Income Taxation: General Principles and Definitions

Income Taxation
General Principles and Definitions

Tax 001 Atty. Froilyn P. Doyaoen-Pagayatan
I. General Principles
1. Income Tax Systems a. Global Tax System (Section 27A) b. Schedular Tax System [Section 24(2)] c. Semi-schedular or semi-global Tax System
Not to be used without express persmission of Atty. Froiilyn P. Doyaoen-Pagayatan.
2. Features of the Philippine Income Tax a. Direct tax b. Progressive c. Comprehensive d. Semi-schedular or semi-global tax system
3. Definitions
1. Income, in general income means all wealth that flows into the taxpayer other than as a mere return of capital (Section 35, Revenue Regulations No. 2)
Tests of Realization of Income - severance test - substantial alteration of interest test - flow of wealth test
3. Definitions
2. Ordinary income - includes any gain from the sale or exchange of property which is not a capital asset or property described in Section 39(A)(1). The term 'ordinary loss' includes any loss from the sale or exchange of property which is not a capital asset.
3. Definitions
3. Capital asset - means property held by the taxpayer (whether or not connected with his trade or business), but does not include: a. stock in trade of the taxpayer; or b. other property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year; or, c. property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business; or d. property used in the trade or business, of a character which is subject to the allowance for depreciation provided in Subsection (F) of Section 34; or, e. real property used in trade or business of the taxpayer.
3. Definitions
4. Gross income derived from business shall be equivalent to gross sales less sales returns, discounts and allowances and cost of goods sold. Cost of goods sold - shall include all business expenses directly incurred to produce the merchandise to bring them to their present location and use.
3. Definitions
4. Gross income (cont.) For a trading or merchandising concern, 'cost of goods sold' shall include the invoice cost of the goods sold, plus import duties, freight in transporting the goods to the place where the goods are actually sold, including insurance while the goods are in transit.
3. Definitions
4. Gross income (cont.) For a manufacturing concern, 'cost of goods manufactured and sold' shall include all costs of production of finished goods, such as raw materials used, direct labor and manufacturing overhead, freight cost, insurance premiums and other costs incurred to bring the raw materials to the factory or warehouse.
3. Definitions
4. Gross income (cont.) In the case of taxpayers engaged in the sale of service, 'gross income' means gross receipts less sales returns, allowances and discounts.
3. Definitions
5. Taxable income - means the pertinent items of gross income specified in the Tax Code, 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.
3. Definitions
6. Corporations- include partnerships, no matter how created or organized, joint-stock companies, joint accounts (cuentas en participacion), associations, or insurance companies, but does not include: a. general professional partnerships; b. joint venture or consortium formed for the purpose of undertaking construction projects or engaging in petroleum, coal, geothermal and other energy operations pursuant to an operating or consortium agreement under a service contract with the Government. 'General professional partnerships' are partnerships formed by persons for the sole purpose of exercising their common profession, no part of the income of which is derived from engaging in any trade or business.
3. Definitions
7. Domestic corporation refers to a corporation created or organized in the Philippines or under its laws.
8. Foreign corporation - refers to a corporation not created or organized in the Philippines or under its laws.
3. Definitions
9. Non-resident Citizen: (a) 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. (b) 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. (c) 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.
3. Definitions
9. Non-resident Citizen (cont.): (d) 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. (e) 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 purposes of this Section.
3. Definitions
10. Resident alien refers to an individual whose residence is within the Philippines and who is not a citizen thereof.
11. Nonresident alien - means an individual whose residence is not within the Philippines and who is not a citizen thereof.
3. Definitions
12. Resident foreign corporation refers to a foreign corporation engaged in trade or business within the Philippines.
13. Nonresident foreign corporation - applies to a foreign corporation not engaged in trade or business within the Philippines.
3. Definitions
14. Shares of stock - shall include shares of stock of a corporation, warrants and/or options to purchase shares of stock, as well as units of participation in a partnership (except general professional partnerships), joint stock companies, joint accounts, joint ventures taxable as corporations, associations, and recreation or amusement clubs (such as golf, polo or similar clubs), and mutual fund certificates.
3. Definitions
15. Taxable year - means the calendar year, or the fiscal year ending during such calendar year, upon the basis of which the net income is computed under this Title.
Fiscal year - means an accounting period of twelve (12) months ending on the last day of any month other than December.
3. Definitions
16. Rank and file employees - shall mean all employees who are holding neither managerial nor supervisory position as defined under existing provisions of the Labor Code of the Philippines, as amended.
3. Definitions
16. Rank and file employees (cont.) Article 212(m) of the Labor Code defines a managerial employee as one who is vested with powers or prerogatives to lay down and execute management policies and/or to hire, transfer, suspend, lay-off, recall, discharge, assign or discipline employees, or to effectively recommend such managerial actions. Supervisory employees, as defined in Article 212(m) are those who, in the interest of the employer, effectively recommend such managerial actions if the exercise of such authority is not merely routinary or clerical in nature but requires the use of independent judgment.
3. Definitions
17. 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.
3. Definitions
17. Minimum wage earner (cont.) Statutory minimum wage - shall refer to the rate fixed by the Regional Tripartite Wage and Productivity Board, as defined by the Bureau of Labor and Employment Statistics (BLES) of the Department of Labor and Employment (DOLE).
3. Definitions
*Trade, business or profession - shall not include performance of services by the taxpayer as an employee.
3. Definitions
18. Regional or area headquarters - shall mean a branch established in the Philippines by multinational companies and which headquarters do not earn or derive income from the Philippines and which act as supervisory, communications and coordinating center for their affiliates, subsidiaries, or branches in the Asia-Pacific Region and other foreign markets. Exempt from income tax.
3. Definitions
19. Regional operating headquarters - shall mean a branch established in the Philippines by multinational companies which are engaged in any of the following services: general administration and planning; business planning and coordination; sourcing and procurement of raw materials and components; corporate finance advisory services; marketing control and sales promotion; training and personnel management; logistic services; research and development services and product development; technical support and maintenance; data processing and communication; and business development. Subject to 10% income tax on taxable income.
3. Definitions 20. Proprietary educational institution - is any private school maintained and administered by private individuals or groups with an issued permit to operate from the Department of Education, Culture and Sports (DECS), or the Commission on Higher Education (CHED), or the Technical Education and Skills Development Authority (TESDA), as the case may be, in accordance with existing laws and regulations. Subject to 10% tax on taxable income.
4. Criteria in Imposing Philippine Income Tax
a. Citizenship Principle Section 23, Tax Code b. Residence Principle Section 23, Tax Code c. Source Principle Section 42, Tax Code
5. Taxable Period
a. Calendar Period Sections 22(Q) and 42, Tax Code b. Fiscal Period Section 43, Tax Code c. Short Period Section 47, Tax Code
6. Kinds of Taxpayers a. Individual Taxpayers i. Citizens - Resident citizens - Non-resident citizens - Section 22(E), Tax Code ii. Aliens - Resident aliens Section 22(F), Tax Code - Non-resident aliens Section 22(G), Tax Code - Engaged in trade or business: Section 25(A)(1), Tax Code - Not engaged in trade or business Section 25(B)(1), Tax Code
6. Kinds of Taxpayers (cont.)
b. Corporations Section 22(B), Tax Code i. Domestic corporations - Section 22(C), Tax Code ii. Foreign corporations - Section 22(D), Tax Code - Resident foreign corporations (Section 22(H), Tax Code) - Non-resident foreign corporations (Section 22(I), Tax Code) c. Partnerships d. General Professional Partnerships Section 22(B), Tax Code e. Estates and Trusts Section 60, Tax Code f. Co-ownerships
III. Situs Rules on Income Taxation

