INCOME TAXATION UNIT 2 – PRELUDE

RECALL: CLASSIFICATION OF TAXPAYERS (Check your book for more infos)

INDIVIDUALS CORPORATIONS
RC DC
NRC RFC
RA NRFC
NRA-ETB
NRA-NETB

How these types of taxpayers are being classified from one another? – Check your book for
more info
**REMEMBER THEIR TAXABILITY
Taxable on WORLD INCOME – RC and DC
- Subject to DOUBLE TAXATION
Taxable ONLY on Philippine Income – NRC, RA, NRA-ETB, NRA-NETB RFC, NRFC
Taxable in Philippine Income – all the basic classifications of taxpayers

INCOME TAX SCHEMES

- Tax imposition of income subject to tax
1. Final Income Tax
2. Capital Gains Tax – Form of final tax w/o w/holding
3. Regular Income Tax
---- Check your book for more information about this
INCOME TAX TREATMENT – mutually exclusive from one another
Q: Kapag naka-earn ka ng income, anong mangyayari sa income mo?
1. Exempt
2. Final Tax
3. Regular Income Tax

*Lahat ng income na hindi exempted at final tax, they will be totaled and will be subjected
to RIT.
Final Tax is known as the special tax treatment

Treatment for Individuals under RIT

 Subject it to Section 24A which is known as the TAX TABLE. Tax table is progressive
Chinecheck if nalagpasan yung 250,000--- tax rate is still 0%
Treatment for Corporations under RIT
  There’s a specific percentage to follow under CREATE law.
The percentage is currently at 20% (for specific domestic corporations) OR 25%
(for other dc, other corporations)
Other taxpayers na ang treatment ay same with corporate taxpayers---Partnership, Joint
venture, Taxable Co-ownership.

Above can be taxed as corporations.

DIFFERENCE between GROSS INCOME and TAXABLE INCOME.

GROSS INCOME TAXABLE INCOME

Gross of everything, of an income that
should be subjected to regular income tax
Tax Liabilities
 Net of Allowable Deduction –
Certain deductions allowed in our
tax code and certain special laws
that could reduce the amount of
GROSS INCOME to minimize our TAX
BURDEN.

Under REGULAR INCOME TAX, we are using ITR or Income Tax Return.
- Annual tax return is filed to BIR. Nandito na kasi yung total ng mga income na hindi
naexempt at hindi naisubject sa final

FINAL TAX – Special Tax Treatment

- Has specific rates on certain transactions, on certain individuals, on certain income
- MEMORIZE PERCENTAGE GRR

Q: Kapag ba RC, lahat ng income pwedeng isubject sa lahat ng income tax treatment? How
about corporations? O lahat ng taxpayers ay pwede masubject sa lahat ng tax treatment?

TAXPAYERS WHO CAN BE SUBJECTED TO ANY INCOME TAX TREATMENT

*RC *NRA-ETB
*NRC *DC
*RA *RFC
NRA-NETB & NRFC – no regular income tax treatment
- most of their taxes are taxed at 25%
- they may be exempted as well pero at few transactions lang
- no regular source of income within the Philippines.
If they will earn income in the Philippines, those are just casual transactions. Walang
established entity, hindi nag-stay sa Philippines. FINAL TAX ang treatment, almost all of
their income/ Final withholding tax. 25%

Concept of withholding- ikakaltas na yung 25%. Kung sino yung nagpurchase ng goods sa
taxpayers, sila ang magreremit sa BIR. Ginagawa para makakolekata pa rin ang govt. sa mga
taxpayers na ito and will not occur a loss.

FINAL INCOME TAXATION – tax on certain passive income.

- Withholding of tax prior the receipt of payee.

If PAYOR is making payment to the PAYEE, payor is required by law to deduct a certain
percentage from that payment.

Deduct certain percentage = withholding of tax

-full and final settlement of tax obligation related to the income

Upon the collection of that certain percentage, it will be remit to the government.

INCOME RECEIVED by the payee is now called NET OF APPLICABLE TAX.

Wala ng obligation si payee na bayaran yung tax in the future and include this related
income sa income tax return niya.

Payor who deducted will be the one who will be PRIMARILY LIABLE to remit that percentage
to BIR.

Final withholding of tax is the most favored tax scheme.

