Iedivideake’ Tagpayers CAPITAL GAINS TAX UPR ee eee rece ony (1) Capital Gains from sale of shares of Citizens & NRA-ETB —NRA-NETB | stock of a domestic corporation not traded Residents | in the local stock exchange a _ __| | Prior to 2018 | | «4 100,000 of capital gain 5% 5% 5% | = in excess of P100,000 capital gain 10% 10% 10% | Beginning Jan. 1, 2018 | + Basis: Capital gan 15% 15% 15% | (2) Sale of real property located in the Philippines. | TAX BASE: Selling Price or Fair Market Value, 6% 6% 6% | whichever is higher ‘NOTE: = The assets sold in the table above must refer to capital assets. Capital assets are assets not used in business ‘nor for sale in the ordinary course of trade or business. Ordinary and capital assets are discussed below. GAIN ON SALE OF ASSETS Property classification of an asset as capital or ordinary is important because of the special tax rules on gains and losses from sales or exchanges of capital assets which do not apply to gains and losses from sale or exchanges of ordinary assets. For income taxation purposes, assets are classified either as ordinary or capital assets. Under the tax code, the following are ordinary assets: 1. Stock in trade of the taxpayer or other property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of taxable year, 2. Property used in trade or business subject to depreciation. 3. Real property held by the taxpayer primarily for sale to customers in the ordinary course of trade or business. 4. Real property used in trade or business of the taxpayer On the other hand, capital assets include all other property held by the taxpayer (whether or not connected with his trade or business) not included in the definition of ordinary assets above. Gain on sale of ordinary assets are commonly known as ordinary or © graduated tax rate as le (as amended). fegular income. Ordinary gains are subject to thi Provided for under Section 124(A) of the Tax Cod(elidel, SSified as Capital Gains, Gain on sale of Capital Assets are cla CAPITAL GAINS may be: 1. Subject to CAPITAL GAINS TAX if its Pertain to sale of: a. Shares of stock of a domestic Corporation sold directly buyer (shares of closely-held or corporations); and bo non-listed domes b. Sale of real Properties located in the Philippines. Capital Gains Tax on Sale of shares Capital gains tax on sale of shares of a domestic corporation sold directly to a buyer, under Section 124(C) of the Tax Codeis computed as follows: “Prior to 2018: 5% on 1# R100, ,000 capital gain There is no CGT tbe 10% in excess of P100,000 capital gain transaction sued Beginning 2018: 15% of capital gain iacaptal bes, Under RR 6-2008 as a Shares lOck at the time determining the value of th mended by RR 6-2013, the value of the Of sale shall be the fair market value. In '@ shares, the Adjusted Net Asset Method shal be used whereby all asset acy liabilities are adjusted © market values. For purposes of illustrations in this book, the selling mamas, 255UMed to be the market sun Using the aforementioned Capital Gains Tax on Sale of real Properties pale of real properties classified i shed s 88 capital assets located int reappines: is Subject '0 capital gains ax (CGT) under Section Of the Tax Cod i B Computed as folows: "°° (PASIC tax if located abroad)” COT lark h he coerket value (FMV) above of real Property shall refer to the ail valve 88 provided by City/Municipal or Provincial assessors: and Provided by the Commissioner of intemal Revense (CIR) 86Indi ideal Tagpayers SALE OF REAL PROPERTY TO THE GOVERNMENT is sold to the If a real property classified as capital asset is sol government, the individual taxpayer shall have the option to be taxed at 6% CGT or basic income tax using the graduated tax rate. SALE OF PRINCIPAL RESIDENCE If the real property sold is classified as principal residence, it may be exempt from CGT provided the requisites for exemption as provided under the Tax Code are met. Sale of principal residence is discussed in page 91. 2. Other Percentage Tax (OPT). OPT is not an income tax but a business tax (a topic in Tax 2 subject). Sale of shares of stock of a domestic corporation listed in the local stock exchange is not subject to income tax but to OPT as provided under Section 127(A) of the Tax Code. The applicable business tax for this type of transaction is known as “stock transaction tax”. Stock transaction tax (STT) is computed as follows: Prior to 2018 = Kh of 1% of Gross Selling Price Beginning 2018 = 6/10 of 1% of Gross Selling Price Since the tax rate is based on gross selling price, stock transaction tax is computed regardless of whether the transaction resulted to a gain or loss (Refer also to Chapter 9 of volume 2 for additional discussions). 3. Subject to basic tax (Chapter 9); Capital gains not subject to capital gains tax and stock transaction tax are subject to basic tax or the graduated tax rate under Section 124(A) of the Tax Code (as amended). Examples of capital gains Subject to basic income tax are gains derived from: + Sale of shares of foreign corporations * Sale of real properties located abroad * Sale of other personal assets other than shares of stock of domestic corporations such as cars, jewelries, and the like. Capital gains subject to basic tax are Subject to additional tax rules Such as holding period and net capital loss carry-over (Refer to Chapter 9 for additional discussions). 