INCOME TAX SCHEMES

• an item of gross income is taxable in any of these tax schemes

passive income
PASSIVE INCOME
taxable income items of gross income active income
k
.

• are earned with very minimal or even

final income taxation
• net of taxes
• income taxpayer
does not need to
file ITR
• Final withholding
tax system
taxable to any one of
capital gains taxation
• Gain on the sale,
exchange, and other
disposition of capital
assets
• Income tax payer
files ITR
• Domestic Stocks
and Real properties
without active involvement of the taxpayer
in the earning process.
• examples: interest income from banks,
regular income dividends from DC, royalties
taxation
• Taxable income ACTIVE INCOME
not subject to • or regular income arises from transactions
FIT and CGT requiring a considerable degree of effort or
are subject to undertaking from the taxpayer.
RIT • examples: compensation income, business
income, professional income

CAPITAL ASSETS VS ORDINARY ASSETS INSTANCES OF SHORT ACCOUNTING PERIOD

ORDINARY ASSETS - Assets that are used in business such as;
• Stock in trade of a taxpayer or other real property of a
kind which would properly be included in the inventory of
the taxpayer if on hand at the close of the accounting year.
• Real property held by the taxpayer primarily for ale to
customers in the ordinary course of his trade or business.
• Real property used in trade or business of a character
which is subject to the allowance for depreciation.
• Real property used in trade or business of the taxpayer.
CAPITAL ASSETS - Any asset other than ordinary business.
Basically, capital assets are:
• Personal (non-business) assets of individual taxpayer
• Business assets of any taxpayers which are;
— Financial assets - such as cash, receivables, prepaid
expenses, and investments.
— Intangible assets - such as patent, copyrights, leasehold
rights, franchise rights
TAXABLE YEAR
1. calendar year - individual taxpayer
2. fiscal year - corporate taxpayer
Deadline of Filing the Income Tax Return
* Under the NIRC, the return is due for filing on the fifteenth
day of the fourth month following the close of the taxable
year of the taxpayer. The regular tax due is payable upon filing
of the income tax return.
• Newly commenced business- The accounting period covers the
date of the start of the business until the designated year-end of
the business.
• Dissolution of the business - The accounting period covers the
start of the current year to the date of dissolution of the
business.
— Under NIRC, dissolving corporations shall file their return within 30
days from the cessation of activities or 30 days from the approval or
merger by the SEC in the case of merger
• Change of accounting period by corporate taxpayers - The
accounting period covers the start of the previous accounting
period up to the designated year-end of the new accounting
period. BIR approval is required in changing an accounting period.
It is NOT automat
• Death of the Taxpayer - The accounting period covers the start
of the calendar year until the death of the taxpayer. It must be
noted that cut-off of income must be made at date point of death
because properties such as income accruing before death are part
of the estate of the decedent in Estate Taxation while those
income accruing after death are not part thereof. Hence, it is
mandatory for the accounting period of the taxpayer to be
terminated exactly at the date of death.
• Termination of the Accounting Period of the Taxpayer by the
Commissioner of Internal Revenue - The accounting period covers
the start of the current year until the date of the termination of
the accounting period. Payable immediately

ACCRUAL BASIS VS CASH BASIS

• The tax accrual basis income is determined as follows: • The tax accrual basis expense is determined as follows:
Cash Income xxx Cash Expenses
Accrued (uncollected) Income xxx Accrued (unpaid) Expense
Advance Income xxx Amortization of Prepayments & Depreciation of Capital Expenditures
Gross Income xxx Gross Income

