Chapter oe Income Taxes for Individuals Definition Individual Taxpayers are natural persons with income derived from within the territorial jurisdiction of a taxing authority. Under the Tax Code, individual taxpayers are classified as: 1. Resident citizens (RC) Importance of Classification: 2. Nonresident citizens (NRC) = Situs of income 3. Resident aliens (RA) = Manner of computing tax 4. Nonresident aliens (NRA) = Treatment of certain . Engaged in trade/business passive incomes (NRA-ETB) "= Allowable deductions : Nonresident aliens not engaged intrade References in the tax or business (NRA-NETB) code Citizens of the Philippines Under Section |, Article II! of the Philippine Constitution, a Filipino citizen is a natural person who is/has 1. Born (by birth) with father and/or mother as Filipino Citizens; 2. Born before January 17, 1973 of Filipino mother who elects Philippine citizenship upon reaching the age of majority 3. Acquired Philippine citizenship after birth (naturalized) in accordance with Philippine Laws.‘eitdel | Alien An alien is a foreign-born person who is not J qualified to acr Philippine citizenship by birth or after birth. “ati Resident aliens Section 22F of the Tax Code defines resident e alien as an individual whose residence is within the Whether an 7 Philippines and who is not a citizen thereof. Aliens isa transient fas who are actually present in the Philippines and who is determined are not mere transients or sojourners are classified tis intentions with as resident aliens. An alien who lives in the regard to the Philippines with no definite intention as to his stay is length and nature also a resident alien. Likewise, an alien who comes of his stay. to the Philippines for the purpose that requires extended stay for its accomplishment, so he makes his home temporarily in the Philippines, is a resident, regardless of his intention to return to his Tesidence abroad. Non-resident aliens The term “nonresident alien’ under Section 22G of the Tax Cow roan an individual whose residence is not in the Philippines and a define e" thereof. They are aliens who come to the Philippines 1" pt alien wre which in its nature may be promptly accomplished. ot ft Nontesident sien "ee transients or non-residents, hence, classi alien. than 180 see Stayed in the Philippines for an aggregate peiod ot income in the Phin’, tte. taxable year and/or aliens who have bu Made or business, res a8 Considered as nonresident aliens engaged include performance nie" Section 22S of the Tax Code, “trade or busine Sonal services in yo tne functions of a public office or performan ne GamaVer as an emp e ilppines (except performance of services bY ne G8¥8 oF less, or yey oY2e)- If an alien stays in the Philippines for only “onsidered fo ag e pont deriving business income in the Philippines, M@ @ nonresident alien not engaged in trade or business: A Nonre; 25% Income tax pe slien not engaged in trade or business is subject 28S (Ordinary *°4 " gross income from all sources within ! farat2! Gains tayy "CM oF passive income except for Income subiee . nares cash and/or property dividends, on, ofits, Other fixed i dotauties, comperaation, | a ‘or casual * 8d capital Gaing e™minable annual or perIndinideal Tagpager ILLUSTRATION 2: Determine the correct classification of the taxpayer from the independent cases provided below: Case 1: Allan is a natural born Filipino citizen. His family migrated in U.S. fifteen (15) years ago. For personal reasons, he decided to retum and reside permanently in the Philippines on March 1, 2018. + Answer. From Jan. to Feb. 2018: Allan is classified as NRC. From March 1, 2018 onwards: Allan is classified as RC. Case 2: G.I. Joe is an American information technology expert. He was signed by NoyPi Telecom (a local telecommunication company) from January to March of 2018 to improve its internet services. Due to the anticipated entry of competitors from other countries, NoyPi decided to extend indefinitely the services of G.I. Joe “Answer. He is a resident alien An alien who comes to the Philippines for the purpose that requires extended stay for its accomplishment, so he makes his home temporarily in the Philippines, is a resident, regardless of his intention to retum to his residence abroad. Case 3: Greg Popovich, head coach of the San Antonio Spurs in the NBA is in the Philippines for a month-long NBA promotional tour. He also expressed his intention to regularly visit the Philippines. Answer. Greg Popovich is classified as NRA-NETB Case 4: a Using the same data in Case 3, assume that Greg Popovich invested in shares of stocks of various domestic corporations during his recent stay in the Philippines. ; Answer: Greg Popovich is NRA-NETB. Passive income such as dividend income is not considered as income derived from trade or business. Case 5: Mika “The Iceman" Immonen, a Finnish cue artist and former world billiard champion is a resident of Finland. He won the world 9-ball championship in 2005 in the Philippines, He is also the owner of one of the disco pubs in Malate since then. Answer, NRA-ETB. He is engaged in actual conduct of trade or business in the Philippines but Is nonresident.Individaal’ Taga ers Case F: | The income and expenses of a Filipino citizen for 2018 were provided as follows: January to June: Philippines Canada Gross income P5,000,000 2,000,000 Allowable deductions 2,000,000 1,000,000 duly to December: Gross income P2,000,000 3,000,000 Allowable deductions 1,000,000 1,200,000 ‘Assume the taxpayer is a resident who left the country in July of the current year to reside permanently in Canada, how much is his taxable income? Answer: P5,000,000 Solution: Gross income, Philippines (Jan.