Taxation Law 2 Reviewer (NIRC) PDF

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TAXATION LAW 2 Alyssa Cabalang (C) (D) (A) (B) INCOME INCOME Capital Gains on Shares Capital Gains on Sale of TAXPAYER NET INCOME PASSIVE WITHIN WITHOUT of Stock NOT Traded in Real Property Located TAX INCOME Local in PH RC   NIT FWT FWT FWT RA  × NIT FWT FWT FWT NRA-ETB  × NIT FWT FWT FWT NRA-N...

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TAXATION LAW 2

TAXPAYER RC RA NRA-ETB NRA-NETB DC RFC NFRC

Alyssa Cabalang

INCOME WITHIN

INCOME WITHOUT

(A) NET INCOME TAX

(B) PASSIVE INCOME

 × × ×  × ×

NIT NIT NIT GIT 25% NIT 30% NIT 30% GIT 30%

FWT FWT FWT GIT 25% FWT FWT GIT 30%

      

RESIDENT CITIZEN

2.

3.

RESIDENT ALIEN

(D) Capital Gains on Sale of Real Property Located in PH FWT FWT FWT FWT FWT × ×

The following are considered citizens of the Philippines: 1. Those who are citizens of the Philippines at the time of the adoption of the Constitution 2. Those whose fathers or mothers are citizens of the Philippines 3. Those born before January 17, 1973 of Filipino mothers, who elect Philippine Citizenship upon reaching the age of majority; and 4. Those who are naturalized in accordance with law 1.

NON-RESIDENT CITIZEN

(C) Capital Gains on Shares of Stock NOT Traded in Local FWT FWT FWT FWT FWT FWT FWT

Who establishes to the satisfaction of the Commissioner the fact of his physical presence abroad with intention to reside therein One who works and derives income from abroad and whose employment thereat requires him to be physically present abroad most of the time (must have been outside the Philippines for not less than 183 days) during the taxable year. One who leaves the Philippines to reside abroad as an immigrant, or for employment on a permanent basis

A resident alien is an individual whose residence is within the Philippines and who is not a citizen. An alien will be considered a resident if the stay here is either definite and extended, or indefinite. An alien actually present in the Philippines who is not a mere transient or sojourner is a resident of the Philippines for purposes of the income tax. A non-resident alien is an individual: 1. whose residence is not within the Philippines; and 2. who is not a citizen thereof

NON-RESIDENT ALIEN An alien is considered a non-resident if he stays here for a definite short period of time. Once a taxpayer is determined to be a non-resident alien, the test to determine whether the alien is a non-resident alien engaged in trade or business is whether his total aggregate stay for a taxable year exceeds 180 days. MINIMUM WAGE EARNERS

Worker, whether in public or private sector, who is paid not more than the statutory wage. Minimum wage earners shall be exempt from the payment of income tax on their taxable income. Further, their holiday pay, overtime pay, night shift differential pay, and hazard pay received by them shall likewise be exempt from income tax

KINDS OF INCOME Service of compensation Rent Royalties Merchandising Gain on sale of personal property Gain on sale of real property Interest Dividend A. From Domestic Corporation

SOURCE OF INCOME (Situs) Place of performance Location of property Place of use of intangible Place of sale Place of sale Location of property Residence of debtor A.

Income within, if 50% or more of the gross income of the foreign corporation for the preceding 3 years prior to the declaration of dividend or for such part of such period as the corporation has been in existence, was derived from sources within the Philippines

B.

B.

From Foreign Corporation

Sale of domestic shares Sale of foreign shares Farming income Mining Income

Income without, if less than 50% of the gross income of the foreign corporation for the preceding 3 years prior to the declaration of dividend or for such part of such period as the corporation has been in existence, was derived from sources within the Philippines Income within Income without Place of farming activities Location of mines

[use at your own risk]

Means all remuneration for services performed by an employee for his employer under an employer-employee relationship unless specifically excluded by the Tax Code. This includes the cash value of all remuneration paid in any medium other than cash. May be paid in money, or in some medium other than money as for example, stocks, bonds, or other forms of property. The test is whether such income is received by virtue of an employer-employee relationship. items not included in compensation income COMPENSATION INCOME

1. For agricultural labor paid entirely in products of the farm where the labor is performed 2. For domestic service in a private home. A private home is the fixed place of aboard of an individual or family. If the home is utilized primarily for the purpose of supplying board or lodging to the public as a business enterprise, it ceases to be a private home and remuneration paid for services performed therein is not exempted and should be included in compensation income. 3. For casual labor not in the course of the employer’s trade or business 4. For services by a citizen or resident of the Philippines for a foreign government or an international organization.