• The tax cash basis income is determined as follows: • The tax accrual basis expense is determined as follows:
Cash Income xxx Cash Expenses
Advance Income xxx Amortization of Prepayments & Depreciation of Capital Expenditures
Gross Income xxx Gross Income
FINAL INCOME TAX
• Final income taxation is characterized by final taxes wherein full
taxes are withheld by the income payor at source. The payor is
the one required by law to remit the tax to the government.
• Consequently, the recipient income taxpayer does not need to file
income tax returns because the withheld tax constitutes the full
tax due and are therefore deemed final payments
• Final taxation is applicable only to certain passive income listed
below. Not all items of passive income are subject to final tax
Passive Income Subject To Final Tax
• Interest or yield from bank deposits or deposit substitutes
• Domestic dividends, in general
• Dividend income from a Real Estate Investment Trust
• Interest income on tax-free corporate covenant
• bonds
• Share in the net income of a business partnership, taxable
association, joint ventures, joint accounts, or co-ownership
• Royalties, in general
• Winnings
• Informer's tax reward
• Prizes exceeding P10,000
• Final withholding system is inherently territorial. It applies only to
certain passive income earned from sources within the Philippines.
RATIONALE OF FINAL INCOME TAXATION
• The final withholding tax is built upon taxpayer and
government convenience that relieves the taxpayer of the
obligation to file an income tax return. This is very
convenient for taxpayers who are limited by distance, time
and cost to comply.
• For the government, the final withholding system is the
most convenient and effective system in collecting taxes on
income where there is high risk of non-compliance or tax
evasion. Under the NIRC, tax is imposed on certain passive
income and upon non-resident persons not engaged in
business in the Philippines.
PASSIVE INCOME
• Items of passive income are earned with very minimal
involvement from the taxpayer and are generally irregular
in timing and amount. Unlike items of active income, they
are not usually specifically monitored by taxpayers.
• When it's recorded by the taxpayer, their existence can be
difficult to predict while the accrued amount may be
difficult to determine. Thus, the final withholding tax
income is the most favorable scheme in taxing items of
passive income.

FEATURES OF FINAL INCOME TAXATION FINAL TAX ON INDIVIDUALS AND CORPORATIONS

• final tax • Unless otherwise indicated, the final tax rates to be
• tax withholding at source discussed in the following sections apply to all taxpayers
• territorial imposition Individuals and Corporation other than:
• imposed on certain passive income and persons not engaged in 1. Non-resident alien not engaged in trade or business
business in the Philippines 2. Non-resident foreign corporation

INTEREST INCOME OR YIELD from local currency bank deposits, deposit

substitutes, trust funds and similar arrangements are subject to final tax as follows
Local currency deposits
Other Interest Income Individuals Corporations Classification Of Debt Instruments
From banks num of borrowers at origination
short term deposits/certificates 20% 20% Issued by debt instrument 19 or less 20 or more
long term deposits/certificates Exempt 20%
From non-bank institutions corporate issuer private borrowing deposit substitute
short term deposits/certificates RIT RIT gvmt including BSP deposit substitute deposit substitute
long term deposits/certificates RIT RIT