-Dec.) 7,000,000 Gross income, Canada (Jan.-June) 2,000,000 Allowable deductions, Philippines (Jan.-Dec,) (3,000,000) Allowable deductions, Canada (Jan.-June) 1,000,000) Taxable income 5,000,000 Case G: Assume the same data in case F except that the taxpayer is a nonresident citizen who returned and reside permanently in the country in July of the current year. His taxable income before personal exemptions is “Answer: P5,800,000 Solution: Gross income, Philippines (Jan.-Dec.) 7,000,000 Gross income, Canada (July-Dec.) 3/000,000 Deductions, Philippines (Jan.-Dec.) (3,000,000) Deductions, Canada (July-Dec.) (1,200,000) Taxable income P5,800,000Nonresident Citizen of the Philippines je is a citizen who: | ; * ‘Establishes, to the satisfaction of the Commissioner of Revenue, the fact of his physical presence abroad with a efi intention to reside therein; 2. Leaves the Philippines during the taxable year to reside abroad «Asan immigrant; or = For employment on a permanent basis; or = For work and derives income from abroad and whose employment thereat requires him'to be physically abroad mos of the time during the taxable year. 3. Acitizen of the Philippines who shall have stayed outside the Philippines for one hundred eighty-three days (183) or more by the end of the year. 1_Anon-tesident citizen who arrives in the Philippines at any time during the axate Yea to reside permanently in the Philippines shall be considered 2 lizen for the taxable year in which he arrives in the Philippines with income derived from sources abroad until the date of his arrival in the | (WLUSTRATION 4 Peco le the Phiippines on fort July 1, 2018 to go abroad and work there or cose’ (lowing data were provided for2018 taxable year (assume 40% of gross " abiagy"°O™® and business expenses presented below wer? Gross income _Businass Expenses say 10 June 30 A000 = 280,000 cember 31 400,000 120,000 Question 1: His taxable income i % Answer: P4se,009 out ‘income, Jan.-June ‘P600,000 | Business on ply ~ Dee. (@60%) 24a | 000 's$ expenses, Jan. - June (280,000) Bus Teste benss, yee (608) (72.000Irdividead Tagpagers YY {Question 2: Assuming he arrived from abroad on July 1,2018 to permanent reset inthe Philippines, his taxable is ‘Answer: P472,000 oon for2018 Gross income, Jan.-June (@60%) ‘360,000 Gross income, July - Dec. 400,000 Business expenses, Jan, ~ June (168,000) Business expenses, Jul-Dec. (@60%) (120,000) Taxable income —Par2,000- overseas Contract Worker(OCW)/ Overseas Filipino Worker (OFW) Revenue Regulation 1-2011 defines OCWs as Filipino citizens employed in foreign countries, commonly referred to as OFWs, who are physically present in a foreign country as a consequence of their employment thereat. Their salaries and wages are paid by an employer abroad and are not borne by entities or persons in the Philippines. Hence, OFWs are classified as nonresident citizens for tax purposes. To be considered as an OCW or OFW, they must be duly registered as such with the Philippine Overseas Employment Administration (POEA) with a valid Overseas Employment Certificate (OEC). Seafarers or seamen are Filipino citizens who receive compensation for services rendered abroad as a member of the Complement of a vessel engaged exclusively for interational trade. To be Considered as an OCW or OFW, they must bé duly registered as such with the Philippine Overseas Employment Administration (POEA) with a valid s Employment Certificate (OEC) with Seafarers Identification Record Book (SIRB) or Seaman's Book issued by the Maritime Industry Acthority (MARINA). Income earned by an OCW or Of 'S eamed out of the country is exempt use they are classified as NRCS er, the earnings of an OFW from Property in the Philippines are subject to income tax. FW as defined in RR 1-2011 that ted from Philippine income tax for income taxation purposes). a business venture or any other Resident citizen of the Philippines congigg’ Filipino citizen taxpayer not classified as nonresident citizen is a resident citizen for tax purposes: |x Rates Tai Applicable Taxes and dividuals depend on several factors suey a The applicable taxes for in not imited ° Classification of the taxpayer « Source of income = Type of income ificatic xpayer Glestiestion ft ‘TO properly classify individual taxpayers becauy, resident citizens are taxable on their income derived from sources Within and without the Philippines while other taxpayers are taxable only on thei, income derived from Philippine sources. Moreover, individual taxpayers classified as nonresident aliens not engaged in trade or business (NRANETB) are taxable based on their “gross income” while others are taxable based on “net income”. Source of Income It is important to know the source of income for tax purposes {income derived from within or without the Philippines) because as resident citizens are taxable based on their worldwide income while others i are taxable only on their income derived from sources within the Philippi MEL) Seeennenl dee hetee ORE ened RC Net Income Within & Without NRC, RA, NRA-ETB Net Income Within only NRA-NETB Gross Income Within only TYPES OF INCOME For purposes of income to income tax as follows: * Ordinary or regular income : Passio income derived from Philippine sources; and Apital gains Subject to capital gains tax taxation, there are three types of incomes subject Ordir compensation (reo or regular income refers to income such 2% Practice of profession (earls ron 2888). businass income, income Fav miscellaneous income and pee from sale and/or dealings of property taxes under Section 24(B) Passive income other than those subject to final [D] of the T; and capital gains tax under Sections 24[C] an ‘@x Code. Regular incomes are ‘subject to graduated tax table (also known (i 7 Sant normal tax) as provided for under Section 24(A) x rate is summarized in Table 2-1, page 68. 64Irdavideal Tags crs Passive incomes subject to final withholding taxes are certain passive incomes from sources within the Philippines as enumerated under Section 24(B) of the Tax Code. These passive incomes are not subject to graduated tax rate or basic tax presented in Table 2-1 but to specific final withholding tax rates as summarized in Table 2-2, page 76. The specific passive incomes derived from Philippine sources subject to final withholding taxes are as follows: 4) Interest income 2) Dividend Income Unless exema, other passive income derived from 3). Royalties Philippines but not in to ist (f any) a8 wel as passive : income derived abroad are subject o basi fax 4) Prizes; and §) Other winnings ° Incomes from sale of capital assets subject to capital gains tax (CGT): 1) Capital gains from sale of shares of stocks of | * Tie tax a domestic corporation not traded in the local stock exchange [Sec. 24(C) NIRC}; and ee 2) Capital gains from sale of real property in the _subject to basi fax. Philippines [Section 24(D) IRC] roles ae summarized in Table 2-3. Regular Income Passive income, Phils. —> —FinalWithholding Tax Table 2-2 Capital gains(subj. to CGT) _—* Capital Gains Tax Table 2-3 (“ess erenpt under te low, nears no subject to fal wining tax and capital gains tax are subject to radi ax rat. ILLUSTRATION 3: Use the following data for Cases A-E: . ‘An individual taxpayer provided the following information for 2018: Gross business income, Philippines P5,000,000 Gross business income, Canada 2,000,000 Gross business income, Singapore 1,000,000 Business expenses, Philppines 3,000,000, Business expenses, Canada 4,000,000 Business expenses, Singapore '500,000 65Determine the taxable income assur Case A: The taxpayer is resident citizen “ Answer: P3,500,000 Solution (Gross business income, Philippines P,000,000 Gross business income, Canada 2,000,000 Gross business income, Singapore 1,000,000 Business expenses, Philppines (3,000,000) Business expenses, Canada (1,000,000) Business expenses, Singapore (500,000), Taxable income 3,500,000 Case B: The taxpayer is a nonresident citizen 4 Answer: P2,000,000 Solution Gross business income, Philippines _P5,000,000 Business expenses, Philipines (3,000,000) Taxable income 'P2,000,000 + The taxpayer is a resident alin ‘% Answer: P2,000,000 ‘Solution: Gross business income, Philippines 6,000,000 Bushes menses rape [as Taxa heone Peron cpayer is @ le Fane pe rarest an engaged in rade or buss Solution: Gross business income, Philippines Business expenses, Phil * faze, Tete one Case: Tr ged oor (2 usPayer sa nonresident aon not me \nawer: 5,000,000 ninwer SA ANETBX 9 ston yoo 6a ar Va UL Ca ae TABLE?) GRADUATE RAN AW TAXABLE YEAR 21162022 wow ™ noe ” 250,000 Exempt Exempt er | Pr0.000 | | Over P1000 PS0+ 10% in | cer rsnono bt 20% otexcess over — | 15% of exes og 250,000 tutrotover excess of 10.000 | not over P400,000 250,000, P0000 ean over P3000 P2S00+ 15%in | serene 730,000 + 25% in| P2500 + A || twtnotover excess of P30,000 | stoma excess of 400,000 | ences of PHONG | P7000 Over P70,000 P8,500+ 20% in ‘Over P800,000 but 130,000 + 30% in 102.500 + 5% butrotover excess of P7000 rotover excess of P800,000 | excess of PAFOE Poot | Pam OwePHoo® —rasiowzsin | owrrzomae rumen szwin | Paz» HN! wires —eneenotP110000 | utnat over excess of oss of 2 aso | 000 2.000.000 vant Or 250000 PEOGIO+20%in | over PB00000 Peatoo0o+as% | Pr.202500 ne ertow economy | ineresat | xs 0900 ver P800900 125,000 32% in 'LUSTRATION 4~ COMPUTATION OF BASIC INCOME TAK DUE PURELY coy MPENSATION INC( : | 1) Determine the income tax c eae GARNER: ‘ncome” for 2018 1s 240,000. SUNG the “taxable compensation % Anewer: PO, tax exemptIndivideal' Tagpayers “taxable compensation income” 2) Determine the income due assuming the for 2018 is P300,000 Answer: 10,000 ee Taxon First P250,000 | tmexcess of 250,000 | _(R50,000 x 20%) (TaxDue 3) Determine the income tax due assuming the “net taxable compensation income" for 2018 is 1,850,000 + Answer, 445,000 _ _ Taxon First P800,000 130,000 In excess of P800,000 315,000 (P 1,050,000 x 30%) Tax Due SELF-EMPLOYED &/or