Professional Documents
Culture Documents
Academic Year 2018-2019 Prof. Roberto Lock (also lectures by Atty. Tristan
Lopez)
INCOME TAX
Taxability according to source of income
GENERAL PRINCIPLES ON INCOME depends on whether the work or engagement
TAXATION has actually transpired within or without the
Philippines. Taxability does not depend on the
What is INCOME? place where the contract has been executed or
what currency has been earned, what is
Income is the gain derived from labor, capital, important is to determine where it was earned.
or both. Income is derived from compensation,
interest, dividend, or gains from sale of For purposes of income taxation, taxpayers are
properties. classified as individual or corporation.
Income and capital are not the same; income FOR INDIVIDUALS:
is the earnings while capital is an asset
devoted for production. Moreover, their tax is INCOME DERIVED INCOME DERIVED
rated differently. TYPE OF SOURCES FROM SOURCES FROM
INDIVIDUAL WITHIN THE WITHOUT THE
PHILIPPINES PHILIPPINES
GENERAL and SPECIFIC SITUS RULE (Sec. (R.C) INCOME BY INCOME BY
23; 42 NIRC) Resident- INDIVIDUAL INDIVIDUAL
Citizen (24A) IS TAXABLE IS TAXABLE
The classification of every taxpayer is (N-R.C) INCOME BY INCOME BY
according to their residency, length of physical Non- INDIVIDUAL INDIVIDUAL
Resident IS TAXABLE IS NOT
stay, and source of income.
Citizen (24A) TAXABLE
(OCW) (24A) INCOME BY INCOME BY
Taxability according to residency depends INDIVIDUAL INDIVIDUAL
on establishment of residency with respect to IS TAXABLE IS NOT
aliens (non-citizens) or on the length of TAXABLE
accumulated physical stay of an individual (R.A) INCOME BY INCOME BY
within or without the Philippines with respect Resident INDIVIDUAL INDIVIDUAL
to citizens. The term “most of the time during Alien (24A) IS TAXABLE IS NOT
TAXABLE
the taxable year” means the majority of days
(N-R.A-Eng) INCOME BY INCOME BY
per year. Since NIRC mentions year, (25A) INDIVIDUAL INDIVIDUAL
according to the Civil Code, taxable year shall IS TAXABLE IS NOT
be computed as 365 days, or 366 days during TAXABLE
leap years. Logically, the majority of days are (N-R.A- INCOME BY INCOME BY
should be computed as one-half plus one or N.Eng) INDIVIDUAL INDIVIDUAL
the computed half which is more than the (25B) IS TAXABLE IS NOT
lesser half. Thus, “most of the time during TAXABLE
the year” is either 183 days, or 184 days.
(N-R.A-Eng) Non-Resident Alien Engaged in
On the other hand, taxability according to trade or business or in the exercise of
length of physical stay defines whether a profession – One who stays in the Philippines
non-resident is engaged in business or not. most of the time during the taxable year.
A stay of more than 6 months (computed as 30
days per the Civil Code) or 181 days shall (N-R.A-N.Eng) Non-Resident Alien Not
classify the non-resident aliens to be engaged Engaged in trade or business or in the
in business whatever the purpose of their stay exercise of profession – vOne who stays out of
within the Philippines. the Philippines most of the time during the
taxable year.
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There is what we call Final Income Tax which is DECLARE NULL and VOID the following provisions
rated differently than the regular income tax of Revenue Regulations No. 10-2008:
schedule. It has a final rate on its own regardless of
income derived from its sources. They are only
applicable in Capital Gains and Passive Income,
(i) Sections 1 and 3, insofar as they disqualify
and Other Income.