87+ Basic | including sale of real property by @ real estate dealer and sale of shares/securities by a “dealer in securities” CG of closely-held * Maybe exempt ic corp.: AP eg if pertaining to domestic corp.; a ae of principal * —6/100f 1% stock meat fesidence transaction tax nel cap «6% CGT or (business tax) if boss om basic tax if sold shares of publicly ver ey tothe listed domestic chee government; corporation _ basic tax if = basic tax if shares Page_ situated abroad of foreign corporation poration ILLUSTRATION 8: Determine the amount of capital gains tax (CGT) for 2018 in the following: | CASE A - (SHARES OF STOCK} ‘) George sold 2,000 shares of a domestic Corporation in the local stock | exchange at P110 per share, The shares were purchased 3 years ago for P100 per share, Answer: PO, Subject to 6/10 of 1% Stock transaction tax, not CGT. | 2) Gere jolt2.00 shat of a domestic corporation directly to a buyer | per share, Tt red si 200 F105 pr share," SatES Were acquired sx (6) mons | Answer: ae ee a8 follows: | FTO (2000 sh. x P18) Ra60,009 Cost (2,000 sh: x Pros 0 Revised CGT rate 4 CAPITAL GAINS Tax P22 a 5) George soig mestic corporation directly to a Per shi share? The shares were Acquired two (2) years 8 Wer: PO. The transaction FeSulted to a to. SS, 88Individual’ Cagpagers CASE B (REAL PROPERTIES SITUATED IN THE PHILIPPINES) The following are the transactions of an individual taxpayer pertaining to sale of real properties for the current year. 1) Sale of a parcel of land used in his trading business. Selling price is P3,000,000. The property was acquired five (5) years ago at 1,500,000. 2) Sale of the taxpayer's residential lot for P5,000,000. The fair market value of the property was P6,000,000. The property was acquired three (3) years ago at P4,000,000. Question 1: What is the amount of final income tax for these real estate transactions? Answer: P360,000 (P6M x 6%) Capital gains tax is 6% of gross selling price or fair market valu, whichever is higher. Transaction “1” pertains to an ordinary asset, hence not subject to capital gains tax. The difference of P1.5M (P3M-P1.5M) is included in the determination of gross income which is subject to basic tax. Question 2: Assume that the residential lot in transaction “2” was sold at 3,000,000. What should be the correct amount of capital gains tax on the transaction? Answer: P360,000 (P6M x 6%) Capital gains tax is 6% of the highest amount among selling price, fair market value or zonal value. Unlike in capital gains in the case of shares of stock directly sold to a buyer, the capital gains tax on the sale of real properties classified as capital assets situated in the Philippines is not dependent on the gain derived from the transaction. Thus, regardless of gain or loss, the transaction is still subject to 6% capital gains tax. CASE C (REAL PROPERTIES SITUATED ABROAD) Assume a corporation sold a parcel of land used in its operations “abroad”. Selling price is P3,000,000. The property was acquired five (5) years ago at 1,500,000. Question: What is the amount of final income tax on the transaction described above? Answer: PO ‘% The 6% capital gains tax on real properties sold are applicable only on teal properties “held as capital assets” situated in the Philippines. The property sold is located abroad and classified as an ordinary asset. 89dividual Tay, | ee ES SOLD TO THE GOV'T or TOA Gor CASEDIREAL PROPERTI the residential lot in transaction “2” was sold at P3,000,009 Assume at ax du ofthe see? How much is the tax + Either 360,000 CGT (P3M x 6%) or Basic tax based gy * tour tale ‘as provided under Section 24(A) of the tax code, athe option of the taxpayer. CASE E (Shares of Stock and Real Property) Pedro, resident citizen, realized the following gains from sale of asses 1 2018: Capital gains on sale of shares of a domestic corporation 110,000 sold directly to a buyer (Sales Price-P1,110,000; Cost 1,000,000) Gain on sale of shares of a domestic corporation sold in a 5000 local stock exchange (Sales Price-P1 15,000; Cost P90,000) Gain on sale of real property classified as capital asset in 500000 the Philippines (Sales Price-P2,000,000; FMV-P3,000,000; ‘Acquisition cost when acquired 3 years ago-P',500,000) Gain on sale of real property “abroad” not.used in business 300,00 (Sales Price-P3,000,000; FMV-P2,500,000; Acquisition cost when acquired 3 years ago-P2,700,000) Question 1: How much is the capital gains tax? Answer: 196,500 Solution: Sale of shares of a domestic corporation sold directly to a buyer ™ CGT=P110,000 x 15% He CGT on sale of real property in the Phils. 1a = PM x 6% et. Total capital gains tax ee NOTE: one "Sale of “ropa Ti domestic corporation listed inthe local Sook one + 2 Cabusinss tan anes However, itis subject to 6/10 of 1% s>* Gai on sale on rea n® Section 127(A) ofthe Tax Code. spent Droperty classified as capita asses are SUBIC pot However sop te property is located ‘within’ the Pate broad, regardless of classification. °°" On. Indiv et L Tagpavers gait OF PRINCIPAL RESIDENCE «principal Residence” is the family home of the individual taxpayer. ers to the dwelling house, including the land on which it is situated, ren an individual including his family resides as a permanent dwelling, whenever absent, wherein the said individual intends to return (RR 14- 2000). It should be certified by the Barangay Chairman over the place, or ‘ne Buikiing Administrator if the residence is a condominium or the individual taxpayer's address as indicated in his latest tax return. The residential address shown in the latest income tax return filed by the vendor/transferor immediately preceding the date of sale of said real property shall be treated as’ a conclusive presumption about his true residential address, the certification of the Barangay Chairman, or Building Administrator (in case of condominium unit), to the contrary notwithstanding, in accordance with the doctrine of admission against interest or the principle of estoppel. The seller/transferor's compliance with the Preliminary conditions ‘or exemption from the 6% capital gains tax under Sec. 3(1) and (2) of the Regulations will be sufficient basis for the RDO to approve and issue the Cestficate Authorizing Registration (CAR) or Tax Clearance Certificate (TCC) of the principal residence sold, exchanged or disposed by the id taxpayer. Said CAR or TCC shall state that the said sale, exchange or disposition of the taxpayer's principal residence is exempt