Savings or Time Deposits with Cooperatives are Not Subject to Summary of Income Rules on Interest on Debt Instruments
Final Tax Deposit Substitutes Individuals Corporations
• The final tax is limited to banks and shall not be applied
Issued by banks
with time and savings account deposit maintained by
short term 20% 20%
members with cooperatives and by primary cooperatives
long term exempt 20%
with their federations. (Dumaguete Cathedral Credit
Cooperative vs CIR, GR 182722) Issued by non-banks
short term 20% 20%
Deposit Substitute long term 20% RIT
• means an alternative form of obtaining funds from the
public other than deposits through the issuance,
Pre-Termination of Long Term Deposits or Investment of Individuals
endorsement, or acceptance of debt instruments for the
borrowers own account, for the purpose of relending or Holding Period Pre-Termination Tax
purchasing of receivables and other obligations, or financing • less than 3 years 20%
their own needs or the needs of their agent or dealer. • 3 years to less than 4 years 12%
Public means 20 or more corporate lenders at any one time. • 4 years to less than 5 years 5%
• 5 years or more 0%
The 19-Lender Rule
• The mere flotation of a debt instrument is not considered to
be a public borrowing and is not deemed a deposit
substitute if there are only 19 or less individual or
corporate lenders at any one time. The 19-lender rule does
not apply to government securities.
CAPITAL GAINS TAX
• is a tax imposed on the gains presumed to have been realized by
the seller from the sale, exchange, or other disposition of capital
assets located in the Philippines, including pacto de retro sales
and other forms of conditional sale.
CAPITAL ASSETS VS ORDINARY ASSETS
Basically, ORDINARY ASSETS are:
• Assets held for sale - such as inventory
• Assets held for use - Such as supplies and items of property
plant and equipment like buildings, property improvements, and
equipment.
Business is habitual engagement in a commercial activity involving the
regular sale of goods or services for a profit. Non-profit entities are
not businesses.
Basically, CAPITAL ASSETS are:
• Personal (non-business) assets of individual taxpayer
• Business assets of any taxpayers which are;
— Financial assets - such as cash, receivables, prepaid expenses, and
investments.
— Intangible assets - such as patent, copyrights, leasehold rights,
franchise rights
Asset Classification is Relative
• The classification of assets or properties as ordinary asset or
capital asset does not depend upon the nature of the property
but upon the nature of the taxpayer’s business and it’s usage by
the business.
Example:
• A domestic stock is an ordinary asset to a dealer in securities
but is a capital asset to a non-security dealer. A "dealer in
securities" is a merchant of stocks or securities with a
registered place business, regularly engaged in the purchase of
securities and their re-sale to customers.
• A vacant and unused lot is an ordinary asset to a taxpayer
engaged in the real estate business such as realty dealer, realty
developer, or lessor but is a capital asset to those not engaged
in the real estate business.
TYPES OF GAINS IN DEALINGS WITH PROPERTIES
• ordinary gain - arises from sale, exchange, and other disposition
including pacto de retro sales and other conditional sales of
ordinary assets
• capital gain - arises from the sale, exchange, and other
disposition including pacto de retro sales and other conditional
sales of capital assets
• Capital gains on
Type of Gain Applicable Taxation Scheme
the sale of
ordinary gains Regular Income Tax domestic stocks
sold directly to
capital gains GR: Regular Income Tax
buyer
XPN: Capital Gains Tax
• Capital gains on
- the sale of real
Asset Classification Rules
• A property purchased for future use in business is an
ordinary asset even though this purpose is later thwarted
by circumstances beyond the taxpayer's control.
• Discontinuance of the active use of the property does not
change its character previously established as a business
property.
• Real properties used, being used, or have been previously
used, in trade of the taxpayer shall be considered
ordinary assets.
• Properties classified as ordinary assets for being used in
business by a taxpayer not engaged in the real estate
business are automatically converted to capital assets upon
showing of proof that the same have not been used in
business for more than 2 years prior to the consummation
of the taxable transaction involving such property.
• A depreciable asset is an ordinary asset even if it is fully
depreciated, or there is a failure to take depreciation
during the period of ownership.
• Real properties used by an exempt corporation in its
exempt operations are considered capital assets. Exempt
corporations are not business.
• The classification of property transferred by sale, barter
or exchange, inheritance, donation, or declaration of
property dividends shall depend on whether or not the
acquirer uses it in business.
• For real properties subject of involuntary transfer such as
expropriation and foreclosure sale, the involuntariness of
such sale shall have no effect on the classification of such
real property
• Change in business from real estate to non-real estate
business shall not change the classification of ordinary
assets previously held.
• Taxpayers engaged in real estate business includes real
estate dealer, real estate developer, real estate lessor and
taxpayers habitually engaged in real estate business.
• Taxpayers habitually engaged in real estate business
include those registered with the HLURB or HUDCC as
dealer or developer or those with at least 6 taxable real
estate sales transactions in the preceding year.
CAPITAL GAIN ON THE SALE, EXCHANGE AND OTHER
DISPOSITION OF DOMESTIC STOCKS DIRECTLY TO BUYER
Domestic Stocks are evidence of ownership or rights to
ownership in a domestic corporation regardless of its
features, such as:
1. Preferred stocks (participative, cumulative, etc.)
2. Common stocks
3. Stock rights
4. Stock options
5. Stock warrants
6. Unit of participation in any association, recreation, or
amusement club polo or similar clubs)

}
SCOPE OF CAPITAL GAINS TAXATION
gains on dealings in capital assets
• gain on the sale, exchange, and other
disposition of domestic stocks directly to buyer
• sale, exchange, and other disposition of real
properties in the Philippines
• gains from other capital assets
properties not
used in business
The capital gains tax covers not only sales of domestic stocks
tax rates for cash but also exchange of domestic stocks in kind and
other dispositions such as:
15% CGT 1. Foreclosure of property in settlement of debt
2. Pacto de retro sales - sale with buy back agreement
6% CGT 3. Conditional sales - sales which will be perfected upon
completion of certain specified conditions
RIT
4. Voluntary buy back of shares by the issuing corporation -
redemption of shares which may be re-issued and not
intended for cancellation
 Note: The term other disposition does not include: Selling Price shall mean:
1. Issuance of stocks by a corporation • In case of cash sale, the total consideration received per
2. Exchange of stocks for services deed of sale
3. Redemption of shares in a mutual fund • If total consideration is paid partly in money and partly in
4. Worthlessness of stocks property, the sum of money and fair value of property
5. Redemption of stocks for cancellation by the received
issuing corporation • In case of exchanges, the fair value of the property
6. Gratuitous transfer of stocks received
-