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 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;

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

Section 42. Income from Sources Within the Philippines. (A) Gross Income From Sources Within the Philippines. - The following items of gross income shall be treated as gross income from sources within the Philippines: (1) Interests - Interests derived from sources within the Philippines, and interests on bonds, notes or other interestbearing obligations of residents, corporate or otherwise; (2) Dividends - The amount received as dividends: (a) From a domestic corporation; and (b) From a foreign corporation, unless less than fifty percent (50%) of the gross income of such foreign corporation for the three-year period ending with the close of its taxable year preceding the declaration of such dividends (or for such part of such period as the corporation has been in existence) was derived from sources within the Philippines as determined under the provisions of this Section

SEC 42. Income from Sources Within the Philippines. (A) Gross Income From Sources Within the Philippines. The following items of gross income shall be treated as gross income from sources within the Philippines (cont.):
(3) Services. - Compensation for labor or personal services performed in the Philippines;
(4) Rentals and Royalties. - Rentals and royalties from property located in the Philippines or from any interest in such property

SEC 42. Income from Sources Within the Philippines. (A) Gross Income From Sources Within the Philippines. The following items of gross income shall be treated as gross income from sources within the Philippines (cont.): (5) Sale of Real Property. - Gains, profits and income from the sale of real property located in the Philippines; and (6) Sale of Personal Property. - Gains, profits and income derived from the purchase of personal property within and its sale without the Philippines, or from the purchase of personal property without and its sale within the Philippines shall be treated as derived entirely from sources within the country in which sold.

Section 42(C) Gross Income From Sources Without the Philippines. - The following items of gross income shall be treated as income from sources without the Philippines: (1) Interests other than those derived from sources within the Philippines as provided in paragraph (1) of Subsection (A) of this Section; (2) Dividends other than those derived from sources within the Philippines as provided in paragraph (2) of Subsection (A) of this Section; (3) Compensation for labor or personal services performed without the Philippines;

Section 42(C) Gross Income From Sources Without the Philippines. - The following items of gross income shall be treated as income from sources without the Philippines: (4) Rentals or royalties from property located without the Philippines or from any interest in such property including rentals or royalties for the use of or for the privilege of using without the Philippines, patents, copyrights, secret processes and formulas, goodwill, trademarks, trade brands, franchises and other like properties; and (5) Gains, profits and income from the sale of real property located without the Philippines.
IV. Organizations Exempt from Income Tax