PROFESSIONALS (SEP) Beginning 2018 or upon the effectivity of RA 10963 [Tax Reform for Acceleration and Inclusion Law (TRAIN Law)], regular income of Self- Employed and Professionals (SEP) amounting to more than P250,000 in a taxable year but with a gross sales/receipts and other non-operating income not exceeding the revised vat threshold of R3,000,000 shall have the option to avail of 8% tax on gross sales/receipts and other operating income in excess of P250,000 in LIEU of the graduated income tax rate and business tax under Section 116 of the Tax Code. DEFINITION OF TERMS: ‘Sel-Employed is defined under RA10963 (TRAIN Law) as ‘a sole proprietor or an independent contractor who reports income eamed from selhemployment. He/She controls who helshe works for, how the work is done and when itis done. It includes, Professionals whose income is derived purely from the practice of profession and not under an employer ~ employee relaionship’ Professional isa “person formally certified by a professional body belonging to profession by virtue of having comploted a required course of ‘hcser wor eeee whose competence can usually be measured against an established set of standards. It also refers to a person who engages in some art or sport for money, as a means of livelnood, rather than 28 hobby. includes but sno limited to professional entertainers, professional athietes, directors, producers, insurance agents, insurance adjusters, management and technical consultants, bookkeeping agents, and other recipients of professional, promotional and talent fees” ° 694 Individual Thy Y -Employed and/or Professionals (SEP) pont 2K) of the Tax Code as amended by RA10963 (TRAIN Law) provides the following rules for SEP: ‘Regular Income Tax Regular Regular + Regular Income ORE" taxon — income Tax income tax Tax OR 8%" taxon Income Tax Gross Gross, Sales/Receots and Sales/Receipts and | car operating ‘ther operating income in rcess of income IN LIEU of | 250,000 LIEU of the graduated ax the roused ax rae and Sec.116 tle ad Secion 116 | “Prod, a SEP oval eee) nat exempt aaaatransaciony in cber OT a ea egal ior ata wore: "SELIG abana nt an ince x. is computed a 3% of rose slehocil nd oar operating ea ‘Babess ne a dicasd in volume 2cf bs ook ened Taft and Buahnese oer” 7 ezine es a 88" i alae ono txaye who ao) ren VAT reise and) abl 3% Trae ae Taro Secon 118 lh NC. As suc, (a VAT regaared taxpayers) se lable or Peco Tess une TeV fe NRC exert Se: 18) aro ate opn tan bo ted ange pated a sre) aon to rant Secton 118 ote Tag be imposed onthe frst P3,000,000,00. purposes, refer be subject o Var 000.0000 shal be colectes 18 due date immedi breached ad | toCASEE ofiustration#s. | 70 |Mabividaal” Tigpaves e taxes differ from business taxes. The latter is discussed in oer our book entitled “Transfer and Business Taxation’. Since these voume 2 Srgscussed In a separate subject, we assume that undergraduate students are not yet adept on topics Involving business taxes. Thus, for sudeon purposes inthis book, the option to be taxed at 89% will nt yet in camplcated business transactions, Additional comprehensive ineons onthe 8% optional tax is dscussed in volume 2 of our textbook, iMrcaly under Chapter 9 entitled “Other Percentage Taxes (OPT). [ILLUSTRATION 5 - Self-Employed andlor Professionals (SEP) _ CASE A: PURELY SEP whose gross sales/receipts and other non- | operating income does not exceed the VAT threshold of P3,000,000. 4) Determine the income tax due assuming the gross salesireceipts and other rnon-operating income” for 2018 is 240,000 4 Answer: P0; exempt from income tax 2) Using the data below, determine the income tax due for 2018: Gross sales 2,800,000 Cost of sales (1,500,000) Operating expenses _(750,000) Net income 550,000 4 _Answer: P67,500 Tax on First B400,000 income 30,000 In excess of B400,000 income 37,500 (F150,000 x 25%) _ Income Tax Due 67,500 Lin adaition to the Income tax computed above, the SEP is stil subject a business tax. Business taxes ae discussed in volume 2 of his book entitled “Transfor and Business Taxation’. For purposes of istration, assume the taxpayer i this particular case is subject to Percentage Tax under Sec, 116 (being a non-vat registered taxpayer and the gross sales did not exceed the revised vat threshold of PAM) the busines fx is computed as folows; (OPT = 2,600,000 x 3% = PB4,000. Consequently, the total tax expense (income and business tax) ofthe SEP is P1S1,500. This tax shal likewise apply in the preceding number (assumpton #1 respective of ts exemption ‘fom income tax. The basis of a business lax isnot the “ncome” but grass salesecoipts and other non-operaing income (exclude compensation income) 71Madividual Ty ‘He 8 3) Assume the SEP in the preceding number opted to avail the 8% taxing the TRAIN Law. Answer: (P2,800,000 - 250,000) x 8% = P204,000 The 8% tax is computed based on Gross salesireceipts and chr ing income in excess of P250,000. This is in LIEU ofthe lane fy using the Graduated Rate and Business Tax under Sec. 116 ofthe TaxCxy ‘Comparing total taxes of items #2 and #3 above, separate congutiong income tax using the graduated rate) and the business tax wil esutto alow {otal taxes due. Hence, the SEP shall compare the