Taxation Law Income Tax tax imposed on ones income considered fund of the government Income flow of wealth

lth other than mere return of capital Capital refers to wealth or resources to generate income Forms of Income Cash Property Service Combination of three (above) Test apply in order to determine the existence of income Severance Test This means in order that income may exist it is necessary that there must be separation from capital e.g. Pig birth there is no yet separation of income , once you sell it that is the time there is separation of income

Realization Test There is no taxable income until such time that income is realized/ earned already in the hands , gain or realized Tax benefit rule This only means that if you benefited from a certain transaction , you earned income/ benefit does you have to pay income tax Test of Income from whatever source We have different sources of income it can be legal or illegal, regardless of the source of income it is taxable. Requirements for the taxability of income 1. There must be existence of a gain. There must be a value receive in the form of cash or its equivalent as a result of rendition of service/ earnings in excess of capital investment. If you only expect a profit that is there is no income / gain to speak of that is existence of a gain 2. There must be a realization of gain

 A gain is realized first when there is actual gain e.g your selling goods and if the price is already in your hands there is actual gain to speak of does there is income to speak off there is taxable under the law Can there be a constructive gain/ receipt of income? e.g you have a bank deposits / savings deposit it will earned income or interest, the interest earned by such bank deposit that you have, though not in your actual possession it is considered an income that is what we called constructive receipt ,you have free disposal of such income , you can withdraw it. Presumptive of Gain e.g A has a property he sold the property supposing that he bought the property in the amount of 1M and later on he is in dire need of money and he sold the property for the same amount 1M, is there a gain, in realty there is none. But he is liable to pay taxes- capital gains tax because it is presumed that he gain income from such transaction. Presumption is that you will not sell a property if you will not earn income out if such transactions.

Such gain must not be excluded or exempted Tax system that we adopt in the Philippines When it comes to individual tax payer Schedular System or progressive A system employ where the income tax treatment varies and is made to depend on the kind or category of taxable income of the tax payer. Individual Tax Payer It is dependent on how much you earned and there is corresponding tax rate from 5-32%. RATA is not subject to tax Global income tax system It is the tax system whereby gross compensation income aggregated or globalized with net income from trade or professions. Fixed rate it is not like scheduler usually employ in a corporation which are subject to 30%. Note: In the Philippines we both adopt the two systems Criteria in imposing Philippine income taxes

1. Place where income was earned/ Source principle Where is the source of the income? Note: When it comes to Resident citizens A citizen of the Philippines- Those whose father or mother is a Filipino citizen. We adopt Consanguine by blood whether where are you born you are considered Filipino citizen if both you parents are Filipino citizens. Resident citizen of the Philippines and Domestic Corporation- are taxable on income within and without the Philippines 3. Residency test or the test of residence Resident alien liable only on income within the Philippines Citizenship Citizen of the Philippines if he is residing in the Philippines liable within and outside and if he is not a resident of the Philippines but a citizen he is only liable on income within the Philippines

Classifications of Income taxpayers and general principle for their taxability Income tax payers Individual Tax payers 1. Resident Citizen- those residing in the Philippines If engage in business the basis of tax imposed is net income if not engage on business the basis of tax gross income e.g. Lawyer basis of tax income is the gross income because he is not engaged in business 2.Non- Resident citizen- citizens of the Philippines not residing in the Philippines taxable only on income derived from sources within the Philippines. If engage on business the basis of tax imposed is net income if not engage on business the basis of tax gross income. Under NIRC there is parameter when can we say that a Filipino citizen is a non- resident Citizens of the Philippines who establishes to the satisfaction of the commissioner of IR the fact of his physical existence abroad with a definite intention to reside therein.

 A citizen of the Philippines who lives the country during the taxable year to reside abroad either as immigrant, or for employment or on permanent basis. Until such time that they acquired citizenship on another country then they are no longer considered as non-resident citizen. A citizen of the Philippines who work or derived income abroad and whose employment they require to be physically present abroad most of the time during a taxable year. Most of the time is interpreted to mean presence abroad for at least 183 days during the taxable year. e.g. OFW they are considered non-resident citizen. Seaman if he receives compensation, Compensation receive source within if the ship is travelling only the Philippines and without the Philippines if the seaman is a member of a vessel engaged exclusively in international trade a citizen who was previously considered as nonresident citizen and who arrives in the Philippines during the taxable year to reside permanently in the Philippines. He shall be considered non-resident