MODES OF DISPOSING DOMESTIC STOCKS - Shares of stocks may What is the Tax Basis of Stocks
be sold, exchanged or disposed: • If acquired by purchase, tax basis is the cost of the
• Through the Philippine Stock Exchange (PSE) - The sale of property which will be determined by the following
domestic stocks classified as capital assets through the PSE is methods in descending order of priority:
not subject to CGT. It is subject to a stock transaction tax of ✓ Specific identification, if the shares can be specifically
60 % of 1% of the selling price effective January 1, 2018. identified.
✓ Moving average method, if books of accounts are maintained
• Directly to buyer by the seller where transaction of every particular stock is
Nature of the CGT recorded.
1. Universal tax - It applies to all taxpayers disposing stocks ✓ First-in, first out method, if the stocks cannot be specifically
classified as capital assets regardless of classification of the identified.
taxpayer. By situs, the gain on sale of domestic stocks is within. • If acquired by devise, bequest, or inheritance, the tax basis
The tax applies even if the the sale is executed outside the is the fair value at the time of death of the decedent.
Philippines. • If acquired by gift - the tax basis is the lower of the fair
2. Annual tax - It is imposed on the annual net gain on the sale of market value at the time of gift and the basis in the hands
domestic stocks directly to buyer of the donor or the last preceding owner by whom it was
not acquired by gift.
The Net Gain is Determined as follows: • If acquired for inadequate consideration, the tax basis is
Selling price P xxx,xxx the amount paid by the transferee for the property.
Less: • If acquired under tax-free exchanges, the tax basis is the
Basis of stocks disposed P xxx,xxx substituted basis of the stocks.
Selling expenses xxx,xxx
Documentary stamp tax on the sale* xxx xxx xxx xxx
Net capital gain (loss) P xxx.xxx
The documentary stamp tax is deducted if paid by the seller.

