Tax 2 - NONE PDF

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Summary

Features of Final Income Tax  Final Tax Tax withholding at sourceo Tax is deducted at sourceo Income received is net of final taxo No need for the taxpayer to file an income tax return Territorial impositiono applies only to certain passive income earned from sources within the Philippines Impos...

Description

Features of Final Income Tax  Final Tax 



Tax withholding at source o

Tax is deducted at source

o

Income received is net of final tax

o

No need for the taxpayer to file an income tax return

Territorial imposition o



applies only to certain passive income earned from sources within the Philippines

Imposed on: o

Certain passive income

o

Persons not engaged in business in Philippines

Rationale of Final Income Taxation  Convenience of both the taxpayer and the government 

taxpayer- relieved form the obligation to file an income tax return



government- most convenient and effective system for collection of taxes



Passive income o

earned with very minimal involvement

o

generally irregular in timing and amount

Non- resident persons not engaged in business in the Philippines Non-resident person not General final tax rate engaged in trade or business Non-resident alien not 25% engaged in trade or business Non-resident foreign 30% corporation Passive income subject to final tax  Interest or yield from bank deposits or deposit substitutes  Domestic dividends in general  Dividend income from a Real Estate Investment Trust  Share in the net income of a business partnership, taxable associations, joint ventures, joint accounts or co-ownership  Royalties  Prizes exceeding P10,000  Winnings 

Informer’s tax reward



Interest income on tax- free corporate covenant bonds



Interest Income or Yie ld  from local currency bank deposits or deposit substitutes Source of Interest Income Short term deposits Long term deposits/ investment certificates

Individuals

Corporations

20%

20%

Exempt

20%

NRA-NETB – 25% NRFC – 30%  Short term – less than 5 years 

Long term- 5 years or more



Exemption does not include NRA- NETB

Interest Income or Yield  Tax on pre-termination of long-term deposit of individuals Holding Period Less than 3 years 3 years to less than 4 years 4 years to less than 5 years 5 years or more 



5% 0%

Savings or time deposit with cooperatives o



Final Tax 20% 12%

not subject to final tax

Other applications of the final tax on interest o

deposit substitute

o

government securities

o

money market placements

o

trust funds

o

other investments evidenced by certificates prescribed by BSP

Foreign currency deposit with foreign currency depositary banks interest income from foreign currency deposits under foreign currency deposit system or expanded foreign currency deposit system

Taxpayer Individuals Corporations Residents 15% 15% Non-residents Exempt Exempt  Resident taxpayers – RC, RA, DC, RFC  Non-resident taxpayers - NRC, NRA-ETB, NRA-NETB and NRFC

Foreign currency deposit with foreign currency depositary banks Joint accounts on forex deposit:  50% is exempt and 50% is subject to 15% final tax Interest income subject to regular tax  lending activities (whether or not in the course of business)



investment in bonds



promissory notes



foreign sources, whether bank or non-bank



penalty for legal delay or default

Dividends  cash dividends – paid in cash 

property dividends – paid in non-cash properties including stocks or securities of another corporation



scrip dividends – those paid notes or evidence of indebtedness of the corporation



stock dividends – paid in the stocks of the corporation



liquidating dividends – distribution of corporate net asset

As a rule, dividends are income subject to tax These dividends are NOT income for taxation purposes:  stock dividends



liquidating dividends

Dividend Tax Rules Sources of Individuals Dividends Domestic 10% final tax Corporation Foreign Regular Tax Corporation

Corporations Exempt Regular tax

NRA – ETB – 20% NRA-NETB – 25% NRFC – 30% or 15% (if tax sparring rule applies)  Exempt dividends

 

 inter-corporate dividends minimize double taxation received by DC, RFC and business partnership (treated as corporation) FROM DOMESTIC corporation  dividends from cooperatives

Share in net Income  10% final withholding tax applies to share in the net income of entities considered as corporations under NIRC and special laws

 

 Real Estate Investment Trusts (REIT)  Business partnerships  Taxable associations  Taxable joint ventures, joint accounts or consortia  Taxable co-ownerships NRA-NETB – 25% NRFC – 30%



Real Estate Investment Trusts (REIT)



the following recipients of REIT dividends are EXEMPT from final tax



o

NRA individuals or NRFC entitled to claim preferential tax rate pursuant to applicable tax treaty

o

DC or RFC

o

Oversea Filipino investors – exempt until August 12, 2018

Business partnerships, taxable associations, joint venture, joint accounts or co-ownerships 

10% final tax applies at the point of determination of income, not the actual point of distribution

Royalties Corporations Sources of Individuals passive roylaties 20% final tax Books, literary 10% final tax works, and musical compositions Other sources 20% final tax 20 % final tax NRA-NETB – 25% NRFC – 30%  Royalties on books sold on e-copies or CDs (e-books) are subject to 20% final tax.  Royalties earned abroad – subject to regular income tax Source of passive Individuals royalties 20% final Cinematographic films and similar tax works NRA-ETB – 25% NRA-NETB – 25% NRFC – 25%

Corporations 20% final tax

Prizes  Exempt prizes 

Prizes received by recipient without any effort on his part to join a contest



Prizes from sports competitions that are sanctioned by their respective national sports organizations

Requisites:  The recipient was selected without any action on his part to enter the contest.

