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Tax reviewer - All about Taxation

Bachelor of Science in Accountancy (Polytechnic University of the Philippines)

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Ch.4 taxable net income, rules on taxable net income, tax base, source rate, due, classes of individual:
Special individual taxpayer—taxed at the preferential single/flat tax rate of 0%, 15% or 25% based only in the gross from within the
Philippines.
- not required to file ITR
- income already net of final tax withheld
-not entitled to claim of deduction
Ordinary income taxpayer—file their ITR
-tax at progressive income tax rates of 5% to 32% based on taxable net income
-entitled to claim the ff. deduction:
bus. Expenses
allowed personal exemption
health hospitalization insurance premium
Summarized rules on individual income taxation

Classes of individual Tax base Tax source Tax rate

1. Resident citizen

a. basic income tax Taxable net income world 5% to 32%

b. final income tax Taxable gross income In philippines Single rates
c. income exempt Income not subject to
income tax

2. Resident Alien,
Non-resident Citizen,
Non-resident Alien
engage in business in
Philippines

a. basic income tax Taxable net income In philippines 5 to 32%

b. final income tax Taxable gross income In philippines Single rates
c. income exempts Income not subject to
income tax

3. Non-resident alien not

engage in bus. In
Philippines

a. basic income tax Taxable gross income In Philippines 25%

b. final income tax Taxable gross income In Philippines Single rates
c. income exempt Income not subject to
income tax

4. Special Alien, Filipino

Employee Gross compensation
a. basic income tax income In philippines 15%
b. final income tax Special income In philippines Various rates
c. income exempt Income not subject to
income tax

Rule I: Income tax for resident citizen

A. basic income tax for resident citizen
1. Resident citizen—taxed at graduated basic income tax rate of 5% to 32%.

(taxable net income world)(5% to 32%) = basic income tax

2. Taxable net income world* = gross income (-) allowable deduction/bus. Expense (-) allowance and exemption incurred/paid within
and without Philippines[allowed personal exemption, health hospitalization insurance premium]

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*taxable net income world or

*net loss world—non taxable nor refundable
Disregarded/excluded in computation of taxable net income world:
items exempt from income tax
income subject to final income tax
non-deductible bus. Expense
Format1: Standard Formula/Pattern:
Compensation income in Philippines
(+) compensation income in foreign country (abroad)
(+)Bus. Income in Philippines
(+)bus. Inc. in foreign country
(+)other income in Philippines
(+)other income in foreign country
Gross income world
(-)allowed deduction world
(-)bus. Expenses in Phil.
(-)bus. Expenses in foreign country
Net income World
(-) allowance and exemption world
(-) APE(single) & HHIP (0)
Taxable net income world
basic income tax due (5% to 32%)
*allowed deduction—refers only to bus. Expenses of sole proprietorship bus.
-excluding the amount of allowed personal exemption and HHIP
Format 2: Alternative Formula/Pattern
Gross income world
(-) Allowed deduction world
(-)bus. Expenses
(-)HHIP world
(-) APE
Taxable net income world
*allowed deduction—refers to deductible bus. Exp.
-already include the amounts of APE & HHIP
*gross income—already includes compensation, bus. &other inc.
B. Final Income Tax for Resident Citizen
*Capital gains from sale of property classified as capital assets and
*income from passive investment—subject to different final income tax rates
-excluded from above gross income computation
C. Income Exempt from Income Tax for Resident Citizen
*winning/ prizes from sweepstakes office
*statutory minimum wage items of non-taxable minimum wage earner—that are expressly exempt from income tax
-excluded from above gross income computation
Rule II. Income taxation for:
Resident Alien (RA), Non-Resident Citizen(NRC), Non-Resident Alien Engage in Business in Philippines (NRAEBP)
A. Basic Income tax for resident alien, non resident citizen, non resident alien engage in bus. In Phil.
1. (Taxable net income Philippines) X (5 to 32%)=Basic Income Tax

2. taxable net income in phil—determined by gross income earned w/in phil. Only
-allowed deduction(bus. Exp.) and allowance and exemption paid in the Philippines(APE & HHIP)
*taxable net in come phil
*net loss phil—neither taxable nor refundable
Format 1: standard formula/pattern:
Compensation income in Philippines
(+)bus. Income in Philippines
(+)other income in Philippines
Gross income in Phil.
(-) Allowed deduction Phil.
(-)Bus. Expense in Phil.

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Net Income in Phil.

(-)Allowance and Exemption Phil.
(-)APE(married) and HHIP(0)
Taxable net income Phil.
Basic income tax due(5% to 32%)

Format2: alternative Formula Pattern

Gross income Phil.
(-)Bus. Expenses
(-) HHIP
(-) APE
Taxable Net income Phil.
B. Final income tax for residentaliens, non resident citizens, non-resident aliens engage in bus. In Philippines.
(-do-)
C. Income exempt for RA, NRC,NRAEBP
(-do-)

Formula : for employee only (fixed earner or pure compensation income earner)
Gross compensation income P210,000
(-)APE (single) P50,000
(-)HHIP 2,400 (52,400)
Taxable net income or taxable compensation income P157,600

Self-employed only (variable earner; pure bus. Income earner)

bus. Income (gross profit from sales) P210,000
(+)other income if any 40,000
Gross income 250,000
(-)bus. Expense (140,000)
Net income 110,000
(-)APE P50,000
(-)HHIP 2,400 (52,400)
Taxable Net income 57,600

For Mixed Earner

Compensation Income
(+)Bus. Inc. (gross profit from sales)
(+) other inc.
Gross income
(-)bus. Expense
Net income
(-) APE
(-)HHIP
Taxable income
*resident citizen—source w/in and w/out Phil.
*resident alien, non resident citizen, NRAEBP—only w/in Phil.