from gains tax pursuant to Sec. 24 (D){2) of the Tax Code, but ‘subject to compliance with the post-reporting requirements imposed under Sec. 3(3) othe Regulations. REQUISITES FOR TAX EXEMPTION AS a rule, sale of principal residence is subject to 6% capital gain tax On the selling price or fair market value, whichever is higher, except, when the proceeds are fully utilized in acquiring or constructing a new Poncipal residence subject to the following conditions: *. The proceeds is fully utilized in acquiring or constructing a new principal fesidence within eighteen (18) calendar months from the date of Sisposition. “Fully utilized” shall mean that the taxpayer has actually Commenced with the construction of his new principal residence or has actually entered into a contract for the purchased his new 91Mividual' Tr Gee principal residence or has act within eighteen (18) cay from tho date of sale, exchange or disposition there intontion of using the entire proceeds of Sale for the pial ith, construction of his new principal residence. Any expense by the seller in effecting the sale (ie. documentary stamp 4. transfer fees, broker's commission) shall be considered as Ad the amount utilized. If there is no full utilization of the proceeds of sale or disposition, t; Portion of the gain presumed to have been realized from the salew disposition shall be subject to capital gains tax as follows: Gross Selling price or far Taxable. = Unutilized Portion x market value atthe med Amount Gross Selling Price sale, whichever is highe er te The tax on the unutilized portion shall be paid within 30 days after expiration of 18-month period. o The historical cost or adjusted basis of the real property ao disposed shall be carried over to the new principal residence acquired. a an dal The BIR shall have been duly notified by the taxpayer within 3 from the date of sale or disposition through a prescribed rel itention to avail of the tax exemption. ‘The tix exemption can only be availed of once every 10 years. " thawiso required under RR 2-98 that the amount representing the rad ‘41 ‘ust bo doposiind under an Escrow Agreement between te “av anvwrs Kavouue District Otficar, the Seller and the Transteree, and t ‘Auttwxivad gant bank (In cash or manager's check in an interest boay secon witha Authorleod Agent Bank), Release occurs if the proceeds O! Ma sila tine in fav boon ullizad In the acquisition or construction of the atte Vtmrtevor'y new principal reakdence within 18 calendar months fom Asti A hos snid wala UF aposttion Shas Antes A ante oo Hiaponlion of a property raters to the date of notarization 1A tm AHA videriciny the Wransfur of eald Property,dual’ Tagpagers | ILLUSTRATION 9: SALE of PRINCIPAL RESIDENCE | Pedro, a resident citizen, sold his residential house and lot (principal residence) | | in the Philippines with the following additional data: | | Selling price 4,000,000 | Fair market value 6,000,000 Zonal value 5,000,000 Expenses on the sale 125,000 If applicable, assume that the taxpayer was able to comply all the fequirements for exemption. Question 1: Assuming Pedro bought a new principal residence for P4,000,000, how much is the applicable CGT? | “Answer: PO | Question 2: Assuming Pedro bought a new principal residence for 28,000,000, | how much is the applicable CGT? | “Answer: RO Question 3: Assuming Pedro bought a new principal residence for R2,000,000, how much is the applicable CGT? Answer: 180,000; CGT = 2/4 x PEM x 6% FORMAT IN COMPUTING TAXABLE INCOME A. PURE COMPENSATION INCOME EARNER: Gross compensation income Less: Basic personal exemption** Additional exemption Premium payment for health and/or** : hospitalization insurance premium (HHIP)** Taxable Compensation income Tax Due (Graduated tax rate; Table 2-1) Less: Creditable withholding tax on compensation income Income Tax paya “*The Personal Exemptions and Premium Payment on health ir longer allowed 2s deductions starting 2018 under RA10963 (TRAIN ta), "Therefore, NO DEDUCTION 's allowed for pure compensation income eat rence, personal ners starting 2018. For reference, ‘“xemptions are discussed in the latter part of this Chapter, Page 114. 93Vedivideal. Foe, B. PURE BUSINESS INCOME EARNER (Under TRAIN Law; using graduated tax rate); Gross salesireceipts Less: Cost of Sales/ Cost of direct services Prox Gross business/professional income 0K Less: Allowable business expenses 00 Taxable net income** Tax Due (Graduated tax tate; Table 2-1) Less: Creditable Withholding Taxes Prior year’s excess credit Prox Tax payments for the previous quarter(s) yu Tax withheld at source a 100K Foreign income tax credit (Chapter 12) Income Tax Payable C. MIXED INCOME EARNER (Business and compensation income) (Under TRAIN Law; using graduated tax rate on business income): Gross compensation income Gross sales/receipts Less: Cost of Sales/ Cost of direct services Gross busin Si Tax Due (Graduated tax rate: Tabl re i Table 2-1 88: Eredtabe Withholding Taxes : ea withholding tax on compensation income Prior years excess credit Pensa Prxx r OC x Payments for the previous quarters) st 00 20 1a mene at source reign ta ate Or psMndivideal Cu y SUL CREDITABLE vs. FINAL TAX FINAL WITHHOLDING TAX Certain Incomes under section 24(B) of the Tax Code as summarized in Table 2-2 are subject to final taxes instead of basic tax or graduated tax rates (refer to discussions in Page 78 and illustration #6). CREDITABLE WITHHOLDING TAX Certain regular incomes not subject to final taxes on passive income and capital gains tax are subject to “creditable” withholding taxes. Creditable withholding tax (CWT) is not an internal revenue tax but a method of collecting income tax “in advance" from the recipient of income through the payor thereof, which is constituted by law as the withholding agent of government. Taxes withheld on certain payments are intended to equal or at least approximate the tax due of the payee on said