Income Tax - Midterm Module 2 PDF

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Philippine Income Tax Module 2...

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Creditable Withholding Taxes CREDITABLE vs. FINAL TAX Final Withholding Tax

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Certain incomes under section 24B of the Tax Code are subject to final taxes instead of basic tax or graduated tax rates. Creditable Withholding Tax



Certain regular incomes not subject to final taxes on passive income and capital gains tax are subject to “creditable” withholding taxes. Creditable withholding tax (CWT) is not an internal revenue tax but a method of collecting income tax “in advance” from the recipient of income through the payor thereof, which is constituted by law as the withholding agent of government. Taxes withheld on certain payments are intended to equal or at least approximate the tax due of the payee on said income computed using the graduated tax rate under Section 24A of the Tax Code. The recipient is required to file an income tax return to report the income and/or pay the difference between the tax withheld and the tax due on the income. The term “creditable” means the taxes withheld are deductible from tax due.   

 

The most common example of creditable withholding tax for an individual taxpayer is the tax withheld by an employer from the compensation of an employee. The amount of tax withheld will be remitted by the employer to the BIR. The withholding taxes at source are amounts withheld by the payor (other than employer) such as creditable withholding taxes for the purchase of goods, services and rentals. The most common known CWT rates are provided under RR11-2019. The duty to withhold and remit income taxes arises only on instances required by law or regulation. Withholding tax return shall be filed and tax paid in withholding agent’s legal residence or principal place of business, or where the withholding agent is a corporation, where the principal office is located, except on sales of real property subject to income tax, where the withholding tax shall be paid in the RDO where the property is located. Creditable withholding taxes shall be filed and the applicable tax paid not later than the last day of the month following the close of the quarter. The obligation to withhold is imposed upon the buyer-payor of income although the burden of tax is really upon the seller-income earner/payee; hence, unjustifiable refusal of the latter to be subjected to withholding shall be ground for the mandatory audit of all internal revenue tax liabilities, as well as imposition of . Every payor required to deduct and withhold taxes shall furnish each payee, a withholding tax statement, in triplicate, within 20 days from the close of the quarter. The prescribed form (BIR Form No. 2307 for passive income) shall be used, showing the monthly income payments and, the quarterly total, and the amount of taxes withheld. Provided however, that upon request of the payee, the payor must furnish such statement, simultaneously with the income payment. INCOME TAX DUE OF MARRIED TAXPAYERS

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Under RA 10963, husband and wife, 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. FILING OF INCOME TAX RETURNS (itr)

 1.

BASIC TAX

1. 

FOR PURELY COMPENSATION INCOME EARNERS: On or before April 15 of the succeeding year.



FOR BUSINESS INCOME EARNERS including inocme from practice of profession. The individua taxpayer is required to file a quarterly tax return (regardless of teh results of operations) as follows:

2.

1st Quarter

May 15

nd

2 Quarter

Aug. 15 (45 days after end of Quarter)

3rd Quarter

Nov 15 (45 days after end of Quarter)

Final adjusted/annual return

April 15 of the succeeding year

2.

INCOME TAX

FINAL WITHHOLDING TAX ON PASSIVE INOMCE

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For final and creditable withholding taxes, teh return shall be filed and paid not later than the last day of the month following the close of the taxable quarter during which the withholding was made. The power of the Secretary of Finance to require withhoding agents to pay or deposit taxes deducted or withheld agents to pay or deposit taxes deducted or withheld at more frequent intervals is repealed under RA10963 2.



CAPITAL GAINS TAX  Shares of stock  Ordinary return – 30 days after each transaction  Final Consolidated Return – on or before April 15 of the following year  Real Property – 30 days following each sale or other disposition. MANNER OF FILING

Filing of ITR may be made through: 1. 2. 3.