citizen for the taxable year in which he arrives in the Philippines with respect to his income source from without until the time he arrives into the Philippines is not taxable. The taxpayer shall submit proof to the commissioner to show his intention of living the Philippines to reside permanently abroad or to return to and reside in the Philippines, as in the case may be. 3. Resident alien Alien or non -Filipino citizen -are those residing in the Philippines though not a citizen thereof. Under the NIRC Resident aliens Taxable only on income within the Philippines Those who are actually present in the Philippines and who not mere transient are and for tax purposes a residents alien is an aliens who lives in the Philippines with no definite intention to stay as a resident. One who comes in the Philippines for definite purposes which is in very natures requires on extended stay and to that ends makes him

temporarily home in the Philippines. So there is purposed the temporary stay in the Philippines. 3. Or an alien who stay within for more than 12 mos. 4. Non-resident aliens -those aliens not residing within the Philippines taxable only on income within the Philippines 5. Non Resident aliens engaged in Trade or business in the Philippines taxable only on income source derived within the Philippines. Note. Non Resident aliens stay in the Philippines for an aggregate period of 1 80 days he is presumed to be engaged in trade or business in the Philippines. Basis of tax is net income Non-resident alien not engage in trade or business taxable only on income derived within the Philippines and that basis of income is the gross compensation income at 25% final Tax. Final tax- is actually the full settlement of tax liability corresponding to such income. Special aliens taxable only on income derived within the Philippines and the basis of income is 15% of the gross income.

 Individual employed by regional or area headquarters or regional operating headquarters of multi- national companies. Aliens employed by offshore banking units, petroleum service contractors and sub- contactors Note: Filipino occupying similar position as that of aliens. If all employees are Filipino we do not fall under special aliens. Corporations Any entity which was form by individuals there is what we called contributions of money and there is an income derive in transacting business we can consider that as a corporation and liable for corporate taxation. So for as long as there is a contract by two or more persons bind themselves to contribute money, property or industries to a common fund with the intention of dividing the profit among themselves we can considered that as corporation.

Classification of corporation Domestic Corporation - Taxable on income within and without the Philippines - Those organized under the Philippines law - Basis of tax is the net income Foreign Corporation Organized under than other laws other than Philippine laws Resident Foreign Corporation Is a foreign corporation engage in trade / business within the Philippines taxable on income within the Philippines and the basis of income is net income since they are engage in trade or business. Non-Resident Foreign Corporation Is a foreign corporation not engaged in trade / business within the Philippines and the basis of tax is gross income and always at 35%, however last January 1, 2009 it became 30% and that is considered final tax.

Estate It is a mass of property granted by a decedent including rights and obligations left by the decedent upon his death It is actually the extension of personality of decedent because if he died and he has obligations the estate will be liable. If the person is alive he is liable as an income taxpayer, but if he died the estate will be liable as income taxpayer. If the estate is not under judicial settlement -meaning there is no separation or judicial partition of property the heirs are considered as co- owners and whatever income derived by such property the co- owners are entitled and they are also obliged to pay income tax because they are the one who receives the income. If the estate is under judicial settlement- the estate itself is liable as income taxpayer and who will be liable in the representation of the execution of the estate it is the executors or administrator of the estate. Trust is actually an agreement whereby a property is being managed by another person in favour of the owners of the subject property so there is: Trustee

 Trustor (Beneficiary) We can say that a trust is liable as income taxpayer, when the trust is considered irrevocable and it is the trust itself though trustee or fiduciary is liable for payment the income tax. So it should be irrevocable as to the principal and income If the trust is revocable it is the liability of the trustor to pay taxes because the trustor where the beneficiary has the control over the income of the trust. Determination of the source of the income e.g X a Filipino citizen working for A( Domestic corporation). A has a subsidiary in hongkong( a nonresident foreign corporation) the subsidiary has a problem and help by A by sending X. and he stayed there for a period of 9mos. Then he is considered a non-resident citizen therefore his income derived abroad is not subject to income tax. Supposing that X is the one indorsing the product in Europe and whatever he sold he is entitled to a commission, is the commission liable source income within or without, source from without and he is not

liable to pay tax because he is considered as a nonresident citizen. So that is when it comes to compensation, we determine the source of income as well as the classification of individual taxpayer. Interest We can earn interest if we lend money to other person. And that interest income is subject to taxation if that is earned within the Philippines and the debtor is a resident of the Philippines. And we can consider it as income source within the Philippines. So regardless of whether or not the interest is usurious or that. It is usurious if it was within the bracket rate given by the bangko sentral ng pilipinas or legal rate is 12% per annum when it comes to forbearance of money. E.g. X a domestic Corporation obtain a loan from a hongkong bank in the amount of 1M US dollars and it will earn a 1% per annum and after a year A paid the principal and the interest. Is x liable to withhold the taxes. The income is source from within, yes , because if such income is earned within the Philippines that is considered source within the Philippines.