BUSINESS INCOME

Business income refers to gross income derived from the conduct of trade or business or the exercise of a profession.

PROFESSIONAL INCOME

Professional income refers to fees received by a professional from the practice of his profession provided that there is no employer-employee relationship between him and his clients. It includes the fees derived from engaging in an endeavor requiring special training as a professional as a means of livelihood, which includes, but is not limited to, the fees of CPAs, doctors, lawyers, engineers and the like

PASSIVE INCOME

Passive income is income derived from any activity in which the taxpayer does not materially participate.

INTEREST INCOME

Interest income means the amount of compensation paid for the use of money or forbearance from such use.

Royalties are any payment of any kind received as consideration for the use of or right to use any patent, trademark, design or model, secret formula or process, industrial commercial or scientific equipment, information concerning industrial, commercial or scientific experience. ROYALTY INCOME

RENTAL INCOME

A sale of royalty on a regular basis for a consideration is considered an active business and any gain therefrom shall be subject to the normal corporate income tax (see RMC 77-2003). Where a person pays royalty to another for the use of its intellectual property, such royalty is passive income of the owner and is therefore subject to final withholding tax.

Rental income refers to the amount or compensation paid for the use or enjoyment of a thing or a right and implies a fixed sum or property amounting to a fixed sum to be paid at a stated time for the use of the property. It includes all amount or property received from the lease contract, whether used in business or not.

When is income taxable? (Elements of a taxable income) 1. There is income, gain or profit (existence of income). For tax purposes, income does not only refer to the money a taxpayer receives but includes anything of value. 2. The income, gain or profit is not exempt from income tax. An income may have other elements but the law may specifically exclude the same from income for tax purposes 3. The income, gain or profit is received or realized during the taxable year (realization of income). Even if there is material gain, not excluded by law, if the material gain is not yet realized by the taxpayer, then there is no income to speak of. Doctrine of Constructive Receipt The constructive receipt doctrine provides than an item is treated as income when it is credited to the account of the taxpayer, or made unconditionally available to the taxpayer; no physical possession is required. Income is received not only when it is actually handed to a taxpayer but also when it is merely constructively received by him.

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GROSS INCOME

EXCLUSIONS

Except when otherwise provided, all income derived from whatever source.

The term “exclusions” refers to items that are not included in the determination of gross income because:

The phrase “all income derived from whatever source” encompasses all accessions to wealth, clearly realized, and over which the taxpayers have complete dominion. A gain constitutes taxable income when its recipient has such control over it that as a practical matter, he derives readily realizable economic value from it. Income from whatever sources refers to all income not expressly excluded or exempted from the class of taxable income, irrespective of the voluntary or involuntary action of the taxpayer in producing the income (GUTIERREZ V. CIR, CTA CASE NO. 65, AUGUST 31, 1965)

1. They represent return of capital or are not income, gain or profit (e.g. life insurance) 2. They are subject to another kind of internal revenue tax (e.g. gifts, bequests, devices) 3. They are income, gain or profits that are expressly exempt from income tax under the Constitution, tax treaty, Tax Code, or general or special law. (e.g. PEZA)

Gains, money or otherwise derived from all other illegal source fall within the ambit of “income derived from whatever source” and is subject to income tax.

