+ amdg Course Outline Tax I Taxation One: Outline with Codals

A. In General Taxable Income The essential difference between capital and income is that capital is a fund; and income is a flow. Capital is wealth, while income is the service of wealth. Property is a tree, income is the fruit. Labor is a tree, income is the fruit. Capital is a tree, income the fruit. Income means profits or gains. (Madrigal v Rafferty) Income may be defined as the amount of money coming to a person or corporation within a specified time, whether as payment for services, interest or profit from investment. o A mere advance in the value of property of a person or a corporation in no sense constitutes the income specified in the law. Such advance constitutes and can be treated merely as an increase in capital. (Fisher v Trinidad) Cash dividends is taxed as income because it has been realized/received, while stock dividends is not taxed as income because it is merely inchoate as it is a mere anticipation of income (it becomes income once you sell it). o One is an actual receipt of profits; the other is a receipt of a representation of the increased value of the assets of a corporation. (Fisher v Trinidad) When dealing with money or property, the questions you should ask are: o Is this capital or is this income? o Has it been realized/received or is it merely inchoate? B. General Principles SEC. 23. General Principles of Income Taxation in the Philippines. - Except when otherwise provided in this Code: (A) A citizen of the Philippines residing therein is taxable on all income derived from sources within and without the Philippines; (B) A nonresident citizen is taxable only on income derived from sources within the Philippines; (C) An individual citizen of the Philippines who is working and deriving income from abroad as an overseas contract worker is taxable only on income derived from sources within the Philippines: Provided, That a seaman who is a citizen of the Philippines and who receives compensation for services rendered abroad as a member of the complement of a vessel engaged exclusively in international trade shall be treated as an overseas contract worker; (D) An alien individual, whether a resident or not of the Philippines, is taxable only on income derived from sources within the Philippines; (E) A domestic corporation is taxable on all income derived from sources within and without the Philippines; and (F) A foreign corporation, whether engaged or not in trade or business in the Philippines, is taxable only on income derived from sources within the Philippines. Who are taxable on income derived from all sources, whether within or outside the Philippines? Taxed worldwide! 1. Resident citizens. 2. Domestic corporations. The other kinds of taxpayers are subject to tax only on income derived from Philippine sources. Citizenship & Residency Resident Citizen Non-resident Citizen Overseas Contract Worker Resident Alien Non-resident Alien Domestic Corp Foreign Corp Taxable Income Inside RP Yes Yes Yes Yes Yes Yes Yes Taxable Income Outside RP Yes No No No No Yes No

C. Income Tax on Individuals Definitions Resident citizens and resident aliens Section 22 (F) The term "resident alien" means an individual whose residence is within the Philippines and who is not a citizen thereof. Resident alien is an individual: 1. Whose residence is within the Philippines 2. Who is not a citizen Mere physical or body presence is enough. Not intention to make the country ones abode. (Garrison v CA)

Mickey Ingles 2A (2C) Atty. Montero

+ amdg Taxation One: Outline with Codals Non-resident citizens Sec 22 (E). The term "nonresident citizen" means: (1) A citizen of the Philippines who establishes to the satisfaction of the Commissioner the fact of his physical presence abroad with a definite intention to reside therein. (2) A citizen of the Philippines who leaves the Philippines during the taxable year to reside abroad, either as an immigrant or for employment on a permanent basis. (3) A citizen of the Philippines who works and derives income from abroad and whose employment thereat requires him to be physically present abroad most of the time during the taxable year. (4) A citizen who has been previously considered as nonresident citizen and who arrives in the Philippines at any time during the taxable year to reside permanently in the Philippines shall likewise be treated as a nonresident citizen for the taxable year in which he arrives in the Philippines with respect to his income derived from sources abroad until the date of his arrival in the Philippines. (5) The taxpayer shall submit proof to the Commissioner to show his intention of leaving the Philippines to reside permanently abroad or to return to and reside in the Philippines as the case may be for purpose of this Section. Meaning of non-resident citizen: 1. Citizen who establishes to the satisfaction of the Commissioner the fact of his physical presence abroad with a definite intention to reside therein 2. Citizen who leaves the Philippines during the taxable year to reside abroad, either as an immigrant or for employment on a permanent basis 3. Citizen who works and derives from abroad and whose employment thereat requires him to be physically present abroad most of the time during the taxable year 4. Citizen who has been previously considered as nonresident citizen and who arrives in the Philippines at any time during the taxable year to reside permanently in the Philippines shall likewise be treated as a nonresident citizen for the taxable year in which he arrives in the Philippines with respect to his income derived from sources abroad until the date of his arrival in the Philippines. Who are non-resident citizens? (RR 1-79) 1. Immigrant one who leaves the Philippines to reside abroad as an immigrant for which a foreign visa has been secured 2. Permanent employee one who leaves the Philippines to reside abroad for employment on a more or less permanent basis 3. Contract worker one who leaves the Philippines on account of a contract of employment which is renewed from time to time under such circumstance as to require him to be physically present abroad most of the time (not less than 183 days) Non-resident citizens who are exempt from tax with respect to income derived from sources outside the Philippines shall no longer be required to file information returns from sources outside the Philippines beginning 2001. (RR 52001) The phrase most of the time shall mean that the said citizen shall have stayed abroad for at least 183 days in a taxable year. The same exemption applies to an OCW but as such worker, the time spent abroad is not material for tax exemption purposes all that is required is for the workers employement contract to pass through and be registered with the POEA. (BIR Ruling 33-2000).