total taxes using ete methods and may choose the method which wil rest oa lover lis ASE B: PURELY SEP whose gross salesireceipts and other non- operating income EXCEEDs the VAT threshold of F3,000,000. Determine the income tax due assuming the following data for 2018: Gross sales 5,000,000 Cost of sales (2,250,000) Operating expenses _(1,250,000)_ Net taxable income _P1,500,000_ “Answer: 340,000 (™ on, | First P800,000 income 130,000 In excess of P800,000 income 210,000 (P700,000 x 30%) Tax Di ~P340,000 | 1 inadittion tote inccme tax computed above, the SEP in his parol is sill subjecttoa business tx. Since the gross salesracaips and abe" ‘operating income exceeds te va threshld, tho appicabl busines #** 12% vat computed as folows: VAT = P5,000,000 x 12% = 600,000 C1 The 6% tnx is not applicable if (athe gross salesiecsipts anc ote TO” Operating income excods te val esol or oe SEP vat wg! CASE C: Purely SEP + GRor GS < PIM + ‘Assume the sar lata in CAS| Pis 3E A(2) ‘ome e oa ax due of the waver the SEP opted to use the 8% tax — | _ J aIrdivideal Taghayers ep Answer: 403,500 Income Tax: First P400,000 income 30,000 In excess of P400,000 income 37,500 67,500 (P450,000 x 25%) Business Tax: 12% vat = P2.8M x 12% 336,000 Total Tax Due {2 The 8% tax is not applicable in this particular case. {CD The folowing are nat allowed to aval the 8% tax: a) VAT-registered taxpayers b) thosé lable for Percentage Taxes other than Sec. 196 under Title Vof NIRC. CASE | Purely SEP+ GR or GS = P3M + tho SEP is subject to other type of OPT Pedros a taxi operator. The folowing data were provided for taxable year 2018: Gross receipts 12,800,000 Cost of direct services (1,500,000) Operating expenses (750,000 Net income 550,000 Determine the total tax due of Pedro assuming he opted to use the 8% tax: Answer: 403,500 Income Tax: First P400,000 income 30,000 Inexcess'of P400,000 income 37.500 67,500 (P150,000 x 25%) CCT under Sec. 117 2. 8M x 3% ___ 84,000 | | Total Tax ue 151,500 {LD The 6% taxis not applicable in ins particular case. {LD The folowing ae not alowed 10 aval he 6 -ogisored taxpayers 3 Hana able for Percentage Taxes other than Sec. 116 under Tite V of NIRC. 73Aedivideal Tse CASE E: PURELY SEP using 8% tax rate but whose gross sales/receipts and other non-operating income EXCEEDs the VAT threshold of P3,000,009 during the y pedro signified his intention o be taxed at 8% income tax rae on gross sles fig 1 quarter income tax retum. However, his gross sales dung the yea exceeded the vat threshold of P3M as follows: Qi a2 a3 Q4/Annual (tan) __(@Yotax)_(0% tax) _ (Gag Sales 500,000 500,000 72,000,000 3,000,000 Cost of sales (300,000) (300,000) 1,200,000) (1,200,000) Gross Income 200,000 200,000 800,000 1,800,000 Operating expenses (120,000) (120,000) (480,000) (720,000) Net taxable inoome 80,000 ‘80,000 320,000 _P1,080,000 = 80.900 P80,000_P320,000_PL.OBDON Question: How much is Pedro's annual income tax payable? Answer: 289,200 san Sales 6,500,000 Cost of sales _(3,00,000)_ Gros Income 3500 000 Operating expenses (1,440,000) oo tiene Income Tax due using graduated rate 509,200 end oce(PAMSSDOOONE) ax rat 1,000)x8%) (220. ‘cai Oh CASE E: MIXED Income Earner who: 60 gross salesireceipts and other NO™ perating income does not exceed the VAT threshold of 3.000000 Assume the folowing data for 2018: Compensation income Gros sles 2.00 tof sales 500, Operating expenses eae Total taxable net income ptaso,o0d 1) Determine the Correct Income © Anawer B25 O00 an aut 74Inbvieal Tagger Solion:_ ——_ Tax on | First P800,000 income~ 130,000 In excess of P800,000 income 195,000 | (P650,000 x 30%) x Due 325000 | As discussed in CASE A(#2), In addition to the income tax computed above, the SEP in this particular case is stl subjct toa business tax (onhis business income only; exclude compensation income) computed as follows: OPT = 64,000 [Same computation/explanation with Case Aj#2)) 2) Assume the SEP opted to avail the 8% tax under the TRAIN Law, determine the tax due. Answer: 364,000 Solution: On his compensation income: Taxon First 800,000 130,000 In excess of 400,000 30,000 160,000 (P400,000 x 30%) _ On his business income = 204,000 | **(P2.8M ~ P250,000) x 8% TOTAL Tax Due +P364,000 {LL The 9% tax shal ot be apple to compensation income {LL “Same computatoneplanaton with Case AS) {LL The P364,00 represents two taxes, nce ad sings taxes id other non- CASE F: MIXED Income Earner whose gross sales/receipts an Operating income EXCEEDS the VAT threshold of P3,000,000. 2018: Determine the Income tax due assuming the following gata for: Compensation income pomnees Gross sales 0 250, 00) Cost of sales (2.260; (1,250,000) jperating expenses Ton taxabe net Income 2,400,000 “Answer: 618,000 Lo Td 75> Solution: _ a Taxon | First P2,000,000 income 490,000 in excess of P2,000,000 income 128,000 (400,000 x 32%) | Tex Due a 21 nation tothe income tax computed above, the SEP in his par ay i tl subject oa business tax. Sinoe the gross salesteceipts and cts | ‘operating income exceeds the vat threshold, the applicable business: 12% vat (on his business income only) instead of Secon 116. The ax | computed as follows: VAT = P5,000,000 x 12% = P600,000 ‘The 8% tax in LIEU ofthe graduated tax rate and Section 116 sno appa ifthe gross salesreceipts and other non-operating income exceeds he threshold of PIM. noomes received from ; etary th dr ia Prior fo 2018: ames Seo ssn nes CON act MOTE: ny C-Exempt Exempt Bet ae on ees a subject tg \ re marocettbani aeons rang 2078 ret NRC=Exempt Exempt Exerot ™ trom, ve ie Ho ng Seo a Se Oe on fin, OSes Exam Exempt a Hermie va ny cag tag 2! 