REGULAR INCOME TAX

CHARACTERISTICS OF THE REGULAR INCOME TAX EXCLUSIONS FROM GI
1. General in coverage • Proceeds of life insurance policy
. A net income tax • Amount received by the insured as a return of premium.
3. An annual tax • Gift, bequest, devise, or descent.
4. Creditable withholding tax • Compensation for injuries or sickness
5. Progressive or proportional tax • Income exempt under treaty
• Retirement benefits, pensions, gratuities, etc.
THE REGULAR INCOME TAX MODEL • Miscellaneous items.
Gross Income - Inclusions xxx “Excluded income is also an Exempt Income”
Less: Allowable Deductions xxx
Taxable Income xxx
INCLUSIONS FROM GI
— Gross income includes, but is not limited to, the following items:
Gross Income consists of the major topics:
• Compensation for services in whatever form paid
• exclusions from gross income
• Gross income from the conduct of trade, business, or exercise of
• inclusions of gross income
profession.
• special topics
• Gains derived from dealings in property.
• Interest (refers to interest income other than passive interest
GROSS INCOME - constitute all items of gross income that
income subject to final tax.
are neither excluded in gross income nor subjected to Final
• Rent (Passive income but is not subject to final tax under the
tax or Capital gains tax.
NIRC.)
1. Compensation Income
• Royalties (if active by nature)
2. Income from the Business
• Dividends declared by foreign corporations
3. Professional Income
• Annuities
4. Other Income
• Prizes and winnings
• Pensions
ALLOWABLE DEDUCTIONS - or simply ‘deductions” are
• Partner’s distributive share from the net income of general
expenses of the conduct of business or exercise of profession.
professional partnership
• itemized deductions
• optional standard deductions
• non-taxable compensation
 Itemized Deductions GLOBALIZATION RULE FOR MIXED INCOME EARNER
• Interest Expense • Depletion • The income of mixed income earner from both sources is
• Taxes • Charitable and other contributions simply globalized or totaled. A negative income or net loss
• Losses • Contributions to pensions and trusts when deductions exceed gross income from business or
• Bad debts • Research and Developments Costs profession shall not be offset against taxable compensation
• Depreciation • Other ordinary and necessary trade, income because deductions are expenses of the business or
Business, or Professional expenses profession and are properly deductible only against gross
If not directly connected with the selling of goods or rendering of income thereto, whereas no expense is deductible against
services, theses items of expenses are classified as “Regular allowable taxable compensation income.
itemized deductions”
TYPES OF EMPLOYEES AS TO FUNCTION
Non-Taxable Compensation • managerial
• Mandatory Contributions • supervisory
• Remuneration received as incidents of employment • rank and file
• De minimis Benefits
• 13th month pay and other benefits Minimum Wage Earner refers to a worker in the private sector
• Certain benefits of minimum wage earners paid the statutory minimum wage or to an employee in the public
sector with compensation income of not more than the statutory
TAXABLE INCOME OF PURE COMPENSATION INCOME EARNER
minimum wage in the non-agricultural sector where he/she is
Gross Compensation Income xxx
assigned.
less: Non-Taxable Compensation xxx
Taxable Compensation xxx
GROSS COMPENSATION INCOME generally includes all
For individual taxpayers, there is a need to note the difference remunerations received under an employer-employee relationship.
between business expenses and personal expenses. Personal expenses
or those that an individual spends that are not connected to Supplementary Compensation
furtherance, maintenance or development of his trade, business or • Overtime pay
profession are non- deductible against gross income. • Hazard pay
• Night shift differential pay
Note: Individuals that are not engage in trade or business cannot claim • Holiday pay
deductions from gross income. Individuals are Classified as follows • Commissions
• Pure compensation income earner • Fees including director ’s fee
• Pure business or professional income earner • Emoluments or honoraria
• Mixed income earner • Taxable retirement and separation pay
• Value of living quarters or meals
DETERMINATION OF TAXABLE INCOME • Gains on exercise of stock options
TAXABLE INCOME OF INDIVIDUAL INCOME TAXPAYER is computed • Profit sharing and taxable bonuses
using the Classification and Globalization rule.