income computed using the graduated tax rate under Section 24(A) of the Tax Code or as shown in Table 2-1. The recipient of income is still required to file an income tax return, as prescribed in Sec. 51 and Sec, 52 of the NIRC, as amended, to report the income and/or pay the difference between the tax withheld and the tax due on the income. The term “creditable” means the taxes withheld are deductible from tax due as shown below: ‘Gross Compensation income Prox Gross businessiprofessional income mm, Less: Allowable business/professional expenses 1) Taxable net income Pax Income Tax Due (Graduated tax rate; Table 2-1) Prax Less: CREDITABLE WITHHOLDING TAXES: CWTx on compensation income Pax CWTx withheld at source 1K OTHER TAX CREDITs: Priot year's excess credit wm Tax payments for the previous quarter(s) xxx Foreign income tax credit mK | Income Tax Payable _ Pax The most common example of creditable withholding tax for an individual taxpayer is the tax withheld by an employer from the compensation income of an employee. The amount of tax withheld will be remitted by the employer to the BIR. 95Iudivideal I, ty hand, the withholding taxes at source are a, (other than employer) such a creditable withhe, for the purchase of goods, services and rentals. The most comm, een CWT rats are provided under RR 11-2018 as follows: me Purchase olfpayment for: cwrs Professional fees Rentals 5% Goods th 2% On the other withheld by the payor Services income payments to beneficiaries of estates/trusts iy | Income payments to partners of GPPs 10%( 15% | Certain income. ints made by credit card companies 1% The delals ofthe creditable withholding tx rates above based on RR 11-2018 The duty to withhold and remit income taxes arises only ¢ instances required by law or regulation. Withholding tax return shall be fe: and tax, paid in withholding agent's legal residence or principal place 2 business, or where the withholding agent is a corporation, where T= principal office is located, except on sales of real property subject to incor: tax, where the withholding tax shall be paid in the RDO where the prope” is located. Creditable withholding taxes shall be filed and the applicable 2 ee later than the last day of the month following the close of quarter. {) “TLUSTRATION 10: Case A: ‘resident citizen employee provided the following data for 2018 taxable yoo" Compensation income (gross of deductions below) 450,000 Deductions made by the employer SSS premiums contributions 6.000 Phithealth contributions 8400 Pag-ibig contributions 2.400 Union dues 1.200 Income tax withheld 36,000 ueston, How ‘much is the income tax payable of the employee? Answer: 3,000 computed as follows: Y Compensation income (gross of deductions below) pasa! 68S: Income exempt from tax (Refer to Chapter 8) (ae ‘SSS premiums contributions ” Phitaaty contributions any ’ag-ibig contributions (2; a Union dues (149 Taxable income page 0” 96Tad bral Tagpagers YY | Tax Due: Tax on 1+ P400,000 30,000 | Excess: P32,000x 25% ~ 8,000 Total tax due 38,000 Less: Tax withheld by the employer (35,000) Income tax payable 3,000 4 SSSIGSIS, Pag-ibig, Phihealth contibutions of the employee as well as Union dues are excluded by law in the computation of taxable income. Exclusions from gross income are discussed in Chapter 8. 4 Asaul, taxable income shall refer to incomes subject to basic tax. 4 itis usual that ifthe taxpayer is a purely compensation income eamer, the / income tax payable is already zero. Case B: ‘Aresident citizen taxpayer (single) provided the following information for 2048: Compensation income 1,000,000 | Gross business income, Philippines 2,000,000 | Gross business income, Canada 3,000,000 Business expenses, Philippines 1,400,000 i Business expenses, Canada . 2,050,000 Income tax withheld by the individual taxpayer's 150,000 employer on his compensation income | Income tax withheld by “certain” payors on business 100,000 income in the Philippines | Income tax payments to the BIR forthe fist three (3) 125,000 | quarters of the year 7 | | Required: Determine income tax payable of the taxpayer. ‘Answer: P80,000 computed as follows: Compensation income 1,000,000 | Gross business income, Phipines P2.000.000 | Gross business income, Canade : ee Business expenses, Philippines 400, Business expenses, Canada oa Taxable income —£2,590,000- Tax Due: | Taxon 122,000,000 mA00009 | On excess over P2M 000 666,000 (550,000 x 32%) 5 | Local 450,000 CWT Taxwithhald by the employer 400,000 Taxes by certain payors 426,000 (375,000) _ Income tax paid — 291,000 | t Income tax payable 7SA deal’ We See QUARTERLY TAX RETURNS Income tax returns for income derived from business andy Practice of profession are required to be filed on a quarterly basis (regardless of the results of operations) as follows: 18 Quarter May 15 (45 days after end of Quarter) 2% Quarter Aug. 15 (45 days after end of Quarter) 3° Quarter Nov. 15 (45 days after end of Quarter) Final adjusted/annual retum April 15 of the succeeding year FORMULA: Gross income (cumulative amounts) Business expenses (cumulative amounts) Taxable net income Tax Due (Table 2-2) Prox — Prox Prox Pa Less: Creditable withholding taxes: Prior year's excess credit Quarterly withholding taxes Quarterly tax payments Foreign tax credit (Chapter 12) Income Tax payable (00) (xxx) (900) (00) (10x) (xxx) (00x) (08) ~ (90x) (x) (004) ILLUSTRATION 41: The following cumulative balances on income and expenses in 2018 of Juan Dela Cruz were siven to you: 1Q 2Q * oaveat Gross Sales 1,200,000 2,100,000 pai. 000 3,700,000 Gestof Sales 700,000 1,200,000 1,800,000 2,200,000 usiness expenses 200,000 325,000 550,000 700,000 Income taxes Paid on: Interest income 1,580 3,040 4 5,960 Sale of and 24,000 24,000 2400 24,000 Dividend Somme ashes from 10,000 10,000 20,000 20,000 \nterest income from BP) UCP r ao {200 8 800 1.200 ‘eo ‘a0Individeal Tagpagers Metro Bank 5,000 10,000 16,000 2,000 Capital