Rule III. Income taxation for

non-resident alien not engage in business in Phil, (NRANEBP)

A. Basic income tax for NRANEBP

(Gross income in Phil) x (25%) = Income tax due and withheld

Illustration: taxable gross income and income tax due of NRANEBP

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Basic Salary in Phil

(+)allowances in Phil.
(+)Other Compensation in Phil.
(+)Dividends income from domestic corp. in Phil.
(+)Other profits or gain in Phil.
Gross income in Phil
Income tax due and withheld 25%
B. Final income tax for NRANEBP
(-do-)
C. Income Exempt from income tax for NRANEBP
(-do-)

Rule IV. Income tax for:

Special/ Alien/ Filipino Employees (SAFE)
A. Basic income tax for SAFE
(Gross compensation income Phil) x (15%) = Income tax due and withheld

Illustration:
Basic Salary in Phil.
(+) Allowance in Phil.
(+)Other Compensation in Phil.
Gross Compensation income, in Phil.
Income tax due and withheld (at 15%)
B. Final Income tax for SAFE
(-do-)
C. Income exempt from income tax for SAFE
(-do-)
Special Alien or Filipino Employee—refer to foreigner or counterpart Filipino
-who is holding a managerial and/or technical position,
-employe by certain specified bus. Org. in the Phil.
-describe as follows:
1. Regional Area Headquarters of Municipal Companies
2. Regional Operating Headquarters of Multinational Companies
3. Offshore Banking Units
4. Foreign Petroleum Service Contractor or Subcontractor engaged in Petroleum Operation in the Philippines
-shall have options to be taxed either:
1. 15% of gross compensation income in Phil
2. Basic income tax rates 5% to 32% on his taxable net income in Phil.

V. Income taxation For: Minimum Wage Earner (MWE)

1. MWE—worker in private sector; paid w/ minimum wage
- work in public sector with compensation income of not more than the statutory minimum wage in the non-agricultural sector where
he/she is assigned
2. statutory Minimum Wage—shall refer to the rate fixed by the regional tripartite wage and Productivity board
- defined by bureau of labor and employment statistics (BLES)
3. compensation income of MWE workprivate sectorexempt from income taxation
4. compensation income of MWEworkpublic sector exempt from income taxation
5. basic salary of public MWEequated to SMW in the non-agricultural sector applicable to the place where he/she is
assignedsame with private MWE
6. *basic pay *holiday pay *overtime pay *nightshift pay *hazard pay likewise be covered by above exemptions
*in excess of the allowable statutory amount of 30,000 not exempt from income tax and withholding tax
7. MWEs receiving other income are not exempted from income tax on their entire income earned during the taxable year.
8. hazard pay—paid by employer toemployee assigned to danger or strife-torn area
-if not satisfy  criteria above subject to income tax
9. offenders may be criminally prosecuted existing laws
10 summary of current regional daily minimum wage rate

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*456non-agricultural sector
*419 other sectors
*30COLA increase

Simplified rules on Income taxation for MWE

1. Income taxation for Non-Taxable Minimum Wage Earner
-If minimum wage earner earned income consisting of only 5 statutory minimum wage items, whether with or without income exempt
from income tax and/or income subject to final income tax MWE is classified as Non-taxable MWE.
2. Income taxation for taxable minimum wage earner
-if the minimum wage earner, earned other income subject to the basic income tax rate of 5% to 32%  MWE is classified as a
taxable MWE

Statutory minimum wage item include the ff.

1. Statutory/ Daily MW or basic pay including the COLA cost of living allowance
2. Holiday pay
3. Hazard Pay
4. Overtime pay
5. Night shift differential pay
RULE VI. Income tax for married couples ( provision of section 51 D of NIRC)
a. Married individual—shall file only one income tax return for the taxable year
b. Spouse –may pass separate ITR; but must be consolidated by BIR
c. In one ITR—taxable net income and income tax due of each spouse shall be separately computed
-identify income and expense directly or wholly
Format 1: standard formula

Husband wife Combined

Compensation income 150000 230000 380,000
Bus. Inc. 700,000 500,000 1,200,000
Share in unspecified 50,000 50,000 100,000
income (50% each)
Gross income 900,000 780,000 1,680,000
Less: Bus. Exp. (600,000) (460,000) (1,060,000)
Unspecified bus. (20,000) (20,000) (40,000)
Expense

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Total deduction (620,000) (480,000) (1,100,000)

Net Income 280,000 300,000 580,000
Less: APE & HHIP (150,000) (50,000) (200,000)
Taxable net income 130,000 250,000 380,000
Basic income tax due
(5% to 32%)

Format 2: Alternative formula:

Gross income
(-)bus. Exp
(-)APE
(-)HHIP
taxable net income
Rule VII. Income tax for parent and children
1. Minor children who are gainfully employed are mandated by law to file their own ITR thru their gardian or parent
2. Income of unmarried minor gratuitously from parent shall be included and declared as part of the parent donor’s gross income
3. Donation is recorded in part of the child –donee’s gross income in his/her income tax return
a. When related donor’s tax has been paid on such property
b. When the transfer of such property is exempt from donor’s tax.

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