Q: Lahat ba ng payor can withhold tax from the payments?
NOT EVERYONE IS OBLIGED TO WITHHOLD TAXES. Yung mga registered entity lang
ang pwede.
Withholding tax is one of the ways of the govt to collect taxes efficiently.

Passive income
- not usually earned on a regular basis
- receiving that income without active participation.
- MOST PI treatment is subjected to FIT
- must be domestically earned (Kapag hindi not domestic, malalabag yung International
Comity)
NOT DOMESTIC – will be subjected to RIT
E.g. of certain passive income (D.R.I.P)

Active Income- these are being earned but with the effort being exerted through the
earning process.
E.g Compensation Income, Business Income, Professional Income
- not subjected under Final Income Tax
- they are subjected to RIT

CONCEPTS TO REMEMBER ABOUT FINAL INCOME TAX

 FIT, IS A TAX WITHHOLDING AT SOURCE
 IMPOSED IN THE TERITTORY OF THE JURISDICTION OF THE TAXING AUTHORITY
 FIT ON CERTAIN PASSIVE INCOME
 NRA-NETB AND NRFC, FIT IS 25%

CERTAIN PASSIVE INCOME – INTEREST INCOME ON BANK DEPOSITS

Why do we earn interest income on bank deposits?
We are the one who lends to the bank.
Less than 1% ang interest
Just for safe keeping, kaya walang reklamo thou kaunti lang ang interest

1. LOCAL CURRENCY DEPOSITS- General deposits

DEPOSIT SUBSTITUTES – fund ng bank na kinukuha from not less than 20 depositors
at a time, to raise fund for the use of the bank. One time collection of deposits from
investors or depositors.
- Minsan may indicated interest rate

2. LONG TERM DEPOSITS

3. FOREIGN CURRENCY DEPOSITS

LOCAL CURRENCY DEPOSITS-DEPOSIT SUBSTITUTES
Bank deposits – any form of deposits na mayroong interest will be subjected to FIT.
- consider the term of the contract.
Short-term deposits – less than 5 years, 20% - individual & corporation
XPT: NRA-NETB & NRFC – exempt sa 20% dahil sa may Final Tax Rate na sila na 25%
(Check summary notes)
(For the illustration, check p. 139 of your book- Illustration 2&3)

LONG-TERM DEPOSITS – duration of the deposit is at least 5 years

- sa individuals malaki ang effect nito, dahil sa they are already exempt from final tax.
- Inexempt ang individuals, nang dahil sa govt want to encourage individuals to save
money.
- Corporation is not exempted nang dahil sa they already have savings.
XPT: NRA-NETB and NRFC – 25% hindi exempted sa FTR kahit na individual pa sila.
XPT: DC and RFC hindi sila masasubject sa FIT, pero subjected sila under RIT
(For the illustration, check p. 139 of your book – Illustration 1)

**Pre-termination of long-term deposits or investment of individuals – pertaining to

deposits na nakinabang si individual.
Time deposits, can be terminated by the depositor anytime that he wants. Kapag may
agreement with bank, magkakaroon ng charges or penalties si depositor.
- Any exempted interest income from tax will be taxed with new rates.
Things to consider: Holding Period
Less than 3 years – 20%
3 to less than 4 years – 12%
4 to less than 5 years – 5%

This will be subject to past or previous interest income received by the depositor that wasn’t
subjected to any FIT.
(For the illustration, check p. 143 and 144 of your book – Illustration – long term deposits
and Illustrations 1&3)

FOREIGN CURRENCY DEPOSITS

- Deposits in the bank that are in foreign currency
- Subjected to 15% on RESIDENTS ONLY (residents citizen, resident alien, resident
foreign corporation)
XPT: NON-RESIDENTS
Including NRA-NETB and NRFC-Exempt
 - Walang classification ng short-term or long-term
(For the illustration, check p. 145-146 of your book – Illustration, scenario 1-3)

ROYALTIES – compensation or amount being given to individuals or entities who has the IPR
on certain assets or properties.
TYPES OF ROYALTIES
1.Active – mag-eexert siya ng effort to get royalties
2.Passive – upon the creation of property, the creator wala na siyang gagawin kung hindi
ang maghintay na lang ng royalties
E.g BOOKS, MUSICAL COMPOSITIONS, MEDICINES, VACCINES, LITERARY WORKS
(For illustration, check p. 152 on your book)

CLASSIFICATION OF ROYALTIES
IN GENERAL – 20%
BOOKS, LITERARY WORKS AND MUSICAL COMPOSITIONS – 10%
CINEMATOGRAPHIC FILMS AND SIMILAR WORKS – 20%
-Hiniwalay dahil sa Non-residents are being taxed not 20%, but 25%
XPT: NRAs (ETB and NETB) and NRFC – 25%
-The right to use those foreign films, should be subjected to final tax.