gain sale of Land 80,000 80,000 80,000 i Soling price: P400,000 Cost: 320,000 Required: Using above information, compute the following for 2018: Income tax payable, first quarter Income tax payable, second quarter Income tax payable, third quarter Income tax payable, fourth quarter Final tax on passive income Capital gains tax tot * @'l, Parone Answers: (1)P10,000; (2)P63,750; (3)P18,750 (4)P25,000; (5)P7,960; (6)CGT(Land)=P24,000 Solution: _(#1-4; Quarterly income tax due): et iQ 32Q Q4lVear Gross sales 1,200,000 2,100,000 3,000,000 3,700,000 Cost of sales (700,000) (1,200,000) (1,800,000) (2,200,000) Business expenses (200,000) (325,000) (850,000) (700,000) Personal exemption (60,000 Taxable income 300,000 575,000 650,000 P750,000 Income Tax Due 10,000 P73,750 92,500 117,500 Less: Tax Paid Qt a (10,000) (10,000) (10,000) Q2 - (63,750) (63,750) Q3 = 18,750) Income Tax Payable 10,000 P63,750 P18,750 25,000 Solution (#5; Final taxes on passive income): (Amounts are cumulative) Amount % Tax Dividend received from domestic corp. 20,000 10 P2,000 Interest income from . BPI 8000 20 1,600 ucPe 1,800 290 ‘360 Metro Bank 20,000 20 4,000 | Total final tax on passive income 99MARRIED TAXPAYERS IF INCOME TAX DUE O 3, d ie ee! on their re ind and wif husbal sect identified as: incom, " x bat ‘tely attributed to or iden come invidualncome te nnot be definitely anehe spouses, the same shall pe that if any rey or realized by either the purpose of determining they exclusively eal the spouses for divided equally between respective taxable income. USTRATION 12: . ita for 2018: a nape te folowing dal Kristof Ana KristoffAng L 800,000 2 : Gross income-practce of profession = P400,000 Gross compensation income Dividend income: from domestic corporation 5,000 5,000 : from resident corporation - - ‘2000 Interest on notes receivable ~ ~ 4,000 Interest on Philippine bank deposit 2,000 3,000 6,000- Royalty income - 2 2000 Miscellaneous income 10,000 60,000 Capital gan onsale of shares of ABC Co, (domestic corp.) sold directly to a buyer 80,000 - Capi os on sate of shares of DEF Co, , (domestic corp.) sold directly to a buyer (20, Capital gain on sale of land in Q.C.: FMV. (20,000) . ; SP-PI0M, Cosepay Cs FUP HM, - 2,000,000 Expenses, business/Profe: : ssion 425,000 20,000 ame the following: Capital gain ta) 2 Tot eal tres pad ona st ses in 2018 } Tatabe income of kis me bythe spouses in 204 4. Taxable income of Ana pl 8 i inswers: (NPT32,009, 2P.600; Solutions; * (403.000; aypase,oo0 Capital Gain — apy Capital gain-sale C Co. 80,000 x 1 f 5%) Telco gage 8 PIQM xo” 12,000 720,000 —220,000_ Er 000- 100 — Te Ys te separate) fe, shall compute ¥ thee ve total taxable income: Prov,Ina Lyidaal Ta fayers Dividend income-domestic corp. (P'10,000 x 10%) _P4,000 Interest on bank deposit (P11,000 x 20%) 2,200 Royalty income (P2,000 x 20%) 400 Total final tax on passive income P3,600 Gross income from practice of profession 800,000, Dividend income from resident corp. (P12,000/2) 6,000 Interest on notes receivable (P4,000/2) 2.000% Miscellaneous income (P80,000/2) 30,000” Expenses-practice of profession (425,000)/ Expenses-miscellaneous income (P20,000/2) 10,000)“ Taxable income - Kristof 'P403,000 Taxable incom Gross compensation income Dividend income from resident corp. (P12,000/2) Interest on notes receivable (P4,000/2) Miscellaneous income (P60,000/2) +P'10,000 Expenses-miscellaneous income (P20,000/2) - Taxable income - Ana Senior Citizens and Persons with Disabilities (PWDs) Generally, qualified Senior Citizens and PWDs deriving returnable income during the taxable year, whether from compensation or otherwise, are required to file their income tax returns and pay the tax as they file the return. However, if the returnable income of a Senior Citizen/PWD is in the nature of compensation income but he qualifies asa minimum wage earner under RA No. 9504, he shall be-exempi from income tax on the said compensation income subject to the rules provided under RR10-2008 applicable to minimum wage earners (Refer also to Chapter 18). Likewise, if the aggregate amount of gross income earned by the Senior Citizen/PWD during the taxable year does not exceed P250,000 he shell be crane from income tax and shall not be required to file income tax return. ith ren lence, a senior citizen/PWD can stil-be tlable-for other taxes such 1. The 20% final withholding tax on interest ir Akl income from any currency 2. The 15% final withholding tax on interest in com i bank under the expanded foreign currency depen . Copository 24(B)(1), Tax Code system (Sec. 101heivideal % 3. Pre-termination of long-term deposit or investment Under g 24(B)(1) of the Tax Code tio, Four years to less than five years 5% Three years to less than four years 12% Less than three years 20% 4. The 10% final withholding tax: * Oncash and/or property dividends actually or Constructively received from a domestic corporation or from a joint stock company, insurance or mutual fund company and a regiona, operating headquarters of a multinational company; or * On the share of an individual in the distributable net income after tax of a partnership (except a general professional Partnership) of which he is a partner; or * On the share of an individual in the net income after tax of an association, a joint account, or a joint venture or consortium taxable as a corporation of which he is 4 member or a co-venturer (Sec. 24(B)(2), Tax Code). 5. The Capital gains tax from sales of shares of stock not traded in te stock exchange (Sec, 24(C), Tax Code); and 8. The 6% final withholding tax on presumed capital gains from sale of real property, classified as capital asset, except capital gains Presumed to have been realized from the sale or disposition of Principal residence (Sec. 24(D), Tax Code). 