SEC 30. Exemptions from Tax on Corporations. The following organizations shall not be taxed under this Title in respect to income received by them as such: (A) Labor, agricultural or horticultural organization not organized principally for profit; (B) Mutual savings bank not having a capital stock represented by shares, and cooperative bank without capital stock organized and operated for mutual purposes and without profit;

SEC 30. Exemptions from Tax on Corporations. - The following organizations shall not be taxed under this Title in respect to income received by them as such: (C) A beneficiary society, order or association, operating for the exclusive benefit of the members such as a fraternal organization operating under the lodge system, or a mutual aid association or a nonstock corporation organized by employees providing for the payment of life, sickness, accident, or other benefits exclusively to the members of such society, order, or association, or nonstock corporation or their dependents;
(D) Cemetery company owned and operated exclusively for the benefit of its members;

SEC 30. Exemptions from Tax on Corporations. - The following organizations shall not be taxed under this Title in respect to income received by them as such: (E) Nonstock corporation or association organized and operated exclusively for religious, charitable, scientific, athletic, or cultural purposes, or for the rehabilitation of veterans, no part of its net income or asset shall belong to or inure to the benefit of any member, organizer, officer or any specific person; (F) Business league, chamber of commerce, or board of trade, not organized for profit and no part of the net income of which inures to the benefit of any private stockholder or individual;

SEC 30. Exemptions from Tax on Corporations. - The following organizations shall not be taxed under this Title in respect to income received by them as such: (G) Civic league or organization not organized for profit but operated exclusively for the promotion of social welfare; (H) A nonstock and nonprofit educational institution;
(I) Government educational institution;

SEC 30. Exemptions from Tax on Corporations. - The following organizations shall not be taxed under this Title in respect to income received by them as such: ( (J) Farmers' or other mutual typhoon or fire insurance company, mutual ditch or irrigation company, mutual or cooperative telephone company, or like organization of a purely local character, the income of which consists solely of assessments, dues, and fees collected from members for the sole purpose of meeting its expenses; and (K) Farmers', fruit growers', or like association organized and operated as a sales agent for the purpose of marketing the products of its members and turning back to them the proceeds of sales, less the necessary selling expenses on the basis of the quantity of produce finished by them;

SEC 30. Exemptions from Tax on Corporations. - The following organizations shall not be taxed under this Title in respect to income received by them as such: Notwithstanding the provisions in the preceding paragraphs, the income of whatever kind and character of the foregoing organizations from any of their properties, real or personal, or from any of their activities conducted for profit regardless of the disposition made of such income, shall be subject to tax imposed under this Code.
DACODECO.pdf
V. Gross Income
1. Items Included in Gross Income, In General a. Compensation Income - Section 32(A)(1), Tax Code b. Fringe Benefits - Section 33, Tax Code c. Professional Income - Section 32(A)(2), Tax Code d. Income from Business - Section 32(A)(2), Tax Code e. Income from Dealings in Ordinary and Capital Property - Section 32(A)(3), Tax Code
V. Gross Income
1. Items Included in Gross Income, In General
f. Passive Investment Income - Interest Income [Section 32(4), Tax Code] - Dividend Income [Section 32(7), Tax Code] - Royalty Income [Section 32(6), Tax Code] - Rental Income [Section 32(5), Tax Code] g. Annuities, Proceeds from Life Insurance or Other Insurance
V. Gross Income
1. Items Included in Gross Income, In General h. Prizes and Awards - Section 32(9), Tax Code
i. Pensions, retirement benefit, or separation pay Section 32(10),Tax Code]

j. Partners distributive share from the net income of the general professional partnerships
V. Gross Income
2. Exclusions from Gross Income Section 32(B), Tax Code a. Proceeds of life insurance policies b. Return of premium paid c. Value of property acquired by gift, bequest, devise or descent d. Amount received through accident or health insurance e. Income exempt under tax treaty f. Retirement benefits, pensions, gratuities g. Miscellaneous: 13th month pay, income of foreign governments, winnings, prizes, and awards, including those in sports competitions
V. Gross Income
3. Deductions from Gross Income Section 34, Tax Code a. Expenses b. Interest c. Taxes d. Losses e. Bad Debts f. Depreciation g. Charitable and Other Contributions h. Contributions to Pension Trusts
V. Gross Income
4. Optional Standard Deduction Section 34(L), Tax Code i. Individuals, except non-resident aliens ii. Corporations, except non-resident foreign corporations 5. Personal and Additional Exemptions Section 35, Tax Code i. Basic Personal Exemptions ii. Additional Exemptions for Dependents
V. Gross Income
5. Items Not Deductible Section 36, Tax Code a. Personal, living of family expenses b. Amount paid for new buildings or for permanent improvements (capital expenditures) c. Amount expended in restoring property d. Premiums paid on life insurance policy covering life of an officer or employee e. Interest expense, bad debts, and losses from sales of property between related parties
V. Gross Income
5. Items Not Deductible (cont.) f. Losses from sales or exchange of property g. Non-deductible interest h. Non-deductible taxes i. Non-deductible losses j. Losses from wash sales of stock or securities
VI. Taxation of Individuals