PRIZES AND WINNINGS

PROBLEMS***
- We use prize interchangeably with winnings
- There’s no exact distinguishing factor between these two
- MAIN PROBLEM: In taxation, we have diff tax rate imposition for prizes and
winnings.
Prizes: based on effort, but not continuous
Winnings: No effort exerted, based on chances

PRIZES
- Under this, kinacategorize ang amount ng prize.
Threshold:
 10,000 and below
Will be subjected under RIT for both individuals and corporation
XPT: NRA-NETB and NRFC – 25% FT
  Above 10,000
Individuals 20%, RIT corporation
XPT: NRA-NETB and NRFC 25% FT.
Few exemption requirements:
1. Prizes and awards in recognition
Noble Awards - walang effort to enter the contest
No future obligation to render services
2. Prizes and awards in sports association
Olympics and Non-Professional Games
Professional game, not exempt

Sports competition should be sanctioned by an accredited sports association for the

prizes to be exempted.

Other rewards, kahit nanalo and coming from other entities, they came from
donation

WINNINGS – Categorize into THREE

 In General
Individual 20%, RIT corporation
XPT: NRA-NETB and NRFC 25% FT
 PCSO and LOTTO Winnings above 10,000
20% Individual and Corporation
XPT: NRA-NETB and NRFC 25% FT
 PCSO and LOTTO Winnings 10,000 and below
EXEMPT Individual and Corporation
XPT: NRA-NETB and NRFC 25% FT
(For the illustration, check p. 153-154 of your book)

Final income tax on winnings, per ticket basis

DIVIDENS

- An income being divided and distributed to shareholders or owners of a certain company or

entity

Forms of Dividends: TAXABLE

1. CASH DIVIDENDS
2. PROPERTY DIVIDEND
-not usual na ibinibigay nang dahil sa the distribution of property is difficult.
3. SCRIP DIVIDEND
-Those declared as cash dividend pero uutangin din ng company.
-They will be not received by the shareholder for quite period of time nang dahil sa company
will give a certification, na uutangin muna nila at may specific interest rate naman
-cash dividend turned somehow into loan for the company
 4. LIQUIDATING DIVIDEND
-Company is into the dissolution or liquidation step already.
-Return of capital, sometimes, even amount sa liquidating dividend sobra sa ininvest kaya
may ROC na dapat maitax
-not tax as a dividend. Not considered as a dividend subject to FIT

5. STOCK DIVIDEND
-mere increase in stock or shareholding of owner or shareholders of company
Wala pang realized benefit

#4 and 5 are EXEMPT BUT CAN BE TAXABLE IF

 Subsequent cancellation and redemption – nagdeclare ng stock dividend tas pinalitan ng
cash dividend
 Substantial alteration in ownership of corporation – baka hindi talaga niclose yung
corporation, nagkaroon lang ng change in ownership

Sino ang nagdedeclare ng Dividends? The CORPORATIONS

- DC, NRFC, RFC = nakabase ang dividends sa income ng companies or corporation

Sino ang nakakareceive ng Dividends? THE INDIVIDUALS

- RC, NRC, RA, NRA-ETB, NRA-NETB

- Corporation can also receive dividends because they can be a shareholder of other
corporations.

DC RFC – nakabase sa situs NRFC

10% RIT RIT RC
10% RIT NRC
10% RIT RA
20% RIT NRA-ETB
25% 25% NRA-NETB
EX RIT RIT DC
EX RIT RFC
*!5% 25% NRFC

EXEMPTED: DC & RFC

- These dividends are intercorporate dividends

- Minimize Double Taxation

**15% NRFC – Tax sparring

- There is a reciprocity between two nations.

- Stiill using 25% kapag hindi inindicate kung reciprocity or tax sparing

OTHER TYPE OF TAXPAYER THAT ARE CONSIDERED AS CORPORATE TAXPAYER