7. eee TAXES, A Senior Citizen/PWD shall also be subject to the Tax Cone onal fevenue taxes, among others, imposed under the * Value Added Tax or Other Percentage Taxes. If he is set employed or engaged in business i - or practice of profession. ana fis Qro8s annual sales and/or focsipts exceeds the Which invat threshold of 3,000,000 or such amount 10 whl his may be adjusted pursuant to Sec. 109(1)V) of shall be saute fe Shall be subject to VAT. Otherwise, he shot he Subject a the 3% percentage tax (VAT and Other | Bones are discussed in volume2—Transfer and Chere ye daring donations made by a Senior Under a specitic nn2,27Y Calendar year, unless exempt Provision of lai " in volume2—Transter an d Busines ro — is discussed 102Iudivideal’ Tapagers * Estate Tax. In the event of death, the estate of the Senior Citizen/PWD may also be subject to the estate tax following the rules enunciated under Title III of the Tax Code and its implementing Regulations (Estate Tax is discussed in volume2-Transfer and Business Taxes). * Excise Tax on certain goods (discussed in volume2- Transfer and Business Taxes), "Documentary stamp tax (discussed in volume2—Transfer and Business Taxes), Benefits for Senior Citizens and/or PWDs Senior citizens and/or PWDs, as the case may be, under under the law are entitled to the following benefits * 20% discount and exemption from VAT on their purchase of specified goods and services (a more detailed discussed is presented in volume2—Transfer and Business Taxes); 500 monthly social pension, for indigent senior citizens; Death benefit assistance; 5% discount on utilities; and Income tax exemption for minimum wage earners or for senior citizens/PWDs whose annual taxable income is not more than 250,000 MINIMUM WAGE EARNERS (RA 9504; RR 10-2008) The rate is fixed by the Regional Tripartite Ww; ivi Board as defined by the Bureau of Labor and Employment Stance mae Department of Labor and Employment (DOLE). Regional 7 orig vane and Productivity Boards (RTWPB) of each region determin tae ge rates in the different regions based on established Criteria che ° le basis of exemption from income tax, Minimum Wai and shail *Xempt from income tax on: Se Eamers are 1. Minimum wage Holiday pay . Overtime pay - Night shift differential Hazard Pay AeonIndividual’ Tate, sonal “compensation” income in excess of Ro, MWE with additions ye) of the Tax Code in relation to pp sto Section 40963 (TRAIN Law) provides that 13” month Pay and gy amended by RA 'd employees of public and private ° jals ani : : ‘Vate enti benefits received by ofS tax and creditable withholding xe eorerisation provided, however, that beginning January 1, 2018, the ior to 2018). Oth i eed P90,000 (P82,000 prior 1 vise fo aucass: A to part of an individual's gross income and would b, Henn to income tax and applicable creditable withholding taxes (refer, algg to discussions in Chapter 4 in relation to 13" month pay and other benefits In relation to MWE as provided under RR 10-2008, an employee who receives/earns additional “compensation” such as commissions, honoraria, fringe benefits, benefits in excess of the allowable P90,000 (as amended), taxable allowances and other taxable income other than the statutory minimum wage, overtime pay, holiday pay, night shift differential, hazard pay shail not enjoy the privilege of being a minimum wage eamer. Thus, his entire earnings are not exempt from income tax and consequently to creditable withholding tax. However, the Supreme Court (SC) ruled that nothing to this effect can be read from RA 9504 (Minimum Wage Earner Law). In a recent SC decision, specifically in the case of Soriano vs. Secretary of Finance with GR No. 184450 dated January 24, 2017, it was held that a MWE who receives/earns additional “compensation” such as commissions, honoraria, fringe benefits, benefits in excess of the allowable make an MWE lose exemption, RA 950: i constitutes an MWE, and RR 10-2008 cannot change this. can bH6 10 dsenranchise the ee eof te 80,00 cal exit granted by Rae enctise the MWE from enjoying the exemplih 2004) seedy R oO: There is a clear legislative intent (under RA additional income On top of th receives/earns a ditiongy '€ minimum wage. Hence, an employee wh? fringe benefits “Compensation” such as commissi inoraria. an one, 1282888 of the allowable 290/000, taradP time pay, holiday 9 come other than the statutory minimum il Y Pay, night shift diffe tial, ‘vilege of being minimum wage eamen hezerd PatAudley teal “Tagpavers ‘An administrative agency may not enlarge, alter or restrict a provision of law. It cannot add to the requirements provided by law. To do so constitutes lawmaking, which is generally reserved for Congress. The Court emphasized that tax administrators are not allowed to expand or contract the legislative mandate and that the “plain meaning rule or verba legis in statutory construction should be applied such that where the words of a statute are clear, plain and free from ambiguity, t must be given its Iteral meaning and applied without attempted interpretation. As we have previously declared, rule-making power must be confined to details for regulating the mode or proceedings in order to cary into effect the law as it has been enacted, and it cannot be extended to amend or expand the statutory requirements or to embrace matters not covered by the statute. Administrative regulations must always be in harmony with the provisions of the law because any resulting iscrepancy between the two will always be resolved in favor of the basic law’. [(CIR vs. Fortune Tobacco; Soriano vs. Secretary of Finance) (emphasis supplied) It should be noted that the intent of the income tax exemption of MWEs is to free the low-income earner from the burden of tax. RA. No. 9504. In other words, the law exempts from income taxation the most basic compensation an employee receives - the amount afforded to the lowest paid employees by the mandate of law. In a way, the legislature grants to these lowest paid employees’ additional income by no longer demanding from them a