1. Kinds of Individual Taxpayers a. Citizens i. Resident citizens ii. Non-resident citizens [Section 22(E), Tax Code b. Aliens i. Resident aliens Section 22(F), Tax Code ii. Non-resident aliens Section 22(G), Tax Code - Engaged in trade or business Section 25(A)(1), Tax Code - Not engaged in trade or business Section 25(B)(1), Tax Code
VI. Taxation of Individuals

b. Aliens (cont.) * Resident alien - A resident alien is one who is not a mere transient or sojourner. Whether an alien is a transient or not is determined by his intentions with regard the length and nature of his stay.
1. Kinds of Individual Taxpayers

b. Aliens (cont.) * Resident alien (cont.) - Under the PH-US Tax Treaty, residence of an individual is primarily in the country where he maintains his permanent home. If he has a permanent home in both the Philippines and the US or in neither of the Philippines and the US, he shall be deemed to be a resident of that country with which his personal and economic relations are closest (center of vital interests).
1. Kinds of Individual Taxpayers

b. Aliens (cont.) * Nonresident alien doing business in the PH A nonresident alien who shall come to the Philippines and stay therein for an aggregate period of more than 180 days during any calendar year.
2. General Principles of Income Taxation (Section 23, Tax Code)

Taxpayer Income Within Income Without
Resident Citizen
Taxable
Taxable
Non-resident Citizen Taxable (including OFW) Alien (Resident or Taxable Non-resident)
X X
3. Individual Sources of Income

a. Compensation Income - Section 32(A)(1), Tax Code
Compensation" means all remuneration for services performed by an employee for his employer under an employer-employee relationship. The name by which the remuneration for services is designated is immaterial. Thus, salaries, wages, emoluments and honoraria, allowances, commissions (e.g. transportation, representation, entertainment and the like); fees including director's fees, if the director is, at the same time, an employee of the employer/corporation; taxable bonuses and fringe benefits constitute compensation income.

a. Compensation Income - Section 32(A)(1), Tax Code b. Fringe Benefits - Section 33, Tax Code c. Professional Income - Section 32(A)(2), Tax Code d. Income from Business - Section 32(A)(2), Tax Code e. Income from Dealings in Ordinary and Capital Property - Section 32(A)(3), Tax Code f. Annuities, Proceeds from Life Insurance or Other Insurance

g. Passive Investment Income - Interest Income [Section 32(4), Tax Code] - Dividend Income [Section 32(7), Tax Code] - Royalty Income [Section 32(6), Tax Code] - Rental Income [Section 32(5), Tax Code] h. Prizes and Awards - Section 32(9), Tax Code i. Pensions, retirement benefit, or separation pay Section 32(10),Tax Code] j. Partners distributive share from the net income of the general professional partnerships
4. Exclusions from Individual Gross Income

i. Life insurance proceeds of life insurance policies paid to the heirs upon the death of the insured
ii. Return of premium paid amount received by insured as a return of premium paid by him under life insurance, endowment, or annuity contracts
iii. Gifts or inheritance - value of property acquired by gift, bequest, devise or descent, but income from such property shall be included in gross income iv. Compensation for injuries or sickness - amount received through accident or health insurance as compensation for personal injury or sickness, including damages received

B. Exclusions from Gross Income (cont.) v. Income exempt under tax treaty
ARTICLE 15 INDEPENDENT PERSONAL SERVICES (1) Xxx. (2) Income derived by an individual who is a resident of one of the Contracting States from the performance of personal services in an independent capacity in the other Contracting State may be taxed by that other Contracting State, if: (a) Xxx. (b) He is present in that other Contracting State for a period or periods aggregating 90 days or more in the taxable year; or
4. Exclusions from Gross Income (cont.) vi. Retirement benefits, separation pay pensions, gratuities Retirement: Companys private benefit plan 50 years old and 10 years service Republic Act 7641 60 years old and 5 years of service
4. Exclusions from Gross Income (cont.) vi. Retirement benefits, separation pay pensions, gratuities Separation pay: Any amount received by employee or his heirs resulting from separation from service due to death, sickness, or physical disability or for any cause beyond the control of employee.
4. Exclusions from Gross Income (cont.) vi. Retirement benefits, separation pay pensions, gratuities Pensions: Pensions received by resident or nonresident citizens and permanent resident aliens from foreign governments and other institutions, public or private.
4. Exclusions from Gross Income (cont.) vi. Retirement benefits, separation pay pensions, gratuities SSS/GSIS benefits: Benefits received from or enjoyed under the SSS or GSIS. US Veterans: payments to residents by the US Veterans Administration
4. Exclusions from Gross Income (cont.) vii. Prizes and awards: made in recognition of religious, charitable, scientific, educational, artistic, literary, or civic achievement, provided: - recipient was selected without any action on his part to enter the contest - recipient is not required to render substantial future services as condition
4. Exclusions from Gross Income (cont.) viii. Prizes and awards in sports competition: all prizes and awards given to athletes in local and international sports competitions and tournaments, whether in the Philippines or not, and sanctioned by their national sports associations
4. Exclusions from Gross Income (cont.) ix. 13th month pay: gross benefits, including productivity incentives and Christmas bonus, received by employees of public and private entities up to the amount of Php30,000.00.
4. Exclusions from Gross Income (cont.) x. Gains from sale of bonds: gains from sale or exchange or retirement of bonds or debentures with maturity of more than five (5) years.
xi. Gains from redemption of shares in mutual funds.
5. Taxation of Resident Citizens, Nonresident Citizens, and Resident Aliens

