INCOME TAXATION REVIEWER – CHAP 2 a.

Resident
b. Non-resident
TAXATION OF INDIVIDUALS i. Engaged in trade or business in
the Philippines
- Our present tax system imposes progressive
ii. NOT engaged in trade or
rates of income taxes on citizens and resident
business in the Philippines
aliens. iii. Employed by
- Schedular system 1. Tf
o The income tax treatment varies 2. Offshore banking units
depending on the kind of taxable 3. Petroleum contractors
income the taxpayer. and sub-contractors
o Provides for a different tax treatment of
different types of income so that a DEFINITION OF TERMS
separate tax return is required to be
filed for each type of income and the 1. CITIZEN
- Citizens of the PH at the time of the adaptation
tax is computed on a per return or per
of the Feb. 2, 1987 constitution
schedule basis.
- Those whose fathers or mothers are citizens of
- Global treatment
o The tax treatment views indifferently the PH
- Born before Jan. 17, 1973
the tax base and generally treats in
- Those who are naturalized in accordance with
common all categories of taxable
law
income of the taxpayer.
2. RESIDENT CITIZEN
o One where the taxpayer is required to
- A Filipino citizen who permanently resides in
lump up all items of income earned
the PH
during taxable period and pay under a - Taxable on all income derived from sources
single set of income tax rules on these within and without
different items of income. 3. NON-RESIDENT CITIZEN
o The taxable income is being subjected - taxable only on income derived from sources
to a unitary but progressive, graduated within
rates.
- If two or more individuals-professionals form a A. Establishes to the satisfaction of the
general professional partnership, there is no Commissioner of Internal Revenue the fact of his
income tax imposed on the entity. physical presence abroad with a definite intention
- All individuals are subject to tax on their to reside therein; or
respective taxable incomes, they are not all
B. Leaves the Philippines during the taxable year to
taxed at the same rate for two reasons.
reside abroad:
o 1. Tax rates are generally higher for
higher levels of income - As an immigrant; or
o 2. Even at the same level of income and
with the same basic personal exemption - For employment on a permanent basis
of 50k, tax dues will vary depending on - For work and derives income from abroad and
an individual’s claim for additional whose employment thereat requires him to be
exemptions on dependents. physically abroad “most of the time” (at least
183 days) during the taxable year.
CLASSIFICATION OF INDIVIDUAL INCOME
TAXPAYERS C. Was previously a nonresident citizen and who
arrives in the Philippines during the taxable year in
1. CITIZEN which he arrives in the Philippines with respect to
a. Resident his income derived from sources abroad until the
b. Non-Resident date of his arrival in the Philippines.
2. ALIEN
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4. RESIDENT ALIEN
- Individual whose residence is within PH and
who is not a citizen, thereof.
- - taxable only on income derived from sources
within
5. NON RESIDENT ALIEN
- An individual whose residence in not within the
PH and who is not a citizen thereof
- - taxable only on income derived from sources
within
6. NON RESIDENT ALIEN ENGAGED IN
TRADE/BUSINESS (NRA-ETB)
- Alien is carrying on a business in the PH
- A non-resident alien who has stayed in PH for
more than 180 days during any calendar year
shall be deemed doing business in the PH
7. OCWs or OFWs
- Filipino citizens employed in foreign countries
who are physically present in a foreign country
as consequence of their employment thereat
- To be considered as an OCW or OFW, they must
be duly registered as such with the POEA, with a
valid overseas employment certificate(OEC)
8. FOREIGN CURRENCY DEPOSIT SYSTEM (FCDS)
- The conduct of banking transactions whereby
any person, may deposit foreign currencies
forming part of the PH international reserves
9. FOREIGN CURRENCY DEPOSIT UNIT (FCDU)
- Unit of a local bank or a local branch of a foreign
bank authorized by the BSP to engage in foreign
currency-denominated transactions
o Local Bank – a thrift bank or a
commercial bank organized under the
laws of the republic of the PH
o Local branch of a foreign bank – a
branch of a foreign bank doing business
in the PH
10. OFFSHORE BANKING SYSTEM – Conduct of
banking transactions in foreign currencies
involving the receipt of funds principally from
external and internal sources and the utilization
of such fund
11. Offshore Banking Unit (OBU) – branch,
subsidiary or affiliate of a banking corporation
which is duly authorized by the BSP to transact
offshore banking business in the PH
12. DEPOSITS – funds in foreign currencies which
are accepted and held by an OBU or FCDU in the
regular course of business, with the obligation
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to return an equivalent amount to the owner
thereof, with or without interest.