 The recipient is not required to render substantial future services as a condition to receiving the price or reward. Taxable Prizes Amount of Individuals Corporations taxable prize 20% final tax Regular tax Prizes exceeding P10,000 Regular Tax Prizes not Regular tax exceeding P10,000 NRA-NETB – 25% NRFC – 30% Prizes from foreign sources– subject to regular income tax Winnings Types of Individuals Corporations winnings Exempt Exempt PCSO/lotto winnings not exceeding P10,000 20% final tax 20% final tax PCSO/lotto winnings exceeding P10,000 20% final tax Regular Tax Other winnings in general Regardless of amount of winnings: NRA-NETB – 25% NRFC – 30%  P10,000 threshold only applies to prizes, not on winnings.  Winnings from foreign sources– subject to regular income tax Tax Informer’s Reward  subject to 10% final tax NRA-NETB – 25% NRFC – 30% Requisites of Tax Informer’s Rewards:  Definite sworn information which is not yet in the possession of BIR  Information furnished lead to discovery of fraud upon internal revenue laws or provisions thereof  Enforcement results in recovery of revenues, surcharges, and fees  Informer must not be a: 

BIR official or employee



Other public official or employee



Relative within the 6th degree of consanguinity of those officials or employee

 Amount of cash reward



lower of:  10% of revenues, surcharges or fees recovered or fine or penalty imposed and collected  P1,000,000 Bond Investor Individuals 30% final tax

Corporations Tax on interest Regular Income tax income on taxfree corporate covenant bonds Final tax applies to all individuals, regardless of classification. Tax Sparing Rule  NRFCs shall be subject to 15% final tax on dividend income 

deemed satisfied if the country in which the NRFC is domiciled reduced the income tax on the dividend by at least 15%

Other Final Income Tax  Interest Income of Expanded Foreign Currency Deposit Units (EFCDU) and Off-shore Banking Units (OBU) Banks Taxpayer Residents Non-residents

Individuals 10% Exempt

Corporations 10% Exempt

 Resident taxpayers – RC, RA, DC, RFC  Non-resident taxpayers - NRC, NRA-ETB, NRA-NETB and NRFC 

Income Payments to Sub-contractors of Petroleum Service Contractors  liable to 8% of its gross income derived from such contract

Taxpayer Individuals Corporations Residents 8% 8% Non- residents 8% 8%  Resident taxpayers – RC, RA, DC, RFC  Non-resident taxpayers - NRC, NRA-ETB, NRA-NETB and NRFC Income received from ALL OTHER SOURCES (domestic – within and without / foreign – within) shall be subject to regular income tax. Special Aliens  employees of offshore banking unit, regional operating or regional administrative headquarters of multinational companies Residents Non- residents

Regular income tax 25% final tax

Final Withholding Tax Return BIR Form Monthly 0619-F Remittance

Return shall be filed and tax

BIR Form 1601-FQ

Return of Final Income Taxes Withheld

shall be paid on or before 10th day of the month following the month in which the withholding was made

Quarterly Remittance Return of Final Income Taxes Withheld

Return shall be filed and tax shall be paid on or before the last day of the month after each quarter

Entities Exempt from Final Income Tax  Foreign governments and foreign GOCCs  International missions or organizations with tax immunity  General professional partnership  Qualified employee trust fund

Capital Gains Taxation Topic 6

From the diagram, we could see that income generated by the taxpayer may be subjected to different tax depending on the nature of the income. Last week, we were done with final Income Taxation. In final income taxation, we said that it is a one shot deal transaction. Meaning when the income is earned, the appropriate tax is immediately computed and collected/withheld by the payor. For this week, we proceed to the next mode of taxing gross income, the Capital Gains taxation. Lesson Proper For tax purposes, there are two types of assets owned and controlled by the taxpayer: A. ORDINARY Asset – assets used in the day-to-day activities of the business Held for sale- inventory Held for use- supplies and items of property plant, and equipment 1. Stock in trade or real properties included in the inventory of the taxpayer which are on hand at the close of the taxable year 2. Real property held for sale by the taxpayer primarily for sale to customers in the ordinary course of business or trade (example are properties sold by AVIDA Real PropertiesInc.) 3. Real property used in trade or business which are subject to depreciation. (building used

as warehouse by Mariton Grocery 4. Real property held for use in trade or business of the taxpayer. Display room of Nissan Corporation along the National Road at Pengue B. CAPITAL Asset – all tangible assets not used in the daily course of business activities. 1. Personal (non-business) assets of individual taxpayers 2. Business assets of both individual and corporate taxpayers a. Financial assets – cash, receivables, prepaid expenses ,investments b. Intangible assets – copyright, patent, franchise, lease holdrights. Please take note that the asset classification as to ordinary or capital asset is based on the nature of the taxpayer’s business and its usage by the business rather than upon the nature of the property. Gains on Dealings in properties Type Ordinary Capital gain gain Arising from Arising from sale of capital sale of assets ordinary asset Regular General rule: regular income Tax scheme income tax tax exemption Rule: capital gains tax 1. Sale of domestic stocks sold Capital gains directly to buyer subject to 2. Sale of real property not capital gains used in business. tax Scope of Capital gains Domestic stocks directly to tax buyer -15% Real property in the Phil -6% Gains from other capital assets – regular income tax Let’s proceed discussing the capital gain on the sale, exchange and other disposition of domestic stocks directly to buyer. Domestic stocks- are evidence of ownership or rights of ownership in a domestic corporation such as common and preferred stocks, stock rights and options, stock warrants and options and unit of participation in any association, recreation or amusement club. -