MWEs who earn purely compensation income from
the privilege of the MWE exemption in case they
Option to be Taxed at 8% Gross Sales or
receive bonuses and other compensation-related
Receipt – this applies to self employed individuals
benefits exceeding the statutory ceiling of ₱30,000;
and professionals. They have the option to be taxed
at 8% instead of being subjected to the schedule of
income tax in excess of PhP 250,000, provided that
their annual gross vattable sales or services do not (ii) Section 3 insofar as it provides for the prorated
exceed 3,000,000. In case of mix income application of the personal and additional
exemptions under R.A. 9504 for taxable year 2008,
Compensation income is the income of the and for the period of applicability of the MWE
individual taxpayer arising from services rendered exemption to begin only on 6 July 2008.
pursuant to an employer-employee relationship.68
Under the NIRC of 1997, as amended, every form For Corporation, at…. Sec. 27-30
of compensation for services, whether paid in cash
or in kind, is generally subject to income tax and
consequently to withholding tax.69 The name
designated to the compensation income received by
an employee is immaterial.70 Thus, salaries, wages,
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TAX RATES BREAK DOWN (as amended by 2. For Capital Gains from BEST or other
R.A. 10963 [Tax Reform for Acceleration and disposition of Real Properties classified as
Inclusion]): capital asset (Sec. 24[D]) –
Sec. 24 of the NIRC mentions that income tax Final Tax of 6% @ any amount of
shall be imposed on the taxable income other gross selling price or FMV, whichever
than the income subject to certain passive is higher
income and capital gains. Such income is best
to be labelled OTHER INCOME.
3. For Certain Passive Income enumerated
I. FOR (R.C) Resident Citizens below (Sec. 24[B]):
[w/in & w/o], (OCW) Overseas
Contract Worker, (R.A) Resident- a) For Cash and/or Property Dividends
Aliens, (N-R.C) Non-Resident from a domestic corporation or ROHQ
Citizens, (N-R.A-Eng) Non-Resident of multinational companies; and, for
Alien Engaged in Trade or Business Individual Share on Distributable
[all others w/in]: Net Income after Tax of a joint
account, association, taxable
partnership, or a taxable joint venture
or consortium –
A. FROM CERTAIN PASSIVE INCOME AND
CAPITAL GAINS (Sec. 24[B-D]) Final Tax of 10% @ any amount of
the declared Dividend or Distributable
Net Income
1. For Capital Gains from BEST of Shares of
Stocks of a Domestic Corp held as capital Final Tax of 20% @ any amount of
asset (Sec. 24[C] in relation to Sec. 127): the declared Dividend or Distributable
Net Income FOR (N-R.A-Eng)
If not listed and traded in the local
stock exchange(Sec. 24[C] ) –
Non-Resident Alien Engaged
in Trade or Business ONLY
Final Tax of 5% @ 0-100,000 of NCG,
or 10% @ amount in excess thereof;
or, b) For Royalty from books, musical
composition & other literary works
Final Tax of 15% @ any amount of and –
NCG, starting January 2018.
Final Tax of 10% @ any amount of
royalties from books, literary works
If LISTED and TRADED in the local and musical composition
stock exchange (Sec. 127 – this is
actually under OPT) –
Stock Transaction Tax of 6/10 (0.6) Final Tax of 20% @ any amount of
@ 1% of gross selling price, per royalties from other intellectual
TRAIN, starting January 2018 properties
0% @ 0-250,000 of other
income not over 250,000,
20% @ excess of 250,000,
of other income over 250,000-400,000,
30,000 + 25% @ excess of 400,000, of
other income over 400,000-800,000,
130,000 + 30% @ excess of 800,000, of
other income over 800,000-2,000,000,
490,000 + 32% @ excess of 2,000,000
of other income over 2,000,000-8,000,000,
2,410,000 + 35% @ excess of 8,000,000,
of other income over 8,000,000;
The following items are Exclusions from Gross Benefits received by the persons regarded
Income: as Veterans as administered by the U.S.
Veterans Administration;
a) Life Insurance Proceeds received by the
beneficiaries except interest paid thereon; Benefits received by SSS, GSIS
Return of Premiums Paid under life beneficiaries plus retirement gratuity
insurance, endowment, or annuity received by government employees.
contracts received by the insured;
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B. Interest Expense
This includes:
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CAPITAL GAINS AND LOSSES (Dealings in b. Real estate held or being sold by real
Property) estate dealers;
“Gross Income means all income derived from Real estate dealer – Any person
whatever source, including, but not limited to, engaged in the business of buying
the following items – xxx xx xxx; (3) Gains and selling or exchanging real
derived from dealings in property; xxx xx properties on his own account as a
xxx.” principal and holding himself out as a
full or part-time dealer in real estate.