Including but not limited to following: (CARD-GRIP4) a. b. c. d. e.

the

Compensation Annuities Rents Dividends Gains from dealings in property f. Royalties g. Interest h. Prizes and winnings i. Pensions j. Partner’s share in the net income of GPP

The following shall not be included in the determination of gross income and shall be exempt from taxation: a. Proceeds of life insurance b. Amounts received by insured as return of premium c. Gifts, bequests, and devises d. Compensation for injuries or sickness e. Income exempt under Treaty f. Retirement benefits, pensions, gratuities, etc. g. Miscellaneous items i. Income of foreign governments ii. Income derived by the Government or its political subdivisions iii. Prizes and awards iv. Prizes and awards in sports competition v. 13th month pay and other benefits Also, under Section 33(C), NIRC, the following fringe benefits are not taxable: a. Fringe benefits authorized and exempted from tax under special laws b. Contributions of the employer for the benefit of the employee to retirement, insurance and hospitalization plans c. Benefits given to rank and file employees, whether granted under a CBA or not d. De minimis benefits

DEDUCTIONS Deductions are items or amounts authorized by law to be subtracted from the pertinent items of gross income to arrive at taxable income. Deductions partake of the nature of tax exemptions. Hence, they are likewise strictly construed against the taxpayer. The itemized deductions in Section 34(A) to (J) are available to all kinds of taxpayers engaged in trade or business or practice of profession in the Philippines. This excludes citizens and alien residents earning purely compensation income. General requisites before deductions are allowed —

1. There must be a specific provision of law allowing the deductions, since deductions do not exist by implication 2. The requirements of deductibility must be met 3. There must be proof of entitlement to the deductions 4. The deductions must not have been waived 5. The withholding and payment of the tax required must be shown

The allowable deductions include:

and

itemized

a. Business Expenses (in connection with taxpayer’s trade, business or profession) b. Interest on Indebtedness c. Taxes in connection with taxpayer’s business, trade or profession [except income taxes, estate and donor’s taxes, special assessments, and foreign income taxes (unless the taxpayer does not make use of the tax credit privilege)] d. Losses e. Bad debts f. Depreciation g. Depletion h. Charitable and other contributions i. Research and development expenditures j. Contributions to pension trusts

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What items are not deductible from gross income? No deduction shall in any case be allowed in respect to: 1. Personal, living or family expenses 2. Any amount paid out for new buildings or for permanent improvements or betterments made to increase the value of any property or estate. (Capital expenditures). Except intangible drilling and development costs incurred in petroleum operations which may be deducted in full 3. Premiums paid on any life insurance policy covering the life of any officer or employee or of any person financially interested in any trade or business carried on by the taxpayer, individual, or corporate when the taxpayer is directly or indirectly a beneficiary under such policy 4. Losses from sales or exchanges of property directly or indirectly between related persons a. Between members of a family b. Between an individual and a corporation more than 50% in value of the outstanding stock of which is owned by such individual (except in the case of distributions in liquidation) c. Between two corporations more than 50% in value of the outstanding stock of each of which is owned by the same individual if either one of the companies is a holding company d. Between the grantor and a fiduciary of any trust e. Between the fiduciary of a trust and the fiduciary of another trust if the same person is a grantor with respect to each trust f. Between a fiduciary of a trust and a beneficiary of such trust 5. Non-deductible interest (between related persons) 6. Bad debts between related parties 7. Fines and penalties due to late payment of tax FRINGE BENEFITS As defined by Section 33(B), the term “fringe benefit” means any good, service or other benefit furnished or granted in cash or in kind by an employer to an individual employee (except rank and file employees) A fringe benefit tax is a final withholding tax (at 35%) imposed on the grossed-up monetary value of fringe benefit furnished or granted to the employee except rank and file employees by the employer. Such as, but not limited to, the following: a. b. c. d.

Housing; Expense account; Vehicle of any kind; Household personnel, such as maid, driver and others; e. Interest on loan at less than market rate to the extent of the difference between the market rate and actual rate granted; f. Membership fees, dues and other expenses borne by the employer for the employee in social and athletic clubs or other similar organizations; g. Expenses for foreign travel; h. Holiday and vacation expenses; i. Educational assistance to the employee or his dependents; and j. Life or health insurance and other non-life insurance premiums or similar amounts in excess of what the law allows The law mandates that the employer shall assume the fringe benefits tax imposed on the taxable fringe benefits of the managerial or supervisory employees, but allows the employer to deduct such fringe benefit tax as a business expense from its gross income.