13. MIXED INCOME EARNER – A compensation-
earner who at the same time is engaged in
business or practice of profession.
14. MARGINAL INCOME EARNER – an individual
whose business does not realize gross sales or
receipt exceeding P100,000 in any 12-month
period.
15. SELF EMPLOYED INDIVIDUAL – who may either
be a single proprietor engaged in business or in
the practice of profession.
16. REGIONAL OR AREA HEADQUARTERS (RHQs) –
A branch established in the PH by multinational
companies
“One who comes to the PH for a definite purpose
which in its nature may be promptly accomplished is a
TRANSIENT”
“Mere ownership of shares of stock in the PH is not
enough to constitute as engaging in trade or business
in PH”
SOURCES OF INCOME
- Property , Activity or service that produced the
income
- INCOME DERIVED FROM LABOR – the place
where the labor is performed
- INCOME DERIVED FROM THE USE OF CAPITAL –
the place where the capital is employed
- PROFITS FROM THE SALE OR EXCHANGE OF
CAPITAL ASSETS – the place where the sale or
transaction occurs
CATEGORIES OF INCOME AND TAX RATES
1. COMPENSATION INCOME
- “Compensation” means remuneration for
services performed by an employee for his
employer under an employer-employee
relationship
- If a taxpayer is receiving income from 2 or more
employers, he or she must combine all
compensation
2. BUSINESS INCOME
- Arises from self-employment or practice of
profession.
3. PASSIVE INCOME
- Subject to a separate and FINAL tax.
 - Not included in the computation of taxable o REGULAR TAXABLE COMPENSATION –
income from compensation or basic salary, fixed allowances
business/professional income o SUPPLEMENTARY COMPENSATION
- Taxed at fixed rates ranging 5% to 25% INCOME – payments in addition to the
- Examples: royalties, interest, prizes, winnings regular compensation( OT pay,
and dividends commission)
- FINAL TAX – imposed without any deduction c. EXCLUSIVITY TEST – employee must be
and is withheld at source exclusively working for the RHQ or ROHQ as
4. CAPITAL GAINS FROM SALE OF SHARES OF a regular employee
STOCK , NOT TRADED THROUGH THE LOCAL
STOCK EXCHANGE
- Taxed at 5% and 10% final taxes on a per ALLOWABLE DEDUCTIONS
transaction basis
o Not over P100000 5% - Items or amounts, which the law allows to be
o Amount in excess of P100000 10% deducted from gross income in order to arrive
5. CAPITAL GAINS FROM SALE OF PROPERTY at the taxable income.
- Taxed at 6% final tax on the gross selling, price
or current fair market value at the time of the 1. From compensation income
sale, whichever is higher. a. Basic personal and additional
6. FRINGE BENEFITS exemption
- Any good, service, or other benefit furnished or b. Premium payments on health and
granted by an employer in cash or in kind in hospitalization insurance
addition to basic salaries 2. From business income
a. Basic personal and additional
Monetary value of the FB xx exemption
Divide by 68% b. Premium payments on health and
------- hospitalization insurance
Grossed-up monetary value xx c. Itemized deductions
Multiply by 32% d. Optional standard deduction (OSD)
---------  Accrual Basis = based
Fringe benefit tax Pxx on gross sales
 Cash Basis = Based on
gross receipts
EXPATRIATE EMPLOYEES – employees occupying
PERSONAL EXEMPTIONS
managerial, confidential or highly technical positions
- Arbitrary amounts allowed as deductions from
The option to be taxed at the 15% preferential rate shall
gross income of the individual taxpayer from
be available to the Filipino employee of an RHQ or
compensation, business or practice of
ROHQ if he meets ALL of the following requirements
profession.
a. POSITION AND FUNCTION TEST – employee - Represent the personal, living or family
must occupy a managerial position or expenses of the taxpayer
technical position and must actually
KINDS OF PERSONAL EXEMPTIONS
exercise managerial and technical function
b. COMPENSATION THRESHOLD TEST – 1. Basic personal exemptions
employee must have received, or is due to 2. Additional exemptions
receive under a contract of employment ,
gross annual taxable compensation of at
least P975,000
- Gross compensation shall include both
REGULAR TAXABLE COMPENSATION and
SUPPLEMENTARY COMPENSATION INCOME
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