Classification Rule - Income is first classified into: DE MINIMIS BENEFITS

• Compensation Income - All remuneration for services performed by • Facilities or privileges furnished or offered by an employer
an employee for his/her employer under employer- employee to his/her employees that are relatively small value and are
relationship, unless specifically excluded. offered or furnished by the employer merely as a means of
• Business or professional income promoting the health, goodwill contentment or efficiency of
his/her employee.
Treatment of Other Income
1. Monetized unsued vacation leave credit of a private
• Income that are neither compensation income nor business income
employees not exceeding 10 days during the year
such as those passive income are simply classified as “other taxable
2. Monetized value of vacation and sick leave credit paid to
income” and are added to gross income from business and
government officials or employees
profession.
3. Medical cash allowance to dependents of employee not
• Other Income which is neither compensation income nor business
exceeding 1,500 per employee pee semester or 250 per
or professional income is simply added to total gross income from
month
business or profession as “Non-operating income”. If the taxpayer
4. Rice subsidy of 2,000 or 1 sack of 50kg rice per month
has no business or professional income, the same shall be added to
amounting to not more than 2,000
taxable compensation income as “other income”
5. Uniform and clothing allowance not exceeding to 6,000 per
annum
TAXABLE INCOME OF PURE COMPENSATION INCOME EARNER
6. Actual medical assistance , e.g medical allowance to cover
Gross Compensation Income xxx
medical and health care needs, annual medicine/executive
less: Non-Taxable Compensation xxx
check up, maternity assistance and routine consulation not
Taxable Compensation xxx
exceeding 10,000 per annum
7. Laundry allowance not exceeding 300 per month
TAXABLE INCOME OF PURE BUSINESS OR PROFESSIONAL
8. Employees achievements, awards, e.g. for lengths of service
INCOME EARNER
or safety achievement which must be in the form of
Gross Income from business/profession xxx
tangible personal property other than cash or gift
add: Non-Operating Income xxx
certificate with an annual monetary value of 10,000received
Total Gross Income xxx
by an employee an established written plan which does not
less: Allowable Deductions xxx
discriminate in favor of the paid employees
Taxable Net Income xxx
9. Any gifts received during Christmas and major anniversary
celebrations not exceeding 5,000 per amployee per annum
9. Any gifts received during Christmas and major anniversary
celebrations not exceeding 5,000 per amployee per annum
10. Daily meal allowance for overtime work and night/graveyard Taxable Income means the pertinent items of gross income
shirt (25%) of the basic minimum wage on a per region basis specified in the Tax Code as amended, less the deductions, if
11. Benefit received by an employee by virtue of collective any, authorized for such types of income, by the Tax Code
bargaining agreement(CBA) and productivity incentives or other special laws.
schemes provided that the total monetary value received
from both CBA and productivity incentives schemes combined Gross Income xxx 800,000
do not exceed 10,000 per employee per taxable year Less: Deductions xxx 500,000
Taxable Income xxx 300,000
Taxable De Minimis Benefits
• Excess de minimis over their regulatory limits DEDUCTIONS
• Other benefits of relatively small value that are not • Mandatory Contributions
included in the list of de minimis benefits • De Minimis Benefits
• Other Benefits
Treatment for Taxable De Minimis Benefits
• For rank and file employees - taxable de minimis benefits is
treated as other compensation income under the category Other benefits
“13th month pay and other benefits” • Excess from the ceiling
• For managerial and supervisory employees - the taxable de amount in De minimis benefits
minimis is treated as fringe benefit subject to final fringe • 13th month pay
benefit tax • Other benefits given aside
from your basic salary
COMPOSITION OF TAXABLE COMPENSATION INCOME
• Regular Compensation - This pertains to the fixed remunerations
received by the employee every payroll period.
• Supplemental Compensation - This pertains to other
performance-based pays to employees with or without regard
to the payroll period.

The taxable compensation income shall be computed as follows:

Regular compensation 400,000
Supplemental compensation [P120k + (P100k-90k)] 130,000
Taxable compensation income 530,000

OLD TAX TABLE TAX DUE (OLD TAX)

Income per Year
P10,000 and below
Above P10,000 to P30,000
Above P30,000 to P70,000
Above P70,000 to P140,000
Above P140,000 to P250,000
Above P250,000 to P500,000
Above P500,000
Income Tax Rate (Before TRAIN) Taxable Income 300,000
5% Basic Tax 50,000
P500 + 10% of the excess over P10,000 Tax Rate ((300k-250k)*30%) 15,000
P2,500 + 15% of the excess over P30,000 Tax Due 65,000
P8,500 + 20% of the excess over P70,000
P22,500 + 25% of the excess over P140,000
P50,000 + 30% of the excess over P250,000
P125,000 + 32% of the excess over P500,000

INCOME TAX TABLES UNDER TRAIN LAW

Part 1 - Applicable from Year 2018 to 2022 TAX DUE (AS OF JAN 1, 2018)
Annual Income Tax Rate Taxable Income 300,000
P250,000 and below None (0%) Basic Tax 0
Above P250,000 to P400,000 20% of excess over P250,000 Tax Rate ((300k-250k)*20%) 10,000
Above P400,000 to P800,000 P30,000 + 25% of excess over P400,000 Tax Due 10,000
Above P800,000 to P2,000,000 P130,000 + 30% of excess over P800,000
Above P2,000,000 to P8,000,000 P490,000 + 32% of excess over P2,000,000
Above 8,000,000 P2.41M + 35% of excess over P8,000,000

Part 2 - Applicable from Year 2023 Onwards TAX DUE (AS OF JAN 1, 2023)
Annual Income Tax Rate Taxable Income 300,000
P250,000 and below None (0%) Basic Tax 0
Above P250,000 to P400,000 15% of excess over P250,000 Tax Rate ((300k-250k)*15%) 7,500
Above P400,000 to P800,000 P22,500 + 20% of excess over P400,000 Tax Due 7,500
Above P800,000 to P2,000,000 P102,500 + 25% of excess over P800,000
Above P2,000,000 to P8,000,000 P402,500 + 30% of excess over P2,000,000
Above 8,000,000 P2.2025 + 35% of excess over P8,000,000