8 ata ar rat POR strat neta * . im nx OB 2% 20% Be %eivdnel Tesayes Citizens & Residents NRAETB _NRANETB (ayROVALTIES Raabe, in goneral (ther than ryalies 20% 20% oo eset inete8) B yates on books, as well as othe ierary 0% 20% 2% vos and msical compositions bl pl (ey PRIZES ° | Paes exceding P10,000 20% 20% 2m | NOTE: Pies P10,000 are subject to basic ‘ax excapt ose received by NRANETB which sesbecto 2SFWT (OTHER WINNINGS Prior to 2018: 20% 20% ae Regardless of amount except OlLato C80 andor Lato winnings (ax exempt) pes Begining 2018: Regardless of amount including 20% Exempt 2 CSO andlor Loto unless the noun is $ P10 000\tax exer [petesenoneregs and/or PROPERTY DIVIDEND. Cash andlor property — diidends ‘actuaylconstrucively received from 3 10% 2% 25% omestc corp, or from a joint stock co. ‘rancor mutual fund coripanies & ROH : ‘Imutinatonal companies beginning Jan 2000 | 8. Share of nindivdualin the distributable net 7 - Pa income after tax of a PARTNERSHIP (OTHER to | THAN 2 GPP) beginning Jen. 1, 2000. . Share ofan ndivdalin the net income ar om os a | 'ac of an Association, 2 Joint Account, Of a ‘int Ventre. or Consortium taxable? | Saporation, which he is @ member oF 8 0 Yerturer begining Jan. 1, 2000.> hadivideal 7, | FINAL WITHHOLDING TAX / (On *Gertain’ income not subject to basic tax) Incomes under section 24(B) of the Tax Code as sum Table 2-2 above are subject to final taxes instead of basic tax or, | ‘tax rates. Final withholding tax is a kind of tax which is Prescribed > | “certain income” (interest income, dividends, royalties, prizes and winr derived from Philippine sources and is not creditable against the income’, due of the payee on income subject to regular rates of tax for the taxate year. imaieg» Under the final withholding tax system, payee received the ize | net of the applicable tax. The amount of tax withheld by the withholé | agent (payor) is “constituted as a full and final payment’ of the income’ | due from the payee on the said income. For instance, if a resident citz taxpayer earned P10,000 interest income from his bank deposi, te mount to be credited to his bank account shall only be P8,000, net f?# 20% final tax on interest income from bank deposit. The applicable i$ ‘withheld by the payor (bank) and shall remit the corresponding tax tof BIR. Consequently, the liability for payment of the tax rests primarily onf® Reyor a8 a withholding agent. Thus, in case of his failure to withnold the = orin hora Of under withholding, the deficiency tax shall be collected for withhotine annolding agent. The payor is required to issue | Mot reauln a cettficate to the payee. The payee, on the other han! ene “anymore {o file an income tax return for these types of emwrse, ‘comes will no longer form part of the payee’s “ta Passi income therefore, rome derived abroad are subject to basic income 'ncome tax return of resident citizen taxP@) ne | MLUSTRATION i Ss a ae PKS he lowing hiomaion or 28 | oss busines income, Phipnnes 722,000,000 Goss business income, Canaue 3.000.000 | aoa ‘expenses, Philippines. 4,400,000 } net xpenae g henge | income. Philippi "100,000 } Dred OO Coa sae | Divider mm @ domest ‘corporation 125,000 I Oden peone siden foreign 75,000 "omesiden oeign corporation 102,000 70Individual’ Tagpagers Interest income received from a depository bank under 000 FCDS, Philippines Senor . Philippine lotto winnings 10,000 Philippine charity sweepstakes winnings 500,000 Singapore sweepstakes winnings 200,000 Other winnings-Philippines 50,000 Raffle draw winnings- Robinsons Manila 8,000 Raffle draw winnings- SM Manila 20,000 Raffle draw- SM "Shanghai, China’ 30,000 Determine the following: (1) Taxable income ‘Answer: P2,315,000 computed as follows: Gross business income, Philppines Gross business income, Canada Business expenses, Philippines Business expenses, Canada Interest income ~ BDO in Canada Dividend income - resident foreign corporation Dividend income - nonresident foreign corporation ‘Singapore sweepstakes winnings Raffle draw- Robinsons Manila Raffle draw- SM "Shanghai China” Gain onsale of rel property abroad Taxable income NOTE. + Taxable income means orinary income subject to graduated tax rates under Section 2A) ofthe Tax Code as summarized in Table 2- ofthis chap. + Inlrestincomes on bank depois from sources “ous ofthePhitppnes and Dvdend income from “oeign corporations are subject to basi tax ‘= PCSOPrilppine Loto winnings Prior to 2018 = Tax Exempt Under TRAIN Law: Exemptifnot exceeding P10,000; Subject to 20% FWT the amount exceeds P10,000 Prizes not exceeding 10,000 from sources within the Philippines are subject o basic tax On the other hand, prizes more than P10,000 from sources “within the Philippines” ‘are subjact lo 20% final tax as shown in Table 2-2 {2) The amount of final taxes on “passive income”. 