence Past service cost contribution not paid into a trust fund

Sotelo, MS

NOTES |7