Non-resident aliens engaged in business in the Philippines Sec 22. (G) The term "nonresident alien" means an individual whose residence is not within the Philippines and who is not a citizen thereof. Who are non-resident aliens? 1. An individual whose residence is not within the Philippines 2. Not a citizen of the Philippines o Determination is by his intention with regard to the length and nature of his stay. (Sec 5, RR 2) Loss of residence by alien o An alien who has acquired residence in the Philippines retains his status until he abandons the same and actually departs from the Philippines. o A mere intention to change his residence does not change his status. An alien who has acquired a residence is taxable as a resident for the remainder of his stay in the Philippines. (Sec. 6, RR 2)

Minimum wage earner Sec 22. (GG) The term statutory minimum wage earner shall refer to rate fixed by the Regional Tripartite Wage and Productivity Board, as defined by the Bureau of Labor and Employment Statistics (BLES) of the DOLE. (HH) The term minimum wage earner shall refer to a worker in the private sector paid the statutory minimum wage; or to an employee in the public sector with compensation income of not more than the statutory minimum wage in the nonagricultural sector where he/she is assigned. Fixed by the Regional Tripartite Wage and Productivity Board. Minimum wage earner: o Private sector paid the statutory minimum wage

Mickey Ingles 2A (2C) Atty. Montero

+ amdg o Taxation One: Outline with Codals Public sector not more than the statutory minimum wage in the non-agricultural sector where he/she is assigned

Dependent Sec 35. (B) For purposes of this Subsection, a "dependent" means a legitimate, illegitimate or legally adopted child chiefly dependent upon and living with the taxpayer if such dependent is not more than twenty-one (21) years of age, unmarried and not gainfully employed or if such dependent, regardless of age, is incapable of self-support because of mental or physical defect. Dependent is a o Legitimate, illegitimate or legally adopted child o Who must be: Not more than 21, Unmarried, and Not gainfully employed, OR if such, Dependent, regardless of age, is incapable of self-support because of mental or physical defect.

To summarize, individual taxpayers are classified into: 1. Citizens, who are divided into: o Resident citizens those citizens whose residence is within the Philippines; and o Non-resident citizens those citizens whose resident is not within the Philippines. 2. Aliens, who are divided into: o Resident aliens those individuals whose residence is within the Philippines and are not citizens thereof; and o Non-resident aliens those individuals whose residence is not within the Philippines but temporarily in the country and are not citizens thereof. They are: Those engaged in trade or business within the Philippines; and Those who are not so engaged. (see Sec 23-25) Kinds of income and income tax of individuals Tax formula SEC. 24. Income Tax Rates. (A) Rates of Income Tax on Individual Citizen and Individual Resident Alien of the Philippines. (1) An income tax is hereby imposed: (a) On the taxable income defined in Section 31 of this Code, other than income subject to tax under Subsections (B), (C) and (D) of this Section, derived for each taxable year from all sources within and without the Philippines be every individual citizen of the Philippines residing therein; (b) On the taxable income defined in Section 31 of this Code, other than income subject to tax under Subsections (B), (C) and (D) of this Section, derived for each taxable year from all sources within the Philippines by an individual citizen of the Philippines who is residing outside of the Philippines including overseas contract workers referred to in Subsection(C) of Section 23 hereof; and (c) On the taxable income defined in Section 31 of this Code, other than income subject to tax under Subsections (b), (C) and (D) of this Section, derived for each taxable year from all sources within the Philippines by an individual alien who is a resident of the Philippines. The tax shall be computed in accordance with and at the rates established in the following schedule: Not over P10,000....5% Over P10,000 but not over P30,000P500+10% of the excess over P10,000 Over P30,000 but not over P70,000P2,500+15% of the excess over P30,000 Over P70,000 but not over P140,000..P8,500+20% of the excess over P70,000 Over P140,000 but not over P250,000P22,500+25% of the excess over P140,000 Over P250,000 but not over P500,000P50,000+30% of the excess over P250,000 Over P500,000 ..... P125,000+34% of the excess over P500,000 in 1998. Provided, That effective January 1, 1999, the top marginal rate shall be thirty-three percent (33%) and effective January 1, 2000, the said rate shall be thirty-two percent (32%). For married individuals, the husband and wife, subject to the provision of Section 51 (D) hereof, shall compute separately their individual income tax based on their respective total taxable income: Provided, That if any income cannot be definitely attributed to or identified as income exclusively earned or realized by either of the spouses, the same shall be divided equally between the spouses for the purpose of determining their respective taxable income.

Not over P10,000 Over P10,000 but not over P30,000 Over P30,000 but not over P70,000 Over P70,000 but not over P140,000 Over P140,000 but not over P250,000 Over P250,000 but not over P500,000 Over P500,000

5% P500 + 10% of the excess over P10,000 P2,500 + 15% of the excess over P30,000 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 Gross Income Less: Deductions

