Guevarra - Taxation Law 1 (Finals) PDF

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GUEVARRA, AKIKOINCOME TAXATIONTaxation is the process or means by which the sovereign, through its law-making body, raises income to defray the necessary expenses of government; a method of apportioning the cost of government among those who in some measure are privileged to enjoy its benefits and m...

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GUEVARRA, AKIKO

INCOME TAXATION Taxation is the process or means by which the sovereign, through its law-making body, raises income to defray the necessary expenses of government; a method of apportioning the cost of government among those who in some measure are privileged to enjoy its benefits and must, therefore, bear its burdens 1. The primary purpose of taxation is to provide funds or property to promote the general welfare and protection of its citizens. In this paper, I will discuss Income Taxation which will specifically focus on Tax on Individuals, Tax on Corporations, Inclusions and Exclusions, and Deductions from Gross Income. On December 19, 2017, President Rodrigo Roa Duterte signed into law Republic Act No. 10963 or the Tax Reform for Acceleration and Inclusion (TRAIN) law which includes major amendments to personal income tax provisions in the National Internal Revenue Code of 1997. It provides for new tax deadlines, new tax rate tables, removal of individual exemptions and limitations on qualifications for preferential tax rates2. In the case of Vicente Madrigal vs. James Rafferty, it defined the point of view of the test of faculty in taxation and discussed the difference between capital and income. As stated in the facts of the case, Vicente Madrigal and his spouse, Susan Paterno were married with Conjugal Partnership as their property relations. In 1914, Madrigal filed his income tax return but later claimed a refund on the contention that it was the income of the conjugal partnership. He also claimed that the income should be divided into two (2) with each spouse filing a separate return. Hence, Vicente claimed that each spouse should be entitled to the P8,000.00 exemption which would result in a lower income tax due. The court ruled that “The Income Tax Law of the United States, extended to the Philippine Islands, is the result of an effect on the part of the legislators to put into statutory form this canon of taxation and of social reform. The aim has been to mitigate the evils arising from inequalities of wealth by a progressive scheme of taxation, which places the burden on those best able to pay”. The court also discussed that “the essential difference between capital and income is that capital is a fund; income is a flow. A fund of property existing at an instant time is called capital. A flow of money from it or any other benefit rendered by a fund of capital in relation to such fund through a period of time is called an income.”

Under the National Internal Revenue Code of 1997, as amended by Republic Act No. 10963 or the TRAIN Law, Income Taxation is defined as a tax on all yearly profits arising from property, professions, trades, or offices, or as a tax on the person’s income, emoluments, profits and the like. It may be defined as a tax on income, whether gross or net, realized in one taxable year 3. It is generally classified as an excise tax which is not levied upon persons, property, funds or profits but upon the right of a person to receive income or profits. Requisites for Taxability of Income: 1. There must be a gain or profit, whether in cash or its equivalent The primary consideration in income taxation is that there must be income before there could be income taxation (Domondon, 2013) 2. The gain must be realized or received Under the realization principle of income taxation, revenue is generally recognized when both of the following conditions are met: (a) The earning process is complete or virtually complete; and (b) An exchange has taken place. Under the recognition of income taxation, income is considered received for Philippine Income Tax purposes: (a) If actually or physically received by taxpayer; or (b) If constructively received by taxpayer. Purposes of Income Taxation 1. To provide large amounts of revenues 2. To offset regressive sales and consumption taxes 3. To mitigate the evils arising from the inequality in the distribution of income and wealth which are considered deterrents to social progress by a progressive scheme of taxation (Madrigal vs. Rafferty, G.R. No. L-12287, August 7, 1918) 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 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. Taxpayer Resident Citizen Non-resident Citizen and Overseas Contract Worker Resident and Non-resident Alien Domestic Corporation Foreign Corporation

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Without ✓ ✘

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Sources of Income 1. Income Within- It comprises earnings from within the Philippine territory (Sec. 42 A of NIRC) 2. Income Without- It refers to earnings coming from outside the Philippines derived from foreign countries (Sec. 42 C of NIRC) 3. Income Partly Within and Without- these are earnings from sources partly within and without the Philippines (Sec. 42 E of NIRC) Individual Taxpayers Citizens 1. Resident Citizen (RC) -

Filipino citizen who stayed permanently in the Philippines or stayed outside the Philippines for less than 183 days during the taxable year.