a. General Rule: resident citizens are taxable on income from all sources within and without the Philippines; nonresident citizens and aliens are taxable on income from sources within the Philippines.

b. Taxation of Compensation Income (cont.) i. Inclusions - Regular Salary/Wage - Separation pay/retirement benefit - Bonuses, 13th month pay not exempt - Directors fees, if director is also employee - Allowances

b. Taxation of Compensation Income (cont.) ii. Exclusions - Fringe benefit not subject to tax (see schedule of fringe benefits) - De minimis benefits (see schedule of de minimis benefits) De Minimis Benefits.doc - 13th month pay and other benefits within the Php30,000.00 threshold

b. Taxation of Compensation Income (cont.) iii. Deductions - Personal and additional exemptions - Php50,000 personal exemption - Php25,000 additional exemption per dependent, not exceeding 4 - Health and hospitalization insurance

b. Taxation on Compensation Income (cont.) iv. Tax Rates on taxable income:
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. Assignment\BIR Form 2316.pdf

c. Taxation of Business Income/Income from Practice of Profession i. Inclusions taxable non-compensation income derived by self-employed and professionals, such as those arising from business, trade or exercise of profession.

c. Taxation of Business Income/Income from Practice of Profession ii. Exclusions any income subject to final tax such as royalties, interest on bank accounts, dividends, capital gains from sale of capital asset, capital gains from sale shares of stock. Any income or gain on which a final tax is imposed shall no longer be included in the taxable net income of the taxpayer. The final tax is imposed without any deduction.

*Note:
Final Withholding Tax Under the final withholding tax system the amount of income tax withheld by the withholding agent is constituted as a full and final payment of the income tax due from the payee on the said income. Creditable Withholding Tax Under the creditable withholding tax system, taxes withheld on certain income payments are intended to equal or at least approximate the tax due of the payee on said income. The income recipient is still required to file an income tax return, to report the income and/or pay the difference between the tax withheld and the tax due on the income.

c. Taxation of Business Income/Income from Practice of Profession iii. Deductions from gross income: (a) Expenses: ordinary and necessary expenses
paid or incurred during the taxable year in carrying on or which are directly attributable to, the development, management, operation and/or conduct of the trade, business or exercise of a profession, including: a) salaries and wages, b) travel expenses, c) rentals, d) entertainment, etc.

c. Taxation of Business Income/Income from Practice of Profession iii. Deductions from gross income:
(b) Interest -33% of the amount of amount of interest paid or incurred within a taxable year on indebtedness in connection with the taxpayers profession, trade or business

c. Taxation of Business Income/Income from Practice of Profession iii. Deductions from gross income: (c) Taxes -Taxes paid or incurred within the taxable year in connection with the taxpayer's profession, trade or business, except:
- Income tax; - Income taxes imposed by authority of any foreign country, unless taxpayer claims the same as foreign tax credit; - Estate and donor's taxes; - Taxes assessed against local benefits of a kind tending to increase the value of the property assessed

c. Taxation of Business Income/Income from Practice of Profession iii. Deductions from gross income: (d) Losses - Losses actually sustained during the taxable
year and not compensated for by insurance or other forms of indemnity provided it is incurred in trade, profession or business and the loss pertains to property connected with the trade, business or profession, if the loss arises from fires, storms, shipwreck, or other casualties, or from robbery, theft or embezzlement.

c. Taxation of Business Income/Income from Practice of Profession
iii. Deductions from gross income: (e) Bad Debts - debts due to the taxpayer
actually ascertained to be worthless and charged off within the taxable year.

c. Taxation of Business Income/Income from Practice of Profession iii. Deductions from gross income: (f) Depreciation - a reasonable allowance
for the exhaustion, wear and tear (including reasonable allowance for obsolescence) of property used in the trade or business.