In the eye of Tax, there are two classifications
of “dealings in property”: sale and exchange Real estate developer – Any person
of Ordinary Assets, and sale and exchange engaged in the business of developing
of Capital Assets. The NIRC implicates tax real properties into subdivisions, or
upon them differently; it means that ordinary building houses on subdivided lots, or
assets shall be part of income taxable constructing residential or commercial
according to the Tax Schedule, while specific units, townhouses and other similar
capital assets are subject to Final Tax, but units for his own account and offering
those not specified are subject to the Tax them for sale or lease.
Schedule (losses are only deducted from
net capital gain, subject to net capital loss c. Securities /Stocks held or being sold
carry-over). by dealers in securities.
Any gain from the sale or exchange of property Dealers in Securities – All persons,
of a capital asset is not an ordinary income. who for their own account are
Conversely, any gain from the sale or engaged in the sale of stocks, bonds,
exchange of property treated or considered as exchanges, bullions, coined money,
ordinary income shall not be a capital gain. bank notes, promissory notes, or other
The same treatment applies in case of losses. securities as licensed by the SEC.
(Sec. 22[Z])
2. Property used in trade or business which
Property classification of an asset is important is subject to allowance for depreciation
because of the special tax rules or gains (property, plant and equipment; See Sec.
and losses from sales or exchanges of 34[F]);
capital assets which do not apply to gains
and losses from sale or exchanges of ordinary 3. (Land/Building, including improvements)
assets. Real property used in trade or business
by the taxpayer (including real property
Under the tax code, the following are held for rent, and those which have
ORDINARY ASSETS: been previously used, by the same
taxpayer, in trade or business);
1. Stock in trade of the taxpayer (not held as
capital asset) or other property of a kind Real estate lessor – Any person
which would properly be included in the engaged in the business of leasing
inventory of the taxpayer properly held by or renting real properties on his own
the taxpayer primarily for sale such as: account as a principal and holding
himself out as lessor of real
a. Merchandise inventory; properties being rented out or
offered for rent.
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CAPITAL ASSET is the totality of all assets Amounts received by an individual upon
including real properties, used in trade or retirement of bonds (even government
business, and other properties, whether or bonds), or other evidence of indebtedness
not related to trade or business, which are not issued by a corporation with interest coupons
classified as ordinary assets. or in registered form, even if considered as
Capital Gains from BEST of capital assets
Examples (counterpart of ordinary assets): are not taxable if maturity date is more
than 5 years.
Stock and securities held by
taxpayers other than dealers in securities; Gains or Losses from Short Sales are
considered Capital Gains from BEST of
Interest in partnership and joint capital assets, as well as those attributable to
venture; the failure to exercise privileges or
options to buy or sell property
Goodwill;
However, in pursuance of a merger, there is There is no net operating loss in capital gains
no gain or loss, whether ordinary or capital, BECAUSE THEY ARE, AGAIN, SUBJECT TO
on exchanges of property for stock among FINAL TAX. Besides, there is a net capital loss
the corporate parties to the merger; it applies allowable in the computation of net capital gain.
to individuals participating who, not
exceeding 4, as a result of such exchange, Net Capital Gain – Excess of the gains from
gains control of the merger. of capital assets over the losses from such
disposition;
Money and/or property received aside from
shares of stock are capital gains if not Net Capital Loss – Excess of the losses from
distributed in pursuance of the merger, and Barter, Exchange, Sale, Trade (BEST) or other
cannot be treated a capital loss (tangina may disposition of capital assets over the gains
shares ka na may property ka pa tapos loss?) from such disposition.