2. Non-resident Citizen (NRC) -

A citizen of the Philippines who: a. Establishes to the satisfaction of the Commission of Internal Revenue the fact of his physical presence abroad with a definite intention to reside therein; b. Leaves the Philippines during the taxable year to reside abroad, either as an immigrant or for employment on a permanent basis; c. 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; d. Has been previously considered as a non-resident citizen and who arrives in the Philippines at any time during the taxable year to reside permanently in the Philippines- it must be noted that it is treated as NRC with respect to income derived from sources abroad until the date of his arrival.

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Filipino citizen who stayed outside the Philippines for 183 days or more during the taxable year and has established sufficient proof to the CIR of his definite intention to reside outside the Philippines on a permanent basis.

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Overseas Contract Workers (OCW or Special Citizens)

a. 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. b. An individual citizen of the Philippines who is working and deriving income abroad whom is taxable only on income from sources within the Philippines. c. Philippine citizen employed in a foreign country by a foreign employer and must be registered with the Philippine Overseas Employment Administration and have been issued an Overseas Employment Certificate (OEC). Aliens 1. Resident Alien (RA) -

An individual whose residence is within the Philippines but who is not a citizen thereof; It also includes individuals who have stayed in the Philippines for more than one year from the date of arrival.

2. Non-resident Alien (NRA) -

Non-resident Alien Engaged in Trade or Business (NRA-ETB) a. A citizen of another country, not residing in the Philippines, but engaging in economic or commercial activities here in the Philippines; b. Those who have stayed in the Philippines for more than 180 days during the taxable year; and c. When an alien enters into contracts or commercial transactions in the Philippines, on a more or less regular basis. Engaged in Trade or Business – It refers to economic or commercial activities or exercising your profession. Also, when an alien doing a commercial activity for gain or profit and such is habitually done.

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Non-resident Alien Not Engaged in Trade or Business (NRA-NETB)- Those who have stayed within the Philippines for only 180 days or less during the taxable year and have no business income derived within the Philippines.

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Special Aliens- It refers to those aliens or Filipino citizens who are taxed with 15% tax rate based on their gross compensation income. They are also individuals with managerial or highly technical positions working in: a. Regional or area headquarters and regional operating headquarters of multinational companies established in the Philippines. b. Offshore Banking Units (OBU) established in the Philippines. OBUs are foreign banks allowed to operate in the Philippines and to conduct foreign currency transactions. c. Petroleum service contractors and sub-contractors in the Philippines.

Corporate Taxpayers 1. Domestic Corporation (DC) -

A corporation created and organized in the Philippines or under its laws and is liable for its income from sources within and without. (Sec. 22 C of NIRC)

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Special Types of Domestic Corporation a. Proprietary Educational Institution- It is any private school maintained and administered by private individuals or groups with an issued permit to operate from the Department of Education, Culture and Sports, or the Commission on Higher Education (CHED), or the Technical Education and Skills Development Authority (TESDA), as the case may be, in accordance with existing laws and regulation. They are not tax-exempt but are rather taxed at a preferential rate of

10% on their taxable income, except on certain passive incomes which are subject to final tax. b. Non-stock, Non-profit Educational Institution- All revenues and assets of this institution used actually, directly, and exclusively for educational purposes shall be exempt from taxes and duties. 2. Foreign Corporation (FC)- A corporation which is not domestic (Sec. 22 D of NIRC) -

Resident Foreign Corporation (RFC)- A foreign corporation engaged in trade or business within the Philippines and is liable for income from sources within the Philippines. (Sec. 22 H of NIRC)

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Non-resident Foreign Corporation (NRFC)- A foreign corporation not engaged in trade or business within the Philippines and is liable for income from sources within and without the Philippines.