4 Answer: P54,000 computed as follows: Interest income - BDO Philippines (20%) P20,000 ‘Dividend income from @ domestic corporation (10%) 12,500 Interest income received trom FCDU deposit (15%) 7,500 ‘Other winnings-Philippines (P50,000 x 20%) 10,000 Rail craw. SM Manila (220,000 x 20%) 4.000 Total inal tex on passive income ____PS4000 79Idi ideal’ vA Gea DEPOSIT SUBSTITUTES (Tax Treatment of Interest income derived from government debt instruments and securities) RR 14-2012 defines “deposit substitutes" as an alternative form obtaining funds from the public other than deposits, through the issuang endorsement, or acceptance of debt instruments for the borrower's om account, for the purpose of re-lending or purchasing of receivables and ot obligations, or financing their own needs or the needs of their agent or dear “Public” is defined as borrowing from twenty (20) or more individual or corpse lenders at any one time. The mere issuance of government debt instrumert of securtties is deemed as falling within the coverage of deposit substitu irrespective of the number of lenders at the time of origination, and thereat interest income derived therefrom shall be subject to applicable final tax rae Government debt instruments and securities including Bureau of Treas issued instruments and securities such as Treasury bonds (T-bonds), ‘Treasuy bills (T-bills) and Treasury notes are classified as deposit substitutes if sue instruments or Securitas are to be traded or exchanged In the seconde INTEREST INCOME FROM LONG-TERM DEPOSIT OR INVESTMENT CERTIFICATES (Evidenced by certificates prescribed by BSP (Based on RR 14-2012, RMC 7-2015) Long-term deposit or Investment certificate refers to certificate of ‘deposit or investment in the form of : Jn or ind | deposit substitutes, investment fer esa eno bn <° management accounts and other invest ith @ maturity period of not less than five (5) years, the form of which shal Prescribed by the Bangko Sentral ng Pi ‘only to Individuals (should not OF 8 trust department of sdaparment of @ bank) {n denominations of P10,000 and ot™ scribed by BSP (RR 14-2012) Requisitos/Conditions for 1) The depositor or invert ‘emption, tor is an individual cit alien of fn engaged in rade or business In tho PhIIDD 80Iediridead Tagbegr ‘term deposits or investments must be issued by banks at lore rr fnancial institutions. ¥ omy att erg form deposits of investments must have a matuity period of rot less than five (5) years. 6) Thelong-term deposits or investments must be in denominations of Ten Tresand pesos (P10,000) and other denominations as may be preserbed by the BSP. 1) Ineteng tem deposits or investments should not be terminated by the ginal investor before the fith (5th) year, otherwise they shall be SiBected to final tax rates of 5%, 12% oF 20% on interest income eamings as shown in Table 2-3. 4) Except those spectically exempted by law of regulations, any other income such as gains from trading, foreign exchange gain shall not be covered by income tax exemption. RMC 7-2015 dated March 6, 2015 provides that, for interest income derived by individuals investing in common or individual trust funds or investment management accounts to be exempt from income tax, the following additional characteristics/conditions must ALL be present: 1) The investment of the individual investor in the common or individual trust fund or investment management account must be actually heldimanaged by the bank for the riamed individual at least five (5) years without interruption. The term "bank" referred to herein are banks duly licensed as such by the Bangko Sentral ng Pilipinas; 2) The underlying investments of the common or individual trust account or investment management accounts must comply with the requirements of Section 22(FF) of the NIRC of 1997, as amended, as well as the requirements mentioned above: 3) The common or individual trust account or investment management account must hold on to such underlying investment in continuous and Uninterrupted period for at least five (5) years - For onresident ‘alien not engaged in trade or business iP the Philippines, interest income received from long-term deposit or investment Sallbe subject toa Final itnaling Tax athe rate of twenty five percent St). Fe Jident foreign corporation, interest income received from longterm doposit of ort geiment Shall be subject to a Final Withholding Tax (Fryar GoPost oO tnity percent (30%) pursuant to Section 28 (B) (1) of the NIG of 1997, 28 mended. However, interest income from long-term aIidividaal Tq ey fay, ito rogular income {8X atthe ray pjac patmont still bo sul 30%) i rocolvod by & domestic corporation and rma on (RMC 7-20 15). F LONG-TERM DEPOSIT (RR 14-2012) from long-term deposit or investment that is pre. itor or the investor before the 5” year shal te (od rates of final withholding tax on the entire income and shall bo withheld by the depository bank from the proceeds # the long-term deposit or investment certificate based on the remaining maturity (holding period) thereof as follows: Four (4) yoars to lass than five (5) years 5% Throo (3) years to less than four (4) years 12% Loss than three (3) years 20% deposit or 1” ‘nity percent forvign corpo" PRE-TERMINATION O! Interest