Manual filing Electronic filing and Payment System (EFPS) Ebir Forms



PAYMENT

Generally, the income tax payable shall be paid at the time the return is filed (also known as “Pay as you file system”. The deadline for filin is discussed in the preceding page. However, RA 10963 (TRAIN Law) provides, that , when teh tax due is in excess of P2,000, the individual taxpayer may elect to pay the tax in two equal installments as follows: 1st installment – at the time of filing the annual ITR 2nd installment – on or before October 15 following the close of the calendar year

CREDITABLE vs. FINAL TAX  

Final Withholding Tax Certain incomes under section 24B of the Tax Code are subject to final taxes instead of basic tax or graduated tax rates. Creditable Withholding Tax Certain regular incomes not subject to final taxes on passive income and capital gains tax are subject to “creditable” withholding taxes. Creditable withholding tax (CWT) is not an internal revenue tax but a method of collecting income tax “in advance” from the recipient of income through the payor thereof, which is constituted by law as the withholding agent of government. Taxes withheld on certain payments are intended to equal or at least approximate the tax due of the payee on said income computed using the graduated tax rate under Section 24A of the Tax Code. The recipient is required to file an income tax return to report the income and/or pay the difference between the tax withheld and the tax due on the income. The term “creditable” means the taxes withheld are deductible from tax due.

Illustration: Gross Compensation Income Gross business/professional income Less: Allowable business/professional expenses Taxable net income

Pxx Xx (xx) Pxx

Income Tax Due (Graduated tax rate) Less: CREDITABLE WITHHOLDING TAXES: CWTx on compensation income CWTx withheld at source OTHER TAX CREDITS Prior year’s excess credit Tax payments for teh previous quarter(s) Foreign income tax credit Income Tax Payable

Pxx

1. 2.

Pxx xx xx xx xx

____ P xx

The most common example of creditable withholding tax for an individual taxpayer is the tax withheld by an employer from the compensation of an employee. The amount of tax withheld will be remitted by the employer to the BIR. The withholding taxes at source are amounts withheld by the payor (other than employer) such as creditable withholding taxes for the purchase of goods, services and rentals. The most common known CWT rates are provided under RR11-2019 as follows:

Purchase of/Payment for Professional fees:  Individual payee o If gross income for the current year ≤ P3M

INCOME TAX

CWT % 5%

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    

3.

4. 5.

10%

o If gross income for the current year is > P3M Non-individual payee o If gross income for the current year ≤ P720K o If gross income for the current year > P720K Rentals Goods Services Income payments to beneficiaries of estates/trusts Income payments to partners of GPPs o If gross income for the current year ≤ P720K o If gross income for the current year > P720K

10% 15% 5% 1% 2% 15% 10% 15%

The duty to withhold and remit income taxes arises only on instances required by law or regulation. Withholding tax return shall be filed and tax paid in withholding agent’s legal residence or principal place of business, or where the withholding agent is a corporation, where the principal office is located, except on sales of real property subject to income tax, where the withholding tax shall be paid in the RDO where the property is located. Creditable withholding taxes shall be filed and the applicable tax paid not later than the last day of the month following the close of the quarter. The obligation to withhold is imposed upon the buyer-payor of income although the burden of tax is really upon the seller-income earner/payee; hence, unjustifiable refusal of the latter to be subjected to withholding shall be ground for the mandatory audit of all internal revenue tax liabilities, as well as imposition of . Every payor required to deduct and withhold taxes shall furnish each payee, a withholding tax statement, in triplicate, within 20 days from the close of the quarter. The prescribed form (BIR Form No. 2307 for passive income) shall be used, showing the monthly income payments and, the quarterly total, and the amount of taxes withheld. Provided however, that upon request of the payee, the payor must furnish such statement, simultaneously with the income payment.