Mickey Ingles 2A (2C) Atty. Montero

+ amdg Taxable Income Tax Rate Tax Due Know the tax base and the tax rate! Only resident citizens and domestic corporations are taxed on income derived from abroad. Worldwide taxable! The tax is imposed upon taxable compensation or employment income, business income, and income derived from the practice of professions derived by citizens and resident aliens. Married individuals shall compute separately their individual income tax based on their respective total taxable income. o If any income cannot be definitely attributed to, or identified as income exclusively earned or realized by either of the spouses, the same shall be divided equally between them for the purpose of determining their respective taxable income. Minimum wage earners are exempt from the payment of income tax on their taxable income. Holiday pay, overtime pay, night shift differential pay, and hazard pay received by them are likewise exempt from income tax. A non-resident alien individual engaged in trade or business in the Philippines is subject to the income tax in the same manner as an individual citizen and a resident alien on taxable income received from sources within the Philippines. For non-resident aliens not so engaged, the tax is Taxation One: Outline with Codals

o
o

25% of the entire or gross income received from sources within the Philippines and 15% of the gross income received as compensation, salaries, and other emoluments by reason of his employment by: regional or area headquarters and regional operating headquarters of multinational corporations; offshore banking units established by a foreign corporation in the Philippines; or by foreign petroleum service contractor or subcontractors operating in the Philippines. (Sec 25 (AE))

Final income tax interests, royalties, awards, dividends, capital gains on sale of shares, realty Sec 24. (B) Rate of Tax on Certain Passive Income. (1) Interests, Royalties, Prizes, and Other Winnings. - A final tax at the rate of twenty percent (20%) is hereby imposed upon the amount of interest from any currency bank deposit and yield or any other monetary benefit from deposit substitutes and from trust funds and similar arrangements; royalties, except on books, as well as other literary works and musical compositions, which shall be imposed a final tax of ten percent (10%); prizes (except prizes amounting to Ten thousand pesos (P10,000) or less which shall be subject to tax under Subsection (A) of Section 24; and other winnings (except Philippine Charity Sweepstakes and Lotto winnings), derived from sources within the Philippines: Provided, however, That interest income received by an individual taxpayer (except a nonresident individual) from a depository bank under the expanded foreign currency deposit system shall be subject to a final income tax at the rate of seven and onehalf percent (7 1/2%) of such interest income: Provided, further, That interest income from long-term deposit or investment in the form of savings, common or individual trust funds, deposit substitutes, investment management accounts and other investments evidenced by certificates in such form prescribed by the Bangko Sentral ng Pilipinas (BSP) shall be exempt from the tax imposed under this Subsection: Provided, finally, That should the holder of the certificate pre-terminate the deposit or investment before the fifth (5th) year, a final tax shall be imposed on the entire income and shall be deducted and withheld by the depository bank from the proceeds of the long-term deposit or investment certificate based on the remaining maturity thereof: Four (4) years to less than five (5) years - 5%; Three (3) years to less than (4) years - 12%; and Less than three (3) years - 20% (2) Cash and/or Property Dividends - A final tax at the following rates shall be imposed upon the cash and/or property dividends actually or constructively received by an individual from a domestic corporation or from a joint stock company, insurance or mutual fund companies and regional operating headquarters of multinational companies, or on the share of an individual in the distributable net income after tax of a partnership (except a general professional partnership) of which he is a partner, or on the share of an individual in the net income after tax of an association, a joint account, or a joint venture or consortium taxable as a corporation of which he is a member or co-venturer: Six percent (6%) beginning January 1, 1998; Eight percent (8%) beginning January 1, 1999; and Ten percent (10% beginning January 1, 2000. Provided, however, That the tax on dividends shall apply only on income earned on or after January 1, 1998. Income forming part of retained earnings as of December 31, 1997 shall not, even if declared or distributed on or after January 1, 1998, be subject to this tax. (C) Capital Gains from Sale of Shares of Stock not Traded in the Stock Exchange. - The provisions of Section 39(B) notwithstanding, a final tax at the rates prescribed below is hereby imposed upon the net capital gains realized during the taxable year from the sale, barter, exchange or other disposition of shares of stock in a domestic corporation, except shares sold, or disposed of through the stock exchange.

Mickey Ingles 2A (2C) Atty. Montero

+ amdg Taxation One: Outline with Codals Not over P100,000........ 5% On any amount in excess of P100,000 10%