c. Taxation of Business Income/Income from Practice of Profession iii. Deductions from gross income: (g) Charitable and other contributions - Contributions or gifts
actually paid or made within the taxable year to, or for the use of the Government of the Philippines or to accredited domestic corporations or associations organized and operated exclusively for religious, charitable, scientific, youth and sports development, cultural or educational purposes or for the rehabilitation of veterans, or to social welfare institutions, or to nongovernment organizations

iii. Deductions from gross income: (h) Research and development - research
or development expenditures which are paid or incurred during the taxable year in connection with the trade, business or profession

c. Taxation of Business Income/Income from Practice of Profession iii. Deductions from gross income: (i) Pension Trusts: the amount transferred or
paid by an employer establishing or maintaining a pension trust for his employees into such trust during the taxable year

c. Taxation of Business Income/Income from Practice of Profession iii. Deductions from gross income: (j) Premium payments on health and hospitalization insurance

c. Taxation of Business Income/Income from Practice of Profession iv. Optional Standard Deduction: In lieu of
the allowed business deductions, an individual subject to tax, other than nonresident alien, may elect a standard deduction in an amount not exceeding forty percent (40%) of his gross sales or gross receipts, as the case may be.
2. Taxation of Resident Citizens, Non-resident Citizens, and Resident Aliens

v. Tax Rates on taxable income:
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 P250,000P22,500+25% of the excess over P140,000 Over P250,000 but not over P500,000P50,000+30% of the excess over P250,000 Over P500,000...P125,000+32% of the excess over P500,000. Annual ITR.pdf

d. Taxation of Passive Income i. Interest the amount of interest from bank deposits and deposit substitutes and from trust funds is subject to final tax of 20%. Interest from depositary bank under the expanded foreign currency deposit system final tax of 7.5%.

d. Taxation of Passive Income i. Interest (cont.) Interest from long term deposits or investments (5 or more years maturity) exempt from income tax
*If the deposit or investment is pre-terminated before the 5th year, the interest income is subject to final tax of 20% to 5%, depending on remaining maturity.

d. Taxation of Passive Income (cont.)
ii. Royalties in general, subject to final tax of 20%. Royalties on books, other literary works and musical compositions 10% final tax.

d. Taxation of Passive Income (cont.) iii. Prizes in general, subject to final tax of 20%. Prizes amounting to Php10,000 or less exempt from income tax PCSO and Lotto winnings exempt from income tax Prizes from sports competitions sanctioned by national sports association exempt from income tax

d. Taxation of Passive Income (cont.)
iv. Dividends cash or property dividends received from domestic corporations are subject to final tax of 10%.

e. Taxation of Capital Gains i. Income from sale of shares of stock - shares traded and listed in stock exchange: the gross selling price is subject to percentage tax of of 1% or 0.5%. - shares not traded in stock exchange: the net capital gains are subject to final tax of: Not over Php100,000..5% Any amount in excess of Ph100,00010% Capital Gains - Shares.xls

e. Taxation of Capital Gains (cont.) ii. Income from sale of real property situated in the Philippines - the gross selling price or fair market value, whichever is higher, from the sale of real property classified as capital asset is subject to final tax of 6%. - sale of principal residence the proceeds of which is fully utilized in acquiring or constructing a new home within 18 months is exempt from income tax. Capital Gains Return.xls
3. Taxation of Non-resident Aliens Engaged in Trade or Business

- In general, taxed in the same way as citizens and resident aliens, i.e., subject to the 5% to 32% income tax rates. - Allowed only personal exemptions. - The following aliens are subject to income tax of 15% on gross income: a. Aliens employed by regional or area headquarters and ROHQs b. Aliens employed by offshore banking units c. Aliens employed by petroleum service contractor and subcontractor
4. Taxation of Non-resident Aliens Not Engaged in Trade or Business

- The gross income of non-resident aliens not engaged in trade or business such as interest, dividends, rents, salaries, annuities, and capital gains is subject to 25% final tax. - The income of non-resident aliens not engaged in trade or business from sale of shares of stock and real property classified as capital asset shall be taxed in the same manner as citizens and resident aliens.
5. Taxation of Partnerships
- In general, partnerships are considered corporations and taxable as such at 30% on taxable income. - The following are exempt from income tax: a. General professional partnerships b. Joint venture or consortium formed for undertaking construction projects c. Joint venture or consortium engaged in petroleum, coal, geothermal and other energy operations
6. Taxation of Estates and Trusts

- In general, the income of estates or any kind or property held in trust is taxed in the same manner as income of individuals, i.e., 5% to 32% on taxable income and final tax on passive income and capital gains. - An employees trust which forms part of a pension, stock bonus, or profit-sharing plan of an employer for the benefit of his employees is exempt from income tax.
Copy of 1701p1jul2008 (Estates).xls
7. Taxation of Domestic Corporations

a. Tax Payable i. Regular income tax 30% on taxable income from sources within and without the Philippines: Gross Sales/Receipts Xxx Less: Returns/Discounts Xxx Less: Cost of Goods Sold/Services Xxx Add: Other Taxable Income Xxx Gross Income Xxx Less: Itemized Deductions/OSD Xxx Taxable Income Xxx Multiplied by: regular tax rate 30% Regular income tax due Xxx Less: Taxes paid/tax credits Xxx Tax Payable Xxx

a. Tax Payable ii. Minimum corporate income tax (MCIT) 2% of gross income beginning on the fourth (4th) taxable year from beginning of business operations, if MCIT is greater than regular income tax: Gross Sales/Receipts Less: Returns/Discounts Less: Cost of Goods Sold/Services Multiplied by: MCIT MCIT due Less: Taxes paid/tax credits Tax Payable Xxx Xxx Xxx 2% Xxx Xxx Xxx

b. Allowable Deductions i. Itemized Deductions: (a) Expenses: ordinary and necessary
expenses paid or incurred during the taxable year in carrying on or which are directly attributable to, the development, management, operation and/or conduct of the trade, business or exercise of a profession, including: a) salaries and wages, b) travel expenses, c) rentals, d) entertainment, etc.