contribution for the operations of government. This is the essence of R.A. 9504 as a social legislation. The government, by way of the tax exemption, affords increased purchasing power to this sector of the working class. The Supreme Court nullified the Provision of Revenue Regulations No. 10-2008 [(i) Sections 1 and 3}, insofar as they disqualify MWEs who earn Purely compensation income from the Privilege of the MWE exemption in case they receive bonuses and other compensation- related benefits exceeding the statutory ceiling of P90,000 (as amended). MWE with additional “business” income Minimum wage earners receiving other income such as income from the conduct of trade, business or Practice of profession, except income jibiect to final tax, in addition to compensation income ave not exempted ii ic income fax on their entire income earned during the taxable year. This i, Hotwithstanding, statutory minimum wage, overtime pay, holiday Pay, a Shift differential, and hazard Pay shall still be exempt from income tax Consequently to withholding tax. 105Taxpayer Income Tax Creditable Withee 4. Purely MWE Exempt Brag 2. MWE with additional Still treated as MWE Still MWE: astoh "benefits" from the (Soriano vs. Secretary of compensation s employer exceeding tax- Finance) except on (Soriano vs, Secret, it exempt thresholds such income in excess of the Finance). excep oni, as the /P90,000 limit limit in excess ofthe ing 3. MWE with additional SMW = exempt ‘SMW = exempt “business” income Business income = Business income = Subies taxable basic income tawcredtate withholding tax at source HAZARD PAY GIVEN TO MINIMUM WAGE EARNERS Given to those on working on hazardous workplaces where primary duty performed under circumstances in which an accident could resut in serious injury or death, such as a duty performed on a high structure where protective facilities are not used, or on an open structure where adverse conditions such as darkness, lightning, fumes/gases, steady rain, or higt wind velocity exist, work were primarily health-related that may result lo fadiation/contamination /communicable/infectious. However, exposures 0 hazard which affects the entire population ina locality as air, land, and water bome and noise hazards are compensable under these Regulations Under RR 10-2008, the following are considered "hazardous workplaces: 1. Where the nature of work exposes the workers to dangerous environmental elements, contaminants’ or work conditions including ionizing radiation, chemicals, fire, flammable substances, noxious components and the like; Where the workers are engaged in construction work, logging, fe fighting, mining, quarrying, blasting, stevedoring, dock work, deers fishing and mechanized farming; ing of 3. Where the workers are engaged in the manufacture or handling explosives and other pyrotechnic products; 4. Where the workers use or are exposed to power driven or explosi? powder actuated tools; ' Where the workers are exposed to biologic agents such as bacter® fungi, viruses, Protozoa, nematodes, and other parasites. 106Mtdé pideall Tagpavers Y FILING OF INCOME TAX RETURNS (ITR) * BASIC TAX * FOR PURELY COMPENSaT; R TON IN > On or before April 1 Conte EARNERS 5 of the succeeding year. * FOR BUSINESS INCOME EA\ practice of profession: > The individual taxpayer is required to file a quarterly tax return (regardless of the results of operations) as follows: RNERS including income from 1 Quarter May 15 (45 days after end of Quarter) 24 Quarter Aug. 15 (45 days after end of Quarter) 3° Quarter Nov. 15 (45 days after end of Quarter) Final adjusted/annual return April 15 of the succeeding year “+ FINAL WITHHOLDING TAX ON PASSIVE INCOME January toNovember 10! day of the month following the PRIOR to 2018 month the withholding was made December January 15 of the succeeding year Beginning 2018 For Final and Creditable Withholding taxes, the retum shall be filed and paid not later than the last day of the month following the close of the taxable quarter during which the withholding was made. The power of the Secretary of Finance to require withholding agents to pay or deposit taxes deducted or withheld at more frequent intervals is repealed under RA10963. CAPITAL GAINS TAX kK r a) Shares of stoc! - 30 days after each transaction . i Return “ Pinal Consolidated Return - on or before April 15 of the following year f b) Real Property — 30 days fol disposition llowing each sale or other 107Vidividual’ Catsay, Geer, Manner of Filing Filing of ITR may be made through: a) Manual Filing b) Electronic Filing and Payment System (EFPS) c) eBIR Forms The aformentioned manners of filing income tax returns are discus, extensively in Chapter 5 (Income Tax for Corporations). * Payment Generally, the income tax payable shall be Paid at the time te Tetum is filed (also known as “Pay as you file system”). The deadine & filing is discussed in the preceding page. However, RA 10963 (TRAIN Law provides, that, when the tax due is in excess of P2,000, the indivicus taxpayer may elect to pay the tax in two equal installments as follows: 1" installment __: at the time of filing the annual ITR. 2” installment _ : on or before October 15 following the close of the calendar year. ILLUSTRATION 13: Juan Dela Cruz, a practicing CPA, with four dependent children, provided the following é=2 for 2018 taxable year; Gross receipts, P 10,000,000, direct cost and expenses, P5,000.°%. Crecitable withholding taxes, 1,250,000. His income tax payable is computed as folows. Gross receipts 10,000,000 Direct cost and expenses 5,000,000) Taxable net income P5,000,000 Income Tax: 18 P2M. 490,000 In excess of P2M @ 32% (P3M x 32%) 960,000 Total income Tax Due P 1,450,000 Less: Creditable withholding taxes 1,250,000) Income Tax Payable 200,000 NOTE: = Juan Dela Cruz is required to file quarterly and annual income tax retums * The creditable withholding taxes is deductible from income the tax due s = He is allowed to pay the income tax payable in two (2) equal annual installmer In addition o income tax, as a practicing professional, he is also required 1 > business tax. tx ‘As discussed in page 70, he may choose to be taxed based on graduated fale or at 8% gross salesireceipts. 