(D) Capital Gains from Sale of Real Property. (1) In General. - The provisions of Section 39(B) notwithstanding, a final tax of six percent (6%) based on the gross selling price or current fair market value as determined in accordance with Section 6(E) of this Code, whichever is higher, is hereby imposed upon capital gains presumed to have been realized from the sale, exchange, or other disposition of real property located in the Philippines, classified as capital assets, including pacto de retro sales and other forms of conditional sales, by individuals, including estates and trusts: Provided, That the tax liability, if any, on gains from sales or other dispositions of real property to the government or any of its political subdivisions or agencies or to government-owned or controlled corporations shall be determined either under Section 24 (A) or under this Subsection, at the option of the taxpayer. (2) Exception. - The provisions of paragraph (1) of this Subsection to the contrary notwithstanding, capital gains presumed to have been realized from the sale or disposition of their principal residence by natural persons, the proceeds of which is fully utilized in acquiring or constructing a new principal residence within eighteen (18) calendar months from the date of sale or disposition, shall be exempt from the capital gains tax imposed under this Subsection: Provided, That the historical cost or adjusted basis of the real property sold or disposed shall be carried over to the new principal residence built or acquired: Provided, further, That the Commissioner shall have been duly notified by the taxpayer within thirty (30) days from the date of sale or disposition through a prescribed return of his intention to avail of the tax exemption herein mentioned: Provided, still further, That the said tax exemption can only be availed of once every ten (10) years: Provided, finally, that if there is no full utilization of the proceeds of sale or disposition, the portion of the gain presumed to have been realized from the sale or disposition shall be subject to capital gains tax. For this purpose, the gross selling price or fair market value at the time of sale, whichever is higher, shall be multiplied by a fraction which the unutilized amount bears to the gross selling price in order to determine the taxable portion and the tax prescribed under paragraph (1) of this Subsection shall be imposed thereon. Sec 22 (Y) The term "deposit substitutes" shall mean an alternative from of obtaining funds from the public (the term 'public' means borrowing from twenty (20) or more individual or corporate lenders at any one time) other than deposits, through the issuance, endorsement, or acceptance of debt instruments for the borrowers own account, for the purpose of relending or purchasing of receivables and other obligations, or financing their own needs or the needs of their agent or dealer. These instruments may include, but need not be limited to bankers' acceptances, promissory notes, repurchase agreements, including reverse repurchase agreements entered into by and between the Bangko Sentral ng Pilipinas (BSP) and any authorized agent bank, certificates of assignment or participation and similar instruments with recourse: Provided, however, That debt instruments issued for interbank call loans with maturity of not more than five (5) days to cover deficiency in reserves against deposit liabilities, including those between or among banks and quasi-banks, shall not be considered as deposit substitute debt instruments. Tax Rate on Certain Passive Income on Citizens and Resident Aliens 1. Interest under the expanded foreign currency deposit system (see RR 10-98 below) Nonresident citizens: exempt 2. Royalty from books, literary works, & musical compositions 3. Royalty other than above 4. Interest on any current bank deposit, yield or other monetary benefits from deposit substitute, trust fund & similar arrangement 5. Prize exceeding P10,000 6. Other winnings, except Phil Charity Sweepstakes & Lotto 7. Dividend from a domestic corp, or from a joint stock company, insurance or mutual fund company, & regional operating headquarters of multinational company or share in the distributive net income after tax o a partnership (except a general professional partnership), joint stock or joint venture or consortium taxable as a corporation But what about dividends from foreign corporations for citizens (not resident aliens)? Well, the income here enters into the computation for Sec 24 (a) tax calendar. For resident aliens, they are not taxed since its income derived from abroad. 8. Interest on long-term deposit or investment in banks (with maturity of 5 years or more) Prize the result of an effort (like a prize in a beauty contest) Winning the result of a transaction where the outcome depends upon chance (like betting) Deposit substitute a means of borrowing money from the public (20 or more individual or corporate lenders) other than by way of deposit with banks through the issuance of debt instruments (like bankers acceptances, promissory notes, repurchase agreements, certificates of assignment or participation) Tax Rate on Interest Income from Foreign Currency Deposit (RR 10-98) 1. Interest income actually received by a resident citizen or resident alien from FCD Mickey Ingles 2A (2C) Atty. Montero Final Tax 7.5% (vs exempt for nonresident aliens engaged in trade/biz) 10% 20% 20% 20% 20% 10% (vs 20% for non-resident aliens engaged in trade/biz)

exempt

7.5% final

+ amdg Taxation One: Outline with Codals withholding tax Exempt 50% exempt/ 50% final withholding tax of 7.5% 7.5% final withholding tax

2. If it was deposited by an OCW or seaman or nonresident citizen 3. If it was in a bank account in the joint names of an OCW and his spouse (who is a resident) 4. Interest income actually received by a domestic corporation or resident foreign corporation from FCD

Interest income which is actually or constructively received by a resident citizen of the Philippines or by a resident alien individual from a foreign currency bank deposit will be subject to a final withholding tax of 7.5%. The depository bank will withhold and remit the tax. If a bank account is jointly in the name of a non-resident citizen, 50% of the interest income from such bank deposit will be treated as exempt while the other 50% will be subject to a final withholding tax of 7.5%. The Regulations will apply on taxable income derived beginning January 1, 1998 pursuant to the provisions of Section 8 of RA 8424. In case of deposits which were made in 1997, only that portion of interest which was actually or constructively received by a depositor starting January 1, 1998 is taxable. (RR 10-98) Tax Rate on Capital Gains

1.

On sale of shares of stock of a domestic corporation NOT listed and NOT traded thru a local stock exchange held as a capital asset, o Capital gains not over P100,000 o Capital gains in excess of P100,000 (see RR 6-2008 below)

5% of the net capital gains 10% of the net capital gains 6% of the gross selling price, or the current market value at the time of sale, whichever is higher

2. On sale of real property in the Philippines held as a capital asset (see RR 8-98 below)

Tax Rate on Income from Sale, Barter, Exchange or other Disposition of Shares of Stock (RR 6-2008) If shares of stock are listed and traded through the local stock exchange If shares not traded through the local stock exchange o Capital gains not over P100,000 o Capital gains in excess of P100,000

of 1% (or .005%) of the gross selling price or gross value in money of the shares of stock 5% of the net capital gains 10% of the net capital gains

Who are liable? 1. Individual taxpayer, whether citizen or alien; 2. Corporate taxpayer, whether domestic or foreign; 3. Other taxpayers not falling under (1) and (2) above, such as estate, trust, trust funds and pension funds, among others. Who are exempt? 1. Dealers in securities 2. Investors in shares of stock in a mutual fund company, as defined in Sec 22 (BB), and Section 2(s) of these Regulations, in ocnnection with the gains realized by said investor upon redemption of said shares of stock in a mutual fund companyl and 3. All other persons, whether natural or juridical, who are specifically exempt from national internal revenue taxes under existing investment incentives and other special laws.