b. Allowable Deductions i. Itemized Deductions:
(b) Interest -33% of the amount of amount of interest paid or incurred within a taxable year on indebtedness in connection with the taxpayers trade or business

(c) Taxes -Taxes paid or incurred within the taxable year in connection with the taxpayer's trade or business, except:
- Income tax; - Income taxes imposed by authority of any foreign country, unless taxpayer claims the same as foreign tax credit; - Estate and donor's taxes; - Taxes assessed against local benefits of a kind tending to increase the value of the property assessed

b. Allowable Deductions
i. Itemized Deductions: d) Losses - Losses actually sustained during the taxable
year and not compensated for by insurance or other forms of indemnity provided it is incurred in trade, profession or business and the loss pertains to property connected with the trade, business or profession, if the loss arises from fires, storms, shipwreck, or other casualties, or from robbery, theft or embezzlement.

b. Allowable Deductions i. Itemized Deductions: d) Losses (cont.) Net operating loss carryover (NOLCO) the net operating loss from any taxable year immediately preceding the current taxable year shall be carried over as deduction from gross income for the next three (3) consecutive taxable years.

(e) Bad Debts - debts due to the taxpayer
actually ascertained to be worthless and charged off within the taxable year.

b. Allowable Deductions i. Itemized Deductions: (f) Depreciation - a reasonable allowance
for the exhaustion, wear and tear (including reasonable allowance for obsolescence) of property used in the trade or business.

b. Allowable Deductions i. Itemized Deductions: (g) Depletion of Oil and Gas Wells and mines a reasonable allowance for depletion or amortization computed in accordance with the cost-depletion method.

b. Allowable Deductions i. Itemized Deductions: (h) Charitable and other contributions - Contributions or
gifts actually paid or made within the taxable year to, or for the use of the Government of the Philippines or to accredited domestic corporations or associations organized and operated exclusively for religious, charitable, scientific, youth and sports development, cultural or educational purposes or for the rehabilitation of veterans, or to social welfare institutions, or to non-government organizations

(i) Research and development - research
or development expenditures which are paid or incurred during the taxable year in connection with the trade, business or profession

b. Allowable Deductions i. Itemized Deductions: (j) Pension Trusts: the amount transferred
or paid by an employer establishing or maintaining a pension trust for his employees into such trust during the taxable year

b. Allowable Deductions ii. Optional Standard Deduction: In lieu
of the allowed business deductions, a domestic corporation and a resident foreign corporation, may elect a standard deduction in an amount not exceeding forty percent (40%) of his gross sales or gross receipts, as the case may be.

c. Taxation of Passive Income i. Interest the amount of interest from bank deposits and deposit substitutes and from trust funds is subject to final tax of 20%. Interest from depositary bank under the expanded foreign currency deposit system final tax of 7.5%.

c. Taxation of Passive Income (cont.)
ii. Royalties in general, subject to final tax of 20%.

c. Taxation of Passive Income (cont.)
iii. Dividends cash or property dividends received from another domestic corporation is exempt from income tax.

d. Taxation of Capital Gains i. Income from sale of shares of stock - shares not traded in stock exchange: the net capital gains are subject to final tax of:
Not over Php100,000..5%
Any amount in excess of Ph100,00010%

d. Taxation of Capital Gains (cont.) ii. Income from sale of real property situated in the Philippines - the gross selling price or fair market value, whichever is higher, from the sale of real property classified as capital asset is subject to final tax of 6%.

e. Tax on Proprietary Educational Institutions and Hospitals - proprietary educational institutions and hospitals which are non-profit shall pay 10% income tax on their taxable income, except their passive income - proprietary educational institutions are private schools maintained and administered by private individuals or groups with a permit to operate issued by DepEd, CHED, or TESDA.

f. Tax on Government-Owned or Controlled Corporations, Agencies or Instrumentalities - all corporations, agencies or instrumentalities owned or controlled by the government shall pay such rate of tax upon their taxable income as are imposed on corporations engaged in similar business. - exempt from income tax: SSS, GSIS, PHIC, PCSO
8. Taxation of Resident Foreign Corporations

a. General Rule b. Special rules on taxation of: - International carriers 2.5% GPB - Offshore banking units exempt, in general - Branch profits remittance - Regional or area headquarters exempt - Regional operating headquarters 10% of taxable income
9. Taxation of Non- Resident Foreign Corporations

a. General Rule 30% of gross income b. Special rules on taxation of: - Non-resident cinematographic film owners, lessor or distributor: 25% of gross income - Non-resident owner or lessor of vessels chartered by Philippine nationals 4.5% of gross rentals - Non-resident owner or lessor of aircraft machineries and other equipment 7.5% of gross rentals
10. Improperly Accumulated Earnings Tax