CASE A. A resident citizen employee provided the following data for 2019 taxable year: 450,000

Compensation income (gross of deductions below Deductions made by the employer: SSS premium contributions Philhealth contributions Pag-Ibig contributions Union dues Income tax withheld

6,000 8,400 2,400 1,200 36,000

Question: How much is the income tax payable of the employee? Compensation income Less: Income exempt from tax SSS premium contributions Philhealth contributions Pag-ibig contributions Union dues Taxable income

P450,000 (6,000) (8,400) (2,400) (1,200) P432,000

Tax Due: Tax on 1st P400,000 Excess: P32,000 x 25% Total tax due Less: Tax withheld by the employer Income tax payable Note:   

P30,000 8,000 38,000 36,000 P3,000

SSS/GSIS, Pag-Ibig, Philhealth contributions of the employees as well as Union dues are excluded by law in the computation of taxable income. As a rule, taxable income shall refer to incomes subject to tax It is usual that if the taxpayer is a purely compensation income earner, the income tax payable is already zero.

CASE B: A resident citizen taxpayer (single) provided teh following information for 2019:

INCOME TAX

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Compensation income Gross business income, Philippines Gross business income, Canada Business expenses, Philippines Business expenses, Canada Income tax withheld by the individual taxpayer’s employer on his compensation income Income tax withheld by “certain” payors on business income in the Philippines Income tax payments to the BIR for the first three (3) quarters of the year

P1,000,000 2,000,000 3,000,000 1,400,000 2,050,000 150,000 100,000 125,000

Required: Determine income tax payable of the taxpayer P1,000,000 2,000,000 3,000,000 (1,400,000) (2,050,000) P2,550,000

Compensation income Gross business income, Philippines Gross business income, Canada Business expenses, Philippines Business expenses, Canada Taxable income

Tax Due: Tax on 1st P2,000,000 On excess over P2M (P550,000 x 32%) Less: Tax withheld by the employer Taxes by certain payors Income tax paid Income tax payable

490,000 176,000 150,000 100,000 125,000

P666,000

(375,000) P291,000

INCOME TAX DUE OF MARRIED TAXPAYERS Under RA 10963, husband and wife, 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. ILLUSTRATION: Spouses Chris and Ana provided the following data for 2019:

Gross income practice of profession Gross compensation income Dividend income; From domestic corporation From resident corporation Interest on notes receivable Interest on Philippine bank deposit Royalty income Miscellaneous income Capital gain on sale of shares of ABC Co., a domestic corporation, sold directly to a buyer Capital loss on sale of shares of DEF Co. (domestic corp) sold directly to a buyer Capital gain on sale of land in Tudela-FMV – P12M, SP- P10M, Cost – P8M Expenses business/profession

Chris Ana P800,000

Chris & Ana P400,000

5,000

2,000

5,000

3,000 10,000

12,000 4,000 6,000 2,000 60,000

80,000 (20,000) 2,000,000 425,000

20,000

Determine the following: 1.

Total capital gain taxes paid by the spouses in 2019

INCOME TAX

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P12,000 720,000 P732,000

Capital Gain – ABC Co (P80K x 15%) Capital gain on sale of land (P12M x 6%) Total capital gains tax 2.

Total final taxes paid on passive income by the spouses in 2019 Dividend income – domestic corp. (10,000 x 10%) Interest on bank deposit (P11K x 20%) Royalty income(P2,000 x 20%) Total final tax on passive income

3.

P1,000 2,200 400 P3,600

Taxable income of Chris in 2019 P800,000 6,000 2,000 30,000 (425,000) (10,000) 403,000

Gross income from practice of profession Dividen cinome from resident corp (P12,000/2) Interest on notes receivable (P4,000/2) Miscellaneous income (P60,000/2) Expenses – practic eof preofession Expenses – Miscellaneous income (P20,000/2) Taxable income - Chris 4.

Taxable income of Ana in 2019 P400,000 6,000 2,000 40,000 (10,000) P438,0100

Gross compensation income Dividend income from resident corp (12k/2) Interest on notes receivable (P4K/2) Miscellaneous income (P20k/2) Expenses miscellaneous income (20k/2) Taxable income - Ana

FILING OF INCOME TAX RETURNS (itr) 1.

BASIC TAX  FOR PURELY COMPENSATION INCOME EARNERS: o On or before April 15 of the succeeding year. 

FOR BUSINESS INCOME EARNERS including inocme from practice of profession. o The individua taxpayer is required to file a quarterly tax return (regardless of teh results of operations) as follows: 1st Quarter 2nd Quarter 3rd Quarter Final adjusted/annual return

2.