2 108Jadive dual” Tagpayes Place of Filing Income Tax Return The Income tax return shall be filed and paid with any of the following; (1)authorized agent banks, (2)Revenue District Officer, (3)Collection agent; (4)Duly authorized city or municipal Treasurer in which the taxpayer has his legal residence or principal place of business in the Philippines or if there be no legal residence or place of business in the Philippines, with the Office of the Commissioner of Internal Revenue. For ‘With Payment” Returns File the return in with the Authorized Agent Bank (AAB) of the place where the taxpayer registered or required to be registered. In places where there are no AABs, the return shall be filed directly with the Revenue Collection Officer or duly Authorized Treasurer of the city or municipality in which such person has his legal residence or principal place of business in the Philippines, or if there is none, filing of the return will be at the Office of the Commissioner. For “No Payment” Returns (refundable, break-even, exempt and no operation) File the return with the concerned Revenue District Office (RDO) where the taxpayer is registered. However, “no payment” returns filed late shall be accepted by the RDO but shall be filed with an AAB of Collection Officer/Deputized Municipal Treasurer (in places where there are no AABs, for payment of necessary penalties. Persons Required to file Income Tax Return 1 Individuals engaged in business and/or practice of profession, regardless of the results of operations. 2) Individuals deriving compensation from two or mi lore employers concurrently or successively at any time during the taxable year, S of the amount, the calendar year, rectly (i.e. tax due is le or refundable return. fession-related income 'S@ subject to final tax. 3 Employees deriving compensation income, regardless whether from a single or several employers during the income tax of which has not been withheld co! Rot equal to the tax withheld) resulting to collectibl Individuals deriving other non-business, Non-pro} in addition to compensation income not otherwi: 44 Madivi h dal ty, | pensation income fr tax of which has been cnt red to file income tax rege 23, 5) Individuals receiving Purely comy employer, although the income withheld, but whose spouse is requi 6) Non-resident alien engaged in trade or business in the Phi, deriving Purely compensation income, or compensation et "8 other non-business, non-profession-related income, oom arg Persons not Required to file Income Tax Return (RR 8-2018) 1) An individual earning purely compensation income income does not exceed P.250,000. ‘mnose laa The Certificate of Withholding filed by the Fespective employers duly stamped “Received” by the Bureau, shall be tantamount to the Substituted filing (Page 111) of income tax returns by sag employees. 2) An individual whose income tax has been Correctly withheld by his employer, provided that such individual has only one employer for tte taxable year — the Certificate of Withholding filed by the respective employers, duly stamped “Received” by the Bureau, shall be tantamount to the substituted filing of income tax retums by sad employees. 3 An individual whose sole income has been subjected to fina withholding tax. 4) Minimum wage eamers, the Certificate of Withholding filed by he respective employers, duly stamped “Received” by the Bureau, shall tantamount to the substituted filing of income tax returns by $3 employees. CERTIFICATE OF WITHHOLDING BY THE EMPLOYER (BIR FORM 2316) Under Section 2.83 of RR2-98, as amended, every employee required to furnish its employees (including minimum wage bette orl! Form 2316 on or before January 31 of the succeeding calendar y¢: - employment is terminated before the close of such calendar vierish BIR day on which last payment of compensation is made. Failure to 110Mndivideal’ Canpayers » Form 2316 shall be grounds for the mandatory audit of payor's income tax liabilities (including withholding tax) upon verified complaint of the payee. In addition to the requirement to furnish BIR’ Form 2316 to employees, the BIR now requires that all employers submit the duplicate copy of BIR Form 2316 to the BIR not later than February 28 following the close of the calendar year. Failure to submit/file BIR Form 2316 on or before February 28 following the close of the calendar year will merit a penalty of 1,000 for each failure, or a maximum amount of P25,000 for all such failures during a calendar year. In case the employer fails to comply with the filing or submission of BIR Form 2316 for two consecutive years, the employer shall be liable to a fine in the amount of P10,000 and suffer imprisonment of not less than one year but not more than 10 years upon conviction, in accordance with Section 255 of the Tax Code. This is in addition to other penalties provided by law. In settlement, a compromise fee of P1,000 for each BIR Form 2316 not filed without any maximum threshold shall be collected by the BIR. (Revenue Regulations No. 11-201 3, June 6, 2013), Substituted filing of income tax returns (ITR) Under RA 9504 and RR 10-2008, individual taxpayers may no longer file income tax return on or before April 15 of the following taxable year provided the taxpayer is/has (all the requirements must be satisfied): 1. Receiving purely compensation income, regardless of amount. 2. The amount of income tax withheld by the employer is correct (Tax due = Tax withheld) 3. Only one employer during the taxable year. 4. If married, the employee's spouse also complies with all three aforementioned conditions, or otherwise receives no income. Ww