- 10% of the improperly accumulated taxable income is imposed on every corporation formed or availed for the purpose of avoiding the income tax with respect to its shareholders or the shareholders of any other corporation, by permitting earnings and profits to accumulate instead of being divided or distributed. APAI Audited FS 2008 Part 1.pdf
IAET.pdf
4. Compliance Accounting periods Filing and payment of tax - Individual Quarterly and Annual ITR - Corporate Quarterly and Annual ITR

Income Taxation: General Principles and Definitions

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Income Taxation: General Principles and Definitions

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Income Taxation

General Principles and Definitions

Not to be used without express persmission of Atty. Froiilyn P. Doyaoen-Pagayatan.

Not to be used without express persmission of Atty. Froiilyn P. Doyaoen-Pagayatan.

Not to be used without express persmission of Atty. Froiilyn P. Doyaoen-Pagayatan.

III. Situs Rules on Income Taxation

III. Situs Rules on Income Taxation

III. Situs Rules on Income Taxation

III. Situs Rules on Income Taxation

III. Situs Rules on Income Taxation

III. Situs Rules on Income Taxation

III. Situs Rules on Income Taxation

IV. Organizations Exempt from Income Tax

IV. Organizations Exempt from Income Tax

IV. Organizations Exempt from Income Tax

IV. Organizations Exempt from Income Tax

(I) Government educational institution;

IV. Organizations Exempt from Income Tax

IV. Organizations Exempt from Income Tax

i. Pensions, retirement benefit, or separation pay Section 32(10),Tax Code]

Not to be used without express persmission of Atty. Froiilyn P. Doyaoen-Pagayatan.

Not to be used without express persmission of Atty. Froiilyn P. Doyaoen-Pagayatan.

VI. Taxation of Individuals

VI. Taxation of Individuals

1. Kinds of Individual Taxpayers

1. Kinds of Individual Taxpayers

2. General Principles of Income Taxation (Section 23, Tax Code)

Non-resident Citizen Taxable (including OFW) Alien (Resident or Taxable Non-resident)

3. Individual Sources of Income

3. Individual Sources of Income

3. Individual Sources of Income

4. Exclusions from Individual Gross Income

4. Exclusions from Individual Gross Income

4. Exclusions from Individual Gross Income

xi. Gains from redemption of shares in mutual funds.

5. Taxation of Resident Citizens, Nonresident Citizens, and Resident Aliens

5. Taxation of Resident Citizens, Nonresident Citizens, and Resident Aliens

5. Taxation of Resident Citizens, Nonresident Citizens, and Resident Aliens

5. Taxation of Resident Citizens, Nonresident Citizens, and Resident Aliens

5. Taxation of Resident Citizens, Nonresident Citizens, and Resident Aliens

5. Taxation of Resident Citizens, Nonresident Citizens, and Resident Aliens

2. Taxation of Resident Citizens, Nonresident Citizens, and Resident Aliens

2. Taxation of Resident Citizens, Nonresident Citizens, and Resident Aliens

2. Taxation of Resident Citizens, Nonresident Citizens, and Resident Aliens

2. Taxation of Resident Citizens, Nonresident Citizens, and Resident Aliens

2. Taxation of Resident Citizens, Nonresident Citizens, and Resident Aliens

2. Taxation of Resident Citizens, Nonresident Citizens, and Resident Aliens

2. Taxation of Resident Citizens, Nonresident Citizens, and Resident Aliens

2. Taxation of Resident Citizens, Nonresident Citizens, and Resident Aliens

2. Taxation of Resident Citizens, Nonresident Citizens, and Resident Aliens

2. Taxation of Resident Citizens, Nonresident Citizens, and Resident Aliens

2. Taxation of Resident Citizens, Nonresident Citizens, and Resident Aliens

2. Taxation of Resident Citizens, Nonresident Citizens, and Resident Aliens

2. Taxation of Resident Citizens, Nonresident Citizens, and Resident Aliens

2. Taxation of Resident Citizens, Non-resident Citizens, and Resident Aliens

2. Taxation of Resident Citizens, Nonresident Citizens, and Resident Aliens

2. Taxation of Resident Citizens, Nonresident Citizens, and Resident Aliens

2. Taxation of Resident Citizens, Nonresident Citizens, and Resident Aliens

2. Taxation of Resident Citizens, Nonresident Citizens, and Resident Aliens

2. Taxation of Resident Citizens, Nonresident Citizens, and Resident Aliens

2. Taxation of Resident Citizens, Nonresident Citizens, and Resident Aliens

2. Taxation of Resident Citizens, Nonresident Citizens, and Resident Aliens

3. Taxation of Non-resident Aliens Engaged in Trade or Business