How to determine the tax base of disposition of stock (RR 6-2008) Sales of stock listed and traded through the LSE Sales of stock listed but not traded through the LSE

Fair Market Value FMV is the actual selling price FMV is the closing price on the day when the shares were sold, transferred, etc (if no sale was made on that day in the LSE, then the closing price on the day nearest to the date of sale, transfer, or exchange of the said shares) FMV is the book value of the shares of stock as shown in the financial statements duly certified by an independent CPA nearest to the date of sale

Sales of stock not listed and not traded through the LSE

Final Tax Rate on Sales, Exchanges, or Transfers or Real Properties Classified as Capital Assets (RR 8-98) Sale of real property in the Philippines

6% of the gross selling price, or the current market value at the

Mickey Ingles 2A (2C) Atty. Montero

+ amdg Taxation One: Outline with Codals time of sale, whichever is higher Either 6% of the gross selling price/current market value or under the normal income tax rate, taxpayers option

If sale was made to the government or to GOCCs

Creditable Withholding Tax on Sales, Exchanges or Transfers of Real Properties classified as Ordinary Assets (RR 8-98) 1. If the seller is habitually engaged in the real estate business o Selling price is less than P500,000 o Selling price is P500,000 to P2m o Selling price is above P2m 2. If the seller is not habitually engaged in the real estate business 3. If the seller is exempt from creditable withholding tax as per RR 2-98

1.5% 3% 5% of gross selling price/current market value, whichever is higher 7.5% of gross selling price/current market value, whichever is higher Exempt

Conditions to be exempt from capital gains tax of 6% on the sale, exchange, or disposition of a principal residence (RR 13-99) 1. The proceeds from the sale, exchange, or disposition of his principal residence must be fully utilized in acquiring or construing a new principal residence within 18 months. There must be proof. 2. This can only be availed of ONLY ONCE every 10 years 3. The historical cost of his old principal residence shall be carried over to the cost basis of his new residence 4. If there is no full utilization, he shall be liable for the deficiency capital gains tax of the utilized portion 5. If the principal residence is disposed in exchange for a condo, and if it is used as his new residence, then he is exempt 6. The 6% capital gains tax otherwise due must be deposited in escrow with an authorized agent bank, and can only be released when sufficient proof is shown that the proceeds have been fully utilized within 18 months. What is the principal residence anyway? (RR 14-2000) o It is the dwelling house, where the husband or wife or unmarried individual resides; actual occupancy is not interrupted or abandoned by temporary absence due to travel, studies, or work abroad o If the ownership of the land and the dwelling house belong to different persons, only the dwelling house shall be treated as principal residence Payment of capital gains tax on foreclosure of mortgaged property (RR 4-99) o If the mortgagor exercises his right of redemption within 1 year no capital gains tax because none has been derived and no transfer of property was realized In case of non-redemption, the capital gains will be due based on the bid price of the highest bidder

Personal and Additional Exemptions SEC. 35. Allowance of Personal Exemption for Individual Taxpayer. (A) In General. - For purposes of determining the tax provided in Section 24 (A) of this Title, there shall be allowed a basic personal exemption amounting to P50,000 for each individual taxpayer. In the case of married individuals where only one of the spouses is deriving gross income, only such spouse shall be allowed the personal exemption. (B) Additional Exemption for Dependents. - There shall be allowed an additional exemption of twenty five thousand pesos (P25,000) for each dependent not exceeding four (4). The additional exemption for dependent shall be claimed by only one of the spouses in the case of married individuals. In the case of legally separated spouses, additional exemptions may be claimed only by the spouse who has custody of the child or children: Provided, That the total amount of additional exemptions that may be claimed by both shall not exceed the maximum additional exemptions herein allowed. For purposes of this Subsection, a "dependent" means a legitimate, illegitimate or legally adopted child chiefly dependent upon and living with the taxpayer if such dependent is not more than twenty-one (21) years of age, unmarried and not gainfully employed or if such dependent, regardless of age, is incapable of self-support because of mental or physical defect. (Amended by RA 9504) Personal and additional exemption for individual taxpayer Basic personal exemption for each individual taxpayer o If married and only one of the spouses is deriving gross income, only such spouse shall be allowed the personal exemption. Additional exemption for each dependent, not exceeding four (4)

P50,000

P25,000 per dependent

Mickey Ingles 2A (2C) Atty. Montero

+ amdg Taxation One: Outline with Codals o o Claimed by only one spouse in case of married individuals If legally separated, additional exemptions claimed only by spouse who has custody; should not exceed maximum additional exemptions allowed

Exemption statutes are not retroactive. (Pensacola v CIR) Discounts for senior citizens is now treated as tax deductions, as per RA 9257. This sucks for the taxpayer because he doesnt get the peso for peso benefit which he would have gotten if it were considered a tax credit as before. (M.E. Holdings Corp v CIR & CTA)