Divedends Distribution made by a stock corporation to its stockholders, it can be in the form of money, property or stocks, if declared by a domestic corporation it is considered it is considered as an income source from within If declared by a non-resident foreign corp. it is considered as income source from without. If declared by a resident foreign corp. in order to determine whether the income is source within or without you have to determine the source of income from the past 3(years) E.g X a resident foreign corporation declared a dividend in the year 2008 dividend income in the amount of 10M.the following are the income of X corporation: 2007- 50M within and 30M without, 2006- 30M within and 20Mwithout and in 200520M within and 0m without. The 10m is considered source from within the Philippines, because if the income is source within is more than 50% of all

income within and without. The dividend in that current year is considered as source from within, but if less than 50% there is pro rata. Sale of real Property When can we say that a gain as a result of sale of real property is an income within the Philippines (the location of the property?) E.g. A resident Filipino citizen has a property in Japan and he sold a property to B who is also a RC. Is he liable from capital gains tax, no because the location of the property is without the Philippines. Personal Property We have to determine where such personal property was sold. If sold within the Philippines the income was considered source from within and if it was sold outside the Philippines income was considered source from without. So if the personal property is bought in the Philippines and sold outside the Philippines it was considered source from without and if purchase outside the Philippines and sold in the Philippines it was considered source from without.

But if manufactured within the Philippines it was considered partially source from within and without and vice versa. Royalty income this are payment for use of property like intellectual property, we have to determine where the royalty is exercise. If exercise within the Philippines the royalty is source within the Philippines and Vice Versa. Determination of gross income and the rules in inclusion and exclusion of gross income Gross Income Means all income derived from whatever source including but not limited to the following: page 7-1 (111) Compensation Income part of gross income it may be in the form of salaries and wages. If you work as an employee your employer is the one liable to pay your compensation and that is part of your compensation income. Retirement benefit As a general rule is taxable, however they are considered exclude as part of the gross income if coming employer

who has reasonable private benefit plan. But theres additional requirement The employee is at least 50years old and rendered 10 years of service and it is the first time that he avail such exclusions.page.7-24 If there is no RPBP the retirement benefit can also be excludes if that is within the CBA If Such Retirement Benefit is not under the CBA it can also be excluded provided that the Following requirements are satisfy: At least 60years old at the time of retirement At least 5 years rendition of service First time to avail the exclusion Separation Payments Happen when there be a separation of service and it can be voluntary and involuntary If the separation is voluntary (like retrenchment or he resign) and the employee receive a separation pay (taxable) If the separation is involuntary (not taxable) If there is a just cause of termination Habitual negligence (misconduct) it was as if there is voluntariness on the part of the employee thus taxable.

Leave benefits As a general rule, they are monetized for 10 days they are not part of the gross income beyond that are taxable. 13month pay Govt. and private entities are required to pay 13month pay, as a general rule it is taxable and the employer are required to withhold. But excluded the first 30,000. SSS, GSIS and pag-ibig are excluded from the gross income Gross salary is 10k-SSS 200-Pag-ibig 100-unions use 100philhealth 100-witheld tax 1500= net pay 8000 Exclusions are 500 , so 9500 is the taxable income Prizes and Awards e.g. recognition in religious charitable institutions Awarded without participation on your part and the recipients is not required to render substantial service t can be excluded or not taxable, page. 7-20 If he accepts the nomination is not an active participation. Fringe Benefit This are given in addition of the usual salary receive. It can be subject to final tax or a compensation income which will become part of the gross income or they can

be excluded depending on the recipients, if the recipients are a managerial or supervisory it was subject to final tax of 32%. Rank and File employee not taxable fringe benefit but form part of compensation income included in the gross income. Specific Fringe Benefit 1. House benefit as a general rule taxable except employers convenience. If the stayed is more beneficial on the part of the employers. 2. Expense Accounts It is an instance whereby the employer is the one who pay like e.g. the groceries of the employees and that is taxable. 3.Vehicle of any kind Is a taxable fringe benefit you have to determine the gross up monetary value the employee is the one liable but the employer serve as a withholding agent. 4. Household expenses Like payment to maids and guards is taxable FB 5. page8-6-