Property used in trade or business Capital Losses shall be allowed only to the
which ARE NOT depreciable (kung meron extent of the gains from the disposition of
man, ang nakikita ko lang is land); capital assets, except that losses from
receipt of deposits and sale of evidence of
Gains and Losses from dealings in indebtedness, issued by other corporation
property are differences between the amount with interest coupons or in registered form,
of value received by the taxpayer over the incurred by banks and trust companies, shall
determined value of the property he has not be limited.
disposed of arising from sale, and/or
exchange of assets. Gains and losses may Evidence of indebtedness means an
be classified as capital gain (loss) or instrument of credit normally dealt with in
ordinary gain (loss). the usual lending operations of a financial
institution.
Capital gain – Gain from the sale, exchange,
or other disposition of capital asset If an “individual” taxpayer sustains a net
Ordinary gain – Gain realized from the sale or capital loss in a given taxable year, such loss
exchange of ordinary asset including gains shall be treated the same in the next
from performance of services and business. succeeding taxable year as a loss from the
BEST of capital assets for not more than 12
Capital loss – Loss from the sale, exchange, months as a short-term capital loss before
or other disposition of capital asset, deductible personal exemptions (meaning, the losses
only from capital gains. incurred in the prior year are also losses for
the entire current taxable year). This is
Ordinary loss – Loss incurred from the sale or called Net Capital Loss Carry-Over.
exchange of ordinary asset. (It also means the
excess of deductions over the gross
income of a taxpayer during a taxable year - Holding Period – Length of time the asset
net operating loss; why? Because allowable was held by the taxpayer. It covers the period
deductions are really not income, they are in from the date of acquisition to the date of sale
fact losses, expenses, indebtedness, etc. or exchange;
[those words are significantly NOT INCOME,
that is why they are deducted]).
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For “individual” taxpayers, the following The factors in making a determination of which
percentages of the gain or loss recognized upon the is neither decisive nor conclusive; each case
BEST of a capital asset shall be taken into account must in the last analysis rest upon its own
in computing net capital gain, net capital loss, and peculiar facts and circumstances.
net income.
A property initially classified as a capital asset
(1) 100% of the CG/CL if the capital asset has may thereafter be treated as an ordinary asset
been held for not more than twelve (12) if the activity was in furtherance of or in the
months from the date of acquisition to the course of the taxpayer's trade or business.
date of disposition; and, Thus, a sale of inherited real property usually
gives capital gain or loss even though the
(2) 50% of the CG/CL if the capital asset has property has to be subdivided or improved or
been held for more than twelve (12) both to make it sellable. However, if the
months from the date of acquisition to the inherited property is substantially improved or
date of disposition. very actively sold or both it may be treated as
held primarily for sale to customers in the
ordinary course of the heir's business.
Exceptions for imposing capital gains tax
(or ordinary tax of course, since this is Selling a land not in the condition from which it
considered a capital asset): was acquired, with extensive improvements
undertaken to enhance the value of the lots
Capital gains realized from the sale of and make them more attractive to prospective
principal residence by natural persons buyers, would make that property cease to be
which proceeds are fully utilized in a capital asset if the amount spent to improve
acquiring a new principal residence within it is double the original cost. It indicates that
18 calendar months from the date of the seller intends to sell the property for
disposition, the historical cost of which sold customers in the ordinary course of business.
carried over to the new principal residence
built; provided, that the BIR Commissioner In this sense, we can say that the word
shall be notified within 30 days from the date “ordinary course of business” connotes an
of disposition for the availment of this activity wherein one actively attracts others to
exemption. This tax exemption can only be enter into a transaction with the subject
availed once every 10 years. Full utilization is property.
a must, and the portion not utilized is not
exempted from capital gains tax (final tax of Selling for liquidation purpose is not
6%). determinative of trade. The manner of trade is
paramount. If the sale was carried on in a
business-like manner, then it was done in the
There is no rigid rule or fixed formula by which ordinary course of business. Consequently,
it can be determined with finality whether the preferred tax status for capital assets will
property sold by a taxpayer was held be lost, and the gains therefrom shall be
primarily for sale to customers in the ordinarily taxed (See Calasanz, et al. vs. CIR,
ordinary course of his trade or business October 8, 1986)
(ordinary assets) or whether it was sold as a
capital asset.
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