Concept of Income Tax

Income tax
Levied from the income from property or an occupation
It is a direct tax upon the thing called income.

Purpose:
a) To raise revenue
b) To mitigate the evils arising from the inequalities of
wealth
Characteristics of Philippine Income Tax
a) A national tax
b) A general tax
c) An excise tax
d) A direct tax
e) A progressive tax
f) The income tax system is a comprehensive system
g) Semi-global or semi-schedular system
Meaning of Income
• Income means all wealth flows into the taxpayer other than
a mere return of capital.
• Income is a gain derived from:
a) use of employment of labor or capital, or both labor
and capital;
b) from the sale or other disposition of assets or property
(ordinary and capital)
Requisites of Taxability of Income
1. There must be a gain or profit whether in cash or its
equivalent;
2. The gain must be realized or received;
3. The gain must not be excluded by law or international
treaty of taxation.
 Classification of Income According to
Source
1. Income from sources within the Philippines;
2. Income from sources without the Philippines; and,
3. Income from sources partly within and partly without the
Philippines.
 INCOME TEST SOURCE OF INCOME

a) Interest Income Residence of the debtor

b) Income from services Place of performance

c) Rent Location of property

d) Royalty Place of use of intangible

e) Gain on sale of real property Location of the property

f) Gain on sale of personal property purchased in one Place of sale

country and sold in another
g) Sale of domestic shares Income within

h) Sale of foreign shares Income without

i) Income from transportation and other services rendered Partly within and partly without
partly within and partly without the Philippines
j) From domestic Corporation
From foreign Corporation
Income within
(1) Income within, if 50% or more of the gross income
of the foreign corporation for the preceding three
years prior the declaration of the dividend or for
such part of such period as the corporation has
been in existence, was derived from sources within
the Philippines
(2) Income without, if less than 50% of the gross
income of the foreign corporation
In 2019, Sarah received a P400,000 dividend income from ABC
Corporation, a resident foreign corporation. ABC Corporation had the
following gross income in 2016 through 2018:

2016 2017 2018

Philippines 1M 2M 3M
Abroad 2M 1M 1M
Situs of Income
1. The place where the taxpayer is a citizen;
2. The place where the taxpayer is a resident;
3. The place where the income is earned and derived.
Income Tax System of the Philippines
Schedular System
Gross income taxation, whereby a final tax is imposed
on the gross amount of specified income

Global System
Net income taxation, certain deductions are allowed
and subtracted from the aggregate of incomes not subject to
final tax
 Returnable Income Passive Income Capital Gains
a) Compensation income Earned without any active Arise from the sale of 2 types
from being an employee action on the part of the of the capital assets, namely:
b) Income from trade, taxpayer. a) Real property in the
business, or practice of a Philippines classified as
profession capital assets; and
c) Gain from sale of ordinary b) Share of domestic
assets; corporations
d) Net capital gain from sale
of “other capital assets”
and
e) Other taxable income not
subject to FT and CGT

Income tax return Final Tax Final Tax (CGT)