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Special Types of Foreign Corporations- Those corporations subject to different tax rates. a. Special Resident Foreign Corporations- this includes Domestic depositary banks (foreign currency deposit units), International carriers, Offshore Banking Units (OBU), and Regional or Area Headquarters and Regional Operating Headquarters of multinational companies b. Special Non-resident Foreign Corporations- this includes Non-resident cinematographic film owners, lessors or distributors, Non-resident owners or lessors of vessels chartered by Philippine Nationals, and Non-resident lessors of aircraft, machinery and other equipment.

Tax on Individuals 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 by 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. (2) Rates of Tax on Taxable Income of Individuals. - The tax shall be computed in accordance with and at the rates established in the following schedule: (a) Tax Schedule Effective January 1, 2018 until December 31, 2022:

Not over P250,000 Over P250,000 but not over P400,000 Over P400,000 but not over P800,000 Over P800,000 but not over P2,000,000 Over P2,000,000 but not over P8,000,000

0% 20% of the excess over P250,000 P30,000 + 25% of the excess over P400,000 P130,000 + 30% of the excess over P800,000 P490,000 + 32% of the excess over P2,000,000 Over P8,000,000 P2,410,000 + 35% of the excess over P8,000,000 (b) Tax Schedule Effective January 1, 2023 and onwards: Not over P250,000 Over P250,000 but not over P400,000 Over P400,000 but not over P800,000 Over P800,000 but not over P2,000,000 Over P2,000,000 but not over P8,000,000 Over P8,000,000

0% 15% of the excess over P250,000 P22,500 + 20% of the excess over P400,000 P102,500 + 25% of the excess over P800,000 P402,500 + 30% of the excess over P2,000,000 P2,202,500 + 35% of the excess over P8,000,000

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. Provided, That minimum wage earners as defined in Section 22 (HH) of this Code shall be exempt from the payment of income tax on their taxable income: Provided, further, That the holiday pay, pay received by such minimum wage earners shall likewise be exempt from income tax. (b) Rate of Tax on Income of "Purely Self-employed Individuals and/ or Professionals Whose Gross Sales or Gross Receipts and Other Non-operating Income Does Not Exceed the Value-added Tax (VAT) Threshold as Provided in Section 109(BB).— Self-employed individuals and/or professionals shall have the option to avail of an eight percent (8%) tax on gross sales or gross receipts and other non-operating income in excess of Two hundred fifty thousand pesos ₱ ( 250,000) in lieu of the graduated income tax rates under Subsection (A)(2)(a) of this Section and the percentage tax under Section 116 of this Code. (c) Rate of Tax for Mixed Income Earners.— Taxpayers earning both compensation income and income from business or practice of profession shall be subject to the following taxes: (1) All Income from Compensation – The rates prescribed under Subsection (A)(2)(a) of this Section. (2) All Income from Business or Practice of Profession – (a) If Total Gross Sales and/or Gross Receipts and Other Non-operating Income Do Not Exceed the VAT Threshold as Provided in Section 109(BB) of this Code.— The rates prescribed under Subsection (A)(2)(a) of this Section on taxable income, or eight percent (8%) income tax based on gross sales or gross receipts and other non-operating income in lieu of the graduated income tax rates under Subsection (A)(2)(a) of this Section and the percentage tax under Section 116 of this Code. (d) If Total Gross Sales and/or Gross Receipts and Other Non-operating Income Exceeds the VAT Threshold as Provided in Section 109(BB) of this Code.— The rates prescribed under Subsection (A)(2)(a) of this Section. (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 (₱ 10,000) or less which shall be subject to tax under Subsection (A) of Section 24; and other winnings (except winnings amounting to Ten thousand pesos (₱ 10,000) or less from Philippine Charity Sweepstakes and Lotto which shall be exempt), 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 fifteen percent (15%) 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 less than four (4) years- 12% Less than three (3) years- 20% (2) Cash and/or Property Dividends. - A final tax at the rate of ten percent (10%) 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; 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 rate of fifteen percent (15%) 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. 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 ac...