May 15 Aug. 15 (45 days after end of Quarter) Nov 15 (45 days after end of Quarter) April 15 of the succeeding year

FINAL WITHHOLDING TAX ON PASSIVE INOMCE For final and creditable withholding taxes, teh return shall be filed and paid not later than the last day of the month following the close of the taxable quarter during which the withholding was made. The power of the Secretary of Finance to require withhoding agents to pay or deposit taxes deducted or withheld agents to pay or deposit taxes deducted or withheld at more frequent intervals is repealed under RA10963

3. CAPITAL GAINS TAX a)

b)

Shares of stock  Ordinary return – 30 days after each transaction  Final Consolidated Return – on or before April 15 of the following year Real Property – 30 days following each sale or other disposition.

MANNER OF FILING Filing of ITR may be made through: a) b) c)

Manual filing Electronic filing and Payment System (EFPS) Ebir Forms

INCOME TAX

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Payment Generally, the income tax payable shall be paid at the time the return is filed (also known as “Pay as you file system”. The deadline for filin is discussed in the preceding page. However, RA 10963 (TRAIN Law) provides, that , when teh tax due is in excess of P2,000, the individual taxpayer may elect to pay the tax in two equal installments as follows: 1st installment – at the time of filing the annual ITR 2nd installment – on or before October 15 following the close of the calendar year

ILLUSTRATION: Juan Dela Cruz, a practicing CPA, with four dependent children, provided the following data for 2019 taxable year, Gross receipts P10,000,000, direct cost and expenses, P5,000,000, creditable withholding taxes, P1,250,000. His income tax payable is computed as follows: Gross receipts Direct cost and expenses Taxable net income

P10,000,000 (5,000,000) P5,000,000

Income tax: 1st P2M In excess of P2M at 32% (3M x 32%) Total income tax due Less Creditable withholding taxes Income Tax Payable Note:

P490,000 960,000 P1,450,000 (1,250,000) P200,000

    

Juan is required to file quarterly and annual income tax returns The creditable withholding taxes is deductible from income tax due He is allowed to pay the income tax payable in two (2) equal annual installments In addition to income tax, as a practicing professional, he is also required to pay business tax He may choose to be taxed based on graduated tax rate or at 8% gross sales/receipts

PLACE OF FILING INCOME TAX RETURN The income tax return shall be filed and paid with any of the following: 1. 2. 3. 4.

Authorized agent banks Revenue District Officer Collection agent Duly recognized city or municipal Treasurer in which the taxpayer has his legal residence or principal place of business in the Philippines or if there be no legal residence or place of business in the Philippines, with the Office of the Commissioner of Internal Revenue.

Persons Required to File Income Tax Return 1. 2. 3. 4. 5. 6.

Individuals engaged in business and/or practice of profession, regardless of the results of operations. Individuals deriving compensation from two or more employers concurrently or successively at any time during the taxable year. Employees deriving compensation income, regardless of the amount whether from a single or several employers during the calendar year, the income tax of which has not been withheld correctly resulting to collectible or refundable return. Individuals deriving other non-business, non-profession-related income in addition to compensation income not otherwise subject to final tax. Individuals receiving purely compensation income from a single employer, although the income tax of which has been correctly withheld, but whose spouse is required to file income tax return. Non-resident alien engaged in trade or business in the Philippines deriving purely compensation income, or compensation income and other non-business, nonprofession-related income.

Substituted Filing of Income Tax Returns (ITR) Under RA 9+504 and RR 10-2008, individual taxpayers may no longer file income tax return on or before April 15 of the following taxable year provided the taxpayer is/has (all the requirements must be satisfied); 1. 2. 3. 

Receiving purely compensation income, regardless of amount The amount of income tax withheld by the employer is correct (Tax due = tax withheld) Only one employer during the taxable year If married, the employee’s spouse also complies with all three aforementioned conditions, or otherwise receives no income.

INCOME TAX

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