Change of status Sec 35. (C) Change of Status. - If the taxpayer marries or should have additional dependent(s) as defined above during the taxable year, the taxpayer may claim the corresponding additional exemption, as the case may be, in full for such year. If the taxpayer dies during the taxable year, his estate may still claim the personal and additional exemptions for himself and his dependent(s) as if he died at the close of such year. If the spouse or any of the dependents dies or if any of such dependents marries, becomes twenty-one (21) years old or becomes gainfully employed during the taxable year, the taxpayer may still claim the same exemptions as if the spouse or any of the dependents died, or as if such dependents married, became twenty-one (21) years old or became gainfully employed at the close of such year. Personal exemption allowable to nonresident alien individuals Sec. 35 (D) Personal Exemption Allowable to Nonresident Alien Individual. - A nonresident alien individual engaged in trade, business or in the exercise of a profession in the Philippines shall be entitled to a personal exemption in the amount equal to the exemptions allowed in the income tax law in the country of which he is a subject - or citizen, to citizens of the Philippines not residing in such country, not to exceed the amount fixed in this Section as exemption for citizens or resident of the Philippines: Provided, That said nonresident alien should file a true and accurate return of the total income received by him from all sources in the Philippines, as required by this Title. Personal Exemptions allowable to nonresident alien individuals If engaged in trade, business or in the exercise of a profession

If not engaged in trade, business or in the exercise of a profession

Entitled to a personal exemption in the amount equal to the exemptions allowed in the income tax law of his country for Filipinos, but it shouldnt exceed the amount fixed here for exemptions None, because Sec 25 (B) states that he will be taxed upon his entire income.

De Leon states that nonresident aliens are not entitled to additional exemptions for dependents. (P. 135, Fundamentals of Taxation 2009)

Optional Standard Deduction Sec. 34 (L) Optional Standard Deduction. - In lieu of the deductions allowed under the preceding Subsections, an individual subject to tax under Section 24, other than a nonresident alien, may elect a standard deduction in an amount not exceeding forty percent (40%) of his gross sales or gross receipts, as the case may be. In the case of a corporation subject to tax under section 27(A) and 28(A)(1), it may elect a standard deduction in an amount not exceeding forty percent (40%) of it gross income as defined in Section 32 of this Code. Unless the taxpayer signifies in his return his intention to elect the optional standard deduction, he shall be considered as having availed himself of the deductions allowed in the preceding Subsections. Such election when made in the return shall be irrevocable for the taxable year for which the return is made: Provided, That an individual who is entitled to and claimed for the optional standard shall not be required to submit with his tax return such financial statements otherwise required under this Code: Provided, further, That except when the Commissioner otherwise permits, the said individual shall keep such records pertaining to his gross sales or gross receipts, or the said corporation shall keep such records pertaining to his gross income as defined in Section 32 of this Code during the taxable year, as may be required by the rules and regulations promulgated by the Secretary of Finance, upon recommendation of the Commissioner. Optional standard deduction is the deduction which an individual other than a non-resident alien, or a corporation, subject to income tax, may elect in an amount not exceeding 40% of his gross sales or gross receipts, as the case may be, or a corporation, in an amount not exceeding 40% of its gross income, in lie of taking itemized deductions. The OSD may be availed of by: o A citizen, whether resident or non-resident o Resident alien, and o Taxable estate and trust. A non-resident alien cannot claim OSD. The OSD allowed to individual taxpayer shall be a maximum of 40% of gross sales or gross receipts during the taxable year. o If one uses the accrual basis of accounting for his income and deductions, the OSD shall be based on the

Mickey Ingles 2A (2C) Atty. Montero

+ amdg

o
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Taxation One: Outline with Codals gross sales during the taxable year. If one uses the cash basis, the OSD shall be based on his gross receipts during the taxable year. The law is specific that for individual taxpayers the basis of the 40% OSD shall be gross sales or gross receipts, not gross income, for which reason the cost of sales and the cost of services are not allowed to be deducted for purposes of determining the basis of the OSD. For other individual taxpayers allowed by law to report their income and deductions under a different method of accounting, the gross sales or gross receipts shall be determined in accordance with the said acceptable method of accounting.

Example: o Suppose a retailer of goods, an individual, whose accounting method is under the accrual basis has a gross sales of P1m with a cost of sales amounting to P800k. the computation of the OSD shall be determined as follows: Gross Sales P1,000,000 Less: CoGS -------------Basis of the OSD P1,000,000 x OSD Rate (max) .40 OSD Amount P400,000 If the taxpayer opts to use the OSD in lieu of the itemized deductions allowed under Sec 34 of the Tax Code, his net taxable income shall be as follows: Gross Sales P1,000,000 Less: CoGS -----------Gross Sales/Gross InomeP1,000,000 Less: OSD (max) 400,000 Net Income P600,000

Premium payments on health and/or hospitalization insurance Sec. 34 (M) Premium Payments on Health and/or Hospitalization Insurance of an Individual Taxpayer. - The amount of premiums not to exceed Two thousand four hundred pesos (P2,400) per family or Two hundred pesos (P200) a month paid during the taxable year for health and/or hospitalization insurance taken by the taxpayer for himself, including his family, shall be allowed as a deduction from his gross income: Provided, That said family has a gross income of not more than Two hundred fifty thousand pesos (P250,000) for the taxable year: Provided, finally, That in the case of married taxpayers, only the spouse claiming the additional exemption for dependents shall be entitled to this deduction. The taxpayer is allowed a deduction of P2,400/family or P200/month for health and/or hospitalization insurance premiums, provided: o Said familys gross income is not more than P250,000 for the taxable year. If married, only the spouse claiming the additional exemption for dependents can avail of this.