DE MINIMIS BENEFITS

As defined by RR 3-98 [M AY 21, 1998], de minimis benefits are benefits of relatively small value offered or furnished by the employer to his/her employees as a means of promoting the health, goodwill, contentment, efficiency of his/her employees.

These include ONLY, pursuant to RR 5-2011, the following: a. Monetized unused vacation leave credits of private employees not exceeding ten (10) days during the year b. Monetized value of leave credits paid to government officials and employees c. Medical cash allowance to dependents of employees, not exceeding P1,500 per employee per semester or P250 per month d. Rice subsidy of P2,000 or one (1) sack of 50 kg. rice per month amounting to not more than P2,000 e. Uniform and clothing allowance not exceeding P6,000 per annum f. Actual medical assistance, e.g. medical allowance to cover medical and healthcare needs, annual medical check-up, maternity assistance, and routine consultations, not exceeding P10,000 per annum g. Laundry allowance not exceeding P300 per month h. Employees achievement awards, e.g. for length of service or safety achievement, with an annual monetary value not exceeding P10,000 i. Gifts given during Christmas and major anniversary celebrations not exceeding P5,000 per employee per annum j. Daily meal allowance for overtime work and night/graveyard shift not exceeding 25% of the basic minimum wage k. CBA agreement benefits and benefits derived from productivity incentive schemes not exceeding P10,000 per annum.

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Explain briefly whether the following items are taxable or non-taxable: a) Income from jueteng; b) Gains arising from expropriation of property; c) Taxes paid and subsequently refunded; d) Recovery of bad debts previously charged off; e) Gain on the sale of a car used for personal purposes. a) Taxable. The law imposes a tax on income from whatever source. [Sec. 32(A), NIRC] Gains, money or otherwise derived from all other illegal source fall within the ambit of “income derived from whatever source” and is subject to income tax. b) Taxable. There is a material gain, not excluded by law, realized out of a closed and completed transaction. Gains from dealings in property are part of gross income. [Sec. 32(A)(3), NIRC] c) It depends. Taxes paid which are allowed as deduction from gross income are taxable when subsequently refunded but only to the extent of the income tax benefit of said deduction. It follows that taxes paid which are not allowed as deduction from gross income, i.e. income tax, donor’s tax, and estate tax, are not taxable when refunded. d) Taxable under the TAX BENEFIT RULE. Recovery of bad debts previously allowed as deduction in the preceding years shall be included as part of the gross income in the year of recovery to the extent of the income tax benefit of said deduction. [Sec. 34(E)(1), NIRC] This is sometimes referred as the RECAPTURE RULES. e) Taxable. Since the car is used for personal purposes, it is considered as a capital asset hence the gain is considered income.

CORPORATIONS, PARTNERSHIPS, CO-OWNERSHIP What are the kinds of partnerships under the Tax Code? A. Taxable partnerships – these are business partnerships or partnerships which are organized for the purpose of engaging in trade or business. They are subject to income tax as if they were corporations whether or not registered with the SEC as a partnership B. Exempt partnerships – these are partnerships not considered as taxable entities for income tax purposes i.e. General Professional Partnerships). How do you determine if a partnership is taxable? (Elements of a taxable partnership) 1. An intent to form the same 2. Generally participating in both profits and losses 3. Such a community of interest, as far as third persons are concerned as enables each party to make contract, manage he business and dispose of the whole property. Is a co-ownership taxable as a corporation? No. The common ownership of property does not by itself create a partnership between the owners, though they may use it for purposes of making gains. Article 1769(3) of the Civil Code provides that “the sharing of gross returns does not by itself establish a partnership whether or not the persons sharing them have a joint or common right or interest in any property from which the returns are derived. A and B, co-owners, bought 3 parcels of land in one transaction and bought 2 more parcels of land in another. They decided to sell the 3 parcels to C and the 2 parcels to D. They realized a net profit gain and paid CGT. CIR assessed them for deficiency corporate income tax. Is the co-ownership taxable as a corporation? No. A co-ownership who own properties which produce income should not automatically be considered partners of an unregistered partnership, or a corporation, within the purview of the income tax law. The essential elements of a partnership are two, namely: (a) an agreement to contribute money, property or industry to a common fund; and (b) intent to div...