Capital gains tax covers sale of domestic stocks for cash, exchange in kind and other dispositions like 1. Foreclosure of property in settlement of debt 2. Pacto de Retro sales – sale with buy back agreement 3. Conditional sale – perfection of sale is dependent on the completion of certain specified condition 4. Voluntary redemption of shares by the issuing corporation – maybe re-issued and not intended for cancellation

-

The following dispositions are not subject to capital gains tax: 1. Issuance of stocks by the corporation – it is a financing transaction where the excess amount received over the par value of the share is treated as additional capital (share premium) rather than an income from sale. There is no sale that is to be subjected to capital gains tax. 2. Exchange of stocks for services – no gain or loss can be imputed as it involves payment of expenses in kind

3. Redemption of shares in a mutual fund – exempted by the NIRC from income taxation 4. Worthlessness of stocks – capital loss subjected to regular income taxation 5. Redemption of stocks for cancellation by the issuing corporation – subject to regular income tax 6. Gratuitous transfer of stocks – donations and inheritance are subject to transfer tax. Mode of disposing domestic stocks 1. Thru the Philippine stock exchange – not subject to capital gains tax but rather to a transactional tax of 60% of 1% (0.6%) of the selling price. WARNING: The 0.6% transactional tax is applicable only to non-dealers of stocks. If the seller is a dealer in stocks then he is not subject to transactional tax but rather to regular income tax. 2. Directly to the Buyer - Universal tax applies to all taxpayers disposing stocks classified as capital assets. - The gain on sale of domestic stocks is income within even if the sale was executed outside of the Philippines - Annual tax is imposed on annual net gain on the sale of domestic stocks directly tobuyer. - The NET GAIN is determined as follows: Selling price xxxx Basis of stocks disposed (xxxx ) Selling expenses ( xxxx ) Documentary stamp tax on the sale ( xxxx ) Net capital gain (loss) xxxx What is the tax basis of stocks? Mode of acquisition vs Tax basis Purchase - Cost of the property determined in descending order of priority a. Specific identification – if shares are specifically identifiable b. Moving average method – if books of accounts are maintained by the seller c. First-in, first-out - if shares are not specifically identifiable Devise, bequest, inheritance - Fair value at the time of decedent’s death Gift- Lower of fair market value at the time of gift and basis in the hand of the donor or the last preceding owner by whom it was not acquired by gift. For inadequate consideration- Amount paid by the transferee for the share Under tax-free exchanges - The substituted basis of the stock Capital Gains Tax Rate  Individuals and Domestic Corporations 15% Deadline of filing of return is within 30 days after each sale, exchange and other disposition of stock   Foreign Corporations 5% and 10% Deadline of filing of annual capital gains tax return is before the 15th day of the fourth month following the close of the taxable year of the taxpayer. (if calendar year is used, April 15 of the succeeding year)   Other Taxpayers 15% When domestic stock is sold in instalments, the capital gains tax may also be paid in instalment if a. The selling price exceeds P1,000 b. Initial payment (total payment for the taxable year) does not exceed 25% of the selling price. Special Tax rules in Capital Gain or Loss Measurement 1. Wash sale of stocks – Capital losses on wash sales are deductible against capital gains if there is an acquisition of replacement shares within the 61- day period (30 days before and 30 days after the losing

sale of securities). 2. Tax-free exchange a. Exchange of stocks pursuant to a merger or consolidation The gains or loss on the share-for-share swaps will not be recognized for taxation purposes b. Transfer of stocks resulting in corporate control We are now ready to discuss the capital gain on the sale, exchange and other disposition of real properties classified as capital asset located in the Philippines - This real properties are subject to 6% tax on the selling price or fair market value. whichever is higher The fair value of the property is whichever is higher between the zonal values (value prescribed by CIR) or fair market value (from the Assessor’s Office) Only lands have zonal value. Thus, the 6% capital gains tax is based on the highest among the selling price or bid price for foreclosed properties, zonal valuation or fair market value shown at the Assessor’s Office THE 6% CAPITAL GAINS TAX - Note that the 6% capital gains tax applies to all sale transactions even if it results to a loss. The basis is the higher amount between the selling price and fair market value but never on the gain. - It applies even to involuntary sale or is forced by circumstances such as foreclosure sale, expropriation sale, and all other forms of forced disposition. - The capital gains tax is withheld by the buyer against the selling price of the seller and remits the same to the government. - It is applicable to all individual taxpayers and domestic corporations only. Any realized gain on sale of property classified as capital asset by a foreign corporation shall be subject to regular income tax...