Exclusions and deductions (discussion from De Leons book) Exclusions are incomes that are exempt from the tax. They are not to be included in the tax return unless information regarding it is specifically called for. o Examples: Life insurance proceeds paid to beneficiaries upon the death of the insured. Value of the property acquired by inheritance or donation, because it is subject to estate or donors tax. Retirement benefits, pensions, etc, received by government officials and employees from the GSIS and SSS in recognition of their services. So with retirement benefits of private firms, under certain conditions. Prizes and awards made primarily in recognition of religious, charitable, scientific, educational, artistic, etc, competitions and tournaments. Christmas bonus, 13th month pay, productivity incentives, and other benefits received up to a max of P30,000. Gains from the sale or retirement of bonds or other certificates of indebtedness with a maturity of more than 5 years. Deductions are items or amounts which the law allows to be deducted under certain conditions from the gross income of a taxpayer in order to arrive at the taxable income. Both reduce actual gross income although exclusions are not included in the income tax return. Some general principals governing deductions include: o The taxpayer seeking a deduction must point to some specific provision of the statute authorizing the deduction; and o He must be able to prove that he is entitled to the deduction authorized or allowed. They are allowed only where there is a clear provision in the statute for the deduction claimed. Taxable gross income is affected by exclusions because the latter are omitted from the former and are not reported on the income tax return but is not affected by deductions because they are subtracted after gross income is determined

Mickey Ingles 2A (2C) Atty. Montero

+ amdg and are reported on the return. Kinds of deductions: 1. Deductions from compensation income. 2. Deductions from business/professional income. 3. Deductions from corporate income. 4. Special deductions 5. Deductions allowed by special laws. Taxation One: Outline with Codals

Tax on non-resident aliens Non-resident aliens engaged in business in the Philippines SEC. 25. Tax on Nonresident Alien Individual. (A) Nonresident Alien Engaged in trade or Business Within the Philippines. -

(1) In General. - A nonresident alien individual engaged in trade or business in the Philippines shall be subject to an income tax in the same manner as an individual citizen and a resident alien individual, on taxable income received from all sources within the Philippines. A nonresident alien individual who shall come to the Philippines and stay therein for an aggregate period of more than one hundred eighty (180) days during any calendar year shall be deemed a 'nonresident alien doing business in the Philippines'. Section 22 (G) of this Code notwithstanding. (2) Cash and/or Property Dividends from a Domestic Corporation or Joint Stock Company, or Insurance or Mutual Fund Company or Regional Operating Headquarters or Multinational Company, or Share in the Distributable Net Income of a Partnership (Except a General Professional Partnership), Joint Account, Joint Venture Taxable as a Corporation or Association., Interests, Royalties, Prizes, and Other Winnings. - Cash and/or property dividends from a domestic corporation, or from a joint stock company, or from an insurance or mutual fund company or from a regional operating headquarters of multinational company, or the share of a nonresident alien individual in the distributable net income after tax of a partnership (except a general professional partnership) of which he is a partner, or the share of a nonresident alien individual in the net income after tax of an association, a joint account, or a joint venture taxable as a corporation of which he is a member or a co-venturer; interests; royalties (in any form); and prizes (except prizes amounting to Ten thousand pesos (P10,000) or less which shall be subject to tax under Subsection (B)(1) of Section 24) and other winnings (except Philippine Charity Sweepstakes and Lotto winnings); shall be subject to an income tax of twenty percent (20%) on the total amount thereof: Provided, however, that royalties on books as well as other literary works, and royalties on musical compositions shall be subject to a final tax of ten percent (10%) on the total amount thereof: Provided, further, That cinematographic films and similar works shall be subject to the tax provided under Section 28 of this Code: Provided, furthermore, That interest income from long-term deposit or investment in the form of savings, common or individual trust funds, deposit substitutes, investment management accounts and other investments evidenced by certificates in such form prescribed by the Bangko Sentral ng Pilipinas (BSP) shall be exempt from the tax imposed under this Subsection: Provided, finally, that should the holder of the certificate pre-terminate the deposit or investment before the fifth (5th) year, a final tax shall be imposed on the entire income and shall be deducted and withheld by the depository bank from the proceeds of the long-term deposit or investment certificate based on the remaining maturity thereof: 0 Four (4) years to less than five (5) years - 5%; 0 Three (3) years to less than four (4) years - 12%; and 0 Less than three (3) years - 20%. (3) Capital Gains. - Capital gains realized from sale, barter or exchange of shares of stock in domestic corporations not traded through the local stock exchange, and real properties shall be subject to the tax prescribed under Subsections (C) and (D) of Section 24.

A nonresident alien engaged in trade or business in the Philippines is subject to the same income tax rate as citizens and resident aliens, on taxable income received from all sources within the Philippines. A nonresident alien who stays in the Philippines for an aggregate period of more than 180 days shall be deemed as nonresident alien doing business in the Philippines. Final Tax exempt 10% 20% 20% 20% 20% 20% (compare with citizens and resident aliens)

Tax Rate on Certain Passive Income on Nonresident Aliens Engaged in Trade, Business or Exercising a Profession 1. Interest under the expanded foreign currency deposit system 2. Royalty from books, literary works, & musical compositions 3. Royalty other than above 4. Interest on any current bank deposit, yield or other monetary benefits from deposit substitute, trust fund & similar arrangement 5. Prize exceeding P10,000 6. Other winnings, except Phil Charity Sweepstakes & Lotto 7. Dividend from a domestic corp, or from a joint stock company, insurance or mutual fund company, & regional operating headquarters of multinational company or share in the distributive net income after tax o a partnership (except a general professional partnership), joint stock or joint venture or consortium taxable as a corporation

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+ amdg Taxation One: Outline with Codals What about dividends from foreign corps? Exempt. Nonresident aliens are not taxed worldwide. 8. Gross income from cinematographic films & similar works 25% 9. Interest on long-term deposit or investment in banks (with maturity of 5 years or more) exempt Tax Rate on Capital Gains (same with residents, and nonresident aliens not engaged in business)

2.