income tweminated by the doposi subject othe following gradual { RLUSTRATION 7: (ted under 14-2012 and ROC 7.2018) 0 Aninstument with a maturity period often (10) years was held by Juan (resident hz) wo (2) yar and was transfered fo Smith (resident aller), who, # | !um, held it for eight (8) years. The final withholding tax are as follows: Juan 20% final tax | Smith Exempt ‘strument with | Cows ay ay ered of tn (10) years was ld by | a Sat ot or wo 2), (3) years and transferred it to Smith, a resident | ret ty who held e. pian before Subsequently transferring it to Pedr? | ries gaa 2) att ofr 8 pai of (8 aah ra tx | coe Pedio 2 tata ‘ramon (oorvesidern mse ® Mata IY Period of ten (10) years was held by Smith Wade oF busin ri for three (3) years and transferred “ aan I for two (2) years before subsequent i foigg) MM® Bre-terminated tar four (4) yes 12% final tax 20% final tax a2Iedivideal T Case D. Mr. X (a resident citizen) appoints Bank A—Trust Department to manage his money created through a trust agreement. Bank A —Trust Department then invests said money in a 5-year corporate bond, 4 Even if Mr, X does not withdraw his money from such trust agreement for atleast five (6) years, his interest income from the trust agreement will NOT be exempt from the final withholding tax as the underlying investment is a corporate bond, even if such corporate bond has a maturity period of five (6) years. The underlying instrument needs to comply with the requirements of Section 22(FF) ofthe tax code. A bond, promissory note or any other type of debt instrument issued by a non- bank corporation as an underlying instrument will not meet the requirements of Section 22(FF) as itis not issued by a bank CaseE: (Refer to Case °D’). If Bank A —Trust Department in its own name without mentioning the particular individual for whom the investment is being made invests the fund instead in a 10-year long-term deposit or investment cetficate, the long-term deposits and investments made in the name of a tust department ‘of a bank are not exempted from the twenty percent (20%) final withholding tax. Only those made spectically "in tust for the name of speciic and quaifed individual investors" may be exempted from income tax, provided they comply with Section 22(FF) of the tax code. Case F: 1k A —Trust Department in the name of Mr. X invests long-term depositor investment certificate as defined Acer Section 22(FF) ofthe NIRC of 1997, as amended, Mr. X's interest income Served from the trst agreement shall be exempt from income tax provided that Bank A—Trust Department in behalf of Mr. X wil hold such depositor investment frcontinuous. and uninterrupted period for atleast five (6) years. The holding for both the individual investor in the trust agreement and the trust in the Enderynginstument mustbot beat astfve(S)yeas. (Refer to Case “D’). If Ban the fund instead in a 10-year} Iadividual Teta, , D , . « TAS rt Persons instrumental in the discovery of violation, o In the NIRC and the discovery and seizure of smuggled goods) f the Tax Code provides: ere Violations of the National Internal ee Code. - Any person, except an internal revenue official or employee, or other public official or employee, or his relative within the sixth degree of consanguiny, who voluntarily gives definite and swom information, not yet in the possession of the Bureau of Internal Revenue, leading to the discovery of frauds upon the intemal revenue laws or violations of any of the provisions thereof, thereby resulting in the recovery of revenues, surcharges and fees and/or the conviction of the guilty party and/or the imposition of any of the fine or penalty, shall be rewarded in a sum equivalent to ten percent (10%) of the revenues, surcharges or fees recovered andlor fine or penaly imposed and collected or One million pesos (P1,000,000) per case, whichever is lower. The same amount of reward shall also be given to an informer where the offender has offered to compromise the violation of law committed by him and his offer has been accepted by the Commissioner and collected from the offender: Provided, Fe, surcharges or fees be actually ro , That should no revenue, be entitled to a reward: Provided, h Case already pending or previously investigated ned. by the Commissioner or any of his, deputies, agents o Proved i Speeretary Of Finance or any of his deputies or agents: and reguitione ‘sous oy thoes Provided herein shall be paid under rules Commissions "© Secretary of Finance, upon recommendation (B) For Discove, i the pub oer anno SeUr@ of Smuggled Goods, courses ton perseaopetaton in eradicating emunghag acs roma and confiscated goods or c,°! te fait market valve ef the smuggled and ekNet lower, shall be guns Til#©®_ esos. (P1,000,000) por esse, S240 oF uch smuggle nfo PE™SONS instrumental inthe argon) The cash ¢¢ evar d a8 a final withholding se ra Collecte I be subject to income tax: “The pov '© Fate of ten percent (10%). Public officials, whether had foregoing Subsecti in the course of the ne,.nCuMbent or ‘retired, are prohibited from of 8 Of their gunn ‘ons notwithstanding, all Performan me ‘aiming inform 10 Acquired the information luties during their incumbency. ir di 'er's reward, 84 So