 General Categories of Individual
Taxpayers
Resident Citizen
a. Those who are citizens at the time of the adoption of 1987
Constitution; or
b. Fathers and mothers are citizens; or
c. Born before January 17, 1973 of Filipino mothers, and who
elect Philippine citizenship upon reaching majority age;
d. Naturalized in accordance with the law
 General Categories of Individual
Taxpayers
Non-Resident Citizen
a. Establishes the fact of his physical presence abroad with a
definite intention to reside therein;
b. Leaves for abroad either as immigrant or for employment
on a permanent basis;
c. Derives income from abroad which requires him to be
physically present most of the time during the year (≥183
days)
 General Categories of Individual
Taxpayers
Resident Alien
Not a citizen but whose residence is within the Philippines.
- Not a mere transient or sojourner as determined by his
intention regarding the nature and length of stay.
 General Categories of Individual
Taxpayers
Non-Resident Alien
a) NRA Engaged in trade or business
- if stay in the Philippines is for > 180 days during the
year
b) NRA Not engaged in trade or business
- if stay in the Philippines is for ≤ 180 days during the
year
Special Individual Taxpayers
(1) BOI-Registered Filipinos Availing of Income Tax Holiday
(ITH)
All registered individuals shall be granted the ITH
incentive to the extent they are engaged in a preferred area
of investment as declared by the Board of Investments under
EO No. 226 (Omnibus Investment Code)
*period of availment for new registered pioneer firms is for 6 years from
commercial operations, for new registered non-pioneer is for 4 years from
commercial operations
Special Individual Taxpayers
(2) PEZA-registered enterprises in ECOZONES
a. ITH – Individuals registered as ECOZONE (a) Export
Enterprise or (b) Free Trade Enterprise may choose to avail of
this incentive under EO No. 226.
- Exemption from duties and taxes on importation into the ECOZONE
- Exemption from payment of the RPT on machineries and equipment they
acquire during the first 3 years of use
- Exemption from payment of local taxes, licenses, and fees except real
estate
Special Individual Taxpayers
(2) PEZA-registered enterprises in ECOZONES
a. 5% Final Tax on Gross income (5% GIT)
- 5% of the gross income earned by the business
enterprise within the ECOZONE shall be paid and remitted as
follows:
- 3% to the National Government
- 2% which shall be directly remitted by the business establishments to the
treasurer’s office of the municipality or city where the enterprise is located
Special Individual Taxpayers
(3) Individuals registered as Barangay Micro Business
Enterprise (BMBE)
- refers to any business entity or enterprise engaged in the
production, processing, or manufacturing of products or commodities,
including agro-processing, trading and services, which activities are
barangay-based and micro-business in nature.
- total assets excluding land on which the business office is
situated shall not be more than P3,000,000.
Special Individual Taxpayers
(3) Individuals registered as Barangay Micro Business
Enterprise (BMBE)
Fiscal Incentives
a. Income tax exemption from income arising from the operations of the
enterprise
b. Exemption from the coverage of the Minimum Wage Law
c. Priority to a special credit window set up specifically for the financing
requirements of BMBEs
d. Technology transfer, production and management training, and
marketing assistance programs from BMBE beneficiaries
Special Individual Taxpayers
(4)Minimum Wage Earners (MWEs)
- shall be exempt from the payment of income tax on
their minimum wage
- holiday pay, overtime pay, night shift differential pay,
and hazard pay received shall be exempted from income tax
Passive Income Subject to FWT
Notes:
a) The income must be taxable by the Philippine
government and the payor must be under the jurisdiction
of the BIR.
b) The payor of the income must withhold the tax.
c) The income subject to FWT is not returnable.
 PASSIVE INCOME Citizen, NRC NRAE NRA
and RA TB NETB

a) Interest from any currency bank deposit (usually Peso) 20% 20% 25%

b) Yield or monetary benefit from deposit substitutes, trust funds, and 20% 20% 25%
similar arrangements

c) Royalties 20% 20% 25%

(except on books, literary works, and musical composition) 10% 10%

d) Prize more than P10,000 20% 20% 25%

- Prizes of P10,000 or less ITR ITR

e) Winnings 20% 20% 25%

- PCSO lotto winnings E if P10K or less ITR
 PASSIVE INCOME Citizen, NRC NRAE NRA
and RA TB NETB

f) Interest from a depositary bank under the expanded foreign currency 15% E E
deposit system Excluding NRC

g) Interest income from long term deposit or investment of 5 years or more E E 25%

h) Cash or property dividend received from a DC, or ROHQ of a MNC 10% 20% 25%

i) Share of an individual partner in the after-tax net income of a business 10% 20% 25%
partnership, or an organization, JV, or consortium taxable as corporation
Notes:
1) Deposit substitutes – alternative form of obtaining funds from the
public other than deposits. (Banker acceptance, repurchase
agreeements, gov’t debt instruments and securities)

2) Long term deposits or investment certificates

a) NRANETB shall not be exempt
b) the LT deposit or investment certificate must be issued by a bank
c) may be in form of savings, common, or individual trust funds,
deposit substitutes, investment management accounts
d) investment must have a maturity of at least 5 years from the time
it its held
e) investment must be held for at least 5 years for the interest to be
exempt
Notes:
Pre termination of investment
Less than 3 years 20%
3 years to less than 4 years 12%
4 years to less than 5 years 5%
3) Interest on foreign currency bank deposits
- Taxable if received by an individual taxpayer, except a non-resident
individual, who may be a non-resident citizen or a non-resident
alien.

4)Interest income from savings and time deposits of members with

their credit cooperative – exempt from the 20% FWT.