On sale of shares of stock of a domestic corporation NOT listed and NOT traded thru a local stock exchange held as a capital asset, o Capital gains not over P100,000 o Capital gains in excess of P100,000

5% of the net capital gains 10% of the net capital gains 6% of the gross selling price, or the current market value at the time of sale, whichever is higher

2. On sale of real property in the Philippines held as a capital asset

Non-resident aliens not engaged in business in the Philippines Sec. 25 (B) Nonresident Alien Individual Not Engaged in Trade or Business Within the Philippines. - There shall be levied, collected and paid for each taxable year upon the entire income received from all sources within the Philippines by every nonresident alien individual not engaged in trade or business within the Philippines as interest, cash and/or property dividends, rents, salaries, wages, premiums, annuities, compensation, remuneration, emoluments, or other fixed or determinable annual or periodic or casual gains, profits, and income, and capital gains, a tax equal to twenty-five percent (25%) of such income. Capital gains realized by a nonresident alien individual not engaged in trade or business in the Philippines from the sale of shares of stock in any domestic corporation and real property shall be subject to the income tax prescribed under Subsections (C) and (D) of Section 24.

Nonresident aliens not engaged in business are taxed 25% of their entire income within the Philippines. That means they have no deductions! Their capital gains are the same with nonresident aliens engaged in business (see table above!)

Special aliens Sec. 25 (C) Alien Individual Employed by Regional or Area Headquarters and Regional Operating Headquarters of Multinational Companies. - There shall be levied, collected and paid for each taxable year upon the gross income received by every alien individual employed by regional or area headquarters and regional operating headquarters established in the Philippines by multinational companies as salaries, wages, annuities, compensation, remuneration and other emoluments, such as honoraria and allowances, from such regional or area headquarters and regional operating headquarters, a tax equal to fifteen percent (15%) of such gross income: Provided, however, That the same tax treatment shall apply to Filipinos employed and occupying the same position as those of aliens employed by these multinational companies. For purposes of this Chapter, the term 'multinational company' means a foreign firm or entity engaged in international trade with affiliates or subsidiaries or branch offices in the Asia-Pacific Region and other foreign markets. (D) Alien Individual Employed by Offshore Banking Units. - There shall be levied, collected and paid for each taxable year upon the gross income received by every alien individual employed by offshore banking units established in the Philippines as salaries, wages, annuities, compensation, remuneration and other emoluments, such as honoraria and allowances, from such off-shore banking units, a tax equal to fifteen percent (15%) of such gross income: Provided, however, That the same tax treatment shall apply to Filipinos employed and occupying the same positions as those of aliens employed by these offshore banking units. (E) Alien Individual Employed by Petroleum Service Contractor and Subcontractor. - An Alien individual who is a permanent resident of a foreign country but who is employed and assigned in the Philippines by a foreign service contractor or by a foreign service subcontractor engaged in petroleum operations in the Philippines shall be liable to a tax of fifteen percent (15%) of the salaries, wages, annuities, compensation, remuneration and other emoluments, such as honoraria and allowances, received from such contractor or subcontractor: Provided, however, That the same tax treatment shall apply to a Filipino employed and occupying the same position as an alien employed by petroleum service contractor and subcontractor. Any income earned from all other sources within the Philippines by the alien employees referred to under Subsections (C), (D) and (E) hereof shall be subject to the pertinent income tax, as the case may be, imposed under this Code. Special Aliens 1. Employed by regional or area headquarters & regional operating headquarters established in the Philippines by multinational; 2. Employed by offshore banking units 3. Permanent resident of a foreign country but who is employed and assigned in the Philippines by a foreign service contractor or by a foreign service subcontractor engaged in petroleum operations in the Philippines Mickey Ingles 2A (2C) Atty. Montero

15% on gross income 15% on gross income 15%

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+ amdg Taxation One: Outline with Codals Provided the same tax shall apply to Filipinos employed and occupying the same position as these aliens. These apply only to positions of a highly technical or highly managerial nature. (Atty. Montero) All income earned from all other sources within the Philippines by the special alien employees shall be subject to the pertinent income tax imposed by the Code.

Tips on answering Thought process in answering problems: 1. Is this income? If not, then its not really a income tax problem. 2. Whos the taxpayer? And whats the source? Refer to Sec 23! 3. Whats the specific rate? See sec 24-25! For example, what is the tax rate of on income derived from dividends from foreign corporations for 1. Citizens 2. Resident aliens and 3. Nonresident aliens engaged in trade or business? 1. Citizens a. Yes, its income. b. The source is outside the Philippines. Are they liable for sources from outside the Philippines? Yes! Citizens are taxed worldwide! c. Whats the specific tax rate? Hmm since its not in any of the charts, but they still have to be taxed, then the income they derive from dividends from foreign corporations will be considered in computing the tax rate based on the tax calendar of Sec 24(a) Resident aliens a. Yes, its income. b. The source is outside the Philippines. Are they liable for sources from outside the Philippines? No! They arent taxed worldwide. Nonresident aliens engaged in trade or business a. Yes, my dear, its income. b. The source is outside the Philippines. Are they liable for source from outside the Philippines? No! They arent taxed worldwide either.

2.

3.

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